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Judge rules Exide Illinois must pay fraud penalty
(May 31, 2006)


In Chicago, New Pay Law Is Considered for Big Stores
(May 28, 2006)

Life after Sears: Meads lands on feet
(May 26, 2006)

Former Wal-Mart Exec Faces Fraud Sentence Aug. 11
(May 25, 2006)

Target Transfers More Health Costs To Its Employees
(May 20, 2006)


Sears to close all nine Michigan hardware stores
(May 26, 2006)

Phone Tax Laid to Rest at Age 108
(May 26, 2006)

Lampert, Griffin make list of highest paid hedge fund mgrs
(May 26, 2006)

Major Los Angeles Project Will Have to Wait Longer
(May 22, 2006)

Chicago, City of...? // Refers to "Structural Meltdown" at Sears
(May 21, 2006)


ake Sure Your Money Lasts as Long as You
(May 21, 2006)

Arthur Martinez to chair ABN AMRO advisory board
(May 19, 2006)


Sears tuns a 1Q profit, but can it sustain growth?
(May 19, 2006)

Attention Michigan: Kmart's empty vows offer lessons
(May 19, 2006)

New Sears mystifies analysts
(May 19, 2006)

Sears profit, shares surge; doubts linger
(May 19, 2006)

Looks like slash and stash strategy is paying off for Sears
(May 19, 2006)

Sears shares sharply higher as cost controls aid profit
(May 18, 2006)


Sears posts 1st-quarter profit vs loss
(May 18, 2006)

Sears Settles Credit Card Lawsuit
(May 18, 2006)

Sears' first-quarter profit beats expectations
(May 18, 2006)

Sears Holdings Reports 1st-Qtr Net Income on Reduced Expenses
(May 18, 2006)


Defiant Home Depot = worried investors

(May 18, 2006)

Innocents Abroad? Wal-Mart's Global Sales Rise as it Learns from Mistakes
(May 16, 2006)

Historians and Fans Are Racing to Catalog Homes Sold by Sears
(May 15, 2006)


Former Sears Canada CEO slams parent's 'cannibalism'
(May 10, 2006)

Microsoft and Google waging 'war for talent'
(May 10, 2006)

Sears Canada Annual Meeting Light On Optimism
(May 9, 2006)

Sears Canada set to go private, but ex-CEO calls deal 'corporate cannibalism’
(May 9, 2006)

International Flavors Chairman Retires, Martinez Interim Chairman and CEO
(May 9, 2006)

Deadline Looms For New Drug Benefit
(May 9, 2006)

Dollar General hires former Sears exec
(May 8, 2006)

Hard to check out Sears' line to profits
(May 6, 2006)

Titans collide in battle for Sears Canada
(May 6, 2006)

Wal-Mart Reviewing Long-Term Media Accounts
(May 3, 2006)

Wal-Mart, Analysts Appear To Differ On Company's Labor Plans
(May 3, 2006)

Sears Canada investors eye Hudson's Bay
(May 3, 2006)

Riling its U.S. parent, Sears Canada board declares dividend
(May 3, 2006)

Author throws punch at Allstate
(May 3, 2006)

Medicare's Cost of Drug Benefit Will Be Lower Than Expected
(May 2, 2006)

Sears Shows Cards
(May 1, 2006)

Sears defends offer for Sears Canada
(May 1, 2006)

FLASHBACK 1973 -- Top job
(April 30, 2006)

Creativity Overflowing
After its initial efforts stumbled, Whirlpool is reaping big dividends
from its push to jump-start innovation

(May 8, 2006 issue)

Groups Opposing Wal-Mart Get Help From New Web Site
(May 1, 2006)

Online Extra: Whirlpool's Future Won't Fade
(May 8, 2006 issue)

Teachers solicited Sears Canada
(April 29, 2006)

Canada Commission reviewing Sears bid
(April 27, 2006)

Another battle over Sears Canada
(April 18, 2006)

Sears Canada swings to Q1 loss of $11.8M from year-earlier profit
(April 27, 2006)

Wal-Mart Ripple Effect Strikes Again:
(April 27, 2006)

Mindshare Takes Control of KMart's Media Work
(April 26, 2006)


US Lobbyists Denounce Mexico's 'Nothing Gringo' Boycott
(April 26, 2006)

Kmart special: HQ garage sale
(April 26, 2006)


Martha Stewart CEO Doesn't Expect Products In Sears Stores
(April 25, 2006)


A towering career in skyscraper safety
(April 25, 2006)

Wal-Mart is fueling political furnace
(April 24, 2006)

Avoiding the Volunteer Trap
(April 24, 2006)

Scammers take money and run away at Sears
(April 23, 2006)

What's Right About Wal-Mart
(May 1 issue)

In Tough Hands At Allstate
(May 1 issue)

Desjardins apologizes for Sears Comments
April 20, 2006

More Culture Changes at Sears Holdings
(April 20, 2006)

Sears a litmus test for takeover climate
(April 19, 2006)

Business school to bear former Sears chairman name
(April 18, 2006)

Allstate 1Q earnings blow away predictions
(April 18, 2006)

Wal-Mart Says Its Logistics Program
Is on Track to Be Completed by 2007

(April 18, 2006)

Wal-Mart Demotes Price-Slashing 'Smiley' In New Ads
(April 18, 2006)

Wal-Mart Eases Benefits Rules For Part-Timers
(April 18, 2006)

Sears Holdings Faces Holder Challenge In Sears Canada Buy
(April 18, 2006)

Sears revving up its auto repair biz
(April 17, 2006)

Allstate by the Numbers
(April 16, 2006)

Risk has its rewards -- Allstate hits milestone on solid ground after long year
(April 15, 2006)

WalMart to Stop Selling Firearms in Some Stores
(April 15, 2006)


Allstate Invites Chicago to Celebrate Its 75th Anniversary
(April 13, 2006)

Wal-Mart CEO to Take Monthlong Vacation
(April 13, 2006)

Cart Blanche? The Megamarket's Savings Don't Come Cheap
(April 13, 2006)

'COMFORTABLE WITH AMBIGUITY'
(April 13, 2006)

Sears Stores Haven't Opted To Sell Martha Goods
(April 13, 2006)

Martha says no to Sears
(April 13, 2006)

Furniture, new luxury items in Sears' plans
(April 13, 2006)

Wal-Mart Sticks With Fast Pace Of Expansion Despite Toll on Sales
(April 13, 2006)

Sears Chairman Works to Emphasize Selling
(April 13, 2006)

Sears chairman down on dividends
(April 12, 2006)

Sears's Lampert Plans to Build Retailer, Keep Land
(April 12, 2006)

Lambert focuses on culture, share
(April 12, 2006)

Sears Holdings to invest in stores, technology
(April 12, 2006)

No Martha Stewart in Sears stores
(April 12, 2006)


Sears' State Street store finally turns a profit

(April 12, 2006)

Sears financially strong despite slow sales: Lampert
(April 12, 2006)

No conflict of interest in Sears deal
Scotiabank: Advisor, shareholder

(April 12, 2006)

In Canada, a Face-off Over Sears
(April 12, 2006)

Wal-Mart bank plan attacked at hearing
(April 11, 2006)


Sears Canada CEO Brent Hollister Plans to Step Down
(April 10, 2006)

How U. S. Store Chief Hopes to Fix Wal-Mart
(April 10, 2006)

Menage a towel: Martha's relationship with Macy's and Sears
(April 10, 2006)

Broken Promises
(April 2006)

Judge: Sears shareholders can sue
(April 7, 2006)

CMS Announces Medicare Benefits Issue
(April 7, 2006)

Pershing rejects Sears bid as inadequate
(April 7, 2006)

Pershing Square won't sell Sears Canada stake
(April 7, 2006)

1,000 Allstate employees take buyout
(April 7, 2006)

One-Day Wonder: Martha's Latest Makeover
(April 7, 2006)

Sears may be hurt by Martha Stewart's deal with Macy's
(April 6, 2006)

Sears Holdings declares victory in Sears Canada takeover - but holdouts remain (April 6, 2006)

Wal-Mart Shuffles Top Managers
(April 6. 2006)

Sears Gets Support for C$899 Mln Sears Canada Bid
(April 6, 2006)

Macy's to Launch Exclusive Line of Martha Stewart Furnishings
(April 6, 2006)

Sears Holdings wins over more Sears Canada holders
(April 6, 2006)

Jim Cramer's Stop Trading!: Loving Lampert
(Apr. 5, 2006)

Sears Holdings to buy back $500 million in shares
(Apr. 5, 2006)

Sears says C$18 is final offer for Sears Canada
(Apr. 5, 2006)

Wal-Mart's RX for health care
(April 17, 2006 edition)

Sears Canada Holders Seek Higher Bid From Parent, Survey Says
(Apr. 4, 2006)

At Sears and Ford, Internal Border Wars
(Apr. 4, 2006)

Notice of 2006 Sears Holdings Corporation Annual Meeting of Stocholders

Sears piles up hefty $4 billion in cash
(April 3, 2006)

Sears Holdings Boosts Bid for Sears Canada Shares
(April 3, 2006)

Sears raises offer for Sears Canada
(April 3, 2006)

FASB Proposes Rule on Retirement Benefits
(March 31, 2006)

Whirlpool's worry: how to make Maytag merger work
(Mar. 31, 2006)

Wal-Mart Shows a Similar Side to Sears
(Mar. 31, 2006)

Sears names top marketing, apparel execs for Kmart
(Mar. 31, 2006)

Whirlpool-Maytag Deal Clears Antitrust Hurdle
(March 29, 2006)

Judge OKs lawsuit by those who lost money during Kmart takeover
(March 28, 2006)

Sears Grand plan draws skeptics
(Mar. 28, 2006)

To Attract and Keep Talent, J.C. Penney CEO Loosens Up Once-Formal Workplace
(Mar. 27, 2006)

Lacy left to ponder legacy, price
(March 26, 2006)

Broad-based Sears Grand debuts
(March 25, 2006)

1 year after marriage, Sears and Kmart are still trying to make the effort work
(March 25, 2006)

Sears Letter Shines
(March 22, 2006)

Wal-Mart Targeting Upscale Shoppers
(March 22, 2006)

Kirkland's says chairman to remain as CEO/Catherine David Named President and CEO
(March 22, 2006)

True Value ready to fight rivals Home Depot, Lowe's
(March 22, 2006)

Analyst: Sears' next project might be Michaels
(March 22, 2006)

Credit gets its due in retailer's sale
(March 22, 2006)

Sears could be worth more, but would Lampert pay it?
(March 21, 2006)

Sears Holdings extends offer for Sears Canada
(March 20, 2006)

Sears Holdings Hikes Its Stake In Sears Canada To 63.2%, Extends Offer
(March 20, 2006)

'Good Life' is elusive for Lampert's Sears
(March 20, 2006)

Government may oppose Whirlpool, Maytag deal
(March 18, 2006)

Experts debate future of Sears Holdings
(March 17, 2006)

Total pay off 50% for chief of Sears
(March 17, 2006)

What a Year for Sears
(March 16, 2006)

Surprising gain drives Sears stock
(March 16, 2006)

Sears Canada bid expected to fail
(March 16, 2006)

Sears rings up jump in profit
(March 16, 2006)

Excerpt of Lampert Letter to Shareholders (March 15, 2006)

Sears Savvy On Costs, But Has Plenty To Learn On Fashion
(March 15, 2006)

Lampert: Sears Missed Co's Target For 2005 Merger Savings
(March 15, 2006)

Attention Sears Shoppers
(March 15, 2006)

Whirlpool, Maytag deal may need sale of some brands
(March 15, 2006)

Sears' Lampert slams pension reforms in shareholder note
(March 15, 2006)


Wal-Mart Takes Control Of Central American Chain
(March 15, 2006)

Sears 4Q Net More Than Doubles On Kmart Merger
(March 15, 2006)

Sears Holdings' net more than doubles
(March 15, 2006)

Sears Holdings Reports Fourth-Quarter Net Income of $648 Mln
(March 15, 2006)

Who's Afraid of Banking at Wal-Mart?
(March 15, 2006)

Sears Holdings Advised That Sears Canada Senior Officers
(March 14, 2006)

Sears' investors await letter from Eddie

(March 13, 2006)

Few U.S. seniors working
(March 10, 2006)

New Old Generation to Redefine Elderly, U.S. Census Study Says
(March 9, 2006)

AutoNation plan no lemon for Lampert
(March 8, 2006)

J.C. Penney Courts Customers Via Internet
(March 7, 2006)

GM Details Pension Changes
(March 7, 2006)

John Terrell, former PR Director of Sears New York Office, Dies
(March 2, 2006)

J.C. Penney sells with an attitude
(March 3, 2006)

Wal-Mart Extending Dominance of the Grocery Business
(March 3, 2006)

Vila shows Sears' harder side
(March 2, 2006)

Is Sears trading faces?
(March 2, 2006)

Sears Canada's directors showing moxie, analysts say
(March 2, 2006)

Independent directors at Sears Canada resign en masse
(March 1, 2006)

 

Breaking News
March  2006 - May  2006

Judge rules Exide Illinois must pay fraud penalty
By Peter Shinkle – St. Louis Post-Dispatch
May 31, 2006

For four years after it was first ordered in 2002 to pay a $27.5 million penalty for intentionally selling defective batteries, Exide Illinois made not a single payment.

On Wednesday, however, a federal judge ordered the company anew to pay the penalty, though under a deal between Exide and prosecutors, it will have until 2011 to complete the payment.

Exide pleaded guilty to wire fraud in federal court in East St. Louis in 2001, admitting that it had intentionally sold defective batteries to Sears, Roebuck and Co. for resale under the "DieHard" brand. In February 2002, a federal judge ordered Exide to pay a $27.5 million fine.

Senior Exide officials, including former Chief Executive Arthur Hawkins of parent company Exide Corp., pleaded guilty to fraud and other charges. Hawkins got a 10-year prison sentence.

In April 2002, Exide Illinois and its parent filed for bankruptcy protection from creditors. After the company emerged from bankruptcy in April 2004 under the name Exide Technologies, it claimed that the bankruptcy had canceled the penalty, prosecutors said in court filings.

Last November, prosecutors from the U.S. attorney's office in Fairview Heights filed documents urging the court to consider whether Exide should be held in contempt of court for failing to pay the fine.

The prosecutors said in court filings that at the time of Exide Illinois' sentencing, the vice president and general counsel of Exide Corp. expressed no doubts about the ability of Exide Corp. to guarantee the payment, even though both companies filed bankruptcy less than two months later.

The original payment plan gave Exide Illinois five years to pay the whole amount. By the time the company filed bankruptcy, it still held $27.5 million in reserve to pay the fine.

U.S. Attorney Ron Tenpas' office argued that federal law prevents a company from avoiding a criminal penalty through bankruptcy. Exide responded to the filings by seeking extensions, and ultimately negotiations resulted in the agreement approved Wednesday by Judge David Herndon.

When the judge signed the new order Wednesday, Exide Illinois representatives made their first payment, $250,000.

Officials at Exide Technologies, based in Alpharetta, Ga., did not return calls seeking comment on why it did not pay the fine previously.

Exide Technologies, which produces and recycles lead-acid batteries, has operations in 89 countries. Since leaving bankruptcy, its publicly traded shares have slid from a high of $24.50 to hover around $5 recently. They closed at $4.47 Wednesday.

 

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In Chicago, New Pay Law Is Considered for Big Stores
By Gretchen Ruethling – The New York Times
May 28, 2006

Chicago may become the first city in the nation to require "big box" retailers like Wal-Mart or Home Depot to pay employees a "living wage" of at least $10 an hour plus $3 an hour in benefits.

So far, 33 of 50 City Council members have signed on to the proposed ordinance — more than enough to pass it, perhaps as soon as next month.

The bill would affect only stores that have at least 75,000 square feet and are operated by companies with at least $1 billion in annual sales, allowing smaller retailers to continue with the state minimum wage of $6.50 an hour.

"This is an effort to try to preserve the middle class," said Joe Moore, an alderman from the North Side who sponsored the measure. Mr. Moore called the notion that it would drive retailers out of the city "hogwash."

But others say the measure will scare off employers.

"Don't let me be the experiment," said Emma Mitts, the alderwoman in the poor and mainly African-American neighborhood of Austin on the West Side, where the city's first Wal-Mart is scheduled to open this year. "Not at a time when my community needs these jobs so badly."

Whether the city has the power to make such demands of certain retailers while exempting others is an open question. The proposal has yet to be reviewed by lawyers, a spokeswoman for the city said.

David Vite, president and chief executive of the Illinois Retail Merchants Association, said that he thought the state would block such an ordinance and that it seemed unconstitutional because it would discriminate against some businesses. "To suggest that someone who is a janitor in a retail store should get paid more than a janitor at a bank doesn't make any sense," Mr. Vite said.

But Jennifer Sung, a lawyer with the Brennan Center for Justice at New York University chool of Law, which helped draft the proposal, said the measure would withstand challenges.

Ms. Sung said courts had ruled that distinctions could be made among industries if there was a rational basis for doing so. She also said that Illinois had granted local governments broad powers to pass regulations to promote a city's health and welfare.

Similar legislation has been introduced in Washington, D.C., and discussed in New Jersey. Lawmakers in Maryland; Suffolk County, N.Y.; and New York City have passed laws requiring certain large employers to provide health care benefits for workers, but none of those laws have a wage component.

If the proposal in Chicago passes, it could mean wage increases for more than 9,000 of the 16,000 or so workers at about 35 big-box stores, according to a study released last year by the Center for Urban Economic Development of the University of Illinois at Chicago.

The proposal in Chicago comes as such stores have opened in poor neighborhoods.

"This ordinance targets the larger retailers who have, over the last probably five years, begun to make some inroads to the inner cities," said the Rev. Dwight Gunn, a pastor at Heritage International Christian Church. "It would continue to push business and development away from the city."

Mr. Gunn said the ordinance would hinder development in needy neighborhoods on the South and West Sides. The North Side's mostly white neighborhoods, meanwhile, would be less affected, Mr. Gunn said, because they have many major retailers.

"The aldermen, I think, have a very difficult choice in the sense that none of them want to be seen as anticommunity, antiworker," Mr. Gunn said.

Over the next two years, Wal-Mart plans to build more than 50 stores nationwide in city neighborhoods in need of development; the Chicago store scheduled to open in September is the first. "We have made a pledge to come to urban areas where communities have been ignored and underserved," said John Bisio, a spokesman for Wal-Mart. He said such a wage law would not affect plans for the Austin store.

Some 9,000 people have applied for about 400 jobs at the store in the Austin neighborhood, Mr. Bisio said, even though the opening is more than three months away.

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Life after Sears: Meads lands on feet
By Sandra Guy – Chicago Sun-Times
May 26, 2006

Former Sears, Roebuck and Co. executives are landing on their feet elsewhere in retailing.

The latest move involves Mindy Meads, former president and CEO of Sears' Lands' End division, who will start a new job Aug. 4 as president and CEO of Victoria's Secret's catalog and online businesses.

Meads will oversee marketing, strategy development and public relations for the catalog and e-commerce operations, said a spokeswoman for Limited Brands, which owns Victoria's Secret. The Victoria's Secret Internet and e-commerce operations are a $1.12 billion business, according to Women's Wear Daily magazine.

Meads' hiring was part of an overhaul of Victoria's Secret's management team announced Wednesday.

Meanwhile, Luis Padilla, who earned a stellar reputation at Marshall Field & Co. and Target before he was hired at Sears as the company's top merchandiser, is working as part-time CEO at Kuhlman Co., a Minneapolis-based retailer of men's and women's European-style suits and separates. Kuhlman operates five stores in upscale neighborhoods in Chicago.

"It's an opportunity to add value to a small company," Padilla said Thursday. Kuhlman employs 275 and posted a market capitalization of $23 million.

"I like the concept and aesthetic principle of the brand," said Padilla, who still lives in Chicago and has other investment interests.

Other moves include:

*Glenn Richter, former Sears chief financial officer, starts next week as chief administrative officer at Nuveen Investments.

*Gwen Manto, Sears' former chief apparel executive, works as chief merchandising officer at Dick's Sporting Goods.

*Sara LaPorta, former senior vice president of strategy at Sears, is working as an outside consultant to Walgreen Co.

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Former Wal-Mart Exec Faces Fraud Sentence Aug. 11
Dow Jones Newswires
May 25, 2006

NEW YORK (AP)--A federal judge has set a sentencing hearing Aug. 11 for Thomas Coughlin, the former No. 2 executive at Wal-Mart Stores Inc. (WMT), who pleaded guilty in January to fraud and tax charges for stealing money, gift cards and merchandise from the world's largest retailer.

Coughlin, 57, faces a maximum of 28 years in prison after pleading guilty to five counts of wire fraud and one count of filing a false tax return. He also could be fined $1.35 million.

U.S. District Judge Robert Dawson, who accepted Coughlin's guilty plea in January, set the sentencing hearing for 10 a.m. on Aug. 11 in his courtroom in Fort Smith, Ark.

Prosecutors have recommended a sentence but Dawson sealed the plea agreement pending a pre-sentencing report.

Wal-Mart referred Coughlin to federal prosecutors after discovering Coughlin allegedly embezzled money from the company and used expense vouchers to buy products as varied as snakeskin boots, hunting trips and Bloody Mary mix. Wal-Mart estimated losses at up to $500,000.

Wal-Mart Chief Executive Lee Scott has called the ordeal "an embarrassment" for himself and for the company.

Coughlin was a protege of company founder Sam Walton. As vice chairman, he received a base salary of $1.03 million in his final year with the company. He received more than $3 million in bonuses and other income in the same period and held about $20 million in Wal-Mart stock, according to Securities and Exchange Commission filings.

In documents filed with the court, Coughlin specifically admitted defrauding the company to pay for the care of his hunting dogs, lease a private hunting area, upgrade his pickup truck, buy liquor and a cooler, and receive $3,100 in cash.

Coughlin retired as Wal-Mart vice chairman last year and gave up his spot on the company board in March after Wal-Mart referred him to prosecutors. The matter was taken up by a grand jury in Fort Smith.

In November, former Coughlin subordinate Robert E. Hey Jr. agreed to plead guilty to wire fraud and testify for the government in return for parole instead of prison time.

Besides giving the case to federal prosecutors, Bentonville, Ark.-based Wal-Mart filed suit last year to end Coughlin's multimillion-dollar retirement agreement and to recover money.

However, that lawsuit was dismissed by an Arkansas judge who said both sides had signed a pledge as part of Coughlin's retirement deal not to pursue any claims against each other for any reasons. Wal-Mart has appealed the dismissal of its lawsuit to the Arkansas Supreme Court.

No mention was made in Coughlin's public filings with the court of his earlier claim that he used money obtained from Wal-Mart to pay for anti-union activism. Wal-Mart has said there was no such project.

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Target Transfers More Health Costs To Its Employees
By Ann Zimmerman – The Wall Street Journal
May 20, 2006

Target Corp. has changed its health-care plan so that employees are responsible for more of the costs and it is considering entirely eliminating its traditional health insurance.

The Minneapolis-based retailer last month introduced a health-savings account and a health-reimbursement account for its more than 300,000 workers. The changes, first reported in the Minneapolis Star-Tribune (see correction below), have provoked worries among workers that Target is shifting more of the financial burden onto them to combat rising health-care costs.

Wal-Mart Stores Inc., Target's main rival, has taken fire for a bare-bones health plan that requires participating employees to pick up 30% of costs. But Wal-Mart has been sweetening its benefits to make them more attractive for its increasing number of part-time workers.

The shifts in Target's health-care plan, implemented last month, underscore that reining in health-care costs is a big concern for all companies. According to the Kaiser Family Foundation, health-care premiums paid by workers and their employers jumped 73% between 2000 and 2005.

In their search for ways to save money, many companies have turned to various forms of health-savings accounts, in which workers and companies set aside money to pay for medical care. Because the workers are paying the bills directly, the hope is that they will make fewer unnecessary doctor visits and will shop for the best rates.

Target spokeswoman Lena Michaud said the retailer told its workers that its traditional health plan might be discontinued. But she said a final decision hasn't been made.

"This is a long-term strategy that will help both us and team members [employees] save money by encouraging them to take greater control over their health-care spending," Ms. Michaud said.

Under its new plans, Target annually will contribute $400 for individual workers and $800 for families. Monthly premiums will drop to as little as $20 for individuals. But deductibles will be much higher than Target's traditional plan: as high as $5,000.

The other alternative is the health-reimbursement account, which is similar to health-savings accounts, except the employer funds them and they aren't portable. The premiums paid by the workers are higher than the health-savings accounts, but the deductibles are lower.

"These plans are great if you are healthy, wealthy or young," says Bernie Hesse, a Minnesota-based organizer for the United Food and Commercial Workers, which is trying to organize Target.

Corrections & Amplifications:

The Minneapolis/St. Paul Business Journal first reported that Target Corp. was planning to introduce health savings accounts and was considering entirely eliminating its traditional health insurance. This article incorrectly credited the Minneapolis Star-Tribune with reporting the news first.

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Sears to close all nine Michigan hardware stores
By Dorothy Bourdet - Detroit News
May 26, 2006

Stiff competition from big-box retailers has squeezed sales,
forcing closure of 20 across U.S.

Sears Holdings Corp. is shuttering all nine Sears Hardware stores in Michigan because of lackluster sales.

The closings come as Sears Holdings, the nation's No. 3 retailer, is being squeezed by competition from big-box retailers, including Target, Wal-Mart and The Home Depot.

"These stores were identified as under-performing stores," said Larry Costello, a spokesman for Sears Holdings, which was created by last year's merger of Kmart and Sears, Roebuck and Co. "As the hardware stores close, the Sears and Kmart stores in the Detroit area will continue to service customer needs."

Eight of the stores are in Metro Detroit; the ninth is in Fenton. Liquidation sales are under way, with all of the stores expected to close by the end of June.

Costello declined to say how many workers will be affected. "We are actively working to help those associates who have been impacted by the announcement to find positions at Sears or Kmart stores in the area."

Eleven Sears Hardware stores outside of Michigan also will close, leaving 119 hardware stores nationwide.

"It is clear that Sears/Kmart is trying to define themselves as a company, and hardware does not fit into their over all mix," said Kenneth Dalto, retail analyst and president of Farmington Hills-based Kenneth J. Dalto & Associates.

"Hardware is not just an area they are going to compete in because it is dominated now by just one or two (companies)."

Sears Hardware, which sells everything from bathroom cleaners to grills and patio furniture, joins a parade of retailers that have left Michigan in recent years, including Mervyn's and Frank's Nursery.

The Sears Hardware closings come as Michigan retailers' sales and short-term forecasts showed little change in April from March's lusterless numbers, despite growth in U.S. retail sales.

April's Michigan Retail Index, which is based on a survey of state merchants, found 39 percent of retailers in the state increased sales in April, compared with 36 percent in March, according to the Michigan Retailers Association.

"Not even a late Easter and some warm April weather could push up Michigan retailers' sales," Larry Meyer, the association's chairman and CEO, said in a statement. "Higher unemployment, higher gas prices and Michigan's struggling economy continued to hurt most retailers."

But Michigan's sour economy is only partly to blame for retailers' woes here, said Gary Kulesza, managing director at Southfield-based BBK Ltd., who works with businesses in crisis.

"There's no question that the automotive restructuring will put a strain on Michigan," Kulesza said. "(But) Michigan is not falling off the map. I think that Sears and Frank's Nursery issues are as much about how the firms are managed and where they're trying to position themselves."

Taylor resident Laurie Bennett was disappointed to hear about the closings Thursday as she picked up plumbing supplies from Taylor Sears Hardware, where bright red and yellow signs blared "Everything must go," from the store windows.

"I wish they wouldn't close down," she said. "I like this store -- I like the location, (and) the help is usually pretty good."

Officials at Hoffman Estates, Ill.-based Sears Holdings said six Metro Detroit Sears stores will be expanded to add some of the hardware items the closing stores carried. Information on which stores were slated for expansion was not immediately available.

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Phone Tax Laid to Rest at Age 108
By Ken Belson - The New York Times
May 26, 2006

Bowing to changes in technology and pressure from taxpayers and phone companies, the Treasury Department said yesterday that it would scrap the 108-year-old federal excise tax on long-distance phone calls. The move will bring consumers and businesses about $15 billion in refunds on next year's tax returns.

The decision, which applies to cellphones and Internet phone services and some landlines, follows a series of court reversals for the government. Large businesses had successfully sued the Internal Revenue Service to recoup the taxes they paid. Phone companies also wanted the tax abolished to relieve them of having to collect it.

Originally a luxury tax to help pay for the Spanish-American War, the 3 percent surcharge was calculated based on the length of the call and the distance of the connection. But as unlimited long-distance calling plans became commonplace, and the tax was applied to a flat monthly fee, some taxpayers argued that the tax no longer applied to them because the duration and distance of a call were irrelevant.

Though the tax will still be imposed on local phone service, the government will reimburse three years' worth of taxes on long-distance calls, including any plans that combine local and long-distance calling. Consumers, who pay about 40 percent of the taxes collected, typically pay about $18 a year in excise taxes if they have a long-distance service and a cellphone.

They will be able to file for a refund on their 2006 federal income tax returns.

"It's time to disconnect this tax and put it on the permanent do-not-call list," Treasury Secretary John W. Snow said. Yesterday's decision, he added, "marks the beginning of the end of an outdated, antiquated tax that has survived a century beyond its original purpose, and by now should have been ancient history."

The abolition of the tax, effective July 31, will cost the Treasury $5 billion annually in lost revenues in the next few years.

With budget deficits soaring, the Treasury had been slow to scrap the tax. But several federal courts ruled in recent years that it was no longer applicable to customers with unlimited long-distance plans. The Internal Revenue Service has refunded hundreds of thousands of dollars in taxes to companies including OfficeMax and the American Bankers Insurance Group based on the court decisions.

While the courts said some businesses should get refunds, Congress had not repealed the tax, so the I.R.S. was compelled to continue collecting it. This created a peculiar dynamic in which taxpayers who won refunds still had to pay the tax in subsequent years and then reapply for another refund.

Companies in districts where courts had ruled against the tax could get refunds, while companies elsewhere still had to pay it.

Now, the hundreds of companies that applied for refunds before yesterday's decision will not have their claims processed, according to some tax lawyers. That means companies that could have won refunds through the courts might have to wait far longer for their refunds to arrive after they file their income tax returns.

"The Treasury wants to standardize the process, but it's grotesquely unfair to the people who got this started," said Hank Levine, a partner at Levine, Blaszak, Block & Boothby, a Washington law firm that has represented business plaintiffs in most of the successful cases to date. "The I.R.S. didn't want to give up the money, and now that they have been forced to, they are doing so grudgingly."

Congress was close to abolishing the tax in 2000, but it was attached to a larger tax bill that President Bill Clinton vetoed. Congressmen are again calling for its repeal.

Senators Charles E. Grassley , Republican of Iowa, and Max Baucus, Democrat of Montana, asked the Senate Finance Committee yesterday to look also at eliminating the tax on local phone service.

For now, the Treasury said that consumers and businesses would get refunds, including interest, on their 2006 income tax returns filed in 2007. The I.R.S. has not decided the size of the standard refund for individuals. But taxpayers who use a lot of phone services will be able to apply for a larger refund if they can document how much they paid in excise taxes.

The average household spends $10 a month on long-distance calls and $41 a month on wireless service, or $612 a year, according to figures from the Federal Communications Commission. Since those services are taxed at 3 percent, the typical household pays $18.36 a year in federal excise taxes, or $55 over three years.

Consumers, of course, can still expect plenty of taxes and fees on their phone bills. Phone companies are obligated to collect an array of state and local taxes as well as fees that pay for emergency response groups and public services provided by the Universal Service Fund and others.

Phone companies have opposed some of these taxes because of the expense of collecting them, and because it drives up the cost of their services, making them less attractive to consumers.

" Wireless consumers can now turn their attention and efforts to repealing discriminatory wireless taxes on the state and local level," said Steve Largent, the president of CTIA, a trade group that represents cellular companies.

Mr. Largent said 17 percent of the typical monthly cellular bill was made up of taxes and fees.

Carriers, however, are partly to blame for that burden because they charge their customers a range of discretionary fees to recoup their business costs. For instance, some customers are charged "property tax allotment" fees that are meant to pay for a company's real estate taxes. Other companies charge "carrier cost recovery fees" to pay for the administrative costs of collecting taxes.

These fees generate billions of dollars in revenue for the companies.

That is a far cry from 1898, when the tax was first levied and there were 681,000 phone subscribers in the United States, according to James Katz, a telecommunications historian at Rutgers University. Though relatively small in numbers, those subscribers paid a considerable amount in taxes to help finance the government's battle against Spain.

The annual basic charge for a home phone in the 1890's was about $100, or more than $2,200 in today's dollars. A three-minute call from New York to Chicago in 1902 cost $5.45 — about $120 today.

 

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Lampert, Griffin make list of highest paid hedge fund mgrs
By Kate Ryan – Crain’s Chicago Business Online
May 26, 2006

(Crain’s) — After earning more than $1 billion in 2004, Sears Holdings Corp. investor and hedge fund manager Edward Lampert took a 50% pay cut from his fund in 2005.

Mr. Lampert, the activist investor who is now chairman of Sears, brought home $425 million from his Greenwich, Connecticut–based ESL Investments hedge fund last year. That made him the sixth highest-paid hedge fund manager in the world, according to rankings by Institutional Investor’s Alpha magazine (he topped the list in 2004).

Mr. Lampert’s pay fell because his $15 billion fund gained only 9% in 2005, according to the magazine. The merged Sears-Kmart company accounts for two-thirds of the fund’s $11 billion equity portfolio, the magazine reported. Mr. Lampert’s fund is Sears’ largest shareholder, with a 41% stake.

Chicago’s Kenneth Griffin appeared on the list at No. 13, with take-home pay of $210 million last year. Mr. Griffin’s Citadel Investment Group LLC has $13 billion in assets under management.

Hedge fund managers generally collect management fees and keep a portion of profits. James Simons of East Setauket, N.Y.-based Renaissance Technologies Corp. topped the list with take-home pay of $1.5 billion.

 

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Major Los Angeles Project Will Have to Wait Longer
By Michelle Keller, Staff Writer – Los Angeles Times
May 22, 2006

A new owner is expected to be sought to put in housing and retail at the landmark Sears site.

The planned sale of a major redevelopment project in Boyle Heights is raising concerns that the affordable housing and retail outlets that the area needs may be delayed.

Santa Monica-based real estate firm MJW Investments is expected to formally announce today that it is soliciting proposals from buyers to purchase its 23-acre site at Olympic Boulevard and Soto Street.

The site, home of a long-shuttered Sears, Roebuck & Co. distribution center, is a landmark in East Los Angeles and one of the city's largest redevelopment projects in recent years.

The project's proposed addition of condominiums, apartments, stores, offices and restaurants would provide an economic spark for the area, possibly making it less affordable for the community's lower-income residents. As such, the project could add to a growing problem facing many lower-income communities whose real estate prices have surged with the five-year housing boom — in some cases rising faster than in more-affluent areas.

The mixed-use project would have taken five to seven years to complete even under the current owner.

But now the process of finding a buyer and completing the transaction could delay the redevelopment even further, community leaders say. They also express concern that a new owner may not have the community's best interests in mind.

"We now have to expedite the process," said Los Angeles City Councilman Jose Huizar, whose district includes Boyle Heights. "The community's been waiting too long."

Huizar and Mayor Antonio Villaraigosa expressed their commitment to the effort.

"The mayor believes this is an important signature site and he is very committed to making sure that it is redeveloped in an appropriate way," said Diana Rubio, a spokeswoman for the mayor's office. "The biggest interest is in retail because the neighborhood is so underserved by retail."

MJW President Mark Weinstein said the company had been flooded with calls from potential buyers about the development, indicating a great amount of interest. He said MJW would work with the new development firm to ensure that the initial vision stayed the same.

"We're open-minded to how we'll be involved," he said.

Weinstein said he didn't have a minimum asking price and would wait to see the bids.

The new developer will have to determine which structures at the site to convert to new uses and which to tear down and replace.

With more than 1 million people living within a five-mile radius of the site, the need for more retail space and housing units continues to be pressing, Huizar said.

The site also is of historical value to the Boyle Heights community. The nine-story, 1.9-million-square-foot Sears building has long been an icon for Angelenos, said Ken Bernstein of the Los Angeles Conservancy. The distribution center once served as an important mail-order fulfillment center for the company.

"It's clearly one of the great visual icons of the entire Eastside of Los Angeles," Bernstein said. "Its tower is a very visible beacon from the jumble of freeways that really bisect Boyle Heights."

MJW's Weinstein said the company would ease the transition to new owners by providing information from the many community meetings in which the firm had participated.

His firm purchased the property in 2004, envisioning a $450-million project with housing and 660,000 square feet of stores, offices and restaurants. After paying $40 million for the property and investing an additional $10 million in the project, the firm decided to sell the property because it did not align with its business plan of focusing on short-term ventures, Weinstein said.

When it was first slated, the MJW project met with resistance from community leaders concerned that the new housing would drive up prices in the surrounding area. But meetings including developers, city planners and residents helped assuage fears that the area would succumb to gentrification.

As the property is put up for sale, residents and community activists fear that new buyers may not be as amenable to input from nearby stakeholders.

"We know that MJW was willing to come to the table and participate in community meetings that really, truly engaged people," said Maria Cabildo, executive director of East Los Angeles Community Corp., a nonprofit community development organization. "I have concerns about who else might be interested in this property."

Gaining the community's trust again may be a challenge for the next investor, said Frank Villalobos, president of Barrio Planners, an architecture firm in East Los Angeles.

"Is the community going to believe the next guys that come around with their carpetbags?" Villalobos said.

The real estate market has changed since MJW bought the property. With more than 400 affordable-housing units lost to housing project renovations, the extension of County-USC Medical Center and the Hollenbeck police station replacement, finding an affordable place to live in Boyle Heights has become increasingly difficult, community leaders say.

"We're really on the verge of changing as a community in a very dramatic way," Cabildo said. "We have families coming in on a regular basis that are facing huge rent increases — those things weren't happening when the Sears project first came up."

The median price of a single-family home in Boyle Heights hit $395,000 in April, up 27.4% from the same month last year, according to DataQuick Information Systems, a La Jolla-based research firm. By contrast, the median price for single-family homes and condominiums in all of Los Angeles County was up 13.6%.

Cabildo said she was also concerned that the new developers might consult primarily with homeowners — "an anomaly on the Eastside" — and could forget renters.

"People aren't used to consulting with renters, thinking they are only here for a temporary basis, but we have renters that have lived here for two, three decades," she said. "They're not transient. They stay here for generations."

The circumstances may make it more difficult for a developer to construct a mixed-income housing project and still make a decent profit in the area, said Ralph Carmona, an economic development advisor to the board of the Boyle Heights Chamber of Commerce.

After seeing MJW's success with projects such as Santee Court in downtown Los Angeles, a series of garment-district buildings converted into luxury lofts, some are disappointed at the firm's decision to leave the project.

"I'm sad that [Mark Weinstein] is pulling away, to tell you the truth," Villalobos said. "He was offering mixed-use development with the luxury trimmings of his apartments downtown."

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Chicago, City of...? // Refers to "Structural Meltdown" at Sears
By David Greising - Chief business correspondent - Chicago Tribune
May 21, 2006

The industries that once defined us are mostly gone, but now there's a smarter head on those big shoulders

Almost immediately after its publication in 1906, "The Jungle" forced the U.S. government to adopt aggressive new food-safety laws, further developed the genre of muckraking journalism and legitimized the demands of trade unionists, widely considered at the time to be anarchists and terrorists.

But great as those accomplishments were, the book made one other historic mark: It defined Chicago for generations of readers across the country and around the globe.

It portrayed the city as a rugged, tough place where capital got its way, as a place where immigrants sought fortunes-and found great misfortune too. "The Jungle" also defined Chicago as a city where Old World ethnic hatreds found a New World cast. Irish and Germans, Lithuanians and Slavs, all were smelted together, pitted against each other, brutalized yet sometimes unified by lives fed by the glinting and slashing of razor-sharp knives.

Everyone knew animals came to die in the sprawling 320-acre stockyards complex. Sinclair's unique insight was that the mechanized mayhem slaughtered the spirit of the butchers too. By playing host to this, Chicago was somehow implicated.

Other visitors saw it differently. Henry Ford came away inspired by a view that the time-and-motion efficiencies of Swift and Armour could create a new American industry. Carl Sandburg took a more localized view. He saw the stockyards as part of Chicago's place in the modernizing world. They symbolized Chicago's brawn and might, and the spirit of pride and cunning that also marks his landmark poem, "Chicago," which opens with the simple words: "Hog Butcher to the World." For much of the world, that was the reason Chicago mattered.

But what if Sinclair were writing today? Or Sandburg?

No one industry would emerge as an obvious target. Sinclair would be heartened that Chicago was among the first cities where masses of people demonstrated on behalf of immigrant workers. But if he wanted to take up the immigrants' cause today in Chicago, against whom would he rail? The skyscraper construction sites where many find jobs? The hotels where the immigrants make beds? The restaurants where they bus tables? The suburban tracts where they build homes? The small businesses they run?

If a writer today sought to define Chicago by the way its people work, as Sandburg did, that writer would hardly recognize the place from the one Sandburg portrayed.

There are the futures markets, obviously. And United Airlines. Big law and consulting firms and-until Arthur Andersen collapsed-at least one big accounting firm. Ad agencies still have offices here, but most of the big-picture "creatives" whose work once yielded Tony the Tiger and the Marlboro Man have migrated to the coasts. Boeing and Motorola, McDonald's and Abbott Laboratories have become the corporate nameplates of Chicago, replacing older names that had grittier pedigrees.

And there are the hundreds of jobs that give modern Chicago perhaps its biggest, yet its most ethereal asset: quality of life. In terms of self-definition-in shaping Chicago's image for the world-the Steppenwolf Theatre steps in for the steel mills, and the Chicago Symphony Orchestra plays the part of the Union Stock Yards.

Add it up, and a 21st Century Sandburg would make the most of what he has: "Hog Belly Trader for the World, Writ Writer, Consultee of Companies, Builder of Airports and the Nation's Intermodal Carrier, Prideful, Anxious, Hopeful, City of the Stringed Orchestra."

And yet, it is working. Chicago, unlike most cities that came into their prime in the industrial age, has pivoted and begun transforming itself into one of the world's great modern metropolises.

During the Rust Belt downturn of the 1980s, it appeared that Chicago might become another derelict relic of the industrial revolution. Another Detroit or Cleveland. The shutdown of the South Works steel mill in 1992-which once had employed 20,000 people-symbolized a broader breakdown in Chicago's economic standing.

Bad as the manufacturing malaise was, the disappearance of Wieboldt's, the bankruptcy of Montgomery Ward & Co. and the structural meltdown at Sears, Roebuck & Co. was equally profound. Merchants had led the drive to bring the World's Fair to Chicago in 1893. Three years after "The Jungle" was published, they had pushed for the Burnham Plan that saved Chicago's lakefront in 1909. If Chicago's great merchant class could not cope with the challenges of a modern world, it was feared, then the city was in real trouble.

But Chicago had too much going for it to just wither and die. Without really knowing it, and without any centralized planning, Chicagoans had put together some of the raw materials for success in the post-industrial society.

The financial markets tied the city into global networks and created a class of "knowledge workers" long before the term became fashionable. Sir Georg Solti took the Chicago Symphony on world tours that won Chicago respect as a place of culture and excellence. Law firms such as Baker & McKenzie globalized ahead of their brethren, and Arthur Anderson & Co.'s expansion into consulting-though ultimately an ill-fated move because of the conflicts of interest it created-branded Chicago as a place where leading-edge professional services could be found.

William Testa, an economist at the Federal Reserve Bank of Chicago, studies the city and its economic changes more closely than perhaps any economist in the country. And he is impressed by what he has witnessed. Between 2000 and 2004, Illinois lost 150,000 manufacturing jobs, a drop of nearly 18 percent. And yet, the overall economic base has grown and, unlike those of most major cities, Chicago's central business district is booming.

"Chicago has done very well. It has shed all this manufacturing and not really suffered a long-term decline," Testa says.

Chicago can hold its position even in the age of knowledge, when flows of information are as important as flows of capital or the movements of railroads and equipment. "We are in an information age," says Testa. "We can transmit anywhere around the world. But we still want to get unambiguous, creative information face to face. We haven't eliminated the need for that."

Chicago is well-situated for such needs. It is centrally located, has a deep pool of information-age talent, the cultural amenities that knowledge workers want and the service industries to support them.

To see how Chicago has made this transformation from the manufacturing to the knowledge age, there may be no better place to look than the trading floors of Chicago's futures exchanges.

They are places of creative destruction-the important but sometimes messy process of reinvention by which the old is cast aside to make way for something better. Both the Chicago Mercantile Exchange and the Chicago Board of Trade built huge new trading floors during the early 1990s. Now the floors seemingly have acres of open space because much of the trading has gone electronic and open-cry pit trading can't keep up with computers in most markets.

The Chicago exchanges nearly blew their chance to adapt: Internal strife slowed their embrace of technology, and European exchanges jumped in and grabbed market share. But once the Merc, and then the Board of Trade, did decide to change, they took advantage of the critical mass of local trading talent and have seen their volume-and their profile in international markets-soar.

The Merc's trading floor still has room for people like John Staren, who symbolizes Chicago's first step out of the "jungle" and into the global marketplace. As a young man, he worked at a meat broker that depended on the stockyards for its business. His father procured canned meat for the military during World War II.

Since 1963, Staren has traded pork bellies on the Merc's floor, a vestige of the days before electronics took over. The traders still jostle and joke as they try to edge out each other for profit on incremental price changes.

Staren and others in the belly pit say they will never go upstairs and sit in front of computers. "All the guys I know who trade upstairs aren't making money," Staren says. "We're floor traders. I don't want to trade on a screen."

Thanks to the boost from electronic trading, the Merc's stock price has made a Google-like surge since going public, trading at around $500 a share recently, more than 10 times its offering price in January 2003. It has helped Chicago remain a center for innovation in financial trading.

When the New York Stock Exchange decided to go electronic, it merged with a Chicago e-trading firm, Archipelago Holdings, which had built a reputation as the most sophisticated purveyor of trading technology.

Chicago's economic transformation has not been without problems. Entering an era in which technology would create new businesses, the city kept losing its most promising technologists. The founders of Netscape, the search engine that ushered in the Internet age, left Illinois after a dispute with the University of Illinois over control of their software. U.S. Robotics, which helped develop the Palm Pilot, sold out prematurely in 1997 to a Silicon Valley company.

Chicago had the intellectual heft and the financial resources to sustain a high-technology industry, but it lacked-and still lacks-an entrepreneurial infrastructure. Our universities don't encourage an entrepreneurial spirit among professors, as the likes of the Massachusetts Institute of Technology and Stanford University do. Leading technology companies such as Motorola have not spawned startups, as Hewlett-Packard once did. And Chicago's venture capitalists chased deals in Silicon Valley and elsewhere rather than at home.

Even so, Chicago's advances far outweigh its setbacks. University of Chicago sociologist Saskia Sassen says modern global cities will be less constrained by the limits of geography and capital than in the past. The networking effect of talent and knowledge will be the key to success. On that front, she argues in a book published by the Global Chicago Center, Chicago is among a few dozen urban centers around the world that have a chance to become true global cities.

Richard Florida, a George Mason University professor who coined the term "The Creative Class" to describe those who would lead the world in the age of the Knowledge Economy, says of Chicago: "[It's] city that is in the moment. It's more than just arts and culture; it has become a very open and exciting place . . . Its financial markets, its investment community, its arts. It's a creative economy in the broadest sense."

He notes that some of its lesser-known attributes are what make the city attractive today: the surge in housing downtown, investment in amenities such as Millennium Park, the planned expansion at O'Hare, the falling crime rate.

Every year, Florida surveys his students about where they want to live after college. Trends come and go, he says. Boston gets hot, then fades. Silicon Valley has its ups and downs. But Chicago every year ranks among the top three.

Alan Warms is the sort of person Florida has in mind when he explains why Chicago is attractive to the creative class. Warms went to business school at Northwestern, then worked for a consulting firm and a couple of other companies. When it was time to start his own firm in 1977, he stayed in Chicago. His company, Participate.com, was a dot-com affair, creating online communities for "brick and mortar" companies like Procter & Gamble, AT&T and Ace Hardware.

He raised $13 million, mostly from Chicago-based investors, and hired local talent. Sales reached $9 million in 2001. Then, after the dot-com bust, business dried up.

Warms sold the business, started looking for new opportunities-and found them. He's running a startup called Participate Media LLC from a loft office in Wrigleyville. The company publishes RealClearPolitics.com, a web clearinghouse of political commentary and analysis, and he is working on deals to create other Web properties.

"You hear a lot of complaining and hand-wringing" about Chicago as a place for technology startups, he says. "But I think it's a great place to start a business. You can raise money. It's a really big city, yet it's small enough that you're one degree of separation from everyone you need to meet."

Even in the neighborhoods that Sinclair studied when writing "The Jungle," the boom in the city's fortunes is more than a distant vision. Drive through the Stockyards Gate, and one enters the Stockyards Industrial District. There one sees Gordon Bros. Iron & Metal Co., Ebro Foods, Shred-All Recycling. Food services company Aramark has a major distribution center.

These are not knowledge-economy employers. But they create the kinds of jobs that sustain a city that must live on more than a downtown filled with parks and museums and office buildings.

Back in the "Jungle" days, this neighborhood was filled with people whose very job descriptions were enough to make some people ill. "Cattle drivers, hangers, hoisters, splitters, gut throwers, neck splitters, vein tiers, washers, trimmers, weighers and refrigerated car loaders" is the list on a plaque posted at the stockyards gate.

Today, the neighborhood is filled with construction workers, house painters, food processors and even meatpackers. The Great Western Beef Co., just outside the gate, is still in business after 99 years. Paul Borgia, says Great Western now takes slabs of meat from Kansas and Nebraska and trims them into steaks and stew meat for restaurants.

"You don't see much swinging stuff anymore, he says, referring to the carcasses that were a visual icon of the stockyards

In Sinclair's time, the stockyards, steel mills and railroads defined Chicago. In existentialist argot, it was capital ergo urbis. I have capital, therefore I am a city.

Capital sought out other capital, in part to fill its needs, in part to amplify its effects. And concentration of capital is what made cities great.

Today, the capital that matters is intellectual, artistic and creative capital. Shoulders need not be broad any more, but minds must be. A new kind of slaughter must take place: the creative destruction that helps one industry's death beget another industry's birth.

This is the sort of work that defines Chicago today. It's a jungle out there in the global economy. But so far, Chicago seems fit to survive-and even thrive.

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Make Sure Your Money Lasts as Long as You
By Jonathan Clements – Getting Going – The Wall Street Journal Online
May 21, 2006

Retirement is a time to kick back, relax and wonder whether you will outlive your savings.

This, I regret, is a real danger. Spending down a portfolio in retirement is a wildly tricky exercise.

The problem: In all likelihood, you will want to spend more than your portfolio's after-cost, after-tax, after-inflation rate of return. And, in the long run, that can spell trouble.

Treading Water

Imagine you and your spouse retired at age 65 with a $400,000 investment portfolio that's divided equally between stocks and bonds. Let's also assume inflation runs at 3% a year throughout your retirement, while your bonds clock 5.5% and your stocks earn 8%.

You are fairly careful about investment costs, so expenses nick just half a percentage point a year out of your bond results and take just one percentage point a year from your stocks. That will give you an annual after-cost gain of 5% on your bonds and 7% on your stocks.

Based on your 50-50 stock-bond mix, your overall portfolio would notch 6% a year. If you pulled out half of that 6% each year to cover living expenses and reinvested the other half, you would be in great shape. The reason: Even after making your annual withdrawal, your portfolio would grow at 3% a year, keeping pace with inflation.

But unless you are extraordinarily wealthy, a 3% withdrawal rate won't be enough to live on. The odds are you will need to withdraw much or all of the 6%. That's especially true once you factor in taxes, which might snag 10% or 15% of your 6% return.

So what happens if you withdraw much or all of your 6% annual gain? Sure, your portfolio might initially tread water or continue to grow slightly. But you could still end up in dire financial straits.

Spiraling Down

To understand why, imagine you withdrew 6% of your $400,000 nest egg, or $24,000, at the start of your first year of retirement. That leaves you with $376,000, which goes on to earn 6% over the next 12 months, so you are back up to $398,560 by the end of the first year.

That might seem pretty good. You still have almost $400,000, even after making your first annual withdrawal. Instead, the first hint of trouble comes the following year. In that second year of retirement, to keep pace with inflation, you really need to withdraw 3% more, or $24,720.

Making allowances for inflation might seem like a minor matter, especially if consumer prices are rising at a mere 3%. But even a 3% annual inflation rate will eventually take its toll, boosting the cost of a $1 item to $1.81 after 20 years.

Faced with steadily climbing consumer prices, you will need to take larger and larger annual withdrawals. Remember how your parents warned you to "never dip into principal" and "never touch your capital"? Suddenly, you're on that slippery slope -- and things can get ugly quickly.

Let's assume you keep stepping up your annual withdrawals with the 3% inflation rate, while your remaining investments continue to grow at 6%. Your portfolio would slip permanently below $300,000 when you and your spouse are age 77 and your savings would fall below $200,000 when you're age 81.

By age 87, you would be down to your last $10,471 -- and unable to afford that year's desired withdrawal, which is now up to $45,986, thanks to all those years of 3% inflation.

Of course, you might not live until age 87. But that isn't a good bet. If both you and your spouse are age 65 and in good health, there's a 50% chance that one of you will live until at least age 92.

Playing Defense

What to do? In all likelihood, you won't have any choice but to spend more than your portfolio's after-cost, after-tax, after-inflation rate of return. Still, a little caution is clearly in order.

For instance, if you trimmed your initial withdrawal to 5%, your portfolio wouldn't give out until you and your spouse are age 94, while a 4.5% withdrawal rate would get you through to age 99. Even then, you wouldn't necessarily be out of the woods. In the scenario described above, we made some huge assumptions, including steady inflation, steady bond returns and steady stock returns.

But in truth, we don't know what inflation, bonds and stocks will average in the years ahead, nor do we know when the next spike in inflation or the next plunge in stock prices will occur. To see how year-to-year financial craziness can affect a withdrawal strategy, check out firecalc.com <http://firecalc.com/> 1, which incorporates investment returns from 1871 on.

Alternatively, head to www.troweprice.com 2 and click on either of the two links directly beneath "individual investors." From there, go to the tab for "investment planning & tools" and try the retirement-income calculator in the section devoted to retirement planning. The calculator figures out your withdrawal strategy's chances of success by looking at how it would perform in 500 different market scenarios.

A big risk: You retire and immediately get hit with a vicious bear market, like the one that started in March 2000. If that happens, the one-two punch of plunging stock prices and rising withdrawals could quickly eviscerate your portfolio.

Faced with that risk, you shouldn't avoid stocks and stock funds. A healthy stock allocation is necessary to generate the sort of long-run inflation-beating gains needed to carry you through a retirement that might last 30 years. Instead, if you get hit with really rough markets, focus on temporarily trimming your spending and avoiding all stock sales until the market recovers.

To give yourself an added layer of protection, you might stash, say, 25% of your nest egg in an immediate fixed annuity that pays lifetime income. You could also keep a cash cushion equal to three or five years of portfolio withdrawals. Invest this cash cushion in a mix of short-term bonds and a money-market fund.

Thanks to your cash cushion and the annuity's income, you will have a reliable source of spending money during rough markets. Your goal: Live off these income sources, while you wait for your stock-market investments to bounce back.

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Arthur Martinez to chair ABN AMRO advisory board
Crain’s Chicago Business Online
May 19, 2006

Former Sears, Roebuck and Co. chief Arthur Martinez has been promoted to chairman of the supervisory board of LaSalle Bank Corp.’s Dutch parent.

Mr. Martinez, 66, has served on the 12-member supervisory board of ABN AMRO Bank N.V. since 2002.

The board is an adviser to the banking company’s managing board, and its members are not employees. Mr. Martinez also serves on the board’s audit committee, nomination and compensation committee and compliance oversight committee.

Mr. Martinez is also on the boards of directors of PepsiCo Inc., Liz Claiborne Inc., IAC/Interactive Corp. and International Flavors & Fragrances Inc.

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Sears turns a 1Q profit, but can it sustain growth?
By Nathaniel Hernandez - The Associated Press
Suburban Chicago Newspapers
May 19, 2006

HOFFMAN ESTATES — Executives at Sears Holdings Corp. rolled the dice a year ago on an aggressive profitability strategy, and it seems the gamble is paying off.

But analysts say the company needs to collect its winnings and move on to another table where it can address sliding same-store sales and lost market share.

Sears turned a $9 million loss during the first quarter of 2005 into a $180 million profit for the same period this year, easily beating Wall Street estimates.

Investors celebrated by opening their wallets as Sears shares climbed almost 13 percent Thursday.

But the news wasn't all rosy for Sears.

The company announced Thursday that it was paying $215 million to settle a federal class-action lawsuit. And the same earnings report that helped boost the company's stock also showed same-store sales continue to decline.

George Rosenbaum, chairman of Leo J. Shapiro and Associates, a Chicago-based retail consulting firm, said the company's strategy has been a short-term fix.

"If they were operating as a retailer with a future, they would have a loss because they would be investing in making a more powerful retail mechanism," Rosenbaum said. "What they are doing is disinvesting to generate more profits. The profits are about the maximum you can expect to make and still run a minimally creditable retail store."

Cost-cutting measures were implemented by the company after it was formed last year through Kmart's acquisition of Sears.

The company has slashed its work force, the amount of money spent on advertising and the number of promotions offered. It has also aggressively edited the product lines in their Sears stores, Rosenbaum said.

"If it doesn't sell well, they throw out the entire department," Rosenbaum said. "They don't keep departments to be a complete or encyclopedic store."

In its earnings report, the nation's third-largest retailer said the measures helped improve profitability at both its Kmart and Sears chains in the United States.

Industry observers said the figures show the company's cost-cutting measures are working, but questioned how much longer Sears can continue to lose market share.

Sales in stores open at least one year, a widely used industry gauge known as same-store sales, declined 4.8 percent domestically. Same-store sales fell 8.4 percent at Sears' U.S. stores due to sales drops in all categories except home appliances, the company said.

Same-store sales slipped 0.2 percent at Kmart due to lower transaction volume from home goods, partially offset by higher apparel and food sales.

"The real question is whether this is sustainable over the long run," said Morningstar analyst Kim Picciola. "How much longer can we continue to see a decline in same store sales and margin improvement from a cut in spending?"

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Attention Michigan: Kmart's empty vows offer lessons
By Daniel Howes - Detroit News
May 19, 2006

Eighteen months ago, Oakland County Exec L. Brooks Patterson and I were sitting in a restaurant in Germany, mulling the blockbuster news back home: Kmart Corp. was buying Sears, Roebuck and the new corporate headquarters would be in suburban Chicago.

Michigan, Patterson rightly predicted in more colorful language than I'm allowed to use here, would get screwed.

Oh, no, Chairman Eddie Lampert said, Kmart would prosper. Troy would remain a viable regional headquarters. Kmart's Martha Stewart line, its value enhanced during the diva's detour into the slammer, would flourish.

All this from the guy who'd been stringing along Gov. Jennifer Granholm and her people with the prospect that an independent Kmart was just days away from solidifying its HQ in southeast Michigan -- thanks to an incentive package worth roughly $200 million in taxpayer dough.

Promises made, broken

None of it happened. The business changed. The competition was tougher than expected. The power moved to suburban Chicago and Lampert's Connecticut offices. The scale of Kmart's decreptitude, the culmination of decades of mismanagement and denial, proved too vast to reverse.

Right. Kmart's big brown headquarters on Big Beaver Road has a new owner, the furniture and supplies sold off in a blue-light garage sale. The symbolic indignity confirms Kmart's slide from the corporate Michigan scene, just as Crowley's, Jacobson's, American Motors and others did before it.

There's a cautionary tale here as thousands of auto workers and their salaried counterparts mull whether to leave their sinecures on guarantees of health benefits and pensions, and it's this:

Some of Corporate Michigan's biggest players have an earned reputation for making promises they cannot keep. For some, the deception was intentional (Kmart) or convenient (Daimler-Chrysler's "merger of equals").

Others proffered a vision of the future that was devoid of realism, utterly unattainable in a competitive business they no longer can bend to their corporate will. To wit: GM's 29 percent market share and Ford's a $7 billion profit by mid-decade.

Skeptics 'R' Us

Didn't happen.

Now, there are few sure things in business, particularly Old Economy plays in the new global order. Be they salaried or hourly, workers can't be blamed for seeking assurances from the brass anymore than they should be criticized for not believing what they hear when they get them.

Kmart's bankruptcy gutted the portion of employee 401(k) plans held in Kmart shares. In a sweeping victory for the dispossessed, a federal judge approved an average repayment of $162 for about 71,000 current and former employees. Gee, thanks.

No wonder e-mails are circulating among UAW members warning that the mondo attrition plan crafted by GM and its former parts unit, bankrupt Delphi Corp., "does not stipulate that GM will guarantee the pension if Delphi decides to terminate the pension after" October 2007.

Meaning there are no guarantees, even if it says there are.

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New Sears mystifies analysts
By Mike Comerford - Business Writer - Daily Herald Suburban Chicago
May 19, 2006

Stock jumps after earnings far exceed experts" expectations

Lots of people think they know Sears — we grew up with its appliances and clothes. Yet even those who closest follow the retail department store chain these days get it wrong. Sears, Roebuck and Co. morphed last year into Sears Holdings Corp. upon its merger with Kmart and it has mystified analysts ever since. Sears Holdings on Thursday surprised Wall Street with quarterly earnings 75 percent higher than the consensus estimate of analysts, according to Thompson Financial. As a result, Sears shares soared $17.89, or 13 percent, to $155.85 on the Nasdaq Stock Market.

Why were Wall Street analysts so wrong about Sears and who can be trusted to analyze Sears’ future?

There appears to be a sharp divide between retail analysts and Wall Street analysts.

“I can’t tell you what (Wall Street analysts) are looking at,” said Howard Davidowitz, chairman of Davidowitz & Associates, a New York City-based retail consulting and investment banking firm.

Equity analyst Kim Picciola doesn’t make quarterly earnings estimates, but acknowledges how wrong Wall Street was this time around.

At the same time, Sears same-store sales fell 8.4 percent for the quarter and the holding company’s revenue fell 12 percent. Some analysts question how long earnings can be propped up by cost cutting if sales continue to fall.

“Looking at (Sears) purely as a retailer, it looks bleak,” said Picciola, analyst for Chicago-based Morningstar Inc. “But if you look at (Sears) as a real estate or other business that it can transform into, there are other options more on the upside. That’s why people are investing in the stock.”

Clearly, some analysts on Thursday were happy Wall Street estimates of Sears earnings were wrong.

“We continue to view Sears as an undervalued turnaround story,” said Gary Balter, a Credit Suisse analyst, in a report.

Balter said the company made progress on “all fronts” except management of working capital. He rates the shares “outperform” and he is the top-ranked Sears analyst by StarMine Professional.

But even his earnings estimate was 33 percent lower than what Sears reported.

“Progress is definitely being made,” agree Scott Rothbort, president of New Jersey-based Lakeview Asset Management.

Off-the-mark earnings estimates and such a wide disparity of views about the company may stem in part from Chairman Edward Lampert’s reticence to share information. For example, the company no longer reports monthly sales numbers and doesn’t hold the extensive analyst briefings of the past.

“Other companies I give guidance on give more (financial) transparency,” Picciola said. “There are so many moving parts with Sears … it’s a merging company … there are so many initiatives going on … and it’s a turnaround story.”

Sears earned $180 million, or $1.14 per share, versus a loss of $9 million, or 7 cents per share, during the same period last year. Revenue fell from $12.8 billion to $12 billion.

Sears also said it will pay $215 million to settle a class-action suit that alleged the company misrepresented the health of its credit card business in 2001 and 2002. The company sold the unit in November 2003.

Lampert, the hedge fund manager who engineered Kmart Holdings Corp.’s purchase of Sears, Roebuck and Co., cut payroll and administrative costs 11 percent to lift profit at both chains.

Lampert, 43, combined Sears with Kmart to create the No. 1 U.S. department-store operator by sales. Since Kmart took over Sears in March 2005, Lampert has shut Kmart’s Troy, Mich., headquarters and fired more than 1,500 employees.

Some analysts speculate Lampert is interested in Sears as a holder of high-value real estate. Others view him as someone who wants to change Sears into an investment firm and wind down retail operations. However, Lampert has said he’s committed to building the retailer and won’t sell large numbers of stores.

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Sears profit, shares surge; doubts linger
Chicago Tribune news services
May 19, 2006

Shares of Sears Holdings Corp. posted their largest increase in more than a year Thursday after the company reported first-quarter profit that beat estimates, but many analysts say they still aren't sold on the firm's turnaround.

The Hoffman Estates-based retailer reported net income of $180 million, or $1.14 a share, easily surpassing estimates of 65 cents a share, according to Thomson Financial.

Chairman Edward Lampert, who arranged Kmart Holdings Corp.'s purchase of Sears, Roebuck and Co., cut payroll and administrative costs 11 percent to lift profit at both chains.

First-quarter revenue was $12 billion. A year ago, Sears had a net loss of $78 million, or 48 cents a share, on revenue of $12.8 billion. Those figures are calculated as if the companies combined at the beginning of fiscal 2005, though the merger didn't happen until March of that year.

Shares of Sears rose as high as $160.01 before closing at $155.85, up $17.89, or 13 percent, on the Nasdaq stock market.

"While we're pleased with the progress we're making, we continue to look for ways to be more efficient and effective in our business," said Sears Chief Executive and President Aylwin Lewis.

Scott Rothbort, president of Millburn, N.J.-based Lakeview Asset Management, agreed. "Progress is definitely being made," he said. "I think they're starting to get their merchandising right."

Other analysts aren't so optimistic. Same-store sales continue to languish at Sears and Kmart, and some are wondering how the nation's third-largest retailer plans to recapture lost market share amid heightened competition.

Same-store sales, or sales at stores open at least a year, are considered a key indicator of a retailer's health. Sears posted declines in same-store sales in all categories except home appliances. At Kmart, sales of home goods fell, while clothing and food sales rose.

Industry observers said the figures show the company's cost-cutting measures are working, but they questioned whether Sears can maintain profits while it keeps losing market share.

"How much longer can we continue to see a decline in same-store sales and margin improvement from a cut in spending?" said Morningstar analyst Kim Picciola.

While the cost-cutting has helped Sears' bottom line, it has also aided its competitors, said Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based retail consulting and investment banking firm.

"They have fueled the turnaround of many of their competitors because they have lost many of their customers," he said. "All things being equal, I would say that within 12 months you will see the earnings start to go the other way, downward, because what they are doing is not sustainable. ... There's only so much you can do with cost-cutting."

George Rosenbaum, chairman of Leo J. Shapiro and Associates, a Chicago-based retail consulting firm, said the firm's strategy has been a short-term fix. "If they were operating as a retailer with a future they would have a loss because they would be investing in making a more powerful retail mechanism. What they are doing is disinvesting to generate more profits. The profits are about the maximum you can expect to make and still run a minimally creditable retail store."

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Looks like slash and stash strategy is paying off for Sears
By Sandra Guy – Business Reporter - Chicago Sun-Times
May 19, 2006

Sears' stock shot up 13 percent Thursday after the retailer reported its first-quarter profit jumped higher than expected despite continued sales declines at Kmart and Sears stores.

The stock closed Thursday at $155.85, up $17.89.

Thursday's earnings report showed for the second straight quarter that Sears Holdings Chairman and hedge-fund guru Edward S. Lampert is slashing costs and jobs to focus on building cash and boosting shareholder returns.

Sears Holdings cut payroll and administrative costs 11 percent to boost the bottom line at the company's Sears and Kmart department store chains in the latest quarter that ended April 30.

Yet sales continued to fall: 8.4 percent at Sears stores, and a less dramatic 0.2 percent at Kmart in the quarter.

The Hoffman Estates-based Sears Holdings also said Thursday it agreed to pay $215 million to settle a class-action lawsuit filed by shareholders who alleged Sears executives fraudulently misled them about the health of Sears Roebucks' credit-card business in 2001 and 2002. Insurance carriers are expected to pay all but $85 million of the total.

Sears surprised Wall Street by reporting profits of $180 million, or $1.14 a share, for the quarter ended April 29, vs. a loss of $9 million, or 7 cents a share, a year ago. Analysts' average estimate was only 65 cents a share.

Revenue jumped 57 percent to $12 billion from $7.63 billion a year earlier. The revenue figures are skewed because Kmart's March 2005 takeover of Sears is treated as though it happened at the start of fiscal 2005.

Analysts had mixed reactions, but repeated their stance that the real proof of a turnaround will be in the next quarter's sales results at stores open a year or longer.

Said Gregory Melich, a Morgan Stanley analyst, "The moment of truth will be if [comparable-store sales] can stabilize."

Said Carol Levenson of research firm Gimme Credit, "We can't wait to see what kind of a retailer Sears will be when it grows up."

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Mayor Bloomberg, Governor Pataki Cut Ribbon For New Sears Headquarters
NY1NEWS
May 18, 2006

As the head of the state assembly was questioning why rebuilding at the World Trade Center site wasn't moving faster, Mayor Michael Bloomberg and Governor George Pataki were just blocks away celebrating another corporate move to Lower Manhattan.

This time it's the company behind Sears and K-mart. Mayor Bloomberg and Governor Pataki, joined by Sears Holding executives, cut the ribbon for the new headquarters for the company's design department. It creates clothes and accessories for Sears and K-Mart stores.

"It's no surprise that Sears is expanding its offices in New York City, you should know,” said Bloomberg. “When Sears went retail in 1925 – no, I was not around then – it relied on its buying offices in New York to find products to appeal to fashion-conscious retail customers throughout the country."

Sears design offices used to be based in Chelsea.

Sears Holdings says it will more than double the design workforce by hiring 120 new employees at the new offices.

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Sears Swings to Profit on Cost Cuts
A Wall Street Journal Online News Roundup
May 18, 2006

Sears Holdings Corp. swung to a first-quarter profit despite declining sales at its Sears and Kmart chains, as the retailer continued to cut costs aggressively. It also settled a lawsuit.

The Hoffman Estates, Ill., company -- which was formed in March 2005 with the merger of Sears and Kmart -- reported net income of $180 million, or $1.14 a share, for the quarter ended April 30. Sears had a loss of $9 million, or seven cents a share, a year earlier, when it took a $90 million charge on a change in its inventory-accounting method. Excluding that charge, Sears would have posted earnings of $81 million, or 65 cents a share, last year.

Analysts had expected a profit of 65 cents a share for the most recent period, according to Thomson First Call.

"While we're pleased with the progress we're making, we continue to look for ways to be more efficient and effective in our business," said Aylwin Lewis, Sears Holdings' chief executive officer and president.

Revenue rose 57% to $12 billion from $7.63 billion a year ago, primarily due to the inclusion of Sears operations for the full 13-week period in the latest quarter.

Still, same-store sales fell 4.8%. Kmart's comparable-store sales -- which had increased during the fourth quarter for the first time since 2001 -- dropped 0.2%. The company blamed sluggish sales of home goods, which were partially offset by increased sales in apparel, food and other consumable items.

At Sears stores, same-store sales fell 8.4% with "declines across all categories and formats except within home appliances," which generated a "modest" increase, the company said.

"With a goal of dramatically improving the customer experience at all of Sears Holdings' touch points, we are starting with the basics and working with our associates to drive the culture shift necessary to become a great retail company," Mr. Lewis said.

Separately, Sears announced its Sears, Roebuck & Co. unit agreed to settle a class-action lawsuit brought in federal court by purchasers of Sears, Roebuck securities from Oct. 24, 2001, through Oct. 14, 2002.

The company said it has agreed to make a payment of $215 million to settle the suit, which concerned statements made about the company's credit business during the class-action period. After giving effect to anticipated insurance proceeds, Sears expects its portion of the payment to be about $85 million on a pretax basis.

The company doesn't expect an impact on earnings from the settlement because it previously established a reserve. Sears noted that it didn't admit to any wrongdoing by agreeing to the settlement, and it denies committing any violation of law.

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Sears shares sharply higher as cost controls aid profit
By Michael Baron - William Spain
Investors Business Daily.com
May 18, 2006

NEW YORK (MarketWatch) -- Shares of Sears Holding jumped more than 13% Thursday after it posted a hefty increase in first-quarter earnings at its Kmart and Sears domestic operations that were driven by cost cutting.

Before the opening bell, Sears (SHLD) reported a profit of $180 million, or $1.14 a share, for the quarter ended April 29, up from a year-ago loss of $9 million, or 7 cents a share. Excluding the charge, Sears Holdings earned $81 million, or 65 cents a share, last year.

Sears latest results also benefited in comparison with last year's comparable quarter by the absence of a $90 million charge related to a change in accounting for certain inventory costs.

On a pro forma basis, calculated as if Kmart and Sears had been combined by the beginning of fiscal 2004, the company earned $12 million, or 7 cents a share, in last year's first quarter, excluding the impact of the accounting change.

The average estimate of analysts polled by Thomson First Call was for a profit of 65 cents a share in the period ending in April.

Total revenue rose in the latest three months to $12 billion from $7.63 billion a year ago, primarily due to the inclusion of Sears operations for the full 13-week period in the latest quarter. Sears domestic same-store sales fell 8.4% in the quarter, while Kmart's comparable stores slipped 0.2%.

The stock jumped $17.89, or almost 13%, on the day to close at $155.85 after cracking to a high of $160.01 earlier on.

"While we're pleased with the progress we're making, we continue to look for ways to be more efficient and effective in our business," said Aylwin Lewis, Sears Holdings' chief executive officer.

Lewis added that Sears is "starting with the basics and working with our associates to drive the culture shift necessary to become a great retail company."

The company attributed the dip in same-store sales at Kmart to lower transaction volumes within home goods, while it said the decline in Sears Domestic comparable sales was due to drops across all categories and formats, except home appliances.

Analyst reaction

Morgan Stanley said the results should please shareholders, especially the successful cost cutting.

"It was all about margins, which expanded to 2.8% vs. our 1.9% estimate and 0.7% a year ago," it said in a research note. "SG&A (selling, general and administrative expenses) was cut by $300 million vs. our expectation of a $160 million decline, which took SG&A/sales down to 22.7% from 23.8%."

The firm noted that this is the last quarter where comparisons are against the cost base prior to completion of the Kmart/Sears merger.

"The moment of truth will be if comps can stabilize (go towards zero) as the money amounts of SG&A cuts, in our view, decelerate," Morgan told clients, adding that it believes the final three quarters of the year will see $230 million in lower SG&A.

Class action settlement

In addition, the company said its Sears, Roebuck & Co. unit agreed to settle a class action lawsuit brought in federal court by purchasers of Sears, Roebuck securities from Oct. 24, 2001, through Oct. 14, 2002.

The company agreed to make a payment of $215 million to settle the suit, which concerned statement made about the company's credit business during the class action period.

After giving effect to anticipated insurance proceeds, Sears expects its portion of the payment to be about $85 million on a pretax basis. The company doesn't expect an impact on earnings from the settlement because it previously established a reserve. Sears noted that it didn't admit to any wrongdoing by agreeing to the settlement, and it denies violating the law.

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Sears posts 1st-quarter profit vs loss
Reuters.com
May 18, 2006

Sears posts 1st-quarter profit vs. loss

Sears Holdings Corp. on Thursday reported a quarterly profit, reversing a year-ago loss, as it cut costs and eliminated clearance sales at its Sears stores.

Sears Holdings, the owner of Sears and Kmart stores, said net income was $180 million, or $1.14 per share, in the fiscal first quarter ended April 29, compared with a loss of $9 million, or 7 cents per share, a year earlier.

Analysts, on average, had expected a first-quarter profit of 64 cents per share, according to Reuters Estimates. The retailer typically does not provide earnings forecasts.

Shares rose 7.2 percent in premarket trading.

Last year's results included a charge of $90 million for an accounting change. Excluding that, the retailer had a profit of $81 million, or 65 cents per share.

Quarterly sales jumped by $4.4 billion to $12.0 billion, although the results were skewed by Kmart's acquisition of Sears, Roebuck & Co., which closed in March 2005 and was therefore only partly reflected in the year-ago results.

Sales at stores open at least a year -- a key retail measure known as same-store sales -- were down 0.2 percent at Kmart and down 8.4 percent at Sears stores.

The retailer said sales at its Sears stores declined in all categories except for home appliances, which generated a "modest" increase.

Under Chairman Edward Lampert, the hedge fund manager who brought Kmart out of bankruptcy and later bought Sears, the retailer has focused on cutting costs and building cash.

Lampert has eliminated profit-crunching clearance sales at Sears stores, but that has exacerbated sales declines, leading some analysts to question the chain's future.

Some investors and analysts think Lampert intends to sell off the stores to cash in on the valuable real estate, but Lampert has insisted that he intends to continue running Sears as a retailer.

The company reported $3.2 billion in cash at the end of the quarter, up from last year's $1.9 billion.

The stock rose $9.95 to $147.91 on the Inet electronic brokerage system.

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Sears Settles Credit Card Lawsuit
HoustonChronicle.com  -  Associated Press
May 18, 2006

HOFFMAN ESTATES, Ill. — Sears Holding Corp. said Thursday it reached a $215 million settlement in a shareholder lawsuit alleging that the company had hidden from shareholders weakness in the company's credit card business. The settlement is subject to court approval.

The company expects to pay $85 million after insurance proceeds. Because the company had reserved money for the suit - which had been pending in the U.S. District Court for the Northern District of Illinois - the company does not expect the settlement to affect earnings.

Shareholders who purchased stock between Oct. 24, 2001 and Oct. 14, 2002 had filed a number of lawsuits against the company, alleging the company overstated the value of its credit card business and understated risks and delinquency rates. When the company revealed the true state of the credit card business in October 2002, the stock fell almost 32 percent, the lawsuit said.

The company will disclose more details of the settlement after it is approved.

Sears did not admit guilt as part of the settlement. The company has since sold its credit card business.

Earlier Thursday, Sears Holdings reported a first-quarter profit topping Thomson Financial consensus estimates and reversing a year-earlier loss.

Shares of Sears rose $16.57, or 12 percent, to $154.53 in early Nasdaq trading.

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Sears' first-quarter profit beats expectations
Crain’s Chicago Business.com
May 18, 2006

Sears' first-quarter profit beats expectations
Cost-cutting and eliminating clearance sales boosted profit

(Reuters) — Sears Holdings Corp. on Thursday reported a much bigger-than-expected quarterly profit as it cut costs and eliminated clearance sales at Sears stores, sending its stock up nearly 9 percent in heavy premarket trading.

The No. 3 U.S. retailer, formed last year when Kmart bought Sears, Roebuck & Co., also said it agreed to settle class-action litigation involving comments made about the credit card business it has since sold.

The company said net income was $180 million, or $1.14 per share, in the fiscal first quarter ended April 29, compared with a loss of $9 million, or 7 cents per share, a year earlier.

Analysts, on average, had expected a first-quarter profit of 64 cents per share, according to Reuters Estimates. The retailer typically does not provide earnings forecasts.

Last year's results included a charge of $90 million for an accounting change. Excluding that, the retailer had a profit of $81 million, or 65 cents per share.  Quarterly sales jumped by $4.4 billion to $12.0 billion, although the results were skewed by Kmart's acquisition of Sears, which closed in March 2005 and was therefore only partly reflected in the year-ago results.

Sales at stores open at least a year — a key retail measure known as same-store sales — were down 0.2 percent at Kmart and down 8.4 percent at Sears stores.

The retailer said sales at its Sears stores declined in all categories except for home appliances, which generated a "modest" increase.

Under Chairman Edward Lampert, the hedge fund manager who brought Kmart out of bankruptcy and orchestrated the Sears takeover, the retailer has focused on cutting costs and building cash.

Lampert has eliminated profit-crunching clearance sales at Sears stores, but that has exacerbated sales declines, leading some analysts to question the chain's future.

