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Are The Lights Dimming For Ed Brennan?

Are The Lights Dimming For Ed Brennan?

They came armed for a showdown. Bearing documents detailing Sears, Roebuck & Co.'s poor financial performance, the chief executive and the general counsel of the California Public Employees' Retirement System, owner of 2.2 million shares of Sears stock, jetted to Chicago in early January. After an ear-popping elevator ride to the Sears Tower's 68th floor, they advanced into the sprawling corner office of Sears Chairman and Chief Executive Edward A. Brennan and unleashed a two-hour torrent of complaints. The core of the message, says CALPERS CEO Dale M. Hanson, was this: "From 1984 on, Sears went to hell in a handbag."

It can't have been pleasant for Brennan, but such meetings could become common. The giant retailing and financial services company he runs is going through some of the toughest times in its 104-year history. Retail operations continue to sputter. Shareholders, especially institutional investors and retirees, are fed up with Sears' downwardly spiraling stock. Standard & Poor's Corp. has downgraded its $10 billion in senior debt to single A. And employees, demoralized by layoffs and the company's poor performance, have begun spreading tales of corporate discord and ineptitude. Some even whisper of a possible coup. Sums up one executive from the company's Dean Witter Financial Services Group: "Sears is an organization in chaos."

Brennan, who has been known to personally measure board members for custom-designed Sears suits, has long enjoyed chummy relations with his directors. "He's the greatest merchant around," gushes Director Norma Pace. But several large shareholders and former Sears executives say there are indications that one or two of the more powerful directors have stepped up the pressure on Brennan to boost performance at the ailing retail group. Edward R. Telling, Sears' former chairman and the executive who guided Brennan's road to the top, is believed to be one. Telling couldn't be reached for comment. But he can't be happy with the performance of his hand-picked successor. As of last April, he owned 35,640 shares of Sears stock, the value of which sank from $1.36 million to $904,365 last year alone. He must retire from the board at age 72--in April--and thus has only a few months to influence Sears' direction.

SCENARIOS. Many current and former Sears executives say a power shift may be in the works. One scenario has Dean Witter CEO Philip J. Purcell in line for a promotion that would move him closer to running the entire company. Such speculation may be fueled in part by the self-interest or bitterness of the people spreading it. But its prevalence--and the reluctance of directors to flatly deny it--shows how severely Brennan's credibility has suffered.

Since Purcell took over the brokerage house in 1986, the unit has gone from being a money-loser into Sears' best-performing division. Considering Brennan's continued support from his directors, a direct ouster seems unlikely. "Phil's too smart to try a palace coup," says the Dean Witter executive. But, he says, "there's no question" that Purcell's goal for a decade has been the top job at Sears. Telling might well support that. He lured Purcell to Sears 13 years ago, and the two men are known to be close.

A power shift could take one of several forms. Purcell could take the president's title, which Brennan now holds, and gain oversight of the entire financial services group. Contributing 43% of Sears' profits in 1981, financial services, which includes Coldwell Banker, Allstate Insurance, Dean Witter, and Sears retail credit operations, now contributes 94% of earnings. An office of the chairman is another possibility, with Purcell sharing power with Brennan. "Phil is held in very high regard by all the directors," says Director Clarence B. Rogers Jr., CEO of Equifax Inc., though he says he knows of no plan to promote him.

Then again, some middle managers talk hopefully of the company bringing in Brennan's younger brother, Bernard, chief executive of Montgomery Ward & Co., to run Sears' much larger retail operations. Seven months ago, Sears and Montgomery Ward even discussed a possible merger of their retail operations, but talks have since ceased.

BOOK'S END? On Feb. 11, the day the board gathers for a two-day meeting in Chicago, Sears is expected to report sharply reduced earnings for 1990. Analysts predict Brennan will respond by announcing a major write-off and a cost-cutting plan designed to save Sears $600 million to $800 million a year. As part of this program, 20,000 jobs may be cut, and the Sears catalog, the business upon which the company was founded, may be trimmed or even closed.

But stronger measures may be needed within the merchandising group, where Brennan's much-heralded "power" formats and "everyday-low-pricing" strategy have failed to boost the bottom line. The retailer is expected to report that its earnings last year were only one-tenth of the $662 million it made in 1984. Last July, the sorry state of things prompted Brennan--already running the parent--to name himself chairman and CEO of the merchandising group, positions he had held in the mid-1980s. Since then, he has cut 21,000 jobs, shuttered the stand-alone McKids stores, and frozen managers' salaries for a year.

Whether Brennan is personally unnerved by the pressure is hard to tell, but he is described by underlings and directors as appearing calm and confident amid the brewing storm. Brennan declined to be interviewed, although a company spokesman says he "is aware of the concerns and knows that things need to be addressed." To unwind he heads for his two-year-old $1.28 million beachfront spread in Ponte Vedra Beach, Fla. Since joining a new local country club last fall, Brennan has even managed to lower his handicap, club computer records indicate, from 28 to 23. When not golfing Brennan indulges another passion, polishing and tinkering with a 15-year-old Cadillac.

Any CEO's fall from grace is painful, but Brennan's would hurt more than most: He is a Sears man to his very marrow. His grandfather, father, and uncle worked for Sears, and he has spent his entire 35-year career there. Known earlier as "Eddie" or "the kid," Brennan started as a clothing salesman, racing up the ladder under Telling's aegis. When Telling acquired Coldwell Banker and Dean Witter in 1981, diversifying Sears into financial services, he put the golden boy in charge of the day-to-day retailing operation, making him chairman and CEO of the group.

Under the banner of the "Store of the Future," Brennan undertook the most ambitious revamping of Sears stores in the company's history. He added such big brand names as Levi's, reorganized departments, and jazzed up store design. Retail earnings jumped 63% from 1982 to 1984. "The kid" had a golden touch.

But it didn't last. Since 1984, a glut of retailers and a bloated cost structure have weakened Sears' ability to compete. Brennan's splashy moves to fix the problems have turned into a series of fumbles. A plan to sell the Sears Tower fell through after Brennan had already made plans to move staffers to a Chicago suburb. Most troubling has been the failure of his policy of everyday low prices. A former executive claims Brennan ignored several top merchandise officers' arguments that the plan was ill-conceived and listened instead to Harvard business school professor Michael Porter, whose consulting firm advised Sears. Porter declined to comment. The company spent nearly $100 million to advertise the new policy. But Brennan bungled things by announcing the strategy after prices for 1989 had already been sent to stores, the executive says. As a result, he adds, merchandise managers resisted the new strategy, and a month after the campaign began, they began running sales again.

Other critics also blame Brennan for relying on consultants and for refusing to brook dissent among lieutenants. Whatever the case, a Sears spokesman says that now, "Brennan is listening like he never listened before."

He may not be happy with what he hears, though. Many of Sears' 125,000 retirees, who own a big chunk of stock, are angry that their benefits have been chopped and fear for their $2-a-share annual dividend. George Reagan, a portfolio manager with the Teacher Retirement System of Texas, owner of 2.4 million shares of Sears, thinks it may be time for Brennan to go. "Obviously, whatever management is doing isn't working. Either you can change the management or change the system. And sometimes the only choice is to change the management," he says. As long as the majority of directors think otherwise, Brennan is safe. But as pressure builds on the board, his luck may run out.