Annual Report 1999    | investor relations | corporate home
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Letter to Our Shareholders

Dear Fellow Shareholder:
In 1999, Sears demonstrated what can happen when its two powerful profit engines - retail and credit - begin firing simultaneously. The strong finish to the year resulted in record earnings for the fourth quarter and for the year. We saw earnings per share grow from $2.68 in 1998 to $3.81 in 1999, an increase of 42 percent. Excluding noncomparable items, earnings per share increased 17 percent, from $3.32 to $3.89 in 1999. Our return on equity increased to 23 percent in 1999, up from 18 percent in 1998. What's more, we are confident that the changes we are making throughout our organization will further strengthen our competitiveness.

Retail, Credit Drive Record Earnings
Sears recorded revenues in 1999 of $41.1 billion, up 2.7 percent from 1998, excluding the impact of divested businesses. We expanded our margins by 20 basis points while investing in our online capabilities and our technology platform. In the end, we produced record earnings for the fourth quarter and a record $2.41 billion in operating earnings for the year.

On the retail side, we generated strong sales growth in both appliances and home electronics. While the apparel businesses showed more modest growth, our important private brands such as TKS Basics for kids, Crossroads and Fieldmaster showed genuine strength. Sears Canada also turned in another strong performance, and we look for continued growth from Canada's only full-line department store chain.

In our credit business, we worked tirelessly to strengthen our portfolio quality, reduce our losses and improve our collection processes. Our success drove earnings from the receivables portfolio up 18 percent to $1.35 billion in operating income. Our active accounts reached 38.9 million in 1999 and we added 4.4 million new accounts during the year. All 63 million customers in our portfolio were converted to the new TSYS system, which will give Sears greater flexibility in customer offerings. In addition, we converted 11 million of our accounts to the new Sears Premier Card.

Following a challenging 1998, our management team spent several intense months reevaluating the entire Sears enterprise - inside and out. Most important, we doubled our focus on our customers. We hear them loud and clear. And the actions we took helped us set these impressive performance marks in 1999.

Listening and Learning
By closely examining our customers' opinions, we wanted to confirm precisely where we have equity with them, and what it will take to draw them to other areas of our business. Our research provided some powerful insights:

> Customers are drawn to Sears largely because of our powerful brands - especially our private brands.

> Our guarantees create confidence in Sears and our products and strongly motivate purchase decisions.

> Our customers want us to more clearly define what we offer and create a more focused, simpler, trend-right store.

> Today's customers seek a dynamic shopping experience, which includes an easy-to-navigate and an easy-to-check-out shopping environment.

> Customers often view Sears in a limited or singular dimension instead of seeing the whole-house appeal we offer.

> Customers often do not recognize that we meet or beat our competitors for price and overall value on a consistent basis.

Turning Feedback into Action
We concentrated on translating our customers' suggestions into in-store initiatives that will capture their imaginations and transform their Sears shopping experience.

First, we created the most strategically developed marketing program our company has ever launched - one that communicates a much stronger whole-house value and event message. Our new ad campaign, built around our core value proposition, "The good life at a great price. Guaranteed," strikes a chord with consumers. We punctuated the launch with our sponsorship of the Backstreet Boys' successful Millennium Tour and the rollout of a Pulse Card, which creates a membership loyalty program for younger shoppers. The new advertising produced an immediate improvement in sales. In fact, the day after Thanksgiving we recorded the single biggest day in our history for sales volume.

Next, we took several important steps to ensure that we consistently deliver what our value proposition promises. We developed a strategy to orient our stores more clearly around the home and the good life our customers strive to create there. In 2000, we will introduce in select Sears stores a new format that concentrates on five key focal areas that support today's lifestyles and our strengths: Appliances, Home Fashions, Tools, Kids and Electronics. Other areas such as Women's and Men's Apparel, Shoes, Sporting Goods and Home Office will assume more of a support role.

Our private brands remain critical to our success. In the appliance sector, we strengthened our dominant Kenmore brand when we introduced the highly successful Kenmore Elite series. In the hardware business, we successfully piloted our new Tool Territory format, which provides an unparalleled selection of Craftsman and other tools in a bright, spacious, hands-on environment. To showcase our private apparel brands, we built a new in-store shop program built around private brands like Crossroads and Fieldmaster. This format will reach 450 stores in 2000. At the same time, we're integrating new national brands into our apparel assortment, including distinctive products from Nike and others.

We took seriously our customers' call for a more focused shopping experience and began to review the breadth and depth of our merchandise. We started with our kids selections through our TKS Exceptional Value lines. Our customers clearly liked what they saw, and sales increased substantially. Next, we will continue the editing of our men's and women's offerings which will be reduced a further 20 percent in 2000. As a result, customers will see a deeper selection and inventory of sizes and colors in the merchandise we carry.

Our customers told us they would like wider aisles, clearer signage and shopping carts, and we're responding with a new, less cluttered store design. We tested carts in a number of stores in the fourth quarter, and customers responded enthusiastically. We plan to have them in all locations by year-end.

As our customers are faced with more credit alternatives than ever before, we need to provide them with good reasons to use their Sears Card. We're enhancing our credit product to make it more attractive to more customers. We introduced the new Sears Premier Card, which rewards our best customers with additional savings opportunities.

