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A Star In The Gloom At Sears


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A STAR IN THE GLOOM AT SEARS

Philip J. Purcell is not the kind of guy to boast. Having launched his career as a consultant at McKinsey & Co., he learned early that tooting your own horn doesn't always win you applause. Purcell lets the facts speak for themselves when it comes to his company, Dean Witter Financial Services -- the brokerage and credit-card arm of Sears, Roebuck & Co. The trouble is, those facts lead to the only question that can really make him squirm: Given his sterling performance at Dean Witter -- and the sorry state of Sears' retail operations -- why isn't Phil Purcell running the show at Chicago's Sears Tower?

Purcell's answer is predictable: "I have the best job at Sears, Roebuck & Co.," he says. "I'm very happy doing what I'm doing." But the reality of Sears today begs the question. If you include profits from the Sears credit card and Allstate Insurance, virtually all of the giant company's earnings have come from financial services since 1985. In terms of earnings growth, Dean Witter and the Discover Card have been the sole bright lights. The venerable retailing business, until recently run directly by Sears Chairman Edward A. Brennan, has defied all efforts to stem its decade-long decline. And as he struggles with a company that seems increasingly out of control, Brennan's leadership has been the subject of several disruptive proxy fights and repeated sniping by institutional shareholders.

HOT COMMODITY. With Sears' fortunes growing bleaker by the day, many wonder why Purcell hasn't jumped ship. Brennan, 58, doesn't appear to be going anywhere, and he maintains an iron grip on the board. Besides, it would break a century-long tradition if someone other than a retail executive were given the top job. Purcell, a hot commodity in New York, could leave if he wanted to. William Benedetto, an ex-Dean Witter investment banking chief, says Purcell has spurned advances from both Prudential Securities Inc. and Shearson Lehman Brothers Inc. Purcell won't comment.

Some speculate Purcell stays because of last year's $ 1.9 million annual paycheck, which significantly outstripped Brennan's $ 979,847 salary. That certainly doesn't hurt. But interviews with dozens of Purcell's friends and associates suggest his motivation runs deeper. Ever since he was recruited by former Sears Chairman Edward R. Telling, Purcell has had a special relationship with the company. He helped Telling diversify into financial services and he has since been intrigued by the challenge of revitalizing an American institution. "Phil has always had his eye on the big prize," says Steven F. Deli, Dean Witter's former head of corporate finance in Chicago. Says mentor Telling: "Nothing would make me happier than to see him run Sears Roebuck."

That was the idea when Telling hired the lanky McKinsey highflier in 1978. At the time, Sears held its rank as the premier retailer in the world and was still steeped in a deeply insular culture where "Searsmen" took almost patriotic pride in the company's crusade to outfit America. At McKinsey, Purcell had studied the fabled retailer for two years and saw its cracks beginning to show. Telling, impressed with the young consultant, tempted him aboard with the notion of helping build on a great tradition while creating something new.

The idea appealed to Purcell, who is a disarming combination of savvy corporate tactician and everybody's all-American. For all his success at McKinsey, he saw a greater purpose in the Sears mission. In Telling, he found a soulmate -- a down-to-earth "man's man" who was turned off by the pretensions of the business world. Purcell became his personal strategic planner, and together they hatched the notion of selling financial services to Sears' broad base of middle-American customers.

In 1981, Sears purchased Dean Witter for $ 607 million and Coldwell Banker, a real estate company, for $ 202 million. That accomplished, Telling decided to give Purcell some operating experience by sending the 6-foot, 7-inch golden boy to New York to run Dean Witter as chief operating officer.

NEW KID. Having grown up a Catholic in Salt Lake City, Purcell was used to being an outsider. But being the new kid on Wall Street was a brutal experience. From 1982 to 1985, Dean Witter lost plenty of money, and Purcell was ridiculed for his contrarian strategies. As he poured cash into building a proprietary mutual fund operation, he began to yank Dean Witter out of its traditional business of catering to large institutions. Since profits in that area were exploding, his big-name investment bankers cried foul. Purcell, they charged, was killing Dean Witter's strongest business.

Although the notion of "selling socks and stocks" had died along with most of the financial-services kiosks in the Sears stores, Purcell was intent on building a low-cost distribution system. He recruited thousands of young brokers, then trained them to sell Dean Witter mutual funds and other financial products to individual investors. He got rid of the biggest prima donnas in the investment banking unit and limited its function to assembling securities for the brokers. Meantime, he aimed an ad campaign at small investors and built a top management team out of a group of non-Ivy League team players. Dean Witter was led by an assemblage known as the "Notre Dame mafia" drawn from his alma mater.

By 1989, as the abrupt end of the dealmaking boom slashed earnings on Wall Street, Dean Witter took off. With its new brokers selling in-house funds, it was in a perfect position to profit from the surge in equities. In 1990, when the industry posted big losses, Dean Witter and Discover earned $233 million. This year, Montgomery Securities estimates net profit will hit $393 million.

Purcell took just as much heat over another expensive foray into financial services: the Discover Card. Launched in 1985, it cost Sears $1 billion in startup costs. Skeptics openly predicted its failure, and banks turned up the heat with their Visa and MasterCard operations. But so far, Discover has been a classic success story. Using its vast customer mailing lists, Sears put the no-fee card into 41.1 million homes within six years. Then it heavily advertised the card's "cash-back" feature, hoping to boost usage. Discover is still far smaller than industry leader Visa, but it has a 5.5% market share. Moreover, having turned profitable in 1989, it's already repaying Sears' investment.