Some investors and analysts think Lampert intends to sell off the stores to cash in on the valuable real estate, but Lampert has insisted that he intends to continue running Sears as a retailer.

The company reported $3.2 billion in cash at the end of the quarter, up from last year's $1.9 billion.

Sears Holdings also said that Sears, Roebuck had agreed to pay $215 million to settle the class-action litigation. It expects insurance to cover most of that, and it had also set aside reserves, so the company does not expect it to affect earnings.

The stock rose $12 to $149.96 on the Inet electronic brokerage system.

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Sears Holdings Reports 1st-Qtr Net Income on Reduced Expenses
BLOOMBERG.COM
May 18, 2006

Sears Holdings Corp., the largest U.S. department-store company, posted first-quarter profit of $180 million after reducing expenses.

Net income was $1.14 a share, Hoffman Estates, Illinois- based Sears said today in a statement distributed by PR Newswire. Revenue was $12 billion.

Chairman Edward Lampert, the hedge fund manager who engineered the Kmart Holdings Corp.'s purchase of Sears, Roebuck & Co., is revamping stores and selling more items at full price to restore profitability. Sears also hired a new team of executives to improve merchandise as the retailer's same-store sales have lagged behind rivals including J.C. Penney Co. and Federated Department Stores Inc.

Lampert ``is bringing in the right people to better figure out what makes sense at Sears,'' said Scott Rothbort, president of Millburn, New Jersey-based Lakeview Asset Management, which owns Sears shares. ``They're testing and they may not quite know right now who they're trying to attract.''

Shares of Sears fell $2.82, or 2 percent, to $137.96 yesterday in Nasdaq Stock Market composite trading. The stock rose 1.4 percent in the year through yesterday. Federated shares gained 9.4 percent and J.C. Penney increased 26 percent.

Analyst Estimates

Sears has about 3,900 stores in the U.S. and Canada.

Credit Suisse analyst Gary Balter, who is top-ranked by StarMine Professional, estimated profit of 76 cents a share. Balter, based in New York, rates the shares ``outperform.''

The average estimate of five analysts surveyed by Thomson Financial was 64 cents a share. Thomson doesn't disclose the parameters for the estimates in its survey.

Lampert, 43, combined Sears with Kmart to create the No. 1 U.S. department-store operator by sales. Cincinnati-based Federated, the owner of Macy's and Bloomingdale's, is the second-largest.

At the company's annual meeting last month, Lampert said he's committed to building the retailer and won't sell large numbers of stores. He also told shareholders he wants Sears to better serve customers and to promote clothing brands such as Lands' End to boost sales.

Sears this weekend will open 12 Sears Grand stores after Lampert reversed course on plans for new stores that operate outside of malls. The stores group merchandise by category or room, with kitchen appliances displayed with dishes and children's clothing, shoes and underwear in one area.

Sears Essentials

In February 2005, Lampert said the company would convert more than 400 Kmart locations to a store format called Sears Essentials that would carry convenience foods, sporting goods and health and beauty items along with merchandise found in Sears department stores.

Instead, the company slowed the conversions and dropped the Essentials name, designating all off-mall stores as Sears Grand. The company operated 50 Sears Essentials stores as of Jan. 28.

Recent positive comments from suppliers including Whirlpool Corp. and Martha Stewart Living Omnimedia Inc. could be an indication Sears ``is slowing down the negative sales trends,'' Balter wrote in an April 26 report.

Martha Stewart executives said on a conference call that sales of its home furnishings at Kmart rose 4.4 percent in the last quarter, according to Balter. Whirlpool executives said Kenmore sales ``showed marked improvement and posted improved year-over-year results.''

Martha Stewart Deal

Last month, Martha Stewart signed a deal to create a line of housewares for Federated to lessen its reliance on Kmart, where it sells its Martha Stewart Everyday home collection.

A former risk-arbitrage executive at Goldman Sachs Group Inc., Lampert heads ESL Investments Inc., a hedge-fund company in Greenwich, Connecticut. He has focused on buying undervalued companies and said he's a student of billionaire Warren Buffett's investment philosophy of buying assets shunned by others.

Since Kmart took over Sears in March 2005, Lampert has removed Alan Lacy as chief executive officer, shut Kmart's Troy, Michigan, headquarters and fired more than 1,500 employees.

Last month Sears said it would increase its share buyback program by 50 percent with an additional $500 million in share repurchases. At end of the last fiscal year, Sears had $4.4 billion in cash.

Sears Canada Deal

Sears has also won shareholder support for a C$899 million ($808 million) takeover of Sears Canada Inc., after boosting its offer by almost 7 percent to C$18 per share.

Sears Canada's board rejected the first offer on Feb. 22 after its financial adviser, Genuity Capital Markets, valued the shares at C$19 to C$22.25. Scotia Capital advised Sears Holdings.

Lampert is seeking to take control of the 46 percent of Sears Canada that the company doesn't own to compete against Wal-Mart Stores Inc. and Hudson's Bay Co.

Earlier this month, hedge-fund manager William Ackman accused Sears Holdings of seeking to ``intimidate'' investors opposed to the bid, saying the Canadian unit's stock is worth more than double the C$18 offer.

Ackman claims that Bank of Nova Scotia, which advised Sears Holdings on the deal, has a conflict of interest because the lender tendered 4.5 million shares to the offer as part of a larger group whose support ensured the success of the bid. Scotiabank said last month that the Ontario Securities Commission is reviewing its role in the takeover.

Ackman, who heads Pershing Square Capital Management in New York, was responding to a statement Sears issued May 1 calling his accusations "baseless.''

Of seven securities analysts tracked by Bloomberg, five recommend buying Sears shares, one says ``hold'' and one says "sell.''

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Defiant Home Depot = worried investors
Analysts bash home improvement retailer's decision not to report crucial sales numbers going forward; shares see red on Wall Street.
By Parija Bhatnagar - staff writer - CNNMoney.com
May 16, 2006

NEW YORK - Retail analysts said Tuesday that Home Depot's decision to stop reporting quarterly sales was "curious," "strange," "irresponsible" and "highly suspect."

Investors seemed to agree, sending the retailer's shares down more than 4 percent on Wall Street.

"This is a terrible way to do business," said George Whalin, CEO of Retail Management Consultants. "This is a publicly traded company with thousands of investors. Same-store sales are a key measure of evaluating how a retailer is doing. It's dishonest and irresponsible for Home Depot to withhold this information from its stock holders. It gives the perception that the company has something to hide from the financial community."

In a note to clients Tuesday, Goldman Sachs analyst Matthew Fassler predicted that Home Depot's decision to stop disclosing comparable-store sales trends "will likely capture almost as much focus as the results themselves."

That was proving to be true. Atlanta-based Home Depot, the No. 1 home improvement retailer, reported second-quarter profit that beat Wall Street's estimates on strong overall sales.

So why was the stock seeing red?

Observers said it's troubling that Home Depot's decision coincided with softer than expected retail sales during the quarter.

"We dislike any decision to reduce transparency, particularly one executed in a quarter when the measure in question most likely shows poorly," Fassler said. "We can only surmise that [the decision] reflects a reality that this measure does - and will - reflect poorly on the firm vs. competitors."

Same-store sales: Big deal or not?
Same-store sales are defined as sales at a company's retail stores open for at least a year. It's one of the most common and long-standing metrics of gauging a retailer's performance.

Ken Perkins, retail analyst and president of research firm Retail Metrics, said he's not aware of any other retailer that used to report same-store sales and suddenly decided not to. Retailers such as Wal-Mart and Target did stop reporting these numbers on a weekly basis, but continue to report monthly same-store sales.

Home Depot used to report only quarterly same-store sales numbers.

"It's curious that of all the metrics that they could have withheld, they chose this one," said Perkins. "Same-store sales are a good measure of a company's organic growth. They show how well or nor a company is doing because new stores tend to be big sales generators."

In an earnings call with analysts, Home Depot executives said it took the decision for the purpose of "comparability."

But Home Depot's explanation didn't make sense to Perkins or to Morningstar analyst Anthony Chukumba.

"Their reason is suspect," Chukumba said. "This is just going to make it harder for analysts to figure out the health of Home Depot's business."

As an alternative, Chukumba said analysts could make an assumption on Home Depot's sales going forward based on average quarterly change in customer traffic trends and the average ticket.

"That's essentially what same-store sales measure. But this calculation won't be precise and the company is just giving more work to do to analysts," he said.

Could Wal-Mart be next?
Wal-Mart executives have repeatedly said that they would prefer Wall Street not focus so intently on its same-store sales - which have slowed significantly as the company saturates its domestic market - and instead look at its total sales which have been growing at a double-digit percentage on an annual basis.

Whalin thinks it will be a big mistake for Wal-Mart to follow Home Depot's example.

"Total sales aren't a key measure of success if your sales are up simply because you're opening more stores," Whalin said. "There a small portion of retailers who maybe think that same-store sales aren't important to use to evaluate them. I say it does give a sense about how the business is really doing. It's every bit as important as the profit number.

"If a retailer's same-store sales are growing along with its profits, it means it's a successful company," Whalin added.

Some observers did offer a contrary take on the issue and even suggested that Wall Street might be overreacting to Home Depot's move.

"Same-store sales are more important for department stores and discounters whose business is more cyclical than Home Depot's," said Burt Flickinger, an independent retail analyst."

"I think Home Depot's actions can be worrisome in that this metric is a very good barometer that shows not only whose business is growing but also who's contracting," Flickinger said.

Home Depot's profits were up 19 percent in the quarter and sales rose 13 percent, the company said.

Said Flickinger, "Home Depot is growing its business base. It's trying to appeal more to women shoppers and going after the professional market." Without its same-store sales, Flickinger said he would probably now look at other metrics such as sales productivity per square foot, gross margins, litigation liability to evaluate Home Depot.

"Home Depot is trying to transform itself into a bigger and better retailer and grow sales," said Marshal Cohen with market research firm NPD Group. "It's challenged by a lot of obstacles along the way, and I can understand that the company doesn't want to be pre-judged on its sales numbers while it makes those changes."

Wal-Mart spokesman Marty Heires said the retailer was not at present considering to stop announcing its monthly same-store sales.

Home Depot could not immediately be reached for comment.

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Innocents Abroad?
Wal-Mart's Global Sales Rise As It Learns from Mistakes -

No More Ice Skates in Mexico
By Geraldo Samor – Cecilie Rohwedde and Ann Zimmerman – Staff Reporters
The Wall Street Journal
May 16, 2006

When Wal-Mart Stores Inc. started expanding abroad in the early 1990s, it offered a little piece of America to foreign consumers -- and that was the problem.

In soccer-mad Brazil, it heavily promoted golf clubs. In sweltering Mexico, it pushed ice skates. In stolid Germany, its clerks bagged and smiled, prompting suspicion that they were flirting.

Now, there are signs that Wal-Mart has learned from its mistakes and is becoming a more formidable global retailer by buying successful local chains, hiring local executives and learning local tastes. Even so, it still faces some large hurdles, the result of facing off against the world's best retailers.

Wal-Mart's international operations account for 20% of the company's total sales and are the fastest growing business at the retailer, based in Bentonville, Ark. Indeed, if Wal-Mart's international business were an independent chain, it could end the year as the world's fourth largest retailer, following Wal-Mart's U.S. operations, Home Depot Inc. and Carrefour SA, respectively, says Michael Exstein, a Credit Suisse Group analyst, who estimates Wal-Mart's international revenue will increase to $78 billion in the fiscal year ending Jan. 31, 2007, from $63 billion in fiscal 2006.

Wal-Mart, which will report earnings today for its quarter ended April 28, said earlier this month that it anticipates a 12% rise in sales to $81.5 billion, fueled partly by a 24% surge in sales from its international operations versus a 9.9% gain by its U.S. operations.

In Mexico, Wal-Mart is the nation's No. 1 retailer based on sales, and trades as a separate company, Wal-Mart de Mexico SA. In Brazil it has jumped to No. 3 from No. 6 in the past two years through acquisitions. Those two markets account for 22% of the company's international sales. In Great Britain, which accounts for 45% of foreign sales, the company has had a tougher time but is taking actions to fix its problems. The same is true in Germany and Japan.

"We're not going to win on every one of them," Wal-Mart's chief executive officer, Lee Scott, said recently, referring to the 15 countries where the company operates. "There is no secret to our formula where we just walk in, hang a sign on the door and, 'My goodness, there's a Wal-Mart here, line up!' It doesn't work that way."

Wal-Mart's challenges have varied by country. In Germany, it hit a trifecta of trouble with employees, customers and competitors. A lawsuit by workers forced Wal-Mart to change part of an ethics manual that prohibited romantic relationships between supervisors and employees. Although those rules are commonplace in the U.S., German workers saw them as violations of personal rights.

German consumers rejected American features such as grocery bagging or cashiers who are asked to smile. And Wal-Mart flopped in competition with Aldi Einkauf GmbH, a so-called "hard discounter" with a limited assortment of private label products at rock-bottom prices.

Hard discounters account for some 40% of food retail sales in the country, compared with Wal-Mart's share of just 2%. "Wal-Mart came to Germany positioning itself as the cheapest, but that spot is already taken by Aldi," says Wolfgang Twardawa, an analyst at GfK, a market-research firm based in Nuremberg, Germany.

Although Wal-Mart is operating in the red in Germany, the company has worked on lowering costs and ingratiating itself with suppliers and shoppers. For instance, it sponsored events like "Singles Shopping Nights," at which customers could look for love along with their groceries and were treated to sparkling wine and oysters at the store. The evenings were so popular that Wal-Mart still hosts them occasionally and has organized them at its stores in other countries.

Wal-Mart has had better success across the English Channel, with its Asda subsidiary, which it purchased in 1999. Asda was long the least expensive of the United Kingdom's large grocery chains, putting Wal-Mart in a familiar role. Rivals have made inroads by slashing prices and beating Asda in offering new products, such as gourmet-style ready-to-eat meals and a wide selection of organic produce. Tesco PLC, the country's biggest retailer, compares its prices with Asda's on the Tesco Web site.

But Asda is adjusting to the tougher competition. With zoning laws obstructing the opening of new large supercenters, Asda is opening smaller stores, as its rivals have done. It is also cutting prices further and upgrading its fresh food selection.

In Japan, Wal-Mart has also faced competition. Even before Wal-Mart entered the country in 2002 by buying a minority stake in the grocery and apparel chain Seiyu Ltd., competitors such Aeon Co. sent employees to visit Wal-Mart stores in the U.S., South Korea and China. Aping the Wal-Mart formula, Japanese retailers slashed prices and opened single-story supercenters with acres of parking -- a novelty in a country used to cramped, multistory shopping.

Earlier this year, Wal-Mart raised its stake in Seiyu to a majority position so it can fully control operations. It is remodeling old Seiyu stores and adding the computerized inventory tracking systems that have long let Wal-Mart keep shelves filled in the U.S. without creating costly inventory.

When Wal-Mart started its foreign operations in 1991, it didn't set specific goals, and the company seemed to figure that what had worked for it in the U.S. would work overseas. In Mexico, it did. There, it bought Cifra SA, the country's largest discount retailer and converted Cifra's stores to U.S.-style supercenters featuring cut-rate prices.

After some cultural flubs -- selling ride-on lawn mowers in a place that lacks American-style suburbs, for instance -- it learned what shoppers wanted. For the thousands of Mexicans who travel to the U.S. for work or even a weekend shopping spree, Wal-Mart was a slice of the U.S. in Mexico.

At a Wal-Mart in the Mexico City area, Raul Perez loads his shopping cart with Huggies diapers, cartons of milk and other necessities for his young family. "We often end up buying more than we came for, there's so much to choose from," he says.

Wal-Mart tried the supercenter model in Brazil, too, when it opened its first stores there in 1995, but it didn't fare well initially. That's because Brazilians like to shop in their neighborhoods, not jump in a car for a trip to the suburbs where Wal-Mart was located. In the past two years, the company has learned that lesson, aided by senior managers that include 16 Brazilians. The supercenters remain but Wal-Mart also has purchased chains with an assortment of formats, including Balaio neighborhood stores and Magazine general-merchandise stores, which don't sell food.

Wal-Mart also learned it had to devote far more square footage to food items than it does in the U.S. because Brazilians are used to buying fresh meat and fish from supermarkets. While U.S. customers get their fish and meat already wrapped, Brazilians like to point to the steak they want and order it cut on the spot. At a Wal-Mart store on the outskirts of Sao Paulo, customers can pick among 37 different types of fresh fish.

Wal-Mart also showed it can adapt in China, which is currently a tiny market for the company. There it sells live turtles and snakes -- popular Chinese dinners -- and tries to lure shoppers coming to stores on foot or bicycle by offering free shuttle buses and home delivery for refrigerators and other large items.

As Wal-Mart ponders new markets, it's doing its cultural homework. Michael Duke, head of Wal-Mart International, recently spent a few days in India, where foreign retailers are barred from operating, to understand Indian customers once investment barriers fall.

"They showed me what food was in their kitchen," says Mr. Duke. "They showed me what little grain they had. They showed me what was in their bathroom. One family of three generations lived in three rooms. There was no refrigerator, but there were three TVs. You can't lead a business without knowing customers personally."

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Historians and Fans Are Racing to Catalog Homes Sold by Sears
By Sara Schaefer Munoz - The Wall Street Journal
May 15, 2006

Modest Kit-Built Houses Face Threat From McMansions;
Braving Snake, Poison Ivy

Marilyn Raschka spends many of her weekends driving around unfamiliar neighborhoods, knocking on doors and talking her way into strangers' basements. Once downstairs, she breaks out her flashlight and shines it along exposed beams, hunting for a letter and some numbers that are each no bigger than a thumbprint.

The 61-year-old resident of Hartford, Wis., is part of a small cadre of historians and passionate amateurs on a mission to identify and protect homes made by Sears, Roebuck and Co. About 70,000 to 100,000 of them were sold through Sears catalogs from 1908 to 1940. Distressed that the houses are falling victim to the recent boom in teardowns and renovations, their fans are scouring neighborhoods across the country, snapping pictures and sometimes braving snakes and poison ivy to poke around basements and attics for the telltale stamps that mark the lumber in most of the catalog homes. Because people can be shy about the state of their basements, Ms. Raschka brings along photos of her own messy cellar to persuade them to let her in.

Precut houses ordered from a Sears catalog were shipped by boxcar in 30,000 pieces -- including shingles, nails and paint -- and assembled by a local carpenter or by the buyers themselves. Styles ranged from the elaborate, nearly $6,000 Magnolia, to the three-room, no-bath Goldenrod, sold in 1925 for $445. (Outhouses sold separately.) One of the larger Sears models, constructed in Takoma Park, Md., sold last year for about $900,000, according to a local real-estate agent.

The homes caught on as the U.S. population grew and Americans began to move away from crowded city centers. Their popularity also was driven by the rise of company towns. In Carlinville, Ill., for example, Standard Oil ordered homes for its mine workers, 152 of which are still standing.

Sears also encouraged sales to families with steady wages but little in savings by financing up to 100% of some of the homes. But many homeowners were forced to default during the Depression, and sales came to an end in 1940.

Like some of the die-hard hunters, Ms. Raschka herself lives in a Sears home, a 1928 Mitchell model. "My passion is to find my house's long-lost sisters and brothers," she says.

Some Sears-home buffs are like bird-watchers, seeking a feeling of accomplishment from spotting a rare style and matching it to one of the hundreds of examples in old Sears catalogs. Nostalgia is a big part of it, too: Interest in the homes, many of which are bungalows and other modest styles, is partly a backlash against the wave of supersized subdivisions and the cropping up of so-called McMansions in many old neighborhoods.

The mail-order houses, many of which had big porches and were made from high-quality materials like early-growth cypress, were less expensive than architect-designed houses at the time, and were often all working-class people could afford. Because they were typically a family's first home -- and because they were often a do-it-yourself project for buyers -- the houses, enthusiasts say, are emblematic of the American dream.

National preservation groups haven't made Sears homes a priority. It's unclear how many are listed on the National Register of Historic Places; just being a mail-order home in itself won't qualify a structure, says a register spokeswoman. The National Trust for Historic Preservation considers the homes historically important, says Midwest Director Royce Yeater, but "there are just so many."

The possibility that thousands of Sears homes are still standing around the country has only further piqued the curiosity of buffs, keeping them on the lookout for the so-called "kit" homes. The blitz of teardowns in neighborhoods across the country in recent years has added a sense of urgency to their quest.

Dale Wolicki, a property consultant in Bay City, Mich., keeps several milk crates of house plans in his car at all times in case he spots a match while on road trips for work. Donna Bakke, a Cincinnati social worker, has enlisted the help of her Girl Scout troop, which has studied pictures of Sears homes, in checking out neighborhoods. "They can spot about a half-dozen models at 100 paces," she says. Returning from canoe trips, "they don't even blink if I tell them we're taking a detour."

In the guide she published, "Finding the Houses That Sears Built," Rosemary Thornton warns that "some homeowners become quite upset when they discover someone is parked outside, staring at their home," and suggests leaving the car running in case you need to leave in a hurry. There's a section in her book titled "Law Enforcement Officials" that says, "Police don't care about Sears homes and when you're explaining,...less is more."

It's difficult to know how many Sears homes are left. Sears doesn't have sales records, and while interest in catalog homes is growing, many people still don't know they are living in one. In addition, identifying a Sears isn't like spotting a steel-paneled Lustron, the ranch houses built to ease the housing shortage after World War II. The hundreds of styles Sears offered varied widely, and many of the homes have been altered over the years. Further complicating matters, a handful of other companies, such as the Aladdin Co., of Bay City, Mich., and Gordon-Van Tine Co., of Davenport, Iowa, produced mail-order homes closely resembling Sears models.

Even if a house does match a picture in an old Sears catalog, it could be a later rip-off by a local builder -- or a popular style that Sears emulated in its designs. Inside the house, hints like Sears-labeled woodwork can also be misleading, because Sears sold such things separately. One way to tell: a stamp of a letter and a three-digit number on beams, which were marked to facilitate assembly.

Measuring the space between studs, or support posts, can be another clue in verifying a Sears home, especially in an area with a lot of Sears imitations, according to Kathryn Holt Springston, a 53-year-old semiretired social historian with the Smithsonian Institution. The studs of older non-Sears houses in the Washington, D.C. area are often 22 to 24 inches apart, she says, compared with about 15 inches in Sears models. When she spots what she thinks might be a Sears home in the Washington area, she asks to be let into the house, and then straps on a headlamp and looks for exposed studs in the attic, closets and basement. Ms. Springston has ripped up floorboards and sometimes uses a metal detector to find nails in studs in the walls. She says she crawled through poison ivy in one abandoned home and once encountered a snake in someone's basement. (She measured anyway.)

Ms. Springston says she once held a memorial service for a Sears home that was being torn down, a 1919 Sunlight model demolished several years ago in Arlington, Va., after the owner was forced to sell. "We said, 'Bless you, house.' "

Many people who live in the homes have grown accustomed to the handful of strangers who show up each year asking to see the basement or attic. Clarice Hausman, whose 1920s-era Westly sits off a state road in central Illinois, keeps pictures of the house's stamped beams near the door. "You can't just let everybody in," she says.

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Former Sears Canada CEO slams parent's 'cannibalism'
'Don't know anything'
By Hollie Shaw - Financial Post – Canada.com
May 10, 2006

A former chief executive of Sears Canada Inc. lambasted the management of corporate parent Sears Holdings Corp. yesterday, accusing the executives of "corporate cannibalism" in their bid to take the retailer private.

"They don't know anything about retailing," Dick Sharpe, who served as CEO and chairman of the Canadian department store's board from 1979 to 1989, said of hedge fund wizard Ed Lampert, chairman of the U.S. retail giant, and Alan Lacy, chairman of Sears Canada and vice-chairman of Sears Holdings.

"They are extracting cash out of the business," Mr. Sharpe added, criticizing a decision to keep capital expenditures low to improve earnings before interest and taxes, which means the retailer spends less money on store upkeep.

"[They] are causing the corporation to eat its own muscle and once you do that, it's going to die."

Mr. Sharpe also said he was relieved of his position as honorary director of the company last year after bad-mouthing Mr. Lacy, whose hand he refused to shake yesterday. Bill Turner, another long-time former senior executive, also expressed his reservations about the privatization.

The moment capped off an oddly brief annual general meeting, which ended after acting president Dene Rogers gave a gloomy overview of Sears Canada, mapping out its weakness over the past five years.

"The financial performance has in general declined," said Mr. Rogers, a Sears Holdings executive who replaced outgoing chief executive Brent Hollister yesterday.

Sales of hard goods have slid 2.1% since 2001, and soft lines revenue, including clothing and bed linens, declined 3.6%, he noted.

Since Sears merged with Kmart Canada in 1998 to create Sears Canada Inc., Mr. Rogers said, the Toronto Stock Exchange has risen 33%, but the retailer's shares have declined 12%.

The shares have doubled in value since rumors began to surface last year that Sears Holdings was interested in buying up the remaining 46% of the company it did not own.

Board member William Crowley, chief financial officer at Sears Holdings, said there is "no magic bullet" solution to fix Sears Canada, adding management doesn't see a lot of ways to create value after the $2.2-billion sale of Sears Canada's credit card division last year to JPMorgan Chase & Co.

"Sales have been declining, gross margins are declining," Mr. Crowley said. "How do you make as much money as you can out of a business where your competitors are building stores at the rate that they are?

"It is really hard to succeed, and if anyone else thinks it's so great to compete against Wal-Mart and Lowe's and Home Depot, look at Hudson's Bay Co. There were no bids for HBC. That tells you something about the interest of being a retailer in that market."

Sears Holdings announced its desire to buy out its Canadian unit in early December for $16.86. Last month, the U.S. retailer sweetened the bid to $18 to convince two large shareholders to tender. A band of remaining minority shareholders, who own or control about 7.7% of the outstanding common shares, is waging a public relations battle against the offer and believes the retailer's stock is worth about $42 to $46.

Led by New York hedge fund Pershing Square Capital Management LP, the group has asked the Ontario Securities Commission to investigate Bank of Nova Scotia's role in the transaction, arguing the bank's role as advisor to Sears Holdings while agreeing to vote its shares in support of the privatization bid poses a conflict. The group also believes Sears Canada should be merged with rival department store chain HBC.

Mr. Crowley had no comment on Pershing's efforts yesterday. "We're very confident that we'll close [the privatization] in December," he said.

Sears Holdings has not talked with HBC owner Jerry Zucker about buying the retailer, he said.

"I don't see [the two merging]," he said. "See how many malls have both [Sears and The Bay] in the same mall. Does that make sense? What are you going to do, close half the stores?"

The drama has succeeded in keeping Sears Canada's share price above the bid. Sears Canada shares have been trading at or above $19 in the last week.

SEARS CANADA INC

Ticker: SCC/TSX

Close: $19.66, up 16 cents

Volume: 102,920

Avg. 6-month vol.: 434,008

Rank in FP500: 47

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Microsoft and Google waging 'war for talent'
By Steve Lohr - The New York Times – International Herald Tribune
May 10, 2006

NEW YORK Microsoft is the reigning powerhouse of computing, and Google is the muscular Internet challenger. On each side, the battalions are arrayed - executives, engineers, marketers, lawyers and lobbyists. The spending and rhetoric are escalating, as the realms of desktop computing and Internet services and software overlap more and more.

For each, it seems, the other passes what Andrew Grove, a founder and former chairman of Intel, calls the "silver bullet test" of strategic competition: "If you had one bullet, who would you shoot with it?"

How the confrontation plays out could shape the future of competition in computing and how people use information technology.

Do the pitched corporate battles of the past shed any light on how this one might turn out?

Business historians and management experts say the experience in two of the defining industries of the 20th century, mass-market retailing and automobiles, may well be instructive. The winners certainly scored higher in the generic virtues of business management: innovation, execution and leadership.

But perhaps even more significantly, those who came out on top, judging from U.S. corporate history, had two more specific attributes. They were the companies, according to business historians, that proved able to adapt to change instead of being prisoners of past success. And in their glory days, these corporate champions were magnets for the best and brightest people.

"One area where Microsoft and Google are really competing head-to- head now is in the war for talent," said Richard Tedlow, a historian and professor at Harvard Business School. "Historically, the company that won the war for talent won the war."

Tedlow points to Montgomery Ward as a company that lost talented managers to its rival Sears, and then lost its way. The crucial defection, Tedlow said, was Robert Wood, a former army general who joined Montgomery Ward in 1919 as general merchandise manager.

Even in the army, Wood was a close reader of the Census Bureau's Statistical Abstract of the United States, an annual tracking of social and economic conditions. Wood became convinced America was at the beginning of a huge population shift from rural regions to urban areas. That meant, he understood, that the mail-order giants like Montgomery Ward and Sears needed to move from being catalogue retailers serving a dispersed market to department store merchants with stores in city and suburban population centers.

Sears, as a company, grasped that fundamental change in the marketplace in a way that initially Montgomery Ward did not, Tedlow said. In 1924, Wood left Montgomery Ward to join Sears, and he later recruited others. In 1945, Wood, then the chairman of Sears, made another smart call on economic trends. The postwar years, he decided, would bring a long expansion, as pent- up consumer demand from the war years was unleashed.

So Sears embarked on a national store-building binge. His counterpart at Montgomery Ward, Sewell Avery, made the opposite bet, keeping money in the bank to prepare the company for a postwar depression, which he was convinced was around the corner.

Over the next several years, sales at Sears doubled, while Montgomery Ward's shrank 10 percent. "Losing Robert Wood was catastrophic to Ward," Tedlow said.

In its recruiting competition against Google, Microsoft insists that it fares quite well over all. But there have been some high-profile defections to Google of leading engineers, who said they preferred Google's technological direction and corporate culture.

The most prominent was Kai-Fu Lee, a star computer scientist and manager. Lee not only established Microsoft's research labs in China, but he is also an expert in areas like natural language and speech-recognition technologies - important ingredients in Internet search now and in how people will interact with computers in the future.

Last year, when Lee left Microsoft, the company sued Google and Lee. Microsoft claimed, under a Washington State law, that Lee had violated a noncompete clause in his employment contract and misused inside information in going to work for Google. The suit was settled in December.

"What does it say about a company when it sues when someone leaves?" Tedlow asked rhetorically. "It makes Microsoft sound like a prison."

In business, forever tends to last about five years, a decade or two at most. So Sears prospered for a time and celebrated its success by building the Sears Tower in Chicago in the 1970s. Yet even from a height of 110 stories, Sears failed to see Wal-Mart coming. Wal- Mart brought the next revolution in retailing with its shrewd use of computer technology to track buying trends and orchestrate suppliers to become a hyperefficient, low-cost merchant.

The auto industry presents a sobering history of past-success syndrome. Henry Ford's Model T, introduced in 1908, famously made the automobile affordable, helped along by his pioneering assembly-line production, which started in 1913. Ford's laser-like focus on efficiency drove the cost of a Model T from $850 when it was introduced down to $275 by the early 1920s.

But cost and efficiency was all he focused on. The design was not updated, and the color selection remained black and only black. Eventually, the single- mindedness caught up with the company. In 1925, Ford's share of the American market was falling, to 45 percent from 57 percent two years earlier.

By then, Alfred Sloan Jr., the managerial maestro of Detroit, was president of General Motors and its sales were surging.

"Henry Ford was so in love with his brilliant idea that he refused to change," said John Steele Gordon, a historian and author of "The Business of America" (Walker, 2001).

General Motors was well on its way to becoming the world's largest carmaker. Yet as early as the 1950s, the Japanese challenge to Detroit's auto supremacy was quietly getting under way. The architect of the Japanese ascent was a production engineer, Taiichi Ohno, who worked at Toyota. In 1950, Toyota manufactured 13,000 cars, barely a day's production for GM.

Ohno had to devise a way to efficiently manufacture a variety of cars in small production runs. Ohno turned that adversity into an advantage, using rapid tooling changes, constant quality improvements and just-in-time parts delivery to steadily improve their cars.

Once again, the corporate giant was complacent and late to see a fundamental shift in its industry.

"GM did not take Toyota and the Japanese seriously until the 1980s," said Michael Cusumano, a professor at the Sloan School of Management at the Massachusetts Institute of Technology and author of "The Japanese Automobile Industry" (Harvard University Press, 1986). "By then it was really too late."

History, then, suggests that past success is often an anchor holding a company back, and that Microsoft is at risk from the Google challenge.

"The wind is really behind Google, and Microsoft's main tool for navigating the future is the rearview mirror," said Paul Saffo, a director of the Institute for the Future, a forecasting consultancy in Silicon Valley, California.

Still, the incumbent-challenger narrative - which portrays the incumbent as an endangered species - might not apply this time. Microsoft has adapted nimbly to big challenges before.

Apple Computer introduced point- and-click, graphical computing with the Macintosh in 1984, but Microsoft caught up and became dominant on the desktop with Windows.

In the mid-1990s, Netscape Communications posed a threat because the Internet browser might undermine the importance of Windows. Microsoft came up with its own browser and rebuffed that challenge, partly with tactics that violated antitrust laws, a U.S. appeals court ruled.

"Microsoft has responded every time in the past," said Cusumano, who is also the author of two books on Microsoft.

Now comes Google. It is offering or developing as free Web-based services e-mail, word processing and other programs that could replace Microsoft desktop programs and eat into Microsoft's lucrative software business. But that is by no means certain.

Google now makes virtually all its money by selling advertisements linked to its enormously popular Internet search service. Microsoft and Yahoo are desperately trying to close the gap with Google, which dominates Internet search and ad sales.

If Google stumbles, the company will be seen as having been unable to move beyond a single huge success.

Since the future is so often the pattern of the past with some twist, what is the expert view?

"I'm a historian," said Tedlow of Harvard. "Ask me in 10 years and I'll tell you why what happened was inevitable."

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Sears Canada Annual Meeting Light On Optimism
By Andy Georgiades – Dow Jones Newswires - Wall Street Journal Online
May 9, 2006

TORONTO -- Sears Canada Inc. (SCC.T) says its sales are in decline and competitive pressures are getting worse.

That message, delivered by the retailer's new executive team at what could be its final annual meeting Tuesday, was in sharp contrast to the positive tone put forth by management in previous years.

Sears Canada is embroiled in a takeover battle with its parent, Sears Holdings Corp. (SHLD), whose C$18-a-share bid has allowed it to lock up about 70% of the outstanding shares. The bid expires in August, and Sears Holdings expects to complete a going-private transaction before the end of the year.

Instead of being told of the company's new marketing and merchandising efforts, in his first official day on the job acting president Dene Rogers said sales have declined 2.4% a year since 2001 and margins are also in a downward trend. In addition, revenue in hardline and softline products is also in decline, with the only exception being appliances - a business with falling margins.

He also noted that competition is intensifying, particularly from Wal-Mart Stores Inc. (WMT) and Home Depot Inc. (HD). The arrival of home-improvement retailer Lowe's Cos. (LOW) in Canada next year won't help matters. "Sears Canada is facing specialized stores, of a larger scale and larger square footage," he told shareholders.

Rogers said minority shareholders unhappy with the offer price have various options available, including the assertion of dissenters' rights, but he noted that this process could take up to two years and shareholders aren't guaranteed a better price than C$18 a share.

There were no questions asked during the period for shareholder questions.

After the meeting, William Crowley, chief financial officer of Sears Holdings, noted that 63% of the minority shareholders voted for the eight-member board, which consisted of five Sears Holdings executives. That shows him that most of the minority shareholders are behind Sears Holdings, giving the company confidence it will be able to take Sears Canada private in December.

Crowley said there's no magic bullet that will solve Sears Canada's problems, and that the department-store business is in a tough spot right now. As evidence, he pointed to department-store operator Hudson's Bay Co., whose auction process failed to result in an alternative to the takeover offer from its largest shareholder, Jerry Zucker.

Crowley said he personally doesn't see a merger of Sears Canada with Hudson's Bay as the answer, and added that there have been no discussions with Zucker about combining the retailers.


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Sears Canada set to go private, but ex-CEO calls deal 'corporate cannibalism’
By Rita Trichur - The Canadian Press
May 9, 2006

TORONTO (CP) - Sears Canada Inc. (TSX:SCC), the target of a going-private move by its U.S. parent firm, told investors Tuesday it doesn't expect that a spat with a group of activist shareholders will delay the transaction.

But those assurances came as a former chairman and CEO, Richard Sharpe, called the proposed $908-million buyout by Sears Holdings Corp. (Nasdaq:SHLD) "corporate cannibalism."

In one of his first duties as the retailer's new acting president, Dene Rogers announced that Sears Canada will hold a special meeting of shareholders Nov. 30 and expects to go private shortly thereafter.

"The expectation is that on Dec. 15 we will begin the process of privatization," Rogers told shareholders attending what is likely to be the firm's last annual general meeting as a publicly traded company.

He warned that minority shareholders who choose to hold their shares and seek dissenters' rights are facing an uncertain process.

"It could be a lengthy process of up to two years or more," said Rogers, who is replacing president and CEO Brent Hollister.

Chicago-based Sears Holdings, already Sears Canada's biggest shareholder, is offering the Canadian subsidiary's minority shareholders $18 a share in its buyout offer.

However, it is facing resistance from some minority investors - including Hawkeye Capital Management LLC, Knott Partners Management LLC and Pershing Square Capital Management LP - who have threatened to take legal action against Sears Holdings.

At Tuesday's meeting, another voice was added to that chorus of dissent. Ex-CEO Sharpe told reporters he refused to shake hands with Alan Lacy, who is a Sears Canada director and vice-chairman of Sears Holdings, because of his strong opposition to the offer.

"I believe that the whole approach has been corporate cannibalism, just devouring the assets of this company," Sharpe said. "None of them really know anything about retailing."

Sears Canada's shares continued to trade above the offer price Tuesday, gaining 49 cents to $19.99 on the Toronto Stock Exchange.

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International Flavors Chairman Retires,
Martinez Interim Chairman and CEO
HoustonChronicle.com – The Associated Press
May 9, 2006

NEW YORK — International Flavors & Fragrances Inc., creator and manufacturer of artificial flavors and fragrances, on Tuesday said chairman and chief executive Richard A. Goldstein retired as expected, after the company's annual shareholder meeting.

In January, the company said Goldstein would retire in May and hired executive search firm Spencer Stuart to look for a successor, a process that is still ongoing.

The company named Arthur C. Martinez, the company's lead director, as interim chairman and chief executive. He was previously chairman and chief executive of Sears, Roebuck and Co.

International Flavors & Fragrances Inc. creates flavors and fragrances for consumer products ranging from soaps and detergents to food and drinks.

IFF shares fell 26 cents to $35.78 during afternoon trading on the New York Stock Exchange.

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Deadline Looms For New Drug Benefit
By Sarah Rubenstein – Wall Street Journal
May 9, 2006

With Six Days Left Before Penalties Kick In, Medicare, Insurers Make Final Enrollment Push

For anyone still considering the Medicare drug benefit, the next six days are crunch time.

More than six million eligible senior citizens and disabled people have yet to sign up for the federally subsidized prescription-drug coverage, by some estimates. After Monday, May 15, most of those who haven't will face a financial penalty if they sign up later. The penalty -- designed to encourage both healthy and sick people to sign up and share in the cost -- permanently increases the premiums that latecomers pay. But despite a months-long effort to inform people about the drug benefit, there's evidence that many still aren't aware the deadline is looming.

The Centers for Medicare and Medicaid Services says that the enrollment pace has remained consistent at about 400,000 a week. To get even more on board by Monday, government agencies and advocacy groups are stepping up their outreach. Insurance companies that provide the policies, including Aetna Inc., Cigna Corp. and Humana Inc., are emphasizing the deadline in their advertising and gearing up for a last-minute push. But millions of people are still weighing the decision, amid conflicting reports about the experiences of those who already signed up.

The benefit, which began Jan. 1, aims to fill one of the biggest holes in Medicare with private prescription-drug policies that are subsidized by the government. Some beneficiaries who have signed on are seeing significant cost savings on their prescriptions, but some also say they've encountered coverage glitches and confusion over choosing a plan and figuring out what drugs are covered and at what cost.

The government recently addressed one common complaint -- that insurers could drop medications from their lists of covered drugs during the year. Since most consumers have only one opportunity a year to change plans, people feared they could be locked into a plan that no longer paid for their medicines. Now, under a policy issued in late April, insurers that drop drugs or add restrictions in most cases have to exempt enrollees who currently take them.

Given that such kinks are still being worked out, Democrats in Congress have pushed hard to remove the financial penalty for late enrollment or push back the deadline, and some Republicans also are supportive. The Bush administration has opposed changes to the deadline or penalty, at least before May 15. But in a major shift in policy, Medicare officials said yesterday that they wouldn't require late-enrollment penalties from low-income beneficiaries who qualify for extra subsidies (people with less than about $15,000 a year in income for an individual, and assets of less than $11,500). The government already had decided to allow that population to enroll in the program after May 15.

SIGNING UP

Ways to enroll in a drug policy:
• Directly with an insurer -- online or over the phone

• With help from Medicare, at www.medicare.gov <http://www.medicare.gov/> 2 or 1-800-Medicare

• Through an insurance agent or at an enrollment event

• Mail an application to your chosen insurer, postmarked on or before May 15

Note: At the end of the day on May 15, when the clock passes midnight, local time, the enrollment period is over. There may be exceptions -- for example, for people who are still waiting on hold.

Several bills regarding the deadline and penalty have been introduced in the House and Senate, and supporters of the changes may decide to bring them as amendments to other legislation. Medicare actuaries have estimated that fewer people would sign up if there were no deadline. It's unclear whether the administration will revisit the issue after the deadline passes. The higher the enrollment by the deadline, the less likely that is.

Road Trips

Medicare and its partners are holding more than 1,000 enrollment events around the country over the next week -- including visits to more than 40 cities with the agency's "Mobile Enrollment Center" buses. The agency also says it has quadrupled the server capacity for the Medicare.gov Web site since enrollment began in November.

The National Council on Aging, one of the groups working to encourage enrollment, is hosting or participating in nearly 200 events in the final week. Recent events at the Mall of America in Bloomington, Minn., and a Nascar race in Richmond, Va., were meant to persuade children of Medicare beneficiaries to help their parents sign up. The NAACP has asked churches to hold a round of enrollment events on the Sunday before May 15. United Health Foundation, a non-profit funded by insurer UnitedHealth Group Inc., has been hosting educational events with the Rev. Jesse Jackson's Rainbow Push Coalition, including one in Cleveland on May 15.

Insurance companies have been aggressively promoting the benefit, eager to tap into this pool of potential customers. Cigna early this month announced that drug-benefit enrollees can use the "Healthy Rewards" program available to other Cigna customers, which provides discounts on vision care and other services. Terri Swanson, vice president of the Cigna unit that provides products for seniors, says Healthy Rewards won't cost extra, "but it is an added benefit."

For the final two weeks, Aetna increased its call-center staffing by 10% on weekdays and has doubled it for the weekends. UnitedHealth Group since May 1 has extended the hours of its call centers to 24 hours a day, seven days a week. WellPoint Inc. is doubling the staffing in its call centers. And Cigna, which has seen a 10% increase in calls since the beginning of May, has increased its call-center staffing accordingly, the company says.

Steve Brueckner, vice president of senior products for Humana, says the company is now stressing the deadline in its advertisements but hasn't planned a marketing surge for the final week, for fear of drawing more inquiries than it can handle. "It's very hard to staff for all the peaks," he says.

In all, about 35.8 million Medicare beneficiaries now have drug coverage, according to the government's latest estimates as of April 18. About 8.1 million signed up on their own for a Medicare plan. The rest include low-income Medicaid beneficiaries, who were automatically enrolled, or people who already had drug coverage that was at least as good as Medicare's -- often through employee retirement benefits.

With a total of about 42.5 million seniors and disabled people covered by Medicare, that would leave over six million still without a drug policy. Mark McClellan, administrator of CMS, notes that given the steady pace of enrollment, the number of people covered has gone up "considerably" since the April report, though the official estimate has not yet been updated.

Putting Off the Decision

Some latecomers have been overwhelmed by the sheer number of choices -- dozens of plans in some regions. Others have heard complaints about the limitations of the coverage. Some, especially healthier people who take few or no drugs, are reluctant to start paying for coverage that they don't need. For most of those who don't have drug coverage at least as good as Medicare's and decide down the road that they want to sign up, there will be a penalty.

An April Kaiser Family Foundation poll of 517 seniors found that 44% of them didn't know the date of the deadline, and 47% were unaware that there even was a penalty.

Here's how it works: For every month past the deadline that you go without coverage, add 1% to your premium once you do finally sign up. That 1%, however, is not based on the premium of the plan you choose. Rather, it's from the national average premium offered by insurers in the year your coverage starts. So you can't keep the penalty low by choosing a cheaper policy.

In a report last week, Medicare's trustees projected that the average monthly premium would be $35.86 in 2007 -- though the final number likely won't be known until fall. That means a 1% penalty for next year would be about 35.9 cents.

For those who miss the May 15 cutoff, generally the next opportunity to sign up will be later this year -- Nov. 15-Dec. 31, with coverage beginning in January. So assuming you enroll this fall, your penalty will total 7% -- accounting for seven full months you went without coverage between May and January. That would amount to a $2.51-a-month penalty next year on top of the premium of the plan you choose.

Rising Penalties

A penalty will continue for all the time that you are covered by a drug plan. It is adjusted each year and will presumably rise as the national average premium increases over time.

For someone who waits until fall 2009 to sign up, Medicare's trustees estimated the average monthly premium would be $42.39 in 2010, your first year of coverage. According to that projection, your penalty would be about $18 a month. (Take 1% of $42.39, and multiply that by 43 for the 43 months without coverage.)

The penalty is roughly similar to the one charged people who don't sign up when they're first eligible for Medicare Part B, which covers physician services and outpatient care.

--Sarah Lueck contributed to this article.

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Dollar General hires former Sears exec
Nashville Business Journal
May 8, 2006

Dollar General Corp. has hired a former Sears merchandising executive as its senior vice president and general merchandise manager of seasonal, home and apparel goods.

James Thorpe will lead the buying team in the Goodlettsville-based discount retailer's non-consumable goods categories. Along with Rita Branham, a Dollar General (NYSE: DG) veteran who was promoted in March to senior vice president and general merchandise manager of consumables, Thorpe will help develop and direct merchandising strategies for the company.

Both Branham and Thorpe report to Beryl Buley, division president of merchandising, marketing and supply chain. Thorpe starts with the company May 15. Thorpe was a senior vice president and general merchandise manager at Sears Holding Corp. for 15 years. During his tenure, he served as vice president of business development and was a divisional merchandise manager of consumer electronics, appliances buyer and commercial sales manager.

In April, Dollar General saw a 13.6 percent rise in sales compared to the same period last year and same-store sales increased 6.9 percent. In a release announcing the month' results, company officials noted that sales were heavily skewed toward lower margin, highly-consumable items and that sales in the higher-margin home and apparel departments have been below company projections.

Dollar General operates more than 8,000 stores nationwide. At about 1:30 p.m., shares of the company were trading at $17.15, up 0.1 percent on the day. Their 52-week range is $16.47 to $22.50.

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Hard to check out Sears' line to profits
By Andrew Leckey, a Tribune Media Services columnist – Chicago Tribune
May 7, 2006

Q. I'm pleased with my shares of Sears Holdings Corp. but unsure of the company's strategy. What is your opinion?

K.V., via the Internet

A. The retailer, formed when Kmart bought Sears, Roebuck and Co. last year, has a fascinating plot line but no clear theme.

Chairman Edward Lampert, who brought Kmart out of bankruptcy three years ago, is a shrewd hedge fund manager with a grasp of assets and real estate. He has already amassed more than $4 billion in cash at the firm.

Lampert takes no salary, stock options or fees. Because he owns more than 40 percent of the company's stock, his own wealth is inextricably tied to stock performance.

Shares of Sears Holdings (SHLD) are up 28 percent this year following gains of 17 percent in 2005 and 313 percent in 2004. Lampert prefers to repurchase shares than pay dividends.

The retailer operates more than 900 Sears department stores, primarily in malls, and 1,400 Kmart stores. Sears Essentials stores located in converted Kmart locations are being renamed Sears Grand, with food and DVDs added to their merchandise.

Pro forma profits rose in the most recent quarter because of cost cutting, but sales were down. It faces stiff competition from the clearly focused discount chains Wal-Mart Stores Inc., Target Corp. and Kohl's Corp.

Although Lampert enacted cost controls and is beginning to remodel more stores and upgrade technology, no one is entirely sure of his longer-term intentions. He has offered no turnaround plan for reversing the company's eroding market share and says he does not intend to sell off large pieces of real estate, as many experts had predicted he would.

So, as Wall Street awaits a clearer signal, the consensus analyst rating of Sears Holdings shares is midway between "buy" and "hold," according to Thomson Financial. That consists of three "buys," two "holds" and one "underperform."

More intrigue: Martha Stewart, whose Everyday merchandise has been sold in Kmart for years, recently made a surprise announcement to add a line of home products in Macy's department stores to begin in fall 2007.

With the existing Kmart contract with Stewart expiring in four years and uncertain beyond that, Lampert has opted not to place Stewart merchandise in Sears stores. He has, however, put some popular Sears items such as Craftsman tools and Kenmore appliances in Kmarts.

Sears Holdings' earnings are expected to rise 28 percent this year versus the 12 percent predicted for the department store industry. Next year's projected 20 percent gain compares to 17 percent for its peers. The five-year annualized growth rate is expected to be 11 percent versus the 14 percent industrywide forecast.

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Titans collide in battle for Sears Canada
By Andrew Willis - Globe and Mail, Canada
May 6, 2006

Much at stake in bitter and nasty takeover battle between two U.S. hedge fund wizards, ANDREW WILLIS writes

For two guys who just doubled their money on Sears Canada -- a $300-million score -- Jacques Chartrand and Claude Boulos can sure point to a lot of things wrong at the retail chain.

As the heads of Natcan Investment Management's $6.5-billion Canadian equity fund, the two money managers helped kick off the bitter takeover battle for Sears Canada by agreeing to sell their 9.7-million-share stake in the stores to its U.S. parent. Natcan headed for the exits in return for $16.86 a share, and was thrilled at the price. "Same-store sales keep falling. Canadians are going to the power centres, to big-box stores, so the traffic is going down at the malls where you find Sears," says Mr. Chartrand, ticking off challenges facing the venerable retailer. "Management has tried different approaches, nothing has worked, and they are a bit complacent. I mean, this has got to be the last North American retailer with its own fleet of trucks."

Given their pessimistic outlook, the Natcan team was all ears when they got a call last November from William Crowley, chief financial officer at Sears Holdings Corp., the U.S. parent of Sears Canada, and a partner in its controlling shareholder, ESL Investments, a $15-billion (U.S.) hedge fund run out of Greenwich, Conn., by billionaire Edward Lampert.

Backing up Mr. Crowley in presentations before the Sears Canada board, the Natcan executives had already helped push the $2.2-billion (Canadian) sale of Sears Canada's credit card division, and a subsequent $2-billion special dividend.

After three weeks of "tough, creative negotiations," Natcan agreed to sell its 9-per-cent stake -- acquired over two years ago for $150-million -- to Sears Holdings. That set the stage for the parent firm's offer for the rest of the company. The moment that bid was announced, there was a flood of investors who play on the theory that motivated buyers such as parent companies will invariably dig deep, and improve their opening bid to get a deal done. The most sophisticated of these players are known as arbs, or risk-arbitrage hedge funds.

"We got a fair price, plus protection if a second bid was made," Mr. Boulos says. "The arbs, they poured in because the statistics show that they can get a 10- to 15-per-cent bump in the bid."

The arbs drove Sears Canada stock over $18, where it has remained since December. In April, Sears Holdings did improve its offer to $18 and won support from other major investors, with Natcan also getting the sweetened price. But at that point U.S. hedge fund Pershing Square Capital Management LP went on the offensive.

After buying shares at around $18, Pershing began making strident arguments that the Canadian chain is worth up to $46 a share. On the phone with Montreal-based Natcan, you can almost hear a Gallic shrug as Mr. Boulos says: "They can always dream."

Just about every takeover of a Canadian subsidiary by a foreign parent -- and there have been more than a dozen in the past decade -- has seen tension between minority shareholders and the buyer. Occasionally, takeover bids don't get improved, and arbs get hammered, as they did when Rogers Communications dropped an offer for its wireless unit. Sometimes, the arbs clean up, as witnessed in the bidding war for Dofasco.

But no takeover has approached the flat-out nastiness of the Sears Canada fight. Hedge funds now control trillions of dollars and have become a major factor in capital markets around the globe. In Canada, we are finding out what happens when two of these powerful players go toe-to-toe.

This battle has grown so ugly that some combatants have withdrawn from the field. Sears Canada's independent directors quit the company rather than endorse the $18 offer. Said one source close to the board: "We just weren't going to be pushed around." On Tuesday, there will be a meeting at which Mr. Lampert is poised to get full control of the board.

Bystanders are being wounded. Sears Holdings unleashed its lawyers at Osler Hoskin & Harcourt to wring an apology from Ron Mayers, head of alternative strategies, at Desjardins Securities who questioned the takeover tactics. Regulators are also being summoned. When Pershing Square and its allies dragged the Ontario Securities Commission into the fray, Sears Holdings shot off a press release asserting the hedge funds are trying to "change the law to bail them out of their mistake."

Pershing Square, run by New York-based William Ackman, responded with its own release, labelling the assertions "vituperative." That means abusive. That nine-page missive also referred to Mr. Lampert as "Eddie." Friends can use the nickname. Coming from Pershing Square, sources close to ESL said it was an attempt to get under Mr. Lampert's skin.

The battle of egos, and thesauruses, is about more than chest-thumping by money managers.

Both Mr. Ackman and Mr. Lampert know their ability to do successful deals in the future -- to sway boards or raise money -- depends in part on burnishing their reputations as winners at Sears Canada. One source close to ESL said: "Lampert doesn't ever want to be known as a guy who rips off public shareholders. He's likely to be in Sears Holdings for a long time, and he plans to be in business a long time."

The rhetoric has grown louder as Pershing Square suffers setbacks. In fact, Mr. Ackman may eventually lose out because he was too clever for his own good.

Pershing Square directly owns 5.6 million Sears Canada shares, bought after the takeover was launched. But the fund also bought 5.3 million shares last year. To legally avoid paying about $20-million in Canadian tax, it entered into what is known as a swap agreement. That deal saw Pershing Square hand over its 5.3 million Sears Canada shares to a Florida bank, SunTrust Banks Inc. In exchange, the fund got a note that entitled it to any future increase in Sears Canada's share price.

The only downside to this swap was Pershing gave up the right to vote the shares. But in a number of interviews, Mr. Ackman said market convention would see those 5.3 million shares either voted his way, or at least not voted at all.

Executives at several Canadian bank-owned dealers, all of whom routinely do these tax-based transactions on dividend-paying stocks, say Mr. Ackman has it wrong. The owner of the shares must be free to vote as it sees fit, they say -- otherwise, the swap agreements might be considered tax fraud.

So who ended up owning the shares that Pershing Square swapped? That's a hotly debated subject. Pershing Square says the block ended up with Bank of Nova Scotia, an allegation both the bank and Sears Holdings deny. Mr. Ackman's best hope of torpedoing this takeover lies in attacking Scotiabank's role.

For what no one disputes is that the bank bought 4.5 million Sears Canada shares as part of a tax-driven trade. When Scotiabank decided to tender its big block to the $18 bid, it paved the way for Sears Holdings to squeeze out the remaining minority investors.

The other fact that's not in question is that Sears Holdings struck its deal with Natcan, then hired Scotiabank's investment dealer arm, Scotia Capital, as adviser on its takeover offer. Sears Holdings sources say they had no clue the bank owned Sears Canada shares, and point out that they also interviewed Merrill Lynch and BMO Nesbitt Burns for the job.

Scotiabank spokesman Frank Switzer said the two arms of his bank acted "with the utmost integrity." But the two roles in this takeover opened the door for Pershing Square to claim Scotiabank had a conflict of interest. If Pershing Square can persuade the OSC to somehow toss out Scotiabank's 4.5 million votes, then Sears Holdings is no longer able to roll up the rest of the minority shareholders. To make the whole thing even more delicious, the chairman of the OSC is former Scotia Capital chief executive officer David Wilson.

For all its troubles, Scotia Capital stands to earn the Bay Street equivalent of minimum wage. The investment bank only stood to make a lucrative success fee -- in the $3-million range -- if Sears Holdings was able to get the chain for the opening bid of $16.86, according to sources at the bank and the American company. With the offer now at $18, Scotia Capital will receive a far more modest stipend. Short of a major reversal at the hands of the regulators, Sears Holdings will take over its Canadian subsidiary early in the new year. A prolonged court fight with Pershing Square is cheaper than an improvement on the $18 bid, sources at Sears Holdings say.

What happens next -- how Sears will beat back Wal-Mart and a planned Canadian invasion by archrival Lowe's Cos. Inc. -- is the subject of enormous debate in retail circles.

Pershing Square pushes the idea of a merger with the troubled Bay and Zellers chains, which were recently taken private by American investor Jerry Zucker. An investment banker who has been through the books of both the Bay and Sears Canada says that while there's no point in putting the chains together, "once everything is private, you're going to see all sorts of wheeling and dealing with the Bay and Sears stores. You'll see Loblaws buy 25 locations, Shoppers, Canadian Tire, even Wal-Mart will buy a few."

The investors who did so well with Sears Canada as a public company say it now makes business sense to say goodbye. Natcan's Mr. Chartrand says: "The next step has to be as a private company. Do that, and you can better deploy capital, you can combine the two companies' purchasing for more clout with suppliers, and combine merchandising. But it has to be private."

Head to head

Meet two fund managers facing off in the Sears Canada takeover, who both claim to follow the value-investing philosophy of Warren Buffett. Strike that. Make it: Meet two money managers who both aspire to be the next sage of Omaha, with the same universal acclaim for their investing acumen, and fortunes in the neighbourhood of Mr. Buffett's $42-billion (U.S.). You decide who stands a chance of emulating Mr. Buffett's incredible four-decade run at Berkshire Hathaway.

William Ackman
The value-based activist investor

William Ackman is a child of the New York suburbs; his father is a successful commercial real estate investor. Mr. Ackman jumped straight into hedge funds after graduating from Harvard Business School in 1992. Starting with just $3-million, Mr. Ackman and a pal built Gotham Partners into a $568-million fund in eight years, backed by investors such as Harvard competition guru Michael Porter.

The wheels came off Gotham in 2002. New York Attorney-General Eliot Spitzer took a long look at the fund's practice of publishing and promoting lengthy research reports -- positive and scathingly negative -- on stocks that Gotham was long or short. Courts held up Gotham's plans to merge two companies where it held stakes, a debt-ridden golf course and a cash-rich real estate trust. The fund was liquidated in 2003, after several investors pulled their money.

Mr. Ackman bounced back with Pershing Square Capital Management, which now has more than $350-million in assets under management, according to Bloomberg News.. The 38-year-old bills himself as a value-based activist investor. He used derivative-based strategies and aggressive, public tactics to push money-spinning restructurings at Wendy's International, which spun off Tim Hortons, and McDonald's, which sold a Mexican fast-food chain. After one recent New York speech to plug his views on McDonald's, Mr. Ackman invited listeners and the media to keep the conversation going at Dizzy's Club Coca-Cola in the Time Warner Centre.

Pershing's current 5.6-million-share direct stake in Sears Canada was purchased after the company's U.S. parent tabled its takeover offer. In addition to running money, Mr. Ackman is a modern art collector who shows his works in New York galleries.

Edward Lampert
Numbers geek with a long-term view

Edward Lampert was a 14-year-old in the suburbs of Long Island, N.Y., when his father, a lawyer, died of a heart attack. His mother took a job as a clerk at Saks Fifth Avenue to pay the bills, her son started working after school in warehouses to help out. In a recent Fortune magazine article, Mrs. Lampert said: "He was a child, and then suddenly he was a man."

After graduating with top marks from Yale University, he landed a job at Goldman Sachs in what's known as risk arbitrage, making bets on stock moves with the house's money. At age 25, Mr. Lampert decided he would prefer to invest his own money. He left Wall Street for Texas, and started ESL Investments -- the letters are his initials. He briefly held a stake in the Texas Rangers baseball team, along with future president George W. Bush. ESL backers include computer entrepreneur Michael Dell and record mogul David Geffen. ESL eventually moved to Greenwich, Conn., and now holds $15-billion. Forbes Magazine puts Mr. Lampert's worth at $1.7-billion.

ESL has just 20 employees. They tend to study the heck out of companies, then take large positions for long periods. Kmart staff told Fortune that Mr. Lampert is a numbers geek, the single-biggest user of IT that the retailer uses to track sales, margins and inventories. Along with a four-year involvement in Kmart and a six-year holding in Sears, ESL has owned a stake in Autozone since 1997, and seen a fourfold increase in the value of the car parts chain.

Mr. Lampert is 43 and married, with a young daughter and a $20-million Greenwich mansion. He never discusses ESL holdings and keeps a low social profile, understandable in view of a 2002 kidnapping that saw the money manager imprisoned in a motel bathroom for 39 hours before being released at the side of a highway. Mr. Buffett earns $100,000 a year as chairman of Berkshire Hathaway. Mr. Lampert doesn't take a salary as chairman of Sears.

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Wal-Mart Reviewing Long-Term Media Accounts
Dow Jones Newswires
May 3, 2006

NEW YORK (AP)--Wal-Mart Stores Inc. (WMT) is reviewing its advertising strategy - accounts reportedly worth more than a half billion dollars - as part of a larger overhaul the world's biggest retailer has begun of its marketing image.

The business under review is worth about $578 million, according to an online report Wednesday by Advertising Age. The trade journal did not cite a source for the information.

Officials at Omnicom Group Inc.'s (OMC) GSD&M, in Austin, Texas, and independent Bernstein-Rein, based in Kansas City, Mo., confirmed Wednesday they were notified by Wal-Mart in recent days about the media review.

The move has been long anticipated since former Target Corp. (TGT) executive John Fleming became Wal-Mart's chief marketing officer last summer. Fleming, who had previously headed up Walmart.com, has begun shaking up the discounter's ad strategy in an effort to get its well-heeled shoppers to buy more merchandise beyond food. Over the past year, Wal-Mart, which is expanding to higher-quality apparel and other merchandise, has run ad campaigns in Vogue magazine, and has de-emphasized its trademark Smiley in TV ads, which is linked to its low price mantra.

Gail Lavielle, a Wal-Mart spokeswoman, said the company wants to "have the very best resources to make sure we have consistent messaging" across all its marketing efforts. She declined to comment on how much business is at stake.

The two agencies, both of which have worked with Wal-Mart for many years, said they aim to defend their established business with Wal-Mart.

"They are going through a lot of marketing changes, and so this is something that we have been anticipating," said Steve Bernstein, chief operating officer at Bernstein-Rein, which has worked for Wal-Mart for 32 years. "Sam (Walton) chose us, and we have always treated it like a test."

Officials at GSD&M, which was notified on Monday, said that they have created ads for Wal-Mart for 19 years, developing the "Always Low Prices" campaign. The agency helped create the Wal-Mart ad campaign with Vogue magazine.

Typically, a review involves the company hiring a consultant to study a number of ad agency clients, which are then narrowed further and then assigned an advertising project. Lavielle declined to give details about how long the process would take.

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Wal-Mart, Analysts Appear To Differ On Company's Labor Plans
By James Covert – Dow Jones newswires
May 3, 2006

NEW YORK -- Wal-Mart Stores Inc. (WMT) insists it doesn't have formal plans to cut full-time jobs at its U.S. stores, but some Wall Street analysts appear to have reached a different conclusion.

Last week, Citigroup analyst Deborah Weinswig predicted in a 60-page research report that Wal-Mart will reduce its ratio of full-time workers to 60% "over the next year or two," with the remaining 40% slated for part-time status. Wal-Mart's proportion of full-time U.S. workers - which currently stands at about 75% - could further fall to 50% in the future, she added.

Only a week earlier, however, Wal-Mart executives had said in the wake of a similar analyst report that the company isn't targeting any particular ratio of full-time to part-time workers for its 1.3 million U.S. employees. The question comes as a new labor-scheduling initiative at Wal-Mart is drawing complaints from full-time workers about lost hours and health benefits.

Wal-Mart's proportion of full-time workers has declined "very minimally" over time, Eduardo Castro-Wright, president of Wal-Mart's U.S. stores, told reporters last month at a media conference near the retailer's Bentonville, Ark., headquarters. But the decline has come because most job applications submitted to Wal-Mart - about 70% - are for part-time work, he said. The company defines full-time work as 34 hours a week or more.

"It's not a metric we use to measure our business," Castro-Wright said of the full-time to part-time ratio. "We truly don't have an objective and certainly don't manage to that metric."

The comments by Castro-Wright, who is a director of Dow Jones & Co., publisher of this newswire, had followed a research report published in January by JPMorgan Chase & Co., which, like the Citigroup report, had forecast that Wal-Mart's percentage of full-time workers will fall to 60% from a historical level of around 80%.

"As for the ratios, no one [at Wal-Mart] has given the analysts any full-time/part-time numbers," Wal-Mart spokeswoman Sarah Clark said in a written response to an email query. "This is purely speculative on their part."

Charles Grom, the JPMorgan analyst, didn't respond to requests for further comment on his report. Citigroup's Weinswig said through a spokesman that her prediction for a decline to a ratio of 60% full-time workers "is more in line with the industry average for retailers." That industry average, Weinswig says in her report, is between 20% and 40% - an estimate for mass merchants that is supported by third-party research commissioned by Wal-Mart, Clark says.

Full-Time's Rural Roots

The National Retail Federation, a Washington-based trade group, estimates that full-timers make up 40% of staff at publicly traded retail companies, and some of Wal-Mart's key competitors do have significantly lower ratios of full-time workers at their stores. Sears Holdings Corp.'s (SHLD) Sears stores employ only about 39% full-time workers. At Costco Wholesale Corp. (COST), full-time workers comprise about half of the chain's staff, a spokeswoman says. Target Corp. (TGT) officials weren't immediately able to produce a statistic.

Wal-Mart's ratio of full-time workers historically has been high mainly because of the company's rural origins, said Clark, the Wal-Mart spokeswoman.

"In rural markets, most people wanted full-time jobs and that was the applicant pool and expectation," Clark said. "As we have evolved into urban areas, the expectation and market needs change."

Wal-Mart recently has stepped up efforts to better match worker schedules with the ebb and flow of customer traffic, and a higher proportion of part-time workers increases the flexibility of a store's payroll. Citigroup's Weinswig said in her report that she was "encouraged by Wal-Mart's focus on increasing productivity of labor." But the recent changes haven't been greeted as warmly by some employees, who complain their status was essentially cut to part-time when they failed to comply with new demands that they work odd hours, sometimes on short notice.

Wal-Mart recently upgraded its health benefits, including shortening the wait period for part-timers to become eligible for coverage to one year from two and extending coverage to children of part-timers. But if health-care costs are an issue as Wal-Mart reworks its labor schedules, matching workshifts with customer demand presents a far greater opportunity to boost profits, says Robert Garf, an analyst at AMR Research Inc. in Boston.

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Sears Canada investors eye Hudson's Bay
Canadian Press Globe and Mail
May 3, 2006

Toronto — In a continued spat over Sears Holdings Corp.'s attempted buyout of Sears Canada Inc., a group of minority shareholders contesting the bid have floated the idea the retailer could be combined with competitor Hudson's Bay Co.

The group of shareholders, led by Pershing Square Capital Management LP, on Wednesday rejected a statement earlier this week from Sears Canada's Chicago-area parent company accusing them of attempting to push up the price of the takeover offer.

They also suggested that “based on a conversation with a former Hudson's Bay Co. senior executive, Pershing believes that a business combination between Hudson's Bay and Sears Canada could yield an additional $300-million of savings from the combined enterprises.”

The minority group did not identify the former executive.

On Monday, Sears Holdings vice-chairman Alan Lacy accused “Pershing and some other U.S. speculators” of delaying the proposed acquisition “in an attempt to extract a premium on shares they purchased recently at prices close to the final offer price of $18 per share.”

The minority shareholders, who also include Hawkeye Capital Management LLC and Knott Partners Management LLC, reiterated in a release that they believe the sweetened Sears Holdings offer of $18 a share undervalues the Canadian firm.

It accused Sears Holdings of being “motivated by its desire to squeeze out minority shareholders at a price that is a small fraction of the fair value of Sears Canada before including any synergies that can be obtained through 100 per cent ownership by Sears Holdings.”

The group noted that each member has held Sears Canada stock since early 2005, “more than one year before Eddie Lampert, chairman of Sears Holdings, attempted to acquire his first share of Sears Canada in the recent bid.”

“Members of the minority group intend to remain long-term holders of Sears Canada as a publicly traded company if they are successful in defeating the minority squeeze out transaction,” it added.

Pershing Square values Sears Canada stock's fair value at between $41.21 to $46.67 per share.

Sears Holdings Corp. is the third largest broad line retailer in North America, with approximately $55-billion in annual revenues, and 3,900 full-line and specialty retail stores in the United States and Canada.

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Riling its U.S. parent, Sears Canada board declares dividend
By Marina Strauss – Retailing Reporter – Globe and Mail.com
May 3, 2006

In what may be its last official move, Sears Canada Inc.'s board of directors declared a quarterly dividend yesterday, even though its U.S. parent had signalled there would be no more cash payouts to investors.

Sears Holdings Corp. doesn't pay a dividend in the U.S., and wanted to continue that practice in Canada by cancelling the 6-cent quarterly dividend -- at least if it wasn't successful in its hostile takeover.

The latest move in the bitter battle didn't seem to impress Sears Holdings. After all, the decision was made just a week before the Sears Canada annual shareholders meeting on Tuesday, when a new board of directors will be elected.

Sears Holdings believes the dividend decision should have been made by the new board, spokesman Chris Brathwaite said.

Its $18-a-share takeover offer, by its terms, will be reduced for this and any other future dividend paid by Sears Canada, he added. "We expect that the Sears Canada board of directors elected on May 9 will evaluate the appropriate dividend policy for Sears Canada going forward."

Despite the friction, the executives of the parent who sit on the Sears Canada board supported the latest dividend, and it was unanimously approved, he said.

The board, whose financial advisers had said that the takeover offer was too low, declared the 6-cent-a-share dividend, payable on June 16 to shareholders of record on May 15.

It is probably one of the board's last decisions before the Sears Canada annual meeting on Tuesday, when the independent directors will step down in protest of how Sears Holdings has handled the hostile takeover.

 

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Author throws punch at Allstate
Tough tactics alleged if payouts resisted

By Becky Yerak - staff reporter – Chicago Tribune
May 3, 2006

Allstate Corp., fresh from fending off criticism about its response to policyholders affected by Hurricane Katrina, faces another potential storm, this one from an author who claims the insurer is forcing policyholders to accept prompt but lower payouts or risk time-consuming and expensive litigation.

The alleged hard-nosed tactics are laid out in the book "From Good Hands to Boxing Gloves," due out this summer. The book claims that the nation's second-largest home and auto insurer treats some policyholders with "boxing gloves" during their time of financial and personal duress, rather than the reassuringly familiar "good hands" highlighted in its advertising.

In the process, the author claims, Allstate, which just celebrated its 75-year anniversary, has flouted what were once long-held industry principles that an insurer act as a fiduciary for a claims fund and not siphon off excessive profits until a policy period has passed and legitimate payouts are made.

The toughened-up practices have paid off, at least financially, generating more than $15 billion in excess profits for Allstate since 1995, according to author David Berardinelli, a New Mexico lawyer who has sued Allstate more than a dozen times since 1997 over the company's alleged mistreatment of customers.

The title of Berardinelli's book, aimed at trial lawyers, was inspired by a controversial PowerPoint slide that McKinsey & Co., a key player in the saga, worked up for publicly traded Allstate as they began developing more consistent claims protocols in the early 1990s.

For its part, Allstate defends its claims practices, which were rolled out in 1995 and have been upheld more than half a dozen times in state and federal courts.

"There has been case after case after case where it has been tried and litigated, and found to be fair and appropriate," Allstate spokesman Michael Trevino said.

Allstate says its claims system in fact helps policyholders because it does a better job of identifying illegitimate claims.

Still, since 2004 the company has admittedly defied a judge's order in a case involving Berardinelli to publicly make available McKinsey's PowerPoint presentation.

Allstate, which calls its actions "respectful civil disobedience," says the slides contain trade secrets.

"We've invested time and energy to develop claims processes to position Allstate much more effectively against our competitors," Trevino said. "To make that freely available to our competitors puts us at a competitive disadvantage."

Doug Heller, executive director of the watchdog group Foundation for Taxpayer & Consumer Rights, agrees with Berardinelli, saying that it is counterintuitive for an insurance company to treat its claims division as a profit center.

"Insurance companies are supposed to make money by building a customer base, investing the premiums safely and doing a good job of underwriting so they have enough money to pay claims and maintain profits," Heller said.

They're not supposed to squeeze "more money out of the claims process by lowballing customers," who are in a vulnerable state to begin with because they have just had an accident, he said.

"Unlike the insurance industry's propaganda where they say they are trying to ferret out fraud, the reality is that 99.9 percent of the people who file a claim have just undergone something ranging from unpleasant to traumatic, and they don't want a fight," Heller said. "People who are traumatized and financially in a jam are easily preyed upon."

Some insurance industry observers suggest Berardinelli is making overgeneralizations about Allstate's practices.

Donald Light, a senior analyst at Celent, a financial research and consulting firm, said it is unusual that Allstate would defy a direct court order to hand over the McKinsey documents. But he said there is nothing wrong, per se, in paying off some claimants in short order while contesting others.

"Those are legal, ethical and fair practices in the abstract," Light said. "Every insurance company should be doing the things that Allstate is accused of doing, to be fair to its owners and its other policyholders," he added. "The real question is has it been applying it in an unfair or unethical way."

Another industry observer said insurance companies' protocols are rarely, if ever, intentionally aimed at paying less than what is owed. At the same time, he said, lawyers make a living by looking for weaknesses in the protocols.

"Insurers, especially big ones such as Allstate, are excellent targets for lawsuits, and couldn't survive for 10 minutes if they had truly inappropriate procedures," said Brian Sullivan, editor of Risk Information Inc., which publishes Auto Insurance Report and Property Insurance Report.

"When a lawyer holds a seminar or writes a book about how to maximize insurance company claims, it is almost always because they don't have enough clients to make money as a lawyer," Sullivan said. "If the lawyer has found a true problem, Allstate has already fixed it, to protect themselves from claims and lawsuits. It's what they do for a living."

In his long-running battle with Allstate Berardinelli was allowed to get a restricted viewing of the McKinsey PowerPoint documents. They formed the basis first for a 16-page August 2005 article that he wrote for New Mexico Trial Lawyer and is now expanding into a book.

He declined to make an advance copy of his book available, but his August 2005 article traced how Allstate began taking a more adversarial stance against policyholders.

The change can be traced to 1992, when Allstate retained McKinsey to redesign its claims-handling systems, Berardinelli wrote. The consulting firm worked with the insurer until 1997.

"Our goal is to redefine the game . . . to . . . radically alter our whole approach to the business of claims," according to the 1995 implementation and training manual for McKinsey's plan.

McKinsey had recommended that Allstate adopt a "zero-sum game," akin to a poker game in which players compete for the money of other players. As an insurer, Allstate would essentially compete with policyholders for profits in the pool of funds that had accumulated to pay off claims, Berardinelli said in his article.

McKinsey, which declined to comment for this story, found that most policyholders would want to avoid the expense and delay of going to court, Berardinelli wrote.

"Instead of a system designed to deliver prompt and fair payment of claims, McKinsey designed its system to deliver either prompt payment or fair payment," but not both, he wrote.

Allstate could give "good hands" service to 90 percent of the claims, settling them within 180 days, Berardinelli wrote, citing a McKinsey slide.

The rest would receive the "boxing gloves" treatment, with some claims taking more than four years to settle, he said.

"The message of McKinsey's `Good Hands to Boxing Gloves' slide is forcefully frank," Berardinelli wrote. "Policyholders who voluntarily accept lower loss payouts will receive the `good hands' treatment, i.e., prompt payment.

"On the other hand, policyholders who resist lower loss payouts will receive the `boxing gloves' treatment, i.e., aggressive litigation tactics deliberately designed to make litigating claim values with Allstate time-consuming and so prohibitively expensive that any possible victory by the policyholder will be a purely Pyrrhic proposition."

In early testing, McKinsey found its new plan was not achieving the desired results because too many Allstate adjusters were clinging to the old way of doing business, he said.

So McKinsey adopted a new employee job performance measure that "would effectively force adjusters to see policyholders who resist . . . as an obstacle to achieving good job performance evaluations, making it natural for [the adjusters] to adopt McKinsey's `boxing gloves' approach," Berardinelli wrote.

"The ability, or even the willingness, to compromise would be replaced by take-it-or-leave-it negotiating tactics."

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Medicare's Cost of Drug Benefit Will Be Lower Than Expected
By Sarah Lueck – Wall Street Journal
May 2, 2006

WASHINGTON -- Medicare's prescription-drug benefit will cost the government about 20% less during the next decade than was projected a year ago, but largely for reasons outside the government's control.

Most of the reduction will result from lower-than-expected growth in the nation's per capita drug spending, Medicare's actuaries said in their latest projections, which came as part of the annual release of data on the financial health of Medicare and Social Security from the trustees of the programs.

The actuaries said fewer people than expected are signing up for the new coverage. Since last year, Medicare actuaries have lowered estimates for enrollment by May 15 -- this year's deadline for signing up -- from about 37 million to 31.4 million, a move that fueled calls in Congress to give people more time to sign up.

The latest cost projection for the drug benefit is "substantially lower" than projected last year, the trustees report said. Last year, Medicare's actuaries estimated the benefit would cost a total of $997 billion over 10 years, not including savings to Medicaid. Now that estimate is $788 billion. Another reason for the reduction: The private insurers selling the new, government-subsidized coverage achieved discounts on medications sooner than the actuaries had expected. That offset a 4% increase in what the government thought it would spend on Medicare beneficiaries with costly drug bills.

"The outlook for Medicare [drug coverage] is much better," said Mark McClellan, administrator of the federal agency that runs the program. He credited the competition for customers between private insurers that resulted in lower than expected premiums for drug coverage this year. On enrollment, he and Health and Human Services Secretary Michael Leavitt said they are hitting their own goals to have 28 to 30 million Medicare beneficiaries getting drug coverage.

The reduced cost of the drug benefit was a bit of good news accompanying continued warnings about financial trends that are unsustainable in Medicare and Social Security. The reports showed that Medicare's hospital insurance trust fund will be depleted in 2018, two years earlier than forecast last year. Social Security will begin running a deficit in 2017, the same as projected last year, and its accounting trust fund will be exhausted in 2040, one year earlier than projected. (Read the report. 4)

Several of the six trustees, including the secretaries of Treasury and Health and Human Services, said fundamental changes are needed to rein in the costs of the programs. Treasury Secretary John Snow warned of a "looming fiscal crisis" if changes aren't made before Baby Boomers retire. "The message of this report is urgency," Mr. Leavitt said.

But in the near term, little is expected to change. President Bush, in his budget proposal for next year, recommended trimming spending on Medicare provider-payments and raising premiums for higher income beneficiaries. But Congress isn't enthusiastic about tackling the issue with mid-term elections approaching. Mr. Bush also recommended the formation of an entitlement commission to examine Medicare and Social Security, after his attempt to add private accounts to the federal retirement stalled last year.

Still, months after it was suggested, the commission hasn't yet been formed. Mr. Snow said it's "being worked hard," but conversations about who should be on the panel continue between prospective members, the White House and Congress.

The Medicare report held two other important developments. Under a requirement passed with the Medicare drug benefit, legislative action is supposed to occur if Medicare's trustees predict that, within the first seven years of their annual 75-year projections, general revenues fund more than 45% of total Medicare spending for two years in a row. Yesterday's report said that threshold would be reached in 2012. That means the trigger for action would occur in 2007 if projections hold. President Bush would be required to propose legislative changes, and Congress would have to give them fast-track consideration

Also, Medicare beneficiaries will see a big jump in the premiums they pay for physician and other outpatient care, under the portion of the program known as Part B. Medicare officials said yesterday that premiums would increase next year by 11%, to $98.20 a month from $88.50, partly because of a surge in the volume and intensity of Part B services and a decision by Congress to override a reduction in physician payment that was scheduled to occur this year.