Winning through Innovation
Sears has a long history of providing innovative products and services to our customers. That tradition continued in 1999 as our customers responded very well to the innovations we presented them. To give them greater access to our products and services, Sears launched the sale of appliances, parts and the Tool Territory over the Web site. Our online customers appreciate the "bricks behind the clicks" and the convenience of our nationwide delivery system. The results have been exciting. Online sales in the fourth quarter exceeded expectations. But this is just the beginning. We see some extraordinary innovations for the home coming from our online businesses in 2000 with some exciting strategic alliances. We'll significantly boost our investment in our online business in 2000.

We also continue to delight customers with exciting new products and The Great Indoors format. We took valuable lessons in innovation from our successful Denver store and applied them to our new Scottsdale store to an overwhelming response from customers. Sales in Scottsdale started out strong and Denver sales grew 20 percent in 1999. We look forward to the opening of our Dallas store this year and have made plans for additional stores. On the product side, our new Kenmore Elite line - the ultimate in innovative styling and technology - has quickly become a favorite for Sears customers.

A New Framework for Success
As we digested the insights gained from examining our organization and listening to our customers, we took two necessary steps to create the infrastructure and cost structure we need to succeed in our highly competitive environment.

We restructured the organization to focus on the whole of Sears so we could more effectively leverage our individual businesses for the greater good of the company.

We also looked hard at our entire cost structure. We engaged our associates to help us examine every aspect of our operations. Our charge was to identify savings opportunities without compromising direct customer service. We also focused on headcount in our headquarters and eliminated approximately 1,000 positions.

This strategy, of course, placed added pressure on our associates, and they responded valiantly. With their hard work and commitment, we are saving an estimated $5 to $10 million each month - funds we can deploy to strengthen our customer value proposition. We will realize the full effect of these cost-cutting actions in 2000.

To support our effort to streamline processes and create whole-house focus, we formed an office of the chief executive to assist me in our decision making. Alan Lacy is responsible for all services, which includes both the Services and Credit business segments. Julian Day assumed the role of chief operating officer and manages all operations, logistics, information technology and finance. By working together, we've discovered many more opportunities to exploit synergies between various businesses.

Reaching Out to Communities
Each year we invest our time and resources to support the communities that support our stores. In 1999, active and retired Sears associates, along with their families, gave more than 275,000 hours of volunteer service through the America's Promise campaign. They also made significant contributions to various disaster relief efforts and pledged more than $5.4 million to nonprofit organizations through the You Can Make a Difference workplace giving campaign. Sears and its associates, along with The Sears Roebuck Foundation, gave nearly $30 million in funding and merchandise to a variety of family-focused arts and human services agencies.

Commitment to Sears
I would like to take special note of another significant 1999 event at Sears, when in October, Jack Rogers retired from Sears Board of Directors after nearly 20 years of distinguished service. Jack's tenure spanned a period of great change in our company. His commitment to Sears inspired us when prospects were unclear. And his wise counsel made him an extraordinary contributor. We miss him, and I sincerely thank him for his service.

Opportunities for 2000
Our success in 1999 was clearly no accident. We made deliberate moves to get our business back on track, and our customers responded. We expect to generate even greater success from many of the programs initiated in 1999. At the same time, we will find new ways to engineer success in other businesses. Here are some of our priorities and opportunities:

> Revitalize our Full-line Stores. Specifically, we will roll out the new Tool Territory format, which tested very well in 1999. Further, we will continue to build apparel brands and expand our in-store brand shops. We also will build our dominance in appliances through additional innovation. And we will test the new store designs - which include everything from wider aisles to edited merchandise to shopping carts - to make our stores more inviting to shop.

> Build on our tradition of innovation in retailing. For example, we will roll out The Great Indoors format at a faster pace, opening 15 stores in the next one to two years. We will also open new Dealer Stores - the only ones of their kind in retailing - with formats customized for small town and urban locations. In 2000, our Sears Hardware format will continue to evolve as we combine the best of our existing Sears Hardware and Orchard Supply formats.

> Aggressively grow to offer the best of Sears Online. We will develop new business designs around home maintenance, home remodeling and home decorating, all delivered through strategic alliances.

> Strengthen key brands. We will build on the success of Kenmore Elite by expanding the product line. Craftsman will see a new professional line of tools. The recently introduced DieHard Security Battery demonstrates our commitment to a higher standard for innovation.

> Enhance Credit performance. We will make the Sears Card more relevant, launch Sears co-branded MasterCard and forge tighter links with our retail organization.

> Focus relentlessly on costs and asset productivity.

As I said earlier, we spent a great deal of 1999 listening to our customers. We found the experience both informative and inspiring. They are refreshingly open and honest and tell us exactly what they expect from Sears. They are also very loyal to us, even as they tell us we must meet their needs to keep their business. And, most important, we confirmed something we already knew - that our customers are truly amazing people who invite us into their busy lives every day.

This year's annual report focuses on our customers. We asked them to help us define, in their own words, how Sears delivers "The good life at a great price. Guaranteed." It wasn't hard to find customers who were glad to help.They're the reason we enhance our Web site and open our doors every day. We're honored to be such an integral part of their lives. We hope you enjoy meeting them.

Chairman and
Chief Executive Officer

  Annual Report 1999 

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1999 Sears, Roebuck and Co. -