N.Y. Sues Sears, Alleging Pricing Policy Deception : Retailing: The action is a further blow to the image of the slumping industry leader.

The New York State attorney general sued Sears, Roebuck & Co. on Thursday, charging that the nation’s biggest retailer misled consumers when it claimed that its much publicized “everyday low price” policy has reduced what consumers pay in its stores.

Sears called the charges “distorted” and “malicious.”

In the second false advertising action against Sears in three years, Atty. Gen. Robert Abrams said prices paid by customers for 20 specific items remained the same or were actually raised over the course of an 18-month statewide investigation. Abrams contended that the new prices were reductions only when compared to old, standard prices that consumers had rarely paid.

Sears, battling encroaching discount rivals, inaugurated a policy last March under which it said it would replace promotional and sale prices for about half its merchandise with consistently lower prices. The policy “was really a ploy to get customers into the stores,” Abrams said at a Buffalo news conference.

Whether or not Abrams proves his case, the suit represents a stinging blow to Sears in its efforts to win over customers. While the “everyday low prices” policy initially drew a surge of business, sales later fell off for Sears’ vast retail group, whose profits have fallen an average of 8% for each of the past five years.

“This company’s credibility is already strained, and this could be extremely damaging,” said Carol Farmer, a retail consultant in Florida. “This is absolutely the last thing Sears wanted for Christmas.”

The suit wasn’t the only blow to its image that Sears struggled to overcome this week.

On Wednesday, the company said it would no longer sell a toy that simulated an exploding space rocket booster. Four children from Boise, Ida., and the National Aeronautics and Space Administration had complained to Sears and to President Bush that the rocket was in bad taste because of the 1986 explosion of the space shuttle Challenger.

From late 1987 to earlier this year, the attorney general’s investigators tracked the prices of such merchandise as furniture, microwave ovens, electric screwdrivers, gas grills and tool boxes, Dennis Rosen, assistant attorney general, said in an interview.

Investigators found, for example, that the new “everyday low price” of a Kenmore Canister Vacuum 28390 was $219.99. That was a significant savings from the prices of $299.99 or $319.99 that had been standard in Sears’ 45 New York stores before the new policy.

But it was $20 more than the old $199.99 discount price that had most often been offered to consumers before the inauguration of the policy. The investigators found that during their study period in 1987 and 1988, the vacuum had been sold to consumers at the sale price 4,301 times. It had been sold at the higher price only 56 times.

“The ‘old’ price was fictitious to begin with, and Sears compounded the deception when it pretended that the new ‘everyday low price’ represented a better deal,” Abrams said.

A Sears spokesman said the charges were inaccurate because they were based on an investigation of the pricing of only 14 items, out of Sears’ full inventory of more than 100,000 items. “We have a valuable reputation for trust and integrity with American consumers, and we intend to prove these malicious charges are false,” Sears said in a statement.

The investigation grew from an earlier probe of Sears’ pricing practices that found the company was luring customers with sales offering discounts up to 50% off “regular prices.” But those standard prices were often inflated figures consumers rarely paid, the state officials said. Sears paid a $75,000 fine to settle those charges.

The attorney general charged in the new suit that Sears’ alleged deception represented a violation of that 1986 settlement, under which Sears had agreed to halt deceptive sales practices. The suit asked that Sears halt the sales practices, make restitution to customers who had been misled and pay a penalty for violating the 1986 agreement.

Walter Loeb, a retail analyst with Morgan, Stanley & Co., New York, said that while he had no direct evidence on the attorney general’s claims, he believed that Sears had cut prices. “I believe they have been lowered roughly 10% across the board,” Loeb said.

Consultant Farmer said that although she did not believe Sears had adopted a “a strategic plan of deceiving people . . . they could have done this.”

She said the pricing policy had, in any event, left Sears in a difficult position. To fend off such competitors as K mart and Target, Sears has stopped discounting for much of its inventory, except for end-of-season close-outs, and on a few other rare occasions, instead offering merchandise at “everyday low prices.”

But because the new strategy has not succeeded in maintaining interest, “they’re in a spot. They’ve ruled out dropping prices,” she said. “They’re really running out of runway.”

Farmer predicted that the suit would “continue the downward spiral of consumer cynicism about sale pricing at all companies, at all times,” she said. “People just don’t believe they’re getting a better value when they’re told they are.”

In a separate development, Sears said Thursday that it has set up an $800-million employee stock ownership plan that will increase the work force’s stake in the company to 21% from 15%. The company said the plan will cut the price that Sears pays for its profit-sharing program because dividends paid on shares contributed to the plan are tax deductible.

Such plans have become a potent anti-takeover weapon, and with its slumping stock price, Sears is sometimes mentioned as a takeover target. But the company denied the plan was created for that purpose. On the New York Stock Exchange Thursday, Sears closed up 12.5 cents at $36.75.

PRICES AT SEARS

These price comparisons on items at Sears, Roebuck & Co. were found in a survey by the New York State Attorney General’s Office.

Prices at which Old “standard most sales New “everyday Item prices” formerly made low prices” Kenmore $299.99 $199.99 $219.99 canister vacuum or $319.99 Dearborn three-piece $1,749.97 $899.94 $979.00 living room sectional Saratoga sofa and $1,149.98 $699.96 $699.00 chair combination