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Sears shows cards
By Andrew Willis – Globe and Mail
May 1, 2006

Sears Holding Corp. lifted the veil on its planned acquisition of its Canadian subsidiary Monday in an attempt to defang criticism of the takeover from U.S. hedge funds.

In the wake of news last week that Ontario regulators are looking into Bank of Nova Scotia's role in the bid for Sears Canada Inc., the retailer's Chicago-based parent said allegations against the bank are “baseless.”

U.S. hedge fund Pershing Square Capital Management LP and other funds raised issues of conflict of interest because one unit of Scotiabank was advising Sears Holding, while other arms of the bank owned 4.5 million Sears Canada shares that were eventually pledged in favour of the transaction. Sears Canada shareholders will formally vote May 9 on the offer.

Sears Holding said it a press release yesterday that there are no conflict-inducing success fees being paid to Bank of Nova Scotia, fees that are contingent on the parent buying the Canadian company. The bank's Sears Canada shares were acquired before Sears Holding made its bid, and the American company said it was not aware the bank held the stake until after it tabled its offer.

“All negotiations between Sears Holdings and the parties to the support agreements were conducted on an arm's-length basis, with all parties acting in their own independent economic interests,” said Sears Holding in a statement. “Pershing's suggestion ... that Scotia Capital and Bank of Nova Scotia were acting as Sears Holdings' agents in entering into the support agreements is false.”

 

 

Sears defends offer for Sears Canada
Reuters
May 1, 2006

LOS ANGELES, May 1 (Reuters) - Sears Holdings Corp. on Monday denied that shareholders Scotia Capital and Bank of Nova Scotia, which backed its plan to completely acquire Sears Canada, were acting on its behalf.

The department store operator issued the statement in response to an April 28 report in Canada's National Post newspaper that said dissident investors Pershing Square Capital Management LP, Hawkeye Capital Management LLC and Knott Partners Management LLC have asked the Ontario Securities Commission to review the deal.

The dissident funds have said they will band together to fight Sears' $775 million bid for Sears Canada, saying they think the Canadian unit is worth more.

OSC officials were not immediately available for comment.

According to the National Post report, the dissident group raised concerns that Scotia Capital, the investment banking arm of Bank of Nova Scotia, was also acting as a financial adviser to Sears in its bid to buy Sears Canada.

On Monday, Sears said the shares owned by Scotia Capital were acquired prior to the firm being hired as an adviser. The retailer also said it was not aware of Scotia Capital's holdings at the time it was hired.

In the statement, Sears Vice Chairman Alan Lacy accused Pershing and the others of wanting to hold up the deal to extract a premium on shares they purchased recently at prices close to the final offer price of $18 a share.

Earlier this month, Sears declared victory after gaining support for its sweetened bid from most of the minority shareholders of Sears Canada.

But the dissenting group has warned it will take "all appropriate legal action" to halt the deal.

Officials from Pershing, Hawkeye, and Knott Partners were not immediately available for comment.

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FLASHBACK 1973 -- Top job
By Nancy Watkins
April 30, 2006

Sources: Tribune archives, "Sears, Roebuck & Co. 100th Anniversary 1886-1986,"
by Lorin Sorensen, U.S. Bureau of Labor Statistics
Published April 30, 2006

IT WAS A MOMENTOUS OCCASION to be sure.

THIRTY-THREE YEARS AGO THIS WEEK, the final beam of what was now the world's tallest building was put in place.

Mayor Richard J. Daley, retired Sears chairman Gordon Metcalf and other dignitaries braved strong winds to witness the culmination of three years of toil.

After all the muckety-mucks had gone home, the construction workers had their own, less-formal gathering in the tower. Beer was present, a fight broke out and about half of the 400 or so partygoers ultimately took part before police finally put a stop to it.

Observed one lieutenant: "THESE TOPPING-OUT PARTIES ARE ALWAYS HELD ON THE FIRST FLOOR, SO NO ONE FALLS OFF THE BUILDING."

- Number of Sears employees, construction workers and dignitaries who signed the final beam: 12,000.

- Number of stories in the first skyscraper, Chicago's Home Insurance Building (1885): 9.

- Rank of structural iron and steel work among the most dangerous jobs in the U.S.: 4.

- U.S. president who bought his wife's wedding ring at Sears: LYNDON JOHNSON.

"She towers so high/Just scraping the sky/She's the Tallest Rock."

-SONG SUNG BY THE TOWER BUMS, A BAND OF ELECTRICAL WORKERS, AT THE SEARS TOWER TOPPING-OUT CEREMONY

 

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Groups Opposing Wal-Mart Get Help From New Web Site
By Michael Barbara – New York Times
May 1, 2006

Trying to stop a Wal-Mart from coming to town? Hit the print button.

Two groups, Wal-Mart Watch and Sprawl-Busters, have teamed up to create an online toolkit for community groups opposing the giant discount retailer. The site, called Battlemart, features everything a local activist needs: grants (to start a citizens' group), reports on the economic impact of a Wal-Mart (to be submitted to a local city council), the names of local traffic engineers (to testify at zoning hearings), and even advice on how to name a group (try "[city name here] First.").

Battlemart, which will be formally introduced today, is intended to "level the playing field" for residents facing off against a company with 5,000 stores and $300 billion in annual sales, said Al Norman, the founder of Sprawl-Busters and the author of "Slam-Dunking Wal-Mart," a guide to keeping giant national stores in check. "It's a grab and go," Mr. Norman said. "You download it and take it to your Sunday night citizens' group. They say, oh, we need a lawyer and a assessor, letters to the editor."

Battlemart even offers fund-raising tips for fledgling anti-Wal-Mart groups. "Avoid very labor-intensive events like car washes and bake sales," it advises.

Wal-Mart Watch — which has received hundreds of thousands of dollars from the Service Employees International Union — will be host of the Web site and offer start-up grants of $500 to $3,000. So far, it has financed 10 groups, including Gresham First in Gresham, Ore., and Great Falls First in Great Falls, Mont.

Battlemart reflects the degree to which the debate over Wal-Mart, once confined to living rooms and union halls, has now shifted to the Web.

Mr. Norman, who has posted some of these suggestions on sites like WakeUpWalMart.com, said he would serve as a blogger on the Battlemart Web site, tracking local campaigns to block stores and responding to questions.

A Wal-Mart spokeswoman could not be reached for comment yesterday.

Asked if Battlemart would help a handful of residents block a store favored by the majority of local residents, Nu Wexler, a Wal-Mart Watch spokesman, said: "We are not trying to create cookie-cutter site fights," as local zoning battles are called. "This Web site is responding to demand, not creating it."

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Creativity Overflowing
After its initial efforts stumbled, Whirlpool is reaping big dividends
from its push to jump-start innovation

By Michael Arndt - Business Week
May 8, 2006

David R. Whitwam had run out of tricks. The chairman and chief executive of Whirlpool Corp. had built the company into the world's No. 1 maker of big-ticket appliances, achieving unmatched economies of scale. He had also cut costs by hundreds of millions of dollars, again and again. Yet here it was 2000 and, judging by everything from stock price to profit margin to market share, Whirlpool was no better off than it was a decade earlier.

The company's problem was not hard to diagnose: Its machines had been reduced to commodities. Prices for its most important products were actually falling each year. Nor was the solution a mystery: Whirlpool had to come up with exciting new products that could command premium prices. But the appliance maker had never paid much attention to innovation. During most of its 95-year history, it excelled at operating plants and distribution channels efficiently and at turning out washers and dryers that were solid and long-lasting. From time to time, research and engineering (R&E) technicians would tweak Whirlpool's Kenmore, KitchenAid, and namesake appliances to lower costs or boost performance -- by better insulating a freezer, say, or adding another washing cycle. But that's about as exciting as product development ever got.

ALPINE RETREAT
It was clear that Whirlpool needed to reinvent its corporate culture. To do so, it had to figure out the answers to basic questions that managers everywhere struggle with: How do you define innovation? How do you measure success? How do you teach people to be creative? "We knew from a strategic point of view what we needed to do, but from a practical point of view we didn't know how to do it at all," confesses Jeff M. Fettig, 49, a 25-year veteran who succeeded Whitwam as chairman and CEO in mid-2004.

So Whitwam put out a broad call for help. Believing that brilliant ideas were buried in the corporate hierarchy, he invited each of the company's 61,000 employees to unleash their creativity: Everybody everywhere, he exhorted, Go out and innovate!

Off in the Italian Alps, a crew of workers got right at it. Handpicked by managers from across the company's European staff, the 25 employees were freed from their regular jobs and packed off to Whirlpool's office in Comerio, Italy, with a single purpose: to dream up products or services that would truly differentiate Whirlpool from rivals. A year later, they came back with their big brainstorm: an Internet business that would enable people to race one another over the Web on stationary bikes. So much for that experiment. It was obvious that Net bike racing, which didn't draw on any of Whirlpool's strengths, was a nonstarter.

Whirlpool learned the hard way that real innovation requires a lot more than simply urging thousands of employees around the world to tap into their inner designer and then waiting for the great ideas to roll in. It requires hard work, structure, and unwavering discipline. After its inauspicious start, the company retreated from the all-out effort to democratize innovation and moved to a more traditional centralized model of product development. That did the trick. Since 2001, revenues from products that fit the company's definition of innovative have zoomed up from $10 million to $760 million in 2005, or 5% of the Benton Harbor (Mich.) company's record $14.3 billion in total revenue. Whirlpool's shares, at $92.64 on Apr. 25, have almost doubled in price over the past five years. Now, following its $2.6 billion Maytag Corp. takeover, Whirlpool will bring innovation to its onetime archrival.

Plenty of other companies are taking notice of Whirlpool's success. Over the past few months, the company has hosted delegations from Hewlett-Packard (HPQ <javascript: void showTicker('HPQ')> ), Nokia (NOK <javascript: void showTicker('NOK')> ), and Procter & Gamble (PG <javascript: void showTicker('PG')> ) -- all eager to benchmark their own innovation programs against Whirlpool's. "You have to give the management team credit," says Jan W. Rivkin, a Harvard Business School professor who uses Whirlpool as a case study in his course on competitive strategy. "A lot of other companies would have shut this down. One of the remarkable things here is they've found ways to adapt and keep this rolling."

Whirlpool's leaders first started to recognize that they had a problem back in mid-1999. Whitwam was in his 12th year as CEO and had just promoted Fettig to president and chief operating officer. Housing, and sales of Whirlpool appliances, were booming. But despite strong demand, the prices of Whirlpool appliances were falling at an average rate of 3.4% a year, forcing yet another job-eliminating restructuring. Whitwam remembers those days like this: "I go into an appliance store. Now, I have pretty good eyes. I stand 40 feet away from a line of washers, and I can't pick ours out. They all look alike. They all have decent quality. They all have the same price point. It's a sea of white."

ROUSING THE TROOPS
So Whitwam, now 64, called in Nancy T. Snyder, an organizational behaviorist who had joined the company in 1986, and gave her a new title: director of strategic process. He also gave her a new assignment: turn everyone at Whirlpool into innovators. That was important to Whitwam, because he believed he could change corporate culture only by calling on each one of Whirlpool's employees to take up the cause. Otherwise, he feared, only an elite would embrace the challenge, and eventually they would lose out to the process-oriented and hidebound majority.

In early 2000, management enlisted a vanguard of 75 employees to be trained in innovation. Their teachers were 10 consultants from Strategos, a management consultancy founded by Gary Hamel in Menlo Park, Calif., in 1995. The students represented almost every job classification, from corporate vice-president to engineer to factory hand. They were assembled by region in groups of 25 in company facilities in Benton Harbor, Brazil, and Italy. For up to a year, as others took over their previous jobs, these employees were trained like pupils at a specialized graduate school.

The consultants spent weeks teaching them how to "ideate" by reexamining orthodoxies that were blinding employees to opportunities. "There are no barriers," Whitwam told students. "I don't care if we get one innovative idea out of the process."

He liberated the students to such a great extent, however, that most of their ideas turned out to be useless, impractical, and poorly suited to Whirlpool's strengths. In addition to Internet bike racing, employees proposed the Unattended Box -- a doorstep appliance to keep food deliveries hot or cold until owners came home from work. It was ignored. So was their plan to create a membership club for people who wanted home repair services.

The next step for Whirlpool was getting the rest of its global workforce involved. Snyder set up an intranet site that offered a do-it-yourself course in innovation and listed every project in the pipeline. Employees were invited to post ideas or to network informally with others and get their expertise. The company hosted innovation fairs to salute inventors and elicit more ideas. For one show, Whirlpool filled the concourse of Orchards Mall, outside Benton Harbor, with 54 exhibits of new products shown off by proud employees, including a quartet of engineers from Whirlpool's oven factory in Oxford, Miss. The four had invented a combination gas grill/refrigerator/oven/boom box for tailgate parties. It's a promising idea now being redesigned to work out safety issues.

Whitwam, meanwhile, continued to use his bully pulpit, encouraging workers to go to their bosses with proposals or to come to him directly if the managers wouldn't listen. And he put his money where his mouth was, setting aside $45 million from the capital budget for innovation in 2000 and doubling that amount in 2001. Although they didn't receive a penny for their ideas, rank-and-file employees were thrilled to be treated as peers and tapped for advice. In 2001 and '02, Whirlpool's "knowledge management" site recorded up to 300,000 hits per month. "I had never seen a strategy that was so energizing to so many people," Whitwam says.

Management, however, wouldn't buy it. Midlevel executives were peeved that their workers were off doing side projects when they still had real work to do. And upper-level managers could shrug off the initiative, because Whitwam hadn't given them any concrete goals or tied their performance to any innovation metrics.

So Whitwam and his coterie were forced to be innovative themselves. While not completely abandoning their come-one, come-all approach, they realized in 2002 that they had to bring more order to the innovation process. For starters, they decided that new ideas would have to enhance the company's existing brands or products. Top management would evaluate and fund all new proposals at monthly innovation-board meetings. These groups, in turn, reported to Whirlpool's nine-member executive committee. Green-lighted projects would be assigned to pros -- representatives from the design, market research, R&E, and manufacturing departments -- to see them through. In addition, Whitwam began setting annual revenue and pipeline targets in 2002 and conducting employee surveys to gauge workers' involvement in innovation. Senior executives would have to hit all of these numbers or lose 30% of their annual bonus.

To make certain that only high-potential ideas reached the I-board, Snyder and her innovation specialists came up with something called the I-box, a two-step graphing tool. The goal: to make it easier to design products that reflected consumers' needs and desires. The first step required innovators to demonstrate that their proposals were something that real people would buy. That could entail months of market research, quizzing thousands of consumers. Their ideas were then graded by innovation consultants on a scale of 1 to 10, from dud to sure thing. Only ideas with a grade of at least 6.5 could proceed.

QUICK ON THE UPTAKE
Step two involved analyzing whether the new product would command above-average markups, again through market research. On this test, also, ideas that scored less than a 6.5 got weeded out. The tool altered the company's development process. "Instead of a guy in the lab inventing something he thinks is cool, innovation is coming from the consumer through research," says Pamela Rogers, global director of customer excellence and innovation.

The company has also become much more flexible and adaptable. In collaboration with Best Buy Co. (BBY <javascript: void showTicker('BBY')> ), Whirlpool designed a mod fridge for dorm rooms and Gen Y apartment dwellers. The 32-inch-tall cube comes with a removable front panel and accessories such as a clock and radio so consumers can customize its look. Its carefully measured capacity: exactly enough to hold a large pizza and two six-packs of drinks. At the last moment, however, Best Buy backed out -- an unexpected development that probably would have killed the product back in the old days. But this time the company didn't give up. Last year, Whirlpool marketed its hip appliance in Brazil, where it was being built by its Brastemp unit. Called Pla, it has become a hit.

Whirlpool's innovators are also learning how to revive products and services that failed in their first go-round. Executives like to point out that they never kill ideas; instead, they shelve them so that other employees can take a look at them later. So far, 717 ideas have been put in this inactive status. Among them was the Personal Valet, an armoire-like appliance that steamed out wrinkles and odors from dry-clean-only clothes. Consumers hailed the idea but balked at the $1,199 price. Introduced in 2002, it was discontinued in 2004. Now it's back. But this time the device, rolled out in 2005 as the Fabric Freshener, comes in a collapsible plastic design made under contract in Mexico and lists for $199.

Although the company has modified Whitwam's original vision, it has succeeded in achieving his top goals. Since 2003, innovation revenue has quadrupled annually, easily surpassing goals. Fettig attributes 3 points of Whirlpool's sales growth rate, which has averaged 9% since 2003, to creative new products. Moreover, Whirlpool is no longer caught in a price war, forcing rivals to innovate as well or fade away, as Maytag did with its aging product line. For the past three years, the average price of Whirlpool appliances has risen 5% annually. The company has 24 I-con- sultants and 580 I-mentors in its workforce and 568 innovation projects in development today, including 195 being scaled up for commercial launch. Whirlpool calculates that these new appliances, once they're on the market, could produce $3 billion in annual sales, up from projections of $2 billion in 2004 and $1.3 billion in 2003.

Whirlpool has also succeeded in debunking some corporate orthodoxies, or conceptions that are so firmly fixed that they seem immutable. One is that consumers are driven almost entirely by price. Three years ago, the company introduced a new Kitchen-Aid waffle maker to replace the $99 model. Rather than just alter its innards and stick with the same price point, management came up with a "design icon," recalls Charles L. "Chuck" Jones, Whirlpool's vice-president of global product design. That meant fancier touches and better materials -- and a $399 retail price. Nonetheless, the company is selling the upscale version as fast as its factory can churn it out. "There is a rational component to purchasing appliances, but far outweighing that is an emotional component," says Jones. "What the eye admires, the heart desires."

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Online Extra: Whirlpool's Future Won't Fade
Business Week
May 8, 2006

The appliance giant's CEO, Jeff Fettig, has a favorite word: innovation. His company has used it to set earnings records and build a cutting-edge brand

These days, Jeff Fettig is getting the glory. Since mid-2004, Fettig has been chairman and chief executive of Whirlpool, which as the world's No. 1 maker of big-ticket appliances, has set records for sales and earnings. The housing boom in the U.S. certainly has helped. But the real numbers booster, says Fettig, is innovation. Thanks to new products, Whirlpool not only has logged outsized growth in demand; it has been able to command higher and higher prices (see BW Online, 4/27/06, "Whirlpool: Fabulous by Design".

In 2005, the Benton Harbor (Mich.)-based company attributed $760 million of sales to new products, up from $217 million a year earlier. Raising the bar, Fettig now expects innovation revenues of $1.2 billion in 2006. And even that goal may not be all that hard to surpass. With 568 projects in some stage of development today, Whirlpool calculates that new appliances in its pipeline will generate $3 billion in annual sales when they're rolled out over the next few years (see BW Online, 3/6/06, "How Whirlpool Defines Innovation."

In 1999, then-chairman and CEO David R. Whitwam concluded that innovation was the only way for the appliance maker to rise above its peers. While Whitwam set the course, Fettig deserves credit for leading the way. After all, as Whirlpool's new president and chief operating officer at the time, Whitwam was urging everyone everywhere in the company to think of themselves as innovators (see BW Online, 2/7/02, "Whirlpool Taps Its Inner Entrepreneur " . Fettig, 49, is a career man at Whirlpool. He was hired as an operations associate in 1981 after earning his MBA from Indiana University. Sitting at a conference table in his executive suite, Fettig recently spoke with BusinessWeek Senior Correspondent Michael Arndt about Whirlpool's innovation strategy. An edited transcript of the conversation follows:

How did you decide on innovation?
This goes back to a critical assessment we did of ourselves and the industry in the late 1990s. Any consumer walking into any appliance showroom anywhere in the world would see this: a sea of white. You don't see anything really different, even if you haven't been in the market for 10 years. You can't differentiate brands. You can't see the value proposition without having someone explain it to you. Thus, it's called the white goods business.

Without innovation and differentiation, the fundamental basis for competition was just price. There's nothing wrong with that. But our view was for us to truly execute a differentiated, value-creating strategy, we needed to do something dramatically different. From day 1, we took the approach that innovation was not the privilege of a few; it was a right of the masses. The only way innovation would work is if everybody was in, so to speak.

So is it working?
We're seeing evidence of what we call a "want in." In other words, consumers see something that is so different or innovative that they want to buy it as opposed to: they have to buy it. Because of that, we're dramatically changing the lifecycle of products. For example, if you looked four or five years ago, the average life of a washing machine was something like 13 years. With our Duet washers and dryers, which have been huge hits, we're surveying owners and finding out a lot of people are replacing their washing machine with the Duet after five, six, or seven years because they want it, not because their old machine broke or wore out. They just saw it, and they wanted it.

Another thing we're seeing is this is driving new revenue growth. I've told our investors that the incremental sales from innovation are now adding three points of growth to our annual growth rate. And it could be more. The other item -- and I don't think anything could be more clear than this -- is our average global selling price, or sales divided by number of units. From 1997 to 2002, our aggregated growth rate was a negative 3.4%. From 2002 through 2005, we've turned that from a minus 3.4% to plus 5%.

Could you highlight an example or two of when you had to adjust your strategy as you discovered things weren't working as you had planned?
Our first year, 1999, was all about learning. We knew what we needed to do; we just didn't know how to do it. We pulled 75 people out of their full-time jobs from vice-presidents to directors to secretaries to blue collars on the assembly line. We put them in three different innovation teams around the world. And for the first year, their job was to start innovating. I would say we had success with that. There's incredible power in putting together diverse people to come up with great business ideas. We learned tons.

But when we got to the end of that, we really started hitting a roadblock. This was the Internet bubble era. And most people wanted to go completely outside of our box; they wanted to start an Internet company. We had our first breakthrough. We said this is great, we don't want to overcontrol this, but we need to bound it. So we made this very simple fundamental decision: You could work on anything you want, but it has to be within the scope of our brands. It brought a boundary to our people.

I'd say we had the next breakthrough, in late 2002 and going into 2003. We were still treating innovation as something separate. It needed to be something we do every day. How do you do that? Basically, you decide where you want to go, set a goal, and hold people accountable. That's when we introduced innovation revenue and pipeline targets, and linked them to executive compensation. That was probably the big breakthrough that allowed us to scale this up.

What do you need to do now to improve your strategy?
I think we have a healthy approach. There's always faster, better, cheaper. Another dimension is that although we are doing this around the world, we think we can more rapidly leverage innovation from one part of the world to another part of the world. We've got 60,000 people worldwide. We estimate that on any given day we've got 1,500 working on innovation. There are probably 5,000 in any given year. That's a lot of people, but we've still got a long way to go. We may never get to 60,000. But we could get to 10,000 or maybe 15,000. We've got a lot of bandwidth.

What has the new strategy done to Whirlpool's corporate culture?
People think they have more freedom to contribute than ever before. This is fun. This is exciting. Our retail partners value this a lot. Young people talk about us like we're a high-tech company. No, we're not, we're a high-innovation company. Which is different from how people thought of us before, as an old, traditional company. People at Whirlpool don't believe they're in an old, traditional company. They believe they have the right and the obligation to create a future.

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Teachers solicited Sears Canada
Takeover battle:
BNS confirms its role in current deal under OSC review

By Theresa Tedesco - Financial Post – Canada.com
April 29, 2006

Senior management at Sears Canada Inc., currently the target of a hostile takeover bid under review by the Ontario Securities Commission, was approached by the Ontario Teachers' Pension Plan last spring about putting together a plan to buy the Canadian retailer from its U.S. parent.

Sources say representatives from the country's second-largest pension fund met with Brent Hollister, Sears Canada's chief executive, about six months after Edward S. Lampert took control of Illinois-based Sears Holdings Corp. in November, 2004. Teachers, which manages about $88-billion in assets, pitched the idea that management of the country's second-largest department store chain could have had success if it presented a cash offer to Mr. Lampert because the reclusive hedge fund manager appeared to be showing little interest in the Toronto-based subsidiary at the time.

"Management didn't want to be proactive in the new ownership environment. They seemed to want to play it out to see what would happen," said a source familiar with the discussions who asked not to be named. Sources confirmed the overture by Teachers was not presented to the 10-member board of directors at Sears Canada.

Seven months later, Mr. Lampert turned his attention to the Canadian unit and served notice that the U.S. parent company intended to launch a takeover bid. An offer of $16.86 a share was tabled on Feb. 9, and subsequently increased to $18 a share after the first offer was rejected as financially inadequate by a special committee of independent directors from Sears Canada.

The Financial Post reported yesterday that the Ontario Securities Commission is reviewing the takeover bid and proposed privatization and is focusing on the role of Bank of Nova Scotia after a group of dissident Sears Canada shareholders filed a lengthy complaint with the provincial regulator this week.

Three New York-based hedge funds, which collectively own 14.1% of Sears Canada's outstanding shares, asked the OSC to examine the bank's roles as lender to the Canadian subsidiary, advisor to the U.S. parent's $892-million offer and as a minority shareholder which agreed to pledge 4.5 million Sears Canada shares in support of the takeover and privatization.

Yesterday, Frank Switzer, a spokesman for the bank, confirmed the Post's article, saying, "It's our understanding that several U.S. hedge funds have asked the OSC's finance team to review the transaction." Mr. Switzer said Scotiabank has had "some enquiries" from the OSC and "we're responding accordingly."

Staff at Canada's largest securities regulator, which declined to comment, began questioning Scotiabank about its role in the controversial bid in the past two weeks.

Although Mr. Switzer would not elaborate on the information sought by the OSC, sources say the dissenting shareholders -- Pershing Square Capital Management LP, Hawkeye Capital Management LLC and Knott Partners Management LLC -- asked the commission to force Scotiabank to publicly disclose its advisory fees as well as its stakeholdings in Sears Canada. They expressed concern to the securities watchdog that the bank's combination of roles may pose a conflict.

The complainants have also requested the commission order Sears Holdings to publicly reveal the identities of a group of unnamed shareholders -- which includes Scotiabank -- who have supported the $18-a-share offer and privatization bid. Until that happens, the New York hedge funds, which have sought to block the deal because they say the price is below an independent valuation of $19 to $22.25 a share, have asked the OSC to halt the U.S. parent's offer.

Meanwhile, sources say the six independent directors on the board of Sears Canada have decided not to write a letter to the OSC in support of the dissenting shareholders.

The six independent board members will not stand for re-election to the Sears Canada board at the May 9 annual general shareholders' meeting.

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Canada Commission reviewing Sears bid
By Theresa Tedesco - Financial Post
April 28, 2006

The Ontario Securities Commission is reviewing a hostile takeover bid for Sears Canada Inc. after a group of dissident shareholders asked the provincial regulator to halt the proposed transaction by the retailer's U.S. parent and to investigate the role of Bank of Nova Scotia in the controversial offer.

Sources say three New York-based hedge funds filed a detailed complaint to the country's largest securities regulator this week urging the OSC to probe details of the Canadian bank's engagement as a financial advisor in a $892-million offer by Illinois-based Sears Holdings Corp. to buy the remaining 46.2% equity stake in the Toronto-based retailing subsidiary it does not already own.

OSC officials declined to comment. However, sources say commission staff in the takeover department, which monitors all mergers and acquisitions, are reviewing the complaint.

Scotiabank has been notified and is assisting the provincial regulator.

Pershing Square Capital Management LP, Hawkeye Capital Management LLC and Knott Partners Management LLC had co-ordinated efforts two weeks ago to oppose what they called Sears Holdings' "coercive tactics to force the minority shareholders of Sears Canada to tender into an undervalued and unsupported offer."

According to sources familiar with the complaint, the U.S. investor group, which is said to collectively own 14.1% of Sears Canada's outstanding common shares, asked the provincial securities commission to determine whether Bank of Nova Scotia should be considered a "joint actor" under Ontario securities laws. Scotia Capital Inc., the investment banking arm of the major Canadian bank, is acting as a financial advisor to Sears Holdings.

At the same time, Scotiabank has agreed to tender 4.5 million Sears Canada shares as part of an unnamed group of shareholders who have signed agreements to support the controversial bid.

The dissenting shareholder group is concerned that the bank's combination of roles as advisor to the bidder, shareholder and banker to Sears Canada may pose a conflict.

They have asked the securities regulator to cease-trade the U.S. parent's takeover offer until commission staff can determine whether Scotia's votes should be allowed to count as part of the minority shareholders whose support is needed to make the bid successful.

Frank Switzer, a spokesman for the bank, said "throughout this transaction, Scotia Capital has acted with the highest degree of integrity and in full compliance with all laws and regulations."

Without prior discussion or negotiation, Illinois-based Sears Holdings, controlled by 44-year-old reclusive hedge fund manager Edward S. Lampert, informed the board of its Canadian subsidiary late last year that it intended to launch a takeover bid.

Sears Canada is the second-largest department store chain in Canada and the largest general merchandise catalogue retailer in the country. It has 122 locations, 113 travel stores, 54 Home outlets, most of them located in power centres, and has joint venture interests in 14 shopping malls across Canada worth an estimated US$310-million.

On Dec. 5, 2005, the U.S. parent, which owns 53.8% of Sears Canada, declared publicly that it intended to make an offer to purchase a majority of the outstanding shares that trade on the Toronto Stock Exchange.

To that end, the giant retailer revealed it had a lock-up agreement with Natcan Investment Management Inc., which had agreed to tender its 9.06% stake.

In response, Sears Canada's board created a special committee of six independent directors to supervise the preparation of a formal valuation and fairness opinion to assess the offer. They hired Toronto-based Genuity Capital Markets to produce the opinion.

On Feb. 7, Genuity produced an opinion that pegged a fair market value of Sears Canada shares in the $19 to $22.25 range. Two days later, on Feb. 9, Sears Holdings unveiled a bid of $16.86 a share. In the offering circular to Sears Canada shareholders, it was disclosed that Scotia Capital was advising the U.S. parent in the proposed takeover transaction.

Sources say when the special committee at Sears Canada learned of Scotia Capital's involvement in the takeover bid, the independent directors debated whether to raise a flag given that Scotiabank had led a syndicate of lenders last December who had arranged $500-million in financing for the Canadian retailer.

Sears Canada's special committee decided to let it rest, because in the words of a source close to the board, "Do you really gain anything by having Scotia disqualified [as advisor]?"

On Feb. 21, Sears Holdings' offer was unanimously rejected by the six independent directors on Sears Canada's board -- four directors who are officers and directors of the parent company abstained from voting. The reasons cited included that the offer was "financially inadequate"; that it was "significantly below the valuation range" of $19 to $22.25 provided by Genuity; and that the bid "exerts pressure" on minority shareholders.

The Sears Canada board also noted that the $16.86-a-share offer did not consider the impact of cost-cutting measures made by Sears Canada in 2005 to improve its financial results. According to a presentation made to bankers late last year, Scotia Capital identified $301-million in cost savings at the Canadian retailer, compared to the $95-million Genuity accounted for in its valuation. As a result, the board believed the Sears Canada shares were being undervalued in the takeover bid.

A couple of days after they issued the rejection circular, the six independent directors also gave notice that they would not stand for re-election to the board at the May 9 annual shareholders' meeting.

For its part, the U.S. parent, which also owns Kmart stores, expressed disappointment that the Toronto-based subsidiary had snubbed its offer. Referring to Genuity's valuation report as "flawed," Alan Lacy, vice-chairman of Sears Holdings, said the Illinois-based parent company remained "committed" to its $16.86 offer price.

On March 20, Sears Holdings extended its offer to March 31 and declared that if it was not able to acquire a majority of the minority shares in Sears Canada, the U.S. parent would eliminate the subsidiary's practice of paying quarterly dividends. As well, Sears Holdings said it would appoint new directors from its own ranks to the Canadian subsidiary.

Nonetheless, Sears Holdings increased its bid to $18 a share on April 4 and announced that it now planned to privatize Sears Canada. To do that, the U.S. parent company indicated that rather than try to secure 90% of Sears Canada's shares, which under securities laws would have allowed it to squeeze out any hold-outs and force them to tender without a shareholders' meeting, it would try to push through the transaction at a special meeting of Sears Canada shareholders.

To achieve that end, Sears Holdings would need to obtain two-thirds of all Sears Canada shareholders, and a so-called "majority of the minority," which is 50% plus one share of those shares it doesn't already own. In other words, Sears Holdings needs to secure 23.1% plus one share of the 46.2% of the common shares of the Canadian unit.

To further its cause, the U.S. parent company revealed on April 9 that it had secured "support agreements" with an unnamed group of shareholders who agreed to tender their shares to the $18 offer, even though Sears Canada's stock price was in the $18.50 to $18.75 range on the Toronto Stock Exchange that day.

As well, these "certain shareholders" also agreed to endorse the privatization of Sears Canada by the end of the year. With that, Sears Holdings extended the expiration date of its $18 offer to Aug. 31 and indicated that the going private transaction would not be completed until December.

The special committee at Sears Canada began a review of the revised offer and sought an updated valuation and opinion from Genuity. The Toronto-based investment firm again concluded that $18 a share was inadequate and restated that the shares had a fair market value in the range of $19 to $22.25 each.

At the same time, Sears Canada's special committee asked for a copy of the support agreements and the names of the unidentified shareholders who agreed to tender to Sears Holdings, to help the board assess whether the shares that were committed could be voted as part of the privatization. The request was denied by the U.S. parent company.

On April 12, the Financial Post revealed the Scotiabank as being among the group of unnamed shareholders who agreed to tender their 4.5 million Sears Canada shares to the $18 offer. At the time, Mr. Switzer said the bank's shares in the Canadian retailer were placed on a restricted list and that all trading was ceased after Scotia Capital was hired in January to advise the U.S. parent in its proposed takeover.

He also said the bank's institutional traders obtained an independent legal opinion when they decided to vote the shares in favour of the privatization bid.

Even so, sources say Sears Canada's independent directors were concerned that Scotia's stake in the company was not disclosed in the offering circular. "You would have thought it was material to the public shareholders of Sears Canada to be told that the advisor who is making a fee is sitting on a truckload of shares," said an insider who asked not to be named.

In the end, Sears Canada's board unanimously decided on April 13 that it would not make a recommendation to shareholders about the revised offer because "there is sufficient information available for shareholders to come to their own conclusions as to whether to accept or reject the offer."

Once again, they repeated their intention not to stand for re-election to the Sears Canada board.

Meanwhile in Manhattan, three New York hedge funds threatened legal action to halt the transaction. Together, they own or control 8.24 million Sears Canada's outstanding common shares, and Pershing is entitled to the economic benefit -- not the legal and beneficial ownership --of an additional 6.9 million shares as a result of swaps the hedge fund entered into with SunTrust Capital Markets last November and December.

The unhappy shareholder group has urged those shareholders who have already tendered to withdraw their shares from the offer. Led by Mr. Ackman, who is known for persuading Wendy's International Inc. to spin off its Tim Hortons division earlier this year, the dissidents say Scotia's shares should not be counted as part of the minority because as advisor to the bidder, the bank is not independent.

"A majority-of-the-minority test can only be effective as a means of determining the fairness of a going private transaction if the shareholders voting in favour of going private are truly independent of the controlling shareholder/acquirer," Mr. Ackman said in an interview. "If, in fact, affiliates or agents of the controlling shareholder are allowed to vote in a squeeze-out transaction, then the majority-of-the-minority test can no longer serve its critical public policy purpose.

"In a world where the investment banker for a hostile bidder can cast the deciding vote, no minority shareholders' rights are safe."

Critics also argue Scotia is not a disinterested shareholder because it is entitled to collect a fee for its advisory work for the U.S. parent. It is common commercial practice for investment banks to earn fees for their work, which are determined by a number of factors, including whether a bid is successful.

Mr. Switzer would not comment on how much Scotia stands to collect from its retainer with Sears Holdings.

According to Ontario securities laws, the same class of shareholders is entitled to receive identical offers and no one should receive additional consideration for their securities.

Scotia's Mr. Switzer dismissed any suggestion that the bank received any added benefits. "We didn't get any collateral benefits," he said.

Mr. Switzer said the Scotia mergers and acquisition department was not aware that the bank owned shares in Sears Canada at the time it became an advisor for the U.S. parent in January.

"The M&A advisory team had nothing to do with the decision to vote the Sears shares," he said. "It was completely unrelated to the advisory agreement."

It is believed that Scotia's decision to tender its 4.5 million shares at a price below the valuation and less than the market price, was made on a tax-advantage basis.

Sources familiar with the complaint to the OSC say the dissenting shareholders estimate that Scotia could gain a tax loss deduction worth about $50-million as a result of its arrangement to tender its 4.5 million shares at the end of the year. By holding on to its Sears Canada shares for more than 365 days, Scotia would be permitted under the federal Income Tax Act to receive a tax-loss deduction.

According to sources familiar with the bid, the tax-loss benefit is available to a small subset of minority shareholders who are Canadian corporations that purchased Sears Canada stock before last December and have not yet tendered to the offer and who plan to hold on to the shares until the end of the year.

In the case of Scotia, price is not an issue because of complicated financial transactions that allowed the bank to purchase the shares and hedge the risk. That means that Scotia has no economic exposure to the stock, but maintains the legal and voting rights to the shares.

Sources say Mr. Ackman's group has asked the OSC to halt the U.S. parent's takeover bid until Scotia's fees are publicly disclosed, as well as its stake holdings in Sears Canada. The complainants have also requested the commission order Sears Holdings to reveal publicly the identities of the unnamed shareholders who have supported the privatization before the May 9 annual shareholders' meeting in Toronto.

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Another battle over Sears Canada
By Zena Olijnyk – Canadian Business Online
April 18, 2006

The war over the privatization of Sears Canada rages on. The latest battle pits activist hedge fund manager Eddie Lampert, chairman of Sears Holdings Corp. — created out of the merger of Sears and Kmart — against another hedge-fund titan, Bill Ackman of Pershing Square Capital Management. Ackman is best known for persuading Wendy's International to spin off its Tim Hortons division. In this case, he perhaps has been a little too clever for his own good, and what seemed like a good financial move (from a tax point of view), when he entered into some complicated derivative swap arrangements last year, has come back to haunt him.

That's why Ackman is now turning to the courts to come to the rescue, announcing in mid April that he and other dissenting shareholders have formed a group to oppose Sears Holdings "coercive efforts" to take the Canadian subsidiary private. "The group intends to take all appropriate legal action to halt the transaction so Sears Canada remains a public company," the group says in a news release, "or alternatively, to ensure that those shareholders who desire to sell their shares in Sears Canada are treated fairly."

Lampert had declared victory in taking the Canadian subsidiary private, after upping his original offer for the 46% of Sears Canada shares that he didn't own to $18 from $16.86, saying he had a "majority of the minority" of shareholders. He based his supposed victory on the support from some of the retailer's largest minority shareholders, as well as a separate agreement with "certain shareholders" controlling the votes behind 7.6 million Sears Canada shares. These shareholders "have committed" to side with Lampert in a private transaction expected to close this December. With those commitments, Lampert will have acquired or received commitments of votes representing 25.6 million shares, or more than 50% of Sears Canada stock not owned by Sears Holdings when the original offer was made.

That's enough to take Sears Canada private, according to Lampert. Case closed, he says.

But hold on, says Ackman, whose funds own 5.6 million-plus shares (5.4% of outstanding stock). He calls the $18 offer "wholly inadequate" and will not tender his shares. In addition, Ackman claims Pershing Square funds are entitled to the "economic benefit" of an additional 6.9 million shares thanks to "cash-settled derivative transactions" with other parties that (coincidentally) terminate in December 2006. That would give him an 11.6% economic interest in Sears Canada. So now Ackman says he will pursue all legal avenues to ensure Pershing funds "receive fair value for their investments in Sears Canada."

He is joined in this legal battle by fellow investors Hawkeye Capital Management and Knott Partners Management. The group own or control 8.2 million shares, representing 7.7% of outstanding shares and close to 26% of the shares not owned by Sears Holdings. However, if you add the 6.9 million shares that are part of the derivative transactions, their total "economic interest" jumps to 14.1% of outstanding and 47.2% of shares not held by Sears Holdings.

But the big question is: Who controls the votes attached to the Sears Canada shares that were part of the derivative transactions? These types of derivative "swap" agreements are relatively common, allowing entities to receive the economic benefit of the shares of a company, though without the right to vote the shares. Ackman's Sears Canada swap transactions were likely part of a strategy designed to protect investors in Pershing funds from a Canadian tax bite. And through a series of these deals, Canada's Scotiabank now apparently has ownership of the voting rights attached to about 4.5 million Sears Canada shares. It has now exercised those rights, with a pledge to accept Lampert's offer and deliver those votes so that Sears Canada can be taken private in December.

Why December? Well, according to a research note written by Desjardins Securities analyst Keith Howlett and research associate Courtney McKay, under certain circumstances, investors can receive a special dividend from a company tax-free, hold the underlying shares for 365 days, and then sell them, claiming a capital loss because the share price is now lower than the purchase price by the amount of the special dividend. While no one involved has confirmed what motivations are at play, Howlett and McKay say their theory "conceptually provides" an explanation why the "certain shareholders" referred to by Lampert will not tender their shares to the bid, which expires Aug. 31, but will cast the decisive votes for the going-private transaction set to close in December. At that time, the shares of the "certain shareholders" would be acquired by Sears Holdings as part of taking the company private, at $18 a share.

In the case of Sears Canada, Howlett and McKay say shareholders were paid a special dividend of $14.26 per share and a tax-free return of capital of $4.38 per share last December. They estimate that the potential tax savings to a shareholder claiming a capital loss from this scenario amounts to $2.70 per share, using a 50% capital loss inclusion and a corporate tax rate of 38% on the $14.26 dividend. That is, so long as the 365-day holding requirement has been met. If not, the amount of the dividend would be added to the proceeds of the disposition, doing away with the capital loss.

What muddies an already complicated situation, however, is Scotiabank's relationship with Sears Holdings. The bank's investment banking arm, Scotia Capital, is the dealer manager representing Sears Holdings. Critics argue Scotiabank is not a neutral party. But a spokesman for the bank says it received a legal opinion before becoming the advisor to Sears Holdings; it also placed all trading of the Canadian retailer's shares on a restricted list, so Sears Canada shares have not been traded by Scotiabank since Scotia Capital was retained. As far as the bank is concerned, there is no conflict or breach of securities regulations.

But it looks like Ackman and his fellow dissenters are planning to fight Lampert through the court system, and that likely includes a hard look at Lampert's agreement with shareholders like Scotiabank. However, at least for the moment, the dissenters appear to have been outfoxed by an activist shareholder who is a more than worthy opponent. And perhaps it should be a lesson to Ackman and other hedge fund managers that if you're going to be an activist investor, it's easier when you actually own the shares outright — including the right to vote.

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Sears Canada swings to Q1 loss of $11.8M
from year-earlier profit
By Rita Trichur – Canadian Business
April 27, 2006

TORONTO (CP) - Sears Canada Inc. (TSX:SCC), the target of a going-private move by its U.S. parent firm, has swung sharply to a first-quarter loss of $11.8 million, from a year-earlier profit, as sales revenue declined. The Toronto-based retailer also said Thursday it is continuing a strategic review as it strives to squeeze out more costs after undertaking a major restructuring late last year.

The department store operator's quarterly loss amounted to 11 cents a share and contrasted with a profit of $13.9 million or 13 cents per share a year ago.

Two analysts surveyed by Thomson Financial forecast a penny per share loss, excluding one-time items.

Pre-tax restructuring charges for the 13-week period were $5.5 million versus nil last year.

"This quarter's expense includes severance and related charges resulting from a workforce reduction in the company's logistics and transportation divisions," said Sears Canada, which has discontinued quarterly conference calls.

The charges, it added, relate to various productivity initiatives announced in 2005.

Last fall, Sears Canada slashed 1,200 jobs across the country to create annualized savings of about $100 million and improve productivity. It later eliminated about 190 jobs at distribution centres in two Ontario communities in March.

"The review of the company's operations is ongoing as is the implementation of opportunity improvements which are expected to lead to a cost structure that reflects a lean, profitable organization competing with the best of Canadian retailers," the company added.

Total expenses for the quarter were reduced by 12.6 per cent from last year, with about half of that reduction related to the sale of its credit-card division to JPMorgan Chase & Co. for $2.2 billion last fall.

Meanwhile, revenues for the period ended April 1 sank 7.5 per cent to $1.22 billion, from $1.32 billion, while same-store sales decreased 2.6 per cent. Sears Canada said the revenue drop was primarily due to the sale of its credit-card division.

"Now they are totally reliant on trying to make money in their merchandising division," observed John Chamberlain, a retail analyst at Dominion Bond Rating Service.

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Wal-Mart Ripple Effect Strikes Again:
Cutbacks Weigh on Supplier Earnings
By Kris Hudson – Wall Street Journal
April 27, 2006

If Wal-Mart Stores Inc. just sniffles instead of sneezes, its suppliers sell fewer tissues.

The world's largest retailer by sales is pushing to cut its inventory costs, and many of its suppliers are reining in their quarterly sales and earnings forecasts to reflect the change. Ultimately, suppliers say, the retailer wants to pare $6 billion in inventory costs, or 20% of its year-end total, to boost its margins and returns. Wal-Mart denies setting such a target.

The inventory-slashing effort has jolted some of the biggest names in the household-goods and personal-care industries, many of which rely on Wal-Mart for 10% to 30% of their sales. Among those that have responded by lowering their quarterly goals before reporting their results in the coming weeks: consumer-goods titan Procter & Gamble Co.; trucking firm YRC Worldwide Inc.; and battery maker Spectrum Brands Inc. Feminine-products company Playtex Products Inc. yesterday indicated that Wal-Mart's cuts have affected it, and analysts anticipate that others, such as Clorox Co. and Chattem Inc., a maker of beauty products, fragrances and other household goods, will follow suit.

The adjustments momentarily spooked investors. P&G's stock sank more than 3% on March 14 after it blamed inventory reductions in cutting its quarterly projections for organic growth -- meaning sales growth outside acquisitions -- to a 5% to 6% range from 5% to 7%. The stock has since fallen an additional 3.3%. In 4 p.m. composite trading yesterday on the New York Stock Exchange, P&G's shares were up 74 cents to $58.01.

The stock of Spectrum plummeted 28% on April 6 after it blamed inventory reductions, skyrocketing zinc prices and slumping battery sales in chopping its forecast for second-quarter earnings to three cents to six cents a share from 35 cents to 40 cents. The stock has since recovered by about 4.1%, closing yesterday on the Big Board at $16.14, up 10 cents. Wal-Mart accounts for 18% and 16%, respectively, of sales by Spectrum and P&G.

"We've talked at length about the fact that we had a significant miss in [second-quarter] revenue in North America related to very tight control over inventories by some of our customers," Spectrum's president and chief operating officer, Kent Hussey, said at an investor conference earlier this month.

The reverberations of Wal-Mart's inventory cuts underscore the retailer's heft in the U.S. economy and with its suppliers. The Bentonville, Ark., company slashed its inventories in the mid-1990s, leaving its suppliers scrambling for several quarters to recover.

Even if Wal-Mart's latest cuts mean the retailer will order only 4% more merchandise from a given supplier this year instead of an anticipated 5% increase, that seemingly minor cut could significantly change the supplier's outlook. "Since Wal-Mart is such a big customer for these guys, that can move the dial for them in terms of their [quarterly] plan," said Tom Swoffer, a portfolio manager at investment-management firm Wentworth, Hauser & Violich in Seattle whose funds include shares of Wal-Mart suppliers PepsiCo Inc., P&G and Estée Lauder Cos. Wentworth manages $8 billion.

Some Wal-Mart suppliers have proved more resilient. Snack maker Hershey Co.'s stock sank 1.8% on April 20 after it reported "modest" first-quarter sales growth due to factors including inventory reductions by major customers. However, Hershey's stock has since gained 7.6%, closing yesterday on the Big Board at $53.52, $1.23 higher. Some suppliers say Wal-Mart gave them ample warning to prepare for the reductions, and they set their initial 2006 sales projections accordingly.

The inventory pullback reflects Wal-Mart's strategy to cut its costs and widen its margins by pruning the offerings in its stores. Wal-Mart is revamping its distribution system to allow more frequent delivery to its stores of fast-selling items such as paper towels and light bulbs, thus fueling sales gains without stockpiling inventory in stores. Wal-Mart also aims to cut any inventory in its stores that isn't on its shelves. That includes inventory in back rooms, on overhead shelves and in off-site warehouses near the stores.

Suppliers say Wal-Mart executives in January outlined a goal of paring up to $6 billion in excess inventory. Wal-Mart denies setting such a target and declined to make executives available to comment. Wal-Mart's chief financial officer, Tom Schoewe, has said the retailer is striving this year for its inventory growth to amount to half of its sales growth. In the past two years, inventory growth has nearly matched or exceeded sales growth.

As it whittles its extra merchandise, Wal-Mart still is determining which offerings -- called stock-keeping units, or SKUs -- in each category sell best in each store. Once it has made those determinations, Wal-Mart might start eliminating SKUs, analysts say. Adrianne Shapira, a Goldman Sachs Group Inc. analyst, predicts that such eliminations will begin in a year or two. She rates Wal-Mart's stock "outperform" and predicts it will reach $53 within 12 months. Goldman has done business with Wal-Mart in the past year.

Chief Executive Lee Scott said earlier this month Wal-Mart isn't dropping SKUs.

"It may take Wal-Mart a while to get through it, but I think it is going to be a one-time hit for most suppliers," said Bob Millen, a portfolio manager at Jensen Investment Management, an investment-management firm in Portland, Ore., overseeing $2.6 billion. His funds include shares of P&G, Colgate-Palmolive Co., PepsiCo and Clorox.

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MindShare Takes Control of Kmart's Media Work
MediaCom Previously Handled $190 Million Account
By Matthew Creamer and Lisa Sanders – Advertising Age
April 26, 2006

Sears Holdings Corp.'s Kmart is shifting its $190 million media-buying and planning account to WPP Group's MindShare, which already handles Sears, Roebuck & Co., according to the marketer.

The move consolidates all of Sears Holding Corp.'s media duties at MindShare.

'Continued integration'
The account has been handled by WPP's MediaCom. "This in no way reflects on the outstanding work that MediaCom has done for Kmart since 2003," said a Sears Holdings spokesman. "It's part of our continued integration."

The move, effective June 30, consolidates all of Sears Holding Corp.'s media duties at MindShare. Kmart spent $190 million in measured media in 2005, according to TNS Media Intelligence. Sears Holdings spent $809 million in total.

Post-merger strategies
The media consolidation follows the merger of Kmart and Sears, a deal that closed in March 2005. In August, Sears consolidated creative duties with WPP's Y&R, Chicago, leaving Kmart at sibling Grey. That creative assignment is unaffected, the spokesman said.

Separately, MediaCom laid off 23 employees Monday as part of an effort to "reshape the organization for the future," according to Dene Callas, CEO of MediaCom US.

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US Lobbyists Denounce Mexico's 'Nothing Gringo' Boycott
Wall Streerrt Journal Online
April 26, 2006

MEXICO CITY (AP)--U.S. lobbyists lashed out Wednesday at the Mexican "Nothing Gringo" campaign timed for May 1 to coincide with the "Day Without Immigrants" boycott in the U.S.

The American Chamber of Commerce in Mexico said organizers are risking a backlash and foolishly targeting some of their best allies, since U.S. corporations have actively lobbied the U.S. Congress for immigration reform, including legalization for many of the estimated 11 million undocumented migrants.

Mexicans' refusal to "buy American" on May 1 could further polarize the debate and make reform supporters seem anti-American at the very moment that lobbyists are trying to persuade lawmakers in Washington to pass a bill that would benefit migrants, worries Larry Rubin, the chamber's president.

"This is like shooting oneself in the foot," Rubin said. "U.S. companies have been the first to lobby, launching a huge lobbying effort for immigration reform. ... Why hurt something that is helping you?"

Migrants and their supporters in the U.S. are being encouraged to skip work and school and not spend money for one day to demonstrate the migrants' importance to the U.S. economy.

South of the border, Mexicans are targeting American stores and chain restaurants - "That means no Dunkin' Donuts, no McDonald's (MCD), Burger King (BKG.XX), Starbucks (SBUX), Sears (SHLD), Krispy Kreme (KKD) or Wal-Mart (WMT)," reads one email making the rounds.

But even activists are confused about which companies are U.S.-owned. Sears is cited by boycott organizers, despite the fact that Sears' Mexico stores were bought by Mexican billionaire Carlos Slim in 1997. And few organizers mention Vips - the chain of ubiquitous Mexican diners - even though they are owned by Wal-Mart Stores Inc.

A quarter of Mexico's formal private-sector jobs with regular pay are provided by U.S. companies, according to the chamber, including Walmex (WALMEX.MX), the Mexican Wal-Mart subsidiary that is the nation's biggest private employer with 140,000 workers. Delphi Corp. (DPHIQ), the U.S. auto parts maker, is second with 70,000 workers.

"Certainly, companies could be hurt," Rubin said at a news conference Wednesday.

The chamber represents more than 2,000 U.S. and other foreign companies doing business in Mexico, and says its members are responsible for $100 billion of investment in the country.

The companies say they are helping Mexico by providing jobs, but activists counter they pay so little that Mexicans have little choice but to head north.

Backers of the Mexican boycott insisted Wednesday that the protest could send a message that U.S. companies should offer better pay and benefits to their Mexican workers.

"They continue to exploit Mexicans with badly paid jobs and no labor rights," said Roberto Vigil, who works in the Mexico City office of the California-based immigrants rights group Hermandad Mexicana. "They're kind of two-faced: they support, but they exploit."

Unskilled workers at U.S. companies usually start with Mexico's minimum wage of $4.35 a day. While many earn more, such as seamstresses making an average of $5.89 a day - even these wages pale in comparison to paychecks offered by the same companies north of the border, conceded the chamber's Humberto Banuelos.

A cashier at Subway (or "sandwich artist," as the company refers to them) earns about $189 a month in Mexico City. In Colorado, Subway cashiers make four times that - $824.

Companies also often hire workers for three-month periods to avoid paying health insurance or other benefits, activists say.

"Yes, we are aware that they are the largest employers in the Mexican republic, but they are paying crumbs," said Martha Suarez Cantu, coordinator of Alianza Braceroproa, a Mexican labor-rights group helping organize the boycott.

The only way to stem immigration is to narrow the income gap between the two countries, said Robert Pastor, director of the Center for North American Studies at American University in Washington. He pointed to the European Union, where migration slowed after heavy investment reduced the income gap in its poorer countries.

Washington doesn't invest directly in job creation in Mexico. The U.S. Agency for International Development gave Mexico $31 million last year, but it went toward scholarships, tuberculosis, AIDS prevention and advice to lending institutions.

But raising wages would cause Mexico to lose ground to countries with cheaper labor, such as China and India. Felix Boni, director of equity research at Scotiabank's Mexican brokerage firm, suggested boosting Mexico's productivity and job growth.

"U.S. aid is not going to do it," Boni said. "It doesn't make sense to pour money into something that's broken. Mexico needs to make structural changes."

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Kmart special: HQ garage sale
Bargain hunters snap up surplus office equipment,
supplies and more at Troy warehouse
By Tenisha Mercer - Detroit News
April 26, 2006

TROY -- Inside a cavernous room in Kmart's former headquarters, Margaret George picked over pieces of retail history -- Rolodexes from the 1970s, burnt-orange office chairs, $79 file cabinets and 50 cent binders marked "Holiday 2003."

Vestiges of Michigan's last national retailer have gone on sale, with hundreds of chairs, tables, office supplies, commercial kitchen equipment and a smattering of apparel being sold as part of a liquidation sale at Kmart's former complex on Big Beaver Road.

George and other customers inspected computers, rifled through old binders and sat at huge conference room tables. Some brought U-Haul trucks. And others just walked around the huge room where products were being sold -- a rare peek inside Kmart's closely-monitored, fortress-like headquarters.

It was a bargain-hunter's delight: $2.99 staplers, $4.99 in/out boxes, $75 computers and aisles of $149 tables. There was old Kmart merchandise, including $2.99 belts, marked down from $5.99. Commercial kitchen equipment was also for sale, including $1,275 refrigerators.

George, 48, of Sterling Heights couldn't resist snapping up a nicked, $25 bookcase cabinet.

"This isn't bad," she said. "It'll be pretty decent if you paint it."

Madison Marquette, a Washington, D.C.-based developer, purchased Kmart's headquarters in December. Plans for the 40-acre site include a luxury hotel, shops, upscale condos, offices and entertainment venues.

Kmart gave employees the first chance to buy merchandise, but extended it to the public this week, said Sears Holdings Corp. spokesman Chris Brathwaite. It's unclear how long it will last.

"We have a surplus of office supplies," Brathwaite said. "If folks are looking for a computer desk for their den, it's there."

Analysts say the sale indicates Kmart, founded as S.S. Kresge in Detroit in 1899, will maintain a smaller profile locally.

Kmart and Sears merged in a $12.3 billion in March 2005 to create Hoffman Estates, Ill.-based Sears Holdings.

"It's the kind of equipment they would need if they are going to have a very meaningful regional operation," said James McTevia, chairman of liquidation firm McTevia & Associates in Bingham Farms. "The message that they are sending is that they don't have many warm bodies in the Metropolitan Detroit area."

 

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Martha Stewart CEO Doesn't Expect Products In Sears Stores
Dow Jones newswires
April 25, 2006

Martha Stewart Living Omnimedia Inc. (MSO) Chief Executive Susan Lyne refused to reveal any details of the company's recent home-goods partnership with Macy's Department Stores, but told analysts on the first-quarter earnings call that there will not be any Martha Stewart products in Sears Roebuck stores.

Eddie Lampert, chief executive of Sears Holdings Corp. (SHLD), had hoped he could expand the Everyday Living brand, now exclusive to Kmart stores, into the Sears stores. But the Macy's deal apparently trumped that.

"We're not going to comment on any of the specific terms of our Macy's deal but I think you can assume we will not be at Sears," Lyne said.

Martha Stewart Living signed a deal with Federated Department Stores Inc.'s (FD) Macy's unit earlier this month.

Shares of Martha Stewart Living (MSO) were up 4.2% recently to $20.56. Sears Holdings (SHLD) shares inched up 2 cents to $141.68.

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A towering career in skyscraper safety
By Jon Anderson - staff reporter - Chicago Tribune
April 25, 2006

Well, there was the time that Spider-Man tried to climb the Sears Tower.

And another night when an activist from Greenpeace started up the skyscraper with a banner that said, "Save the Whales."

Both were situations that called for some delicacy on the part of building management.

As Philip Chinn put it the other day, e-mailing some memories from his retirement home in Florida, "Thank God for Leroy Brown."

Chinn was the building's general manager at the time. Brown was the late-night security supervisor.

With Spider-Man, Chinn recalled, "some of the macho younger members of the security staff wanted to block him with the window-washing equipment and then remove a window and grab him. Luckily, Leroy prevented such antics."

Similarly, the Greenpeace climber was allowed to descend peacefully--and safely. That, of course, is not how the average day goes for a security supervisor in a building the size of the Sears Tower.

Mostly, notes Brown, it's a matter "of being as vigilant as you can be."

Brown is, as they say, a noticing kind of person.

For 33 years, he has been involved in some aspect of security at the 110-story Sears Tower. He started on Feb. 1, 1973, when construction crews were still pushing upwards from the 88th floor, and that part of downtown, less developed than it is now, had more than its share of vagrants.

One of Brown's early duties was politely but firmly to evict those who sneaked in to camp out.

These days, with tightened security and screeners at every entry, there are new challenges.

"You learn to read people," Brown said last week, in an interview. "You get to know who belongs in the building and who doesn't. But you also learn to be as friendly as you can. You say, `Can I help you?' instead of `Hey, where are you going?'"

This week will be Brown's last at the 1,450-foot high tower, a mini city where 50,000 people a day come and go.

Brown, 62, will retire Friday. But it's not like he won't have anything to keep him busy.

He is the deputy mayor of the southwest suburb of Bolingbrook, where he has been a village trustee for 15 years. He hosts a cable access show on teen issues, is a district chairman for the Boy Scouts and is active in church groups. He's been married for 40 years to his high school sweetheart.

They have two sons.

But, say Sears Tower staffers, he will be much missed downtown.

"Sometimes, people are intimidated by him. He's a big guy. He has this powerful stature," said Michael Querfurth, who will take over Brown's post next week. "But when they meet him, they find he's a real genuine nice person, easy to talk to, good to deal with."

Brown will be feted Wednesday at a retirement party in the skyscraper's 99th-floor conference center.

"Leroy knows everybody's name," said Barbara Carley, the tower's managing director. "He's made this building friendly, instead of being a big fortress."

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Wal-Mart is fueling political furnace
By Ron Fournier – The Associated Press – Arkansas Democrat-Gazette
April 24, 2006

WASHINGTON — There is no candidate. There are no ballots. There won’t be an Election Day. And yet it may be the hottest, highest-stakes political contest in America today.

It’s the campaign against Wal-Mart.

A year-old effort to force the nation’s No. 1 private employer to change its business practices has evolved into a Washingtonstyle brawl: tens of millions of dollars spent by Republican and Democratic political consultants using polling, micro-targeting, ads, e-mails, direct mail, grassroots organizing and strategic “war rooms.”

Their fight centers on some of society’s most vexing trends, including the rising cost of health care, the painful realities of globalization and the waning relevance of organized labor.

“Our opponents have organized the likes of a political campaign against us,” said Bob McAdam, vice president of corporate affairs at Wal-Mart. “It would be nonsense for us not to respond in a similar fashion.”

Wal-Mart’s main opponents are the Service Employees International Union, which started Wal-Mart Watch, and the United Food and Commercial Workers International Union, which funds a separate campaign called WakeUpWalMart. com.

After failing to organize employees of Wal-Mart Stores Inc. with traditional tactics, the unions decided to use modern campaign and communication methods to drag the company into the public square and try to shame it into change.

Both groups have hammered the world’s largest retailer about its wages, health insurance, treatment of workers and proclivity for buying non-U. S. goods. Wal-Mart has responded with counterattacks and a multimillion-dollar public campaign to polish its image.

Both sides use some of the best political strategists money can buy.

WakeUpWalMart. com is run by Paul Blank, political director for Howard Dean’s 2004 Democratic presidential campaign, and Chris Kofinis, a former political professor who helped draft Arkansan and retired Army Gen. Wesley Clark into the same race.

Their campaign has all the markings of the Dean and Clark insurgencies — a snappy Web site, volunteer action lists and an issues-based grass-roots campaign.

Those lined up against the company at Wal-Mart Watch include Jim Jordan, campaign manager for 2004 Democratic presidential nominee John Kerry, and Terry Holt, a spokesman for the 2004 Bush-Cheney campaign.

Odd bedfellows: A Republican working for unions against Wal-Mart.

“Wal-Mart is giving capitalism a bad name,” Holt explained. “It’s lost touch with its small-town roots and has become a company that is depending on corporate welfare... and an all-too-cozy relationship with China.”

Under fire, Wal-Mart turned to Reagan adviser Michael Deaver, Bush-Cheney political director Terry Nelson and several Democrats, among them civil-rights leader Andrew Young and campaign strategist Leslie Dach.

Talk about odd bedfellows: Democrats working for Wal-Mart against organized labor.

“We were being attacked. We wanted to hire people who knew how to respond,” said Wal-Mart’s McAdam, formerly a GOP aide on Capitol Hill and political strategist for the tobacco industry.

WakeUp-WalMart. com claims 212, 000 supporters whom a computer stroke can mobilize to recruit members and participate in media events designed to shine a bad light on the Bentonville company.

The group also passes out Food and Commercial Workerssponsored workers’ rights material outside Wal-Mart stores.

The union aims to show Wal-Mart’s 1. 3 million U. S. employees, many of whom have a low opinion of unions or fear retribution if they organize, that unionized labor can change their workplace and lives for the better.

THE STAKES

In its own way this campaign over Wal-Mart carries as much importance as the congressional races this year. Bringing Wal-Mart to heel with 21 st-century tactics would signal a fresh approach for organized labor after a decades-long decline in membership. At stake for Wal-Mart is the future course of a company with $ 312. 4 billion in sales in the fiscal year that ended Jan. 31. Its stock has fallen 20 percent over the past two years, and the company has had trouble sustaining its historically high rates of profit growth. Analysts say bad publicity from the union-backed campaigns may be hurting Wal-Mart, though unrelated business pressures also factor in.

Wal-Mart denies that the union-backed campaign has hurt its bottom line. But the company sees the effort as a threat.

After Maryland’s Legislature passed a labor-backed bill requiring companies — Wal-Mart in particular — to spend more on workers’ health insurance, the Arkansas company came out with improvements in its health-care coverage.

Wal-Mart also has announced plans to: Help competing local companies stay in business. Expand its share of the Hispanic market.

Sell more environmentally friendly products.

A multimillion-dollar advertising campaign featuring testimonials of happy customers and employees cast Wal-Mart as a good corporate citizen.

Wal-Mart hired Nelson to wage a grass-roots campaign by recruiting Wal-Mart shoppers and local leaders sympathetic to the corporation’s cause.

In the union camp, both groups send opposition research on Wal-Mart to reporters and e-mail supporters and stage such events as rallies and documentary film screenings.

They have had an impact.

Maryland-style health care bills have come up in more than 30 states. Democratic candidates in Ohio, Arizona and Pennsylvania have spoken out against Wal-Mart, as have elected officials in Wisconsin, Georgia, Connecticut and several other states.

Then there is Sen. Hillary Rodham Clinton.

The potential 2008 presidential candidate served on Wal-Mart’s board for six years when her husband was governor of Arkansas. Just two years ago the New York senator called her time on the board “a great experience in every respect.”

But now she does not want anything to do with the company. Citing “serious differences with current company practices,” her re-election campaign returned a $ 5, 000 contribution from Wal-Mart.

To this, Wal-Mart officials acknowledged that the company has become a political issue — at least for Democratic candidates who need labor’s money and organizing might.

“While not commenting specifically on Mrs. Clinton, apparently there are those who want to appeal to union leaders regardless of what office they’re running for and whether they want to do what union leaders want done,” McAdam said.

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Avoiding the Volunteer Trap
 By Kelly Greene – The Wall Street Journal
April 24, 2006

Rita Vance retired three years ago, at age 58, to devote herself full time to volunteering after winning a battle against breast cancer.

With 30 years' experience in social work at nonprofits and government agencies, she relished the idea of sidestepping the meetings involved in such settings and spending all her time with people in need.

Instead, her first foray into volunteering found her sitting through meetings at a group focused on aging in Ashland, Ore. -- and dishing up cafeteria-style meals at a senior center.

"They just needed a body to do that job," Ms. Vance says, "and they weren't really interested in what else I could do."

With retirements beginning to stretch routinely into two -- or even three -- decades, many older Americans are assuming that volunteering will become a natural and fulfilling part of their post-work lives. That belief, though, is about as far as most people get in their planning. As a result, many retirees like Ms. Vance wind up in volunteer positions that turn out to be dead ends. Sometimes, the tasks that retirees raise their hands for don't fit their skills, or the position just isn't what the person expected.

"If you want [volunteering] to be a significant part of your life, then it's likely going to take some work to figure out the right fit," says John Gomperts, chief executive of Experience Corps, a nonprofit based in Washington, D.C., that pays 1,800 older adults small stipends to tutor schoolchildren in 14 cities. "Sometimes you take a very bumpy road to a very beautiful place. So it may be with finding just the right opportunity to engage in volunteer activities."

The hard work could pay off in more ways than you think. A two-year study of 128 volunteers between the ages of 60 and 86, who were working with children in Baltimore schools, found that the volunteers -- when compared with a control group -- were in better health, burned more calories each week, watched less TV and reported having more people in their social networks.

There also are more opportunities to choose from. The steady increase in two-worker families means that nonprofit groups have lost much of their volunteer base and, thus, are scrambling to recruit help. Hands On Network, a volunteer clearinghouse based in Atlanta that serves more than 50 communities, is trying to increase volunteerism by 10% over two years, says Michelle Nunn, the group's chief executive. The group is counting on a new partnership with AARP, the membership group for older Americans, to help meet that target, mainly by recruiting retirees to help direct projects and reel in other volunteers.

So how can you find the right setting in the shortest amount of time? We put that question to retirement consultants, nonprofit executives and retirees who have found a good fit in volunteering, often through trial and error. Here's their advice:

IDENTIFY WHAT INSPIRES YOU

It might sound obvious, but almost every person we spoke with urged would-be volunteers to take the same first step: Identify a cause -- a mission -- that inspires you. Again, that might seem evident, but it requires time and reflection, and few people make the effort.

"It's an ethical, spiritual question," says Mary Westropp, who handles volunteer placement for New Directions Inc., a Boston consulting firm that works with executives who take early-retirement packages. "What really matters to you? Is it housing and homelessness? Human rights? Education?"

WANT TO HELP?

If you're seeking ideas about volunteer work, try these groups and Web sites
• United Way (unitedway.org) Click on the "Volunteer" button to find positions in your area.

• Volunteer Match (volunteermatch.org) A popular Web site that lists thousands of ways to volunteer.

• Hands On Network (handsonnetwork.org) Click on "Volunteers" for links to local groups with volunteer opportunities

• Next Chapter Initiative (civicventures.org/nextchapter) A directory of Next Chapter centers across the country, many of which offer retirees guidance on volunteering.

• Newcomers Clubs (newcomersclub.com <http://www.newcomersclub.com/> 8) Newcomers clubs often invite guest speakers from nonprofit groups.

• RespectAbility Initiative (respectability.org) This initiative is evaluating nonprofit groups that work well with older volunteers.

Source: WSJ reporting

Ms. Westropp has found that many of her clients already have personal interests they can incorporate into volunteer work. That's not surprising, given older adults' experiences and aspirations. "We aren't talking about people in their 20s," she says. "These folks have lived a certain portion of their lives and want to feel satisfied that they've done their part to make this a better world."

Leslie Berry, a 65-year-old retiree in suburban Atlanta, spent a good part of her adult life overseas, raising four sons in six countries over 13 years. Some of that time was spent volunteering in local libraries and museums. "They were so quiet and orderly, and our life was so chaotic," she says.

After returning to the U.S. and settling in Georgia, Ms. Berry eventually found herself yearning, she says, to relive the experiences she had enjoyed in Thailand and Kenya, learning about local art. Three years ago, she discovered that Atlanta's celebrated High Museum of Art was seeking docents, just at the moment when she was reducing her hours working at a party-supply store. She applied, landed a position, and started nine months of training. Today, she spends two days a week at the High, taking classes from curators and leading fourth- and fifth-graders on tours of the museum.

A recent Monday morning found Ms. Berry and other volunteers consulting with a curator amid the museum's newly expanded folk-art collection. She is searching for ways to teach students about creating art from so-called found objects, a lesson they can use in their school projects.

Ms. Berry worried at first that her lack of art-history education would be a problem. But what's more important, she says, is that "you have to be deeply into art to do this."

DON'T BE AFRAID TO START AT THE BOTTOM

As in the business world, people who volunteer sometimes start with an entry-level position. Don't let that deter you.

Ms. Vance, in Oregon, wanted to volunteer at the library to select and deliver books to homebound readers. "But when I first went in to approach the library, they didn't really need people to do that," she says. "They wanted me to come in and help with orientations, setting up coffee." She took the job -- and eventually worked her way into the role she wanted. Now, she works with five people, often searching for large-print books from her home computer.

"Sometimes you aren't going to get the dream volunteer job," says Jeri Sedlar, a retirement-transition counselor in New York. "But it's the same mentality you use in a career -- like starting as a gofer at a publishing company to move up the ranks. Sometimes you have to think, 'I'll do the punch and cookies, but I'll let everyone know that my goal is this.' "

And, as when you were exploring careers, internships can help you vet opportunities -- and get a foot in the door, says Marc Freedman, president of Civic Ventures, a San Francisco nonprofit that promotes civic engagement among older people. "Maybe," he says, "you can develop your own internship where you rotate through two to three nonprofits that seem appealing, where you can try different roles and structures. You could even do it while you're still working by using vacation time."

KNOW WHEN TO MAKE A CHANGE

Some people may find it's more rewarding to try something completely different from their former day jobs when volunteering. Others, however, may be better off sticking with what they know.

Hazel Hutcheson, 71, is a former clinical nurse specialist who now volunteers with Ms. Berry and others as a docent at the High Museum. Before retiring seven years ago, Ms. Hutcheson had specialized in pain relief, working primarily with patients after surgery. The job, she says, was stressful but "very satisfying."

The same, though, couldn't be said for the volunteer roles she was offered in nursing: checking blood pressure, drawing blood for lab tests, and giving immunizations. Such tasks, she says, are "important to patient care -- but I didn't find them challenging." Instead, she sought a new challenge working in a different field with a different age group: children.

But Bob Williams found that using skills and knowledge from earlier jobs allowed him to settle into a volunteer role more easily and be more effective.

Mr. Williams, who retired as an investment banker at State Street Corp. in Boston a few years ago, joined YMCA Training Inc., a New Directions volunteer project where its clients help immigrants and low-income adults find jobs. At State Street Corp., Mr. Williams had spent much of his "mental energy looking for local people we could train to operate in a global market, but run our business in their own country," he says. "Now I'm doing the same thing. I'm finding really capable immigrants who never bothered to put down on their résumé that they ran a restaurant in their home country. Somehow they get it in their minds that their experience back home doesn't matter here."

IT'S ALL RIGHT TO BE SELFISH...

Of course, you want to do something meaningful as a volunteer, and that's reward enough. Or at least it's supposed to be. But the biggest incentive for many volunteers is what they get from the work -- whether it's freebies from, say, the local theater group, or pats on the back from a nonprofit's leadership, or the simple satisfaction that comes from meeting and making friends with other volunteers.

"People tend to focus very heavily on the idealism of this phase of giving back," says Mr. Freedman at Civic Ventures, who has participated in focus groups with volunteers who have recently retired. "But when you talk to people who are involved [as volunteers], they say there are more immediate aspects that appeal to them. The relationships and a sense of purpose are just as important as some of the more lofty ideals in getting a satisfying experience."

Rich Yurman, in his work as a volunteer in San Francisco, gets to feed his desire to be a grandparent and compose poetry. For eight years, the 68-year-old writer and retired teacher has tutored schoolchildren, mostly Asian immigrants, through Experience Corps. He turned to the organization after several years of working with a counseling group for abusive men and hearing how many had been abused as children. Plus, "I hit age 60, and this sudden surge of wanting to be a grandparent came out of who-knew-where," he says. "I have children who are not going to have children."

This year, Mr. Yurman is working one-on-one with a third-grader whom he calls an "amazingly intense" poet. She jots down ideas to write about in a little notebook he persuaded her to carry around. Among her material: notes from her family's gambling trips to Reno, Nev. One day a week, the young girl and Mr. Yurman get out the notebook, "she picks out a topic, and we both write about it," he says. "It's just grand."

...AND TO PROTECT YOUR TIME

Just because you have more free time in retirement, you don't -- and shouldn't -- have to waste it.

"As I dedicate hours a week to doing [volunteer] work, I don't want the organization to take [unfair] advantage of that offer of time," says Mr. Williams, the retired investment banker. "The thing you find out when you retire is that you think you're going to have an awful lot of time, but you don't. It's a precious commodity."

When Mr. Williams, 57, decided to retire a few years ago, he wanted to make his family -- particularly his wife -- his top priority, since his career often had come first. Volunteering and a Chinese investment venture came second and third.

But even with that planning, Mr. Williams says, it's been hard to keep control of his time. For example, he learned to fly while working in Australia years ago and has a pilot's license. But after retiring, "I gave up flying for about a year and a half because I didn't have the time."

After two years, Mr. Williams says he finally feels like he's starting to find a good balance between volunteering and personal time. He dedicates two or three hours on most Mondays to the job-training project. And he spends the equivalent of a day and a half each week working on fund-raising and planning projects as a board member for Angel Flight New England. While working, he volunteered as a pilot for the nonprofit group, flying families needing sophisticated medical treatment from small-town airfields to big-city hospitals.

"I was surprised at how hard it was to get yourself organized and make it all work," he says. "By saying no sometimes, it seems I'll be able to do all three things at a level where I'm comfortable."

LOOK FOR GOOD TRAINING

Nonprofit groups and social-service agencies aren't all structured alike. A library, for instance, may have a few volunteers to shelve books, without being set up to offer frequent orientation, training, field trips and lectures solely for its volunteers.

In contrast, groups organized to train and put volunteers to work tend to offer more educational opportunities, chances to mingle with fellow recruits and greater recognition -- all of which may take on increasing importance in volunteer work that replaces a career.

Mr. Yurman, for instance, was drawn to Experience Corps by its speedy response to his inquiry about volunteer opportunities. He met with an Experience Corps coordinator for an hour and quickly discovered that he and the organization were "on the same page on how to deal with kids." He was hired and fingerprinted, and did several one-hour training sessions. "Within a couple of weeks, I was introduced to my first kid," he says.

Most important, Experience Corps offers continuing training and promotes interaction among its volunteers. "We go through exercises," Mr. Yurman says, "and you find out there are people doing this who have lived amazing, diverse lives."

HIRE YOURSELF IF NECESSARY

If you can't find a volunteer activity or position that interests you, create your own.

Steve Weiner, a 66-year-old retired university administrator in Piedmont, Calif., spent the first six years of retirement, starting in 1996, as "trial and all errors -- nothing painful, but just paths that I went down that I didn't want to stick with," he says. He volunteered as a consultant for a nonprofit group and served on a few boards. "I enjoyed them, but they didn't prove meaningful to me."

So, in 2002, Mr. Weiner and a colleague created the Campaign for College Opportunity, a nonprofit advocacy group trying to make sure that California's higher-education system will continue its tradition of admitting all qualified students who want to enroll. Since 1960, such access has been all but guaranteed under California law -- but a lack of funding and limited classroom space now threaten that promise.

Mr. Weiner's lobbying work has "called on all the knowledge, experience and relationships that I had developed before," he says. "I had to join with others to create entirely new enterprises [for] this particular point in my life."

On the East Coast, Jim Beaton, a 66-year-old retiree who managed real estate as vice president of corporate services and facilities for New England Financial Corp. in Boston, became intrigued when he heard about an effort to start a farm on Cape Cod. The nonprofit venture, called Dana's Fields, hopes to rehabilitate homeless people by teaching them basic skills involved in running a small business, such as cooking, maintenance, and using a computer.

The project, part of the Housing Assistance Corp. in Hyannis, Mass., didn't really have a single person to guide it through what has proved to be a contentious approval process. Enter Mr. Beaton.

"I had gone through the rigorous process of [obtaining permits for] a large office building in Boston, and I used to tear my hair out, saying, 'My God, it shouldn't be this difficult to do things,' " he recalls.

Mr. Beaton offered to serve as head of a committee to get the farm off the ground. This time, he didn't mind the obstacles. "It became kind of a mission for me," he says. "We've managed to get to where we are with [almost] no funding, other than some grants from the Boston Foundation and pro bono work, local churches' fund raising, and a walk for the homeless. It's been a real bootstrap operation."

STAY (VERY) FLEXIBLE

Finding the right volunteer work can be tougher than finding the right job. Often, expectations are impossibly high: You're newly retired, eager to "make a difference," and convinced that you and your talents are needed and welcomed. Perhaps you've even taken a hard look at an organization or a cause and you're confident that the fit is right. And then, after a month or two, you're looking for the exit.

Remember: Volunteer organizations, for all their good intentions, can be as unpredictable as any business, experts say. Leaders come and go; missions change; budgets expand and shrink.

Patricia Weiner, a 63-year-old retired lawyer and Steve Weiner's wife, tried three volunteer positions before finding the right one. While she was still working, she read a book about Court-Appointed Special Advocate programs, in which volunteers speak for abused and neglected children in courts. "I really thought that CASA was going to be the one thing that I was going to want to do for years and years," Ms. Weiner says. But she grew frustrated when the foster child she was assigned to represent was moved to another county. Sadly, the two were "just about at the bonding point," Ms. Weiner recalls.

Next, after joining the board of the Family Violence Law Center, Ms. Weiner realized she didn't want to attend meetings at night. And after she and her husband read to the blind for an hour a week for two years, they grew tired of the half-day commute involved.