For all his success on Wall Street, Purcell couldn't be more out of place there. Colleagues say his motivation has never been money, and in contrast to the glitzy, celebrity lifestyles of many on the Street, his life is decidedly homespun. He's still married to his grade-school sweetheart, Anne, whom he met in communion class and wed when he was 20. They have had seven boys, aged 8 to 27, and Purcell is a devoted father.

Oddly, despite his 10 years at Dean Witter, he has always kept his family in the Windy City. They live in a relatively modest home in the Chicago suburb of Wilmette, and Purcell commutes on the corporate jet. He spends three days in New York and two in Riverwoods, Ill., where Discover is located. The reason he has never moved, he says, is that he didn't want to pull his kids out of school. Some speculate Purcell never wanted to get too far from headquarters, which he says is bunk. "I'm out of town two or three nights a week no matter where I live," he says.

OVERACHIEVER. Despite his disarming "aw-shucks" personality, associates say he's a compulsive overachiever. He was near the top of his class at Notre Dame, at the University of Chicago, where he got his MBA, and at the London School of Economics, where he earned a master's degree. At 27, he became McKinsey's youngest principal director and the firm's youngest managing director soon after.

Indeed, Purcell knows how to operate. In a grueling second-year business-school policy class, Purcell was the only one out of 65 students to get an A, despite the fact he worked as part of a four-person team. It didn't hurt that Purcell kept the diary of the team's progress, which emphasized his contribution and was submitted to the professor. The others were furious when they found out Purcell's grade, but today he's still good friends with them. "That's one of his great skills," says John E. Jeuck, professor emeritus at the University of Chicago's Graduate School of Business. "Basically, the process was managed so that the group's resentment was channeled toward me and not Purcell."

These days, Purcell is focusing his smarts on some thorny problems at Dean Witter. Many think Discover's 19.8% interest rate is way too high. Undaunted, Purcell is currently trying to push Sears further into the credit-card business by launching a new Sears Visa card. He insists he can do it without cannibalizing Discover, but he has had to sue Visa for the right -- the banks that own it are trying to block the launch. "Visa and MasterCard have an 80% piece of the pie that we're excluded from," says Purcell. "We think we can attract a material piece of that business." A jury trial was scheduled to begin Sept. 30 in Salt Lake City.

Dean Witter's biggest problem, however, reflects a larger quandary at Sears. With the retailer sucking up capital, "Phil's most critical decision is how to fund his business," says Nancy S. Donovan, a Dean Witter executive vice-president. Right now, the financial service units pay hefty internal dividends to the parent. That's why a credit-card processing operation called SPS Transaction Services had to spin off a 26% chunk earlier this year to raise $45 million in growth capital. The offering fueled speculation that Sears will eventually sell a piece of Dean Witter to the public. But Purcell brushes off the notion, insisting that neither Dean Witter nor Discover faces capital constraints. "When we needed Sears, they stood up very tall in both businesses," he says. "It's not just take, take, take. You have to give."

OUTMODED STORES. Sound like a guy looking at the big picture? Maybe so. But Purcell is also smart enough to appreciate the dilemma faced by Ed Brennan. Purcell's boss has slashed away at the retailer's crippling cost structure, laying off more than 48,000 people in the last two years alone. Nevertheless, the company's costs outpace those of rivals Wal-Mart Stores Inc. and Kmart Corp., and the bureaucracy is still ponderous. Add to that outmoded stores in left-behind neighborhoods, and the decline Sears entered into 10 years ago seems unstoppable. It didn't help that the retailer has been buffeted by attorneys general nationwide with charges that its auto centers cheated customers. Says a longtime Searsman: "Ed Brennan's got the toughest job in the country." Brennan would not comment for this story.

Whether Phil Purcell is better qualified to save Sears is anybody's guess. Ed Telling doesn't advocate dumping Brennan, but he says, "There's no question Phil could run the whole thing." It's likely an executive with Purcell's ambition won't hang on forever. "My guess is he's patiently awaiting what will happen at Sears," says Walter M. Miller, a friend from B-school and McKinsey. "He wants to be a CEO -- and not under the aegis of a larger company." Purcell seems willing to take on the Sears challenge. But if the board wants him, they had better make a move before he changes his mind.ALWAYS A HIGH ACHIEVER

BORN Philip J. Purcell, Sept. 5, 1943, in Salt Lake City

EDUCATION BA, Notre Dame; MBA, University of Chicago; master's, London School

of Economics

McKINSEY & CO. In 1976, after 9 years in Chicago office, became firm's youngest

managing director ever at 32. Biggest client: Sears

SEARS, ROEBUCK Hired by former Chairman Ed Telling in 1978 to develop strategy.

Mapped purchases of Dean Witter Reynolds and Coldwell Banker

DEAN WITTER REYNOLDS Placed there by Telling in 1982 to gain operating

experience. Surprised Wall Street by overhauling firm. Spearheaded launch of

Discover Card in 1985, while refocusing firm on individual investors. Earnings

soared

Leah Nathans Spiro in New York and Julia Flynn in Chicago


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