Since becoming Sears (S) CEO in 2000, Alan Lacy has staunchly maintained that its giant credit-card business is integral to the retailer's future. But in an about-face, Lacy said on Mar. 26 that Sears was exploring the sale of the business, which accounts for 60% of corporate profits. Sears stock rallied on the news, rising about 13%, to $24.14.
Lacy said the sale, which some analysts estimate could fetch nearly $6 billion, would create shareholder value. Indeed, fears about the credit operations have been weighing on Sears' stock price since October, when the retailer first warned of rising charge-offs. But in the long run, selling the credit operations could hurt Sears. That's because the retailer boosts its sales by extending customers credit. Whoever buys the business "will be more discriminating about who they offer credit to," says Richard Church of Shumway Capital Partners.
Moreover, retail history offers Lacy a stark lesson. In the late-1980s, rival Montgomery Ward sold its credit business. Its retail business was ultimately liquidated in 2000. Plans by Deutsche Post, parent of Brussels-based DHL Worldwide Express, to purchase U.S. rival Airborne (ABF) for about $1 billion are likely to draw American regulatory scrutiny. That's because the German postal giant's incursion into the U.S. overnight-delivery market aims to challenge the dominance of FedEx (FDX) and United Parcel Service (UPS). Federal law restricts foreign ownership of a U.S. airline to a maximum of 25%. For DHL to get around the rule, it has agreed to purchase Airborne's ground operations. Airborne's airline will be spun off as a separate company. DHL, which boasts overnight service in 220 countries but derives less than 2% of its business in North America, has long coveted a foothold in the U.S. But with the stakes so high, FedEx and UPS will probably ask the Transportation Dept. to review the acquisition, executives say. The prognosis continues to worsen at HealthSouth. On Mar. 26, the Birmingham (Ala.) company's chief financial officer, William Owens, pleaded guilty to financial fraud. Owens, who is on leave, is considered key to the government's efforts to build a case against HealthSouth's ousted founder, Richard Scrushy, as part of a criminal probe into alleged accounting fraud and insider trading. The Securities & Exchange Commission has filed civil charges accusing the company of overstating earnings by $1.4 billion since 1999 in a scheme allegedly orchestrated by Scrushy. Company officials declined comment and Scrushy's lawyers didn't respond to calls. In a major blow to the U.S. steel industry, the World Trade Organization ruled that temporary tariffs of up to 30% on imported steel violate international trade rules. If the ruling is upheld, President Bush may have to lift the tariffs next September, about halfway through their expected life span. After the tariffs were imposed in March, 2002, Europe, Japan, and others complained to the WTO. Citing the loss of 13 of the past 15 WTO cases, some in Congress are calling for the U.S. to pull out of the organization. Kmart remains awash in red ink. Its losses widened to $3.22 billion for fiscal 2002 ended Jan. 29, up from $2.45 billion in fiscal 2001. Sales tumbled 15%, to $30.8 billion, as the Troy (Mich.) retailer struggled to compete against giants Wal-Mart Stores (WMT) and Target (TGT). Last year, Kmart closed 283 stores, or 13% of its floor space, after filing for bankruptcy protection. For fiscal 2002, excluding special charges such as store-closing costs, losses totaled $846 million. Even so, CEO Julian Day expects Kmart to emerge from Chapter 11 by the end of April. In an encouraging sign, the decline in same-store sales slowed to 2.5% in February from 9% in January. SEC Chairman William Donaldson said on Mar. 24 that he intended to put hedge funds under a microscope and might seek new rules for the largely unregulated industry. As part of this review, the SEC will hold public hearings May 14-15 on hedge funds, which are big investment pools for wealthy individuals and institutions. The initiative is Donaldson's first big public move since taking the agency's top post in February. Donaldson said more scrutiny is needed because of allegations that hedge funds exert "undue influence" on financial markets and concerns that small, unsophisticated investors are buying into such funds. -- Federal regulators recommended refunds to California energy customers of $3.3 billion.
-- Goldman Sachs (GS) Co-President John Thornton quit to become a professor in China.
-- David Snow Jr. was named CEO of pharmacy benefit manager Medco Health Solutions. An earnings restatement hurt AFC Enterprises (AFCE), owner of Church's Chicken, Cinnabon, and other franchises. The Atlanta outfit's stock fell 21.7%, to $13.40, on Mar. 25. After a special audit by KMPG, AFC said it would take a $12 million pretax charge against 2002 profits. It will also write down up to $5.5 million in assets.