Now, Ms. Weiner works with the first free-standing children's hospice in the country, leads school tours at the Oakland Museum of California, and also works in the book section of the museum's annual "white elephant" sale.

"I do think there is some trial and error, and it is healthful," she says. "I'm not sorry I did any of them." And they helped her narrow her focus to helping children. "It wasn't conscious -- I just brought together things I cared about and where other interesting people were involved."

--Ms. Greene is a staff reporter for The Wall Street Journal in Atlanta.

 

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Scammers take money and run away at Sears
Do the right thing - Times Herald Record – Middletown, NY
April 23, 2006

I got a call the other day from a Middletown businessman who said he'd just gotten scammed at Sears. But it wasn't Sears who'd scammed him.

The businessman doesn't want his name published, but says he called me because "I'm just trying to keep someone else from getting duped."

I'll call him "Chad."

He was at work last Tuesday when he got a call from a guy who claimed to be with the company who collected Chad's trash. "He knew the name of our garbage company," Chad recalled.

The guy told Chad he had a brother named Tony who was a foreman at the Sears department store in Yonkers, where there was a chance to get some great deals on discontinued electronics - laptops, TVs, digital cameras. Would Chad be interested?

Sure, Chad said. He gave Tony a call.

"He gave me model numbers and everything," Chad told me. "I looked them up, and it was true, some of the stuff was discontinued."

Chad said he'd take two laptops and two TVs. Tony said the total price would be $3,300 - cash only. Be there at 4:30 p.m.

On Wednesday, Chad headed down to Sears in Yonkers and drove around back to the pickup bay.

He was met by a dark-haired woman in a black business suit, wearing a Sears badge. She said she was Joanne, Tony's secretary. "Let me go get your receipts and get you loaded up," Chad remembers her saying.

The woman then went through the doors into the warehouse while Chad waited.

And waited.

After five or 10 minutes, Chad called Tony, asking where Joanne had gone. She'll be right out, Tony assured him.

Chad waited a few more minutes. No Joanne.

He called Tony again. No answer.

Chad went through the store and found a manager. "He said there was no Tony who worked there, and there was no Joanne who worked there."

Chad went to the store's security supervisor.

You just got scammed, the security guy told him. It happens every year. We don't do business like that - you should have known.

Sears didn't call the cops, and neither did Chad. "The security people at Sears said I could call the police, but it's likely they could arrest me for trying to buy stuff out the back door," Chad said. "As far as I knew, I was buying discontinued items. I didn't know what to do. I was a long way from home."

The next day Chad called the Sears corporate office in Chicago.

"They said I should have called the police," he told me.

After Chad contacted me, I called Chicago and reached spokesman Chris Brathwaite.

This has happened at other Sears stores, Brathwaite said. It happened in Rego Park just a few months ago, and it happened to a bar owner in Massachusetts who was promised big-screen plasma TVs for just pennies on the dollar.

"All of our stores have been notified that this scam is going on," Braithwaite said. "People are tricking people into going to Sears to get stuff. They move from store to store."

Brathwaite said another alert would be sent out to Sears stores. Some are increasing security in the pickup areas, and they are considering posting a warning to customers.

"The gist is that is we don't sell things outside our store for cash," Braithwaite said.

Chad says the scheme was "unbelievably well organized."

"Everybody says, 'How could you be so stupid?' But anybody in my shoes would have done the same thing. You're inside a store. You wouldn't think anything like that would happen."

But that's the whole idea of a scam.

Been ripped off? Having problems with a product or service in the private or public sector? Christine Young writes a watchdog column for the Times Herald-Record. Send the details of your problem to her from the recordonline website, www.recordonline.com

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Sears holdout shareholders plan legal action
By Rita Trichur – Canadian Press – Globe and Mail, Canada
April 22, 2006

TORONTO -- Three activist shareholders of Sears Canada Inc. are threatening to take legal action against Sears Holdings Corp. in its $908-million bid to take its Canadian subsidiary private.

Hawkeye Capital Management LLC, Knott Partners Management LLC and Pershing Square Capital Management LP said yesterday that they have united to oppose the offer and will share legal costs.

They are also urging other minority shareholders who have tendered to the bid to withdraw their shares, fuelling speculation that others may join their group.

Holdouts have been digging in their heels ever since Chicago-based Sears Holdings, the Toronto-based retailer's biggest shareholder, suggested the deal was a virtual fait accompli earlier this month.

"These shareholders believe that Sears Holdings is engaging in coercive tactics to force the minority shareholders of Sears Canada to tender into an undervalued and unsupported offer," the firms said.

"As such, the group intends to take all appropriate legal action to halt the transaction so Sears Canada remains a public company or, alternatively, to ensure that those shareholders who desire to sell their shares in Sears Canada are treated fairly."

The group members, or funds controlled by them, own or control more than 8.2 million common shares of Sears Canada, representing about 7.7 per cent of the outstanding shares and 25.7 per cent of the shares not owned by Sears Holdings.

In addition, the Pershing Square funds are entitled to an additional 6.9 million common shares, or about 6.4 per cent of the outstanding common shares, under cash-settled derivative transactions that terminate in December.

That means the group's members have a total economic interest equal to about 14.1 per cent of the common stock and about 47.2 per cent of the shares not owned by Sears Holdings.

William Ackman, Pershing Square's managing partner, did not return telephone calls seeking further comment.

 

What's Right About Wal-Mart
Ideas – The Welch Way
By Jack and Suzy Welch – Business Week
May 1, 2006

Is Wal-Mart a force for good or evil in the world? -- Anonymous, Exeter, N.H.

We have heard this question again and again in recent months, but it was posed perhaps most fervently by the high school student above. He added: "You claim business is good for society -- but Wal-Mart destroys it."

Destroys it? No way.

Maybe it's politically incorrect these days to say this, but Wal-Mart helps individuals, communities, and whole economies prosper.

Without question, Wal-Mart is huge and getting more so. Its business model is threatening to rivals and its purchasing power frightening to suppliers. But that doesn't make Wal-Mart bad -- just a fat target for critics who, for reasons of their own, won't concede how Wal-Mart improves lives.

Take individuals. Most obviously, Wal-Mart's prices have a positive impact on the quality of life of millions of consumers. No other retailer offers so many good products for so little, from groceries to school supplies to medicine. The net effect: Wal-Mart does more to hold down household expenses than any social or government program.

In addition, Wal-Mart provides its employees with tremendous access to upward mobility, even those with modest educational credentials. There are stories galore of employees who started on the floor or as cashiers and worked their way up to management positions. And with Wal-Mart's international growth, you are now seeing career paths that can start in merchandising in Texas, move to logistics in Arkansas, and end up in divisional leadership positions in Europe and Asia. Only the military rivals Wal-Mart when it comes to providing training and opportunity for individuals who have no other way to break out of a paycheck-to-paycheck lifestyle and into a whole new world of possibility.

Wal-Mart's low prices and large workforce, of course, have a cumulative effect on the local and national economies where the company operates. Low prices keep inflation down, while the employees' purchasing power keeps demand high.

This is evil?

There are critics who claim that Wal-Mart destroys communities by wiping out mom-and-pop stores -- the little pharmacies, hardware, and grocery stores -- that took much better care of customers and employees. These critics are nostalgic for a time that never was.

Yes, Wal-Mart has meant the end of many local stores. And yes, at some of them, customers might have been greeted by name when they walked in the door. But those customers chose to shop at Wal-Mart when it came to town because low prices, apparently, meant more to their quality of life than a wave and a smile. No conspiracy, just the free market at work.

AS FOR TAKING BETTER CARE of employees -- nonsense. In most small towns the storeowner drove the best car, lived in the fanciest house, and belonged to the country club. Meanwhile, employees weren't exactly sharing the wealth. They rarely had life insurance or health benefits and certainly did not receive much in the way of training or big salaries. And few of these storeowners had plans for growth or expansion: Their lives were nicely set. That was good for them but a killer for employees seeking life-changing careers.

Critics also lambaste Wal-Mart for being brutal to its suppliers. Be it swing sets or beef jerky, you sell to Wal-Mart on its terms, or you don't sell at all.

We'd say this is pretty true. Wal-Mart's huge market share gives it enormous leverage. One of us (Jack) negotiated for decades with Wal-Mart buyers at General Electric , and they were never unethical or unfair. Just tough. GE won plenty of rounds and lost a few. But losing had its upside. It forced GE to look inside to see how it could do its job better by lowering manufacturing costs, for instance, or being more flexible in how a product was packaged.

Ultimately, prices stayed low, and the customer won. And that is what drives Wal-Mart -- keeping its customers satisfied -- and why it keeps increasing sales and profits.

Yes, there will be "casualties" of Wal-Mart's success: competitors that fold, jobs lost. But in that way, Wal-Mart is no different than Toyota. When Toyota arrived in the 1970s, it was accused of upsetting the status quo. Decades later most people accept that Toyota simply had a better way of doing business. Its value proposition to consumers was a wake-up call to the auto industry, raising standards and requiring companies that had lost their edge to reinvent themselves and start making better cars for a lot less. And that's the Wal-Mart story. It's a great company that helps consumers win and employees grow. And as long as it does, it will, too.

Jack and Suzy Welch are co-authors of the best-seller Winning (HarperCollins 2005).

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In Tough Hands At Allstate
By Michael Orey - Business Week
May 1, 2006

Legal Affairs – Car Insurance

It's fighting accusations that its methods deny policyholders legitimate benefits

David Berardinelli is something of a bon vivant. The Santa Fe (N.M.) plaintiffs' lawyer collects fine wine, has chefs from local restaurants over to cook in his home, and restores classic Porsches. He's also about to become a published author.

His book, From Good Hands to Boxing Gloves, won't burn up the best-seller lists. But it's already making waves. It tells the story of the key role played by management consultant McKinsey & Co. in reengineering auto insurance claims operations at Allstate Corp. -- and it's a story Allstate doesn't want told.

In February, a New Mexico state court rejected Allstate's efforts to keep Berardinelli from publishing his book, which will be marketed to trial lawyers nationwide later this year. Since 2004, Allstate has been defying an order by the same court to make available public copies of some 12,500 PowerPoint slides McKinsey prepared for the insurer, which form the basis of the book. That's quite unusual -- big companies almost never ignore judicial orders. In a court filing, Allstate has characterized its actions as "respectful civil disobedience."

What is it that Allstate so badly wants to keep under wraps? In a written response to BusinessWeek, the insurer says the McKinsey material contains proprietary business secrets. The documents also present a clear risk to the company's reputation. The title of Berardinelli's book is drawn from a McKinsey slide that suggests that Allstate should treat some of its claimants with "boxing gloves," rather than with its trademark "good hands." Collectively, the documents present a portrait of business strategies that are at odds with the insurer's carefully cultivated public image. Rather than simply rushing to the scene of an accident and doling out cash, Allstate deploys a variety of systems set in place by McKinsey to make sure it pays the minimum necessary -- and it plays hardball with those who seek more.

Berardinelli, 57, has provided BusinessWeek an exclusive copy of a draft of the book, as well as more than 200 typed pages of notes he took on the McKinsey slides. His tale illuminates the largely hidden role McKinsey has played as a key architect of claims practices in use across the insurance industry today. In addition to advising Allstate, McKinsey has also done work for Farmers Insurance Group, USAA, State Farm, and Fireman's Fund. While many of the cost-reduction strategies McKinsey recommended at Allstate remain in place, some have been reined in following legal and regulatory challenges in several states.

EPIC WAR
Berardinelli's book is certainly a partisan one, written to support "bad faith" lawsuits that he and other attorneys have filed against Allstate alleging mistreatment of policyholders. He says that the McKinsey project, which lasted from 1992 until at least 1997, institutionalized aggressive practices aimed at enriching investors at the expense of customers. "When you strip away all the fancy jargon, all this is a plan for switching money from the policyholders' pockets to the shareholders' pockets," he maintains. In the decade after Allstate instituted the McKinsey program in 1995, the amount of money it paid out per premium dollar in car accident cases declined from about 63 cents to 47 cents, according to A.M. Best.

Mckinsey declined to comment, citing client confidentiality. But Allstate says Berardinelli's allegations are "unfounded and unproven." Rather than trying to cheat customers, the company says, its claims revamp was just good management: an effort to "become the premier claim organization in the industry." A major goal, it says, was to benefit policyholders by identifying "exaggerated and fraudulent claims." In its written response, Allstate further said its "processes are absolutely sound" and that its goal is "to investigate, evaluate, and promptly resolve each claim fairly, based on the merits."

The battle over the McKinsey documents is just the latest round in an epic, decades-long war between insurers and the plaintiffs' bar over access to one of the biggest treasure troves of cash ever created: the billions of dollars in premiums held by insurers to pay claims. For years, each side has cast the other as evil incarnate. In the early 1990s, when Allstate retained McKinsey, there was a widespread sense among insurers that they were paying too many illegitimate automobile-accident claims and that an aggressive plaintiffs' bar, fueled by a wave of newly allowed attorney advertising, bore much of the blame. One focus of the program McKinsey introduced at Allstate, called Claim Core Process Redesign (CCPR), was aimed at striking a blow at that trend.

But plaintiffs' attorneys around the country allege that various elements of CCPR go beyond eliminating fraudulent claims and operate in a systematic way to deny policyholders legitimate benefits. Copies of Allstate's massively thick CCPR manuals have been circulating among trial lawyers for years. Although plaintiffs have had piecemeal success in bad-faith cases against Allstate, the insurer points to seven court rulings that have rejected attacks on CCPR. Last December a Montana state court noted that while CCPR practices may be illegal "if misapplied in a particular case, they nevertheless are neutral with no manifestly illegal purpose."

Berardinelli is convinced that the McKinsey material could turn the tide. The documents "explain why McKinsey built CCPR," he says. In his book he compares Allstate to a vendor of canned peas and argues that the documents "show how McKinsey...deliberately designed Allstate's claim factory to arbitrarily 'underfill' every can of Allstate insurance."

He begins his story in 1992, when, Berardinelli believes, McKinsey made its initial presentations on the Allstate project. (Allstate confirms that it retained McKinsey in the early 1990s.) Berardinelli's notes on the McKinsey slides, which he has filed in court, show that the consultants' goals were far-reaching. The objective, according to notes on one slide, was to "radically alter our whole approach to the business of claims." The consultants also advised the insurer on what steps were needed to achieve those ambitious goals.

Just why Allstate brought in McKinsey at that time isn't clear. But Berardinelli notes that in 1993, Allstate's then owner, Sears Roebuck & Co., spun off 20% of the insurer to the public and distributed the rest of the Allstate stock to Sears shareholders two years later. Freed of their ties to the large and struggling retailer, Allstate executives could now connect their personal financial fortunes directly to improvements in the insurer's bottom line. Jerry D. Choate was president of Allstate's personal property and casualty operations when McKinsey was retained, and the notes on several McKinsey slides list him as a participant in the project. Choate went on to serve as Allstate's chairman and chief executive from 1995 through 1998. By the end of 1997 he had accumulated shares worth tens of millions. He could not be reached for comment.

Allstate's "gross opportunity" if McKinsey's plan were fully implemented, according to Berardinelli's notes on one slide, was $550 million to $600 million in savings, almost all of which would come from reducing claims payments, not from cutting expenses. The consultants then targeted several areas as presenting the greatest opportunity for reductions. Fraud was one, with one slide stating that "it may exist in approximately 11 percent of current claim volume," according to Berardinelli's notes.

DRY SPIGOT
Another major focus was on "subjective" injuries, meaning claims for such things as emotional distress and pain and suffering, as opposed to "objective" injuries, such as broken limbs. To get a handle on these claims, the notes on the slides show, McKinsey worked with Allstate to install Colossus, a computerized claim-evaluation system sold by Computer Sciences Corp. Colossus compares a claimant's injuries with a database of similar cases and recommends a settlement range. Plaintiffs' attorneys have alleged that insurers can "tune" Colossus to consistently spit out lowball offers.

Berardinelli's notes show one McKinsey slide stating that the system has been "extremely successful in reducing severities with reductions in the range of 20% for Colossus-evaluated claims." ("Severities" is insurance industry jargon referring to the size of claim payments.) In its written response to BusinessWeek, Allstate says that "Colossus is merely a tool used to assist in the valuation" of some bodily injury claims and that adjusters use their expertise to come up with appropriate settlements "on each individual claim."

One of the key elements of McKinsey's plan was reducing the number of claimants who turn to attorneys after an accident for help in collecting on their insurance. The consultants even forecast what the potential gains in this area would mean for Allstate's stock. A 25% drop in attorneys appearing in several categories of cases could add $1.60 to Allstate's share price, one slide states, according to Berardinelli's notes.

The boxing gloves slide was displayed in open court in a case against Allstate in Kentucky last year. It states that by "holding the line" on cases where accident victims hire lawyers, Allstate could achieve "a new distribution of settlement times" on subjective-injury claims. "By increasing the number of early unrepresented settlements," the slide says, Allstate could give 90% of these claims the "good hands" treatment, resolving them within about 200 days. But the slide shows the remaining 10% getting "boxing gloves" treatment, and a graph shows resolution of their claims taking as much as four years or longer.

In Berardinelli's view, this slide reflects what he sees as the current practice at Allstate. Claimants in the "good hands" category may get swift reimbursement, but they will end up with less than they're entitled to, he says. Those who hold out for more -- and retain a lawyer to help them get it -- face battering in the courts and potentially years of delay. "You can get your claims resolved promptly or fairly," he argues, "but not both." Allstate says some people hired lawyers because they were not familiar with the claims process.

Once the CCPR program was rolled out in 1995, the effect was quickly felt by the trial bar. "We would ordinarily settle one or two cases a month," recalls Whitney Buchanan, a plaintiffs' attorney in Albuquerque. But then, "Allstate simply turned off the taps."

In mounting a counterattack, plaintiffs' attorneys have had some success. Courts and regulators in a number of states, including New York, Pennsylvania, and Washington, have forced Allstate to halt or change its practice of handing out a controversial "Do I Need an Attorney?" form to people involved in accidents. And Colossus, now widely used in the insurance industry, has come under attack on a number of fronts, with attorneys alleging it is being used to lowball claims. Last year, Farmers Insurance Group, a unit of Zurich Financial Services, agreed in a nationwide settlement to stop using it for certain claims.

Loquacious and professorial-looking, Berardinelli began his quest for the McKinsey documents in a routine bad-faith suit he filed against Allstate in December, 2000, in Santa Fe County. In ordering Allstate to turn the McKinsey material over to Berardinelli, the trial judge ruled that the documents were not entitled to confidentiality but said Berardinelli had to treat them as confidential while Allstate pursued an appeal. If Allstate lost its appeal, the judge ruled, the confidentiality order would expire.

During this period, Berardinelli furiously took notes as he worked in the office of his home, perched in the southeast hills overlooking Santa Fe. The 12,500 pages -- a bit more than half of which are duplicates -- were on paper that contained background printing declaring them to be confidential.

It took two years for an interim appellate court, and then the New Mexico Supreme Court, to rule that Allstate's appeal failed because it had filed it one day too late. With the Supreme Court ruling in hand in March, 2004, Berardinelli returned the McKinsey material he had to Allstate and demanded a clean copy, free of the restrictive printing. Allstate refused, prompting the trial court judge to hit it with the most extreme civil sanction a court can order, a default judgment -- finding it liable without trial in the underlying bad-faith case.

Allstate is appealing that ruling. In a court filing, Allstate argues that Berardinelli's aim is not to have the McKinsey documents for use in a particular case but to be able to disseminate their contents to lawyers around the country. As he puts the finishing touches on his book manuscript, Berardinelli would be hard-pressed to disagree.

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Desjardins apologizes for Sears comments
Marina Strauss – Retailing Reporter – Globe and Mail, Canada
April 20, 2006

Desjardins Securities Inc. apologized yesterday for comments made to the media by one of its executives about the battle by U.S.-based Sears Holdings Corp. to take its Canadian division private.

The apology comes after Sears Holdings, which is controlled by hedge fund giant Edward Lampert, sent a notice of libel to Desjardins.

Ronald Mayers, head of alternative strategies at Desjardins, "made statements regarding the current takeover bid by Sears Holdings Corp. for Sears Canada Inc. which could have been misconstrued," Desjardins said in its press release. Both Desjardins and Mr. Mayers own Sears Canada shares and oppose the deal.

The contentious views on the takeover were also addressed in analyst reports issued by Desjardins.

The takeover battle has been mired in controversy since Sears Holdings made its initial $16.86-a-share bid, which Sears Canada's board of directors rejected for being too low. The parent boosted its offer to $18 a share, and said on April 6 it had enough support to succeed after unveiling an agreement it reached with "certain shareholders." It did not identify the shareholders, but one of them is believed to be Bank of Nova Scotia, whose investment arm also acted as adviser to Sears Holdings on the transaction. Now a coalition of Sears Canada minority shareholders is threatening legal action to block the buyout.

"There is no basis in fact to conclude, and Desjardins Securities and Mr. Mayers unequivocally do not assert, that Sears Holdings Corp. has entered into any agreements, commitments or understandings collateral to the agreements to tender into the takeover bid announced on April 6, 2006," Desjardins said.

"Desjardins and Mr. Mayers apologize to Sears Holdings and regret any harm to Sears Holdings that may have been caused by statements made by Mr. Mayers and Desjardins Securities."

Desjardins wouldn't comment.

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More Culture Changes at Sears Holdings
By George Anderson – Retail Wire.com
April 19. 2006

Aylwin Lewis, president and CEO of Sears, is looking to change the culture at the retailer, making it second nature for associates to greet shoppers and work as a team.

The focus on serving the customer and building teamwork is part of the "performance-based culture" that Edward Lampert, chairman of Sears Holdings, is looking to instill throughout the organization.

Group performance is linked to the company's plan to cap bonuses for top executives at $5 million a year or $15 million over three years. Mr. Lampert is looking to tie compensation for all employees directly to the company's ability to make a profit. Last year, the company cut benefits and bonuses to some salaried employees as it sought to improve bottom line performance.

According to a Chicago Sun-Times report, Mr. Lampert told shareholders at the company's annual meeting last week that the new management team in place at Sears Holdings has been put there to turn the business around.

"We took a lot of time putting this team together," he said.

Moderator's Comment: Should bonuses paid to retail employees, regardless of their position in the corporate hierarchy, be tied to group (company, department, store) performance measures alone? How do businesses go about creating company-wide compensation plans that all employees can understand and support? - George Anderson - Moderator

To properly develop a compensation system that is fair for ANY business (retail or other), the following need to be considered (this is not an exhaustive list):


Does it truly reward the performance it is intended to produce?

Is it accurately measuring performance results?

Is it within the control of the person being measured to change or impact results or contribute to results?

Is it accurately measuring the person's impact on those results?

Is it motivating?

Does it create an incentive to "win" by having someone else "lose?"

Does it encourage cooperation or competition? (and is that intentional or desired)?

Is it understood by the person(s) being rewarded?

Does it unfairly reward or incent results on factors other than performance?

We all have heard the bromide - Management can only expect results on what it chooses to inspect, because that is what employees think is worthy of respect. If you evaluate and reward based on a single variable - don't be surprised if that single variable (to the exclusion of other critical measures) is what you receive back in return.
David Zahn, Managing Partner, Clow Zahn Associates, LLC

I think bonuses need to be tied to various factors -- company, store, and department. They need to be set up so a bonus is achievable. Low level employees have no control of executive blunders, stock market prices, or competitive changes. Therefore, they should not be financially punished if some of the bonus criteria is out of their control. The bonus program should be structured so there is always a carrot on the stick but never out of reach.
David Livingston, Principal, DJL Research

Retailers with a true customer focus tend to do well even if merchandising, price and other elements are not the best. Examples that come to mind include Publix, Wegmans, H E. Butt and Trader Joe's. Too much emphasis on a single Key Performance Index has significant risk. In the case of Sears and Kmart, this is too little too late. It takes years to change the culture. Then it takes even longer for the consumers to appreciate it. How many consumers will never go back to shopping either of these names? How does one prove to these consumers that a change has occurred if they will not visit the store? Nice try, but 5 years from now Sears Holding will just be a memory with double digit like for like store sales declines.
W. Frank Dell II, CMC, President, Dellmart & Company

Hopefully there is more to the "cultural change at Sears" story than evident in this brief article. If not, we should make funeral arrangements. The apparent thinking that building high performance teams at Sears is simply a matter of a new comp plan explains fully how Sears found itself in this mess in the first place. Obviously compensation plans are part of the picture but aren't even close to being the whole picture.

What seems to be missing is an exhilarating sense of purpose and vision. That's the pilot-light of any cultural transformation. When you get employees seeing a meaningful purpose in their work and THEN you reward them well they'll climb any mountain you put in front of them.
Ian Percy, President, The Ian Percy Corporation

Here comes my pet company again. Privately owned, with all employees owning shares, everyone top to bottom got the same percentage of their salary as a bonus this year. This company is renowned for the loyalty of its employees, all referred to as partners. It is also renowned for excellent customer service and knowledgeable shopfloor staff. It is an innovative company and one of the few British retailers that made money during this past year. I think that says it all.
Bernice Hurst, Managing Director, Fine Food Network

If the objective is to build a team, then the more people tied into the results dependant on each other, the better. The more people know about what is going on, how it is measured and what is rewarded, than the more the team as a whole can focus and drive the truly important things a company needs to achieve to grow.
Charlie Moro, President, CFS Consulting Group, LLC

David Zahn did a great job on this, but here are a few additional observations. First, my own twist on the "inspect what you expect" parable goes like this. "You get activity around that which you manage and results around that which you reward." The other critical pitfall in having too much focus on group incentives is that the individual begins to lose touch with their ability to materially affect the outcome, and therefore the reward. This leads quickly to abdication of responsibility, apathy and some very robust cross-functional finger pointing.

It is much better for management to take the time to create an integrated market plan that spells out the details of what each department or function is expected to contribute. (E.g. Our plan calls for Advertising to drive incremental foot traffic of 5% and for Merchandising to reduce markdowns by 3%.) Then everyone knows exactly what they are expected to contribute. Functional or departmental roles can be further broken down into work team or even individual goals. No rule of thumb is perfect, but 50% corporate, 25% functional and 25% individual or team seems to work pretty well at balancing the variables.
Ben Ball, Senior Vice President, Dechert-Hampe

I like David's list and agree with those who argue that employees have to feel some measure of control over incentive pay. A bonus that is too disconnected from an employee's daily work is worse than no bonus at all. That's not to say that a group bonus can't be an important part of the mix, even the primary part of an incentive plan. But it is up to management to explain just how each employee contributes to the goal, then measure and, most importantly, communicate progress against the goal to those employees. A bonus should never be a surprise, either pleasant or unpleasant.
Jeff Weitzman, President & COO, Coupons Inc.

Sears' problems - at the moment - seem to be that they offer more negative reinforcement ( "my way or the highway" ) than positive; that and frequent changes in direction and management drawn from the idea-of-the-week playbook. Of course when everything has been falling apart for years, I suppose stability seems almost like a luxury good...too bad, because that's usually when it's needed most.
'csundstrom'

I think putting too much emphasis on Bonus plans is a mistake. People are hired to produce results. Is Sears hiring and then having to pay more to produce those results? Could it be that Sears is not paying employees enough and using the bonus as a Scrooge measure to try and get superhuman results out of employees that already deserve more? This typically results in "high pressure" tactics like "selling extended warranties" and advertising appliances and then charging extra for an electrical cord. I think Sears employees would appreciate management working a little harder to get customers in the door in the first place. If traffic rises and Sears floor personnel can stick to their high level of product knowledge and salesmanship, then Sears and their employees will be OK. If Sears management is using the latest from the MBA bag of tricks, then the good employees will go elsewhere (as many already have) and Sears lofty stock price will be a great place from which this management team may leap.
Ed Dennis, president, Dennis Enterprises

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Sears a litmus test for takeover climate
By Andrew Willis – Streetwise: Retailing - Globoe and Mail.com -
April 19, 2006

Forget all the fascinating subplots arising from the Sears Canada takeover. Quite apart from larger-than-life billionaires who are now crossing swords, an important precedent is about to be set over what a public company is actually worth.

If you've been paying any attention to the merger and acquisition world lately, you've likely noticed that the Sears retail chain faces an $18-a-share takeover bid from its U.S. parent, which is controlled by star hedge fund manager Eddie Lampert. In a game where compensation is used to keep score, Mr. Lampert is the highest-paid money manager on the planet, earning more than a billion U.S. bucks a year after purchasing Kmart out of bankruptcy, then banging it together with Sears. But I digress . . .

While Mr. Lampert can count on majority support for his bid, a position that would allow him to legally squeeze out the rest of Sears Canada's owners, he faces a determined minority shareholder in Bill Ackman. He's the head of another hedge fund, called Pershing Square Capital, and he has also scored big by forcing Wendy's to cough out Tim Hortons and getting McDonalds to part with a Mexican fast-food unit, two moves that the market greeted with standing ovations.

The core issue here is what Sears Canada is actually worth. Mr. Lampert and the vast majority of investors say that if $18 is the best offer going, then that's the price.

But Sears Canada's independent directors hired an outside adviser when the takeover bid came in, asking Genuity Capital Markets to run the sums. Genuity crunched numbers nine ways to Sunday, putting the price at between $19 and $22.25 a share. After Mr. Lampert refused to hit this price, the independent directors quit.

Pershing, now allied with at least two other hedge funds, argues that the $18 bid is unfair and oppressive. Money managers take these stands all the time, but few have the stomach to actually take these battles through the courts. Pershing doesn't seem to be bluffing. The funds have hired Davies Ward Phillips & Vineberg to hammer home their point, which brings one of the more sophisticated business law firms in the country into the fray.

This battle has captured the Street's attention because just about every dealer and law firm is working on something similar; that is, a going-private transaction that targets a public company.

The source of these takeovers are the deep-pocketed private equity funds that are all searching for deals. The objects of their attention are mature Canadian public companies that no longer need to raise capital -- think Masonite or Cara, which were both taken out last year. Many of these companies are run by families who are tired of the hassles that come with a listing, or run by CEOs who are frustrated with a Street that just doesn't get it.

If public companies can be taken private at relatively bargain prices -- and let's be clear, Mr. Lampert is pitching a low-ball offer -- then leveraged buyouts are going to become more common. If, on the other hand, aggressive hedge funds such as Pershing can get more generous terms, then takeovers are going to be more expensive and difficult to mount. There's a buyout wave coming. The fate of the Sears Canada takeover will help determine how large that wave will be.

Where are they now?

When the tech boom went bust, many domestic dealers went from having a half dozen tech analysts to one or two. Ever wonder what happened to all that talent?

Byron Berry covered software plays and tech-focused special situations for Yorkton Securities, then National Bank Financial during the tech boom. He's now been reprogrammed, and re-emerged this week as a business trust analyst at Dundee Securities.

Two other analysts have followed a similar career path in recent years. National Bank trust analyst Gareth Tingling used to cover tech stocks, while Jason Zandberg covered tech for Raymond James before becoming a trust expert at Acumen Capital Finance Partners.

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Execs face cash ceiling as Sears remodels culture
By Sandra Guy – Business Reporter – Chicago Sun-Times
April 18, 2006

Sears Holdings has capped bonuses for executives as it continues its move toward what Chairman Edward S. Lampert calls a "performance-based culture."

Bonuses will go no higher than $5 million a year or $15 million in a three-year period, according to the Hoffman Estates-based retailer's proxy statement filed with federal regulators.

Lampert, a billionaire hedge-fund manager who doesn't take a salary as Sears chairman, announced a year ago that many of Sears' employee benefits would be cut, and that their pay would be based on the retailer's profitability.

At that time, Sears employees already had had their stock-option grants and guaranteed pensions eliminated on Jan. 1. Sears also had ended company-subsidized retiree medical insurance to all new hires and to employees younger than 40, and dramatically cut bonuses to some of its salaried workers.

The measures are being imposed to try to make Sears more competitive with its lower-cost rivals such as Target and Wal-Mart. Sears President and CEO Aylwin B. Lewis is seeking to change the culture at the store level by requiring managers to train their underlings to greet shoppers, work as a team and institute systems that help shoppers find merchandise.

Lampert, who engineered Kmart's $12.3 billion takeover of Sears Roebuck a year ago, introduced a new and relatively young top management team during the company's shareholders' meeting April 12.

"We took a lot of time putting this team together," Lampert said, noting that he expects the top executives to turn around Sears' lagging performance. Sears Holdings' sales fell 5.3 percent in 2005 from a year earlier -- down 8.4 percent at Sears stores and 1.2 percent at Kmart.

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Business school to bear former Sears chairman name
Dominican University honors Ed and Lois Brennan
Crain’s Chicago Business Online
April 18, 2006

(Crain’s) — Dominican University will rename its business school after former Sears Roebuck and Co. Chairman Edward A. Brennan and his wife, Lois, the River Forest school confirmed Tuesday.

The Brennans made a seven-figure gift to kick off a $10-million fundraising campaign for the school of business at what once was Rosary College. A formal announcement was scheduled for Tuesday night during a university event.

Mrs. Brennan is a 1955 Rosary graduate and a former trustee.

During nearly four decades with Sears, Mr. Brennan, now 72, rose from selling men’s clothes in Madison, Wisc. to become chairman in 1986. He retired in 1995.

Mr. Brennan was unavailable for comment, Dominican said, while he recuperates from recent surgery.

University President Donna Carroll said a larger endowment would help the 29-year-old business school gain accreditation and, with it, more visibility to attract students.

“It’s a young school, relatively, in a crowded business school market,” she said. “This gives us distinction, profile and opportunity.”

Dominican has about 600 undergraduates and 350 graduates enrolled in its business school, which specializes in business ethics, entrepreneurship and international studies. Besides an MBA degree, it offers master of science degrees in accounting, management information sciences and computer information systems.

Mr. Brennan is a former chairman of Fort Worth, Tex.-based AMR Corp. and its American Airlines Inc. subsidiary, where he remains lead director. He also sits on the boards of three of Chicago’s most-recognized companies: McDonald’s Corp., Allstate Corp. and Exelon Corp. Last year, he and several other directors left the board of Morgan Stanley after shareholder unrest at the Wall Street firm led to a management shakeup.

“Ed is just one of those individuals who’s driven by conscience in everything he does,” said Exelon Chairman and CEO John Rowe, who terms Mr. Brennan “perhaps the most diligent director I’ve ever worked with.”

Mr. Brennan has been a benefactor of alma mater Fenwick High School in Oak Park, another Dominican institution. He is also a graduate of Marquette University in Milwaukee.

Lois Brennan was born in Oak Park and attended Trinity High School, a Dominican-sponsored girls’ school in River Forest. She is a member of the board of the Boys & Girls Clubs of Chicago and serves on the women’s boards of Northwestern University and Rush University Medical Center.

“They grew up in the neighborhood,” said Ms. Carroll. “They courted at Rosary. They married the weekend after they both graduated from college. When I approached them, it was in the context of Lois’ 50th reunion and their 50th wedding anniversary.”

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Allstate 1Q earnings blow away predictions
Crain’s Chicago Business Online
April 18, 2006

(AP) — Allstate Corp., a personal lines insurer, said profit rose 26 percent in the first quarter as the company collected more premiums and saw less damage to insured homes and automobiles.

Net income totaled $1.42 billion, or $2.19 per share, compared with $1.12 billion, or $1.64 cents per share, in the year-ago quarter. Consolidated revenue was $9 billion, an increase of 4 percent from the first quarter of 2005.

Analysts polled by Thomson Financial forecast earnings of $1.66 per share on $8.51 billion of revenue.

Underwriting income increased to $1.24 billion in the quarter from $981 million. The company said it is receiving less claims damage in its auto and homeowners lines.

The Northbrook company paid $3.87 billion in property and liability insurance claims in the quarter, a drop of nearly 5 percent.

The company increased its operating income per diluted share for 2006 to a range of $6 to $6.40, from the previously announced range of $5.60 to $6. Analysts forecast $6.08 earnings per share for the year.

Allstate reported the results after markets closed Tuesday. Shares had risen $1.53, or 3 percent, to $51.95 on the New York Stock Exchange before the announcement.

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Wal-Mart Says Its Logistics Program
Is on Track to Be Completed by 2007

By Kris Hudson – Dow Jones newswire
April 18, 2006

BENTONVILLE, Ark. -- Wal-Mart Stores Inc.'s implementation of its Remix program for speeding merchandise through its distribution system remains "on schedule" for completion in 2007, providing the retailer hopes for a boost to its sales and returns on investment.

The program, which Wal-Mart began implementing last year, will shift Wal-Mart's distribution system to one that uses a portion of the retailer's 120 warehouses to store and distribute merchandise that sells out at Wal-Mart's stores rapidly, such as paper towels, most food items and light bulbs. In turn, Wal-Mart will designate the balance of its warehouses to store and distribute slower-selling fare such as toys, sporting goods and food items such as olives and pickles. The aim is to create a faster route to Wal-Mart's shelves for hot sellers, thereby boosting sales and avoiding stock outages.

Ultimately, Wal-Mart envisions the so-called Remix program helping it to boost sales, trim costs and widen its margins.

Wal-Mart so far has converted its warehouses in the southeastern U.S. to the Remix format. The company plans to begin distributing half of its entire portfolio of merchandise through the Remix program by the end of this year, and the other half next year, said Johnnie Dobbs, Wal-Mart's executive vice president of logistics, during a media tour of a Bentonville warehouse on Tuesday.

"We are tracking exactly on schedule," Mr. Dobbs said. "We've moved the slower moving-items from the grocery distribution centers to the general-merchandise facilities. One of the keys to that was the Replenishment team [paring] the inventories."

Wal-Mart now has crews in its warehouses installing new rack systems to accommodate the new routing of merchandise within the warehouses under Remix.

Another of Wal-Mart's logistics programs -- the introduction of radio-frequency identification, or RFID, for tracking inventory -- also is proceeding as planned, Mr. Dobbs said. Last year, 100 of Wal-Mart's suppliers began adding RFID tags to the merchandise they sell Wal-Mart. The retailer intends to add another 200 suppliers to the program this year, and 300 more next year.

Wal-Mart moved about two billion food cases and 2.7 billion cartons of other merchandise through its distribution system last year.

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Wal-Mart Demotes Price-Slashing 'Smiley' In New Ads
By Kris Hudson and Ann Zimmerman – Wall Street Journal
April 18, 2006

Pity poor Smiley.

For 11 years the star of Wal-Mart Stores Inc.'s "always low prices" advertising, the frenetic, yellow, grinning face is only a bit player in much of the retailer's current campaign touting stylish "lifestyle" themes.

Upstaging him aren't the giddy Wal-Mart customers and employees with whom he shared camera time in the past. Instead, Wal-Mart's ads are using actors and celebrities to make low-key pitches such as "Save more, smile more" or "I came in for eye drops and discovered something eye opening."

In a sweeping overhaul of its mass advertising in the past year, Wal-Mart and its two ad agencies, Bernstein-Rein Advertising Inc. of Kansas City, Mo., and Omnicom's GSD&M, based in Austin, Texas, set out to entice well-heeled customers to shop for more than just basic goods like cleaning supplies, sweat socks and boxer shorts. The retailer, based in Bentonville, Ark., is aiming to spur more sales of high-margin general merchandise -- such as trendy apparel and housewares -- in a bid to boost its sluggish growth in same-store sales, or sales at stores open for more than a year.

One way to do that, as reflected in Wal-Mart's new ad strategy, is to appeal to shoppers' interest in an intriguing yet calm shopping environment rather than sending Smiley careening across their television screens.

Smiley "was a character that we dressed up, and we have tried to move from that to an emotion, a feeling," said John Fleming, Wal-Mart's chief marketing officer. "We'll see how it goes and evaluate it."

The "Save More, Smile More," ad, for instance, didn't scream Wal-Mart's low prices. Instead, it focused on well-priced products, with low-key smiles part of the landscape -- whether on a baby or in soapsuds. "With that ad, it moves from Wal-Mart smiling at you to the customer smiling," says Wal-Mart spokeswoman Gail Lavielle.

Mr. Fleming, a 19-year veteran of Target Corp., is the key executive behind the ad strategy, and the man who demoted Smiley to a supporting role. Mr. Fleming joined Wal-Mart's online division in 2000, and, after being named head of marketing last May, he now oversees a division that had a $1.6 billion ad budget last year.

In recent months, Mr. Fleming has recruited fresh marketing talent to Bentonville, including Frito-Lay veteran Stephen Quinn and Julie Roehm, who previously managed marketing of the Chrysler, Jeep and Dodge auto brands.

Mr. Fleming's most high-profile move came last fall when Wal-Mart, in an effort to promote its new fashion line Metro 7, for the first time advertised in the haute-couture pages of Vogue. The move seemed utterly incompatible with Wal-Mart's cost-conscious demographic and a heretofore less-than-cutting-edge clothing image. Smiley is nowhere to be found in the Vogue ads.

Smiley's demotion has been undertaken with little fanfare, but it is a big deal nonetheless. Wal-Mart employees have grown accustomed to the character, which Wal-Mart reintroduced each year with different themes: Zorro Smiley, Cowboy Smiley, even Ms. Smiley. Yet he had become a bit of a distraction because of his popularity with another group: Wal-Mart's critics. Among recent unauthorized parodies of Smiley, a marketing poster for an anti-Wal-Mart documentary last year featured a rampaging Smiley in a business suit.

While Mr. Fleming and others insist that Smiley might eventually regain a prominent role in the retailer's advertising and that he retains a strong presence in its print ads and store signs, some marketing experts speculate that the time has come for the icon to hang up his blue vest. "In my judgment, it has run its course," said Rajiv Lal, a professor of retailing at Harvard Business School.

Wal-Mart used Smiley regularly in his heyday to tout price rollbacks, the prolonged or permanent price reductions in featured products. He reflected the cornerstone of the Wal-Mart discount strategy. Instead of occasional short-term discounts, Wal-Mart always priced its products as cheaply as possible. When it found ways to cut costs on an item even more, it passed those cuts or rollbacks on to the customers, too.

The new Wal-Mart ad campaign, launched last summer for back-to-school, for the most part has shied away from focusing on price as it touts improved merchandise quality instead. "We own low prices," Mr. Fleming said, while recently touring Wal-Mart's new high-end store in Plano, Texas, that is supposed to lure more affluent customers.

"We are not just about price, but the broad value proposition for all customers," Mr. Fleming said. "We don't want to lose prices, but evolve the message of value -- in products, service and customer experience."

Whether Wal-Mart's new message is clicking with consumers isn't yet clear. Charles Grom, a retail analyst at J.P. Morgan, recently wrote about the retailer's anemic March same-store-sales increase of less than 1% at its supercenters and discount stores. He said he didn't think Wal-Mart's ad campaign was resonating with shoppers.

Some Wal-Mart watchers say the ads are too much, too soon and may unrealistically raise shoppers' expectations of what Wal-Mart stores have to offer. While the company is planning to remodel 1,800 stores in 18 months and is trying to roll out its new fashion line to more stores, all that is still a work in progress. If shoppers arrive expecting more than they get, they might be disappointed. Asked whether all the marketing changes are causing controversy inside Wal-Mart, Mr. Fleming quipped, "I just wear a bulletproof vest."

Smiley's recent benching reflects a history of ups and downs for corporate mascots prominent enough to become synonymous with their companies. Burger King Holdings Inc.'s fast-food chain Burger King had retired the burger king himself for several years until recently recoronating him in a series of quirky "Wake up with the king" breakfast ads. And McDonald's Corp.'s Ronald McDonald has seen his prominence in the burger chain's ad strategy ebb and flow through the decades.

The challenge for Wal-Mart won't be whether to retire Smiley or eventually reinstate him, some branding experts say. Rather, it will be overcoming the perception that decades of Wal-Mart advertising has cemented for shoppers -- that it is all about low prices.

For example, it took Target a decade to position itself as a low-cost yet chic retailer, and Wal-Mart will need a lengthy, consistent campaign as well to change its image, said Robert Passikoff, president of New York-based Brand Keys Inc. Wal-Mart is "doing all the right things," he says. "But they have a brand image and brand values that are so deeply entrenched that changing the direction is like trying to turn around the Queen Mary."

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Wal-Mart Eases Benefits Rules For Part-Timers
By a Wall Street Journal Staff Reporter
April 18, 2006

BENTONVILLE, Ark. -- Wal-Mart Stores Inc. said it will halve the waiting period for part-time staff members' eligibility for health benefits to one year.

Until now, the employees have had to work for Wal-Mart for two years to qualify. The coverage also will extend to the employees' children. The company said the change will make more than 150,000 part-time associates eligible for initial or enhanced coverage during a special enrollment period in mid-May.

The retailer also said it plans to cut co-pays on generic medications for common conditions such as diabetes, hypertension, high cholesterol and infections to $3 from $10 and will offer 20% discounts on prescription drugs otherwise not covered.

Wal-Mart has been criticized for paying low wages and being stingy with health benefits, leading some workers to seek government aid.

Susan Chambers, a Wal-Mart vice president, said the version of the health plan that most employees are expected to sign up for would be available for $23 a month. Workers' children would be included for $15 more, whatever the size of the family. "Every Wal-Mart associate, both full- and part-time, will get coverage after no more than 12 months, no matter how many hours they've worked," she said.

The company also said it will provide a contribution of up to $1,200 and an additional match of up to $1,200 to staffers' health-savings accounts, and will provide a 10% staff discount on healthy foods in Wal-Mart stores and Sam's Clubs.

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Sears Holdings Faces Holder Challenge In Sears Canada Buy
Dow Jones Newswires
April 17, 2006

Hawkeye Capital Management LLC, Knott Partners Management LLC and Pershing Square Capital Management L.P. have formed a group to oppose Sears Holdings Corp.'s (SHLD) "coercive efforts" to acquire the publicly owned shares of Sears Canada Inc. (SCC.T), Pershing said on Monday.

The group members, or funds controlled by them, own or control 8.24 million shares of Sears Canada representing 7.7% of the outstanding shares, and 25.7% of the shares not owned by Sears Holdings.

The shareholder group said it plans to take all appropriate legal action to halt the transaction so Sears Canada remains a public company or, alternatively, to ensure that the shareholders who want to sell their shares in Sears Canada are treated fairly.

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Sears revving up its auto repair biz
Lampert is testing Auto Center concept in Kmart stores
By Sandra Jones – Crain’s Chicago Busine ss
April 17, 2006

Sears Holdings Corp. is testing its Sears Auto Centers format in Kmart stores — a move that, if rolled out companywide, could double the size of Sears' auto-repair business and make use of hundreds of vacant repair shops at Kmart stores around the nation.

Some of the first Sears Auto Centers are expected to go into Kmart stores in the Detroit area, according to people familiar with the plan. U.S. Auto Care's Big O Tires Inc. franchise had been operating as many as 13 outlets in Kmart stores in the Detroit area since March 2003.

The Big O franchise in Detroit went into Chapter 11 bankruptcy reorganization in October and shuttered the outlets in March after Kmart told the Bankruptcy Court that it had another tenant for the spaces. Kmart declined to name the potential tenant in court filings, but people familiar with the operation say Sears officials have been in Michigan looking to turn at least some of the former Big O locations into Sears Auto Centers.

Kmart has had a love-hate relationship with its auto repair business for decades, valuing the shopping traffic it brought to the store while customers waited for their cars to be serviced, but never quite figuring out how to run the business profitably. Kmart got out of the auto repair business in 2002, when Penske Auto Centers Inc. shut down its 563 Kmart outlets after the discounter entered Chapter 11.

Sears has a long history with automobile businesses — from selling cars in its catalog in the 1900s to selling DieHard batteries today. Auto repair traditionally has been a big profit contributor to the retailer, but the business has struggled lately. Annual sales for the more than 850 Sears Auto Centers are estimated between $1.5 billion and $1.8 billion.

"It's been a very important part of Sears' business for a long time and a very profitable part of the business," says George Whalin, CEO of Retail Management Consultants Inc., a San Marcos, Calif.-based retail consulting firm. "It's a natural extension. With their experience, it makes sense" to put Sears Auto Centers in Kmart stores.

Sears Chairman Edward Lampert, who engineered the combination of Sears and Kmart a year ago, knows the auto business well. Through his ESL Investments Inc. hedge fund, Mr. Lampert is the largest shareholder of two auto firms. He owns 29% of Florida-based AutoNation Inc., the largest U.S. auto retailer, and 22% of Tennessee-based AutoZone Inc., the nation's largest seller of auto parts. Mr. Lampert is also Sears' largest shareholder by far, with a 41% stake.

EMBRACE 'AMBIGUITY'

If Mr. Lampert has any notions of combining the auto businesses, he's not saying. But he made clear at Sears' annual shareholders meeting last week that he wants to test a wide range of ideas before making any decisions about the company's future. Sears employees and shareholders alike need to be comfortable with "ambiguity," he says. "The strategy is about, 'Let's try a lot of things and see what works,' " Mr. Lampert said at the meeting.

The Hoffman Estates-based retailer disclosed in its annual report filed last month with the Securities and Exchange Commission that it is testing the addition of Sears Auto Centers to Kmart stores.

A Sears spokesman wouldn't reveal locations or comment beyond the SEC filing.

RIVALRY INTENSIFIES

The move comes as competition in the auto repair business intensifies. Wal-Mart Stores Inc. operates Tire & Lube Express centers in about 1,700 of its 3,100 stores. And Home Depot Inc. is starting to sell auto supplies at 10 stores in Florida as a pilot project.

In case the Sears Auto Center test doesn't go well, Sears has an alternative: Auto-Lab Franchise Management Corp. of Michigan has agreements to open centers at Kmart stores in six states and is eager for more, says co-owner Bill Downs. Nine sites are slated for Illinois, including one at a Kmart in New Lenox that opened this year.

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Allstate by the numbers

Here’s how The Allstate Corp. looks these days.
•Headquarters: Northbrook
•CEO: Edward Liddy
•2005 sales: $35 billion
•One-year sales growth: 4 percent
•2005 profit: $1.8 billion
•One-year net income growth:
-45 percent
•Employees: 39,000
•Agents/financial specialists: 13,600
•Businesses: Auto, home and life insurance along with retirement planning, annuities and mutuals.

Source: Allstate.com, Hoover’s

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Risk has its rewards --
Allstate hits milestone on solid ground after long year
 By Mike Comerford – Business Writer - Daily Herald – Suburban Chicago
April 16, 2006

Seventy five years of hurricanes, earthquakes and fender benders.

Seventy five years of selling financial safety nets, for cars, houses and lives.

And yet The Allstate Corp. began during a game of chance on a local Chicago train car, according to its own company literature.

“On a fall morning in 1930, as the 7:28 commuter train headed for downtown Chicago, a suggestion was made to Sears, Roebuck & Co. President and Board Chairman Gen. Robert E. Wood that Sears should start an auto insurance company and sell insurance by mail.”

Allstate CEO Edward Liddy stands alongside the first car insured by Allstate, a 1930 Studebaker, at the insurer’s Northbrook campus.

That pivotal suggestion was made during a card game and Allstate has been calculating the odds ever since.

Allstate took its name from a Chicago-based Sears catalog tire brand and company lore says an Aurora tool and dye worker was its first customer. Later, the first claimant was paid when he came in with a car door he said was broken-off in a theft.

Flash forward 75 years, Allstate’s sprawling Northbrook headquarters commands an insurance empire, the largest privately traded U.S. insurer.

However, 2005’s hurricane season rocked Allstate on its heels last year, causing the first quarterly loss in a decade and sparking outrage by some Gulf State homeowners insured for wind but not for floods.

Still, Allstate responded with charitable assistance and what seemed like legions of personnel. Much of the response was organized from its South Barrington catastrophe center.

Part of the territory

All the while, the losses keep piling up.

“This is the nature of our business,” said Edward Liddy, longtime chief executive officer at Allstate in an interview with the Daily Herald. “But we think we’re in substantially better shape in 2006 than in 2005.”

The second-largest U.S. insurer, behind Bloomington-based State Farm Mutual, Allstate is rolling out its storied history and reassuring customers and investors that it’s healthy on its 75th anniversary.

Allstate can take credit for several insurance industry milestones, such as customizing insurance rates to the individual car. Over the years, it advocated for air bags, seat belts and drivers tests.

In the marketing realm, its 1950 slogan “You’re In Good Hands With Allstate” is one of the longest lasting, most recognizable company slogans in the country.

Still, Allstate long seemed overshadowed by its parent, Sears. When Sears changed, so did Allstate.

In the 1980s, aiming to buffer itself from the cyclical nature of the retail marketplace, Sears separated its merchandise group from Allstate. After acquiring the Dean Witter Reynolds Organization Inc. and Coldwell Banker & Co., Sears added Allstate to its growing financial group.

But the world’s largest retailer at the time began closing stores and by 1993 was restructuring again, selling or spinning-off its financial companies.

Going public

The sale of 20 percent of Allstate’s stock in 1993 was the largest initial public offering in U.S. history. A couple years later, remaining Allstate shares went to Sears shareholders.

Many newly public companies struggle but Allstate had been operating since the 1930s and came out of the gate with record profits.

Then-CEO Jerry Choate and President Liddy could boast within a year that Allstate, with its $30 billion market capitalization, was bigger than Sears or Chrysler.

Nevertheless, the 1990s would prove perilous for the insurer.

There was still the bad publicity fall-out from the 1994 Northridge, Calif. earthquake. It was the largest insurance payout in history, costing Allstate $1.7 billion on 46,000 claims. But claimants said Allstate mishandled as many as 9,000 claims and Allstate agreed to set aside $60 million to cover potential damages.

At the time, Liddy said the company was so overwhelmed by the size of the disaster that it used outside contractors, who were the cause of the mishandled claims.

Then, faced with higher personnel costs than competitors, Allstate decided to make all its full-time Allstate agents independent contractors. The shake-out was a painful one for thousands of employees, many who didn’t make the transition.

At the time, insurers thought Internet and global operations would dominate the industry in a few years. But Allstate has “pulled back” from its ventures in Europe and Asia, Liddy said, and he acknowledges many people thought Internet insurance would be bigger by now.

A year to remember

In 2005, hurricanes Katrina, Rita, Ophelia, Dennis and Wilma handed Allstate its worst year for catastrophic losses. Net income fell 45 percent.

Nevertheless, even in one of its worst years it racked up $1.8 billion in profits.

Learning from the experience, the insurer is ratcheting up its reinsurance protection on the East Coast. It cutback insurance in some Gulf States. And the company has been using consumer credit histories to find customers least likely to file claims.

“We have some technology now to manage risk much better,” Liddy said.

This year the company expects to earn $2.35 to $2.50 a share before investment gains and losses.

“Catastrophes are part of the business,” said Stuart Quint, an analyst at Gartmore Global Investments. “What matters is whether they are still generating solid underwriting profit excluding the catastrophes.”

Of the 29 analysts listed by Bloomberg as Allstate stock analysts, a majority call it a “buy.”

More than just profitable, Allstate points to an unusually high number of best practices citations.

And the way Liddy sees it, Allstate has a stable management team, steady income flows and new technologies for managing through future disasters.

“I think we have another great 75 years ahead,” Liddy said. “When you have a company 75 years old and thriving, not just surviving, I don’t know how many companies can say that.”

In 2003, it stopped selling all guns in California, after the state found thousands of violations of gun laws -- including sales of guns to felons -- at Wal-Mart stores over the previous three years. Wal-Mart paid $14.5 million to settle a state lawsuit stemming from the violations.

Wal-Mart's latest decision disappointed gun advocates. "We hope that Wal-Mart wasn't influenced by the gun-control lobby or other liberal elitists," said Chris W. Cox, chief lobbyist at the National Rifle Association. "We've been told the decision would be made store by store, based on demand. The NRA will be watching closely to make sure they stay true to their word."

Separately, Wal-Mart said on Friday that its board has nominated Aida Alvarez, former administrator of the Small Business Administration, and James Cash Jr., retired professor at the Harvard University Business School, to its board. The company said directors Jose Villarreal, J. Paul Reason and John Opie won't stand for re-election at the company's June 2 annual meeting.

-- Kris Hudson contributed to this article.

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Wal-Mart to Stop Selling Firearms in Some Stores
By Ann Zimmerman – Wall Street Journal
April 15, 2006

Wal-Mart Stores Inc., the biggest seller of firearms in the country, said it is discontinuing sales of guns in about 1,000 U.S. stores due to insufficient demand, part of an effort to boost sluggish sales by better matching store merchandise to individual neighborhoods.

The Bentonville, Ark., retailer wouldn't say which stores would stop selling guns and whether sales at those stores had fallen off recently or had always been substandard. The company said the move to stop selling guns at what amounts to about a third of its U.S. stores is part of Wal-Mart's larger effort to improve its "store of the community" program that tailors store products to neighborhood demand.

"If demand is not there for an item, we stop selling it," said Karen Burk, a Wal-Mart spokeswoman.

Wal-Mart declined to break out its gun sales. However, its much broader sporting goods and toys category, which includes firearms, was one of three merchandise categories whose percentage of Wal-Mart's total sales slipped last year.

Amid litigation against gun manufacturers and retailers in the 1990s, particularly in the aftermath of the Columbine school shooting, many retailers backed away from selling guns. Wal-Mart, which was founded by hunting enthusiast Sam Walton, continued selling rifles and shotguns, though it did cease handgun sales in 1993.

In 2003, it stopped selling all guns in California, after the state found thousands of violations of gun laws -- including sales of guns to felons -- at Wal-Mart stores over the previous three years. Wal-Mart paid $14.5 million to settle a state lawsuit stemming from the violations.

Wal-Mart's latest decision disappointed gun advocates. "We hope that Wal-Mart wasn't influenced by the gun-control lobby or other liberal elitists," said Chris W. Cox, chief lobbyist at the National Rifle Association. "We've been told the decision would be made store by store, based on demand. The NRA will be watching closely to make sure they stay true to their word."

Separately, Wal-Mart said on Friday that its board has nominated Aida Alvarez, former administrator of the Small Business Administration, and James Cash Jr., retired professor at the Harvard University Business School, to its board. The company said directors Jose Villarreal, J. Paul Reason and John Opie won't stand for re-election at the company's June 2 annual meeting.

-- Kris Hudson contributed to this article.

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Allstate Invites Chicago to Celebrate Its 75th Anniversary
Business Wire
April 13, 2006

NORTHBROOK, Ill. - Born from an idea over a game of cards on a commuter train rolling into Chicago, 75 years later, Allstate Insurance Company is still enjoying the ride.

Allstate turns 75 years old on Monday, April 17, 2006, and Mayor Richard M. Daley has officially declared it "Allstate Day" in Chicago. Originally housed in the first Sears Tower in Homan Square, Allstate is partnering with the City of Chicago to deliver a variety of Good Hands(R) experiences to Chicagoans.

Allstate will ensure that commuters are "in Good Hands" on its official birthday (April 17) when it covers fees for all of the City-metered parking spaces located in Chicago's Loop, bordered by Wabash Avenue on the east, Lake Street on the north, Wells Street on the west and Jackson Boulevard on the south. In addition, Allstate also will feed parking meters along Ontario Street, east of Michigan Avenue extending to Lake Michigan.

"Allstate is proud to call Chicagoland home. For decades, Allstate has been a leader in its industry, championing business innovations that ultimately benefit our customers. Likewise, Allstate has been active in social initiatives in the communities in which we live and work with the intention of helping improve the quality of life for people," said Allstate Chairman and CEO Edward M. Liddy. "We are proud of our history and look forward to continuing the tradition for many years to come with our talented employee and agency force."

As Chicago has grown and prospered, Allstate has supported civic and cultural efforts enriching local families and communities. Continuing this tradition, throughout the summer Allstate will partner with the Chicago Department of Cultural Affairs and Chicago Park District to present a lineup of activities, including:

-- Chicagoans will be steered to a new outdoor sculpture exhibit designed in collaboration with the Department of Cultural Affairs, "Artists and Automobiles," which features car relics transformed into a variety of impressive works of art. Showcased in Grant Park and Michigan Avenue, "Artists and Automobiles" will be parked in these prominent locations throughout the summer.

-- Car fanatics will brake at the Chicago Cultural Center this summer for "Chicago Car Culture," an exhibit that explores Chicago's contributions to automobile culture in America via a mix of history, artifacts, storytelling and art. Free and open to the public, "Chicago Car Culture" will be on display in the Chicago Cultural Center's Chicago Rooms June 9 through Aug. 31.

-- A throwback to drive-in movies, the Chicago Park District's popular "Movies in the Park" program will screen twice as many films at parks throughout the city this summer through Allstate's gift.

-- Allstate also will serve as a primary sponsor of more than 75 world-class events taking place at Chicago's Millennium Park this summer.

Celebrating its hometown, Allstate will continue its anniversary festivities in August when more than 2,500 top agents from across the country visit Chicago for Allstate's National Conference.

Chicago Roots

Sears adopted the Allstate name from a tire sold through its catalogs. Initially funded in 1931 with $700,000, it didn't take long for Allstate insurance to catch on. On May 17, 1931, William Lehnertz of Aurora, Ill., became the first Allstate policyholder. And, a few months later, Allstate paid its first claim when a customer holding a car door handle broken off in a theft attempt walked into Allstate's one-room Chicago office. A successful presence at the Chicago World's Fair in 1933 led Sears to place Allstate agents in Sears stores, where they'd become mainstays for decades. Ultimately, Sears took Allstate public in 1993, and the company became totally independent of Sears in 1995. At the time, the 1993 stock sale was the largest initial public offering in U.S. history.

A full-page ad created by Allstate's longtime ad agency of record, Leo Burnett, will appear in the Wall Street Journal and then other newspapers thereafter. The full-page anniversary ad that begins running Monday is full of info about Allstate's history and the many history-making moments in the company's 75 years. Among other things, the ad notes that Allstate was founded in 1931, when Gen. Robert E. Wood, the head of Sears Roebuck and Co. (Allstate's former parent), wanted to establish a unit that would help the then-burgeoning number of car owners cut through the red tape when their vehicles needed repairs.

The ad also explains how the company's "You're in Good Hands" tag came to be back in 1950, when the daughter of an Allstate sales manager was seriously ill. As his daughter was being wheeled into surgery, the man was reassured that the girl "was in good hands." The warmth and trust of that line, as the anniversary ad states, stuck with the father, and, along with the image of cupped hands, the phrase became the cornerstone of Allstate advertising.

Other historical highlights mentioned in the anniversary print ad include Allstate's aggressive push to make seat belts mandatory starting in 1968, the development of a national catastrophe team in 1996, and , most recently, the introduction this year of a safe driving bonus.

Also noted, for trivia buffs:

* The Allstate name came from a tire sold in a Sears catalog in the 1930s.

* William Lehnertz of Aurora became Allstate's first policy-holder on May 17, 1931.

Sears took Allstate public in 1993 and in 1995, Allstate was spun off and became totally independent of its former parent.

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Wal-Mart CEO to Take Monthlong Vacation
By Marcus Kabel – Associated Press
April 13, 2006

Lee Scott will take an unusually long one-month vacation in May from his job as chief executive of Wal-Mart Stores Inc., his first break of that length since taking over the helm of the world's largest retailer in 2000, Wal-Mart said Thursday.

Scott, 57, will leave his two deputies in charge and remain in touch while he travels with his family and possibly goes fishing, spokeswoman Mona Williams said.

"Lee has a well-qualified team in place and that enables him to take a longer than usual vacation," Williams said in an e-mail to The Associated Press.

"He will stay in touch while he is away and return in time for the shareholders meeting (June 3)," Williams added.

Williams did not respond to an e-mailed question about whether Scott's long break was a sign that he may be considering leaving.

Scott's job has changed in the past year as he has had to spend more time defending Wal-Mart against increasingly organized attacks from unions and other critics of wages, benefits and business practices of the giant retailer.

His duties will be shared while he is gone by Vice Chairman Mike Duke, the head of Wal-Mart's international division, and Vice Chairman John Menzer, who runs the domestic stores division. Both are widely seen as potential future contenders for the CEO position.

The Bentonville, Ark.-based Wal-Mart promoted Duke and Menzer to vice chairman positions last year and effectively swapped their responsibilities for U.S. and international operations, a move seen as giving each man a better overall grasp of the organization.

Scott is a 25-year veteran of Wal-Mart who rose through the ranks of its formidable logistics operations.

In January 2000, he replaced President and CEO David Glass and became a member of the Wal-Mart Board of Directors in 2001.

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Cart Blanche?
The Megamarket's Savings Don't Come Cheap
By Bob Thompson - Staff Writer - Washington Post
April 13, 2006

It's just a big old sack of dog food, for crying out loud, but Charles Fishman can hardly restrain himself: "Fifty pounds for $13.82! That's amazing!" the author of "The Wal-Mart Effect" bursts out. "That's less than 30 cents a pound!"

You'd think the guy would be a bit jaded by now. Fishman has schlepped through more than a hundred Wal-Marts in 23 states, trying to chart the nearly unfathomable influence of the retail behemoth Americans have learned to love, hate or take for granted. But he's never been to the one in Hagerstown, through which we're piloting a shopping cart on a weekday afternoon -- and he's calling out bargains like a hyperactive carnival barker.

"$3.88 for a rake! How much cheaper could the rake actually be before it was free ? You know what I mean?"

We've driven 65 miles out from the District of Columbia, one of the nation's few Wal-Mart-free zones, to get here. A closer option would have been one of the two stores in Alexandria, but they're normal-sized Wal-Marts, the kind that stock a mere 60,000 products. I've asked Fishman to show me around a "supercenter," the extra-humongous kind that stocks 120,000 products and boasts a full-size grocery store.

Wal-Mart No. 1,674 is a nondescript, boxlike structure, an eighth of a mile wide and a football field deep, that makes neighbors such as Home Depot, Borders, Pier One and Circuit City look like Georgetown boutiques. Outside, discarded Wal-Mart bags festoon a field like unpicked cotton bolls. Inside, canyons of merchandise envelop us: Easter candy, power tools, bras, microwaves and green plastic margarita glasses, stacked on shelving higher than our heads.

Wal-Mart loves to experiment, Fishman says, hence the recently opened upscale store in Plano, Tex., which features sushi, microbrews and a coffee shop with Wi-Fi. But there's not a lot of experimentation visible in No. 1,674. The Hagerstown supercenter is built on the same principle as the nearly 4,000 other U.S. Wal-Marts, the principle that has driven the company's growth since Sam Walton opened the first store in Rogers, Ark., in 1962, and the one Wal-Mart management expects to fuel its recently announced move into blighted urban areas -- one of the few parts of the American landscape it has yet to conquer.

It's right there on the ubiquitous blue-and-yellow smiley-faced signs: "Always Low Prices. Always."

"A hundred-foot heavy-duty outdoor extension cord: My God, it must weigh eight pounds! $9.68. That's truly amazing!"

For more than two hours, the Wal-Mart Tour rolls on and, as it does, I drop an occasional item into the cart. This is partly so we'll look normal walking around the store, but it's also because -- as someone who doesn't get to Wal-Mart that often -- I'm almost as excited about the prices as my guide.

Where am I going to get a better deal on light bulbs or shaving cream or the half-socks my daughter just told me she needs?

'What's Your Price?'

We think we know all about Wal-Mart. But we don't.

It's a fantastic American success story, built on entrepreneurial genius and hard work, whose rock-bottom prices are a boon to the nation's working families. Or it's a soulless corporate empire that decimates small-town shopping districts, pays its workers poverty wages and restricts their access to decent health care.

Or maybe both: The two versions aren't contradictory, after all.

But to Fishman, all of that is just the beginning of what Wal-Mart means. However you choose to judge the company, he argues, Wal-Mart is a retail planet with a gravitational pull so strong it shapes our economic universe in ways we can barely comprehend.

What happens when a single enterprise gets so huge it has no real rivals? Wal-Mart, Fishman points out, "is as big as Home Depot, Kroger, Target, Costco, Sears and Kmart combined." What happens when it can dictate how and where the companies with which it deals do business? Wal-Mart has become a prime mover in economic globalization, "accelerating the loss of American jobs to low-wage countries" in the name of keeping its prices down.

"The Wal-Mart Effect," which has drawn favorable reviews and made several business bestseller lists, is an attempt to show just how pervasive Wal-Mart's influence really is.

It started as an article for Fast Company, a business magazine for which the 45-year-old Fishman works as a senior editor. (Earlier in his career, he did stints at several newspapers, including a few years at The Washington Post.) In 2003, his boss asked him to write about the culture of Bentonville -- the small Arkansas town dominated by Wal-Mart's headquarters -- and in particular, about the sad plight of the urbane corporate types forced to relocate there to service their companies' Wal-Mart accounts.

Fishman didn't much like the idea. "The sophisticated people come to Hicksville -- it isn't amusing, and it isn't true," he says. If an enterprise he calls "the most powerful company in history" comes out of Arkansas, then "I guess the hicks have got something going on ."

His wife, an editor at the Philadelphia Inquirer, suggested a different approach. Couldn't he write more broadly about the benefits and costs of being a Wal-Mart supplier? How much does being in a "partnership" with a store so big that 100 million Americans shop there every week put you under Bentonville's thumb?

Intrigued, Fishman set out to understand this relationship. He asked a former Kraft executive he knew, now a business school professor, for guidance. The man wouldn't go on the record, and he wouldn't talk about Kraft's actual relationship with Wal-Mart, but he offered a helpful hypothetical:

Suppose you're the manager of barbecue sauce at Kraft, he began. You go down to Bentonville to show off the new label on your bottles and the summer's jazzy cardboard display, "and all they say is: 'What's your price?' And you say, '99 cents a bottle.' And they say, 'You know, we don't care about the cardboard display, that's cute and everything, but, 79 cents.' "

How do you deal with that? Fishman asked.

"You slap your palm on your forehead and you say: '79 cents a bottle! What a brilliant idea!' "

And if you don't?

"They say, 'Well, we're not going to carry the barbecue sauce.' "

But wait! You represent a major multinational corporation! Why wouldn't you hold the line?

"Well, you just lost 20 percent of your barbecue sauce business for the year. By the time you get back to Chicago from Bentonville, you're fired."

Fishman's article wasn't easy to report. No one at Wal-Mart would talk to him, and suppliers were terrified by the very idea. Wal-Mart is "our biggest customer by far," a Dial executive told him. "We have a great relationship. That's all I can say. Are we done now?"

The article -- based mainly on conversations with people who used to do business with Wal-Mart -- got more response than anything Fast Company had ever done, Fishman says. A significant percentage came from businesspeople hungry for advice on working with the world's biggest retailer. "I could have opened my own little 'How to Deal With Wal-Mart' consulting firm," he jokes.

Instead, he got a book contract -- and kept trying to understand what "always low prices" really means.

'A Layer of Toxic Sludge'

What it means right now is that our shopping cart is filling up.

In go the Barbasol shaving cream (92 cents) and the Dial soap (eight bars for $3.50). In go the energy-saving light bulbs (two for $8.44) and the ordinary 60-watters (eight for $1.67) and the Easter chocolates in the shape of soccer balls, basketballs and baseballs ($1.66). We still haven't found my daughter's socks. But by the time we hit the grocery section I'm starting to lose all restraint: I stock up on OJ, pasta, shredded cheese, clementines and breakfast cereal.

So what if the house-brand cornflakes end up tasting like cardboard? An 18-ounce box is just $1.33!

Fishman, meanwhile, has been tempering his running commentary on Wal-Mart prices with observations about how those prices are achieved.

Prowling the health and beauty section, he reminds me that some years back, just about all deodorant brands came in paperboard boxes. Then Wal-Mart said: Boxes costs money, they take up space, who needs 'em? Pretty soon, deodorant didn't come in boxes anymore.

No harm done there, unless you were a box manufacturer: Wal-Mart was using its clout to force waste out of the system. What's more, Fishman says, it passed on most of the savings. Its main goal, when forcing suppliers to economize, is to keep prices down, not to increase its extremely low profit margins. Its formula is simple: Low prices equal volume equals growth and thus success.

Yet much of what Fishman highlights on the Wal-Mart Tour has more troubling implications.

Take the L.R. Nelson lawn sprinklers, which used to be made in Peoria, Ill., before Wal-Mart pressured Nelson to make them in China instead. Before the move, one laid-off Peoria worker told the reporter, Chinese managers were "walking around the plant and videotaping us working. That was horrible, horrendous. Right in our faces. They are taking our jobs."

Take the fresh salmon we find in the seafood section for $5.84 a pound (it cost a buck less when Fishman was writing his book). "What exactly did Wal-Mart have to do to get salmon so cheaply?" Fishman wrote, then answered his own question by noting that the Chilean fish farms from which it buys are environmental disaster areas that deposit "a layer of toxic sludge" -- made up of salmon feces and excess fish food -- on the ocean floor.

Or take the beautiful yellow oxford-cloth boy's shirt Fishman stops to rhapsodize over. ("Look at the level of perfection! There's little buttons sewn in for replacement, it's got the little loop -- $8.87!")

The shirt was made in Bangladesh. Two years ago, on an American tour sponsored by a labor rights group, a Bangladeshi garment worker named Robina Akther talked about the working conditions in a factory there that supplies Wal-Mart. At age 16, Fishman writes, Akther worked 14-hour days, seven days a week, for 13 cents an hour; when she didn't sew fast enough, "a supervisor would slap her across the face with the pants she was sewing."

Last year, Akther joined 14 other workers from Bangladesh, China, Swaziland, Indonesia and Nigeria to sue Wal-Mart, arguing that its suppliers' actions are the company's responsibility. Wal-Mart has argued, in response, that it has a code of conduct for its suppliers and a worldwide inspection program to enforce it. Fishman's analysis of this program led him to conclude that Wal-Mart's inspections, however well-meaning, are not tough, frequent or independent enough to prevent abuse.

But lost manufacturing jobs, environmental damage and sweatshops are only part of the cost of "always low prices." The Wal-Mart effect can be more subtle as well. To make this point, Fishman walks me over to the lawn mower display to consider a product that's not there.

That would be the Snapper mower, a high-end brand whose management decided a few years back that it couldn't afford to continue dealing with Wal-Mart. The reason? Meeting Wal-Mart's incessant demands for lower prices would put the company in what Fishman describes as a "death spiral" of "collapsing profitability, offshore manufacturing and the gradual but irresistible corrosion of the very qualities for which Snapper was known."

Almost no one turns down Wal-Mart. The sales volume it offers is simply too enticing. But "once you get hooked on the volume," as the CEO of Snapper's parent company once explained, "it's like getting hooked on cocaine."

A Decision to Make

"This looks like a modest book section," Fishman says. "A lot of inspirational. All books 25 percent off the cover price. Let's see if we can find Sam's."

No luck. Wal-Mart No. 1,674 doesn't seem to carry "Made in America," its founder's autobiography. The book was published in 1992, the same year Sam Walton died.

Is Walton's retail legacy good or bad for us? The question is far from simple, and in Fishman's own book -- which, not surprisingly, we don't find in stock, either -- he wrestles with more aspects than can be covered in a quick Wal-Mart tour.

There's the question of Wal-Mart's rock-bottom wages and benefits. Had he been able to talk to CEO Lee Scott, Fishman says, he'd have asked about Wal-Mart's "brutal" 50 percent turnover rate: "Why do you allow 650,000 of your employees in the U.S. to leave every year?"

There's the company's recently announced concern with environmental sustainability. "We're very passionate about sustainability at Wal-Mart," Scott told the nation's governors in Washington in February. Is he serious? If so, how will he change a culture that for 40 years has focused, with messianic zeal, on lowering prices at all costs?

Wal-Mart, which has put more energy into defending its image lately than it used to, has nonetheless chosen to ignore "The Wal-Mart Effect." ("We really do not have comment on the book" was spokeswoman Mona Williams's response to an interview request.)

But however his efforts are viewed in Bentonville, Fishman is not a blame-Wal-Mart-for-everything kind of guy. Wal-Mart didn't create globalization all by itself, he says, and America's health care crisis is bigger than any one corporation -- however outsize -- can deal with alone. At the end of his book, in fact, he puts the ball right back in our court.

"Wal-Mart is the ultimate form of democracy -- we vote yes each time we buy something," he writes. The problem is, we don't know enough to understand what our vote means.

Speaking of which, I've got a decision to make. Am I going to buy my daughter the socks we've finally tracked down: plain white, Fruit of the Loom, $3.76 for five pair? They've got a stick-on label that says "Made in Turkey."

Fishman peels it back. Underneath, it says "Made in the USA."

Is this more evidence of the Wal-Mart effect? There's no way for us to know. Maybe Fruit of the Loom was going global anyway. Maybe it just had some extra pre-printed bags. Meanwhile, that price seems awfully good . . .

I toss the socks in the shopping cart. Pretty soon we're heading for the checkout line.

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'COMFORTABLE WITH AMBIGUITY'
Lampert offers no grand solution

By Susan Chandler - staff reporter - Chicago Tribune
April 13, 2006

Lots of investors are waiting to hear what Edward Lampert has in store for Sears and Kmart.

They're going to have to wait a while longer.

Lampert, chairman of Hoffman Estates-based Sears Holdings Corp., said Wednesday that there is no grand plan for fixing the ailing retail chains, and he continued to extol the virtues of staying flexible and agile. Lampert, however, had plenty of Zen-like comments on the state of the business.

In regard to Kmart's four years of declining sales, he asked: "A plane goes from 40,000 feet to 10,000 feet. Is that a good thing or a bad thing?"

As far as setting strategy, Lampert granted that some people are uncomfortable with his approach.

"It's hard for certain cultures to do multiple projects at the same time without feeling there's no strategy," he said. "It's not just an external problem. It's an internal problem as well. We have to be comfortable with ambiguity."

In a meeting with the Chicago Tribune's editorial board following the annual meeting, Sears Holdings Chief Executive Aylwin Lewis echoed Lampert's comments and said the company has yet to figure out the brand message it wants to convey for either Kmart or Sears.

"We haven't determined the brand positioning yet. It won't be an ad campaign, and we won't make a promise we can't fulfill," he said.

But other things can be fixed in the meantime, he said. For instance, Sears' phone systems drop about 20 percent of customer calls.

Lampert and Lewis did allow that there had been some mistakes during their first year.

Sears Essentials, a chain of 50 former Kmart stores that were filled with Sears merchandise and convenience items like milk and snacks, has been a bust and is being renamed Sears Grand.

"We probably made a dozen mistakes, from the labor model to the product mix," Lampert said. "We're trying to fix those stores."

At Sears' core chain, apparel continued to be disappointment despite the previous regime's efforts to be more trend-right and fashion-forward.

"Apparel has been a big opportunity at Sears, sort of, forever," Lampert said. "There was a strategy last year to get ahead of customers--that didn't work that well. We're going back to basics."

To that end, Lands' Ends, the preppy apparel catalog company acquired by Sears in 2002, will play a bigger role in Sears stores.

"What we have at Lands' End is unique," Lampert said. "If we can ever get that right, it's a big opportunity."

Lewis predicted that Sears' steep sales declines might stabilize by the end of the year.

"No one likes double-digit sales declines, but we were renting sales," he said. "There's no reason we can't win the marketplace if we get it right."

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Sears Stores Haven't Opted To Sell Martha Goods
By Desiree J. Hanford – Dow Jones Newswires
April 12, 2006

HOFFMAN ESTATES, Ill. -- Sears Holdings Corp. (SHLD) hasn't put Martha Stewart-branded products in Sears stores because it's unsure whether it would be able to keep the brand in the stores "for a long time," Sears Holdings Chairman Eddie Lampert said Wednesday.

Speaking at the Sears Holdings' annual meeting, which was held at the company's headquarters here, and with reporters afterward, Lampert said the contract between Kmart stores and Martha Stewart Living Omnimedia Inc. (MSO) ends in four years. The contract allows the retailer to put the Stewart brand in Sears stores, and the retailer would do that if it thought that it was a good idea, he said.

Lampert added that the retailer doesn't want to have to pull a product off shelves after just two, three or four years.

Kmart stores have sold Martha Stewart-branded products since before Kmart filed for bankruptcy protection under previous management. Kmart acquired Sears in March 2005 after emerging from bankruptcy, and there's been speculation since that time that the company might put Stewart's products in Sears stores.

Martha Stewart Living Omnimedia inked a deal with Federated Department Stores Inc.'s (FD) Macy's unit last week, putting Martha Stewart-branded home furnishings in Macy's stores. The five-year deal begins next year and includes dinnerware, cookware and bed and bath products.

