(FORTUNE Magazine) – God never did give Ed Brennan the gift of seeing Sears as others see it. During his nine years as CEO, Brennan misread consumers, fought change, and cheer-led Wall Street while investors tried to tell him that the Big Store was an overpriced, out-of-touch dinosaur. Sears was getting crushed by the competition in 1992 when Brennan recruited Arthur Martinez, then vice chairman of Saks Fifth Avenue, to head the retail unit. The two first met at a tiny airport terminal in Trenton, Maine, near the spot where Martinez was vacationing. They talked for three hours about how Martinez would, if given the chance, revive Sears. "I was struck by how similarly we think," says Brennan. Fortunately for Sears shareholders, Brennan's assessment was totally--amazingly--inaccurate. Martinez, 55, did indeed rejuvenate the company. But he did it with a strategy that Brennan, 61, a third-generation Sears merchant, had resisted: closing the catalogue division, shutting 113 unprofitable stores, slashing 50,000 jobs. Martinez (pronounced MAR-tin-ez) is different not only from Brennan but also from the sort of person many think he himself is. He is a shrewd, hearty Irishman. Yes, Irish--Brooklyn born, with a trace of Spanish blood. He's a career finance man who doesn't mind spending money. He has allocated $4 billion to make his stores more appealing to Sears' new target customer: women. To clear space for apparel and cosmetics, he is moving all furniture out of the mall stores into neighborhood outlets called Homelife. In another move away from the malls that enthralled Brennan, Martinez is expanding the company's small, freestanding hardware stores into what he hopes will be a $5 billion chain.

Sears, which lost $3.9 billion in 1992, is expected to earn $1 billion on revenues of $36 billion this year. Martinez became CEO in August, just after Brennan dismantled the financial services supermarket that he had helped create. Now, having shed Dean Witter, Discover Card, Coldwell Banker real estate, and Allstate insurance, Sears is--for the first time since 1931--just a retailer.

FORTUNE met with Brennan and Martinez on the same August day, in separate locations, and asked the same questions of each. At Chicago's Sears Tower, Brennan was preparing to vacate his 68th-floor suite and move to a smaller space in the Wrigley Building. He's looking for work--outside retailing, he says, because he is too loyal a Sears man to aid a competitor. Martinez talked at Sears' new corporate campus in Hoffman Estates, an hour northwest of Chicago. From this edited transcript, judge for yourself how different these CEOs really are.

FORTUNE: What is Sears?

BRENNAN: Sears is a great American retailer providing merchandise and merchandise-related services to the consumer at competitive prices with excellent quality.

MARTINEZ: Sears is a moderate-price department store. This resolves a fairly major identity crisis. When I came in, we didn't know if we were a discounter or a specialty store or a department store.

FORTUNE: Has Sears' target customer changed?

BRENNAN: No. Not really. The customer who buys appliances or lawnmowers from us covers a very broad economic spectrum.

MARTINEZ: Yes. Strange as it may sound, nobody in the company really understood who was shopping in the departments, who was making the purchase decisions. In almost every case, it was the woman in the family. And we didn't seem to care very much about her. The businesses we seemed to care most about were male oriented: hardware, tools, automotive. There was a mistaken belief that these purchases were predominantly male driven.

FORTUNE: Have Sears' competitors changed?

BRENNAN: As we improved our merchandise mix, we had to expand the competitive base. At the low end, you're competing with the discounter. At the high end, with the department store. And in the middle, you're competing by product line.

MARTINEZ: Sure. Because we're in multiple lines of business, we have multiple sets of competitors. But you can't keep the universe on your radar screen. We said, "We're not going to compete against Wal-Mart and Kmart in apparel. We're going to compete against mall-based department stores and specialty stores. We'll be the price leader." You could drive yourself crazy worrying about everybody else.

FORTUNE: How did Sears' image suffer, particularly a few years ago when the automotive centers got blasted for overcharging for repairs?

BRENNAN: We never lost the good will of the American consumer. The automotive situation was a temporary blow to the automotive business. Interestingly, it never rubbed off on the balance of the store.

MARTINEZ: I got here two or three months after the automotive thing broke. I underestimated what a profound potential breakdown in trust it represented. It clearly impacted how people thought about the store. In general, our brand perception with consumers still has a long way to go.

FORTUNE: In a 1993 cover story called "The Dinosaurs," FORTUNE described the declines of Sears, IBM, and General Motors. Was Sears a dinosaur?

BRENNAN: The article lumped the three corporations together. I think that wasn't fair, based on what we were doing at the time. I mean, we were making huge changes.

MARTINEZ: We use that FORTUNE cover, occasionally, as a rallying cry. I don't think the reporting was inaccurate at all. The word "dinosaur" implies that the company will eventually become extinct. There was a real risk of that, I think, at the time the article was written. That we and the other two companies would become so irrelevant and out of touch that our future existence was in question.

FORTUNE: Was the financial supermarket a mistake?