Sears Holdings wants its relationship with Martha Stewart Living to remain a good one, Lampert said.

"I think we've treated the Martha Stewart brand really well," Lampert said of its presence in Kmart stores. "It makes sense for us and them, the relationship will continue."

"We have a contract with Kmart through the end of the decade," Martha Stewart Living said in a written statement Wednesday. "We remain committed to working with them to deliver the distinctive products that Kmart customers have come to expect from us."

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Martha says no to Sears
Attempt to add Stewart's housewares line at Sears stores fails
By Susan Chandler - staff reporter – Chicago Tribune
April 13, 2006

The talks between Eddie and Martha have broken down.

Sears Holdings Corp. Chairman Edward Lampert acknowledged as much Wednesday, saying customers won't be seeing Martha Stewart's housewares in Sears stores because the two sides haven't been able to come to terms.

"We've tried to have a bigger relationship with them, and we haven't been successful," Lampert told reporters after Hoffman Estates-based Sears Holdings' annual meeting. "Maybe they don't like us anymore," he added, referring to Stewart's recently announced plans to design a more upscale line of housewares for Macy's, the national department store chain.

Expanding distribution of Kmart's popular Martha Stewart Everyday line to Sears was supposed to be one of the major synergies behind Kmart's acquisition of Sears, Roebuck and Co. last year. Stewart's array of home goods was Kmart's best-known exclusive brand, and one of the few things the struggling chain had going for it.

But Stewart's long-term contract with Kmart contained rich guarantees that Lampert was trying to renegotiate in exchange for expanding the merchandise to Sears' nearly 900 stores, sources previously told the Tribune.

On Wednesday, Lampert said the contract gives him the right to roll out Martha Stewart in Sears, but the move wouldn't make sense because the contract has only four years to run.

"A lot changes in four years, but we would like to make sure there is continuity in what we do," he said.

Lampert also raised the possibility that Martha Stewart has become overexposed.

"You see her everywhere," he said. "I don't know how much time she spends on the product."

In response, Martha Stewart Living Omnimedia Inc. said, "We have a contract with Kmart through the end of the decade. We remain committed to working with them to deliver the distinctive products that Kmart customers have come to expect from us."

Sears shareholders took the breakdown in stride.

In fact, Sears Holdings' first annual meeting was a virtual lovefest, with shareholders praising Lampert for much of the nearly two hours he spent answering questions. It was a sharp contrast from last year's Sears, Roebuck and Co. meeting, when angry Sears shareholders vented their unhappiness with the Kmart deal, and security guards ended the 20-minute question period by flanking a shareholder who tried to fit in one more question.

This year's gathering at Sears' headquarters was sparsely attended, with dozens of chairs remaining empty. Many shareholders hailed from hedge funds and other investment firms and have held their Sears Holdings stock since Lampert, a hedge-fund operator himself, took the helm. Only a few dozen mom-and-pop shareholders were in attendance, the type that used to fill the seats at Sears' annual meetings.

The new unanimity was expressed in the in-favor vote totals on the four proposals up for shareholder approval: 99.07 percent; 96.64 percent; 98.05 percent and 99.36 percent.

Some of the old-timers turned out to be Lampert fans as well.

"You've turned the battleship around. Keep up the good work, captain," said one shareholder who said he had held Sears stock since 1970.

Another small shareholder was far less complimentary. She accused Lampert of conspiring with former Sears CEO Alan Lacy to hide the fact that the two were secretly discussing a potential merger in the summer of 2004 when Sears purchased 50 stores from Kmart at premium prices, which was revealed later in regulatory filings.

"Mr. Lampert was more than an influence in the mismanagement of Sears Roebuck from the time of his initial stock purchase in October 2000," said Carmen Liggett of Indianapolis. "It is my opinion that you were a ghost CEO directing Alan Lacy in his failed leadership."

Lampert declined to respond and took another question.

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Furniture, new luxury items in Sears' plans
By Sandra Guy – Chicago Sun-Times
April 13, 2006

Sears executives are still grasping for ways to lure shoppers back to Sears and Kmart stores, one year after hedge-fund billionaire Edward S. Lampert engineered Kmart's audacious $12.3 billion takeover of Sears Roebuck.

A few certainties emerged at the first shareholders' meeting of the newly combined Sears Holdings Corp.: Lampert sees great opportunity in home fashions without Martha Stewart, even though Kmart's existing contract with Stewart gives the parent company the right to sell her goods in Sears Roebuck stores.

Stewart's contract exacts too high a price in guaranteed minimum royalty fees from Kmart, and the two sides have been unable to work out a long-term agreement, Lampert said. Kmart's contract with Stewart ends in four years.

It doesn't make sense to sell Martha Stewart goods in Sears stores for just a few years, Lampert said. Another sign of the fraying relationship came last week when Stewart agreed to provide higher-end home goods exclusively to Macy's department stores.
Instead, Sears will try again to sell furniture -- this time, ready-to-assemble furniture; will expand to 100 stores its test of high-profile Lands' End "shops," featuring dedicated salespeople and online ordering and hotline telephone access to Lands' End; and introduce a new, private label line of luxury bed and bath products called Everyday Luxe.

"We see a lot of bonds to be built around homeownership," and getting first-time home buyers into Sears stores, said Lampert, who is chairman of Sears Holdings.

Clearly, something must be done: Sales fell 5.3 percent in 2005 from a year earlier -- 8.4 percent at Sears stores and a more hopeful 1.2 percent at Kmart.

The man Lampert called his "partner," Sears President and CEO Aylwin B. Lewis, said the Hoffman Estates-based retailer is no longer looking for a "silver bullet," and will experiment with different ideas in different stores.

"Eventually we'll get it right," Lewis told the Sun-Times editorial board in a meeting Wednesday afternoon.

Lampert and Lewis served up platitudes about transforming Sears' and Kmart's cultures, winning shoppers' hearts with the right mix and price of merchandise, and letting hard-working employees be successful.

Lewis is clearly the go-to man, while Lampert concedes he spends most of his time where he lives, in Greenwich, Conn.
Lewis has led meetings with the company's top 500 executives, and is spelling out Sears' new expectations to store managers who are being brought to the Hoffman Estates headquarters for "eyeball to eyeball" meetings.

Lewis regularly visits stores unannounced, and each time gives a grade of "A" to "F" based upon exacting criteria such as whether a salesperson within 10 feet speaks to him. He travels on store visits two to three days a week.

In the past 90 days, Sears has started testing a program in which salespeople sell products throughout the store, rather than in one department.

Earlier this year, Kmart upended employees' 9-to-5 weekday shifts by installing night and weekend crews to replenish shelves and serve the greater numbers of shoppers in the stores during those times.

Store managers are asked to act as cheerleaders by passing the rules on to their subordinates, and to pledge their allegiance to the new culture. If they don't, they must leave. The result: 35 percent of Sears' 870 store managers have departed since the merger, and 25 percent of Kmart's 1,400 have left.

As for store turnaround strategies, Kmart and Sears will continue to have different mixtures of merchandise, with Kmart selling to urban, lower-income shoppers and Sears to middle America.

But Sears' most stalwart brands -- Kenmore appliances, Craftsman tools and Die-Hard batteries -- are popular at Kmart, and they will be part of a ramp-up in Kmart store renovations nationwide.

Both Kmart and Sears are getting upgraded information technology systems in stores, and concentrating on the basics such as cleaning the bathrooms, stocking the shelves and sourcing merchandise that customers want, Lewis said.

Sears is digging deeper into the Sears credit-card database to get a better idea of who its customers are. The retailer has set up a scanning system to tell whether an item is in stock and, if so, where it is located in the stockroom. The efforts are necessary because Sears intends to make its Web sites a more integrated part of the retail businesses.

Lewis said he has no illusions that shoppers will pick Sears or Kmart above its rivals. But he'd like for shoppers to consider Sears and Kmart as possibilities.

The stores must be more compelling and exciting to baby boomers and to children, he said.

Chicago will play a big role in the transformation, and Sears intends to stay at its downtown State Street location, Lewis said.

Whether Lampert will stay for the long-term vision to play out is unknown.

Lampert, 43, gave a typically circuitous answer when asked at the shareholders' meeting how long he would remain Sears chairman.

"Many people stay on way beyond their time," he said, yet added in the next breath, "I'm relatively young and I enjoy what I'm doing."

In his first Sears Holdings annual meeting, Lampert made clear that he had little time for critics, including shareholder and former employee Carmen Liggett, who questioned why Lampert and former CEO Alan Lacy didn't outline for shareholders plans for Kmart's takeover of Sears Roebuck.

Lampert refused to spell out answers in response to Liggett, who was fired Dec. 30, 2004, after she made public her plan to criticize the retailer.

In contrast, Lampert gave long, philosophical answers on his views about everything from dividends to labor unions when addressing Sears Holdings' hedge-fund investors who voiced their admiration of his strategies.

Some of his answers were hard to comprehend but seemed to gain approval from his admirers: "Everything is relative. Spending more doesn't always mean better," he said. "Spending less doesn't always mean worse."

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Wal-Mart Sticks With Fast Pace Of Expansion Despite Toll on Sales
By Kris Hudson – Wall Street Journal
April 13, 2006

After decades of relentless expansion in the U.S., Wal-Mart Stores Inc. is cannibalizing its own business in many markets. But the huge retailer says the strategy of opening new stores that compete with older ones is paying off and will continue, despite Wall Street's rising dissatisfaction.

When the Bentonville, Ark., company opens new Wal-Mart stores in markets already served by older ones, same-store sales -- sales at stores open for at least a year -- average two percentage points below those for stores free of competing new stores. More broadly, Wal-Mart's return on capital spending -- mostly on new stores -- has fallen in recent years, meaning that the company is earning less for every additional dollar it spends on expansion.

In the year ended Jan. 31, same-store sales grew 3.4%, down from a peak of 9% in the late '90s and compared with 5.6% for archrival Target Corp. last year. Wall Street has taken note. The retailer's stock is down about 28% from its five-year high in early 2002, even as net income has risen 68%. In 4 p.m. composite trading on the New York Stock Exchange yesterday, Wal-Mart shares were at $45.90, up 40 cents.

Some Wal-Mart watchers want the company to slow its expansion and channel more resources into improving the appearance of existing stores and upgrading its merchandise to entice shoppers to spend more. "What hurts the company and ultimately the value of its stock price is if you're paying more for the real estate but getting less and less out of it," says Morgan Stanley analyst Gregory Melich.

But Wal-Mart executives, who wouldn't comment for this article, have vowed to maintain the pace of expansion, arguing that new stores add to Wal-Mart's aggregate sales and profit even if the result is less from each store individually.

"We would much prefer to increase growth rather than increase already very high -- way higher than acceptable -- returns," Wal-Mart Chief Financial Officer Tom Schoewe told analysts at the retailer's annual meeting last June. "And, in fact, if those returns were to come down a bit and we could grow faster, that would be just fine by me and...for our investors."

Wal-Mart points out that cannibalization saps only one percentage point from same-store sales growth nationally. However, that's a notable sacrifice when the retailer's same-store gains already are slowing, some analysts say.

Other big-box retailers that grew explosively in the 1980s and 1990s have met the same predicament Wal-Mart faces. Atlanta-based Home Depot Inc. reported in 2002 and 2003 that it sacrificed four percentage points of same-store sales to cannibalization as it raced to open 180 to 200 stores a year. Since then, Home Depot has slowed the pace to 80 to 100 new stores a year and turned for growth to new businesses such as wholesale supply. Meanwhile, the home-improvement retailer's stock has doubled.

But Wal-Mart isn't slowing down. It plans this year to expand its square footage globally by 8% -- its typical annual goal. In recent years, that has translated to 8% annual growth in the U.S., as well. At that pace, Wal-Mart alone -- not counting its Sam's Club stores -- will account for about 27% of the 150 million square feet of retail space forecast to be constructed in the U.S. this year, according to Property & Portfolio Research Inc. Included in its plans this year are up to 370 new Wal-Mart stores (the company won't say where), including store relocations and expansions, to add to the existing 3,900. Wal-Mart also has more than 1,500 potential store sites in the U.S. in various phases of review for construction.

When deciding where to put all these new stores, Wal-Mart has two options: continue to cannibalize in markets it already dominates -- Wal-Mart executives call it "market development" -- or push further into new markets like California and the Northeast, where land and labor typically cost more, government approvals take longer and shoppers are less enamored of the retailer.

Either way, the company is looking at a likely continuing drop in return on its investments. From 2003 to 2005, Wal-Mart's yearly capital spending grew by $4.3 billion, while its operating cash flow grew by just $1.6 billion. In several years previously, growth in operating cash flow exceeded capital spending.

At Target, meanwhile, operating cash flow grew at nearly double the rate of capital spending from 2003 to 2005. Target opens fewer stores each year than Wal-Mart, and it tends to choose densely populated locales because its merchandise appeals more to higher-income urban shoppers than Wal-Mart's.

Returns on capital spending can be measured in many ways, but Wal-Mart's are declining by most. That means the retailer has "picked all the low-hanging fruit" of U.S. store sites, according Morgan Stanley's Mr. Melich. "To the extent that you see cannibalization, that's a hint that more of those [new] stores are coming in the markets where they already have a strong presence."

In the past, Wal-Mart executives have argued that rather than remaining happy with two stores with $100 million in annual sales each in a given market, Wal-Mart would often prefer to add a third store there. That's because, even if the three would then generate only $80 million each in annual sales, the combined sales of $240 million would still exceed the $200 million from the original two stores.

Further, they have said, a cannibalized market's sales and profits will increase with time as the population grows and shorter lines and reduced congestion lure more customers. "It's a near-term hit for a long-term opportunity, basically," says Goldman Sachs analyst Adrianne Shapira.

Consider the situation in and around Wal-Mart's home base of Benton County, Ark. There, the company was operating three stores before adding two last year. Same-store sales at each of the established stores were down an average 7.4% by September. However, the entire cluster of five stores, including the new ones, saw an 18% jump in combined sales, a 9% rise in profit and a 10% increase in operating cash flow in the same span.

Wal-Mart is striving to bolster its returns by buying more goods directly from overseas and paring its inventory costs by billions of dollars. "It is costing us more...per square foot to build these stores," Wal-Mart Treasurer Joseph "Jay" Fitzsimmons said at a Morgan Stanley conference in November. "We compensate for that in part because these stores are more productive. They have a tendency to be in the coastal areas or the urban areas, and we're getting more sales volume out of it. But that doesn't make up for the entire increase in the fixed asset cost."

Eventually, the retailer may conclude that it's time to slow the pace of expansion. "At some point, the returns get so diminished by adding that one more store that...it's not the highest and best use of your dollars," says Patricia Edwards, managing director and retail specialist at investment-management firm Wentworth, Hauser & Violich in Seattle. "The question is how much of a trade-off they're willing to make between return on invested capital and their quest for world domination."

Wentworth Hauser, which manages $6.6 billion, held 1.2 million Wal-Mart shares in 2004 but has since sold the majority and now holds about 59,000.

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Sears Chairman Works to Emphasize Selling
By Michael Barbaro – New York Times
April 13, 2006

billionaire investor who pulled off the unlikely merger of Sears, Roebuck and Kmart is undertaking another challenge: creating a business culture focused on selling.

For 90 minutes on Wednesday, the investor, Edward S. Lampert, the normally reclusive chairman of Sears Holding, spoke expansively about the need to change attitudes and work habits at the merged company.

One effort is already under way: assembling the company's top 500 managers here for marathon training sessions, where a film clip from "Miracle on Ice," about the United States hockey team that won the gold medal at the 1980 Winter Olympics, is used to promote team work and improve customer service.

"In the past, we had a situation where people worked here but could not get results," Mr. Lampert said during the first shareholder meeting for the newly formed retailer. "We need to invest in those people."

But one cultural change that analysts and investors wanted to see — the disclosure of a detailed plan for Sears — remained elusive. Mr. Lampert said there was no need to articulate a "grand strategy" because the $55 billion retailer must remain flexible. Investors and employees, he said, "must be comfortable with ambiguity and with failure."

But he did give some hints about his plans, saying that Sears would upgrade its Lands' End clothing lines; that the popular Martha Stewart. Everyday line of housewares, which analysts expected Sears to carry, would remain exclusive to Kmart; and that the company would not pay a dividend, but rather reinvest that money in operations.

Analysts have noted that Mr. Lampert's strategy of experimentation has yielded mixed results. Broad cost-cutting has increased profits and the share price but has damped revenue, prompting some concern that Mr. Lampert was trying to squeeze money — rather than long-term success — out of the company.

Efforts to reduce discounting, while perhaps decreasing sales, have improved operating profit by 38 percent, according to Deutsche Bank.

During an unusually candid question-and-answer session on Wednesday, Mr. Lampert, who is often criticized for sharing little information with stockholders, discussed a range of topics, talking at great length and, in many cases, not about Sears.

He expressed dismay with a law in Maryland aimed at forcing Wal-Mart  to pay more for health insurance; offered the opinion that organized labor has hampered the airline and automobile industries; and recommended, for shareholders' edification, a book called "Crazy Busy", about the drawbacks of multitasking.

He also acknowledged missteps since the merger, like the ill-fated Sears Essentials format, which failed because of what Mr. Lampert called a dozen mistakes, including how workers were deployed in the store and the mix of products.

But at a time when the company's revenue has slipped, the biggest emphasis Wednesday was on the employee culture at Sears and Kmart.

One result of that emphasis is a program that allows workers at Sears stores who collect commissions to sell products across the store, not just in a niche area like refrigerators or dishwashers.

Mr. Lampert acknowledged that critics might frown on his focus on or Microsoft ."

He cited the example of Sears employees who used up to three coupons to buy a product at the store but were willing to pay full price at a rival, Target. "That's something to learn from," he said.

In a sign of how seriously Sears executives are taking corporate culture, the chief executive, Aylwin B. Lewis, said that he and Mr. Lampert had spent 90 days developing a relatively short vision-and-mission statement and defining its every word.

The shift, Mr. Lewis said in an interview after the shareholder meeting, was more than just symbolic. In the last year, the company has replaced 35 percent of store managers at Sears and 25 percent of store managers at Kmart, saying they did not meet tough new standards. Typically, the turnover rate among store managers is 10 percent a year.

"It's not the heartless whacking of people," Mr. Lewis said, "but telling them we are serious about our new standards."

Sears Holding has struggled to find its footing since the merger in 2004 of Kmart and Sears, two once-venerable names in retailing that had fallen out of favor.

The merger was promoted as a chance to cross-pollinate brands — stocking the popular Craftsman line of tools at Kmart and placing Martha Stewart Everyday products inside Sears.

To a certain degree that has worked, executives said, but the products have flowed primarily from Sears into Kmart, not vice versa.

Mr. Lampert shed some light on one Kmart line, explaining that he did not want to put Martha Stewart Everyday into Sears, with the contract up for renegotiation in four years. He also expressed some chagrin over Ms. Stewart's decision, announced last week, to sell a line of home furnishings at a Sears rival, Federated Department Stores.

Finding the right retail format for the combined company has also proved tricky. The Sears Essentials concept, intended to combine the best elements from both companies in a small store, performed so poorly that plans for expansion were dropped this year.

Mr. Lampert said the concept "confused shoppers."

"What does Essentials mean — milk and bread?" he said, explaining consumers' response.

Now, Sears is focused on the Sears Grand format, larger stores designed to resemble big box stores like Wal-Mart and Target, with food and pharmacy items. So far, the stores have performed well, Mr. Lampert said.

Analysts have hinted that Mr. Lampert, the largest shareholder in Sears, has invested too little into remodeling stores, which could improve sales. Referring to those complaints, Mr. Lampert said he would not throw money at stores to satisfy critics.

"Our goal is not to take as much as possible out of the company and watch it founder," he said.

"Our better stores will get more investments," he added, while poorly performing stores "will have to earn that investment."

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Sears chairman down on dividends
By Jennifer Waters - MarketWatch
April 12, 2006

HOFFMAN ESTATES, ILL. (MarketWatch) -- Sears Holdings Corp. shareholders will find themselves mightily disappointed if they were hoping for a dividend any time soon.

Edward Lampert, chairman of the parent of Sears Roebuck and Kmart stores, told investors at Wednesday's annual meeting here that he's more likely to repurchase shares than write out dividend checks.

"With dividend taxation today the same as long-term capital gains, it's really a disadvantage," he told the sparse, but friendly crowd. With a corporate buyback program stockholders get more value for each share and are not forced into taking money, he said.

"If shareholders want a 5% dividend, they can choose to sell 5% of their stock into the repurchase," he said. Last week, Sears Holdings'  board expanded its $1 billion buyback program launched in September by another $500 million.

Jennifer Waters is a reporter for MarketWatch based in Chicago.

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Sears's Lampert Plans to Build Retailer, Keep Land
BLOOMBERG.COM
April 12, 2006

Sears Holdings Corp. Chairman Edward Lampert said he is committed to building the retailer and won't sell large portions of real estate.

“It's a shame to have to sell stores to other retailers,'' Lampert said today at the company's annual meeting in Hoffman Estates, Illinois. A store should be making more from its operations than the value of its real estate, he said.

Lampert, the hedge-fund manager who engineered Kmart Holding Corp.'s purchase of Sears, Roebuck & Co. a year ago, said he will hold the line on discounts and consider additional acquisitions. Under Lampert, the largest U.S. department-store company is cutting costs and adding exclusive brands to try to reverse declines in comparable-store sales.

Shares of Sears fell 75 cents to $139.30 at 4 p.m. in Nasdaq Stock Market composite trading.

Speaking to shareholders at the company's headquarters, Lampert said he's trying to change the culture of the more than 100-year-old merchant.

“Flexibility and adaptability is what it's all about,'' Lampert said. ``Whether it's Goldman Sachs or GE, those companies are not the same as they were 50 years ago. We're going to need to be different and better. One thing we have right now is scale.''

Lampert, 43, combined Sears with Kmart in a $12.3 billion acquisition that created a company with 3,843 stores in the U.S. and Canada.

Shareholder Questions

About 250 people attended the annual meeting. For 90- minutes, Lampert answered shareholder questions that focused mostly on what he plans to do with the company's $4.4 billion in cash. One stockholder said Lampert was too secretive about the company's operations and plans, while another cheered his practice of explaining decisions in open letters to shareholders, which are posted on Sears's Web site.

Lampert said he will limit discounts to protect profits. ``More sales are better than less, assuming they are the right type of sales,'' he said. ``Our employees pay full price at Target but they use coupons at Sears. Something to think about.''

In the last fiscal year, sales at stores open at least a year fell 8.4 percent at Sears locations, hurt by a decline in apparel. At Kmart, same-store sales dropped 1.2 percent because of weak demand for home goods and food.

“Kmart has stabilized,'' Lampert said.

Sears stores do not plan to add Martha Stewart merchandise because Kmart's eight-year agreement only has four years left to run and the company does not want to have to pull the product from the stores, Lampert said during a press conference.

Right Direction

“People are starting to realize that Sears is moving in the right direction and is a good investment,'' said Scott Rothbort, president of Millburn, New Jersey-based Lakeview Asset Management, which owns Sears's shares.

Lampert told shareholders he hasn't ruled out additional stock repurchases and said the buybacks are a way to pay a dividend without the same tax consequences.

In 2005, Sears announced a $1 billion stock repurchase and since September has bought 8 million shares, reducing its shares outstanding by almost 5 percent. On April 5, Sears said it would repurchase an additional $500 million of stock.

Since buying Sears in March 2005, Lampert has removed Alan Lacy as chief executive officer, shut Kmart's Troy, Michigan, headquarters and fired more than 1,500 employees. He also took direct control of marketing, merchandising and the Internet business.

Falling Sales

Sears is trying to reverse falling sales by adding exclusive clothing brands and home goods by designers such as Ty Pennington, while Kmart is offering Sears brands including DieHard Batteries.

A former risk-arbitrage executive at Goldman Sachs Group Inc., Lampert heads ESL Investments Inc., a hedge-fund company in Greenwich, Connecticut. He has focused on buying undervalued companies and said he's a student of billionaire Warren Buffett's investment philosophy of buying assets shunned by others.

Sears said on March 15 fourth-quarter net income was $648 million, or $4.03 a share. Profit exceeded analysts' estimates, and revenue was $16.1 billion. A year earlier, the company earned $589 million, or $3.62, and had revenue of $16.8 billion. Those figures are calculated as if the companies had combined at the beginning of fiscal 2004.

For the year ended Jan. 28, Sears earned profit of $858 million, or $5.59 per share, on revenue of $49.1 billion.

Sears's shares have climbed 21 percent this year. Federated Department Stores Inc., the second-largest department-store company, rose 12 percent during the same period, while No. 3 J.C. Penney Co. gained 6.6 percent.

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Lambert focuses on culture, share
By Jennifer Waters - MarketWatch
April 12, 2006

HOFFMAN ESTATES, Ill. (MarketWatch) -- Sears Holdings Corp. Chairman Edward Lampert assured shareholders Wednesday that the company was in strong financial shape, but stopped short of outlining a merchandising or marketing strategy to increase sales at Sears and Kmart stores and regain lost market share.

Instead, he focused many of his remarks on efforts the company has made to combine the two divergent cultures: the Sears business in this Chicago suburb, and the Troy, Mich.-based headquarters of Kmart stores now relocated here.

"We are setting up a culture where people are comfortable with ambiguity, people are comfortable with failure and are not afraid to try things and not afraid to admit when things are wrong," Lampert told a relatively sparse crowd. "We're not going to just dig into any idea."

His second confab with investors at the company's headquarters was considerably cozier -- and longer -- than last year's. Gone was the tension brought on a year ago by a number of disgruntled former employees and longtime shareholders, who griped that Lampert was destroying a long-held heritage in retailing by combining Sears with the discount Kmart chain.

Lampert, who has been criticized for being uncommunicative with shareholders, fielded questions for nearly 90 minutes, stopping only when there weren't any left. He touched on a number of disparate topics ranging from an apparent obsession with corporate culture to multitasking, using a more folksy style than the defensive posture he took on a year ago. He gave candid and often long-winded answers, and easily acknowledged and then dodged the only hardball question thrown at him.

While he talked openly about the company's need to be relevant with consumers, he offered no hints on what the retailers are doing to step up apparel sales or hold on to electronics and big-appliance market share, business that competitors such as Wal-Mart Stores Inc. and Best Buy Co. are nibbling at aggressively.
Lampert did note, however, that he's got some 350,000 employees he needs to convince first to buy merchandise at Sears and Kmart stores at full price rather than with coupons.

"We felt in certain cases we were overly promotional," he said. "Our own employees are using three or four coupons to buy products. That suggests that's the only way to get people to buy things. That's not a good thing.
"Not every transaction for us will be profitable, but we like to think that we're providing enough value for customers," he added.

Past the merger

Along with Chief Executive Aylwin Lewis, Lampert supported his flexible -- or, as some would say, directionless -- approach to spending and to the strategic course of the company.

"We hear a lot about not having a grand strategy," Lewis said. "We're very slave-ish to driving this business and improving this business through a very back-to-basics approach in all segments.

"We stopped thinking about the business as post-merger," he added. "Now we're just about running the business."

Lewis introduced a number of senior managers, many of them new to the company or in new positions, but did not offer any insight into what they were doing to drive sales or improve apparel offerings.

"We are pushing the needle," he asserted. "The fastest way to get a great store is to get a great store leader, and that's what we're focusing on to get better stores."

Lampert claimed that critics misread his intentions when he brought the two companies together in an $11 billion deal first announced in last 2004.

He repeated remarks he made last year about unloading real estate to build profits as a strategy. "No retail company should aspire to have the value of its real estate worth more than its operation," he said.

"The Sears/Kmart merger took a company rich with heritage and rich with brands and combined it with a company rich with real estate," he added. "What the merger has done is open up more opportunity for both companies. I don't think people appreciate certain limitations that existed for Sears' management prior to the merger and for Kmart before the merger, and how we now have a lot more flexibility.

"The decision to merge the two companies is looking better today than even it did a year ago."
Lambert continued: "We will make mistakes. We try to dissect what's working and what's not working and do more of what's working."

He pointed to the choice to abandon the Sears Essentials concept -- a store model he characterized as "confusing" -- at the same time that he's updating other Sears department stores and Kmart stores.

"It's hard for certain cultures to be able to do multiple projects at the same time without people thinking there's no strategy," he said. "And the strategy is: Let's try to do a bunch of different things and see what works."

Although he's not actively pursuing acquisitions, Lampert noted that he is open to them, including those that might not fit with retailing. "Potentially, there could be" nonstrategic acquisitions, "but we ought to try to do the strategic things first."

He said that he has "stabilized" the Kmart business and that cross-selling Sears products such as certain Craftsman, Kenmore and Diehard products has been successful.

Living without Martha

Lampert is giving up, however, a move to cross-sell Kmart's Everyday Living line by Martha Stewart into the Sears stores. He said that negotiations with Martha Stewart Living Omnimedia for a multiyear extension on its exclusive contract failed, making it unclear how long he would be able to sell her products in the Sears stores.

The Kmart contract, which would allow for the Sears cross-over, expires in 2009.

Sounding annoyed by her announcement with Federated Department Stores last week that an upscale home-goods line would be launched at Macy's next year, Lampert said that it's not in the best interest of Sears to put the products in those stores.

"If we thought it was the right thing to do, we would do it," he added.

Notably missing from the meeting was Alan Lacy, vice chairman of the corporation. Lacy was at the helm of Sears Roebuck & Co. when the company was merged, and last year was reassigned to the corporate duties from the day-to-day operations. Though he was a major presence at last year's meeting, there was not even a mention of him Wednesday.

Jennifer Waters is a reporter for MarketWatch based in Chicago.

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Sears Holdings to invest in stores, technology
By Emily Kaiser - Reuters
April 12, 2006

HOFFMAN ESTATES, Illinois (Reuters) - Sears Holdings Corp. said on Wednesday it plans to invest in its stores and technology, one year after completing the blockbuster deal that combined struggling retail icons Sears and Kmart to create the third-largest U.S. retailer.

At its first annual shareholder meeting, Sears Holdings said integration efforts were largely complete, and it was time to focus on fixing merchandise and infrastructure problems that have contributed to steep sales declines.

"We're going to watch every single penny, but we're also going to make investments that we think make sense," Chairman Edward Lampert said. "I think you'll see many more Kmart remodels this year than we did last year. Hopefully we'll do more going forward."

Lampert spent nearly two hours answering questions from a handful of investors at the meeting, which drew only a few dozen people besides Sears staff and journalists. Topics ranged from Lampert's views on dividends (he is not a big fan) to his favorite books ("Crazy Busy" by Edward Hallowell).

Investors seemed willing to put their faith in Lampert, and the mood was generally upbeat even though the stock price has fallen about 5 percent in the past year.

Lampert, the hedge fund manager who brought Kmart out of bankruptcy in 2003 and orchestrated the takeover of Sears, Roebuck & Co. last year, has built up a cash pile of more than $4 billion by cutting back on store investment and eliminating profit-crunching clearance sales.

Those efforts have come at a price -- sales at Sears stores open at least a year dropped 12.2 percent in the latest quarter, although they were up slightly at Kmart.

Analysts point out that competitors such as Wal-Mart Stores Inc. spend far more money per store than Sears Holdings has, and their sales are growing.

But Lampert argues that profitable growth is the key, and same-store sales are not a good measure of whether a company is spending its money wisely.

"We think more sales are better than less sales, assuming that they're the right kind of sales," Lampert said.

While Kmart has stabilized, Sears stores are still generating too much of the wrong kind of sales, Lampert said. He said the retailer's own employees often use three or four coupons to buy Sears merchandise, but will pay full price at Target stores.

His own shopping experiences haven't always been ideal either. Lampert said he wanted to buy an Xbox video game system, but the Sears store had only the console, not the games and accessories. He had to go to a Kmart three miles away for those. The stores were not communicating with each other.

To solve those problems, Sears Holdings plans to invest heavily in infrastructure upgrades, particularly information technology -- a strength for competitors such as Wal-Mart.

The retailer does not intend to sell off chunks of its valuable real estate to fund major acquisitions -- something that many shareholders had expected Lampert to do after he sold dozens of Kmart stores.

"No retailer should aspire to have real estate worth more than their operating business," Lampert said, adding that it was frustrating for him to see rival retailers make money off of stores that Kmart could not operate profitably.

Lampert offered few clues as to how the retailer would spend its billions of dollars in cash, but dividends are probably not high on the list.

Investors asked whether Sears Holdings would pay a dividend, but Lampert said shareholders should sell some stock if they wanted cash. He said dividends force all shareholders to take money out of the company and pay taxes on it, even if they don't want to reduce their holdings.

And since Lampert owns more than 40 percent of the stock, a great deal of that money would go directly to him anyway, Lampert noted. He takes no salary, stock options or fees, so his fortunes are tied directly to the stock price.

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No Martha Stewart in Sears stores
By Jennifer Waters - MarketWatch
April 12, 2006

HOFFMAN ESTATES, Ill. (MarketWatch) -- Martha Stewart won't be selling her household goods at Sears stores anytime soon, the retailer's top executive said Wednesday.

Sears Holdings Corp. Chairman Edward Lampert told shareholders that the contract the company has with Martha Stewart Living Omnimedia to sell the Everyday Living brand of housewares in Kmart stores runs out in four years.

Though he is contractually able to extend the line into the Sears stores -- and was in negotiations with Martha Stewart Living to do so -- Lampert announced that he's taking a pass because it's unclear the contract will be extended after it expires.

"We don't know that we would be able to continue to do it for a long time," the executive said after the company's annual meeting. "If we put a product into Sears, we don't want to have to pull it out two or three years from now."
Kmart and Stewart inked the agreement in 1997. Since Lampert merged Kmart's operations with Sears last year, he has been trying to extend the pact before placing the products in the Sears stores. He is successfully selling certain merchandise from Sears' exclusive Craftsman, Kenmore and Diehard brands in Kmart stores.

"We tried to have a bigger relationship with [Martha Stewart Living], but we haven't been successful in doing that," Lampert added.

Last week, Martha Stewart announced that she will begin selling a more upscale line of home products in Macy's stores, a division of Federated Department Stores by fall 2007. She said then that the two lines will not compete with each other or violate the Kmart contract, because they are aimed at different customers and carry different price points.

As for deepening the ties with Stewart after the Kmart contract expires, Lampert said: "Lots of things can change in four years. Maybe they won't like us anymore. Maybe they'll get a better deal somewhere else. Maybe they'll want to position themselves different strategically.

"From our standpoint, [Everyday Living] is an important part of our business right now," he added. "But the deal with Macy's shows that they were looking at other options."

Jennifer Waters is a reporter for MarketWatch based in Chicago.

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Sears' State Street store finally turns a profit
Retailer to keep flagship outlet open; store lost money in 2004
By Sandra Jones Crain’s Chicago Business
April 12, 2006

Sears Holdings Corp. plans to keep its five-year-old flagship on State Street open, Sears CEO Aylwin Lewis said at a press conference following the company’s annual shareholders meeting today.

The store made a profit in 2005, he added.

That’s an improvement from 2004 when Sears told the city in a letter that sales at the State Street store were more than half of what the company had projected and that the “lower revenue has resulted in a substantial negative contribution to profit by the State Street store in the millions of dollars.”

The Hoffman Estates-based retailer opened the giant store at State and Madison Streets with much fanfare in 2001, but had trouble adjusting to the demands of urban shoppers. The retailer received $13.5 million in tax-increment financing from the city, almost half of the $29 million required to build the store and surrounding streetscape.

The TIF agreement requires Sears to employ a minimum of 125 full-time workers and to require annual status reports with the city. The city reduced the employment requirement in 2004 from the original 200 after Sears claimed “economic hardship.” Sears 2005 report is expected to be filed with the city in August.

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Sears financially strong despite slow sales: Lampert
Crain’s Chicago Business Online
April 12, 2006

Sears Holdings Corp. assured shareholders Wednesday that the company is very strong financially despite sagging sales and is working hard to improve its Kmart and Sears, Roebuck & Co. stores.

Just over a year after the merger of the two slumping retailers, Lampert was upbeat about the stores' prospects at the company's annual meeting but did not provide a blueprint for what he envisions for the long-lagging brands.

"In terms of vision, flexibility and adaptability is what it's all about," he said during two hours of fielding questions from the approximately 100 shareholders who attended the meeting at company headquarters.

Many industry observers have speculated Lampert would ultimately like to turn Sears Holdings into an investment giant along the lines of Berkshire Hathaway, a company he admires, and take it far beyond retail. But the billionaire chairman, who runs Sears from the Greenwich, Conn., home of his ESL Investments hedge fund, again did little to tip his hand beyond indicating that fixing the stores is the top short-term priority.

"We are a very financially strong company, and we're constantly evaluating our options," he said. "If an environment was rich for making acquisitions, we might do that. If we found that things we were doing in the stores weren't working so well, we might accelerate the rollout" of retooled stores, he added.

Turnout was much smaller and the shareholders more supportive than the sometimes-raucous crowd that turned out in Hoffman Estates in March 2005, many upset by the acquisition of more than century-old Sears by a discount retailer not long out of bankruptcy. While some criticized or expressed concern Wednesday about weak sales, the crowd was dominated by professional investors from financial institutions who trust Lampert's impressive track record as an investor and in resuscitating Kmart.

Lampert acknowledged the company had made numerous mistakes, including product mix and labor model, with its short-lived experiment last year with Sears Essentials - the concept that represented somewhat a hybrid of Kmart and Sears. But he said Sears products have been successful in Kmart and stressed that "we're not just cutting costs" but also are adding products and revamping basic operations at stores.

The company will push ahead with the Sears Grand concept this year and also accelerate the pace of Kmart store renovations nationwide, he said.

But importing the Martha Stewart brand from Kmart to Sears stores isn't currently planned despite the products' popularity.

Lampert said the company has been unable to negotiate a long-term deal with Martha Stewart beyond the four years remaining on its contract and doesn't want to commit to the products for just the short term.

Asked to elaborate on the reasons for the company's proposed full acquisition of Sears Canada, he said the Canadian unit has a much better chance of being successful if it's integrated with the parent.

"We can buy together, we can do a lot from an information systems standpoint together," he said. "Working together, we have a lot of opportunities."

Sears Holdings shares rose 7 cents to $140.12 in afternoon trading on the Nasdaq Stock Market, just above the midpoint of their 52-week range of $111.64 to $163.50.

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No conflict of interest in Sears deal
Scotiabank: Advisor, shareholder

By Theresa Tedesco and Boyd Erman,
with files from Hollie Shaw – Canada.com
Financial Post - April 12, 2006

Concerned about the appearance of a conflict of interest, Bank of Nova Scotia obtained a legal opinion from a major law firm before it began advising Sears Holdings Corp.'s proposed takeover of its Canadian subsidiary this year.

The bank also placed all trading of its Sears Canada Inc. shares on a restricted list. "From the point of the engagement as advisor, there has been no trading of Sears Canada shares by Scotiabank," said bank spokesman Frank Switzer.

In recent days, Pershing Square Capital Management, a New York-based hedge fund, has threatened to block the takeover deal in court.

Sources say the hedge fund is concerned about the perception of a conflict of interest at Scotiabank. The concern is over the bank's role as the parent company's financial advisor on the $899-million transaction and because Scotiabank is among a handful of "special shareholders" who have agreed to vote for the privatization and tender their shares for $18 each in December, 2006.

Sources say Scotiabank holds about 4.5 million Sears Canada shares in a stock-swap agreement with SunTrust Banks Inc., which expires in December of this year.

Pershing Square, known for persuading Wendy's International Inc. to spin off its Tim Hortons division, said it has a 5.2% stake in Sears Canada and is also entitled to the economic benefit of another 6.9 million shares.

Sources say Pershing's stock-swap contract is with SunTrust, not Scotiabank.

These types of common derivative agreements allow entities to take an "economic interest" in shares of a company, letting them benefit from any gains but putting them on the hook for any losses.

It is believed Scotiabank entered into such a swap agreement with SunTrust, a long-time U.S. client, last fall. However, the Canadian bank retained ownership of the shares, and more importantly, the voting rights that come with it.

In return, Scotiabank has no exposure to price fluctuations on the Sears Canada stock it owns for the duration of the agreement and receives a low risk, predictable fee income for essentially leasing its shares.

And because Scotiabank retained voting interest, it was able to vote in favour of the U.S. parent's $18-a-share offer to take Sears Canada private even though it can't actually deliver the shares until its swap agreement with SunTrust expires at the end of the year.

Some in the risk arbitrage business, which involves buying shares of a takeover target and then trying to force a higher bid, have questioned Scotiabank's decision to tender 4.5 million Sears Canada shares because that stock helped make the takeover by Sears' U.S. parent a success.

The rule of thumb in merger advisory work is that a firm gets paid when a transaction is completed. By backing the U.S. parent's takeover, some arbitrageurs argue Scotiabank may have thwarted a higher bid because it was motivated by the investment banking fees it would receive from advising on a successful deal. In recent days, analysts at Desjardins Securities have been among the most vocal critics of Scotiabank.

Meanwhile, Pershing Square's attempts to influence deals have also come under scrutiny.

Thomson Financial says the hedge fund has used derivative deals to give the appearance of owning more shares in a company whose future is at stake.

For example, during the push to have Wendy's International Inc. spin off its Tim Hortons chain, Pershing Square "filed a statement of ownership with the SEC that indicated an equity ownership" of 9.9% of Wendy's common shares.

The filing also stated the position consisted of 1.18% of the common stock and call options that gave the company the right to buy more shares, according to a recent Thomson investor relations newsletter

"Mr. Ackman, the director and general partner of Pershing Square, was very proactive in his contact with the media and his intentions to unlock hidden shareholder value in Wendy's stock," the Thomson report said. "With headlines reporting a 9.9% equity stake, he was also successful in getting management's attention."

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In Canada, a Face-off Over Sears
Rival Hedge-Fund Managers Take On Battle for Share Price
of Iconic Retailer's Northern Unit
By Jesse Eisinger – Wall Street Journal
April 12, 2006

Two of the biggest names in hedge funds faced off in a little-noticed clash that took place in wintry Canada.

In one corner was Bill Ackman, the outspoken activist hedge-fund manager who shook up the boardroom of Wendy's and made a high-profile push to break up McDonald's last year.

In the other: Eddie Lampert, the hedge-fund manager who almost single-handedly started the new activism craze by taking over Kmart while it was in bankruptcy court and merging it with the great American icon Sears at the end of 2004.

Shortly after that merger was announced, investors began turning their eyes to the company's sleepy Canadian subsidiary, Sears Canada. While controlled by Sears Holdings, the unit's shares trade on the Toronto Stock Exchange. Mr. Ackman and other investors, many of whom had ridden Sears shares higher, began snapping up shares of Sears Canada in anticipation that Mr. Lampert could turn it around, too.

Initially, that looked like a wise bet. In November of last year, Mr. Lampert sold Sears Canada's credit-card operations and declared a large dividend to shareholders.

In the wake of that news, Mr. Ackman employed some financial wizardry that looked smart at the time. Wanting to protect his tax-exempt investors from a Canadian tax bite, he entered a complex derivative transaction with a U.S. bank. The U.S. bank turned around and entered into a similar deal with a Canadian bank. It wasn't an unusual transaction; other hedge funds in similar situations did the same thing. The upshot was that, for a fee, Mr. Ackman retained the same economic interest in the stock but no longer had the ability to vote the shares.

That didn't matter until a few weeks later when Mr. Lampert's Sears Holdings offered to buy the rest of Sears Canada that it didn't own for C$16.86 (US$14.67) a share. Under Canadian securities law, Mr. Lampert needed a majority of the minority shareholders to sell their shares to him in order to get the deal completed. Once Sears Holdings got a majority, Mr. Lampert could force the remaining shareholders to accept the offer price.

Sears Canada's minority shareholders held out for more, arguing the company deserved a higher bid. The Sears Canada independent directors said they wouldn't stand for re-election because they viewed the Sears offer as inadequate. The independent board committee engaged an investment bank to assess the offer, and it determined Sears Canada was worth between C$19 and C$22.25 a share.

Sears Holdings raised its offer to C$18 a share last week. But it still wasn't looking good for Mr. Lampert. Sears Canada shares kept trading above the C$18 offer price, indicating investors expected Mr. Lampert would raise his bid again.

And then on Friday, Sears said it had locked up the deal. Sears had managed to bring on board two other large shareholders, including Vornado Realty Trust.

"We think $18 is way too cheap," Rich Rubin, who manages Hawkeye Capital, a $350 million hedge fund that owns 1.5 million shares of Sears Canada, said this week. Sears maintains its offer was fair.

Even with the two large minority shareholders agreeing to the deal, Mr. Lampert didn't have enough votes to secure the deal. How did he get over the hump?

There was a mysterious paragraph in the release saying Sears had reached an agreement with "certain shareholders" whereby they would commit to vote shares in favor of Mr. Lampert in December. But the bid expires in August. Why would it take until December? Where were the mystery shares coming from? What investor would take C$18 in December, when it could sell for more on the open market today?

The answer may go back to the Ackman derivatives transaction from last December. In all likelihood, Mr. Ackman's tax strategy ended up providing Mr. Lampert the tool to outmaneuver him.

The Canadian bank ultimately on the other side of the Ackman transaction, Scotiabank, reached the agreement with Sears, pledging 4.5 million shares to back the deal at C$18.

Several hedge-fund managers said it would be unusual for an investment bank to vote in a different direction from the one the client specified. But the entire point of the derivatives transaction was to separate voting and economic interest. So the counterparty must not be directed in how it votes -- or else the transaction would be a sham. However, often an investment bank will stay neutral in such a vote.

Mr. Ackman had scrambled to unwind his swap agreement in order to recapture the voting rights. But the party on the other end of the deal declined, saying it was restricted in trading the shares due to investment-banking conflict. Swaps are typically unwound easily.

"It is the convention in the swap market for a swap dealer to abstain from voting for corporate actions of any kind," says Mr. Ackman. "The notion that a conflicted swap dealer might vote in favor of a transaction that squeezes out their customer and all other minority shareholders at a discount to market and at an enormous discount to fair value is abhorrent. We are looking forward to regulatory and legal scrutiny of this transaction."

It's clear that Mr. Lampert should drive a hard bargain to serve his Sears shareholders (of which he is the largest). But some other Sears Canada investors are troubled by the unfolding events.

Scotia says that it owned its shares outright and didn't pledge shares that it had gotten through a swap agreement. But shares, like money, are fungible and the question remains: Why was Scotia pledging its shares in the first place?

Sears Canada investors fighting for a better price argue that Scotia isn't neutral. Its investment-banking unit, Scotia Capital, is the dealer manager on the Sears Canada offering, representing Sears Holdings. The parent, Bank of Nova Scotia, led a Sears Canada debt deal in December.

Mr. Rubin, the Hawkeye Capital manager, raised issues about Scotia's potential conflict of interest, saying "It smells kind of funny."

Frank Switzer, a spokesman for Scotiabank, says, "We've reached a business decision to pledge the shares, and there was no collateral benefit from Sears Holdings for doing so." He says, "There's no conflict. Scotiabank has complied with all legal and regulatory requirements on this transaction."

After having conducted the swap transaction, Mr. Ackman bought more Sears Canada stock in the market, building his position again. He has an economic interest in 11.6% of Sears Canada and is vowing to continue to fight for a higher price.

Aside from the legitimate questions about Scotia's involvement, Mr. Ackman also seems a victim of his own cleverness. By entering into the swap, he lost control of the voting rights that could have helped him push for a better buyout price. One lesson is that long-term activists may need to take full, unadulterated ownership to keep the voting power. When he became an activist on McDonald's, Mr. Ackman had some shares and some options. Options don't have voting power, and that became a cudgel that McDonald's used to undermine his activist arguments.

In this case, it looks like Mr. Ackman was outmaneuvered by Mr. Lampert. But there might be some moves left in the chess game.

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Lampert tells investors Sears in strong shape
Daily Herald News Services – Suburban Chicago
April 13, 2006

Sears Holdings Corp. said Wednesday it plans to invest in its stores and technology, one year after completing the blockbuster deal that combined struggling retail icons Sears and Kmart to create the third-largest U.S. retailer.

It’s time to focus on fixing merchandise and infrastructure problems that have contributed to steep sales declines, executives said at the annual meeting at the company headquarters in Hoffman Estates.

“We’re going to watch every single penny, but we’re also going to make investments that we think make sense,” Chairman Edward Lampert said. “I think you’ll see many more Kmart remodels this year than we did last year. Hopefully we’ll do more going forward.”

Lampert spent nearly two hours answering questions from a handful of investors who attended. Topics ranged from Lampert’s views on dividends (he is not a big fan) to his favorite books (“Crazy Busy” by Edward Hallowell).

Investors seemed willing to put their faith in Lampert, and the mood was generally upbeat even though the stock price has fallen about 5 percent in the past year.

Lampert, the hedge fund manager who brought Kmart out of bankruptcy in 2003 and orchestrated the takeover of Sears last year, has built up a cash pile of more than $4 billion by cutting back on store investment and eliminating clearance sales.

Those efforts have come at a price — sales at Sears stores open at least a year dropped 12.2 percent in the latest quarter, although they were up slightly at Kmart.

Analysts point out that competitors such as Wal-Mart Stores Inc. and Target Corp. spend far more money per store than Sears Holdings has, and their sales are growing.

But Lampert argues that profitable growth is the key, and same-store sales are not a good measure of whether a company is spending its money wisely.

“We think more sales are better than less sales, assuming that they’re the right kind of sales,” Lampert said.

While Kmart has stabilized, Sears stores are still generating too much of the wrong kind of sales, Lampert said. He said the retailer’s own employees often use three or four coupons to buy Sears merchandise, but will pay full price at Target stores.

His own shopping experiences haven’t always been ideal either. Lampert said he wanted to buy an Xbox video game system, but the Sears store had only the console, not the games and accessories. He had to go to a Kmart three miles away for those. The stores were not communicating with each other.

To solve those problems, Sears Holdings plans to invest heavily in infrastructure upgrades, particularly information technology — a strength for competitors such as Wal-Mart.

The retailer does not intend to sell off chunks of its valuable real estate to fund major acquisitions — something that many shareholders had expected Lampert to do after he sold dozens of Kmart stores.

“No retailer should aspire to have real estate worth more than their operating business,” Lampert said, adding that it was frustrating for him to see rival retailers make money off of stores that Kmart could not operate profitably.

The company will push ahead with the Wal-Mart like Sears Grand concept this year but Lampert acknowledged its short-lived experiment with a Sears-Kmart hybrid called Sears Essentials was a mistake.

Adding the popular Martha Stewart brand to Sears stores isn’t currently planned. Lampert said the company has been unable to negotiate a long-term deal beyond the four years remaining on its contract and doesn’t want to commit to the products for the short term.

 

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Wal-Mart bank plan attacked at hearing
By Becky Yerak - Tribune staff reporter – Chicago Tribune
April 11, 2006

ARLINGTON, Va. -- Confronting concerns that it secretly yearns to become another Bank of America, Wal-Mart Stores Inc. found itself on the defensive Monday at a federal hearing on whether it should receive a limited bank charter.

The world's biggest retailer tried to make a case to U.S. regulators that it should receive federal deposit insurance for an in-house bank that it wants to open to more cheaply process its own credit, debit and check transactions.

Calling itself "one of the most supportive institutions for independent banks anywhere," with branches in 1,200 of its stores, Wal-Mart insisted at the Federal Deposit Insurance Corp. hearing that it has no plans to start company-branded financial locations.

"You will not see a Wal-Mart branch in a Wal-Mart store," said Jane Thompson, president of Wal-Mart Financial Services.

But small bankers, labor and environmental groups and other foes regard Wal-Mart's application as the financial equivalent of a Trojan horse, arguing that once the door cracks open for Wal-Mart to receive deposit insurance for even a limited-purpose bank, it eventually will want to expand with branches and offer traditional banking products.

Critics threw every complaint in the book against the discount chain, ranging from the dangers of mixing banking and commerce to its track record as a corporate citizen to the impact that a Wal-Mart bank would have on small financial institutions if it were to open branches. Some painted doomsday scenarios for the now-robust retailer.

"The failure of Wal-Mart would pose an enormous systemic risk to the FDIC insurance fund," testified Larry Maschhoff, president of the Bank of Illinois in Normal. "What if Enron ... had owned banks?"

Another Midwestern banker believes the next step down a slippery slope could be Wal-Mart's encouraging its employees to open checking accounts in the company bank.

"Being one of the largest employers in the United States, millions of employees would no longer need their existing accounts currently held at local community banks," said Rose Oswald Poels, vice president of the Wisconsin Bankers Association.

Never has the FDIC received such overwhelming opposition to a filing. Wal-Mart's request for federal deposit insurance drew a record 2,900 letters. About 100 people, far fewer than expected, showed up on the first of 2 1/2 days of planned hearings.

In years past, Wal-Mart made no secret of its intentions to become a player in the retail banking industry. But with those previous efforts thwarted, Wal-Mart said it has seen "the writing on the wall," said Thompson. The company wants to keep independent banks in its stores and desires a Utah-based industrial loan corporation largely to save itself money, she said.

Discount rival Target Corp., as well as other commercial companies, already have opened industrial loan corporations, made possible by a loophole in federal laws. Wal-Mart doesn't think it should be held to a different standard, though it said it expects any regulatory approval would be conditioned on its being prohibited from opening branches.

About 300 independent banks have branches in Wal-Mart stores, and an additional 250 branches will open between now and 2009, Thompson said. Wal-Mart is negotiating with banks for leases running as long as 2024.

She also addressed concerns that Wal-Mart could easily cancel its existing 1,200 bank leases. The 15-year leases, which come up for renewal every five years, can be continued at the sole discretion of the banks, she said, and can be voided by Wal-Mart only if the bank, say, doesn't make lease payments.

"We've never broken one of those leases," Thompson said.

Although the hearings are to decide whether to grant Wal-Mart federal deposit insurance, they also quickly became a referendum on Wal-Mart's status as a corporate citizen.

FDIC officials pressed Wal-Mart to address the ethical problems that dog the company, including critics' contentions that it provides inadequate wages and benefits.

"We have what we think are fair wages," and three out of four of company managers started in the hourly ranks, said Thompson, a former Sears, Roebuck and Co. executive. "I'm very proud of this company. It's the best company I've ever been associated with."

Those speaking on behalf of Wal-Mart include the Retail Industry Leaders Association and Working Families for Wal-Mart, whose representative lauded the retailer's efforts to serve people who don't have bank accounts by providing check-cashing services that are less expensive than those found at other service providers.

Critics included the National Grocers Association and the AFL-CIO.

Following Thompson was Rep. Stephanie Tubbs Jones (D-Ohio), the only member of Congress to testify. She opposes Wal-Mart's application and drew distinctions between Wal-Mart and other commercial companies that own industrial loan corporations.

"None are as huge as Wal-Mart," Tubbs Jones said. "They're doing great in retail. Why expand into another area?"

Douglas Jones, the FDIC's acting general counsel, asked why Tubbs Jones thought that Wal-Mart would go beyond its stated plan of merely processing checks, debit and credit cards.

Wal-Mart, Tubbs Jones replied, has "expanded, expanded, expanded."

Terry Jorde of the Independent Community Bankers of America also isn't taking Wal-Mart at its word about just wanting to process transactions.

"There's nothing that would stop Wal-Mart from coming back another day," Jorde said. "Deposit insurance would already be in place."

A representative from the Retail Industry Leaders Association spoke out in favor of the expansion-minded retailer.

"Consumers vote with their pocketbooks and their feet," Sandra Kennedy said.

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Sears Canada CEO Brent Hollister Plans to Step Down
Bloomberg.com
April 10, 2006

Sears Canada Inc., the retailer parent company Sears Holdings Co. has sought to take private, said President and Chief Executive Officer Brent Hollister is quitting as of next month.

Hollister, 58, who leaves May 9, also won't stand for re-election to the board of directors, Toronto-based Sears Canada said today in a statement. Dene Rogers will be acting president of the department-store chain, Canada's second-biggest, according to a separate statement from the company.

Hollister spent 37 years at Sears Canada, with the last two as CEO. His resignation comes less than a week after Sears Holdings said enough stock had been tendered from Sears Canada's minority investors to complete the C$899 million ($782 million) deal. Pershing Square Capital Management LP, the New York hedge fund founded by Bill Ackman, is refusing to tender its shares.

Sears Canada spokesman Vincent Power said he didn't know what Hollister intends to do now.

Sears Holdings, headed by Chairman Edward Lampert and based in Hoffman Estates, Illinois, owned 54 percent of the Canadian unit before bidding to take the retailer private in December. The parent company raised the bid 7 percent to C$18 a share on April 3 to secure support for from investors such as Vornado Realty LP.

Pershing Square called the bid “wholly inadequate'' on April 7 and said managers will “exercise all of their legal rights'' to get a higher price.

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How U.S.-Store Chief Hopes to Fix Wal-Mart
By Ann Zimmerman and Kris Hudson – Wall Street Journal
April 10, 2006

Each week, 100 million customers -- more than one-third of the U.S. population -- stream through Wal-Mart's doors. And to hear Eduardo Castro-Wright, the company's new chief executive officer of U.S. stores, tell it, those customers have been poorly served.

Stores don't have enough workers at the times shoppers need them most, particularly weekends, he has claimed, and merchandise hasn't been strategically selected to reflect customer demographics in individual neighborhoods. When he first arrived in the U.S. last year after leading Wal-Mart Stores Inc.'s Mexican division, he was shocked to learn that not one Wal-Mart store featured a machine for making tortillas, he recently told a Merrill Lynch & Co. analysts' conference. And don't get him started on the state of the women's bathrooms.

Mr. Castro-Wright, 51 years old, has the daunting task of whipping into shape a 3,000-plus store division that, despite its vaunted reputation for efficiency, has grown fat and complacent. On the job just 14 months, he has spearheaded many of Wal-Mart's key efforts this year and is already being considered by suppliers and analysts as a contender to eventually succeed Wal-Mart CEO Lee Scott.

Mr. Castro-Wright's job is to wring more productivity out of each store, increase sluggish sales at stores open more than a year and improve the store experience to appeal to a more sophisticated consumer. To that end, he has been overhauling the system for scheduling work shifts, tailoring each store's offerings to its clientele's tastes, improving the presentation of merchandise, and speeding up store remodeling. He is also getting ready to trim half the employees in each store's accounting office. (He told analysts they will be offered other jobs within the chain.)

Not all of the moves are being applauded. A research report by HSBC Holdings PLC, a financial-services company, called Wal-Mart's beefed up remodeling plans "botox," designed to "arrest decline but not relaunch growth."

This month Wal-Mart is rolling out a new electronically driven pilot program for matching employees' work shifts more precisely with customer traffic patterns. Mr. Castro-Wright has said it will improve customer service markedly, but critics worry it could undermine morale because employees will have little say over what days and hours they work.

Wal-Mart executives have acknowledged that the retailer will also shift to a heavier reliance on part-time workers, who now account for roughly 20% of the work force, higher than the national average for retailers. A recent JP Morgan report said Wal-Mart plans to increase the ratio of its 1.2 million-member U.S. hourly work force on part-time schedules to 40% from 20%, meaning the hours of as many as 240,000 workers could be cut below 34 a week, the threshold to be considered full time. Wal-Mart spokeswoman Mona Williams says the company has no "predetermined target."

Mr. Castro-Wright was born in Ecuador, where his grandfather built that nation's first grocery-store chain. Before joining Wal-Mart, he oversaw Nabisco's Asian-Pacific region and served as a corporate officer of Honeywell International Inc. Earlier this year, he became a director of Dow Jones & Co., the publisher of The Wall Street Journal.

Mr. Castro-Wright, who declined to comment for this article, brings an outsider's perspective and a sense of urgency to the task at Wal-Mart. At Wal-Mex, he presided over major improvements as operations chief from 2001 to 2003 and as CEO from 2003 to 2005. Under him, Wal-Mex refined its approach by tailoring the merchandise and format of each store to its customers' traits: The company's Bodega Aurrera outlets cater to low-income customers; its Wal-Mart supercenters serve midlevel customers; its Superama supermarkets offer groceries; and its Suburbia apparel stores cater to middle-income shoppers.

Mr. Castro-Wright's initiatives helped fuel a more than 50% jump in Wal-Mex's revenue to $12.5 billion in 2005 from $8 billion in 2000, and a surge in its sales per square foot to $527 from $470 in the same period. Meanwhile, he trimmed costs. The result: Wal-Mex's stock, which trades on the Mexican Stock Exchange, rose 72% during his tenure.

Mr. Castro-Wright moved to Wal-Mart's U.S. operations in January 2005 and was promoted to CEO of U.S. stores in September. Since then, he has told analysts and suppliers he aims to rededicate Wal-Mart to its "store of the community" program, which strives to match offerings to the clientele. At the same time, suppliers say, he intends to chop billions of dollars from Wal-Mart's inventory costs. Better to have six popular styles of toasters, including some high-end models, for example, than a dozen brands. "I think inventory clutters stores," he said at the Merrill Lynch conference.

To better tailor merchandise to each store, Mr. Castro-Wright overhauled Wal-Mart's regional executive structure, relocating managers to the regions they cover rather than having them commute each week from the headquarters in Bentonville, Ark. He has also given these managers more authority to make marketing decisions.

After beefing up the corporate marketing team, which is overseen by Mr. Castro-Wright, Wal-Mart is now relying on more customer-driven data to determine customer preferences. Research shows that Hispanics are loyal Wal-Mart shoppers for certain products but tend not to buy their food there. Wal-Mart is implementing a new food display that will feature a broader array of Hispanic food brands. It will also display products -- from cakes to dresses -- for quinceaneras, the popular celebration when Hispanic girls turn 15.

Mr. Castro-Wright was in such a hurry to get these managerial changes made, he implemented them during the holiday season -- a bold but risky move. They haven't yet caused meaningful change, such as jump-starting sluggish sales, particularly of higher-margin general merchandise such as apparel and electronics. Still, early tests of stores with improved apparel offerings and displays have shown sales gains.

Wal-Mart's ambitious plan for upgrading rundown stores calls for remodeling 1,800 of them in 18 months by adding mock-hardwood flooring in the apparel area, widening aisles and upgrading bathrooms. Wal-Mart will improve the layout and fixtures in the electronics, apparel and baby departments. The latter will now be more of a destination, offering clothes and equipment along with diapers and food.

The speeded-up remodeling is an effort to reduce the variation among stores. "The [top] 800 stores perform in terms of [same-store sales] 10 times better than the bottom 800," Mr. Castro-Wright told analysts last October. "If we can reduce that [gap], move everything up, then we can certainly improve the overall performance of the company."

And it seems that no detail is too small for Mr. Castro-Wright to consider. Take accidents. He recently outfitted store managers and workers with both clean-up kits to mop up spills in store aisles and inflatable orange cones to mark them. And he got a new line added to the Wal-Mart cheer. After spelling out the company's name and shouting that the customer is always No. 1, Wal-Mart employees now yell: "What do we want to be? Accident free!"

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Menage a towel: Martha's relationship with Macy's and Sears
By Sandra Guy – Chicago Sun-Times
April 10, 2006

Martha Stewart's exclusive deal to design high-end housewares and home decor for Macy's, spurning Sears Roebuck and Co., points up the night-and-day differences in the two retailers' strategies.

Sears Holdings, the parent company of Kmart and Sears Roebuck, is led by hedge-fund guru Edward S. Lampert, 43, who put everyone on notice that his priorities are cutting costs, squeezing savings from suppliers and building up cash. He has rejected such age-old retail measurements as sales at stores open at least a year, and trumpeted Jack Welch's reinvention of General Electric, hardly a retail standard-bearer, as a business role model.

Macy's is led by Federated Department Stores CEO Terry Lundgren, 54, a merchant who has spent all but six of his 30 years in retail at Federated, climbing the career ladder from an assistant buyer in stationery and electronics to CEO in 2003.

Lundgren reversed four years of declining same-store sales when he took over Federated in 2003 by selling more exclusive merchandise, expanding the size of dressing rooms, and marketing to four distinct ages and lifestyles of shoppers.

It was Lundgren's idea to build a mockup of a Martha Stewart-designed house inside Marshall Field's State Street store (it will be a Macy's store by the time the house is built) to showcase Stewart's dishes, cookware, bed sheets, holiday decorations, and garden and patio decor.
The idea is similar to the "Trend House," which features rooms by select designers in Marshall Field's eighth-floor furniture department.

Susan Lyne, president and CEO of Martha Stewart Living Omnimedia, told the Sun-Times that the Martha Stewart house will become a destination, as is Field's.

"You're coming to the store to shop, but also because there are wonderful things happening there," Lyne said.

As for Sears, one need only look at the situation from a financial strategist's eye: Stewart will receive guaranteed minimum royalty fees from Kmart of $59 million at year's end; $65 million at the end of 2008; and, for 2009, under a newly amended agreement, either $20 million or 50 percent of her earned royalty fees for 2008.

The higher payments are guaranteed even if Stewart's merchandise doesn't sell.

Lampert is haggling over long-time celebrity endorsers' big contracts. He has put his bet on Ty Pennington, the star of ABC-TV's "Extreme Home Makeover," for sheets, towels and bedding, bath and table-top decor, and will soon announce a new furniture line.

Retail expert Howard Davidowitz, a critic of Sears' sales performance, said Lampert did the right thing by pressing Stewart to amend her exclusive deal with Kmart to lower the fees.

"Martha made a deal with Kmart when Kmart was in the tank and when Kmart desperately needed her. She put through a deal that was outrageous," said Davidowitz, chairman of Davidowitz & Associations, a New York retail consulting and investment banking firm.

Stewart pulled off another upset by putting her name on both the low-priced Kmart brand and the higher-end Macy's brand, rather than calling the lower-end brand something besides Martha Stewart.

No other celebrity has done it, Davidowitz said. But Martha's "powerhouse brand name" has overcome what retail experts believe is a death-knell of selling to lower-income shoppers, he said.

By now, analysts who had hoped that Lampert would sell Sears' most valuable assets, especially its real estate, understand that his strategy is more complicated.

Neil Stern, senior partner at Chicago retail consultancy McMillan Doolittle, said, "Most retailers are obsessed with growing sales. Sears Holdings is obsessed with cash flow and improving [profit] margins. It's a different mentality."

There is one wild card: Sears Holdings last week won the right to take Sears Canada private. Martha Stewart has an exclusive deal to sell her wares at Sears Canada. Stewart's deal with Sears Canada is exclusive, and separate from her deal with Kmart, but it would all be under Sears Holdings' roof.

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Broken Promises
By Reed Karaim – AARP Bulletin – Your Money
April 2006

With companies cutting back on retiree health benefits, more and more former employees have to go it alone. What lies ahead for today’s workers?

Santos R. Arrona of Visalia, Calif., worked for J.C. Penney for 25 years, mostly in delivery services, before he retired at age 69 in 1990. In addition to a modest pension, Penney provided Arrona with health benefits, including prescription drug coverage. Those benefits were something he thought he could count on from a company founded on its golden rule of fairness, honesty and value.

But last year J.C. Penney announced that, effective Jan. 1, 2006, it would cancel virtually all health benefits for retirees age 65 and over. So Arrona, 84, joined the growing ranks of Americans who have seen their retiree health benefits end or at least deteriorate at an employer's discretion.

Among huge companies that trimmed benefits in recent years are General Motors, Raytheon, Lucent Technologies, United Airlines and Pfizer. The reasons they cite for their retreat include soaring health care costs, cutthroat global competition and even the new Medicare Part D prescription drug plan.

Coupled with countless frozen or terminated pension plans, health benefit cutbacks make plain the growing transfer of economic risk and responsibility from employers and government to workers. To retirees like Arrona, the decisions simply feel like broken promises.

"You're there all those years, you do all the work and everything they ask you to do, and then you retire and they cut you off," he says. "It doesn't seem right."

The number of large companies that provide their retirees with health benefits fell precipitously in 1991, when the federal government imposed stricter accounting requirements for measuring the financial cost of future benefits. The decline has continued, from 46 percent in 1991 to 33 percent in 2005, according to annual surveys by the Kaiser Family Foundation and Hewitt Associates. Smaller firms are even less likely to provide retiree health benefits.

Companies that do maintain benefits have been hiking the share retirees must pay. In the 2005 Kaiser/Hewitt survey, more than two-thirds of the companies reported such increases. More than a third increased copayments, and nearly a fourth increased deductibles.

Millions of retirees are scrambling to adjust. J.C. Penney is helping the 9,500 retirees affected by its 2005 decision move their drug coverage to a Medicare Part D drug plan offered by AARP and provided by United Healthcare. The new coverage, the company says, is better than its old plan.

But when Arrona looked into it, he received contradictory information, and the monthly cost quoted to him by one plan representative—$176 a month for the premium and his three medicines— would badly strain his finances. He is in the process of signing up, but as a veteran, he has in the meantime turned to the Department of Veterans Affairs for his prescription drugs. "I think they're going to be able to help me," he says. "I sure hope so."

At least Arrona qualifies for Medicare. More than 3.5 million retirees don't because they haven't reached age 65, according to the Kaiser Foundation and the Urban Institute, a think tank in Washington. That makes their employer coverage especially critical, and rising costs could strap them.

Ed Beltram of Woodland Park, Colo., worked as a manager for Lucent Technologies for 31 years. When the company downsized four years ago, it asked him to take early retirement at age 56. Part of the incentive was generous health benefits, which, he says he was told, wouldn't be available if he delayed his departure.

Out-of-pocket medical costs for Beltram and his wife were $43 a month when he retired. Now, because of changes Lucent has made in its plan, the Beltrams are spending $690 a month. The increase has changed their retirement; he's working part-time at a golf course to bring in a little extra money.

"We're still all right on the basics," he says, "but we're not doing the things we thought we would do, like traveling to see our sons regularly."

It wasn't what Beltram had been led to expect. "In the years [workers] didn't get much of a raise, we were always told, 'Even though your salary isn't going up as much, you're still accruing your benefits for your retirement years.' " Now, he says, "the companies are supporting their corporate financial reports on the backs of retirees by having accountants and lawyers look every way they can—do whatever is legal—to reduce the benefits. It may be legal ... but I really feel it's immoral."

Companies also take advantage of their contributions to health care for employees and retirees to help the bottom line. They've parlayed the payments into the largest tax break in the history of the U.S. tax code—$102.3 billion in 2004. At the same time, corporate underfunding of retiree health plans dwarfs the better-known shortfalls of pension obligations.

Are cutbacks simply economic reality? "Medical costs are just generally out of line, for current and former employees," says Paul Dennett of the Washington-based American Benefits Council, which represents Fortune 500 companies. "Anytime one area of costs goes out of line, it underscores the need for greater discipline into that area of expenses."

At the same time, Dennett says, increased competition, nationally and globally, has put financial pressure on older firms that offered benefits packages more generous than many newer firms offer. "Very few retirement health plans have been established in the past few years," he says. Many companies, he adds, have no economic choice but to cut benefits.

The changing economic landscape hit home with hourly workers at General Motors, whose health benefits were part of their union contract. They voted last fall to support a change that would cut $1 billion in annual health care benefits for more than 750,000 hourly workers, retired hourly workers and their families.

The deal requires federal court approval because it would force retirees, who didn't have a vote in the matter, to begin paying monthly premiums, deductibles and copays. In March GM retirees turned out at a U.S. District Court hearing in Detroit to ask that their health benefits remain unchanged.

The lead plaintiff in a suit challenging the deal, Leroy McKnight of Haslett, Mich., went to work for GM at age 19 and retired at age 56 in 2000. "It's an issue about corporate power versus individual contractual rights," McKnight says. "I sold 30 years of services to GM—for wages, health care while I was working, a pension, and health care while I was retired—and now they're trying to weasel out of their obligation."

Last year 12 percent of larger companies terminated all subsidized retiree health benefits for future retirees, the Kaiser/Hewitt study found. By all indications, the trend will at least continue and probably intensify. "The approaching generation of retirees is far less likely to have the level of financial security from employer-sponsored benefits that many of today's retirees enjoy," says Kaiser's Tricia Neuman, a co-author of the annual study.

Of retiree health benefits, prescription drug coverage is the most sought after. The Medicare Part D benefit was intended to ensure that such coverage would be available to all Medicare beneficiaries. But some analysts worry the new program makes it easier for employers to cancel drug benefits, which on average are more generous than Part D coverage, because employers can point to the federal program as a viable alternative.

As an enticement for companies to maintain their retiree drug benefits, Part D offers a subsidy that amounts to 28 percent of their overall costs on top of their existing tax break. Still, with Part D in place, 9 percent of larger companies plan to eliminate their retiree drug benefit in 2006, according to the 2005 Kaiser/Hewitt survey.

"Clearly some companies are feeling far more comfortable in cutting benefits," says Robert M. Hayes, president of the Medicare Rights Center, a national consumer group. "I have no doubt in the next couple of years employers will see this as a way of abandoning employees and retirees."

The outcome of a long-running legal battle could further clear the way for dumping retiree health benefits. Last September, ruling in a lawsuit brought by AARP, a federal judge in Philadelphia said that the Equal Employment Opportunity Commission could implement a rule that would allow employers to provide better benefits packages to younger retirees than to Medicare-eligible retirees without violating age discrimination laws.

The judge barred the EEOC from implementing the rule until AARP could appeal the decision. If the EEOC ultimately prevails, employers will be able to reduce or eliminate health benefits for retirees as soon as they become eligible for Medicare.

Another development echoes the tightening of accounting methods that started the rush to unload retiree health benefits in 1991. A new accounting requirement regarding underfunded retiree health benefits funds takes effect this year and will likely accelerate the trend, but analysts disagree on its effect.

All these factors will conspire to allow far fewer workers to retire with guaranteed medical benefits, and those lucky few are likely to find the benefits far less generous than their predecessors'. The United States, says Alicia Munnell, director of Boston College's Center for Retirement Research, is in the middle of a historic shift in how retirees are provided for. Except for the poorest families, this responsibility has centered on the employer.

"Now, the employer is pulling away from these commitments, and we have put nothing in place of the old system," she says. "The individual is just hanging out there, flapping in the breeze."

With no comprehensive solution in sight, workers and retirees will be fending for themselves.

Reed Karaim is a freelance writer in Tucson, Arizona.

What You Can Do to Protect Yourself
Protecting yourself against lost retiree health benefits.
By Reed Karaim  -  April 2006

Wait. If you're an eternal optimist, you might keep hoping the United States will imitate Canada and European nations by adopting a national health care program.

Sue. Did your employer promise you lifetime health coverage after retirement and then fail to deliver? You can try to win back what you were promised in court, but be forewarned: For nonunion employees, "there are very, very few court cases in which the retirees have won," says Jay Grenig, a professor of law at Marquette University.

Work Part-Time. At some companies, even part-timers qualify for attractive benefits. Example: Starbucks employees who work at least 20 hours a week are eligible for health insurance, a 401(k) and stock options.

Save. While waiting for Medicare coverage to kick in, early retirees who are healthy should consider a health savings account, a tax-free account that's tied to a high-deductible health plan.

Save More. Four of five employees fail to estimate their annual health care expenses. That's why it's a good idea to use a "medical expense estimator"—ask your employer or financial adviser for one—to help make sure you're socking away enough to cover future health care expenses. Then see how much more you need to save should your retiree health coverage vanish and you're forced to go it alone.

Stay Well. "The best offense is a good defense," said legendary football coach George Halas. That applies to your health, too. Making the right lifestyle choices, such as diet and exercise, can make lots of financial sense.

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Judge: Sears shareholders can sue
Eagle news services - WICHITA EAGLE
April 7, 2006

Sears Roebuck & Co.' s shareholders can sue the company and former chief executive Alan Lacy for failing to disclose they were discussing Sears' sale to Kmart Corp. in 2004, an Illinois federal judge ruled.

Judge Robert Gettleman on March 22 dismissed a request by Sears and Lacy, Sears' chief executive until 2005, to throw out the suit filed by Maurice Levie on behalf of other shareholders. Gettleman ordered the defendants to respond to Levie's complaint by April 19.

Levie says he lost money because he sold Sears stock before a Nov. 17, 2004, announcement that Kmart would acquire Sears for $13.4 billion. Sears shares jumped 17 percent on the announcement. Levie alleges statements by Sears and Lacy before the announcement were misleading because they failed to reveal the ongoing talks between Sears and Kmart.

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CMS announces Medicare benefits issue
From Sears Retiree Website
April 7, 2006

The Centers for Medicare and Medicaid Services (CMS) have announced that some individuals are enrolled in more than one Medicare plan (two Medicare Part D prescription drug plans, or two Medicare Advantage HMOs, or a Medicare Part D prescription drug plan and a Medicare Advantage HMO). CMS does not permit individuals to enroll in more than one Medicare plan. CMS has instructed health plans to dis-enroll members from the first plan that the individual enrolled in, as long as no claims have been paid from the first plan. If claims have been paid from the first plan, the members will receive a letter asking them to confirm their Medicare plan choice. Additional details are provided below.

What’s the issue?
CMS does not permit individuals to be enrolled in more than one plan that provides Medicare Part D prescription drug benefits (a “Medicare plan”). Medicare plans include Medicare Part D prescription drug plans and Medicare Advantage HMOs. Due to a CMS system error, some individuals are enrolled in more than one Medicare plan. When an individual enrolls in a Medicare plan, the plan is required to send the individual’s enrollment information to CMS to verify eligibility. If the person is already enrolled in a Medicare plan, CMS is supposed to notify the first plan the individual enrolled in and instruct it to dis-enroll the member from the first plan. However, this process has not worked, resulting in individuals being enrolled in more than one Medicare plan. For Sears retiree medical participants, Retiree Health Access offers several Medicare plans including: two drug plans called Aetna Enhanced Rx Access – Low Option and High Option
several Medicare Advantage HMOs (plans vary by geographic region)

Individuals may enroll in an AARP Medicare Supplement plan and a Medicare Part D prescription drug plan.

Who is affected? Medicare-eligible individuals who enrolled in a Medicare plan and then either: enrolled in another Medicare plan
Or were automatically enrolled in another Medicare plan by someone else on their behalf, such as the State or another retiree health plan.

Who is not affected? The following individuals are not affected by this issue:

Individuals who are not eligible for Medicare
Individuals who are only enrolled in a Medicare Supplement plan
Individuals who are enrolled in a Medicare Supplement plan and one Medicare Part D prescription drug plan

What’s the solution?

Individuals who are enrolled in more than one Medicare plan and have received benefits (claims were paid) from the first Medicare plan will receive a letter from CMS. These individuals will have an opportunity to remain in the first plan (and dis-enroll from the second plan) by contacting the first plan. If the individuals do not contact the first plan by the date specified in the letter, their coverage in the first plan will be cancelled and they will remain enrolled in the second plan.
Individuals who are enrolled in more than one Medicare plan, and have not received benefits (no claims were paid) from the first Medicare plan, will be automatically dis-enrolled from the first plan. Their coverage in the second plan will continue.

The CMS has not yet provided guidance on resolving claims paid and premium payments.

What do I need to do?
If you receive a letter from CMS, you may need to take immediate action. You need to decide which Medicare plan you would like to remain enrolled in. CMS dictates that you can only be enrolled in one Medicare plan (Medicare Part D prescription drug plan or Medicare Advantage HMO).

If you want to remain enrolled in the first plan (and dis-enroll from the second plan), you will need to contact the first plan by the date specified in the letter. The phone number for your first plan will be included in your letter.
If you want to remain enrolled in the second plan (and dis-enroll from the first plan), you do not need to take action.

Click here to view a generic copy of this letter . If you are unsure which Medicare plan(s) you are enrolled in, you can call CMS at 1-800-MEDICARE (1-800-633-4227, 24 hours a day, 7 days a week. TTY/TDD users should call 1-877-486-2048. Be sure to tell them that you received the “Special Notice to Confirm Medicare Plan Choice.” If you do not receive a letter from CMS, you do not need to take any action. However, if you think you might be enrolled in more than one Medicare plan, you may contact CMS at 1-800-MEDICARE (1-800-633-4227, 24 hours a day, 7 days a week. TTY/TDD users should call 1-877-486-2048.)