BRENNAN: It wasn't a mistake. There's a tendency for people to say, because we divested these companies, that the strategy didn't work. The strategy did work. In 1990, Sears' market capitalization was less than $8 billion. The market cap today is $11.8 billion. The market cap of Allstate (spun off to Sears shareholders in June) is $15 billion. And the market cap of Dean Witter is $10 billion. So we went from less than $8 billion of market cap to over $36 billion. We built shareholder value over the past 12 years. We released the shareholder value in the past few years. There's a real benefit in putting a company out on its own for shareholders to focus on it--and having management accountable directly to those shareholders.

MARTINEZ: We're not going to recreate the financial supermarket. I'd like to leave my answer at that, okay?

FORTUNE: Who is the world's premier retailer?

BRENNAN: Oh, you're trying to lead me into a trap. I won't bite.

MARTINEZ: That isn't fair. People ask whom I admire in retailing. I do answer that question. I certainly admire Wal-Mart. What they've done with technology and logistics is a model for anyone. I admire Crate & Barrel for brilliant and innovative merchandising that really captures the customer's eye. You can't go into those stores and not walk out with something. And I admire Nordstrom for the way they connect with their target customer. They get credit for service, but not as much credit as they should for understanding the role of full assortments--complete inventory--in satisfying customers.

FORTUNE: What is the most important characteristic of a good manager?

BRENNAN: Conviction.

MARTINEZ: I can only tell you what has served me well. And that is a very open attitude. A willingness to try things, to let people try things. To be a sort of loose type. And not treating mistakes as fatal.

FORTUNE: Rate Sears' recent management.

BRENNAN: My peers and I have had one of the larger business challenges of the past 50 years. We came out on the other side in great shape. That's my greatest satisfaction. I don't think we made any one big mistake. I would do two things differently. While I thought I was pushing hard for change, I don't think I got that message across to the degree I wanted. I believe that was because the organization was too inward-focused. The other thing I learned--if there's any wisdom to be passed on--is the importance of being much, much closer to the large institutional investors earlier in the game. I began to spend more time with them, one on one, in 1991. I found that a very rewarding initiative.

MARTINEZ: I'd rather not. When I came in, the organization was very impatient for leadership. People wanted strategic direction.

FORTUNE: What do you think is Sears' most critical weakness?

BRENNAN: Sears' largest challenge is the dynamics of change in the industry, but its challenge is no greater than that of any other retailer. I honestly believe that we have a distinct competitive advantage over almost everybody else. So it's purely up to the organization to succeed. Fortunately, I've been able to leave the company in superb financial shape.

MARTINEZ: Our biggest challenge is convincing customers and the financial community that this is a for-real, sustainable turnaround. No capital letter on the T-word. This isn't a one-act play. Convincing Wall Street is easy: earnings growth, earnings growth, earnings growth. Convincing customers calls for a deeper understanding of that customer on an ongoing basis.

FORTUNE: Why bring in outsiders to manage Sears?

BRENNAN: I felt that to accelerate change, we needed a catalyst. And that catalyst could best be somebody from the outside.

MARTINEZ: Retailing is a very insular industry. Retailers don't think strategically about customers. They don't understand brand building. In the marketing area, I knew I would never get the perspective and vision I needed from anyone in retailing, so I hired John Costello [former president of Nielsen Marketing Research and an alum of Procter & Gamble and PepsiCo]. To head distribution, I brought in Gus Pagonis [a three-star general who masterminded the supply chain in the Gulf war]. It didn't make sense to hire one of Wal-Mart's logisticians. Someone who knew how to move cases of Crest toothpaste rapidly around the country was not going to help me with furniture and appliances and hardware and lawnmowers and dresses and blouses.

FORTUNE: Talk about Sears' culture. Is it lost?

BRENNAN: When people talk changing culture, I kind of keep my mouth shut because what you want to preserve are the great qualities of a corporation. Some would define that as tradition, a sense of integrity, or doing what's right. By God, you want to preserve those things. At the same time, you're changing your approaches. If there are some things defined as culture that stand in the way, then you have to change the culture. I worried about losing the culture when I was making some very difficult decisions in the Eighties. What I said many times is that I want to adapt to the times but not tear the fabric. The fabric has been stretched. Maybe it got punctured in a couple of places and had to be sewn.

MARTINEZ: We're replacing 29,000 pages of policies and procedures with two very simple booklets. We call them "Freedoms" and "Obligations." We're trying to tell our managers what they're responsible for, what freedoms they have to make decisions, and where to turn if they need help. But we don't want to codify every possible situation. Part of the trick in getting this company moving again is not dishonoring its past but trying to honor the parts of its past that are relevant to the future. Satisfaction guaranteed, integrity, trust, fair dealing with customers, respect for people are all values that were pretty alive in this organization. They need to be respected.

FORTUNE: Where do you buy your suits?

BRENNAN: Well, this is a Sears suit. But we don't make them anymore. So I buy my suits today from Hart Schaffner & Marx.

MARTINEZ: The suit I'm wearing is from Paul Stuart. I have a mixed wardrobe from Neiman Marcus and Paul Stuart.