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Pershing rejects Sears bid as inadequate
By Emily Kaiser – Reuters.com
April 7, 2006

CHICAGO, April 7 (Reuters) - Pershing Square Capital Management on Friday said it would not accept Sears Holdings Corp.'s C$18 ($15.65) per share offer for the portion it does not already own of Sears Canada Inc., setting the stage for a battle between two powerful hedge funds.

In a statement, Pershing dismissed the price as "wholly inadequate," and said it intends to remain a shareholder of Sears Canada rather than accept it.

Pershing said its economic interest in Sears Canada equals 11.6 percent of the common shares and the hedge fund, managed by William Ackman, said it would exercise its legal rights to ensure fair value for its investment.

Sears Holdings spokesman Chris Brathwaite declined to comment. Sears Canada also declined to comment.

Pershing has pushed for sweeping changes at several companies, including Wendy's International Inc. and McDonald's Corp., and Ackman has built a reputation as an activist shareholder. He recently succeeded in getting McDonald's and others to adopt some of his recommendations.

But this time, he is taking on one of the most powerful players in the hedge fund industry -- Edward Lampert, the chairman of Sears Holdings. Lampert's ESL Investments Inc. owns more than 40 percent of Sears Holdings' common stock.

"This is really a street fight between large U.S. hedge funds happening in the streets of Canada," said Ron Mayers, head of alternative strategies at Desjardins Securities, which owns Sears Canada shares.

"It's among the nastier disputes I have seen."

Lampert brought Kmart out of bankruptcy in 2003, and then bought Sears, Roebuck and Co. last year to create the third-largest U.S. retailer.

He wants to take over Sears Canada because he thinks it can better compete with formidable rivals such as Wal-Mart Stores Inc. with the cost savings and management direction that Sears Holdings would provide.

COURTS TO DECIDE?

Sears Holdings, which has long held a majority stake in Sears Canada, originally offered to buy the remainder for C$16.86 per share.

It sweetened the bid to C$18 per share earlier this week, and, based on the 49.55 million shares that Sears Holdings did not already own when it first announced the offer in December, it is now prepared to pay about C$892 million, or about $775 million, for the remaining stake.

Shareholders appeared to be holding out hope for an even higher price -- the stock traded as high as C$18.66 on the Toronto Stock Exchange on Friday and closed at C$18.40, still above the bid price.

Sears Holdings said Thursday that most of the minority shareholders had accepted its offer to take the company private, and that it expected to complete the deal in December.

With the backing of most of the minority shareholders, Sears Holdings has the power to force the deal, but analysts said legal objections could be raised.

Dissenting investors could ask the court to determine the fair value of the shares, known as "appraisal rights."

Another option is to seek "oppression remedy", where investors ask the court to decide that a company's actions are oppressive to shareholders, said Ralph Shay, head of the Toronto securities group with law firm Fraser Milner Casgrain.

Shay said there was very little precedent for Canadian shareholders suing a company for oppression, and appraisal cases were also relatively rare.

"That could change because the shareholders are becoming more active and they might decide to use more legal firepower than they did in the past," he said.

Sears Canada had received a valuation report from Genuity Capital Markets that valued the shares at as much as C$22.25, giving many shareholders hope for a higher price.

Pershing said it owns about 5.2 percent of Sears Canada's outstanding common stock, and is entitled to the economic benefit of an additional 6.4 percent through derivative transactions that terminate in December.

Pershing said all of the shares that its funds currently hold were acquired through the Toronto Stock Exchange and Nasdaq since Feb. 9, 2006, when Sears Holdings commenced its bid for Sears Canada.

($1=$1.15 Canadian) (Additional reporting by Blaise Robinson in Toronto)

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Pershing Square won't sell Sears Canada stake
ABC News
April 7, 2006

CHICAGO (Reuters) - Pershing Square Capital Management said on Friday that Sears Holdings Corp.'s C$18.00 per share offer to buy Sears Canada Inc. was "wholly inadequate," and the hedge fund would not accept it.

Pershing, which said it has an 11.6 percent economic interest in Sears Canada, said it intends to exercise its legal rights to ensure fair value for its investment.

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1,000 Allstate employees take buyout
By Becky Yerak - Tribune staff reporter – Chicago Tribune
April 7, 2006

About 1,000 workers at Allstate Corp.'s Northbrook headquarters have accepted a voluntary buyout offer to leave the company, about 50 percent more takers than the insurer expected when it announced the cost-cutting program in January.

Allstate, the nation's second-biggest home and auto insurer, after Bloomington, Ill.-based State Farm Insurance Cos. had estimated that 600 to 700 of the 6,800 eligible salaried workers might opt to leave the company.

Allstate has been trying to reduce its expenses, including shifting more jobs overseas, to remain competitive in an industry hit hard by recent natural disasters.

Allstate provided an update to workers on the job situation in a memo sent out this week. Most of the workers will leave by May 31.

In the third quarter, Allstate posted a record $1.5 billion loss in the wake of Hurricanes Katrina and Rita.

Claims related to Hurricane Wilma, which struck southern Florida as a Category 3 storm in October, helped contribute to a 9 percent drop in fourth-quarter earnings, to $1.04 billion.

The company also recently announced it had bought billions of dollars in reinsurance to help cover auto and personal property claims nationwide arising from future hurricanes, earthquakes and other disasters.

The reinsurance, which is basically insurance for insurers, will reduce the volatility of Allstate's future earnings but costs about triple what it previously paid. Allstate has said it plans to recoup its increased reinsurance costs through higher premiums.

Allstate also has slowed the writing of new property insurance and renewing policies in certain markets to help limit its exposure to major losses caused by hurricanes and earthquakes. Last month, for example, Allstate said it would stop offering new earthquake coverage in all markets and would consider not renewing existing earthquake policies in Alaska.

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One-Day Wonder: Martha's Latest Makeover
By Will Swarts – Smartmoney.com – The Wall Street Journal Online
April 7, 2006

Martha Stewart is following up her affordable Kmart collection with a foray into more upscale merchandise.

Shares of Martha Stewart Living Omnimedia climbed 14% Thursday after the company unveiled a five-year deal to develop an exclusive line of home goods for Macy's. The products, ranging from sheets to cookware, will hit store shelves in the fall of 2007. Despite the run-up, the stock still sits nearly 50% below the five-year high it hit last February around the time Martha Stewart was released from prison. Shares of Federated Department Stores Inc. (FD), parent of Macy's, rose fractionally.

The announcement, which was big on brand boasting but short on numbers, was received positively on Wall Street. The move toward more affluent customers seems to dovetail nicely with Federated's plan to rebrand many of its stores with the Macy's name. Martha Stewart Living's merchandise has been sold at about 1,500 Kmart stores, now a unit of Sears Holdings Corp. (SHLD), since 1997. Its wares are also stocked by 2,400 Sears stores ever since the 2004 merger of the two chains.

Michael Meltz, an analyst at Bear Stearns, notes that Martha Stewart Living executives didn't talk about sales numbers when commenting on the new line's prospects, other than saying they'd like to get a significant share of Macy's estimated $4 billion housewares business. Martha Stewart Living had sales of $209 million in 2005. Analysts forecast sales of $279 million this year, and called for revenue of $312 million in 2007 prior to the announcement.

"They haven't given any financial guidance, but I think it's pretty clear this will be a meaningful contributor to the company over time," Meltz said. "This is not going to be as big as Kmart - it's at a higher price point and initially it's not as wide a product range as Kmart. One thing to consider is that MSO Everyday products tend to dominate the categories at Kmart, and Macy's is still going to have a lot of other (product) lines. But to me this shows there's still a lot of interest in the Martha Stewart brand."

The partnership received a lukewarm response from Robert Routh, an analyst at Jefferies & Co. "Aside from generating additional brand exposure for the company, we note that we are not currently factoring anything for this new line into our model," Routh wrote in a research note published Thursday. "We believe though that it should represent a solid new revenue stream for the company, and thus potential upside to our numbers going forward."

The Analysis

This is a good deal for Federated, which will add a hip national brand to its product lineup as many of its underperforming stores adopt the Macy's name. But it's an even better deal for Martha Stewart Living, which faces the prospect of declining revenue from its arrangement with Kmart, now controlled by Sears. That agreement runs through 2010, but minimum guaranteed payments are slated to shrink over the remaining few years.

According to documents filed with the Securities and Exchange Commission, Martha Stewart Living is guaranteed $59 million from Sears this year, and $65 million next year, though it could receive more from the retailer if its merchandise sells well. The minimum total drops off for the last three years of the agreement, which makes the Macy's expansion a well-timed move.

"This provides support when minimum guarantees from Sears start dropping in 2008," said Meltz. "Martha Stewart gets minimum payments no matter how well the products sell. After it gets the $65 million next year, then it falls." The payment drops to a minimum of $20 million in 2009 and to $15 million in 2010.

Federated gets a boost that will help its integration of May Department Stores, which it bought last year in an $11 billion deal that joined the parent of Bloomingdale's with May's, Marshall Field's, Lord & Taylor and Hecht's. Federated will close some stores and rename others, including the landmark Marshall Field's in Chicago, creating a national brand of about 50 department stores and another 700 bridal and formal-wear stores. The company's strategy is to gain as much leverage as possible with suppliers, a critical issue for midpriced retailers. Federated faces fierce competition on all fronts from specialty retailers, big discounters such as Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT), and upscale chains like Nordstrom Inc. (JWN).

"It allows Macy's to add a well-known brand to their collection," said Kimberly Picciola, a retail analyst at Morningstar. "They've been struggling and are competing with Bed Bath & Beyond (BBBY) and Kohl's (KSS) as well as the discounters. It's certainly an area where Federated needs to make some changes."

The Bottom Line

Retail is a cutthroat business, and Federated is wise to box out rivals with the acquisition of a brand that extends beyond its stores. Richard Hastings, senior retail analyst at the New York credit ratings agency Bernard Sands, said it's not just that Martha Stewart Living elevated consumer standards at Kmart, where the quality of the merchandise was often derided, but that the brand has extraordinary reach.

"What Martha brings is significant multimedia branding," Hastings said. "That's where the action is today, and you've got to lock in your younger shoppers today. Martha Stewart Living Omnimedia and Martha Stewart personally represent a multimedia approach. She can reach an audience through satellite radio, through cable, through national television, retail and print. It's certainly helped Kmart."

Sheets, towels, cookware and other housewares designed by Martha Stewart may prove to be a sustaining factor for the Macy's chain, just as they were for Kmart while other aspects of its business slumped.

"It's important for Macy's to get aggressive on the domestic space," said Hastings. "Holiday shopping data from Visa and Mastercard showed intense activity in home furnishings and domestics. The housing market might slow down, but it doesn't change what people do inside the house."

According to Picciola, Martha Stewart Living doesn't need to worry too much about losing sales at Sears and Kmart. "It's a different consumer who shops at Macy's, and I think they will be expecting a higher quality product than they would at a discount store," she said. "There may be some overlap, but I think they're going after a different segment of the market."

The keys to success for both parties will be to minimize promotional pricing and make the most of macys.com, an area Hastings said Federated needs to improve. "You never bet against Federated," he said. "They always figure out a way to make it happen."

So will Martha like Macy's? Probably, said Picciola.

"No one ever thought she'd have been caught dead at Kmart," she said. "But given the uncertainty surrounding Kmart and Sears, and what the true situation is there, it makes sense for Martha Stewart to look outside for the channel and move a bit upscale to Macy's."

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Sears may be hurt by Martha Stewart's
deal with Macy's
By Sandra Jones – Crain’s Chicago Business Online
April 6, 2006

Martha Stewart’s deal to launch an exclusive line of home products in Macy’s stores could hurt Sears Holdings Corp.’s effort to revive its own home fashions business.

Martha Stewart Living Omnimedia Inc. agreed to develop a line of home goods—including bath and bed textiles, dinnerware, glasses, cookware and holiday decorating items—for Macy’s department store chain under the Martha Stewart Collection. The domestic maven plans to direct the design team herself. The deal with Macy’s begins in 2007 and last five years.

Martha Stewart already has an exclusive agreement with Kmart to sell home products, including furniture under the Martha Stewart Everyday brand. That contract began in 1997 and runs through 2009.

Kmart Holdings Corp. bought Sears in March 2005 for $12 billion.

Since then, Sears has talked to Ms. Stewart about bringing her Martha Stewart Everyday brand into Sears’ U.S. stores, but the companies have clashed over terms. The line is already available at Sears in Canada.

It’s unusual for a designer to offer two separate exclusive lines—albeit at different price points—at competing retailers. Sears and Macy’s compete directly in hundreds of malls across the country.

"That kills any chance of getting into Sears," says Neil Stern, a Chicago-based retail consultant with McMillan/Doolittle. "I don't think Macy's would have done it if (Martha Stewart) had the opportunity to still sell to Sears."

A Sears spokesman declined to comment on the talks with Martha Stewart, saying only, “We look forward to continuing to work with Martha Stewart Omnimedia.”

Martha Stewart officials weren’t immediately available for comment.

But Susan Lyne, CEO of Martha Stewart, told analysts and investors on the company's fourth-quarter earnings call in February: “If we were able to strike an agreement with Sears that was good for our shareholders, we would absolutely do that. But in the meantime, we are building our merchandising business very nicely in new channels and with new product lines.”

New York-based retail analyst Walter Loeb says the Macy’s deal throws cold water on the negotiations with Sears.

“This makes it more likely that Sears will not get it,” says Mr. Loeb.

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Sears Holdings declares victory in Sears Canada takeover - but holdouts remain
By Rita Trichur – The Canadian Press
April 6, 2006

TORONTO (CP) - Sears Holdings Corp. (Nasdaq:SHLD) declared victory Thursday in its sweetened $18-per-share bid to buy out minority stockholders of Sears Canada Inc., but at least one holdout investor says the fight is not over.

The Chicago-based retailer announced it has secured commitments for more than half of the 46.2 per cent of the Canadian subsidiary (TSX:SCC) that it didn't already own when it launched its privatization bid late last year.

The U.S. firm said that should "assure" the necessary shareholder approval for a going-private transaction, but it also took the extra step of extending its offer until Aug. 31 - prompting some observers to question whether it's really a done deal.

Spokesman Chris Brathwaite declined to say whether Sears Holdings had reached the 90 per cent threshold that would enable it to force the Toronto-based subsidiary to be delisted from the Toronto Stock Exchange.

Another source familiar with the bid said the parent firm could now lay claim to about a 76 per cent stake in the Toronto-based retailer, suggesting there may be another plan to acquire the remaining shares, such as through a special meeting of shareholders.

Nevertheless, one activist shareholder said it's premature for Sears Holdings to be waving the victory flag, noting that Sears Canada's shares continued to trade above the offer price.

"They are talking about it as if it is over and I'm not sure that that is the case," said Ron Mayers, head of alternative strategies at Desjardins Securities Inc., which holds Sears Canada shares.

"I think probably there's another shoe to drop here . . . In chess parlance, I would call it check, but not checkmate."

The stock traded as high as $18.50 on Thursday, changing hands early in the afternoon at $18.25.

Mayers also questioned how Sears Holdings had secured its investor commitments, suggesting it had thrown "its weight around" in a way "that is not fair to shareholders." He declined to elaborate but said there are still other shareholders, holding millions of Sears Canada shares, who could seek other remedies.

"The other possible outcomes are that this transaction gets done at price better than $18," Mayers said. "Or if it gets done at a price of $18 that there is litigation brought, alleging shareholder oppression or . . . dissenters' rights, where people say that $18 is not fair value for this name and sue to get a better value."

A securities lawyer, who spoke on the condition of anonymity, said Sears Holdings likely has the support to effect a so-called squeeze-out transaction.

"To do that, they need to pass a shareholders vote with two-thirds of the votes cast, but also need a majority of the minority," he said.

"Minority shareholders should have a 'dissent' right, meaning they can apply to court to have the court set the fair value of their shares if they don't like the squeeze-out price."

A similar scenario played out on the transaction to take Ford Canada private, he added, but noted that while shareholders ultimately did get more for their shares, it took years of litigation.

America's No.3 retailer had insisted Wednesday that the $18-a-share offer - bolstered Monday from $16.86 and valuing all of Sears Canada at more than $1.9 billion - was its "best and final offer."

Independent directors of Sears Canada had opposed the initial bid from Sears Holdings, which was created a year ago in the $11-billion-US merger of Sears, Roebuck and Kmart under hedge-fund magnate Edward Lampert.

Sears Holdings had warned that if its proposal was rejected, "Sears Canada will face the increasingly competitive Canadian retail environment without the financial and operating benefits of being owned 100 per cent by Sears Holdings" and it would stop paying dividends.

Sears Holdings said Thursday the going-private transaction is expected to close in December.

"We are pleased that our transaction has received the support of a majority of the minority shareholders, including the two largest minority shareholders," stated Sears Holdings vice-chairman Alan Lacy.

"With the success of our offer assured, we expect other Sears Canada shareholders to tender their common shares in order to promptly receive our offer price of $18 Cdn per share."

Sears Holdings, with $55 billion US in annual sales at 3,900 stores in the United States and Canada, now will "work to leverage the strengths of our two companies," he said.

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Wal-Mart Shuffles Top Managers
by Kris Hudson – Wall Street Journal
April 6, 2006

Wal-Mart Stores Inc. shuffled several top managers, continuing a practice of challenging its executives by shifting them to new departments.

The highest-profile move is Lawrence Jackson's promotion to chief executive officer of the retailer's global procurement unit, which oversees Wal-Mart's purchasing of goods in 28 countries. He had been executive vice president of the human-resources division. The procurement job has been vacant since last year, when Ken Eaton left, and Wal-Mart is expanding its scope under Mr. Jackson.

The division is critical to Wal-Mart's efforts to bolster its profit margins by buying goods directly from overseas suppliers. "What this shows us is a bigger commitment to global procurement," said Adrianne Shapira, an analyst with Goldman Sachs Group Inc. "They talked about tripling it over the next three to five years. The last we had heard was that it was under 10% [of Wal-Mart's purchasing], so tripling that is an ambitious goal."

Mr. Jackson came to the Bentonville, Ark., retailer in 2004 from dollar-store operator Dollar General Corp., where he was president and CEO. Before that, he worked for Safeway Inc. and PepsiCo Inc.

To fill Mr. Jackson's previous post, Wal-Mart named Susan Chambers, previously executive vice president of risk management and benefits administration, to executive vice president of the human-resources unit.

Filling Ms. Chambers's former job will be Linda Dillman, previously Wal-Mart's chief information officer. Ms. Dillman also will oversee Wal-Mart's sustainability efforts aimed at environmental responsibility and resource conservation. Succeeding Ms. Dillman is Rollin Ford, who as executive vice president of logistics and supply chain had overseen the first stages of Wal-Mart's Remix program, aimed at moving fast-selling goods through its distribution system more quickly. Succeeding in Mr. Ford's old job is Johnnie Dobbs, who as senior vice president of logistics oversaw the retailer's distribution centers in the Eastern U.S.

Wal-Mart's practice of continually shuffling its top ranks originated with late founder Sam Walton, who called it "cross-pollenization" -- challenging officers to broaden their expertise, making them better candidates for higher roles.

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Sears Gets Support for C$899 Mln Sears Canada Bid
Bloomberg.com
April 6, 2006

Sears Holdings Corp., the No. 1 U.S. department-store chain, won shareholder support for an C$899 million ($778 million) takeover of its Canadian unit after it sweetened the offer by almost 7 percent this week.

Sears Canada investors with about 7.61 million shares accepted the C$18 a share offer, enough to give Sears Holdings more than 50 percent of the stock it wanted, the Hoffman Estates, Illinois-based retailer said today in a PRNewswire release.

Sears Holdings, controlled by Chairman Edward Lampert, wants to buy the Canadian unit to compete against rivals Wal- Mart Stores Inc. and Hudson's Bay Co. by combining management and cutting costs.

The additional 7.61 million shares, combined with previous commitments by shareholders, gives Sears Holdings about 25.3 million additional shares. The company needed about 24.8 million to be able to complete the transaction and take the unit private. Sears Holdings owned 54 percent of Sears Canada before the bid.

Sears Holdings said this week that Vornado Realty LP, a New York-based real estate trust, agreed to sell its 7.5 million shares after the company increased its bid from C$16.86 a share. Natcan Investment Management Inc., which was the biggest minority shareholder with 9.69 million, had already agreed to tender its stake.

Sears Holdings extended its offer until Aug. 31 to obtain the shares it doesn't yet hold. It expects to complete the transaction by the end of the year. Sears Canada is the country's No. 2 department store chain with 435 stores.

Sears Canada shares fell 16 cents to C$18.59 yesterday on the Toronto Stock Exchange. Sears Holdings shares rose $6.19, or 4.7 percent, to $137.87 in Nasdaq trading

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Macy's to Launch Exclusive Line of Martha Stewart Furnishings
By Ellen Byron – Wall Street Journal
April 6, 2006

Federated Department Stores Inc. is expected to announce today that its Macy's division will launch an exclusive line of Martha Stewart-branded home furnishings, called Martha Stewart Collection.

The line, set for launch in the fall of 2007, will include bed and bath furnishings, casual dinnerware, flatware, glassware, cookware, garden furniture and holiday decorations.

Martha Stewart Living Omnimedia Inc. already has an agreement to sell housewares and other home products under the Martha Stewart Everyday brand exclusively through Kmart, a division of Sears Holdings Corp. That agreement, which runs through 2009, will continue. The Macy's line will be positioned as "affordable luxury," said Martha Stewart, founder of Martha Stewart Living Omnimedia. "The products will be more upscale" than her current product offerings at Kmart, Ms. Stewart said.

Federated's home-furnishings department has struggled to gain a foothold against discounters such as Target Corp. and home-furnishing superstores such as Bed Bath & Beyond Inc. As with other product categories, Federated has aggressively sought exclusive merchandise as a way to differentiate itself.

"This line not only covers the fundamental parts of our home-furnishings business, it also allows us to expand our seasonal and holiday offerings," said Janet Grove, a Federated vice chairwoman and head of Macy's Merchandising Group.

Federated's $17 billion acquisition of its rival May Department Stores Co. last year, which created a 850-store national department-store chain, made the agreement possible. "In our former self, we'd never be large enough to satisfy the demand potential of the Martha Stewart product offering," said Federated Chief Executive Terry Lundgren. "This is an advantage of the May acquisition."

For Martha Stewart Living, finding new opportunities is important because nearly all its merchandising revenue currently comes from Kmart. When considering the agreement with Macy's, Martha Stewart Living conducted research that found some 30 million women go to a store specifically because it carries Martha Stewart products. "With all the new Macy's stores, virtually all our markets will be covered," said Susan Lyne, president and CEO of Martha Stewart Living.

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Sears Holdings wins over more Sears Canada holders
Reuters.com
April 6, 2006

CHICAGO (Reuters) - Sears Holdings Corp. said on Thursday that more Sears Canada  shareholders had agreed to vote in favor of going private, and the retailer expects to close the deal in December.

Sears Holdings, the owner of Sears and Kmart stores, said shareholders owning about 7.6 million Sears Canada shares had agreed to the transaction, and it now had sufficient support for the C$18.00 per share deal.

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Jim Cramer's Stop Trading!: Loving Lampert
The Street.com
April 5, 2006

Ed Lampert is the "Warren Buffett of his generation" and his Sears Holdings remains a buy, Jim Cramer said on CNBC's "Stop Trading!" segment Wednesday.

"The guy's for real," Cramer said of the hedge fund manager who engineered Kmart's acquisition of Sears. "The buyback is for real, the numbers are for real. The naysayers are not for real."

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Sears Holdings to buy back $500 million in shares
ASSOCIATED PRESS
April 5, 2006

CHICAGO – Sears Holdings Corp., the third-biggest U.S. retailer, said Wednesday its board of directors has approved the repurchase of as much as $500 million more of the company's common stock.

The repurchase plan follows an existing $1 billion buyback, under which $30 million remains. Since launching that buyback plan last September, Sears has bought back about 8 million shares at an average price of $120.86. The company, which owns Kmart and Sears, Roebuck and Co. stores, has about 157 million shares outstanding. Sears shares rose $6.19, or 4.7 percent, to close at $137.87 on the Nasdaq Stock Market, near the middle of their 52-week range of $111.64 to $163.50.

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Sears says C$18 is final offer for Sears Canada
Reuters.com
April 5, 2006

CHICAGO, April 5 (Reuters) - Sears Holdings Corp. said on Wednesday that C$18.00 per share was its best and final offer for the remaining shares of Sears Canada, denying speculation that it could again increase its bid.

The retailer raised its buyout offer from C$16.86 earlier this week.

"We are concerned that speculation reported in the press may be misleading the market regarding our intentions," Sears Vice Chairman Alan Lacy said in a statement. "As a result, we are stating clearly and categorically that we will not increase our price further."

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Wal-Mart's RX for health care
By Rik Kirkland – Senior Editor-at-large - Fortune
April 17, 2006 edition

The retailer is opening cheap, convenient clinics in its superstores -- and calling on Washington to fix the really big problems.

NEW YORK - When Wal-Mart announced recently that it would open medical clinics in supercenters across the country, the news coverage went something like this: Get ready for a battle of the titans. America's most admired, most vilified, most shopped-at retailer is finally taking on the $2-trillion-a-year U.S. health-care market, a hulking giant just begging to be whipped into shape by Wal-Mart's vaunted efficiency and everyday low pricing. It's Ali vs. Foreman, Mothra meets Godzilla, right?

Not exactly. Stop by the Wal-Mart in a place like Owasso, Okla., five miles northeast of Tulsa, and you do see signs of something interesting going on. Between the Smart Styles hair salon and the Kids Fun Center is the new RediClinic, three freshly painted, stark-white rooms staffed by nurse practitioners licensed to prescribe drugs.

A smiling receptionist hands out fliers touting a flat $45 fee for "Get Well" visits. That price includes all the tests necessary to diagnose and prescribe for everyday ailments like colds, flu, strep throat and pink eye. If you're uninsured, as roughly half the clinic's customers are, it's a big saving over the $95 or so that a regular doctor's visit would cost in this part of the country, and a huge savings over the $400 a hospital emergency room might charge.

Another pamphlet offers a menu of "Stay Well" screenings for basic preventive medicine. For instance: a $29 blood test to determine your cholesterol profile with glucose, vs. what RediClinic claims is a "retail" price of $65. (Thirty minutes south down Highway 169, the Wal-Mart in Broken Arrow touts an "end-of-season special" on flu shots--"Now only $20.")

This mix of transparent prices, electronic efficiency (patients can access test results online using a password), and convenient hours (7 A.M. to 7 P.M. weekdays, 8 A.M. to 6 P.M. Saturdays, and noon to five on Sundays) looks, for now at least, like a winning formula.

"It was pretty awesome," according to Dirk Thibodaux, a landscape architect who dropped by the RediClinic in Fayetteville, Ark., with an ear infection a few weeks back. Visiting his regular doctor, he figures, would have involved a midday appointment and a "minimum of two hours." For roughly the same cost as his regular co-payment, says Thibodaux, "I showed up at 7 A.M., got my diagnosis and prescription in 20 minutes, and wasn't even late for work."

"The initial results on this launch were as good as any test we've done recently. We were seeing satisfaction rates over 90 percent," says Glenn Habern, Wal-Mart's senior vice president for new-business development. This being Wal-Mart, the company promptly stepped up the rollout. It had planned to open 12 clinics with four partners by the end of 2006. (The clinics are owned and operated by vendors; Wal-Mart merely leases them its valuable floor space.) In February it pledged to open 50 more by next January.

Though Wal-Mart is only collecting rent money here, it sees the clinics potentially as a big deal for two reasons: They boost its appeal as a one-stop place to shop by giving customers a much-needed service, and they help fulfill its self-proclaimed mission to be "a champion for working families," as Susan Chambers, head of benefits, puts it.

The model for the clinics, in fact, is the company's bid to drive costs out of the fat-margin check-cashing and money-order business; it now offers those services in more than 3,000 stores and figures it's saving workers and customers $4 million a week.

Still, there's a limit to the dent the clinics can put in the nation's swelling health-care tab -- even if all 2,000 Wal-Mart supercenters eventually get them. Year in and year out, roughly 70 percent of medical bills are generated by just 10 percent of the population, usually folks with serious chronic illnesses, which these places are not set up to treat.

So let's go back and revise that Godzilla vs. Mothra story to reflect reality. Wal-Mart, it turns out, is getting slammed just like every other company by the rising cost of health care. Its spending on health-care benefits has soared 19 percent a year since 2002. At the same time, it continues to get pounded politically on this issue like no other company.

While its benefits are quite respectable by the standards of big retailers, which operate on razor-thin margins, they still leave a lot to be desired. Chambers says she and her team were "surprised" and "disappointed" to discover last fall after a "deep dive" into the data that nearly half the children of Wal-Mart's employees were either uninsured or on Medicaid.

An ever more vocal crowd of critics is trying to force Wal-Mart to adopt the more generous benefit standards of the typical blue-chip corporate giant. Their weapon: state laws mandating that large employers either spend at least 8 percent of payroll on health benefits or pay the difference into a state low-income health-insurance fund. Maryland passed such a law over its governor's veto in January, and unions are pushing for similar legislation in 31 states.

To all this the nation's largest employer is responding in three ways: (1) by vigorously defending itself in the opinion wars, (2) by launching initiatives, large and small, such as opening the new clinics, giving employees big discounts on fruits and vegetables to promote healthy eating, and offering inexpensive "value plan" health insurance to workers that combines high-deductible catastrophic coverage with low co-pays on a limited number of visits, and (3) by insisting that ultimately health care is not a Wal-Mart problem but a national one. CEO Lee Scott recently told the National Governors Association: "The soaring cost of health care in America cannot be sustained over the long term by any business that offers health benefits to its employees."

The fact is, he's right. While it's premature to declare the death of the uniquely American system of delivering health-care security mainly through employers, signs abound that it is dying. A little more than half of Americans now receive health insurance from their employer, down from nearly 70 percent in 1980.

The steepest decline in coverage -- from 46 percent to 26 percent -- has occurred among workers earning roughly $8.50 an hour (the populace of Wal-Mart Nation, in other words). No wonder 25 percent of states now spend 25 percent of their budgets on Medicaid alone.

It's only going to get worse. Princeton University health expert Uwe Reinhardt predicts that the exploding cost of private-sector insurance premiums, up 10 percent to 20 percent a year since 2000, means "low-wage workers and their employers are sailing into a perfect storm."

The number of uninsured Americans, which has already climbed from 40 million in 2000 to more than 45 million today, should soon top 50 million. Meanwhile, most analysts predict that the percentage of large U.S. companies that can afford to offer health-care benefits to retirees, already down from 70 percent in 1990 to 36 percent today, will wind up somewhere close to zero.

What's the solution? Wal-Mart's top brass haven't formulated a plan, beyond calling for business, government, and industry leaders to develop standards and electronic systems that will drive costs out of health care the way Wal-Mart and its allies drove them out of supply chains.

Inevitably, any fix to make the U.S. health-care system more affordable and accessible -- not to mention sustainable -- requires facing down a whole herd of snorting-mad interest groups. That's why politicians won't act unless there's a much stronger sense of crisis than there is today.

The bad news is, such a crisis seems almost certain down the road. And the good news? At least we'll be able to afford those $20 flu shots from Wal-Mart.

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Sears Canada Holders Seek Higher Bid
From Parent, Survey Says
Bloomberg.com
April 4, 2006

Sears Canada Inc. investors holding more than two-thirds of the shares parent company Sears Holdings Corp. needs to take the retailer private say they won't accept yesterday's sweetened bid, according to a survey by Desjardins Securities Inc.

Investors owning 22 million shares say they won't accept the bid of C$18 a share, or C$899 million ($774 million), Ron Mayers, head of alternative strategies at Desjardins, said today in an interview. The survey doesn't account for 10 million shares the Hoffman Estates, Illinois-based company doesn't already own.

The results indicate Sears Holdings may have to raise the price a second time, Mayers said. Sears Holdings raised the bid from C$16.86 after investors with more than a third of the stock failed to tender. Financial adviser Genuity Capital Markets had valued the shares at as much as C$22.25 in a report. Vornado Realty LP agreed to tender 7.5 million shares yesterday.

“By picking off shareholders piecemeal, you only galvanize the remaining shareholders,'' Mayers said. A price below C$20 is “probably not acceptable.'' Desjardins holds shares in Toronto- based Sears Canada, the country's third-largest department-store chain. .

Sears Holdings owned 54 percent of Sears Canada before the first bid. The bid's success depends on Sears Holdings' getting 50 percent of the stock owned by other investors, and the stake from Vornado, a New York real estate trust, gives the company more than 35 percent. Sears Holdings needs 7.1 million more shares.

More Shares
“If we can account for another 3 million shares (who won't tender), then this thing doesn't get done,'' Mayers said. ``I am hard-pressed to believe they would obtain those, because anyone who would accept C$18 would probably sell into the bid that is out there right now.''

Sears Holdings is in discussions with shareholders who may tender enough for the bid to succeed, according to a statement from the company yesterday.

Sears Canada shares rose 20 cents, or 1.1 percent, to C$18.75 by the 4 p.m. close of trading on the Toronto Stock Exchange today, indicating some investors expect a higher offer.

Sears Holdings shares advanced $1.03 to $131.68 in Nasdaq trading.

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At Sears and Ford, Internal Border Wars
By Ian Austen – New York Times
April 4, 2006

OTTAWA, April 3 — Given that the United States is right next door, it is not surprising that some of the biggest companies trading on the Canadian stock exchanges are subsidiaries of large American corporations and that their parents are also their largest shareholders.

But as Sears Holdings and Ford Motor are finding, attempts to streamline increasingly global operations by taking Canadian subsidiaries private can prompt protracted legal and financial battles.

On Monday, Sears Holdings increased its bid to take full control of Sears Canada by 7 percent, to 899 million Canadian dollars ($767 million), or 18 Canadian dollars a share. The move came after minority shareholders twice rejected by overwhelming margins earlier bids from Sears Holdings. They took that step at the suggestion of the Canadian company's board, whose outside directors are resigning next month, apparently in protest.

At Ford, lawyers are preparing submissions to the Supreme Court of Canada challenging lower courts' finding that Ford unfairly undervalued its Canadian affiliate by about three billion Canadian dollars ($2.6 billion) when it was privatized 11 years ago.

The Canadian variation of a minority shareholder fight is fed by several factors, including the prevalence of companies with dominant shareholders, the market influence of pension funds and Canadian laws. That combination, some say, makes conflict almost unavoidable.

"I wouldn't say this kind of dispute happens every day, but it's not entirely unusual," said Jeffrey G. MacIntosh, a professor of securities law at the University of Toronto. "In Canada, we have a lot of companies that are controlled by a single shareholder. Inevitably, there's some temptation for a controlling shareholder to further its own interests, and if there's a means, these sorts of things are bound to happen."

When Sears Holdings, which is based in Hoffman Estates, Ill., announced its intention to buy out the minority shares of Sears Canada last December, it owned about 53.8 percent of the company. Its offer of 16.86 Canadian dollars a share, however, ran into trouble when an appraisal by Genuity Capital Markets, commissioned by the Canadian operation's board, valued Sears Canada at 19 to 22.25 Canadian dollars a share.

In statements to shareholders, Sears Holdings said that Genuity should have reduced its appraisal because the Canadian company did not own the rights to its name or product trademarks like Kenmore.

The Canadian board was unimpressed. Noting that the trademarks had relatively little value in Canada without a retail chain, it recommended that investors reject the offer. Soon afterward, the six independent directors said they would not stand for re-election.

As two deadlines for the offer came and went, the most recent on Friday, most shareholders heeded the directors' advice and kept their holdings.

While the increased offer announced Monday is still short of the independent valuation, it signaled a retreat from Sears Holdings' announcement two weeks ago that it would not raise its bid and would cut dividends if it failed.

The increase was enough to persuade one large investor, Vornado Realty, to announce that it would tender its 7.5 million shares. With that stake and other shares turned over earlier, Sear Holdings will hold just more than 70 percent of the Canadian company, which is based in Toronto.

Still, analysts warned that Sears Holdings might have to pay more to reach a complete takeover.

"It's 50-50 that they'll get anyone else at $18," said David Brodie, a merchandising analyst with Research Capital in Toronto.

Ford's problem was also board-related, but in a different way. When Omers, a pension fund for municipal employees in Ontario, began a legal challenge of the appraised value for Ford Canada's shares in the 1990's, it came across an internal memo from Roy Bennett, a Ford Canada director and former chief executive, warning that Ford's internal accounting could create a problem with minority shareholders.

Ultimately, both a trial court and an appeals court upheld the Omers view that Ford had improperly siphoned off about three billion Canadian dollars from 1985 to 1995, when Ford Motor bought out the Canadian operation.

Ford Canada's sales operation, documents produced during the trail showed, had consistently lost money since 1977 after paying its American parent for goods and services it received. Both courts found the company's internal pricing system arbitrary and unfair to shareholders other than Ford Motor.

"This was not something that you could tell from the publicly reported financial information," said Paul M. Pugh, the senior vice president for public investments at Omers.

The pension fund's case against the company was simplified thanks to a Canadian legal concept that is known as oppression, which is not available to American investors. With it, investors need to show only that they have been harmed rather than demonstrate that a company deliberately acted in bad faith.

But the victory has been largely theoretical for Ford Canada's minority shareholders.

When Ford Motor bought out Ford Canada, it paid 185 Canadian dollars a share. The courts raised that price to 207. The three billion Canadian dollars that Ford siphoned would have added 52.36 Canadian dollars.

But in an apparent bid to avoid giving a windfall to investors who did not hold the stock during the 10-year period, the appeals court decided that all stockholders should get just 8.6 cents a share, the amount of cash per share that Ford took out of the Canadian company in a single business day.

That "doesn't create a level playing field," Mr. Pugh said. "It creates a windfall for the corporation."

Last month, Omers asked the Supreme Court to hear an appeal of the award decision. The court will probably decide by this summer whether it will hear the case.

Professor MacIntosh, who submitted a paper to the court on Omers's behalf, said letting the case stand would be a significant setback.

"It would be a big blow for investors," he said. "The court of appeal decision provides a bit of a blueprint for taking advantage of minority shareholders."

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Sears piles up hefty $4 billion in cash
By Sandra Jones – Crain’s Chicago Business Online
April 3, 2006

Spending cuts build war chest, give Lampert investment options

Sears Holdings Corp.'s cash hoard has about tripled in the past year, leaving billionaire hedge fund manager and Sears Chairman Edward Lampert in a prime position to do what he does best: invest it.

But Sears investors looking for hedge fund-like returns may be disappointed, as the company's debt load and operating nee

Thanks to cost-cutting and the sale of Sears Canada's credit card unit, the Hoffman Estates-based retailer had amassed $4.4 billion in cash as of Jan. 28, the end of its fiscal 2005. That's up from the $1.6 billion it reported last April in its first quarter as the combined Sears and Kmart. That leaves Sears with more cash on hand than any retailer but Wal-Mart Stores Inc., which has $6.4 billion, according to Standard & Poor's Capital IQ division.

That is good news to Mr. Lampert's fans, many of whom have bought Sears shares as a way to tap his investing acumen without putting up the $10 million required to gain entry to his Greenwich, Conn.-based hedge fund, ESL Investments Inc.

"Investors are betting on his ability to convert assets into cash and to convert cash into a lot more cash," says Mohnish Pabrai, managing partner at Irvine, Calif.-based Pabrai Investment Funds, a $300-million hedge fund. "From my perspective, the hedge fund and the company are the same."

Mr. Pabrai praises Mr. Lampert — but has yet to buy any Sears shares himself, believing they're overpriced. Sears shares closed Friday at $131.83, almost the same price as when Sears Holdings began trading in March 2005.

But Sears isn't a hedge fund. It's a company with large capital needs — and $4 billion in debt, mostly brought on when Kmart Holding Corp. bought Sears. Some analysts say that expecting Mr. Lampert to generate big investment returns through Sears is a risky proposition.

"As an investing company, you have a lot of latitude in ways to make money, but Sears is an operating company," says Brian Hamilton, co-founder of SageWorks, a North Carolina-based financial research firm. "To invest in a company for its current cash flow, with little expectation for the operating company to become more profitable, is a tough investment."

Another risk: Most investors have no idea what Mr. Lampert plans to do with Sears' cash. Two obvious options would be acquiring another retailer or buying back Sears shares.

The latter tactic has proved a favorite in the past. As the largest stakeholder in AutoNation Inc., AutoZone Inc. and the old Sears, Mr. Lampert has advocated for billions of dollars in stock repurchases and even, in the case of AutoNation, pushed to issue new debt in order to repurchase shares. Since Sears Holdings was created, the company has repurchased 5 million shares for $600 million; it is authorized to repurchase another $400 million in shares.

Stock buybacks enrich shareholders — especially Mr. Lampert, who owns 41% of Sears shares — but not everybody loves them. Bond analyst Carol Levenson of Gimme Credit in Chicago says she "would prefer to see cash reinvested profitability into the business or even a shrewd acquisition."

Ms. Levenson says a good fit, given Kmart's Martha Stewart product lines, could be Texas-based Michaels Stores Inc., the crafts retailer that put itself up for sale in March. But at $5-billion market capitalization, Michaels would be a big-ticket item.

A Sears spokesman declined comment. Still, Mr. Lampert has been explicit about what he won't do with Sears' cash, eschewing spending to build new stores or improve existing ones.

"It would be a mistake to plow money into capital expenditures merely because that is the 'accepted practice' or 'expected,' " he wrote in a December letter to shareholders. Sears cut capital spending nearly in half to $562 million last year. The company plans to keep capital spending at the same level in 2006, according to Sears' annual report.

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Sears Holdings Boosts Bid for Sears Canada Shares
Bloomberg.com
April 3, 2006

Sears Holdings Corp., the No. 1 U.S. department-store chain, increased a hostile bid for its Canadian unit to C$899 million ($764 million) after some shareholders rejected an earlier offer as too low.

Sears Holdings offered C$18 a share for the stock it doesn't own in Sears Canada, 7 percent higher than its previous bid, the company said in a statement today. Vornado Realty LP, a real estate trust, has agreed to sell its 7.5 million shares to the enhanced offer.

Sears Holdings, led by Chairman Edward Lampert, has said Sears Canada will be able to compete against rivals such as Wal- Mart Stores Inc. and Hudson's Bay Co. by combining operations with the parent company, allowing for lower costs and common purchasing.

Sears Holdings now has the support of more than a third of the minority shareholders. The retailer is in talks with others and ``believes'' it will be able to gain a majority of the 46 percent stake it didn't own when it first made the proposal Dec. 5. Sears Holdings extended its offer until April 18.

Sears Holdings now has more than 70 percent of shares in Toronto-based Sears Canada, up from 54 percent when it first made its offer, the Hoffman Estates, Illinois-based company said. Sears Holding raised its bid from C$16.86 a share.

The parent company had obtained less than 10 percent of Sears Canada's shares under its original offer. Vornado and other shareholders, including Pershing Square Capital Management, held out for a higher offer.

Sears Canada shares fell 25 cents to C$18.10 on March 31, when Sears Holdings offer was scheduled to expire. Sears Holdings rose 86 cents to $131.83.

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Sears raises offer for Sears Canada
By Angela Moore – MarketWatch
April 3, 2006

Sears Holdings Corp. on Monday said its subsidiary SHLD Acquisition Corp. increased its offer for Sears Canada to C$18.00 a share and entered into an agreement with Vornado Realty L.P. under which Vornado agreed to deposit its 7.5 million shares to the enhanced offer no later than Friday, April 7. Sears prior offer for Sears Canada was C$16.86 a share.

Sears said it extended its offer until 11:59 p.m. on April 18. To date, 10,204,999 common shares of Sears Canada have been deposited into the offer, including the 10,161,968 shares which were taken up by SHLD Acquisition Corp. on March 17, 2006.

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FASB Proposes Rule on Retirement Benefits
By Stephen Singer - Business Writer – Associated Press
March 31, 2006

Companies will be forced to disclose more prominently whether they have set aside enough money for pensions and retirement benefits under an expected change in accounting rules that comes amid estimates that U.S. retirement plans are underfunded by $450 billion.

The rule proposed Friday by the Financial Accounting Standards Board would require companies to add an entry on their balance sheets to reflect whether their retirement plans are overfunded or underfunded. Currently, such information is only disclosed in a separate footnote that accompanies financial statements, a practice that can make a company's debt and future liabilities appear lower than they are.

Current standards do not provide complete information about post-retirement benefit obligations, FASB said. They allow an employer to recognize an asset or liability in its balance sheet that "almost always differs" from the actual overfunded or underfunded standing of the benefit plans, FASB said.

The proposed changes, signaled by FASB last year, would be effective for fiscal years ending after Dec. 15, and therefore would start appearing in company reports early next year. The rule will apply to pension plan sponsors that are public and private companies and non-governmental not-for-profit organizations.

The accounting standards board is accepting written comments on the proposal by May 31. The FASB is the designated organization for establishing standards of financial accounting and reporting. The standards govern the preparation of financial reports and are officially recognized by the SEC and certified public accountants.

The proposal comes amid a series of bankruptcies in which airlines and others have sought to foist the hefty pension obligations on the federal agency that insures retirement plans. At the same time, major companies, including Sears Roebuck & Co., Motorola Inc., Verizon Communications Inc., and International Business Machines Corp., have been freezing their pensions benefits to cut costs.

George Batavick, a member of FASB, said investors, creditors and staff of the U.S. Securities and Exchange Commission believe accounting for retirement benefits is now incomplete and "makes it difficult to assess an employer's financial position and its ability to carry out the obligations of its plans."

"Today's proposal, by requiring sponsoring employers to reflect the current overfunded or underfunded positions of post-retirement benefit plans in the balance sheet, makes the basic financial statements more complete, useful and transparent," Batavick said in a statement.

The proposal issued Friday also would require employers to measure pension plan assets and obligations as of the end date of the period covered by the financial statements. Companies now may measure pension benefit obligations as of the balance sheet date or up to three months earlier. The change would force companies to provide information that reflects the latest economic or fiscal developments.

Public companies would be required to apply this proposed change to the measurement date for fiscal years beginning after Dec. 15. Nonpublic entities such as not-for-profit organizations, would be subject to that requirement in fiscal years beginning after Dec. 15, 2007.

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Whirlpool's worry: how to make Maytag merger work
By Padraic Cassidy – MarketWatch.com
March 31, 2006

NEW YORK (MarketWatch) -- Whirlpool Corp. on Friday closed its acquisition of Maytag Corp. -- its main rival in appliances -- in a deal that combines the top two producers of the nearly 18 million laundry machines sold in the in the U.S. last year.

But it's a union of two companies headed in opposite directions.

Despite a commanding market share for the combined entity in some appliance categories, the deal easily passed federal antitrust review earlier this week.

Not only is Whirlpool taking on about $1 billion in Maytag debt; it will assume hundreds of millions in Maytag pension obligations, a growing influx of lower-cost appliances from Asia, and critical decisions about how to position Amana, Jenn-Air and other well-known brands it inherits.

For Maytag (MYG) shareholders, the $2.7 billion merger, including debt, ends two years of turmoil, restructuring and executive exits. It also pushed the shares to a close Wednesday above $21 -- a level the stock hadn't achieved since the last day of 2004 -- as the Department of Justice announced it wouldn't block the deal.

Whirlpool shares (WHR), on the other hand, have enjoyed a 33% gain in that time, as the Benton Harbor, Mich., company absorbed its main rival and beat back competing bids for Maytag from Chinese manufacturer Haier and private-equity group Ripplewood Holdings.

In the end, what mattered was that federal antitrust lawyers said Whirlpool could be checked in its price increases by models from General Electric Co., Electrolux and Asian manufacturers, and, to a lesser extent, that the merged company would produce more savings than a struggling Maytag could on its own.

The combined company would make three out of every four top-loading washers in North America, or 80% of the washers sold, according to Prudential analyst estimates.

Whirlpool sells products under the Whirlpool, KitchenAid, Estate and Roper brands. Maytag's brands include Maytag, Amana, Admiral, Performa, Jenn-Air and Magic Chef. The two manufacturers, along with GE (GE), Electrolux (ELUXY), LG and Bosch, also make appliances for Sears (SHLD), all under the Kenmore name.

Whirlpool has been a much more profitable company than Maytag, according to Morgan Keegan analyst Laura Champine, because it produces three times the annual revenue of Maytag despite having an identical manufacturing footprint in North America.

'[I]n today's global economy, there probably could have been no better outcome than for a struggling Maytag to become part of the world's largest appliance company. Bring on the competition now.'

Des Moines Register

Analysts said Hoover, Maytag's struggling floor-care unit, will likely be sold and are awaiting updates from Whirlpool on how it plans to position the enlarged pool of competing brands.

"Specifically, we would like additional detail on how the brands will be arranged in order to be mutually complementary and avoid overlap," according to David MacGregor, analyst at Longbow Research.

The relatively upmarket Jenn-Air could address what has been a gap in Whirlpool's kitchen lineup, and the Amana brand could boost Whirlpool's refrigeration lines, according to MacGregor. He added that beyond Maytag's Neptune line of high-end laundry machines, the company has had little success in premium machines. Whirlpool could move the rest of Maytag lines to a middle-range prices and position Whirlpool models to attract higher-paying buyers.

One unknown is what will happen with Home Depot (HD) stores, which accounted for 14% of Maytag sales in 2005, but which stocks no Whirlpool appliances, except in its small Expo chain.

"The home center is light years behind its competitor Lowe's in merchandising of major appliances," according to MacGregor.

"By our assessment, it makes little sense to spend a lot of money rebuilding" Maytag brands only to have Home Depot treat them as a commodity.

Sears, Lowe's (LOW), Home Depot and Best Buy (BBY), account for about two-thirds of all U.S. home-appliance sales. Early in 2005, Best Buy stopped selling Maytag laundry products in favor of more LG appliances from South Korea, which Home Depot also sells. Samsung (SAMCF) has also had success in selling at Lowe's and Best Buy.

Those relatively recent entrants, along with GE and Sweden's Electrolux, would be able to curb Whirlpool attempts to raise prices by boosting production, Department of Justice lawyers said.

"The combination of strong rival suppliers with the ability to expand sales significantly and large cost savings and other efficiencies that Whirlpool appears likely to achieve indicates that this transaction is not likely to harm consumer welfare," according to a Justice Department announcement.

But Prudential analyst Nicholas Heymann, who was surprised by the antitrust clearance, reminded clients in a note Wednesday that Whirlpool also faces a large financial hurdle in taking on Newton, Iowa-based Maytag, as well as the challenge of reviving its brands. Maytag's "market share has never been lower than today over the past decade in virtually all of its appliance product lines, nor has the company's financial condition ever been as leveraged as it is today."

There should be little difficulty in blending Maytag and Whirlpool corporate cultures, according to the editorial page of Iowa's largest newspaper, the Des Moines Register, which lamented that the deal leaves the state with the headquarters of just one Fortune 500 company, the Principal Financial Group.

"But in today's global economy, there probably could have been no better outcome than for a struggling Maytag to become part of the world's largest appliance company. Bring on the competition now," the editorial board said Friday in an open letter to Whirlpool.

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Wal-Mart Shows a Similar Side to Sears
By Michael Barbaro – The New York Times
March 31, 2006

THE year was 1993, and Sears, Roebuck & Company wanted to shake off its image as a testosterone-filled department store focused on tools and lawn mowers.

So its advertising agency developed a print and television campaign featuring female shoppers discovering, to their surprise, that the retailer stocked fashionable clothing. The campaign had a catchy jingle: "Come see the softer side of Sears."

Fast forward to 2006. This time, the retailer is Wal-Mart Stores  and the goal is to shake off its image as a house of bargains for cheap laundry detergent and toilet paper.

So its agency developed a print and television campaign featuring women discovering, to their surprise, that the retailer stocks fashionable clothing and home furnishings. It, too, came up with a catchy slogan: "Look beyond the basics."

A similar goal is evident in both campaigns: to change consumers' view of the kinds of products the retailers carry. But the similarities do not end there. Wal-Mart's advertising campaign bears a remarkable resemblance to the Sears campaign right down to its execution.

For its print ads, Sears chose a two-page spread. The left page is dominated by white space, with a small image of a household product, like a refrigerator, positioned in the middle. On the right page is the image of a sleek leather coat or a sundress.

A testimonial in one ad stated: "We were looking for a refrigerator. But I found something much cooler."

For its print ads, Wal-Mart also chose a two-page format. The left page is dominated by white space, with a small image of a commodity product, like eye drops, in the center. On the right page is a large image of a sleek dress or flat-screen television.

A testimonial in one ad states: "I went in for eye drops and found something eye opening."

If the adage is correct, perhaps Sears should be flattered by the imitation, a common situation in advertising. (Sears had no comment on the campaign.)

GSD&M, the agency in Austin, Tex., that is behind Wal-Mart's "Look beyond the basics" campaign, says it did not work from, or even review, the Sears campaign, which was developed by Y&R, a division of the Young & Rubicam Brands unit of the WPP Group.

Roy Spence, the president of GSD&M, a division of Omnicom Group, said his staff "had no clue that it was even close."

Mr. Spence said the author of the tagline "Look Beyond the Basics" was a college student when the Sears campaign broke in 1993. "She was more interested in sipping beer than watching Sears ads," he said.

But Mr. Spence concedes that the two campaigns are "scarily similar."

He attributes the resemblance to the goals of the campaigns: to contrast what both Sears and Wal-Mart considered to be an incomplete consumer perception (that they carried dowdy fashions) with a more informed reality (that they had improved their fashion offerings.)

"This campaign is like 100 campaigns that go out every year," Mr. Spence said. "It is classic advertising method. Here is what you thought. Here is what we want you to know."

Asked to review ads from both companies, Adam Hanft, chief executive of Hanft Unlimited, a New York branding and marketing firm, said the similarities were "amazing. " He expressed surprise that Wal-Mart executives approved it.

"It is amazing that nobody in the chain of command remembers" the Sears campaign, he said. "It was all over the place."

Industry experts agreed that even if the Wal-Mart ads did consciously borrow from the Sears campaign, the most likely consequence would probably just be embarrassment over not being more original. Though the advertising looks similar, the problems plaguing Sears in the early 1990's and the ones Wal-Mart faces today are not.

By 1993, Sears had earned a reputation as a hardware store that happened to sell clothing, an image it desperately wanted to overcome.

"Women went in on an errand but did not view it as their store," said Stephanie Kugelman, who helped develop the Softer Side of Sears campaign and is now vice chairman and chief strategic officer at Young & Rubicam Brands.

Wal-Mart, on the other hand, has found that shoppers rely on the store for household staples — food, cleansers and paper products— even though the retailer devotes significant space to clothing and home furnishings.

In fact, to discourage consumers from flirting with J. C. Penne (for a cute skirt), Target (for a trendy coffee maker) or Best Buy (for a sleek television), Wal-Mart has significantly expanded its offerings over the last year.

There is a new line of women's fashion, called Metro 7, and a men's line, called Exsto, is on the way; and there are now $2,000 flat-screen televisions in the store. On average, 100 million Americans walk into a Wal-Mart store every week, a staggering figure that suggests the company has no trouble attracting shoppers. "We think we can have the people already shopping us shop for more trend," Mr. Spence said.

For Wal-Mart's perception vs. reality campaign to work, it will have to do something that Wendy Liebmann, president of WSL Strategic Retail, says Sears failed to do: change the reality of its stores.

"You have to deliver in the store," Ms. Liebmann said. "Otherwise, consumers look at you and say, Great ad, bad store."

Today, Sears is struggling again, not to overcome a male image, but to attract customers of both sexes.

Since its merger with Kmart, sales at individual Sears stores have plunged. A new print and television advertising campaign, announced this week, will feature images of plants sprouting vines that become Sears products — at least a subliminal nod to the company's desire for growth.

The hopeful theme: "Spring changes everything."

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Sears names top marketing, apparel execs for Kmart
Crain’s Chicago Business
March 31, 2006

(Reuters) — Sears Holdings Corp. on Friday named two executives to lead the marketing and apparel businesses at its Kmart unit.

Bill Stewart will become Kmart's chief marketing officer after working at Levi-Strauss & Co., where he was most recently the vice president of marketing for the Dockers brand, Sears said in a statement.

The company, based in Hoffman Estates, Illinois, also said that Irv Neger was named senior vice president of Kmart apparel, overseeing apparel strategy, product positioning, merchandising and buying. Neger previously served as senior vice president of softlines for Family Dollar Stores Inc.

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Investors bet Lampert will sweeten Sears bid
By Marina Strauss – Retailing Reporter – Globe and Mail, Canada
March 29, 2006

Sears Canada Inc.'s shares are trading considerably above U.S. hedge fund manager Edward Lampert's $16.86-a-share takeover offer, prompting speculation as the Friday deadline approaches that he may sweeten it.

Mr. Lampert will face intransigent investors who may demand even more in the future if he doesn't boost the bid at least a little when the current offer expires, said Ron Mayers, head of alternative strategies at Desjardins Securities, which owns Sears Canada shares, as does Mr. Mayers.

The general consensus among analysts is that Mr. Lampert, who controls U.S. parent Sears Holdings Corp., will not succeed in his attempt to acquire a majority of the minority interest in the Canadian division at the current offer. This would allow him ultimately to take it private.

"I believe the longer he waits, the more expensive it becomes," Mr. Mayers said in an interview yesterday. "The time to strike is now."

The wild card for Mr. Lampert may be whether two influential U.S. investors are ready to accept an offer of about $19 a share, or whether they expect much more, analysts said. If they expect more, Mr. Lampert may not play ball, they predict.

The two large investors are U.S.-based Vornado Realty Trust and Pershing Square Capital Management LP.

Meanwhile, Natcan Investment Management Inc., the largest independent shareholder representing about 9 per cent of Sears Canada, has tendered to Mr. Lampert's offer. But Natcan has a deal with Sears Holdings that gives it the benefit of any increase to the bid for 90-days.

David Brodie, retailing analyst at Research Capital, said it comes down to something of a power struggle between Sears Holdings, on the one hand, and the two key investors on the other.

"I think it's tidier to get the deal done sooner rather than later," Mr. Brodie said. This would allow Sears Holdings to tap into the benefits of a fully integrated company without the added costs of overlapping functions and public company expenses, he said.

But Mr. Lampert is probably not ready to pay much more than $19 a share, he predicted. And some industry sources have suggested that Pershing may expect considerably more than that.

Officials at Perhsing and Vornado could not be reached.

A spokesman for Mr. Lampert said he is staying firm on his offer. Last week, after failing to entice enough shareholders, Mr. Lampert extended it to Friday but said he would not extend it again.

Investors, nevertheless, appear to be holding out for a better offer. On the Toronto Stock Exchange, Sears Canada's shares rose 11 cents to close at $18.37.

Genuity Capital Markets, hired by Sears Canada's independent directors' committee, has deemed the offer to be too low.

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Judge OKs lawsuit by those who lost money during Kmart takeover
By Sandra Guy – Business Reporter – Chicago Sun-Times
March 28, 2006

A federal judge in Chicago has given the green light to plaintiffs who charge that Sears Chairman Edward S. Lampert and former Sears CEO Alan Lacy failed to tell shareholders they were plotting Kmart's takeover of Sears Roebuck and Co.

The plaintiffs making the complaint sold their Sears stock between Sept. 19 and Nov. 16, 2004, and lost out on a spike in Sears' share price that occurred when Kmart and Sears announced Nov. 17, 2004, that Kmart would acquire Sears. Kmart's $12.3 billion buy of Sears Roebuck won shareholders' approval on March 24, 2005.

U.S. District Judge Robert W. Gettleman ruled that the aggrieved shareholders cited sufficient facts so they can try to prove that Lampert and Lacy violated securities laws by failing to fully disclose their negotiations.

While Lampert and Lacy were talking Kmart's takeover of Sears, Sears was issuing press releases telling investors it had bought 54 Kmart stores. The Kmart store announcement started rumors of a bigger deal between Sears and Kmart, but Lampert's ESL Partners hedge fund filed papers with federal regulators saying it was not holding Sears stock in order to change or influence control of Sears.

Lampert was Sears' largest shareholder and chairman of Kmart Holdings before Kmart took over Sears.

Sears continued to issue press releases bragging about its efforts to improve its store performance after a real-estate investment trust, Vornado Realty Trust, announced on Nov. 5, 2004 that it had acquired a 4.5 percent interest in Sears' equity.

The judge's order says Lacy, "perhaps more than anyone, knew the status of the proposed [Kmart-Sears] merger and at the same time knew Sears was repurchasing its own stock and potentially misleading the public about Sears' intent to continue its retail business by purchasing off-mall Kmart stores."

The shareholders allege that Sears, with Lacy's knowledge, was repurchasing shares at what they contend was an artificially low price, effectively increasing the interest of Lampert's hedge fund and making Kmart's takeover of Sears easier.

The judge said that the complaint "contains more than enough factual detail for a reasonable person to conclude that Lacy was aware that the statements being made were misleading and either intentionally chose to ignore them, or intentionally elected to mislead the public."

The plaintiffs seek a jury trial and compensatory damages.

A Sears spokesman had no comment.

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Sears Grand plan draws skeptics
By Sandra Guy – Business Reporter – Chicago Sun-Times
March 28, 2006

The bricks-and-mortar answer to Kmart's takeover of Sears Roebuck was supposed to be Sears Essentials, an off-the-mall, big-box store that combined the best of Kmart and Sears. That concept failed, and now Sears Chairman Edward S. Lampert is pinning the retail chain's hopes on Sears Grand stores.

Analysts remain skeptical and expect that Lampert, a billionaire hedge-fund manager, will find a profitable exit for himself and his hedge-fund friends who have bought up stock in the new Sears.

Lampert's latest effort at retailing, where he has no hands-on work experience, is a smaller, redesigned Sears Grand store.

The latest Sears Grand concept, Sears' off-mall store that aims to compete with Target and Wal-Mart, will offer shoppers an Internet cafe, an electronic-games play area for children, and mock-ups of rooms outfitted with Sears products.

It's part of Sears' strategy to reinvent Sears Grand to make it more family-friendly, inspire home designers and build long-term relationships with customers, said Julie Younglove-Webb, senior vice president of customer experience and general manager of Sears Grand.
Sears Grand stores will continue to be designed as one-stop shops, selling everything from toys to convenience foods to TVs, and offering a pharmacy under the same roof as tools, electronics and clothing.

The first reconfigured Sears Grand store opened Saturday in a former Kmart store in Summerville, S.C., a town with a median household income of $43,635 about 15 miles west of Charleston.

The first eight Sears Grand stores, including one next to Gurnee Mills mall, were built from the ground up, and are nearly twice as large as the former Kmart stores.

Shoppers will notice changes in the new Sears Grand in Summerville before they enter the store. Sears is using a more earthy cinnamon terra cotta on the store's exterior, and is planting flowers outside and resurfacing the parking lot.

Shoppers will be able to quickly glance around the store because fixtures and shelving will be lower than those in the initial Sears Grand stores, and the focal point will be a living room mock-up filled with Sears products, Younglove-Webb said.

On one side of the living room will be vignettes of a bedroom, kitchen, and in some stores, a laundry room, and on the other side will be apparel basics.

Sears has never been strong in apparel sales, and its latest fashion-forward efforts have been outright flops. So the Sears Grand store will feature basics from Sears labels such as Apostrophe, Covington and Classic Elements, as well as Lands' End apparel, with only a nod to fashion, Younglove-Webb said.

The front of the store, near checkout, will feature "The Grand Cafe," where shoppers can grab a cup of Coffee Beanery coffee or food from Nathan's Hot Dogs, Connie's Pizza or Bruegger's Bagels. Sears also is reintroducing an old staple from its mall stores of 20 years ago: free popcorn.

Near the food cafe will be the Internet cafe, with five Dell flat-screen computers and free printing from one printer, making it easy for shoppers or their children to check e-mail or play on the Internet.

In a separate area, youngsters will be able to try out electronic games.

The Sears Grand store in South Carolina also has an outdoor garden center and a pharmacy with an outdoor window that enables shoppers to walk up to the window and leave their prescriptions without having to go inside.

If a shopper cannot find the exact color or size of a product in the store, he or she can log on to any of a dozen Internet kiosks throughout the store and buy the product from Sears' Web site.

The idea is to use technology to increase service, and to emphasize the fact that the Hoffman Estates-based Sears provides a variety of services, whether it's online, inside a store, or in people's homes by doing installations and appliance repairs, Younglove-Webb said.

The store has 74,000 square feet of selling space, compared with the first Sears Grand just outside Salt Lake City, which boasts 208,000 square feet. Yet nothing from the initial Sears Grands has been eliminated from the new one; departments are simply smaller.

Younglove-Webb declined to say how much Sears is paying to reconfigure 14 former Kmart stores into Sears Grands, but it cost an estimated $3 million per store to convert former Kmarts into Sears Essentials, a format that Sears Chairman Edward S. Lampert dropped in February.

The latest strategy is one of many that Sears executives have introduced in the last several years to try to revive the flagging retailer.

Retail expert George Whalin called Sears "the most schizophrenic company I've ever seen" because of its quick, never-ending changes in focus.

"Sears spent almost no money marketing Sears Essentials and gave it less than six months to work. It's not enough time," said Whalin, president of Retail Management Consultants, based in San Marcos, Calif.

Whalin said, "I don't know what in the world they're doing."

Retail consultant Robin Lewis said Lampert's first priority is to make money for himself and his hedge-fund manager followers as quickly as possible, rather than developing a long-term repositioning and sustainable growth plan. as Alan Questrom did when he turned around J.C. Penney.

Indeed, one of Sears' hedge-fund investors, Atticus Capital, a New York-based hedge fund, has increased its interest in the retailer to 6.7 percent of the shares outstanding.

For his part, Lampert's latest letter to shareholders sought to rally the troops by calling the year-old company a $55 billion startup -- but one capable of returning Sears and Kmart to prominence amid the Wal-Marts, Kohl's and Targets that have proven so adept at attracting shoppers.

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To Attract and Keep Talent, J.C. Penney CEO Loosens Up Once-Formal Workplace
By Ellen Byron – Wall Street Journal
March 27, 2006
Managing 'Call Me Mike!'

PLANO, Texas -- When Mike Ullman took over as chief executive officer of J.C. Penney Co. in late 2004, he found a formal corporate culture that in some ways seemed to evoke the 104-year-old retailer's earliest days.

Employees still referred to senior management and store managers as Mr. and Ms., rather than using first names. At the company's headquarters here, casual attire wasn't officially acceptable, even on Fridays. Decorating cubicles too elaborately, such as placing personal items on top of file cabinets, was a no-no. A team of "office police," reporting to human resources, enforced décor guidelines.

Penney also had a practice of promoting almost exclusively from within. To advance, ambitious employees had to work their way up through the stores, with many starting behind the cash register. Serving as a store manager was an assumed requirement to reach a senior-management position.

Mr. Ullman decided that the stringent code of conduct and in-house hiring were not only a factor in the company's high turnover rate, but also an obstacle to recruiting new talent. While Penney's financial performance has enjoyed gains over the past few years -- profit more than doubled in 2005, totaling $1.1 billion, and Penney shares have surged more than 80% to $60.82 over the past two years -- the company realized it could find further gains by stemming employee turnover, the cost of which it attempted to quantify last year. It estimated that each employee who left Penney cost the company about a third of that employee's wage. All told, for 2005, those departures added up to $400 million, the company estimates.

Penney, which targets middle-income consumers, faces a difficult competitive environment, as discounters lure shoppers with lower prices than Penney's, while higher-end department stores offer designer brands. To continue growing, Mr. Ullman insists that inspiring the company's current workers, and recruiting new ones, is mandatory. "In retailing today, you have to realize that there is too much property and too much merchandise," he says. "What there isn't enough of is talent."

Only the second CEO in Penney history to be hired from outside the company, Mr. Ullman is mindful that in many ways he is walking a tightrope: Bringing in new blood, without alienating loyal employees or destroying over a century of corporate tradition. But he is confident in his approach. "I think our founding fathers would want to compete in today's market," he says. "Change is necessary to do that."

Transforming corporate culture is a focus for many companies today, says Batia Wiesenfeld, professor of management at New York University's Leonard N. Stern School of Business. "Today's emphasis on culture change is shifting from stemming the bleeding of the last five years to paying attention to broad cultural adaptations that will deliver a competitive advantage," she says. But bringing change to a company that prides itself on its history isn't easy, she says, "especially when a company's legacy is part of its marketing."

Much of the way Penney operates today is rooted in its 1902 beginnings, when James Cash Penney opened his first store, called The Golden Rule Store, in Kemmerer, Wyo.

When the rapidly growing chain was incorporated in 1913 and renamed J.C. Penney, Mr. Penney instituted a ceremony for loyal employees to affirm their commitment to the company's motto, known as HCSC, which stands for Honor, Confidence, Service, Cooperation.

The son of a preacher, Mr. Penney wrote prolifically about how Penney employees should conduct themselves both on the job and at home, emphasizing the need for values such as agreeableness, thriftiness and moral leadership.

Using colleagues' surnames was addressed early on. In a 1922 memo, Earl C. Sams, the second president of Penney, decried employees' use of each other's first names. "I do believe that in and around our stores if we would address our help as 'Mr.' or 'Miss' and 'Mrs.' as the case may be, then we would maintain a certain dignity and command a certain respect that carries with it an earning power with a value that is hard to measure," he wrote.

While the memo was never sent to store managers, "everyone would have known about it," says Joan Gosnell, who oversees the J.C. Penney archives at Southern Methodist University.

Much of that formality lingered through the decades. "Even if I insisted on being called 'Mike,' people still would call me 'Mr. Boylson,' " says chief marketing officer Mike Boylson of his tenure as a Penney store manager.

Instrumental in Penney's campaign is Mr. Ullman's newly recruited human-resources officer, Michael Theilmann, a former executive at Yum Brands Inc. At a rally last summer, Mr. Theilmann announced a series of "quick hits," or small changes that he bet would make a big initial impact in Penney's cultural revolution.

One of his first moves: a poster campaign dubbed "Just Call Me Mike" that he hoped would finally cure employees of their stubborn reluctance to call senior management by their first names. Nodding to the fact that some 400 of the headquarters' 5,200 employees go by the name Mike, Mr. Theilmann had posters emblazoned with the phrase plastered throughout the sprawling corporate campus. In addition to photos of company officers named Mike, including Messrs. Ullman, Boylson and himself, the posters cited all the advantages of being on a first-name basis, including "First names create a friendly place to shop and work."

Other announcements that drew cheers from the crowd: Acceptable work attire would officially be "business casual" at the corporate office, and, on Fridays, jeans. Having disbanded the office police, Mr. Theilmann also declared that employees could decorate their cubicles as they chose (within reason).

To emphasize that workers are center stage at the company, Penney plans to sell or donate most of its art collection -- which includes over 300 pieces and is estimated to be worth millions of dollars -- and replace it with photos of Penney employees and other company-oriented art. Plans for the proceeds of the sale are in development. Sotheby's Holdings Inc. is currently appraising the collection, which includes works by Andy Warhol and Robert Henri.

New security-ID badges are currently being distributed to all 150,000 employees. To promote a more democratic sentiment inside corporate headquarters, those cards allow employees access to all parts of the building, including the executive floor, which was previously off limits to most workers. New cards feature the employee's first name in large letters, with the last name in much smaller type.

One of the most sensitive changes was the unveiling of Penney's "Winning Together Principles," which offer an updated moral code for employees that the company says is inspired by Mr. Penney's original one. The new code also quietly supersedes the HCSC ceremony, founded by Mr. Penney, which included an elaborate induction and pin ceremony and was meant to recognize loyal employees embodying Penney's core values. But only profit-sharing management was eligible. Penney's new code and recognition program is intended to be more inclusive, Mr. Ullman says, arguing that lower-level employees can embody the HCSC principles of honor, confidence, service and cooperation just as much as senior management.

"The business isn't just about store managers anymore -- it's more complicated than it used to be, and I need to motivate employees from the entry level to the officers," says Mr. Ullman. "If I had a choice to honor the past and lose, or move forward and win, I pick winning."

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Lacy left to ponder legacy, price
Tenure as Sears CEO was marked by some missteps, and his biggest deal--the Kmart merger--cut him out of the picture
By Susan Chandler - staff reporter - Chicago Tribune
March 26, 2006

It was the beginning of 2004, and Sears Chief Executive Alan Lacy knew he was running out of time. Sears, Roebuck and Co. had just turned in its third consecutive year of sales decline under his leadership, and directors had cut Lacy's 2003 bonus in half and given him no raise.

Lacy reached out for help to an unlikely source: Edward Lampert, a hedge fund wizard almost nine years Lacy's junior who had demonstrated his financial prowess by taking control of Kmart and leading it out of bankruptcy early.

In late February 2004, the two began holding secret talks about how Kmart and Sears might work together, and on Halloween, Lampert proposed an audacious plan to buy Sears. Lacy backed it.

But if Lacy thought he was going to be Lampert's partner in running the combined company, he was wrong.

Six months after the deal closed, Lampert demoted Lacy, taking away his CEO title and giving it to Aylwin Lewis, a former fast-food executive Lampert had hired to be Kmart's CEO. Lampert also cut Lacy's pay by a third.

Lacy, 52, still occupies the same sixth-floor executive suite he did before the Kmart merger, but he is the odd man out. Lampert runs Sears Holdings Corp. by phone and BlackBerry from Connecticut. Lewis has moved away from the sixth floor and now occupies a modest office on a lower floor that allows him more everyday contact with Sears' employees.

Lacy, who declined interview requests from the Tribune, has a 5-year contract with Sears Holdings. But he is expected to leave at the end of June when he can cash in a load of stock options and nearly $10 million in restricted Sears Holdings shares.

He is concerned about how people will view his years as the head of Sears and whether some will blame him for selling out, several Lacy associates say. He is worried about his legacy.

Lacy is tall and trim with a full head of brown hair that is only showing wisps of gray at the temples. His boyish good looks and straight white teeth would make him a natural to play an eager up-and-coming corporate executive in a Hollywood movie. Lacy is a good listener, and his eyes drill in on the people when he is speaking. There is a sense of drive and sincerity about him. But he also comes across as a little aloof.

From early on, Lacy was a loner. The only child of older parents, he grew up in small-town Cleveland, Tenn., at the foot of the Great Smoky Mountains. It was a conservative place where four fundamentalist Christian sects were headquartered, making the Southern Baptist Church, where the Lacys belonged, appear moderate by comparison. Many teenagers stayed away from school dances and proms because they weren't allowed to dance.

Lacy couldn't wait to go to college and get away from Cleveland's restrictive environment, he admitted in a 2000 interview, but he credited his strict upbringing with instilling him with a strong work ethic.

His early experience with the retail world didn't have a happy ending. Lacy's father kept the books at Lay's 5&10, an up-and-coming dime-store chain in Tennessee where the younger Lacy worked after school, painting lines in the parking lot and sorting inventory.

Then Wal-Mart came to town and drove Lay's out of business, costing his father his pension, his insurance coverage and his equity stake in the company. "He lost everything," Lacy told the Tribune.

Most people who rise to the top of a retail organization are merchants. They can't resist rubbing fabric between their fingers. They walk into a store and immediately notice when racks are too close together or colors too bright. The truly gifted ones have a kind of sixth sense that helps them anticipate what people will be wearing three seasons from now.

Lacy wasn't a merchant.

Fresh from business school at Emory University, Lacy had worked as a financial analyst for Holiday Inn in Memphis. A few years later, he moved to the Chicago area to work for Dart & Kraft Inc., and, by the age of 30, he had become treasurer of the Northbrook-based conglomerate. When Kraft Inc. was spun off as a separate company in 1986, Lacy went with Kraft and eventually became the firm's chief of finance and strategy.

Lacy's analytical powers caught the attention of Kraft CEO Michael Miles, who came to view Lacy as a protege. They stayed close after Miles was named CEO of Kraft's owner, Philip Morris Cos., in 1991, and two years later, Lacy followed him to the tobacco giant where Lacy became president of its capital arm.

Miles didn't mix well with the old-line tobacco guys, so he resigned in mid-1994. Later that year Lacy departed, too, for a finance job at Sears--a company where Miles had emerged as an influential board member. By the following fall, Lacy was named Sears' chief financial officer.

During his early years at Sears, Lacy stayed firmly on the finance side of the business and later led a cleanup of its credit card unit where delinquent accounts had soared.

After Sears CEO Arthur Martinez announced his retirement in March 2000, Lacy emerged as the leading internal candidate to succeed him. As directors winnowed the list of candidates, it came down to Lacy and Mark Baker, then a rising executive from Home Depot, the Atlanta chain that had changed the home renovation market with sprawling stores and mind-boggling assortments.

Lacy's lack of retail experience was a negative, but the board--where Miles was chairman of the search committee--eventually decided in his favor.

"The feeling on the board was that Alan had earned the chance to be CEO. He had not failed. He was a good manager, if not a leader," said a source close to the board who did not want to be identified.

What Lacy did bring to the job was a strong desire to succeed, a willingness to put in long hours and a sense of urgency, former subordinates say. He often talked of Sears as a "burning platform" to communicate the idea that time was short.

Lacy used numbers to find his way. Sears' product lines and retail chains had to earn a certain targeted return on investment to justify their continued existence. Those that didn't would see their resources withdrawn. "We will manage for growth and returns," he told Wall Street analysts a few weeks after he won the top job in September 2000. "We will be doing fewer things better."

His regime would be marked by repeated layoffs at headquarters and deep cuts in Sears' store organization.

The last restructuring of his regime was code-named Project Sharp. Workers at Hoffman Estates jokingly said what it really stood for was "Sears Has A Real Problem."

While Lacy was schooling himself in retail, he wasted little time dispatching his internal rivals.

As Lacy's first major act, he fired Julian Day, who had served with Lacy in the Office of the CEO set up in Martinez's last year. Within a few months, he dismissed Paul Walters, the head of Sears Canada, and sent Mark Cohen, Sears' marketing chief and top merchant, to Toronto.

Then Lacy set about building his team. He hired Greg Lee, the head of human resources at Whirlpool Corp., to figure out the people side of the equation. A tall, gregarious man who was older than Lacy, Lee provided a counterpoint to Lacy's reserve and soon became his closest adviser and confidant.

Lee decided that Lacy, who disliked confrontations, needed a tough guy to handle the unpleasant work of reshaping Sears' top management team. So Lacy and Lee wooed Paul Liska, the CFO of Minnesota insurer St. Paul Cos., to be the company's new chief financial officer.

Liska was known as a cost-cutter, a corporate pit bull. In 2000, he won an award from CFO Magazine in the "cost optimization" category for trimming half a billion dollars from St. Paul's overhead. Boisterous, outspoken, willing to embarrass colleagues in meetings, Liska developed a reputation as someone you didn't want to cross.

The troika soon became known as the three Ls: Lacy, Lee and Liska.

Other former top executives say they felt off-balance, never really knowing where they stood with Lacy. When they would make a presentation to him or offer feedback, his facial expression rarely changed, making it hard to figure whether he agreed with them or approved of their moves.

Andrea Zopp, who served as Lacy's second general counsel, paints a different picture.

"He let people do their job. Sometimes it would have been nice if he said, `You're doing your job but not the way I want you to do it.' But he wouldn't step in and strong-arm people," Zopp said. "The feedback he gave me was dead on. It was like the light bulb went on."

A series of personnel changes

It seemed a risky proposition, but Lacy let the chief merchant job at Sears sit vacant for almost two years after he shifted Cohen to Canada.

During that time, Lacy looked at getting out of the apparel business altogether and then did an about-face: He bought preppy apparel purveyor Lands' End Inc. for nearly $2 billion.

Some people expected Lacy to make Lands' End CEO David Dyer his chief merchant. But Lacy kept Dyer at arm's length. When Lacy finally did bring someone in to tie it all together, he made an unexpected choice: Mark Cosby, the chief operating officer of fried chicken giant KFC Co.

Cosby, who had no retail experience, was supposed to be Sears' "super merchant" in charge of everything from appliances to apparel.

He was a likable sort, say several people who worked with Cosby, a cheerleader who would tell everyone in the room to stamp their feet during meetings to show their enthusiasm. But he was clearly in over his head, they add, adrift in Sears' giant bureaucracy. Behind his back, Cosby's numerous detractors referred to him as "The Chicken Man."

Twenty months after he was named, Cosby was fired and his job was eliminated.

Another of Lacy's high-profile hires also failed to produce dramatic results: Janine Bousquette, a former PepsiCo and eToys executive, who was named chief customer and marketing officer.

Bousquette cut quite a figure in the halls of Sears headquarters. She was tall and thin. Her long blond hair and flashy fashion choices made her quickly recognizable among Sears' conservatively dressed corporate workforce.

Bousquette's reputation as a workaholic preceded her. A headline in Advertising Age, the trade publication, referred to her "24-hour manic energy." She quickly demonstrated it. Soon people at Sears wondered whether she was sleeping in her office. They viewed the growing clutter of Diet Pepsi cans in her office as a sign that she was fueling her long hours with caffeine.

After five months of toil, Bousquette proudly unveiled a new tagline for Sears' advertising, the retail mantra that would appear in every Sears TV commercial or print ad, "Sears. Good Life. Great Price."

It was virtually the same tagline--"The Good Life at a Great Price," minus the word "Guaranteed"--that marketing chief Cohen had rolled out in 1999, the one Lacy had shelved in late 2000 for being too price-oriented.

Plenty of sell-offs

Lacy did make changes at Sears. He moved checkout registers from individual departments to central locations. He brought in shopping carts. He gave the green light to Sears Grand, an off-the-mall store that combined Kenmore appliances and Craftsman tools with convenience items like pretzels and milk.

But the centerpiece of Lacy's strategy was retreat.

He dumped Sears' cosmetics departments and abandoned its proprietary makeup line. He got out of selling computers, bicycles, wall-to-wall carpeting and custom draperies.

He sold off NTB, a tire and battery chain started by Martinez. He slowed and then halted the rollout of the Great Indoors, Sears' well-received home remodeling chain because the stores were too expensive to build. In his most dramatic move, he sold off Sears' credit business, the engine of the company's profitability, when Sears' retail business was still in disarray.

As retreat followed retreat, Lacy gave shoppers fewer reasons to come to Sears even as aggressive rivals such as Wal-Mart, Target and Kohl's shifted into high gear.

Some analysts and retail executives say it is unfair to pin all the blame on Lacy. Sears' franchise had been in a slow decline since the 1970s as one turnaround strategy after another was tried and discarded. But there's little question Lacy's moves accelerated the slide, leaving Sears vulnerable to a takeover that would have been unthinkable a few years earlier.

"When I left, Sears was a very profitable company that believed in itself and was on the right track," Martinez said in an interview. "Anybody who suggests it was a broken business is overstating the case to make their own point."

Lacy apparently disagrees. He is telling friends and associates that he inherited a debilitated company and the only way to save Sears was to sell it. He frequently mentions that shareholders were the big beneficiaries of Kmart's $12.3 billion acquisition.

He is right about that. Sears' stock was trading in the mid-$30s in November of 2004 before the Kmart deal was announced. Based on Sears Holdings' current stock price, those shares are now worth about $65-$70 a share.

"Alan led that. He made it happen. He gets no credit for that. Some people view what happened as some freak accident--or worse, that he destroyed Sears," said Zopp, who left Sears in October.

"Sometimes the only way to change is with a gross-level shock. You have to blow the place up and look at it from a different perspective. That's what Eddie is doing."

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Broad-based Sears Grand debuts
Store offers expanded variety; Summerville site is first
By Caroline Fossi – Charleston, South Carolina Post and Courier
March 25, 2006

A new Sears store in Summerville is the first of its kind in the country, embodying a new design aimed at offering one-stop shopping for busy families.

Sears Grand opened Friday in a converted Kmart store off Ladson Road in the town's growing Oakbrook section. Thirteen similar stores will be opening across the country in the coming weeks, and all will hold grand opening celebrations on May 20.

Kmart and Sears Roebuck and Co. joined forces last year as the struggling retail giants merged to become Sears Holdings Corp., based in Hoffman Estates, Ill. The merger created the nation's third-largest retailer, with annual revenue of $55 billion and about 3,900 stores.

Since then the combined company has been experimenting with several new store formats, while still operating traditional Sears and Kmart stores.

The new Sears Grand concept offers a mix of the retailer's traditional products such as appliances and clothing with convenience items including food and health-and-beauty products. The stores also carry familiar Sears brand names such as Kenmore appliances, Craftsman tools and Lands' End clothes, as well as other national brands.

"There's a really good product mix for everybody," said Jim Putzel, manager of the Summerville store, which opened Friday on a shortened schedule. Regular store hours start Sunday.

Product categories include appliances, electronics, apparel, lawn and garden, sporting goods, toys, home furnishings and decor, pantry items and food staples such as milk.

Putzel noted that Sears Grand stores offer a wider range of items than you'd find at a traditional Sears store.

At the standard Sears, he said, "You could buy a hammer, but you couldn't buy a nail." At Sears Grand you can buy both, along with light bulbs, plumbing products, air filters and other everyday merchandise.

The new stores offer conveniences such as aisles set at an angle so it's easy to see the whole product assortment, and shelves built low enough so shorter shoppers can reach the top rows.

Complementary products are grouped together, so customers will find athletic clothing and shoes near the sporting-goods department and cleaning supplies near the home-furnishings section.

Scattered throughout the store are set-ups called "vignettes" that suggest how to put various products together, such as a dining-room set topped with place settings and centerpieces in brown and green tones.

The store also has hands-on, interactive offerings, including a small-kids' play area in the children's section and games such as air hockey and Foosball in the sporting-goods section.

Hungry shoppers can fuel up at a food stand that sells baked goods, coffee, pizza, hot dogs and other nibbles.

"We want people to come in and spend time in the store, and make it a fun shopping experience," Putzel said.

In addition to the new Sears Grand, Sears Holdings operates three Kmarts and two Sears stores in the area.

The company doesn't expect to make any major changes to the existing Sears stores, located at Citadel and Northwoods malls, said Bill Seal, director of stores for the company's central region.

The fate of the Kmarts remains to be seen. The company is evaluating stores across the country to decide which format best fits each market. The company doesn't plan to close any stores in the area, Seal said.

The company chose Summerville to test the new Sears Grand concept because the town's demographics fit its target market, said Sears spokeswoman Corinne Gudovic.

That includes lots of young families with household incomes of about $50,000 to $75,000 a year.

"(Summerville) really was a good snapshot of our core customer," she said.

Shoppers seemed impressed by the new store.

Summerville resident Bill Hostetter lives within walking distance of the Sears Grand, and shopped at the store when it was a Kmart.

He said he liked the new store's open feel.

"You can see from one end to the other," he said. "It's so nice and bright."

Shopping for her granddaughter in the children's clothing section, Chris Quick said she liked the store's clean look and wide aisles.

"I think I'll be shopping here more," said Quick, who recently moved from Las Vegas to Summerville to be closer to her grandchildren.

"I think it will be an asset to the community," she said of the store. "It certainly will be an asset to my granddaughter."

New concept

Address: 4570 Ladson Road, located next to the Ladson Oakbrook Shopping Center

Hours: 8 a.m. to 10 p.m. Monday through Saturday, 8 a.m. to 8 p.m. Sunday (Today's hours are 10 a.m. to 8 p.m.; regular shopping hours start Sunday)

Size: 90,000 square feet

Store manager: Jim Putze

Number of employees: 90

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Murky merger
1 year after marriage, Sears and Kmart are still trying to make the effort work

By Erica Sagon – The Arizona Republic
March 25, 2006

After their first year of marriage, Sears and Kmart are two crazy kids still trying to convince everyone else that their union just might work.

The two unlikely retailers merged a year ago this week to form Sears Holding Corp., now a retail force of nearly 3,500 stores and 317,000 employees across the country.

The company surprised the industry last week with better-than-expected financial results for the fourth quarter, giving some hope that the retail veterans might have a future in the increasingly competitive industry. But in the same breath, the company was criticized for having ugly stores and weak apparel sales.

Britt Beemer, a retail-trend watcher and chief executive officer of America's Research Group of Charleston, S.C, said Sears sent mixed messages to its customers in its first year and is stumbling, trying to keep up with such competitors as Target and Wal-Mart.

"They can't decide what they want to be when they grow up," Beemer said. "If they're not careful, they're going to become a minority-focused discount store."

Arizona honeymoon

In Phoenix, the marriage came with a handful of Kmart closings and the opening of a Sears Essentials in Peoria. The store, an off-mall hybrid of Sears and Kmart, was among the first 10 to open across the country. The company has said it will convert Sears Essentials to Sears Grand, a similar but larger concept, and will cut back on the number of such stores it opens.

The company now has 47 stores in Arizona. The lineup includes 20 Kmarts, 14 Sears, one Sears Essentials and 12 other specialty stores, such as the Great Indoors, which are owned by the company.

In the wake of the merger, some Kmart stores in the Valley closed and were sold to other big-box retailers.

A Kmart in central Phoenix became a Phoenix Ranch Market. In Mesa, one store was converted to Kohl's and another will become American Home Furnishings. Lowe's Home Improvement will supposedly take over empty Kmart stores in south Scottsdale and Tempe.

Retail opportunity

Phoenix retail broker Judi Butterworth of De Rito Partners Development Inc. said many of the Kmart stores were old, but were snapped up quickly by other retailers hunting for good real estate.

Nationally, Sears Holding Corp., which did not return phone calls for comment, has a portfolio of 3,500 stores, including 1,416 Kmarts, 866 Sears, 58 Sears Essentials and Sears Grand stores, 17 Lands End stores and 1,128 other specialty stores including Great Indoors, outlets and hardware stores. The company also owns more than half of Sears Canada, which has 425 stores, and has made a bid to fully acquire the chain.

At the corporate level, the company has combined the home offices of Kmart and Sears into a Hoffman Estates, Ill., headquarters about the size of Scottsdale Fashion Square. About 1,500 jobs have been eliminated since the home offices combined, according to the company's filings with the Securities and Exchange Commission. The number of jobs lost locally was not available.

In an upbeat note to shareholders earlier this month, Sears Chairman Edward Lampert underscored the company's hunger for profits.

"Success must include profitable growth," he said. "We are not focused on sales or sales growth as an end in itself. Nor will we spend capital on stores simply because we have the capital available to invest or because everyone else does it."

Lampert's letter came on the heels of the company's fourth-quarter earnings results, which were difficult to compare with the previous year because Sears and Kmart were separate then.

The company earned $648 million, or $4.03 a share, in the fourth quarter, up from $309 million, or $3.09 a share, in the same period last year. Revenue rose to $16.09billion from $5.9 billion the year before. Sales were shy of some analysts' expectations of $16.45 billion.

Will it last?

Same-store sales, a key indicator of a retailer's health measured at stores open at least a year, dropped 12 percent at Sears stores during the holiday shopping season. Shoppers didn't buy the "fashion forward" clothes the company tried to market through several new proprietary brands.

At Kmart, same-store sales rose 1 percent, the first gain since mid-2001. Apparel sales got a boost but were offset by drops in home goods and the food and drug business.

The focus on profits means the company isn't likely to upgrade the stores' interiors, said Richard Hastings, a retail analyst for Bernard Sands LLC of New York City.

"Management is concerned about return on invested capital and return on shareholder equity and that's the focus," Hastings said. "Everything else takes a backseat to that."

But Sears Essential shopper Martha Beeman, 77, favors the store because it is clean, an improvement from before.

"I used to come here when it was Kmart," said Beeman, who filled her cart with drapes, a blouse and popcorn during a recent trip to the store. "This is handy.

"I'm finding several good things that are good buys, but not as many (as before)."

In a report for analysts, Gary Balter, a retail analyst with Credit Suisse, said Sears performance in the fourth quarter rose above expectations, but cautioned that the retailer has "intense competition."

"Sears faces significant challenges in the discount retail market, particularly from the large cap retailers Wal-Mart and Target," Balter said.

Beemer said those retailers have made their mark, while Sears and Kmart are still trying to find their identity.

"The only niche Kmart has in that strategy is they've got to become a discount home store," Beemer said, "but I don't see them moving into that niche. Clearly, they've got strategies that don't make any sense."

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Sears' Letter Shines
By Nathan Parmelee - Motley Fool.com
March 22, 2006

I'm a big fan of shareholder letters. Reading just a few from any company can tell you a lot about the company's management and how well they treat their shareholders. Warren Buffett's letters to shareholders are the gold standard, and having re-read some of the letters done by Kimco Realty (NYSE: KIM) this week, I believe the REIT does an excellent job in this regard as well.

I'm also impressed with the letter to shareholders that Sears Holdings (Nasdaq: SHLD) Chairman Edward Lampert provided, and I'm even more impressed that the company posted it on its website. It's full of information specifically for Sears shareholders, but there are lessons in it that are applicable to all investors. The portion I found the most fascinating was the discussion on same-store sales.

I've stated before that I think the focus on same-store sales is overblown. Abercrombie & Fitch (NYSE: ANF) and Starbucks (Nasdaq: SBUX) routinely report strong same-store sales results, and it's an important metric, but it's not the only lever available to a company. And it's certainly not the metric I consider the most important for either company. That's an important point that people seem to lose sight of when same-store-sales (SSS) numbers are released, especially for a company that operates profitably and has a high return on invested capital. The Sears letter to shareholders says pretty much the same thing, as the following excerpt demonstrates:

If we take a simple example of a single store, then a comparison of SSS from year to year is fairly straightforward. If a store does $1 million in sales at a 10% operating margin this year, generating $100,000 in operating profit, and does $1.1 million in sales next year at the same operating margin of 10% generating $110,000 in operating profit, it will report a 10% increase in SSS. Now, let's add another dimension. Imagine that this same store spent $500,000 to improve the store experience during that year. The 10% increase in SSS generated an additional $10,000 in profit. Whether the $500,000 investment makes sense or not in hindsight will depend on the future performance of the store. Obviously, if the store only improves by the $10,000 in profit, the $500,000 investment doesn't make sense. I believe that companies that pursue SSS growth at any cost often fall victim to these traps.

I'm not sure how the Sears Holdings story will unfold and whether the company will ultimately be able to become a force in retail again. It's honestly not a story I've followed all that closely. However, the letter offers plenty of lessons for investors -- including an interesting discussion on pensions, liabilities, and share repurchases -- on how to think about companies and how they operate. And investors should give it a read for that reason even if they have no interest in the company.

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Wal-Mart Targeting Upscale Shoppers
By David Koenig – AP Business Writer
Associated Press
March 22, 2006

PLANO, Texas (AP) -- Wal-Mart Stores Inc. has overcome its rural roots and downscale image to attract affluent shoppers, but executives admit that many of those well-heeled consumers come only for cheap groceries and steer clear of the other merchandise.

In its boldest effort yet to target upscale shoppers, the nation's largest retailer is opening a new store this week with an expanded selection of high-end electronics, more fine jewelry, hundreds of types of wine ranging up to $500 a bottle, and even a sushi bar.

Wal-Mart says it won't duplicate this format anywhere else. But if plasma TVs, microbrewery beer and fancy balsamic vinegar sell in Plano, those items could be added to stores in other affluent communities.

Retail experts say nearly half of American families shop at Wal-Mart at least once a week. They say the retail giant has nearly tapped out its middle-class base and must attract consumers who love Target and Costco but not Wal-Mart.

With about 3,700 U.S. stores, Wal-Mart has nearly saturated the market, and analysts say future growth depends on boosting sales by offering a better shopping experience. The company is renovating 1,800 stores as many of its older outlets have started looking a little tired.

Wal-Mart profits keep rising, but not as fast as Wall Street expects, and same-store sales, those at locations open at least a year, rose faster in 2005 at smaller but trendier Target Corp. Wal-Mart stock has slipped about 20 percent in the past two years while Target shares gained about the same percentage. Wal-Mart shares rose 35 cents Tuesday, to $48.11, in a 52-week range of $42.31 to $51.46.

Analysts say that despite low prices, Wal-Mart suffers from a perception that its merchandise is lower quality, which turns off consumers who can afford better.

"The challenge they face is value, and upper-end consumers define value differently than a moderate-income shopper," said Patricia Edwards, who helps manage retail funds for Wentworth, Hauser and Violich investment counselors. "If it was just price, they would drink the office coffee instead of going to Starbucks."

In recent months, some Wal-Marts began selling upscale bed-and-bath items and its new Metro 7 and no boundaries clothing lines - all of which are highlighted in the new store.

Wal-Mart listened to focus groups of "selective shoppers" - the company's term for affluent customers - in designing the store, said regional general manager John Murphy.

"The upscale customer is shopping our store," Murphy said. "Are they interested in everything we have to offer? No. This is a test store. Can we make that leap to where they are interested in other parts of the store?"

Murphy said Wal-Mart hopes to prove it can reach affluent consumers, which should help persuade vendors who are reluctant to sell their goods there. Target has succeeded in selling designer lines.

Don Gher, an analyst with Coldstream Capital Management, said it took Target years to shift upscale and it won't happen quickly at Wal-Mart either. In the meantime, he said the stores must guard against changing too much, which could alienate its core customers.

Gher predicted that Wal-Mart will succeed at selling high-end electronics to upscale consumers, but selling them apparel will be more difficult. "Fashion can be fickle," he said.

The new store, which opens Wednesday, is 217,000 square feet, about 20,000 square feet bigger than the average Supercenter. It sits across the street from a SuperTarget, and you can see Costco from the parking lot. The blue and gray Wal-Mart exterior gave way to two-tone brick. Inside, wood floors and wide aisles abound. Shelves are lower to reduce clutter. Even employees look different in khaki pants and navy polo shirts instead of blue smocks.

The new store is just as notable for what's missing. The store won't sell guns. It has far less space devoted to lawn and garden, fishing, camping and automotive products.

"This customer is telling us they're not doing it themselves," said Ryan Lincks, the store's project manager. "They don't change their own oil."

But the store has rows of high-definition televisions, several of them over $2,000, plus pricier bikes and even an expanded yoga section. It features an expanded baby clothes area, a cards and books section with cherry-finish wood racks and arching halogen gallery lights, and baggers at the checkout lines - a first for Wal-Mart.

Hungry shoppers will search in vain for McDonald's. It has been replaced by an espresso bar with a sandwich menu and free wireless Internet service.

Cosmetics and pharmacy aren't relegated to the far end of the store; they're next to the food and wine because female customers in focus groups said they want it that way for convenience and speed. Apparel areas have their own cash registers and more discrete fitting rooms.

But no layaways.

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Kirkland's says chairman to remain as CEO/Catherine David Named President and COO
Reuters
March 22, 2006

NEW YORK (Reuters) - Home decor retailer Kirkland's Inc. on Wednesday said Chairman Robert Alderson would remain chief executive having been appointed to the post on an interim basis after CEO Jack Lewis was fired last month.

The company, which gave no reason for firing Lewis after less than nine months in the job, said it had decided not to pursue a search for a new CEO and Alderson would continue in that role.

The company also said it had hired Catherine David as president and chief operating officer, effective March 22.

David was most recently senior vice president and general manager of Sears Essentials, Sears Grand and The Great Indoors for Sears Holding Corp. She will lead the hiring of a new general merchandising manager for the company.

Kirkland's also said Reynolds Faulkner had resigned as chief financial officer to pursue a new career and the board had elected Mike Madden, vice president of finance, to replace him.

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True Value ready to fight rivals Home Depot, Lowe's
6,000-store cooperative has an aggressive marketing strategy
By Dave Carpenter – Associated Press – Buffalo News
March 22, 2006

True Value Co. CEO Lyle Heidemann spends a lot of his time shopping these days - and that's a good thing for a chain that had lost its way in retail.

Roaming the aisles of big-box competitors and other retailers that have put hundreds of its member stores out of business, Heidemann and True Value are actively on the prowl for more customers after a restructuring that has cleaned up its financial problems and given it new momentum.

Whether it can regain business lost to home improvement behemoths Home Depot Inc. and Lowe's Cos. remains questionable. But after years on the defensive, the 6,000-store member-owned cooperative is fighting back again with an aggressive marketing strategy and what its first-year CEO calls "a whole new beginning" for True Value. The quest: Attract more "weekend warriors" away from the giant stores.

The True Value name is well-recognized in Western New York. There are 26 True Value-affiliated hardware stores within 60 miles of Buffalo.

"We're trying to now not (just) survive but in essence put together a strategy for growth," Heidemann said in an interview at True Value's headquarters. "And . . . probably the biggest difference is that we're focused on retail versus wholesale."

True Value always acted as a wholesaler to its retail members, but now it is focusing more on what will help them improve store sales and profits, he said.

Heidemann is pounding the aisles of big and little stores alike, taking mental notes in search of competitive tips.

True Value was synonymous with hardware for many Americans for decades following its establishment in 1948 by hardware wholesaler and distributor John Cotter, who formed a Chicago-based cooperative of 25 dues-paying retailers and called it Cotter & Co. By his death in 1989, sales exceeded $2 billion and nearly one in every four U.S. hardware stores bore the True Value name.

Since then, the cooperative - which became TruServ Corp. and then was renamed True Value Co. last year - has been buffeted by the relentless expansion of giant discount-store competitors, financial losses and accounting errors which led to a Securities and Exchange Commission investigation and a restatement of earnings for 1997-99. More than 1,000 members have left, most closing down but some defecting to rival such as cooperative Ace Hardware.

Financial specialist Pamela Forbes Lieberman was brought in to straighten out the mess in 2001 and headed the company until last June, when she was replaced with Heidemann, an industry veteran. Heidemann spent 36 years with Sears, Roebuck and Co. before retiring in 2003, overseeing at various times its hardware, tools and paint, and lawn and garden businesses, among others.

The 61-year-old Heidemann credits Lieberman for leaving True Value in solid shape, including four straight years of improving profits and same-store sales growth of 2 percent last year, when revenues totaled $2.04 billion. That momentum has enabled him to undertake new retail initiatives, such as adding regional items - for example, snow shovels in the north, fire ant killer in the south and moss killer for the Northwest - and changing pricing and inventory procedures, along with making the marketing push.

Despite the financial recovery, retail consultant Howard Davidowitz isn't sure True Value and its independent operators can be viable in the face of continuing growth by the discount powerhouses.

"They do have a convenience element, and they have some niche businesses," said Davidowitz, chairman of Davidowitz & Associates Inc. in New York. "But in this environment of Wal-Mart, Target, Home Depot, and Lowe's, can they be competitive on price? I think the book is out."

The continuing loss of 150 to 200 members a year, which hardware industry trends suggest is likely to continue, underscores the challenge.

Hardware stores are seeing their share of the do-it-yourself market shrink steadily, with sales growing in the low single-digit percentages annually while their big-box rivals grow at a double-digit clip, doubling their sales in about the last five years.

"Home Depot and Lowe's are going to get bigger and bigger and they're going to take more market share away from small mom-and-pops," said Morningstar analyst Anthony Chukumba. "They have much more purchasing power, a wider selection and lower prices, and at the end of the day that's what customers are really looking for."

Heidemann says True Value, which also operates Grand Rental Station, Taylor Rental, Party Central and other stores, isn't trying to be "a little box carrying all the big-box items." But it is providing its member stores with more detailed information about competitors' prices in individual markets in order to help them compete better head-to-head in its core areas: plumbing, electrical, lawn and garden and paint.

By dropping its decade-old advertising slogan "Help is right around the corner" this spring, the company acknowledges that a reputation for knowledgeable, available service isn't enough. Its new print and television campaign introduces an updated tagline - "Start right. Start here." - reflecting the consumer trend away from repair and maintenance and the billions of dollars now spent annually on home upgrades, alterations and enhancements.

After listening to customer focus groups for months, True Value is targeting not bargain-hunters or advice-seekers but the "do-it-yourself enthusiasts" who already account for an estimated 43 percent of its sales. The goal: to get them to come to True Value first, not Home Depot or Lowe's, for small projects such as painting, refixturing a bathroom or changing lighting.

"We are a very well-known brand," said Carol Wentworth, vice president of marketing. "But the key in retail is to be top of mind when someone says "I'm going out to do a project' - who do you think of first. And when you do a survey of the entire industry and all the customers who are active in the industry, True Value's not top of mind."

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Analyst: Sears' next project might be Michaels
Chicago Sun-Times
March 22, 2006

Sears Holdings Corp. might be interested in buying Michaels Stores, the nation's largest arts-and-crafts retailer, according to analyst Carol Levenson with independent research firm Gimme Credit.

Michaels, a company with more than 1,000 stores and a market capitalization of $4.61 billion, is steadily profitable and could provide Sears with "softer side" diversification, Levenson wrote in a note to investors Tuesday. Michaels also could provide a strategic fit with Martha Stewart Living's line at Kmart, Levenson said.

A Sears spokesman said Tuesday the Hoffman Estates-based retailer declines to comment on rumor and speculation.

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Credit gets its due in retailer's sale
It may be said that an anonymous letter about Sears' credit card unit chief sparked a chain of events that eventually led to the takeover by Kmart

By Susan Chandler - staff reporter – Chicago Tribune
March 22, 2006
Tribune Special Report – One year after the Sears-Kmart Merger

Kevin Keleghan was puzzled but not alarmed when he answered a Friday morning summons in October 2002 from Sears, Roebuck and Co. Chief Executive Alan Lacy. He didn't feel a pit in his stomach until Lacy walked into the conference room with the head of human resources.

"Kevin, I have to have a very disappointing conversation," he told Keleghan, the head of Sears' giant credit card business. "I've decided to release you. I'm very disappointed about that."

Keleghan couldn't believe what he was hearing and asked Lacy if he was kidding. Lacy wasn't. Then Lacy told Keleghan he was being fired "for cause" and wouldn't be getting a severance package.

Keleghan wasn't the only one caught off guard.

His abrupt firing shocked and worried Sears investors, as did Lacy's vague but ominous explanation to Wall Street analysts that, "I lost confidence in his personal credibility."

Ten days later, Lacy tried to reassure Wall Street that there wasn't worse news to come, but investors bid down Sears stock by $10.80 a share, to $23.15, a 32 percent decline and its biggest one-day drop in decades. Several shareholders filed suit, alleging that Sears had misled them about rising delinquency problems. Keleghan sued Sears for defamation.

Keleghan's dismissal proved to be a tipping point in Lacy's tenure. It sent Sears stock into a tailspin and kicked off an unhappy chain of events that culminated in the sale of Sears' highly profitable credit card division the following year. The sale to Citigroup in November 2003, in turn, laid the groundwork for Kmart's daring takeover offer for Sears almost a year later.

As Sears approaches the one-year anniversary Friday of its merger with Kmart, the Tribune was able to piece together through court documents the behind-the-scenes machinations in the executive suite that shareholders rarely are privy to.

It may not be overreaching to say the decline and fall of Sears as an independent company began with an anonymous letter.

It arrived in mid-August 2002, addressed to Lacy, and alleged that Keleghan had been misleading his boss about the health of the credit card business. Lacy decided not to tell anyone else about the letter, according to his sworn statements in Keleghan's defamation suit. But Lacy did tell his chief financial officer, Paul Liska, "I think we need to pay a little more attention to credit."

Liska turned to Cindy Baier, an ambitious executive who recently had joined the credit unit from the tax department. Liska asked Baier to help him keep an eye on Keleghan and the credit business. It was the kind of opportunity she had been looking for.

Baier had told Keleghan that she "wanted to be the CFO of Sears," and to get there, "I needed to get exposure to the senior management team," according to her deposition in the Keleghan case.

Keleghan did help her, Baier said: "He made arrangements for me to make presentations at Alan's staff meetings. He tried to get exposure for me at Sears and within the business community, and he tried to give me good counsel."

Baier ended up playing a key role in Keleghan's undoing.

As president of Sears Credit, Keleghan was overseeing one of the world's largest retail credit card operations. Sears' portfolio held more than $28 billion in consumer debt and counted 60 million credit card holders as customers.

Credit contributed about 10 percent of Sears' revenue but regularly provided 60 percent to 70 percent of its operating profit. With cards bearing interest rates of 21 percent and higher, credit was a gold mine with double-digit profit margins. By comparison, Sears' vast retail operation had a profit margin of about 3 percent.

Sears was really a finance company with a retail empire attached.

For many middle-class families, the Sears card was the only credit card they had, the only way to pay off a new dishwasher over time or finance a new roof.

Switch to MasterCard

The advent of Visa and MasterCard began to change all that. In 1993, when Sears began accepting Visa and MasterCard, 60 percent of purchases were charged on a Sears card. By 1999, that number had fallen to 48 percent. On top of that, nearly 24 million Sears card accounts had become inactive or no longer carried a balance.

Lacy, who had run the credit business for two years in the late 1990s, saw an opportunity. Hoping to increase outstanding balances and fee income, he hit the accelerator on the rollout of the Sears Gold MasterCard, a card that could be used at Sears as well as other stores.

Unlike the old Sears card, which was free, the Sears MasterCard carried an annual fee. But it also allowed customers to run up much larger balances, as high as $10,000 to $20,000. In contrast, the old Sears cards often carried limits of $250 to $1,000. Sears said it was controlling its risk by offering its MasterCard to longtime customers with high credit scores.

In 2000, Sears sent its Gold MasterCard to 7 million accounts that had not been racking up finance charges on their Sears cards. The next year, the number of accounts ballooned to 19 million. Sears also began marketing Gold MasterCards to consumers who didn't have a Sears card, a segment of the population it knew far less about.

In order to build balances faster, Sears offered "teaser rates" and "convenience checks" that allowed customers to pay bills with their cards. It also encouraged customers to transfer balances from other cards. They did.

By mid-2002, shoppers had amassed an impressive $8.5 billion in Gold MasterCard balances. MasterCard now represented almost 30 percent of Sears' credit portfolio. It was a home run for Sears and Lacy, who frequently would lead his presentations to analysts with a rundown of the spectacular growth in credit.

Delinquencies surge

Yet with rising balances came rising delinquencies. In the credit card business, it's called "seasoning." When people get new credit cards and fresh lines of credit, it takes them a while to fall behind on their payments.

Both delinquencies and credit card fraud were rising at Sears, but no alarms were going off. Maybe they should have been.

"Clearly they misjudged how the behavior of Sears customers with a proprietary credit card would change once they had a general purpose card," said David Robertson, publisher of the Nilson Report, a credit card newsletter in California.

Instead, Sears was enjoying a surge in interest income that allowed the company to deliver a second-quarter earnings surprise. Sears even raised its profit outlook for the year.

Lacy downplayed analysts' concerns about troubles at credit card lender Capital One Financial Corp., which had been forced by regulators to boost its reserves for bad debt because of its significant exposure to "subprime" borrowers. The news had sent Capital One stock tumbling 40 percent. "We're 180 degrees different than Capital One," Lacy said.

But after Lacy received the anonymous letter, his anxiety level increased. He began scheduling additional briefings with Keleghan. The write-offs and delinquency rates in the MasterCard portfolio were in line with projections, Keleghan reported.There had been some fraud with the convenience checks, but those were being reined in.

Liska, however, had a different perspective.There were "problems in credit. Big issues," he told Lacy in a voice mail.

The back-channel loop that Lacy had established with Liska and Baier continued to feed his concerns. Finally, Lacy heard something he thought crossed a line. Liska told Lacy that Keleghan had coached Baier "to be accurate but not necessarily honest" when making presentations about the credit business, a statement Keleghan later denied ever making.

It was Sept. 16, and Lacy later acknowledged under oath that he decided he was likely to fire Keleghan that day. A week later, a second anonymous letter arrived. This time, Lacy told Liska about the letter, but as with the first missive, no formal investigation was launched, and Keleghan wasn't told of the letter or its allegations.

Shoring up bad-debt reserves

Two weeks after Keleghan's exit, Lacy addressed Wall Street analysts and gave them bad news. Sears was adding $222 million to its bad-debt reserves and would fall short of the 22 percent increase in earnings per share the company had recently affirmed. Even though Keleghan's team had nothing to do with calculating the reserve, the connection seemed clear: Lacy was cleaning up Keleghan's mess.

By the end of the year, though, there was no sign of alarm or unease about the state of Sears Credit. In its annual 10-K statement, Sears said its MasterCard initiative "had been successful in building balances in the portfolio." A nearly half-billion-dollar increase in the provision for bad debt was attributed to a difficult economy, the seasoning of the MasterCard portfolio, a bigger portfolio and a surge in bankruptcy filings.

Even with those difficulties, credit contributed $1.5 billion in operating profit during 2002, besting the $1.2 billion profit from the retail business. Factoring out one-time items, Sears' 2002 earnings per share exceeded the 2001 figure by 17 percent, an increase most companies would have been proud of.

The wheels set in motion by Keleghan's defamation lawsuit were not so easily stopped. A long list of Sears executives were called to give depositions. So was Greg Lee, head of human resources at Sears, and several Sears directors, including Michael Miles, Sears' lead director and the former CEO of Kraft General Foods, and Brenda Barnes, now the CEO of Sara Lee Corp.

Expert witnesses were called in by both sides, and, not surprisingly, they offered differing views of the situation.

Gregory Baxter, a human resources expert hired by the Keleghan legal team, concluded that Keleghan was "the victim of three badly bungled decisions by [Sears]: the decision to discharge him, then to claim the discharge was `for cause' and then to broadcast publicly criticism of Mr. Keleghan. In my expert opinion, each of those rash decisions could easily have been avoided with resources [Sears] had at hand and by following its own policies and established practices."

Michelle Bryan, an expert witness brought in by Sears, said Lacy was well within his rights to fire one of his top lieutenants because he had lost confidence in him.

"The only person, in my opinion, that could reach the conclusion that Kevin Keleghan was not providing him, Alan Lacy, with a complete picture was Alan Lacy," Bryan said in a November 2004 deposition. "Because it's not only just what's on paper and the data. It's also about what is Mr. Keleghan saying to him in their one-on-one meetings, what is his demeanor, what are the characterizations he is making, what is he saying, and what is he not saying. And only Alan Lacy can make that assessment."

In April 2005, Sears reached an undisclosed, confidential settlement with Keleghan. Estimates of the size of the settlement vary, but several sources close to Sears put it in the $6 million to $8 million range. Keleghan declined to comment on the settlement, and his attorney did not return calls.

The Keleghan case isn't really over. His termination is expected to be a critical aspect of a class-action suit in federal court here that alleges Lacy, Liska, Keleghan and others misled shareholders about the state of the credit business. The case is scheduled for trial in late October.

Two months after he was fired, Keleghan went to work as a temporary CEO for Outsourcing Solutions Inc., a St. Louis-based company that provides collection services to Fortune 500 firms. Arthur Martinez, the former CEO of Sears, provided Keleghan with a reference. Keleghan has since become OSI's permanent CEO.

Despite Lacy's assurances that Keleghan's dismissal was not a reflection on the health of its credit business, Wall Street remained skittish. Sears' stock continued to languish in the $20s during the spring of 2003, down from a high of almost $60 a share the previous summer.

Then Standard & Poor's, the debt rating agency, dealt Sears another blow. It lowered the rating on Sears debt to BBB+ from A-, citing rising credit card delinquencies. Sears long had prided itself on its "A" credit rating, a top grade that allowed it to borrow money at cheaper rates.

Lacy began to worry that Sears would not be able to refinance the billions of dollars in credit card debt that rolled over every year, according to several sources with knowledge of the situation. At the same time, Liska, who now was running the credit business, was arguing that Sears' credit unit would be worth more to a giant financial company that could borrow more cheaply and run it more efficiently.

One of Lacy's strengths was his ability to question the assumptions underlying a business, say executives who worked with him at other companies. Rather than debating strategies for fixing a particular product line, Lacy would be the one to question whether the firm should be in that business at all.

He was about to show that talent on a large scale. Lacy, the finance guy, decided to put the credit unit up for sale.

It was a move that shocked the Sears organization and created anxiety among those who remembered Montgomery Ward doing the same thing in the late 1980s. Without the profit from its credit card business, which had been sold to GE Capital as part of a 1988 leveraged buyout, Wards sought Chapter 11 protection in 1997 and liquidated in 2001.

In a seven-page letter delivered to employees, Lacy said Sears' situation was different from Wards' because "the financials of Sears' retail business are very healthy, as evidenced by the record profitability generated by the business in 2002."

But much of that profit came from aggressive cost-cutting, not a retail turnaround. In fact, Sears' same-store sales had declined every month that year, sometimes by double digits.

To his closest colleagues, Lacy likened the sale of the credit unit to Spanish conquistador Hernando Cortes burning the boats of his soldiers after they landed in Mexico to prevent all thought of retreat. Without the credit business to rely on, Sears would have to improve its retail operations, Lacy reasoned. What had been a slow decline in the company's fortunes would either turn around or accelerate.

Twenty-six days after S&P lowered the debt rating, Sears put its credit card business up for sale with an asking price of $6 billion to $7 billion. In July, Citigroup agreed to pay $6 billion, a $3 billion premium on top of assuming $3 billion in debt. That worked out to a 10 percent premium on Sears' $30 billion portfolio.

Lacy was relieved to have the credit issue resolved, but some Sears insiders and credit card experts thought he had sold the business for way too little. The shadow of the Keleghan scandal, as well as the S&P downgrade, lent the air of a fire sale to the auction, they said.

That view appeared to be validated by data compiled by California investment banker Robert Hammer, who in 2003 tracked 61 sales of credit card portfolios. The average weighted premium on those sales was 18.6 percent, he said.

And last year Sears Canada sold its credit portfolio for a premium exceeding 20 percent.

Buyback strategy backfires

Sears insiders also were concerned when they heard what Lacy planned to do with the proceeds from the credit sale. Rather than reinvest in the retail business, Lacy said he would use the cash to buy back Sears stock. While competitors such as Target and Wal-Mart continued their aggressive expansion plans, it was an admission that Sears didn't have a retail concept worth investing in.

Lacy's stock repurchase plan was intended to boost the price of Sears shares. But it had another effect as well. It increased the percentage of Sears held by a hedge fund operator named Edward Lampert, who had become the controlling shareholder in Kmart Holding Corp.

Lampert wasn't selling his Sears stock, so as the number of outstanding shares decreased, his stake got bigger--and it was already large. Lampert's ESL Investments held an 8.9 percent stake in Sears at the end of 2002, which rose to 13.5 percent by the end of 2003.

Lampert looked like a genius. Kmart's stock had quintupled, from $15 a share when it went public in May 2003 to $75 a share 14 months later when Lacy and Sears made a move that propelled Kmart's stock higher. He agreed in June 2004 to buy up to 54 Kmart stores for $621 million, a first-rate price that investors applied to Kmart's legion of remaining stores.

Suddenly the idea caught fire that retailers could be worth more for the liquidation value of their real estate than they were as going concerns. Kmart's stock continued its lofty ascent, rising to more than $100 a share by Nov. 11, 2004.

Six days later, Kmart launched its takeover of Sears.

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Sears could be worth more, but would Lampert pay it?
Investors think he'd boost value: analyst
By Marina Strauss – Retailing Reporter – Globe and Mail
March 21, 2006

Hedge fund giant Edward Lampert is his own worst enemy in trying to persuade shareholders to back his $835-million offer to take Sears Canada Inc. private, industry observers say.

That's because the controlling shareholder of U.S. parent Sears Holdings Corp. is seen as a savvy businessman who can improve the Canadian division, and increase its value, retailing analyst George Hartman at Dundee Securities Corp. said. Shareholders figure the company will be worth more than the offer -- and want to stick with him rather than bail out. Already the parent is performing better in his hands.

"They think Mr. Lampert is an investment genius," Mr. Hartman said of the man who has made a lot of money for others and engineered the takeover of both Kmart and Sears.

Mr. Hartman and others predict that Mr. Lampert will dig in his heels and refrain from boosting his $16.86-a-share offer despite opposition from some key -- and powerful -- shareholders.

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Yesterday, Sears Holdings extended the offer until March 31. It had only managed to increase its 54-per-cent stake in Sears Canada by 9.5 percentage points, giving it just over 63 per cent of the Canadian division's shares.

Mr. Lampert is playing hardball. Sears Holdings said it will appoint a majority of insiders to the Sears Canada board of directors; currently, the majority are independent directors, but all six said they will not run for re-election at the annual meeting this spring, an apparent protest over how they felt they had been browbeaten by the parent.

Moreover, Mr. Lampert said that Sears Holdings will push to end the Canadian unit's 6-per-cent quarterly dividend if it fails to acquire a majority of the minority Sears Canada shares. That would mean dropping about $25.8-million in annual dividends, including roughly $16.3-million for the parent.

The company argued that Sears Canada "will face an increasingly competitive Canadian retail environment without the financial and operating benefits of being owned 100-per-cent by Sears Holdings" if the offer is unsuccessful."

The parent has criticized the Canadian operations for their weak performance in recent years, although it enjoyed a much improved fourth quarter in 2005.

Sears Holdings believes its offer represents "a full and fair price," vice-chairman Alan Lacy said in a statement, adding the company does not intend to extend the offer again if a majority of the minority investors fail to back the deal.

But some analysts continue to counsel investors not to tender to the offer. And Sears Canada's share price suggested they would not: On the Toronto Stock Exchange, the shares remained well above the offer, rising 5 cents to close at $18.05.

Ron Mayers, head of alternative strategies at Desjardins Securities, said shareholders voted "a resounding no" to the bid and will probably balk at anything less than between $19 and $20 a share.

Sears Holdings' takeover attempt has revealed a rift between the Sears parent and its Canadian unit. In February, Sears Canada's board of directors recommended against the parent's offer, saying it was too low. The rejection was based on an opinion from adviser Genuity Capital Markets, which valued Sears Canada at between $19 a share and $22.25 a share. A few weeks later, the independent directors signalled they would step down.

Last week, Sears Holdings said that most of the senior executives at Sears Canada were tendering to the offer, or selling their shares. Nevertheless, two large shareholders, Vornado Realty Trust and Pershing Square Capital Management LP, have resisted the offer.

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Sears Holdings extends offer for Sears Canada
After recent tender offer, retailer owns 63% of Canadian unit
Crain’s Chicago Business
March 20, 2006

(Reuters) — Sears Holdings Corp.extended its C$835 million ($726 million) buyout offer for Sears Canada on Monday after failing to convince most minority shareholders of its Canadian unit to accept the bid.

Sears Holdings, the parent of U.S. retailers Sears and Kmart, has taken up about 9.5 percent of its target, extending its stake in Sears Canada to more than 63 percent. The shares tendered include a 9 percent stake that Natcan Investment Management Inc. had already agreed to tender, a Sears Holdings spokesman confirmed.

Dundee Securities analyst George Hartman said the fact that a slim percentage of shares was tendered, excluding Natcan Investment's stake, was a boost for minority shareholders in the standoff.

"It's a game of chicken, and for now, the shareholders won," Hartman said.

Sears Holdings, which is headed by hedge fund manager Edward Lampert, said its C$16.86-per-share offer for the Canadian retailer was extended until March 31 and wouldn't be sweetened.

The offer doesn't have a minimum share tender condition, meaning the company is prepared to buy any and all shares tendered, even if it doesn't get 100 percent of the stock.

"Unless shares that, when combined with the shares already tendered, represent a majority of the minority agree to support our transaction, we do not intend to extend our offer again," Sears Holdings Vice Chairman Alan Lacy said in a statement.

Raising the stakes in a bitter takeover battle, Sears Holdings threatened to force Sears Canada to cut its dividend of 6 Canadian cents a share and to block any extraordinary dividend if it doesn't get a majority of the remaining shares by the new deadline.

The news didn't dent investors' hopes for a higher bid. Shares of Sears Canada were at C$18.06 on the Toronto Stock Exchange in afternoon trading on Monday, about 7 percent higher than Sears Holdings' bid. Shares of Sears Holdings were down $1.12, or 0.8 percent, at $133.78 on the Nasdaq.

Dundee Securities' Hartman said the threat over the dividend sent a contradictory signal because by cutting it, Sears Canada would boost its value as it will have more money to spend, while Sears Holdings, with a 63-percent chunk of the retailer, would be the first to suffer.

Sears Canada's board rejected its U.S. parent's bid in February after considering several factors, including a valuation by Genuity Capital Markets which put the Canadian retailer's worth at C$19.00 to C$22.25 a share.

Sears Holdings said the valuation ignored the fact that Sears Canada doesn't own the Sears trademark and trade name in Canada.

The Canadian retailer competes with The Bay and Zellers chains — both operated by Hudson's Bay Co. — as well as with Wal-Mart and hard-goods retailer Canadian Tire. Sears Canada operates more than 360 corporate and dealer stores and 67 home improvement showrooms across Canada.

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Sears Holdings Hikes Its Stake In Sears Canada to 63.2%, Extends Offer
TRADING MARKETS.COM
March 20, 2006

(RTTNews) - Monday before the bell, Sears Holdings Corp., a third largest broad line retailer, revealed that it has increased its stake in Sears Canada to 63.2%. The increase in the stake comes following its subsidiary SHLD Acquisition buying about 10.16 million shares or 9.5% of the share holding. The company also extended its tender offer till March 31.

The Hoffman Estates, Illinois-based Sears Holdings disclosed that it was extending its offer of C$16.86 per share to Sears Canada and the company plans to send the extension of the offer to all Sears Canada shareholders.

Sears Holdings believes that if it does not own a majority stake in minority Sears Canada, the latter could face stiff competition from the Canadian retail environment. Therefore, the company wanted Sears Canada to be as its subsidiary so as to enable Sears Holdings provide financial and operational support.

Commenting on the developments, Sears Holdings vice chairman Alan Lacy, said, "Unless shares that, when combined with the shares already tendered, represent a majority of the minority agree to support our transaction, we do not intend to extend our offer again."

Additionally, Sears Holdings stated that following the six independent directors decision opting out of re-election, the company has started looking for new directors to replace them. The company intends to nominate and elect three qualified independent directors in place of the current directors, who will be ceased to be directors after the next annual meeting.

Sears Holdings disclosed that it would also seek to nominate and elect other directors either from Sears Holdings or Sears Canada employees. The company stated that since it got a majority stake in Sears Canada, the company thought it fit to appoint majority of the directors from the employees of either Sears Canada or Sears Holdings.

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'Good Life' is elusive for Lampert's Sears
Frugal boss of a once-dominant retail chain keeps investors guessing about his strategy to generate a real turnaround
By Susan Chandler - staff reporter – Chicago Tribune
March 20, 2006

The Sears Essentials store sits forlorn in an old strip mall off Hicks Road in northwest suburban Palatine. A few dozen cars dot the giant parking lot, which is bordered by a former Card & Party Outlet store with a for-rent sign.

More than 150 blue shopping carts are lined up outside, but there are few shoppers inside the cavernous store on a weekday autumn afternoon. An appliance salesman in a white shirt and khaki pants leans back against a dishwasher drumming his fingers on the lookout for customers. A middle-age woman in a yellow windbreaker is frustrated that she can't find a pair of pumps in her size for an upcoming wedding. She leaves empty-handed.

Sears Essentials--the combination of Sears brands in former Kmart stores--was supposed to be the future of Sears Holdings Corp., the $55 billion retail Goliath formed by the March 2005 merger of Sears and Kmart. But as the one-year anniversary of the merger arrives, the outlook for Sears is dismal.

- At Sears' core chain of nearly 900 department stores, sales were down more than 8 percent in 2005 and plunged by 12 percent during the crucial holiday season.

- Sears Holdings' debt is rated "junk" by all three major rating agencies, a far cry from the A credit rating the old Sears earned for decades.

- Sears and Kmart are opening few new stores while competitors such as Wal-Mart unveil more than 300 new locations a year.

The man calling the shots on merchandising and marketing is Sears Holdings Chairman Edward Lampert, a 43-year-old hedge fund operator with no retail experience who gained control of Kmart while it was in Chapter 11 bankruptcy.

By rushing Kmart out of bankruptcy in 2003 and then using the still-struggling discounter to launch a bid for Sears in 2004, Lampert has stretched himself and vastly expanded the borders of his retail empire.

Lampert's supporters, and there are many in the investment community, believe he will be able to hold on to his prize. In a vote of confidence, they bid up Sears Holdings stock to more than $130 a share last week.

His critics wonder if he hasn't overextended himself. They also warn that Lampert's willingness to give up market share to fatten profit margins is shortsighted and self-defeating.

"What has been done is not sustainable," argues Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm in New York. "The reason your sales dropped 12 percent is you cut promotions, you've increased prices, you've handed your customers to J.C. Penney, Kohl's, Target and everybody else."

Stuck in the middle
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Sears finds itself stuck in the middle, its brand associated with stodgy merchandise and dated stores, despite its repeated attempts to update itself. These days, Sears "doesn't stand for anything," says Tim Calkin, a marketing professor at Northwestern University's Kellogg School of Management. "It's not really cheap and it's not really good."

Where Sears fits in the retail world is the big question, and it goes unanswered partly because Lampert is a bit of a mystery. He rarely gives interviews and declined several interview requests from the Tribune. Stock analysts get the same cold shoulder.

Lampert hates to fly and always goes to bed at 9:30 p.m., even when he is entertaining guests at his home, according to an acquaintance familiar with his routine. He surrounds himself with bodyguards because he was the victim of a kidnapping in 2003. Lampert talked his captors into letting him go by promising to leave $40,000 in a trash can behind a Wendy's. The kidnappers were apprehended and are serving jail terms.

Adding to his air of mystery, Lampert is calling the shots at Sears from Greenwich, Conn., where ESL Investments Inc., a bare-bones 20-person operation, is headquartered. He is addicted to his BlackBerry, and when he messages Sears executives, they stop everything they're doing to tap out a response.

Wearing suits perfectly tailored to his small frame, Lampert could easily be mistaken for a freshly scrubbed MBA graduate. But in a few short years, he has become one of the best-known investors in the country, and few people are willing to bet against him.

Lampert ranks 61st in Forbes' 2005 listing of the 400 richest Americans, with a net worth put at $3.5 billion.

Favoring companies with strong cash flows that had fallen out of favor with Wall Street, Lampert likes to compare himself with the country's most famous investor, Warren Buffett. No surprise. Lampert has studied Buffett--No. 2 on Forbes' list--like a scholar poring over a newly discovered ancient text.

Unlike Buffett, who generally takes a hands-off approach to operations, Lampert has earned a reputation for aggressively managing the companies he invests in. He focuses on reducing overhead and trimming capital investment, and he is unabashed about using cash flow to buy back shares.

He also is skeptical about investing in new stores and store remodeling. Last year, Sears and Kmart cut their capital expenditures in half.

Lampert acknowledges knowing little about retail other than what he gleaned as a teenager when his mother went to work as a clerk for Saks Fifth Avenue after his father died unexpectedly of a heart attack at age 47. His death left the family with little savings.

Lampert's lack of retailing experience hasn't discouraged him from acting as Sears' de facto chief merchant. Since September, managers handling merchandising, product development, advertising, the Internet site and the Lands' End division have been reporting to him. He has fabric samples sent to him in Connecticut, according to former Sears executives.

Some observers are skeptical Lampert has the skills to lead a turnaround at Sears.

"Lampert is a stock picker. Does that make you a good CEO or chairman of the board of a company? Usually no. They are different skills," said James Schrager, professor of entrepreneurship and strategy at the University of Chicago Graduate School of Business.

"If Sears is going to bring in a new line of clothes, the CEO has to pass judgment on the stuff. A finance guy can ask classic finance questions such as, `What are the terms from the vendor?' `How fast will the inventory turn and how attractively can we price it?' `What is the margin?' These are not bad questions.

"But a retail merchant will take a holistic, completely different point of view. Psychologists call it instinct. We now know it is learned behavior, built from years and years of fighting in the trenches," Schrager said.

An outside consultant who has worked at Sears on management issues shares Schrager's concern. "They make the fatal assumption that if you're smart, you can figure it out. People say the same thing about sports, but Michael Jordan didn't make it in baseball, and you don't find much better athletes than him. In business, everybody is a specialized animal, but no one wants to admit it."

Keeping score
In the business world, it's easy to keep score. Increases in revenue, profit or return-on-equity are positive indicators. Decreases are not good.

Retail and restaurant companies have an additional way to measure themselves: same-store sales, the percent change in sales at stores open at least a year. In the retail world, same-store sales are a closely watched indicator of financial health and shopper enthusiasm.

From 2000-2004, Sears, Roebuck and Co.'s same-store sales declined each year. Results have worsened since the merger. In the 2005 holiday season, a make-or-break period for most retail chains, Sears' sales fell 12 percent, the worst showing of any major retailer.

Sears said its fashion offerings flopped with customers, but it also ran fewer promotional events, a deliberate strategy by Lampert to boost gross profit margins. Profit margins did go up and that was reflected in Sears' better-than-expected fourth-quarter earnings.

"We are not focused on sales or sales growth as an end in itself. Nor will we spend capital on stores simply because we have the capital available to invest or because everyone else does it," Lampert wrote in a shareholder letter last week.

Beginning in April 2005, a month after the merger closed, 780 Sears employees were laid off, most of them at Sears' Hoffman Estates headquarters. During private meetings with their managers, they were handed packets with terms of their severance packages, which were less generous than Sears employees had received in previous downsizings.

`We're losing money'

"We're losing money," Sears' communication specialist Rose Bertini told the Tribune last spring. "I don't mind them laying me off, but to not pay me what they said they were going to pay me, I don't understand."

Some departing Sears executives felt the same way.

Beryl Buley had been the executive in charge of managing and opening new stores at Kohl's Corp. when he was wooed away by Sears in 2003. Within a year, he was overseeing operations at Sears' 870 full-line stores and was responsible for the rollout of such new concepts as Sears Grand and Sears Essentials.

After the merger with Kmart, though, Sears Grand and Essentials were taken away from him, and Buley was told his operational team would be cut about 40 percent.

Buley asked for a severance package under the "change in control" provision of his employment contract, which entitled him to a generous payout. The salary and bonus alone would have added up to $1.7 million.

Sears refused to pay him.

Buley sued Sears in Chicago's federal court in June, alleging the company had "engaged in a pattern and practice of using discretion in an arbitrary and capricious manner in failing to provide proper severance benefits to similarly situated executives."

The case has since been settled.

Plenty of other top Sears executives have headed for the exit, too. Mindy Meads, CEO of the Lands'End division, was fired in August; Catherine David, the senior vice president in charge of Sears Essentials, Sears Grand and the Great Indoors, left in September; Luis Padilla, Sears' top merchant, departed in October; and Sears' apparel chief Gwen Manto left in December.

Left at the top are Sears' former CEO Alan Lacy, who was demoted by Lampert in September, and Aylwin Lewis, a former fast-food executive with no retail experience before he was named Kmart's CEO.

"Aylwin would say I'm a quitter, but I'm smart enough to know I didn't want to be on the team," said David, who spent 13 years at Target before joining Sears in 2004. "It would have been harmful to me to stay."

At Sears' headquarters, easy chairs scattered throughout the buildings have been removed. A satellite snack bar has been closed and the cafeteria's hours of operation shortened. When Sears staffers show up for 6 a.m. meetings, coffee is no longer routinely served.

Travel budgets are Spartan. The company will reimburse employees $25 a day for meals: $6 for breakfast, $7 for lunch and $12 for dinner. Hotel costs also are monitored closely, and in at least one case, Sears executives were prohibited from staying at a New York hotel where the company was holding an event because it cost too much.

Lampert's frugality also extends to his retail concepts. A Sears task force concluded it would take about $3 million per store to convert 50 old Kmarts to Sears Essentials. Lampert told them to make a go of it with $2 million per store. Almost three-quarters of that was spent on back-end functions customers don't see, like the information technology systems, leaving only about $500,000 for all the things they do see--new flooring, shelves, lighting and shopping carts, according to sources close to Sears.

Sears recently announced it was dumping the Sears Essentials format because of poor customer response and was changing the name of the stores to Sears Grand.

The real strategy
It's become conventional wisdom that Lampert began buying up the debt of Kmart Corp. because he recognized the underlying value of Kmart's extensive real estate holdings around the country. If Kmart couldn't make money at hundreds of its store locations, maybe somebody else would pay Kmart a premium for its parcels and turn them into retirement villages, office space or another retail chain--one having more cachet with shoppers.

That view appeared to be validated when Kmart sold about 100 stores to Sears, Roebuck and Co. and Home Depot in the summer of 2004 for almost $1 billion, close to what Lampert paid to acquire all of Kmart, which had 1,400 stores remaining.

But in the year since he acquired Sears, Lampert has done little to show that liquidation is, indeed, his strategy.

Lampert has said that Lands' End, the preppy catalog company that Sears acquired in 2002, is not for sale. Rather than selling off the company's majority stake in Sears Canada, Lampert has announced he will buy out the outside shareholders and make the operation wholly owned by Sears Holdings.

Several sources who have spoken with Lampert say it was never his intention to hold a vast real estate auction. From the beginning, he bought into Kmart and later Sears, intending to fix them and run the chains as more efficient and profitable retailers, they say.

Lampert has said the same thing himself, repeatedly.

"I bought Kmart to make money, and I felt the best way to make money was to have it be a viable retailer," he told Tribune reporters the day the merger with Sears closed. "Allen Questrom came out of the retail business, and people gave him four or five years [to turn around J.C. Penney Co.] We've been at this for two years, and people have been selling us short from the beginning. We've accomplished a lot in two years."

Retail consultant Cynthia Cohen, for one, takes Lampert at his word.

"I don't believe the real strategy is liquidation," said Cohen, the president of Strategic Mindshare, a Florida-based retail consulting firm. "If you look at his involvement at AutoZone, he wants to create shareholder value through the operations of the business. I think that's very clear. He wants to win and make it work."

If Lampert has a plan for rejuvenating Sears, he has not unveiled it. One year after the merger deal, he describes Sears Holdings as a "$55 billion revenue, 350,000-person start-up" and characterizes his retail strategy as a work in progress.

"We are a learning company that analyzes, tests and adapts as appropriate," Lampert wrote in a December letter to shareholders. "While we are clear on our vision, we recognize the importance of being flexible and quick to change if the situation warrants. We will not rely on a single grand strategy but will respond to customer desires and market opportunities."

- - -

ESL Investments caters to the wealthy

What is a hedge fund?

An investment fund available only to wealthy individuals and institutions; it employs aggressive trading strategies that are unavailable to mutual funds, such as short selling. Mostly unregulated.

Investors pay an annual management fee, typically between 1 percent and 2 percent of assets, but fund operators also take 20 percent of realized profits off the top, leaving 80 percent to be split among investors.

What is ESL Investments?

An eponymous hedge fund founded in Texas in 1988 by Edward Lampert, then 25 years old, with $28 million in seed capital from Richard Rainwater, investment manager for the Bass family. ESL attracted superwealthy clients such as music mogul David Geffen and Dell Inc. founder Michael Dell. It moved to Greenwich, Conn., in the early '90s. Lampert refuses to tell his investors what the fund is invested in, but unlike many other hedge funds, the majority of its capital is tied up in large equity positions in several publicly traded companies that must be disclosed.

ESL's major holdings:

29 percent of the publicly traded shares of AutoNation Inc., the nation's largest auto retailer, worth an estimated $1.67 billion.

29 percent of AutoZone Inc., a retailer of auto parts, worth an estimated $2.16 billion.

41 percent of Sears Holdings Corp., the combination of Kmart and Sears, worth an estimated $8.90 billion.

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Sears going back to the furniture
Along with pricey bedding line, is it a 'message to Martha'?
By Sandra Jones – Crain’s Chicago Business
March 19, 2006

Sears Holdings Corp. is dipping its toe back into the furniture business, a brutally competitive market where the retailer has failed before.

A line of bedroom, dining room and living room furniture will arrive in Sears stores next month, a spokeswoman says. The move dovetails with the launch of a private-label luxury bed and bath line Sears calls Everyday Luxe that debuted in about 500 of Sears' largest stores and online earlier this month. The trendy 500-thread-count sheets sell for up to $130 and cotton sateen comforters for up to $250. That's 50% to 60% above typical Sears bedding prices, raising questions as to whether middle-class Sears shoppers can afford it.

The steps mark Sears Chairman Edward Lampert's first visible attempt to remake Sears' ailing home fashions department since he engineered the combination of Kmart and Sears last year. The billionaire hedge fund manager took direct control of Sears' merchandising, marketing and the online business in September.

The new home lines could strengthen Sears' hand in negotiations with Martha Stewart. The domestic maven has an exclusive agreement to sell home products, including furniture, at Kmart, but has clashed with Mr. Lampert over terms to sell to Sears. The name of the new Sears line is very similar to that of the Martha Stewart Everyday collection sold in Kmart.

"I think there's a message to Martha in here, and part of this may be negotiation," says Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York-based retail and investment banking firm.

Sears won't discuss Ms. Stewart's contract or elaborate on the furniture move, aside from confirming plans for a marketing blitz when the collection arrives in stores early next month. "We're very excited about what's happening in terms of the quality and value we're going to provide our customers," the spokeswoman says.

A spokeswoman for Martha Stewart Living Omnimedia Inc. in New York declines comment.

Hoffman Estates-based Sears' last foray into furniture ended in 1999 when it sold its money-losing HomeLife furniture chain. HomeLife soon went bankrupt, battered by high merchandise returns and competitors like Pottery Barn, Ikea and Room & Board.

"Executing furniture is tricky," says Philip Zahn, credit analyst at Fitch Inc. in Chicago. "But people are eating this stuff up at the moment. Maybe Sears sees a trend and wants to hop on it."

Target Corp. recently introduced a furniture collection from designer Todd Oldham available only online. Wal-Mart Stores Inc. is launching a line of premium bath and bedding products in April. And J. C. Penney Co. scored a hit with a collection of home furnishings from designer Chris Madden.

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Government may oppose Whirlpool, Maytag deal
Federal lawyers wary of less competition
Bloomberg News – Chicago Tribune
March 18, 2006

WASHINGTON -- Justice Department lawyers are gathering evidence for a possible court challenge to Whirlpool Corp.'s proposed $1.68 billion purchase of home appliance rival Maytag Corp., people familiar with the case say.

Justice Department lawyers are concerned the Whirlpool deal is anti-competitive, said antitrust lawyers who spoke on condition of anonymity. The Justice Department staff has questioned such retailers as Home Depot Inc. and Whirlpool's appliance-maker rivals, the lawyers said.

"If they don't challenge this merger, Ford and General Motors is next," said Steven M. Axinn, a New York antitrust lawyer not involved in the transaction. "Unless someone can argue that Maytag is going out of business, I don't understand how the government can let this deal happen."

The combination of Benton Harbor, Mich.-based Whirlpool and Maytag, based in Newton, Iowa, would create the world's largest appliance-maker. The deal would give Whirlpool more than 70 percent of the U.S. market for washing machines and dryers and almost half the dishwasher market.

"We are still looking at the proposed transaction," said Justice Department spokesman Gina Talamona.

"We are not commenting," said Whirlpool spokesman Christopher Wyse. Maytag spokesman John Daggett declined to comment.

The Justice Department's staff has questioned executives of the companies under oath, a sign the agency is preparing for a possible court challenge, the people familiar with the case said.

Last month, Whirlpool and Maytag agreed to give the department until March 30 to complete its investigation. The companies could extend that deadline if the government wants more time.

The government lost its last two court battles to stop mergers. In 2004, a U.S. judge in San Francisco rejected the Justice Department's request to block softwaremaker Oracle Corp.'s $7.7 billion acquisition of PeopleSoft Inc. The Federal Trade Commission also lost an effort later that year to block Arch Coal Inc.'s $364 million acquisition of Triton Coal Co.

Those defeats have made the government cautious about challenging mergers, according to observers and antitrust experts.

"Justice has been very gun-shy about going into court" since the Oracle defeat, said Herb Hovenkamp, who teaches antitrust at the University of Iowa's College of Law in Iowa City.

He predicted "the tide will turn a little," and the government might be more aggressive in the Whirlpool case because recent Supreme Court decisions show deference to the government on antitrust issues.

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Experts debate future of Sears Holdings
By Dave Carpenter – AP Business Writer – Seattle Post-Intelligencer
March 17, 2006

CHICAGO -- Minutes after securing final approval for the Kmart-Sears merger last year, Edward Lampert pledged in a rare appearance before reporters to transform the two faded retail icons into "a great company." But he didn't offer any blueprint for how he'd do it.

Twelve months later, approaching next Friday's anniversary of the unlikely pairing that created Sears Holdings Corp., industry experts are still trying to figure out just what the billionaire chairman has in mind for the famously struggling store brands.

On the surface, retail results are shakier than ever.

Same-store sales fell 5.3 percent in 2005 - 8.4 percent at its namesake department stores, where an attempt to introduce more fashionable clothing fell flat, and 1.2 percent at Kmart. A new brand for a Kmart-Sears store hybrid, Sears Essentials, was abandoned amid poor results and will be incorporated into the existing Sears Grand. Service levels were reduced in some stores.

Competitors, meanwhile, are taking more market share and expanding while Sears holds down spending on stores and promotions.

For the short term, cutting costs to improve profitability works for Wall Street. After Sears reported results on Wednesday, including an increase in profit margins and operating income in the fourth quarter, its stock shot up 18 percent in two days. Shares are now up modestly since the merger despite weaker sales.

But prospects for shoppers, and the 120-year-old retail legacy of Sears, Roebuck and Co., remain highly uncertain. The strategy of reducing assortments, curtailing sales promotions and cutting service is not sustainable, industry observers say.

"Eddie Lampert is shrinking in the face of an explosion by Target, Wal-Mart, Home Depot, Lowe's, Best Buy and Penney's," said Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based retail consulting and investment banking firm. "The proposition he's put together doesn't work as a retail entity. As a retail entity, he's disappearing."

Lampert, who oversaw Kmart's turnaround before engineering the $11.9 billion acquisition of Sears, says he's not concerned.

In a nearly 6,000-word letter posted on the Sears Holdings Web site, he said he views the Hoffman Estates, Ill.-based company as "a $55 billion revenue, 350,000-person startup" and doesn't fret about same-store sales sinking lower and lower. He said he wants to make it "a great company whose greatness is sustainable for generations to come" and invoked the names of General Electric and another well-known billionaire investor whom he acknowledged over a decade ago as one of his investing heroes.

"Warren Buffett makes clear that his goal is to increase the per-share value of Berkshire Hathaway," he wrote. "Similarly, our goal is to increase the per-share value of Sears Holdings."

The reclusive chairman avoids contact with analysts and reporters and declined to be interviewed for this story. But Lampert-watchers think there's more evidence than ever that the hedge-fund operator and investing whiz wants to turn the company into an investment empire along the lines of Berkshire Hathaway, taking it far beyond retail - and maybe even out of retail altogether.

"When he names Warren Buffett as a model, you've got to believe there are things he has in mind with the cash that he has and the stock price that he has," said George Rosenbaum, chairman of Leo J. Shapiro and Associates, a Chicago-based retail consulting firm. "I would think it's acquisitions. But I can't imagine what he might acquire. It may not be a retail business at all."

Lampert promised last March 24 that there would not be wholesale store closings, and there haven't been. But Rosenbaum speculated that more closings will occur in the already pruned-down Kmart chain, resulting in a smaller but more profitable group of Sears and Kmart stores.

"It's the Lampert style," Rosenbaum said. "Keep the stock high, cut spending to the bone, let sales down to levels where you're running pretty profitable stores without a lot of investments in renewing the store or improving the offering. And then take the stock price and use it in businesses that are more interesting than Sears or Kmart."

Davidowitz believes similarly. "There's got to be another act to this because I think Eddie Lampert knows that what he's doing is unsustainable," he said.

Lampert used cost cuts and real-estate transactions to help Troy, Mich.-based Kmart Holding Corp. turn a $1.1 billion profit in 2004, a year after taking control when it emerged from bankruptcy.

That contrasts with the strategy employed at rival Penney's, where then-CEO Allen Questrom launched a turnaround by upgrading stores and merchandise and opening new off-mall stores.

Some analysts say Lampert is treading dangerously with his opposite approach.

"To claim that same-store sales is a 'vastly overrated metric' ignores every retailer's primary performance target, expense leverage tool and definition of success, and his reasoning rests more on mathematics than merchandising," said Carol Levenson, of the corporate bond research firm Gimme Credit, in a research note.

Lampert, whose personal wealth was ranked by Forbes magazine this month at $2.5 billion, could use his Greenwich, Conn.-based ESL Investments to fund acquisitions as he did with Kmart. So far, little of the money being saved through margin management and cost controls is being plowed back into the stores.

Sears Holdings had $4.4 billion in cash as of Jan. 28 when its fiscal year ended, $1 billion more than a year earlier.

"The cash arsenal is starting to build up again, just like it did at Kmart in 2003 and 2004," said Richard Hastings, retail analyst for Bernard Sands LLC.

That cash was used in the Sears deal, which caught everyone by surprise when it was announced in November 2004.

Lampert isn't any more likely to tip his hand about the next acquisition. But shareholders may hear more about his thinking at Sears' April 12 annual meeting in Hoffman Estates.

Regardless, Wall Street couldn't be more curious about Lampert's next move after watching his unorthodox strategy in retailing over the last three years.

"This remains one of the most interesting major retailing case studies in the past 20 years," said Hastings.

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Total pay off 50% for chief of Sears
$2.7 million for Lewis; $12.3 million for Lacy
From Chicago Tribune news services
March 17, 2006

Sears Holdings Corp. on Thursday said President and Chief Executive Aylwin Lewis received total compensation of about $2.7 million for the 2005 fiscal year, down from about $5.1 million, excluding stock option grants, for the previous year.

Lewis became CEO and president of the Hoffman Estates-based company in September 2005. From March to September 2005, he was president and CEO of Kmart and Sears Roebuck and Co. after the merger of Sears Roebuck and Kmart Holding Corp. Before the merger, he was CEO and president of Troy, Mich.-based Kmart.

Sears Holdings said Lewis received a fiscal 2005 salary of $1 million, bonus of $510,000, restricted stock awards valued at $1 million and other annual compensation of $188,496, according to a definitive proxy filed with the Securities and Exchange Commission. Lewis received no stock options for the period, compared with a grant of 150,000 stock options for 2004.

For 2004, Lewis received a salary of $278,646, a bonus of $267,206, restricted stock awards valued at $4.5 million and other annual compensation of $7,120.

Sears Holdings said Vice Chairman Alan Lacy received fiscal 2005 total compensation of $12.3 million, excluding the grant of stock options, up from fiscal 2004 compensation of $2.8 million.

Separately, the company said Lacy realized $21.2 million from the exercise of options to purchase 1,189,961 shares. Value realized generally is defined as the market value of the stock on the dates of exercise minus the applicable exercise price. It doesn't necessarily indicate the stock was sold.

Also, the SEC filing said Lacy realized $10.1 million from the exercise of options for 436,001 shares. A Sears Holdings spokesman said the exercise of the options for the 436,001 shares was automatic under terms of the merger agreement with Kmart Holding.

The spokesman also said that before the merger with Kmart Holding, Lacy had never sold an option for cash during his tenure with Sears, Roebuck.

Since March 2005, Lacy has served as Sears Holdings' vice chairman and chairman of Sears Canada Inc. He was CEO of Sears Holdings from March to September 2005. Before the merger with Kmart Holding, he was chairman, president and CEO of Sears, Roebuck from December 2000 to March 2005.

For fiscal 2005, Lacy received a salary of about $1.3 million, a bonus of $772,296, restricted stock awards valued at $10 million, other annual compensation of $267,108 and all other compensation of $9,800.

For 2004, Lacy received a salary of $1 million, a bonus of $768,731, restricted stock awards valued at $1 million, other annual compensation of $5,166 and all other compensation of $39,849.

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Sears CEO received total compensation of $2.7M in 2005
CRAIN'S CHICAGO BUSINESS ONLINE
March 16, 2006

Ex-CEO Lacy received $12.3M, excluding options, last year (AP) - Sears Holdings Corp. on Thursday said President and Chief Executive Aylwin B. Lewis received total compensation of about $2.7 million for the 2005 fiscal year, down from about $5.1 million, excluding the grant of stock options, for the prior year.

Lewis became chief executive and president of the Hoffman Estates company in September 2005. From March to September 2005, Lewis was president and chief executive of Kmart and Sears Roebuck & Co. — Retail after the merger of Sears Roebuck and Kmart Holding Corp. Prior to the merger, he was chief executive and president of Kmart.

Sears Holdings said Lewis received a fiscal 2005 salary of $1 million, bonus of $510,000, restricted stock awards valued at $1 million and other annual compensation of $188,496, according to a definitive proxy filed with the Securities and Exchange Commission. Lewis received no stock options for the period, compared with a grant of 150,000 stock options for 2004.

For 2004, Lewis received a salary of $278,646, a bonus of $267,206, restricted stock awards valued at $4.5 million and other annual compensation of $7,120.

Sears Holdings said Vice Chairman Alan J. Lacy received fiscal 2005 total compensation of $12.3 million, excluding the grant of stock options, up from fiscal 2004 compensation of $2.8 million.

Separately, the company said Lacy realized $21.2 million from the exercise of options to purchase 1,189,961 shares. Value realized generally is defined as the market value of the stock on the dates of exercise minus the applicable exercise price. It doesn't necessarily indicate that the stock was sold.

For fiscal 2005, Lacy received a salary of about $1.3 million, a bonus of $772,296, restricted stock awards valued at $10 million, other annual compensation of $267,108 and all other compensation of $9,800.

For 2004, Lacy received a salary of $1 million, a bonus of $768,731, restricted stock awards valued at $1 million, other annual compensation of $5,166 and all other compensation of $39,849.

Sears Holdings said it granted Lacy 226,864 stock options for fiscal 2005, compared with 262,204 for the previous year.

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What a year for Sears
Sales stall but stock soars as anniversary of merger with Kmart approaches
By Mike Comerford
Business Writer - Daily Herald – Suburban Chicago
March 16, 2006

Sears Holdings Corp. kept retailers guessing but made Wall Street happy on Wednesday as its latest lackluster sales were overshadowed by higher-than-expected profits.

Almost a year after Sears merged with Kmart Holdings, Hoffman Estates-based Sears’ stock responded by shooting up nearly 13 percent, or $15.02, to $132.29 a share.

Nevertheless, same-store sales at Sears fell about 12 percent in the fourth quarter, while Kmart sales rose a minuscule 0.9 percent. Since the merger was finalized on March 24 of last year, same-store sales fell an average of 4.7 percent at Sears and 2.3 percent at Kmart stores.

Sears net income was $648 million on revenue of $16.1 billion in the quarter, the company said. Because of the difficulty of comparing quarters in its first year of the merger, the company said its pro forma earnings rose 23 percent for the year, to $2.6 billion.

The company said cost cutting and holding fewer sales boosted profits, but retail analysts worried about weaker apparel sales.

“They are milking the winners and milking the margins but where is the retail management and leadership,” said Willard Ander Jr., senior partner at McMillan/Doolittle LLC., a Chicago-based retail consulting firm. “We think their top-line (revenue) will continue to be in trouble as long as there’s no clear cut strategy to differentiate themselves.”

But some financial analysts lauded the cost cutting and attention to shareholder value.

“We’re looking for expenses that are coming in line and gross margins that are working, and that’s what we saw,” said Gary Balter, analyst with Credit Suisse. “These results give us more confidence that Sears can continue to improve earnings in 2006.”

Still, Sears’ stock is trading at a premium to the market. It’s selling at 22 times analysts’ profit forecasts for the year. The average for companies in the Standard & Poor’s department store index is 18 times earnings.

Sears Chairman Edward Lampert wrote a letter to investors accompanying the fourth-quarter report, saying same-store sales growth is a “vastly overrated” measure of the strength of a company.

And despite skepticism about his intentions among some retail analysts, Lampert reiterated his commitment to long-term growth at Sears. He cited the success of other top executives, including Berkshire Hathaway’s Warren Buffett and General Electric’s former CEO Jack Welch, at turning companies into long-term profit-makers.

“My goal is to see Sears Holdings become a great company whose greatness is sustainable for generations to come,” Lampert said in the letter. “A great example is General Electric, which has been in business for over 100 years. When Jack Welch took over, he completely reinvented GE, not out of obvious need or crisis, but to sustain its ability to excel for the long term.”

Lampert, 43, is a former risk arbitrage executive at Goldman Sachs Group Inc. He now also leads ESL Investment Inc., a hedge fund.

In the year since taking over Sears, Lampert removed Alan Lacy as chief executive officer, shut Kmart’s Troy, Mich.-based headquarters and fired more than 1,500 workers, according to Bloomberg News. He also took direct control of marketing, merchandising and Internet businesses.

In Wednesday’s letter to investors, the Connecticut billionaire went on to assail pension reforms, which he said punish older firms such as the 120-year-old Sears, which has the money to meet its $6.1 billion pension liabilities. The reforms call on all companies to increase funding of a government-run insurance fund backing U.S. pensions.

Among other changes announced Wednesday, Sears said directors Michael Miles and Julian Day would not stand for re-election, cutting the board to nine members.

Last month, Sears said it will stop using its less-than-year-old Sears Essentials brand name at former Kmart stores, unifying off-mall Kmarts being converted to the Sears name and Sears Essentials stores under the name Sears Grand. It was the latest sign the company still hasn’t found a growth strategy that works.

Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York consulting and investment banking firm, said Sears is losing its customers to other retailers.

“Everybody’s expanding; he’s building no stores, remodeling no stores, turning management over faster than the inventory, cutting promotions, cutting service, raising prices.”

Still, other retail analysts see signs of retail change at Sears.

“Sears is on the way back to health,” said Kurt Barnard, president of Barnard’s Retail Forecasting, a retail advisory group. “They’re doing a good job (of cost cutting) and they are offering customers a good, recognizable value and customers are responding.”

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Surprising gain drives Sears stock
By Sandra Guy - Business Reporter – Chicago Sun-Times
March 16, 2006

Sears Holdings Corp.'s stock leaped to a six-month high after the retailer reported Wednesday its profits exceeded analysts' estimates because of cost-cutting and fewer markdowns at Sears stores.

The stock ended the day Wednesday with its largest gain in a year, up $15.02, or 13 percent, to $132.29. Before Wednesday, the stock had declined 10 percent this year.

The results reflect Sears Chairman Edward S. Lampert's priority: to cut costs, boost cash reserves and return value to shareholders, even if it means losing sales. Still unknown is how Sears will turn itself around as a retailer.

Earnings more than doubled in the fourth quarter, to $648 million, or $4.03 a share, even though same-store sales fell 12 percent at Sears stores and edged up 0.9 percent at Kmart, the first increase at Kmart in four years. Revenue dropped to $16.1 billion in the quarter from $16.8 billion a year earlier after the numbers were adjusted to treat Kmart's $12.3 billion takeover of Sears Roebuck on March 24, 2005, as though it happened at the start of fiscal 2004.

Wall Street analysts had expected Sears to earn $3.62 a share on revenues of $15.99 billion.

However, Sears' full-year net income fell 10.7 percent to $789 million, or $4.85 a share, from the previous year. Full-year revenue dipped to $54.2 billion from $55.9 billion.

Lampert, the billionaire hedge-fund guru, said in an 11-page letter to shareholders that he considers the year-old company a $55 billion startup -- but one capable of returning Sears and Kmart to prominence amid the Wal-Marts, Kohl's and Targets that have proven so adept at attracting shoppers.

But Lampert expressed disappointment in missing internal savings targets from Kmart's takeover of Sears, and he bemoaned federal pension rules that increase costs for old-line retailers such as Sears and Kmart. Sears must pay 60 percent higher premiums this fiscal year to the Pension Benefit Guaranty Corp., the nation's federal pension insurer, even though Sears has enough cash to fund its pension plans.

Investors anxiously await Lampert's quarterly letter, but they will have to hang on for as long as a year for another one.

Lampert said he wrote the letters quarterly because of the many changes he made in the first year after he engineered Kmart's takeover of Sears Roebuck and Co. Now Lampert believes he needs to write only once a year, though he said he might "pick up the pen" more often if the need arises.

Lampert's vision

Lampert's letters offer surprising insights into his personal philosophies and how he plans to turn around the struggling retailer. His pronouncements Wednesday included these topics:

*Sears Holdings, the parent company created after Kmart's takeover of Sears, has a pension liability of roughly $6.1 billion. The federal pension system hurts companies with large market capitalizations and cash flow, such as Sears, because they must "bail out" other companies that have been unable to handle their pension obligations to retirees and employees, Lampert wrote.

Lampert also bemoaned pension rules that prevent companies from taking back assets from plans that are overfunded.

Sears' biggest rivals, primarily Wal-Mart and Target, have no similar pension burdens.

*Sears Holdings sold Kmart's headquarters building in a suburb of Detroit, and 520 Kmart employees accepted offers to move to Sears' headquarters in northwest suburban Hoffman Estates.

*Sears is looking to hire "the right people" who want to succeed, but provided no number. Sears has confirmed that it has cut 1,510 headquarters jobs -- 780 at Sears headquarters and 730 at Kmart headquarters -- but has given no figures on job cuts at the store level. The combined company has 350,000 employees.

*Shoppers bought Kmart's clothing, toys and home electronics, but shunned Sears' more fashionable apparel. Sears' poor store-sales showing was partly offset by its aggressive sales of in-home services such as carpet cleaning and repairs to washers and dryers.

*There were 60 fewer Kmart stores at the end of fiscal 2005 than at its beginning, including 48 Kmarts that have been converted to a Sears store format.

*The former Kmart stores that are now Sears Essentials stores, including those in Palatine, Elmhurst and Homer Glen, must be converted a second time. That's because Lampert decided that Sears Essentials, which were meant to combine the best of Kmart and Sears, had flopped. The stores will be changed to the Sears Grand format, a mega-store that differs from a regular Sears in that it is not located in a mall but is a stand-alone store. It is designed to be a one-stop shop, complete with toys, some groceries, a tire-and-battery center and even a bank branch under the same roof as tools, electronics and clothing.

*Sears stores have no Martha Stewart Living Everyday items because Sears reportedly is trying to cut the terms and costs of her contract. At Sears Essential stores, Martha Stewart was supplanted by Ty Pennington Style, a line of bedding, bath and table-top accessories designed by the star of ABC-TV's "Extreme Makeover: Home Edition."

*Lampert described his strategy as one in which he focuses on "providing direction, raising issues, asking questions and suggesting ideas -- on challenging and collaborating."

*Lampert repeated his belief that sales at stores year over year -- a key figure that Wall Street watches closely -- are overrated because the figure overlooks how much money a company had to invest in a store to generate a profit. Lampert refuses to spend what he calls "excessive amounts" to boost sales, and Sears has cut overhead by nearly $400 million from a year ago.

*Julian Day, a former Kmart CEO who lost a bid for Sears' top job to former CEO Alan Lacy, and Michael Miles will leave Sears' board of directors rather than seek re-election when shareholders meet in April. The board will be cut in size from 11 to nine.

Both were controversial appointments to Sears' board after the Kmart takeover.

In 2004, Sears Roebuck shareholders criticized Miles because he served on seven other boards at the time. Miles, a retired CEO of Philip Morris Cos., also served as Lacy's mentor when the two worked at Kraft Foods and Philip Morris.

Day, who became a point man for Lampert, has pocketed at least $116 million by exercising stock options and selling the shares at a far higher price than he paid for them.

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Sears Canada bid expected to fail
By Hollie Shaw - Financial Post - Canada
March 16, 2006

It is unlikely Sears Holdings Corp. will convince enough shareholders to tender to its offer for the piece of Sears Canada it does not own, analysts say -- even as the subsidiary's shares slide ever closer to the bid price.

"These guys are just not going to get it this time around," said Ron Mayers, head of alternative strategies at Desjardins Securities, who is advising his clients to not tender to the offer. "They just aren't. We have done an informal enough count" of stakeholders. "They came in way too low, and they know it. They have to know it is going badly."

According to industry sources, two top shareholders, Vornado Realty Trust and Pershing Square Capital, with about 5 million shares and 7.5 million shares, respectively, are not going to tender.

And a release sent out by the U.S. retailer late Tuesday did little to dispel rampant speculation that Sears Holdings, whose $16.86-per-share offer expires tomorrow, will fail in its bid. The statement, which revealed the majority of senior officers at Sears Canada will tender or sell their shares into the market on March 17, might have in fact added fuel to that speculation.

"It is entirely reasonable to think that [the timing of the release] means that they haven't gotten as much [stock] coming in as they would like," said Peter Holden, analyst at Veritas Investment Research. "This is also a day when Sears Holdings announced significantly higher profits, and that may suggest that [chairman] Eddie Lampert is a better operator than people are giving him credit for."

Sears Holdings has said it will be satisfied with whatever stake it takes up and has flatly disagreed with the findings of a report from Genuity Capital Markets, Sears Canada's financial advisor, which valued the Canadian unit at $19 to $22.25 per share.

Despite the release of stronger-than-expected fourth-quarter results from Sears Canada this month, Sears Holdings has said it does not believe the Canadian unit is taking a turn for the better -- sales have been flat for five years -- saying the retailer faces stiff competition from retailers such as Wal-Mart Stores Inc.

Natcan Investment Management Inc., the largest independent shareholder, has tendered its 9.7 million shares (about 9%) to the offer, but that could also be a key reason why Sears Holdings has not sweetened its bid this time around.

Speculating in a note to clients about why Sears Holdings might just take what it can get now and walk away, Mr. Mayers noted the NatCan deal gives NatCan the benefit of any increase to the bid for a period of 90 days.

"It's conceivable that Sears Holdings could just take what they get -- especially if the number is low -- wait 90 days, and bid $19 for the balance, making their average cost around $18.55, saving [Mr. Lampert] US$20-million by waiting. In this case, we expect Sears Canada will trade with a premium following the take up and pay."

Two weeks ago, the battle grew more fractious as all six Sears Canada independent directors announced they will quit even if shareholders follow their advice and reject the parent company's $835-million offer.

Sears Holdings said on Tuesday that five Sears Canada senior officers out of eight intend to tender or sell into the market if the stock is still trading above the offer price. The remaining three, it noted -- chief executive Brent Hollister and senior vice-presidents Ajit Khanna and Frances Magliochi -- sold the majority of their shares in the three months prior to the Sears Holdings offer.

SEARS CANADA INC.
Ticker: SCC/TSX
Close: $17.34,down 23 cents
Volume: 1,740,401
Avg. 6-month vol.: 248,127
Rank in FP500: 47

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Sears rings up jump in profit
Cost cuts overcome sales slide; analysts worry about future
By James P. Miller - Tribune staff reporter – Chicago Tribune
March 16, 2006

Sears Holdings Corp. shares jumped Wednesday after the big retailer released stronger-than-expected fourth-quarter results, but critics questioned whether the upturn can be sustained.

Although tough cost-cutting measures fattened the Hoffman Estates company's profit margins in the final quarter, sales declined.

And future earnings improvement will be difficult, some observers suggested, unless Sears can generate top-line growth.

The increase in profitability was "impressive," observed Carol Levenson, of the bond-analysis firm Gimme Credit, but the improved margin "was achieved at the expense of sales growth."

Sears "did a tremendous job" on containing costs and integrating operations, echoed Howard Davidowitz, chairman of New York retail and investment banking firm Davidowitz & Associates.

But because the profit bump was achieved through price hikes and the elimination of promotional pricing, "it's not sustainable," Davidowitz said.

Investors cheered the company's upside earnings, however, and in Nasdaq trading Wednesday Sears' shares climbed $15.02, or 13 percent, to close at $132.29.

"This is not about sales growth," Richard Hastings, an analyst with New York-based Bernard Sands LLC, said in a positive report on the results. "It is about return on investment growth."

Quarterly results from the retail chain have been complicated ever since Sears Holdings was forged almost a year ago through the combination of mass-marketers Sears, Roebuck and Co. and Kmart Holding Corp.

As a formality, Sears Holdings compares results of the combined company in the latest quarter with Kmart Holding's results in the year-ago quarter, because the companies didn't merge until March 2005.

Investors prefer to focus on Sears' "pro forma" results, which treats the year-ago period as if the merger had already occurred.

Pro forma revenue for the quarter ended Jan. 28 declined 4 percent, to $16.09 billion from $16.84 billion.

Despite that slip in sales, however, Sears' net income climbed 10 percent, to $648 million, or $4.03 a diluted share, from the year-ago pro-forma net of $589 million, or $3.62 a share.

The company "ended the year on a slightly better note than we expected," said Morningstar analyst Kimberly Picciola. "Management's cost-cutting efforts paid off with improved profitability."

But, she continued, Sears Holdings "will have to make some major improvements in its merchandise offering and invest in its stores if it wants to effectively compete as the nation's third-largest retailer."

Sears is in a grueling market fight with giant rivals such as Wal-Mart and Target, and the issue of whether it should be plowing more money into sprucing up its operations remains a contentious one among analysts. Big expenditures might help attract new customers and retain market share, but such outlays would also pinch bottom-line profits.

Nonetheless, the company's softening sales unsettled some analysts. The retail industry places heavy importance on "same-store sales," which measure results at stores open at least 12 months.

At Sears outlets, same-store sales dropped a dismal 12 percent. At Kmart outlets, the measure rose 0.9 percent, the first gain since mid-2001.

In an upbeat "message from the chairman," Edward Lampert downplayed the importance of the same-store measure, saying it is a valuable metric "but one that is vastly overrated." Kmart started its rebound under his management a few years ago, he said, by "changing the objective from maintaining sales to growing profit."

He also defended the focus on profits over sales that the fourth-quarter results revealed.

While "reducing sales is not a prescription for success on a base of healthy, profitable stores," he wrote, "it can be a prescription for success where profit was not the primary objective, and where sales came from `giving product away' rather than from providing value to the customer."

But analyst Davidowitz wasn't buying that argument. "In the history of retailing, no company ever survived with this strategy," he said.

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Excerpt of Lampert Letter to Shareholders
in today's SEC filing
 (March 15, 2006)

Merger Integration

For the most part, the process of effecting the integration of Sears and Kmart is behind us. This is significant, because the integration process is a difficult one in all mergers, and many companies stumble at this threshold stage. As part of the integration, 520 Kmart associates accepted relocation offers to move from Troy to Hoffman Estates. We sold the Troy Headquarters buildings to a developer who plans to create a multi-use facility that will benefit the city of Troy and the entire state of Michigan for years to come. We will continue to have a significant employment presence in Troy.

In 2005, we combined the Sears and Kmart Supply Chain, IT, Finance, Legal, and Human Resources functions. This past fall, we combined our Marketing functions under Maureen McGuire, and our Merchandising functions under Dan Laughlin and Peter Whitsett. Last month, we combined the Kmart and Sears store operations under Bruce Johnson. Karen Austin, EVP and Chief Information Officer, and her IT team have made better-than-expected progress in moving forward on our IT roadmap, which is designed to bring the Sears Holdings businesses onto one platform and to ensure that we invest where necessary to further our goal of increasing profits. We are working to improve our customer relationships and the customer experience across Sears Holdings.

In short, the merger process is largely complete. We have faced this challenge and now are focused on running the business better each and every day. We will not have to deal with the distractions of moving, resizing the organization, or setting a new direction. At the same time, we will not have the same ability to harvest the low-hanging fruit that the merger presented to us. We are firmly anchored in the tasks of testing, adapting, and executing.

Team

The most important aspect of beginning to create a new and winning culture is ensuring that we have the right people in place. We have worked hard attempting to identify the right people, and we now have an executive team that we believe has the capabilities and commitment to enable Sears Holdings to become a great company.

We continue to look to attract, develop, and retain high-quality people. I believe Sears Holdings can offer an unparalleled opportunity for challenge and advancement for the right people. One of the great pleasures that I have experienced through my involvement at Sears Holdings has been the opportunity to work closely with various associates, store managers, district and regional managers, and executives. While our culture is focused on results, we have a great deal of patience for individuals who have the ability, talent, and desire to succeed – that patience is born out of our commitment to long-term value creation.

We are asking a great deal of our executives, of our associates, and of ourselves. We believe that we have the opportunity to be part of overcoming an enormous challenge and creating lasting success. This will not be easy, but since the merger, we have been contacted by many candidates who want to get in on the ground floor of a unique opportunity to live our transition from good to great. We remain interested in hearing from people at all stages of their careers who have the energy, ability, and dedication to help us succeed in our goal. We invite the best, brightest, most ethical and commercial people to join us.

Growth and New Company

I view Sears Holdings as a $55 billion revenue, 350,000 person start-up – and I continue to believe that we have the challenges, excitement, pace of change, and opportunity for success that characterize a start-up. We will not be bound by the dictates of past practices. Instead, we will question, test, evaluate, and change. We have looked to hire the best talent available from both inside and outside of retail, and now have a team that combines some very experienced retail executives with some innovative and creative executives from outside of retail. We have looked to hire executives who bring to Sears Holdings an expectation and culture of success. I credit Aylwin with helping to bring this collection of “great athletes” together into a cohesive team.

Success must include profitable growth. As a team, we are aligned around the goal of increasing our EBITDA. We are not focused on sales or sales growth as an end in itself. Nor will we spend capital on stores simply because we have the capital available to invest or because everyone else does it. Rather, we are investing in our stores where the investment makes sense – in other words, where it improves the experience for our customers and associates and leads to attractive returns. Our culture around capital is intense, and it is not simply about not spending. It is about investing well. Our philosophy is that we should not spend $1 too much or $50,000 too little. We are constantly evaluating how best to use the considerable capital that Sears Holdings has on its balance sheet and the cash flow we expect to generate every year. We continually work to use our resources to fuel improved profitability.

As you may have read, we are continuing to experiment with the concept of transforming Kmart locations into a Sears format, but we have decided to change the name of those stores from Sears Essentials to Sears Grand in order to communicate more clearly to our customers the breadth and quality of product assortment provided in these stores. We are also continuing to look at ways of bringing Sears merchandise to the Kmart format. One of the great advantages of having approximately 2,300 large-format stores at Sears Holdings is that we can test concepts in a few stores before undertaking the risk and capital associated with rolling out the concept to a larger number of stores or to the entire chain. I am pleased with the way we have approached the various alternatives for bringing Sears products to our Kmart locations. We invite our shareholders to visit the various Sears Grand stores around the country, and for those who plan on attending the Annual Meeting in April, there are several Sears formats in the Chicago area that we invite you to visit while you are in town.

My goal is to see Sears Holdings become a great company whose greatness is sustainable for generations to come. One of the critical elements of that kind of longevity is having a culture of testing and measuring, and openness to change. It is very rare for companies to continue to operate for long periods of time without substantial change and adaptation. A great example is General Electric, which has been in business for over 100 years. When Jack Welch took over, he completely reinvented GE, not out of obvious need or crisis, but to sustain its ability to excel for the long term. It appears that Jeff Immelt is doing exactly the same thing today. It is not surprising that a company like GE, which adapts when it wants to instead of waiting until it has to, is a company that is admired for both its history and its current performance. As part of Sears Holdings’ efforts to adapt, I am focusing on providing direction, raising issues, asking questions, and suggesting ideas – on challenging and collaborating – and I rely on the experience and ability of our talented management team to make those ideas come alive.

Same-Store Sales

The discussion of profitable growth brings me to the issue of same-store sales, and why I believe it is not always the best measure of a retailer’s performance. Many analysts and commentators focus on same-store sales (SSS) as the most important statistic in retail, almost to the exclusion of any other statistic (even above profit). I consider SSS to be an important metric for retail performance, but one that is vastly overrated. Like any single metric, SSS has significant limitations. Let me offer a framework to help explain my thinking on SSS and why we do not rely on it to judge our success at Sears Holdings to the degree others in our industry do. If we take a simple example of a single store, then a comparison of SSS from year to year is fairly straightforward. If a store does $1 million in sales at a 10% operating margin this year, generating $100,000 in operating profit, and does $1.1 million in sales next year at the same operating margin of 10% generating $110,000 in operating profit, it will report a 10% increase in SSS. Now, let’s add another dimension. Imagine that this same store spent $500,000 to improve the store experience during that year. The 10% increase in SSS generated an additional $10,000 in profit. Whether the $500,000 investment makes sense or not in hindsight will depend on the future performance of the store. Obviously, if the store only improves by the $10,000 in profit, the $500,000 investment doesn’t make sense. I believe that companies that pursue SSS growth at any cost often fall victim to these traps.

In reality, the calculation of SSS becomes even more difficult. Individual retailers are opening, closing, and remodeling stores all the time. In this context, the simple comparison of a single store breaks down. Let me explain. Imagine that a new store opens on January 1, 2006. In the first year of operation, this store would be excluded from a company’s calculation of SSS because most calculations only include stores that have been open at least a year. A retail store matures over time and the first year of sales is often at a level that is a fraction of its potential. If we assume that a store opens at 60% of potential and matures to potential over four years, we know that this store will grow by 67% over that period of time (from $6 million to $10 million, let’s say). On that $10 million-in-sales store that opens at $6 million in year 1, the SSS increase over the next three years will average 18.6% per year, with the higher growth rates occurring in years 2 and 3 rather than year 4.

At the end of that period of time, the $10 million store may be at a relative steady-state, and let’s say it is earning at a 10% operating profit, or $1 million per year. The key question is not how well the store did from a SSS standpoint but rather how much money was invested to generate the $1 million profit. If the store cost $5 million to build, a $1 million profit represents a 20% pre-tax return on investment, which is attractive. However, if the store cost $20 million to build, the 5% return on that investment would not be attractive at all. Nevertheless, regardless of cost, the store would still have reported 18.6% compounded growth in SSS.

Complicating things further and bringing things even closer to reality, the more stores that are opened relative to the outstanding base of stores, the higher the SSS metric a company can produce, regardless of whether the new store openings make economic sense or not. If the mature stores ( i.e. , those that are over four years old) grow at a 1% rate and the new stores grow at the 18.6% per year rate (remember, it is likely that in years 2 and 3 the rates are materially higher than the 18.6%), then mathematically it is simple to show that the more new stores that are opened, the higher the SSS calculation. Only after a period of years will one know whether the new store investments actually made sense and actually contributed to the creation of value.

With Sears and Kmart, given that we have chosen not to open new stores at the pace of our competition, one can get a more accurate measurement of SSS performance. For retailers that aggressively open new stores, the reported SSS metrics are helpful, but far from complete. Rather, an investor would want to know how the stores greater than four years old are doing from a sales and profit perspective and how much money is being invested in those stores. In addition, an investor would like to know what is being spent on the newer stores and how they are performing from both a sales and profit standpoint. Without that information, any interpretation of SSS performance lacks real meaning. But so often today, SSS figures are cited without providing that critical additional information – giving investors only part of the picture.

In our case, starting with Kmart three years ago, we had many stores that were operating with low levels of profit or at a loss. If we had attempted to sustain our sales levels, it would have been difficult to improve our store and company profitability. By changing the objective from maintaining sales to growing profit, we were able to make a substantial improvement in our company’s profitability. No longer are we carrying excessive inventories, spending excessive amounts on marketing, and scheduling excessive labor dollars all in the pursuit of a given level of sales. Instead, our focus is on understanding our customers and figuring out how to provide them products and services that they value, so that we can build relationships with them and profitably serve them over the long term. While reducing sales is not a prescription for success on a base of healthy, profitable stores, it can be a prescription for success where profit was not the primary objective and where sales came from “giving product away” rather than from providing value to the customer. Improving our stores and our store experience will take time, and I am pleased with the progress that we have made to date.

Cash Flow and Investment

At the end of the fiscal year, after distributing $5.4 billion in cash as part of the merger transaction, Sears Holdings had $4.4 billion in cash on hand, including $664 million in cash held at Sears Canada. Sears Holdings has generated significantly more cash than we have spent on share repurchases and capital investment, and has considerable additional debt capacity to support value-creating investments if available.

Our credit statistics compare favorably with many of our major retail competitors. We ended the year with $3.7 billion of domestic cash, approximately $400 million in excess of our domestic debt of $3.3 billion. Excluding capital leases, our domestic debt is only $2.6 billion. Furthermore, we generated domestic Pro Forma Adjusted EBITDA of $2.6 billion for 2005. We also have a $4.0 billion credit facility on which we did not draw this year except for letters of credit. In light of our favorable net debt position, our powerful cash flow generation, and our credit statistics, we believe Sears Holdings clearly deserves an investment-grade credit rating. The three rating agencies, however, have yet to agree with us on that point. Instead, should we decide to access the credit markets, we would have to borrow at higher rates than many of our similarly situated competitors. We will continue to work to convince the rating agencies to better understand our Company, our actions, and the context in which the agencies have treated and rated other retail companies. In the meantime, on behalf of Aylwin and each of our roughly 350,000 associates, we welcome the challenge of being the underdog, and we will let our performance speak for us.

Share Repurchases

During 2005 we announced the intention to repurchase $1 billion of our stock. To put this in context for retail companies, in the last few years Wal-Mart has repurchased over $13 billion of stock, Home Depot has repurchased over $7 billion, Target has repurchased over $2 billion, and JC Penney has repurchased over $4 billion. In addition, each of those companies has paid out significant dividends over the same period of time. We completed almost $600 million of our repurchase program as of the end of the fiscal year and expect to continue to repurchase shares as long as we feel that it is a good use of our capital and that market conditions make it attractive.

While most observers focus on repurchases as a way to return cash to shareholders or to offset the dilution from options, it has other consequences as well. For those shareholders who choose to sell some or all of their shares, repurchases provide liquidity. For those shareholders who choose to hold their shares, their ownership percentage in the company increases. Either decision can be a good or bad one depending on the price paid and the subsequent performance of the company. For example, a shareholder who owns one percent of a company and chooses not to sell as that company repurchases shares will see his ownership percentage increase. Should the price paid for the repurchase be too high or the performance of the company subsequently decline, that shareholder would have a greater participation on the downside than he would have had before. Conversely, if the price paid was reasonable and the company goes on to perform well, participation in the increase in value would be magnified.

Warren Buffett makes clear that his goal is to increase the per-share value of Berkshire Hathaway. Similarly, our goal is to increase the per-share value of Sears Holdings . At the present time, I believe that the most significant lever for creating per-share value is in improving the operations of our core business. To the extent that we also have fewer shares outstanding, the returns to shareholders can be further magnified so long as we pay a reasonable price for the shares repurchased.

Pension Liability

As an investor, I have always been interested in, and tried to keep abreast of, the major issues and challenges facing the American economy and American businesses. Being Chairman of a large company these past few years – first at Kmart and now at Sears Holdings – has helped me do that by providing me with a first-hand view of the real-world impact of some of those policy issues. One such issue, which has been in the news a great deal lately, is that of pension liability and reform. Given all of the recent attention that pension issues have generated – in the media, on Wall Street, and in Washington – I thought it would be useful to share my thoughts on the status of Sears Holdings’ pension plan funding and more generally on the pension plan issues that the American economy is now confronting.

Sears Holdings has a very significant pension plan obligation. The Company’s current estimated U.S. pension liability – which includes both the Kmart Employee Pension Plan and the Sears Pension Plan – is roughly $6.1 billion (applying a 5.5% discount rate) and the combined pension assets are about $4.3 billion, which leaves a pre-tax shortfall of about $1.8 billion. While $1.8 billion is certainly a large number, there are three points I want to make about it:

First, the estimated pension liability (of Sears Holdings or of any company) is very sensitive to interest rates. A pension is a promise to pay benefits in the future. To estimate (in today’s dollars) what that promise represents, these projected future benefits are discounted back to today’s dollars using current interest rates. The lower the interest rate, the higher the estimated pension liability – and with interest rates currently near historic lows, the estimated pension liability for all companies is relatively high. If interest rates rise in the future, however, estimated pension liabilities will decline: in Sears Holdings’ case, we expect that a one-percentage-point increase in interest rates would reduce our plan’s liability and funding shortfall by approximately $750 million.

Second, Sears Holdings has the financial capacity to meet this pension obligation (as one can see based on our current cash position). Further, we are very focused on appropriately managing this liability to meet our obligations over time by conservatively managing the asset portfolio, and not using the portfolio or assumptions related to it to improve earnings, to chase better investment performance, or to do anything else that is disconnected from the goal of meeting the pension obligation.

Third, and most importantly, Sears Holdings is committed to honoring this obligation and has demonstrated that commitment. In bankruptcy, for example, Kmart could have attempted to “walk away” from its pension obligation like some other companies have. But it did not, instead opting to honor its obligation to associates and retirees. Over the past three years, moreover, Sears and Kmart have contributed $1.4 billion to their pension plans.

Because a pension is by its nature a long-term obligation, Sears Holdings’ intention is to fund our pension obligations in a measured, disciplined manner, much like the way most people pay for their homes through mortgages. Recent events, however, have complicated matters. As you know, a number of companies have defaulted on their pension plan obligations, and this has prompted two significant legislative changes. First, the premiums assessed by the Pension Benefit Guaranty Corporation (PBGC), which is in essence a government-mandated pension plan insurance program, are increasing. Second, pension funding relief rules, which were enacted because interest rates were at historic lows and would have threatened the liquidity of many companies, were allowed to expire.

The net result of these changes is a significant increase in pension costs for those companies – like Sears Holdings – that have pension plans. The annual PBGC premiums Sears Holdings pays will increase by nearly 60 percent, and we, like many other companies, will be required to increase our pension contribution by hundreds of millions of dollars over the next few years. And we still don’t know where the costs caused by legislative changes will ultimately end: a number of measures are pending in Congress and each would have onerous consequences to companies with defined benefit plans.

There are at least three problems with the recent wave of pension reform efforts. First, while the desire to ensure that retirees are protected if their former employer defaults on its obligations is an admirable and characteristically American one, the system for funding that pension insurance is outdated. Under the current system, the costs of providing that PBGC insurance are borne only by a subset of American businesses, namely those that offer (or have in the past offered) defined-benefit plans. This may have seemed sensible in an era when offering a defined-benefit plan was the norm for American businesses, but given the tendency in recent decades of employers to avoid the liabilities and regulations associated with defined-benefit plans, this system results in the burden of pension insurance being placed entirely on older companies, like Sears and Kmart, and not on more recently established companies. We are not against new competition; in fact, we welcome new competition as a way to force us to be more relevant to our customers. We believe, however, that if policymakers are going to attempt to redress the broad, structural problem of pension plan default in a way that burdens older American businesses and favors newer firms, then that policy decision (and its consequences to the American business landscape) should be made explicit and fully debated.

Second, even among companies with pension obligations, the PBGC premium increases are applied across-the-board, without regard to whether a company’s pension plan funding is manageable or precarious. Accordingly, a company like Sears Holdings, with a large market capitalization and significant cash flow relative to its pension liability, is being forced to “bail out” other companies that (for whatever combination of reasons) have not been as successful managing their pension obligations. This is very different from a traditional insurance program, in which premiums are adjusted for risk and a company is rewarded for good behavior. (Some have proposed that premiums should relate to a company’s credit rating, but if that is to be the measure then there also needs to be a more fair and consistent evaluation by the credit rating agencies of Sears Holdings’ strong cash flow and credit statistics, as I mentioned above.)

Third, pension regulations today do not allow companies to recapture assets from plans that are (or become) overfunded. Under current law, if a company’s pension plan becomes overfunded, i.e., if the plan’s current assets exceed the present value of the future obligations, then additional contributions by an employer are not tax-deductible and are not capable of being recouped by the company. Instead, those assets become trapped. This creates a powerful disincentive that discourages employers from fully funding or over-funding their pension plans. This surely is an unintended result and is ripe for a legislative solution. Because of this trapped-asset risk, the sensitivity of the obligation to interest rates, and the long-term nature of the obligation, we believe that pensions should be funded in a measured, disciplined manner.

The net result of the current system, with its shortcomings, is that a company like Sears, which has been a responsible steward of its pension plan, is being burdened with a 60% increase in PBGC premiums, not in order to address any risk associated with Sears, but rather to make up for the difficulties of other companies. Meanwhile, our competitors that do not offer defined-benefit plans do not share this burden, even though the problem is a broad and structural one.

Pension funding is one of the most important, complex, and vexing issues facing American workers and businesses today. At Sears Holdings, we understand and believe that a company should manage its pension plan and fund its pension obligations in a way that provides a high degree of certainty that the obligations will be met. We also understand that the pension system in America, including the funding of the PBGC, needs to be fixed. But imposing additional costs on long-established firms, like Sears and Kmart – especially on those that have acted responsibly in managing their pension obligations – while allowing a competitive advantage to companies that have not been around long enough to have provided defined benefit plans or that have not managed their plans well, is a controversial way to address this problem. Before policymakers decide the best way to address this problem, the issues, the potential solutions, and the consequences for American business should be debated fully, frankly, and fairly.

Legacy and Heritage

I mentioned earlier in this letter that, in many ways, Sears Holdings is a $55 billion start-up. We are trying to build a culture that is appropriate to the opportunity that Sears Holdings presents. While we are absolutely focused on profitability, we believe that in order to achieve that objective, we should strive to return Sears and Kmart to the position of prominence that both brands and companies held in American retailing. Our long association with the American consumer is a valuable foundation on which to build; and the reputation for reliability and trust that Sears has established through its stores and unparalleled service organization is something we greatly value.

Our strong association with customers, and our reputation for reliability, are attributable in significant part to our great brands, such as Kenmore, Craftsman, Lands’ End, and Die-Hard (as well as the Sears and Kmart brands themselves). We are proud of these brands, which have justly earned their status as symbols of excellence and quality.

Ultimately, however, the success of a company is a function of its people. To be successful, Sears Holdings, like any company, needs to continue attracting associates and executives who are talented, hardworking, honest, ethical, commercial, and dedicated. In that vein, I was struck recently by the story of a man I never had the privilege of meeting – a long-time Sears associate who helped establish and build the Company’s reputation for excellence. John Terrell, who passed away earlier this month, was a Sears associate for 28 years, serving the Company from July 1952 to January 1981. For over a decade, he was responsible for Sears’ Public Relations function, based in New York City. He recruited Ted Williams to be the Sears spokesman and brought Winnie the Pooh to Sears as a brand. He ensured that Sears provided the uniforms for the 1972 U.S. Olympic Team, and led Sears in its role promoting women in sports through its support of the LPGA and Title IX. John served in the Navy in World War II and later served with the President’s Council on Physical Fitness. This brief description of course cannot capture the fullness of John Terrell’s character, but it gives a sense of the breadth of his contributions to Sears and of the values he epitomized. We are fortunate to have John Terrell’s son, Jim, as an associate. Jim has worked at Sears for 27 years and, like his father, loves the Company. We extend our condolences to John Terrell’s family on his recent passing, and we thank John for his lifetime of contributions to what is now Sears Holdings. We also express our gratitude to the many others like John Terrell, who have given so much to Sears and Kmart over the years, and who loved what they did and what they accomplished. We hope that we will continue to attract and retain future John Terrells, because people like John are the heart and soul of any great company.

* * * *

In closing, I want to take this opportunity to thank you, the shareholders, for your continued support and interest in Sears Holdings. Along with my fellow directors and the management team, I deeply appreciate your decision to invest in Sears Holdings, and we are committed to working as hard as possible on behalf of you, the owners of the Company. As Chairman, I enjoy and look forward to the opportunities that these letters present to share my thoughts and perspective with you, and I appreciate your indulging my musings. In this, our first year as a new entity, with the many pro forma adjustments required (in our opinion) to explain our financials, and the many rapid changes we instituted across the board at the Company, I felt it was important to communicate with you on a very frequent basis – hence my quarterly letters. At this point, with the benefit of a full year behind us since the close of the merger, I expect to write to you less frequently (probably only on an annual basis); however, those of you who know me understand that I will consider myself free to pick up the pen and communicate directly to you more frequently should the need or occasion arise.

Respectfully,

Edward S. Lampert, Chairman

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Sears Holdings earnings double in 4Q
By Dave Carpenter – AP Business Writer
March 15, 2006

Sears Holdings Corp., the retailing company formed last year when Kmart bought Sears, said Wednesday its fourth-quarter earnings more than doubled due to the addition of Sears' results.

Shares of Sears Holdings rose almost 10 percent, or $11.69, to $128.96 in pre-market trading after the news.

Sales at Sears stores continued to decline sharply during the quarter, however, even as they gained slightly at Kmart for the first time since that retailer emerged from bankruptcy three years ago.

Comparable sales -- a key barometer of retail performance -- tumbled 12.2 percent at Sears stores during the key holiday period, which the company attributed to its decision to forgo costly promotions and to weaker-than-usual results from apparel. Kmart stores registered a 0.9 percent comparable sales increase, their first since the second quarter of 2001.

Net income for the November-through-January period rose to $648 million, or $4.03 a share, in the quarter ended Jan. 28, up from $309 million, or $3.09 a share, a year earlier.

Fourth-quarter revenue rose to $16 billion from $6 billion.

Analysts surveyed by Thomson Financial had expected the company to earn $3.62 per share on revenue of $15.99 billion.

Sears also announced that board members Michael Miles and Julian Day have decided not to stand for re-election at the company's April 12 annual meeting. The company said Miles, who joined the board at the time of last year's merger, plans to devote more time to personal matters, while Day, who was president and CEO of Kmart from March 2002 to October 2004, will spend more time on various other business interests.

Chairman Edward Lampert said the two will not be replaced and the board's size will reduce to nine directors from 11.

Full-year net income fell to $858 million, or $5.59 a share, from $1.1 billion, or $11 a share, a year earlier. Revenue rose to $49.1 billion from $19.8 billion.

The former Kmart Holding Corp., based in Troy, Mich., acquired Sears, Roebuck and Co. last March. The enlarged retailer was renamed Sears Holdings and its headquarters were moved to Sears' home in Hoffman Estates, Ill.

The company's reported results include results from Sears only after the close of Kmart's acquisition on March 24, 2005.

On a pro forma basis, which reports the results as if Kmart had purchased Sears at the beginning of fiscal 2004, Sears said its full-year net income fell to $789 million, or $4.85 per share, from $884 million, or $5.40 per share, in the previous year. Full-year pro-forma revenue slipped to $54.2 billion from $55.9 billion.

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Sears Savvy On Costs, But Has Plenty To Learn On Fashion
By James Covert – of Dow Jones Newswires – Wall Street Journal Online
March 15, 2006

NEW YORK -- Sears Holdings Corp. (SHLD) has displayed uncommon savvy when it comes to managing its finances, but it still has plenty to learn about fashion.

The Hoffman Estates, Ill., retailer has shown ingenious and innovative ways to pull profits out of a pair of aging, struggling retail chains by being highly selective on spending. But with room running out for cost cuts, its future increasingly may rest on its knack for old-fashioned retailing - particularly when it comes to apparel.

Sears - which was formed during the fiscal first quarter of last year as Kmart acquired Sears, Roebuck & Co. - more than doubled its fourth-quarter profit as it added results from Sears, and sales soared 170% including Sears stores. The company's shares rose more than 10% Wednesday, as earnings exceeded Wall Street's estimates.

But compared with last year's pro forma results that combine Sears and Kmart, sales actually declined 4.5%. The company's Kmart chain eked out a 0.9% increase in sales at stores open at least a year - or same-store sales, a closely watched measure of retail performance. But same-store sales at the Sears chain plunged 12.2%.

Sears countered the weak sales with better gross margins as it reduced inventory and eliminated storewide promotions in favor of more targeted markdowns to clear excess goods. The company also slashed marketing costs by nearly $300 million and cut overhead costs by $100 million, said Gregory Melich, an analyst at Morgan Stanley.

But that kind of cost-cutting "is unlikely to be repeated in 2006, so sales need to get better," Melich said.

For its part, Sears isn't promising better sales this year, saying only that it expects the same-store sales declines at Sears stores to moderate. The company said the recent, steep declines at Sears stores have resulted partly from smaller promotions and reduced spending on marketing and store labor. But the other big culprit, the company admitted, has been the company's apparel, including several new, fashion-oriented, private-label brands that didn't attract shoppers.

'Heavy Lifting Ahead'

The apparel issue is a big one. Gary Balter, an analyst at Credit Suisse, said Sears could increase its earnings before interest, taxes, depreciation and amortization by more than 25% this year. But to do so will require flat or improved comparable sales in Sears' stubbornly sluggish apparel business, Balter said.

That's a tall order by some reckonings. While competitors including J.C. Penney Co. (JCP) have dramatically improved their fashions over the past few years, Sears continues to dither, said Arun Daniel, an analyst at ING Investments Inc. The most noticeable thing about Sears apparel of late is that there's less of it, he said. Otherwise, the company continues to miss out on key fashion trends, including denim and dresses this spring.

"The spring season is all about dresses, but when you look at what they have versus competitors, it's pretty underwhelming," Daniel said.

Fashion has always been a tricky business, but few retailers have been vexed by it as consistently as Sears. The company's "Softer Side of Sears" campaign in the 1990s under former CEO Arthur Martinez failed to shake off the company's reputation for dowdiness. In May 2002, Sears bought Lands' End, but the suburban, preppy label proved to be an awkward fit for Sears' ethnic shoppers. Sears has replaced a hodge-podge of no-name labels with a few private brands, but the new labels have yet to take off.

In a letter to shareholders Wednesday, Sears Chairman Edward S. Lampert said the most significant factor that will boost Sears shares is an improvement at the company's retail stores, but he offered few specifics and didn't discuss apparel. Lampert did, however, emphasize that the company continues to search for new talent.

While the company's apparel problem is big and its strategy remains unclear, there's at least one reason to be upbeat, said Bill Dreher, an analyst at Deutsche Bank Securities Inc. He notes that Kmart's fourth-quarter same-store sales gain was driven partly by increased sales of apparel.

"There's significant heavy lifting ahead on the Sears domestic apparel side," Dreher said. "But given the similarly dire outlook two years ago on the Kmart side, we're optimistic."

None of the analysts mentioned in this report own Sears shares, but Morgan Stanley makes a market in Sears securities.

Gary Balter is an analyst at Credit Suisse.

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Lampert: Sears Missed Co's Target For 2005 Merger Savings
By James Covert – Dow Jones Newswires - Barron’s Online
March 15, 2006

NEW YORK -- Sears Holdings Corp. (SHLD) has missed its internal targets for savings from the merger of Sears and Kmart completed nearly a year ago, the company's chairman said.

The Hoffman Estates, Ill., retailer said Wednesday its fourth-quarter profit more than doubled from the year-ago period, which included results only from the Kmart chain. While holiday sales were lackluster, the company's profits and cash on hand surpassed expectations of some Wall Street analysts, and the company's shares rose 10% in early trades.

However, Sears' earnings before interest, taxes, depreciation and amortization - or EBITDA, a measure often used on Wall Street for struggling companies - was $2.62 billion for the year. That result showed a 23% increase from $2.13 billion for the pro-forma Sears and Kmart a year earlier, but fell short of the company's forecast at the time of the merger, Sears Holdings Chairman Edward S. Lampert wrote in a letter to shareholders posted Wednesday on the company's corporate Web site.

"Although we exceeded our internal synergy targets, we had set even higher internal standards - and our Chief Executive Officer Aylwin Lewis, his executive team, and I are disappointed," Lampert said.

Lampert didn't elaborate on the reasons for the shortfall, but noted that Kmart's adjusted EBITDA was $828 million in 2005, down from pro-forma adjusted EBITDA of $902 million a year earlier. The decline resulted from a shrinking number of Kmart stores, with 60 fewer locations than a year ago, and costs and clearance markdowns associated with converting Kmarts to off-mall Sears formats.

"We believe that we have stabilized Kmart's EBITDA and are now in position to grow from that base," Lampert said.

Calling Sears "a $55 billion start-up," the Connecticut hedge-fund magnate who engineered the merger of Sears and Kmart said the company will continue to focus on growing profits rather than sales. Sears has largely completed the integration of the two companies, including their supply chains, technology, finance and human resources functions, Lampert said.

"We will not have the same ability to harvest the low-hanging fruit that the merger presented to us," Lampert said. "We are firmly anchored in the tasks of testing, adapting, and executing."

Citing the example of great corporate leaders including former General Electric Co. (GE) CEO Jack Welch and Berkshire Hathaway Inc. (BRKA, BRKB) Chairman Warren Buffett, Lampert said Sears will continue to pursue unconventional routes to success.

"When Jack Welch took over, he completely reinvented GE, not out of obvious need or crisis, but to sustain its ability to excel for the long term," Lampert said.

Likewise, Sears will reject some conventional measures of performance. Lampert singled out the example of same-store sales - or sales at stores open at least a year, which are closely watched by Wall Street analysts and retail executives alike. The company's same-store sales were mixed during the fourth quarter. While Kmart's posted a slight increase for the first time since 2001, the Sears chain posted a 12.2% decline.

Retail experts for years have harped on the company's poor same-store sales, citing them as evidence that Sears and Kmart are losing customers to competing retailers - a difficult trend to reverse that eventually could hurt profits that have been boosted by cost cuts in the past.

In a lengthy rebuttal, however, Lampert said same-store sales can't measure retail performance unless they are taken together with the money that has been spent to achieve them.

"No longer are we carrying excessive inventories, spending excessive amounts on marketing, and scheduling excessive labor dollars all in the pursuit of a given level of sales," Lampert said. "While reducing sales is not a prescription for success on a base of healthy, profitable stores, it can be a prescription for success where profit was not the primary objective and where sales came from 'giving product away' rather than from providing value to the customer."

With a somewhat folksy tone reminiscent of Warren Buffett's annual letters to Berkshire shareholders, Lampert went on to muse on still larger issues that currently face Sears and corporate executives, including whether or not to repurchase shares, and how to cope with pension liabilities.

On the latter subject, Lampert complained that insurance and government regulations are making it more difficult for companies like Sears to meet pension obligations as other companies fail to adequately address their own liabilities.

"Before policymakers decide the best way to address this problem, the issues, the potential solutions, and the consequences for American business should be debated fully, frankly, and fairly," Lampert wrote.

Noting that Sears currently has $1.8 billion in pension liability, Lampert said a rise in interest rates could correct the shortfall, and noted the company's strong cash position.

"Sears Holdings is committed to honoring this obligation and has demonstrated that commitment," he said, noting that Kmart didn't "walk away" from its pension obligation before it emerged from bankruptcy in 2003.

In closing, Lampert said he will no longer regularly write quarterly letters to Sears shareholders, and will probably write them on an annual basis instead.

"However, those of you who know me understand that I will consider myself free to pick up the pen and communicate directly to you more frequently should the need or occasion arise," he said.

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Attention Sears Shoppers
By Will Swarts - Midday AlertSMART MONEY.COM
March 15, 2006


Sears Holdings1
Share price as of Tuesday's close: $117.27
Share price now: $131.24
Percent change: 11.9%
Volume: 13.5 million shares, daily average 1.4 million
The News
Improving profits at Sears Holdings (SHLD2) drove shares up 12% in midday trading, but questions were raised over the sustainability of the bottom-line momentum. Aggressive cost-cutting played a much greater role in the earnings gains than operational improvements.

The Hoffman Estates, Ill.-based company, formed by the merger of Sears Roebuck and Kmart a year ago, posted a per-share profit of $4.03 for its fourth quarter ended Jan. 28. That handily beat Wall Street's estimate of $3.62 and the year-earlier quarter's $3.09 a share. Total sales climbed 170% year over year, though last year's results factored in only the 1,479-store Kmart chain. Sears has an additional 2,400 locations in the U.S. and Canada.

Same-store sales, a closely watched measure of a retailer's performance, fell 12.2% at the Sears chain, due to a significant drop in apparel sales and unsuccessful promotions during the holidays. The Kmart chain's same-store sales rose 0.9% for the fourth quarter, the first such gain since 2001.

The Analysis
Sears Holdings faces brutal competition from discounters Wal-Mart Stores (WMT3) and Target (TGT4), and it's also losing market share to the likes of Best Buy (BBY5) and J.C. Penney (JCP6). Better prices and more selection are luring shoppers to rivals. The impact of these and other competitors is evident in Sears's declining same-store sales, making Wednesday's stock move to the upside a head-scratcher for some.

"This is an absolute dichotomy," says Emanuel Weintraub, who heads Emanuel Weintraub Associates, a management consulting firm in Fort Lee, N.J. "You have a company that is losing market share and doesn't have a clear direction, facing ferocious competitors."

But Sears Chairman Edward Lampert seems to be satisfying investors with his focus on profits. It doesn't hurt that Sears is sitting on acres of valuable commercial real estate that Lampert picked up on the cheap when he combined the struggling chains.

"He's done an incredible job of buying $100 worth of real estate for a dollar," says Howard Davidowitz, chairman of Manhattan-based Davidowitz & Associates, a national retail consulting firm. "The stock was at a low until all this was announced. He identified value in Sears and he's been able to make great purchases. You have to give him credit for that."

But rising stock prices and falling same-store sales don't square up, Davidowitz says.

"On the operating side you've got to give him credit for cutting costs," he says. "But you have to give him credit for the fact that he's going out of business. There's no way he can sustain the comp-store sales drop that he's had — it's impossible. You also can't sustain the cost-cutting. That tends to be a one- or two-time event."

In a letter to shareholders published on the company's web site on Wednesday, Lampert said same-store sales are "not always the best measure of a retailer's performance." He pointed instead to improved cash flow and a $1 billion stock buyback program aimed at boosting shareholder value. The company has already repurchased $600 million worth of Sears shares.

The Bottom Line
What happens next is the key to the stock's trajectory. Lampert could make big moves such as sprucing up the Sears chain and converting Kmart stores to a Sears format, but any big expenditures could hurt the bottom line. A glut of commercial real estate right now also diminishes the value of the land the stores are sitting on, Davidowitz says.

James Ragan, an analyst at Crowell Weedon & Co., a Los Angeles investment bank, says it's too soon to write off Lampert's turnaround efforts.

"They had a very strong cash flow performance in 2005, and from a sales and cash flow perspective, the stock is cheap," Ragan says. "I think Lampert has made it clear that they weren't focusing on comps in 2005. The belief was that both Kmart and Sears were generating sales at the expense of profit, and they had to cut lower-margin products. The gross margins indicate they're doing that."

Management has been tight-lipped about its next course of action. It might be the end of the line for substantial cost-cutting, and absent operational improvements that leaves analysts wondering where the profit growth will come from.

"I think he may look for something else to buy — that's his thing," says Davidowitz of Lampert. "We need another act to this. It's going to become evident that the business can't be sustained at any decent level. I think Lampert is going to have to do something else to sustain the business. You can't keep getting earnings from cost cuts indefinitely."

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Whirlpool, Maytag deal may need sale of some brands
By Jayne O'Donnell - USA Today
March 15, 2006

Appliance maker Whirlpool won approval from Canadian antitrust regulators Tuesday for its proposed purchase of Maytag. But it might need to divest one or more brands to satisfy U.S. antitrust concerns, say people familiar with the deal who won't comment on the record during negotiations.

The $1.7 billion merger, announced in August, would give the new company more than 70% of the washing machine and clothes dryer market and about half the dishwasher market. Such market power often worries antitrust regulators because the new company could more easily raise prices without losing much business.

Justice Department staff lawyers have gathered affidavits from customers and competitors and other evidence that could be used in a lawsuit to block the deal. But Thomas Barnett, who became antitrust chief last month, could overrule any staff recommendation to sue.

Last month, Whirlpool agreed to extend until March 30 the date for closing the deal if Justice haven't moved to block it.

Still in question: Whether the Kenmore-brand appliances Whirlpool makes for Sears should be included in its market share. Whirlpool, Kenmore and Maytag — in that order — sell the most washers and dryers, says market researcher NPD Group.

Antitrust lawyer James Rill, representing Whirlpool, says Kenmore is an "independent competitor," but the sources say Justice is including Kenmore in its analysis. Rill would not comment on the negotiations. Justice spokeswoman Gina Talamona says "the investigation is continuing."

Whirlpool CEO Jeff Fettig says the Canada decision "recognizes that the global home appliance industry is open and competitive." The Competition Bureau of Canada could have sued to block the merger because the companies do business in Canada.

Justice's recent loss of a court challenge to the merger of software companies Oracle and PeopleSoft has fueled speculation that Barnett might be reluctant to block Whirlpool. But former Federal Trade Commission antitrust chief Molly Boast says the government can't pursue just sure bets: "The government is supposed to undertake challenges where it believes harm will ensue from a merger."

Former Justice antitrust official James Weiss says that's why negotiating divestitures, which could include plants, distribution agreements or brands, could help.

"Even if the Justice Department decides that it will challenge a merger, its concerns generally can be resolved with divestitures of assets that will enable someone else to compete in the business," says Weiss. "This would seem to be the type of transaction that could readily be resolved in this manner."

Brand names
Among their U.S. brands:

Whirlpool*
Whirlpool
KitchenAid
Roper
Estate
Gladiator
GarageWorks
Maytag

Maytag
Magic Chef
Hoover
Jenn-Air
Amana
Dixie-Narco
Jade

* — Maker of many Kenmore washing machines, dryers and dishwashers for Sears.

Source: the companies

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Sears' Lampert slams pension reforms in shareholder note
Confirms changing of Sears Essentials name

Crain’s Chicago Business Online
March 15, 2006

(Reuters) — Sears Holdings Corp. Chairman Edward Lampert on Wednesday blasted legislative pension reform as particularly costly for the No. 3 U.S. retailer, amid moves by the company to slash costs in efforts to compete in a cutthroat retail environment.

Lampert also detailed strategies for adding Sears merchandise to Kmart stores.

In a letter to shareholders, Lampert said well-meaning pension reform punished older companies like Sears Holdings, which was formed by the acquisition of Sears, Roebuck and Co. by Kmart last year.

He took aim at the Pension Benefit Guaranty Corp., a federal program that insures employer-provided pensions and is operating under a deficit after airline and steel companies abandoned their pension plans.

Sears Holdings will be forced to pay 60-percent higher premiums to the PBGC, although the company has adequate cash to fund its own pension plans, Lampert said in the letter.
"A company like Sears Holdings, with a large market capitalization and significant cash flow relative to its pension liability, is being forced to 'bail out' other companies that (for whatever combination of reasons) have not been as successful managing their pension obligations," Lampert wrote.

The company's U.S. pension liability, which includes both the Kmart Employee Pension Plan and the Sears Pension Plan, is roughly $6.1 billion.

Lampert also took issue with the current regulations in which companies cannot take back assets from plans that become overfunded.

"The net result of the current system, with its shortcomings, is that a company like Sears, which has been a responsible steward of its pension plan, is being burdened with a 60 percent increase in PBGC premiums, not in order to address any risk associated with Sears, but rather to make up for the difficulties of other companies," wrote Lampert.

The financier also used his letter to inform investors on his plans for transforming Kmart locations into a Sears format. "We have decided to change the name of those stores from Sears Essentials to Sears Grand in order to communicate more clearly to our customers the breadth and quality of product assortment provided in these stores," he said.

Sears Essentials, touted among the reasons for the deal between Kmart and Sears, combined Kmart's discount merchandise with Sears staples such as appliance and tools, but the mix hadn't been as successful as the company had originally hoped.

Lampert has written to investors quarterly, but said that with benefit of a full year behind him since the close of the merger, he planned to write less frequently, likely on an annual basis.

Sears shares were up $10.17, or 12 percent, at $129.17 near midday, after the company reported quarterly earnings that beat Wall Street forecasts.

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Wal-Mart Takes Control Of Central American Chain
A Wall Street Journal Online News Roundup
March 15, 2006

Wal-Mart Stores Inc. said Wednesday that it raised its stake in Central American Retail Holding Co., or Carhco, to 51% and changed the name to Wal-Mart Central America.

The Bentonville, Ark., company acquired a 33% stake in the Central American retailer in September 2005 from Dutch retailer Royal Ahold NV. Terms of the original investment or the additional purchase from the other Carhco partners – the Paiz family and Corporacion de Supermercados Unidos -- weren't disclosed.

Wal-Mart said Carhco is Central America's leading retailer, with 375 supermarkets and other stores in five countries. Carhco has about 23,000 employees and its sales during in 2005 were about $2.2 billion.

The move comes as Wal-Mart looks for growth amid an increasingly saturated U.S. home market. Wal-Mart has been experimenting with multilevel stores and trying to fend off criticism of its employee pay and benefits in the U.S.

In February, Wal-Mart posted a 13% rise in quarterly profit because of aggressive holiday promotions and an overhaul of its U.S. operations, but the company said rising interest costs would constrain results this year.

The world's biggest retailer has been beset by soaring energy prices and an uneven economic recovery that hasn't benefited the majority of lower-income workers, a main Wal-Mart constituency. But unlike in previous quarters, the company didn't cite external factors for performance issues. Instead, its executives focused on how Wal-Mart was adapting to a tougher operating environment.

Wal-Mart, which had stores in 15 countries as of its quarterly report, said its international division's operating income in the quarter rose 14% to $1.12 billion. Still, the retailer said its international sales of $18.4 billion fell short of its goal amid softer-than-expected sales at its Asda stores in the United Kingdom. This was partially offset by strong results at Wal-Mart de Mexico, where sales rose 15%. Wal-Mart built 95 stores in Mexico last year.

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Sears 4Q Net More Than Doubles On Kmart Merger
By James Covert – Dow Jones Newswires
March 15, 2006

NEW YORK -- Sears Holdings Corp. (SHLD) said its fourth-quarter earnings more than doubled from the year-ago period, which included results only from the Kmart chain.

The Hoffman Estates, Ill., retailer, which was formed during the fiscal first quarter of last year with the merger of Sears and Kmart, said sales soared more than 170% with the addition of Sears. Comparable results for the company's two chains, however, continued to reflect lackluster sales amid aggressive cost-cutting.

For the quarter ended Jan. 28, Sears Holdings reported net income of $648 million, or $4.03 a share, up from $309 million, or $3.09 a share, in the year-earlier period. The latest results surpassed the company's forecast given in January for net income of $570 million to $635 million, or $3.55 to $3.95 a share.

Revenue rose to $16.09 billion from $5.95 billion.

Analysts projected earnings per share of $3.62 on revenue of $15.99 billion, according to Thomson First Call. Sears shares in premarket trading Wednesday recently were at $128.70, up $11.43, or almost 10%, from Tuesday's close.

Holiday sales at the Sears chain faltered, and sales at stores open at least a year - or same-store sales, a closely watched measure of retail performance - plunged 12.2% at Sears stores as the company cut unprofitable sales events and fashions continued to be shunned by shoppers. The Kmart chain, however, posted a 0.9% improvement in its same-store sales for the fourth quarter, the first such improvement Kmart has seen since the second quarter of 2001.

In a press release Wednesday, management said Kmart's same-store sales gain was "primarily due to increased sales of apparel and home products," with the latter including Martha Stewart Everyday bed and bath linens and kitchenware from Martha Stewart Living Omnimedia Inc. (MSO). Sears said it expects its same-store sales declines to moderate this year.

"Same-store sales haven't improved materially since last quarter, and they're clearly not performing well compared with other discounters," said Arun Daniel, an analyst at ING Investment Management Inc.

In its annual form 10-K filing with the Securities and Exchange Commission on Wednesday, Sears Holdings said annual pro forma revenue including Sears slipped 3% to $54.3 billion. Companywide same-store sales slipped 5.3% for the year, with Sears' same-store sales declining 8.4% and Kmart same-store sales declining 1.2%.

The company's profitability and finances, however, appeared to surpass forecasts on Wall Street. Sears said its operating income totaled $1.5 billion, up from $472 million posted by Kmart a year earlier. Earnings before interest, taxes, depreciation and amortization, or EBITDA, was $1.49 billion, or 9.2% of sales when adjusted for merger costs and asset sales.

That figure was ahead of the $1.3 billion forecast by Christine Augustine, an analyst at Bear Stearns, although Augustine said her forecast was "probably conservative." The company's gross margin rose to 28.3% of sales from the pro forma 27% reported by Sears and Kmart a year earlier. And despite lackluster holiday sales, costs as a percentage of sales fell during the quarter, the company said.

Those figures bode well for profitability during the coming year, said Gary Balter, an analyst at UBS. Balter says Sears could add $1 billion to its EBITDA in 2006, but to do so will require flat or improved comparable sales in Sears' stubbornly sluggish apparel business.

Secondly, Balter said he's looking for "signs of positive traction in Sears Grand effort," referring to the company's new initiative to convert Kmart stores to "Sears Grand" stores that sell Sears-branded products including Craftsman tools, Kenmore appliances and Lands' End apparel.

Sears didn't file a Form 10-Q on its fourth-quarter results Wednesday, and company spokesman Chris Brathwaite said the company had no plans to make a quarterly filing that day. The company offered little comment on its plans for Sears Grand in the 10-K filing or in the Wednesday press release.

"The key to the story is really, are they going to move forward with any type of divestiture of the current brands, or are they going to continue to operate as a retailer going forward?" ING's Daniel said. "It's difficult to come to a conclusion based on the information they have given us."

Sears finished the year with $3.8 billion in cash, excluding $664 million at Sears Canada (SCC.T), which reaped $2 billion from the sale of its credit-card business last year. Sears, which has made a tender offer to purchase the 46.2% of Sears Canada shares it doesn't already own for C$16.86 a share, said late Tuesday that five of eight senior Sears Canada executives intend to accept its offer, which is slated to expire Friday.

Separately, Sears said Wednesday that Michael Miles and Julian Day won't seek re-election to the board of directors and that its board will be reduced to nine seats from 11.

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Sears Holdings' net more than doubles
By Jennifer Waters, MarketWatch
March 15, 2006

CHICAGO (MarketWatch) -- A year into combining Kmart and Sears Roebuck store operations, Sears Holdings Corp. said it more than doubled quarterly earnings as tight cost controls helped offset weakness in same-store sales.

Hoffman Estates, Ill.-based Sears Holdings (SHLD ) said Wednesday that fourth-quarter net income rose to $648 million, or $4.03 a share, up from the prior year's $309 million, or $3.09 a share. Revenue rose to $16.09 billion from $5.95 billion.

Analysts polled by Thomson First Call had expected earnings of $3.62 a share on revenue of $15.99 billion.

Last year's figures don't account for combined financial results. Proforma results suggest profit would've risen a more modest 10%, with revenue falling 4.5%, if the firms had already operated as a single company. The above-consensus results helped lift the stock more than 5% in pre-open trading.

Holiday sales boosted Kmart's same-store sales by 0.9% in the fourth quarter, which the firm said was its first increase since the second quarter of 2001.

Domestic same-store sales at Sears dropped 12.2% in the quarter as the group cut its reliance on promotional events and on weaker-than-anticipated customer response to fashion offerings.

For the year, domestic same-store sales at Sears dropped 8.4%, while Kmart same-store sales fell 1.2%. In the past year, Sears Holdings has started to integrate merchandise offerings in both the Sears and Kmart stores. Most Kmart units, for example, carry some lines of Sears' No. 1 Kenmore appliance brand and Craftsman power tools.

For 2006, the firm expects Sears' comparable-store sales declines to moderate, and the company said it's adjusting its apparel strategy to better meet customer demand.
The combined firm's outlook wasn't too bright. It sees continued market-share pressure as competitors open additional locations and engage in heavy promotional activity.

"The company expects these trends to continue in the foreseeable future, and these trends may negatively affect the company's future sales performance and results of operations," it said.

Sears Holdings' shares ended Tuesday's session at $117.27, off 76 cents. Trading has been choppy since the beginning of the year, with the share price ranging between $114 and $124.

Jennifer Waters is a reporter for MarketWatch based in Chicago.

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Sears Holdings Reports Fourth-Quarter Net Income
of $648 Mln
Bloomberg.com
March 15, 2006

Sears Holdings Corp., the largest U.S. department-store company, posted fourth-quarter profit of $648 million.

Net income was $4.03 a share, Hoffman Estates, Illinois- based Sears said today in the fourth report since Kmart Holding Corp. bought Sears, Roebuck Co. last March. Revenue was $16.1 billion, the company said in a regulatory filing.

Chairman Edward Lampert is cutting costs, introducing exclusive brands and renovating stores as the one-year anniversary of the $12.3 billion purchase nears on March 24. Since combining the retailers, comparable store sales have plummeted and Sears has lost customers to competitors including Federated Department Stores Inc. and J.C. Penney Co.

“They need to develop merchandise that fits the right niche,'' said Scott Rothbort, president of Lakeview Asset Management in Millburn, New Jersey, which owns Sears shares. “That's the wild card. It's a company that's transitioning.''

Shares of Sears fell 76 cents to $117.27 yesterday in Nasdaq Stock Market composite trading. The stock declined 10 percent in the year through yesterday. Federated shares rose 12 percent and J.C. Penney gained 28 percent.

Sears has about 3,900 stores in the U.S. and Canada.

Analyst Estimates

Credit Suisse analyst Gary Balter, who is top-ranked by StarMine Professional, estimated profit of $3.53 a share. Balter, based in New York, rates the shares “outperform.''

The average estimate of five analysts surveyed by Thomson Financial was $3.62 a share. Thomson declined to disclose the parameters for the estimates in its survey.

Of eight securities analysts tracked by Bloomberg, five recommend buying Sears shares, two say ``hold'' and one says ``sell.''

Lampert, 43, combined Sears with Kmart to create the largest U.S. department-store company by sales. Cincinnati-based Federated is the second-largest.

A former risk arbitrage executive at Goldman Sachs Group Inc., Lampert heads ESL Investments Inc., a hedge fund company in Greenwich, Connecticut. He has focused on buying undervalued companies and said he's a student of billionaire Warren Buffett's investment philosophy of buying assets shunned by others.

Declining Store Sales

Since taking over Sears, Lampert has ousted Alan Lacy as chief executive officer, shut Kmart's Troy, Michigan, headquarters and fired more than 1,500 employees. He also took direct control of marketing, merchandising and the Internet business.

Same-store sales in the previous three quarters fell an average of 4.7 percent at Sears and 2.3 percent at Kmart stores.

Sears is trying to reverse declining store sales by adding exclusive clothing brands and home goods by designers including Ty Pennington. Kmart is adding Sears brands including DieHard batteries to boost sales.

In a December letter to shareholders, Lampert said clothing sales at Sears stores were “disappointing.'' At Kmart, clothing gained while home furnishings declined in November and December, the company said.

Lampert has reversed course on plans for new stores that operate outside of malls. In February 2005, he said the company would convert more than 400 Kmart locations to Sears Essentials. The chain carries convenience foods, sporting goods and health and beauty items along with merchandise found in Sears department stores.

Sears Essentials

In December, Lampert said Sears would convert fewer Kmart stores. Last month, the company decided to stop using the Sears Essentials name and to call the off-mall stores Sears Grand.

“The format's being retooled and the company made a decision to have a single format for all of its off-mall Sears stores,'' spokesman Chris Brathwaite said. Sears plans to redesign all such stores, he said.

Sears Essentials has been a ``major disappointment,'' wrote Credit Suisse's Balter in a March 10 report titled “Stuck in Execution Mode?'' Lampert should consider scrapping the two store brands and adopt one that works, he said.

“In our opinion, this story works when and if Sears and Kmart can successfully transfer their respective brand values into one store format, be it mall or ideally off-mall,'' he said.

No AutoZone

Lampert's performance with Sears stands in contrast to his turnaround at AutoZone Inc., Balter said.

In 1997, Lampert bought shares in AutoZone, the largest U.S. auto-parts retailer, when the stock was trading at about $20. By December 2001, he was the largest shareholder and sold part of his stake when the stock was about $73. He became actively involved in the company, visiting stores and speaking with managers about AutoZone's performance.

“We have been expecting Sears to play out similarly, but to date have not seen the asset sales or leadership that have characterized the other stories,'' Balter wrote.

Sears is losing sales of appliances to Home Depot Inc., Morgan Stanley analyst Gregory Melich said.

“Home Depot continues to benefit at the expense of Sears given 63 percent of Sears's stores are within 5 miles of Home Depot's stores,'' Melich wrote in a Feb. 22 report. Melich, based in Purchase, N.Y., rates the shares “underweight.''

During the quarter, Sears completed the sale of a 20 percent stake in its Orchard Supply Hardware Stores for $58.7 million plus a $450 million dividend to private equity fund Ares Management LLC.

Sears also made an offer to buy the 46 percent of Sears Canada Inc. it didn't own for C$16.86 a share. Sears Canada rejected the offer on Feb. 22, saying the price didn't fairly value the chain.

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Who's Afraid of Banking at Wal-Mart?
By David Leonhardt – New York Times
March 15, 2006

IMAGINE that Wal-Mart announced it was going to open a new kind of store, one that would have all the benefits of the chain's low prices without a lot of the collateral damage.

Shoppers who went to this store would save money, and they would be able to choose from a wider variety of products than they now do. But the store would not put mom-and-pop hardware stores out of business, and it would not steal jobs from unionized supermarket workers. It would mainly hurt mammoth corporations and Wall Street.

Well, Wal-Mart has made an offer very much like this, again and again, over the last few years. It has tried to open a bank. And based on everything we know about the company, a Wal-Mart bank would almost certainly make life difficult for the Citigroups of the world and bring down A.T.M. fees. There is a good chance it would also persuade some people without savings accounts to open one.

But the answer from lawmakers has been the same every time: no. In 1999, Congress went out of its way to keep the company from buying an Oklahoma savings and loan. In 2002, the Legislature in California blocked a plan to buy a bank there.

Chastened — and well aware that they already have enough fights on their hands — Wal-Mart executives are now floating a far narrower plan. They are applying for a bank charter that would merely allow the company to become its own middleman on credit card purchases, reducing transaction fees. The Wal-Mart Bank would not accept normal deposits or lend money.

But even for this limited purpose, the bank has generated an impressive list of opponents, on both the left and the right. The group includes big-business lobbyists, small banks, influential Republicans, Senator Hillary Clinton (who once was on Wal-Mart's board) and regular Wal-Mart critics like the A.F.L.-C.I.O. They worry that the new bank is a Trojan horse. Eventually Wal-Mart may help its customers open checking accounts and pay them interest.

Imagine that.

FOR all the criticism of Wal-Mart — much of it deserved — you simply cannot argue with the fact that the company saves its customers money. It roots out inefficiencies, cuts the price on a product and forces its competitors to match. That is why it is easily the nation's most popular store.

Now think about what would happen if Wal-Mart applied its legendary price-cutting to banking. Because starting a new bank is quite difficult, banks have been able to get away with things that other companies just can't. They refuse to give you access to money for days after you cash a check, even though the money itself now moves within minutes. And they have long ignored low-income families, because the banks can make enough money elsewhere.

As a result, many of these families pay exorbitant fees to cash checks. They have credit card interest rates and mortgage rates that look as if they came out of the 1980's. It is not just poor people who are ill served by the financial-services business, either. More than half of American families still do not have their own retirement accounts.

Robert B. Reich , the former labor secretary who was often a lonely voice of liberalism among the Clinton administration's economic centrists, describes Wal-Mart as "not my favorite employer — far from it." But he is also in favor of a Wal-Mart bank, for the very liberal-sounding reason that it would improve life for ordinary people. All the opposition to the plan, he added, "is a pretty good indication that consumers would be helped if Wal-Mart could get in somehow."

To see what he means, take a look at just about the only thing Wal-Mart does that remotely resembles banking. At customer service desks near the front of most stores, you can cash a check for a flat fee of $3. By comparison, many check-cashing stores charge 3 percent of a check's value, or more than $10 on a $350 paycheck. Not surprisingly, Wal-Mart's check-cashing business is booming.

But it is still no bargain. A two-income family that cashes all of its weekly checks at Wal-Mart could spend close to 1 percent of its after-tax income on the fees. Most of us with checking accounts pay nothing at all.

So we allow Wal-Mart into one of the most exploitative parts of financial services, but we do not let the company try to make money by offering truly useful services. We let it offer a Wal-Mart-branded credit card (through General Electric ) but do not let it sell retirement accounts to all the moderate-income Americans who shop there.

"Banks talk about going after the 'unbanked,' " said Jane J. Thompson, president of Wal-Mart's financial-services group, "but they don't do much to make them comfortable or to welcome them in."

Next month, banking regulators will hold hearings in the Washington and Kansas City, Mo., areas on Wal-Mart's application for a narrow charter. In an ideal world, the hearings would be examining how a Wal-Mart bank would need to be monitored differently from one owned by an investment company. The government would have to make sure, for example, that the bank was not pushing loans on customers to get them to buy more items at the store.

Unfortunately, though, these hearings will be more of a sideshow. Wal-Mart executives say they no longer plan to start a real bank, at least not anytime soon. Instead, they are signing 15-year leases to rent space to existing banks, which are then opening branches inside Wal-Mart stores. And the company's application for a charter — which, again, would allow it to reduce its own credit card processing fees — will probably be approved, despite the opposition.

But I don't think this issue is going to go away. Ben S. Bernanke, the new Federal Reserve chairman, has been saying recently that the law should be clearer about what kinds of companies can own banks. Eventually, there needs to be a larger discussion about why we unnecessarily restrict bank competition — an issue that should resonate with both Republicans and Democrats.

Remember that this is not a fight between Wal-Mart and the little guy. It's a fight between Wal-Mart and Wall Street.

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Sears Holdings Advised that Sears Canada Senior Officers Intend to Tender or Sell Shares
Sears Holdings News Release
March 14, 2006

Natcan Has Tendered 9,690,149 Common Shares to the Offer

HOFFMAN ESTATES, Ill., March 14 /PRNewswire-FirstCall/ -- Sears Holdings Corporation announced that it has received notice that five of the eight senior officers of Sears Canada Inc. have indicated that they intend to either accept the Sears Holdings' offer and tender all of the common shares held by them to the Offer or sell the shares into the market prior to the expiration of the Offer, or a combination of both. The five senior officers who have declared their intentions include David Merkley, Senior Vice-President and Chief Financial Officer; Rudi Vezer, Senior Vice-President and Chief Legal Officer; Richard Brown, Senior Vice-President, Merchandising and Marketing; Frank Rocchetti, Senior Vice-President and Operations Officer; and Ethel Taylor, Senior Vice-President, Corporate Store Sales.

As disclosed in the Sears Canada Directors' Circular dated February 21, 2006, the three officers who have yet to declare their intention have recently sold a significant portion of their holdings. In the 90 days prior to the announcement of the Offer, Brent Hollister, Chief Executive Officer, sold approximately 54% of the shares he owned at an average price of C$13.51, after adjusting for the special distribution; Ajit Khanna, Senior Vice-President, Direct, Dealer and Service Sales, sold approximately 67% of the shares he owned at an average price of C$13.48, after adjusting for the special distribution; and Frances Magliochi, Senior Vice-President, Human Resources sold over 92% of the shares she owned at an average price of C$13.36, after adjusting for the special distribution.

Natcan Investment Management, Inc., the largest independent shareholder, has tendered all of the 9,690,149 shares that it beneficially owns or controls to the Offer.

Alan Lacy, Vice Chairman of Sears Holdings commented: "We believe that Sears Canada shareholders should consider the actions of the senior management and the largest independent shareholder when making a decision with respect to whether to tender their Sears Canada common shares. We remain committed to our C$16.86 offer. We continue to believe that it is a full and fair price for the Company and provides much needed liquidity to shareholders. We intend to purchase any and all shares tendered prior to the expiration of the offer."

The offer is open for acceptance until 8:00 p.m. Eastern Standard Time on March 17, 2006.

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Sears' investors await letter from Eddie
By Jonathan Birchall in New York
Financial Times
March 13, 2006

Investors in Sears Holdings, the third largest US retailer, are this week awaiting another letter from the chairman, as the company created by the $12bn merger of Kmart and Sears Roebuck delivers its first full year results.

With Sears' shares down over 10 per cent from the time of the merger, Edward Lampert, the turnaround investor and chairman, will have plenty to write about in the quarterly missive that he uses to address shareholders.

Over the past year, his combined management team has been trying to unify the 3,900 store network that now combines a discounter with the struggling a down-market department store.

Kmart, the discounter, is now selling some of Sears' market-leading own brand Kenmore appliances and Craftsman power tools. Sears, the department store, has smartened up its presentation, introducing new "store within a store" segments for its Lands' End clothing and footwear.

But same-store sales at Sears stores fell almost 12 per cent in November and December, with the company citing price cutting, and saying customers had failed to respond to a drive to deliver more "fashion forward" clothing.

At the same time, Sears has seen an exodus of its top merchants - the executives who make the buying decisions that determine its product range. Over the past six months, it has lost the head merchants for its clothing, electronics, and hardware departments. Luis Padilla, the chief merchandising officer who joined Sears from Target in 2004, left in October and has not yet been replaced.

Mr Lampert himself has taken a more direct role in merchandising and other day to day operations, while moving Kmart's Aylwin Lewis chief executive into the chief executive position previously held by Sear's Alan Lacy, who is now vice chairman.

The company also announced last month it was abandoning a plan to turn up to 400 free-standing Kmart locations into a new format "Sears Essentials" stores.

The performance has dismayed some industry observers. "We don't think that the direction that Sears is headied in under its current management makes any sense from a retail perspective," says Will Anders, senior partner at McMillan Doolittle, the retail consultants. Sears, he argues, is being run as a holding company focused on its shareholders, and has lost its touch as a retailer.

So far, though, Mr Lampert has not pursued widesread store closures to realise potential real estate value that he used during Kmart's bankruptcy, or other asset sales that some Wall Street analysts had expected.

Orchard Hardware Supply, a California based hardware retailer owned by Sears, is still part of the company, after a bid to sell it off entirely last year failed to draw what Mr. Lampert regarded as sufficiently attractive bids. Instead, a private equity investor has taken over management, with the option to take majority control over three years.

The sales problems could still lead to a push to reduce the stores by selling off poorly performing locations, although Sears said in January that it had "no plans to close stores other than in the normal course of business", as leases expire or are terminated.

Elsewhere, Sears has launched a bid for the remaining 46 per cent of Sears Canada, which has been rejected by the retailer's indepdendent directors - Sears argues that the takeover and closer integration with the US company will strengthen Sears Canada as its fights growing competition.

In the meantime, Mr Lampert argues that Sears' management, and not sceptical commentators, should be given the benefit of the doubt.

Most observers and pundits, he wrote in his last letter, missed turnarounds at IBM, American Express and JC Penney, as well as the emergence of Google, and the resurrection of Kmart "until it was abundantly clear that those companies had succeeded".

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Few U.S. seniors working
Most people retire by 65, report says
By Stephen Ohlemacher – Detroit Free Press - Associated Press
March 10, 2006

WASHINGTON -- Americans are living longer, healthier lives than ever before, but they aren't working into their old age nearly as much as seniors did 50 years ago.

A government report released Thursday shows that only 19% of men 65 and older were part of the labor force in 2003, down from 46% in 1950.

Women are working in much larger numbers earlier in life, but among those 65 and older, participation in the labor force has remained steady, at around 10% since 1950.

"Not too long ago, people -- particularly men -- worked until they were physically unable to work," said Robert Friedland, director of the Center on an Aging Society at Georgetown University, a public policy institute in Washington, D.C. "Now, people have a period of time to which they are looking forward."

But they can only look forward to retirement if they are financially prepared, said Friedland, who noted that $1 million in a retirement account isn't that much to live on if you expect be around another 20 or 30 years.

"If you leave the labor force thinking you have plenty, and then realize that you don't, then you are stuck," Friedland said.

Life expectancy for men was 74.1 years in 2000, up from 68.2 years in 1950. Among women, life expectancy was 79.5 years in 2000, up from 71.1 in 1950.

Implications for society

The findings are part of a report thick with statistics on America's senior citizens, titled "65+ in the United States: 2005." It was commissioned by the National Institute on Aging and compiled by the Census Bureau.

They have added importance as the first baby boomers near retirement age. The oldest baby boomers turn 60 this year, and the report suggests that many of them already have left the workforce.

"The social and economic implications of an aging population -- and of the baby boom in particular -- are likely to be profound for both individuals and society," Census Bureau Director Louis Kincannon said in a statement.

There are about 35 million Americans age 65 and older, a number that is projected to more than double by 2030, according to the report. About 59% of seniors are women.

Benefits play a role

The report attributes the declining work rate among older Americans to the growth in private pensions, Social Security and Medicare benefits. As benefits for older Americans grew in the last half of the 20th Century, fewer saw the need to work beyond age 65, said Mitra Toossi, an economist at the Bureau of Labor Statistics.

But the biggest benefit programs face problems. Private pension systems have been defaulting at an alarming rate.

Many companies are abandoning pension plans that guarantee benefits based on years of service and age at retirement.

Medicare, which just added a prescription-drug benefit, faces insolvency in 2020, according to the trust fund that runs it, and Social Security, if left alone, is projected to go broke in 2041.

"This report tells us that we have made a lot of progress in improving the health and well-being of older Americans, but there is much left to do," Richard Hodes, director of the institute on aging, said in a statement.

Among men 65 and older, the percentage still in the labor force bottomed out in the 1980s and increased slightly since then.

The Bureau of Labor Statistics expects the percentage to increase only slightly in the future.

What the report found
There are about 35 million Americans age 65 and older; that number is projected to more than double by 2030.

About 19% of men 65 and older participated in the labor force in 2003, down from 46% in 1950.

The overall percentage of women in the labor force has grown significantly since 1950. But among women 65 and older, the percentage has remained relatively steady, at about 10%.

The median age -- the one in which half the population is older and half is younger -- was 35.3 in 2000, up from 22.9 in 1900. It is projected to increase to 39 by 2030.

Of the 1.8 million senior citizens -- people 65 and older -- who died in 2000, a third of the deaths were caused by heart disease and 22% were caused by cancer.

About 80% of seniors have at least one chronic health problem, and about half have at least two. Arthritis, hypertension, heart disease, diabetes and respiratory disorders are among the leading ailments that restrict activity.

About 10% of seniors lived below the poverty level in 2003, down from 35% in 1959.

The states with the highest proportions of senior citizens are Florida (17.6%), Pennsylvania (15.6%) and West Virginia (15.3%).

Older men are much more likely to be married than older women. About 71% of men 65 and older are married, compared with 41% of women.

U.S. Census Bureau

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New Old Generation to Redefine Elderly,
U.S. Census Study Says
Bloomberg
March 9, 2006

The U.S. population age 65 and older will double in the next 25 years, and the new elders will be healthier, wealthier and more highly educated than previous generations, redefining what it means to be older in America, according to a new Census Bureau report.

By 2030, about 72 million Americans, or one in every five, will be 65 or older, the report issued today found.

“The aging of our society will have profound consequences on our future, and, in fact, it's a not very distant future,” Census Bureau Director Louis Kincannon said in a teleconference today with reporters. The first of the baby boomers, those born between 1946 and 1964, are turning 60 this year at the rate of about 8,000 a day, Kincannon said.

While much of the data isn't new, the study puts more data in one place than ever before with the goal of benefiting the public and policy makers, said officials of the Census Bureau and the National Institute on Aging, which commissioned the report.

The boomers “will enter retirement as the most educated generation in American history,” Kincannon said.

“Education is a particularly powerful factor in both life expectancy and health, and we're not quite sure why,'' Richard Suzman, associate director for behavioral and social research at the National Institute on Aging, said in the teleconference. Better-educated people may have more money to pay for health care, and they may know more about a healthy lifestyle, he said.

Rising Education Levels

U.S. education levels have been rising for the last half century, and by 2030, more than one-fourth of the older generation is likely to have an undergraduate degree, the report says. In 2003, about 17 percent of Americans had at least a bachelor's degree.

The coming generation of retirees is “not a formal generation,'' said Leonard Steinhorn, associate professor of communication at American University and author of the book “The Greater Generation: In Defense of the Baby Boom Legacy.''

“It's a generation that's broken barriers of formality and entrenched tradition,'' Steinhorn said in an interview. “It's an older generation that will have a younger sensibility, because even as boomers age, they're a generation that has long tried to stay youthful.''

Overall better health of Americans will be reflected in the coming older generation, the Census Bureau report said. The proportion of people with a disability fell from 26.2 percent in 1982 to 19.7 percent in 1999, the report said.

Less Grueling Work

Baby boomers “entered a work world that was moving from a manufacturing and industrial model to a knowledge model, so the grueling work of old is being done by a declining number of Americans,'' Steinhorn said. “And so boomers will not have these physical issues associated with the hard life of a manufacturing career.''

Older people already are wealthier than in the past, the Census report says. The proportion of people 65 and older living in poverty fell to 10 percent in 2003 from 35 percent in 1959, the study found.

An older generation with money has obvious implications for companies and the economy. Marketers can't presume that boomers will have older tastes, Steinhorn said.

“Every time a car company has tried to target a car to young people, what has happened?'' Boomers have been the big buyers, he said. DaimlerChrysler AG learned that when it aimed its PT Cruiser at the younger market. For the first couple of years, the average age of buyers of the car was about 50.

“Boomers are just not going to be pegged as old fuddy- duddies,' Steinhorn said.

Keep Busy

Many boomers will keep working, at least part time, or doing volunteer work, and companies will want to keep or hire them, Kincannon said. Employers will