It's going to take a miracle on Yonge St. - and Bay Street - for Eaton's to have a Merry Christmas.

Its stock is getting hammered, sales are down and now its chief executive, George Kosich, has quit.

Brent Ballantyne, chairman of T. Eaton Co. Ltd., announced the resignation yesterday along with a warning that third-quarter sales were lower than expected.

The decision to replace Kosich ``was initiated by the board some time ago,'' Ballantyne said, adding an international recruitment firm is working on finding a successor.

Ballantyne insisted that the timing of the announcements was ``a total coincidence'' and that the board of directors was satisfied with Kosich's performance during his 18-month stint at Eaton's.

``George has done everything we expected of George to do,'' he said.

``He has taken this company to the level it's at.''

Unfortunately, that level is nowhere near the $58 million in net profit for 1998 that Eaton's promised shareholders, who shelled out $15 a share when the retailer went public in June. The Eaton family still controls slightly more than 50 per cent of the shares, which closed at $5.25 yesterday, up 20 cents.

On Bay Street, industry watchers weren't completely caught off guard by Eaton's earnings downgrade or Kosich's departure, said one analyst, who asked not to be named.

To come out of bankruptcy protection, constantly having to downgrade sales and earnings numbers, is clearly disappointing, the analyst said.

``Things may have been a little tougher than (Kosich) expected them to be. Maybe they didn't give themselves enough room.''

Kosich was brought in as CEO of Eaton's in June, 1997, when Eaton's was under bankruptcy protection. He had just retired from running rival retailer Hudson's Bay Co.

Kosich's mission was to develop a turn-around program to bring Eaton's back to profitability, a plan which included closing 21 money-losing stores. Today, it operates 64.

A major component of the plan is reinventing Eaton's as a fashion department store that primarily sells clothing and cosmetics.

Formerly a privately owned company controlled by Toronto's Eaton family, the company raised more than $175 million by selling shares to the public last June. The proceeds were used largely to upgrade stores across the chain, with emphasis on those in major urban centres.

A well-crafted marketing and advertising campaign has been impressing industry watchers, but Eaton's may be moving too far upscale, retail analyst John Winter said.

``They had to move a notch up from The Bay, but not 10 notches,'' he said. ``That may work for Toronto, but what about Bramalea or London?''

The fact that Eaton's is falling short of expectations shouldn't come as a shock to anyone, said Albert Plant, retail analyst and chair of Toronto-based Karabus Management Inc.

``They built a business plan that had expectations beyond the possible,'' Plant said. ``It didn't take into account that the competition wasn't going to sit idly by and let them regain all the customers they lost in the past five years.''

Eaton's downgraded its initial profit estimate by $25 million two months ago because of a one-time write-down associated with exiting the ``hard goods'' category, such as electronics, appliances and toys.

The exact impact the disappointing third quarter will have on year-end numbers won't be released until Dec. 10, said Hap Stephen, Eaton's chief financial officer.

``Our operating performance continues to be imparted by downward pressure on sales and margins,'' he said.

Stephen wouldn't comment on persistent speculation that Eaton's poor financial results and floundering stock price make it a prime takeover target by a major U.S. retailer.

``I get asked that question every day,'' he said. ``We will not comment on rumours.''

The Eaton family, with slightly more than 50 per cent of Eaton's stock, is prevented from selling its shares until next June unless the family gets permission from the two Toronto brokerage houses that underwrote the stock offering.

Potential suitors include Federated Department Stores Inc., which runs a number of chains including Bloomingdale's and Macy's. It has been sniffing around Eaton's for years.

But a better fit would be Minnesota-based Dayton Hudson Corp., according to Jim Dion, a retail analyst with the J. C. Williams Group Ltd.

Eaton's stores in smaller centres could be converted to Dayton Hudson's Target discount outlets while Eaton's 20-odd urban locations could be switched over to its upper-end Marshall Field's stores, he said.

``I could see quite possibly Dayton Hudson doing that,'' Dion said. ``They are fabulous merchandisers.''

Besides poor numbers, a clash of corporate culture may be behind Kosich's exit, said J. C. Williams' Dion.

The hard-nosed approach of Kosich, nicknamed ``George Carnage'' because of his willingness to mercilessly cut costs and staff, was a bad fit, Dion said.

Throwing a CEO with such a ``Draconian, dictatorial management style'' into Eaton's culture became ``a glaring problem,'' he said.

``Clearly, Canada needs a department store that says: `Hey, we've got style, fashion and other neat stuff.' ''

However, it must stop the constant barrage of sales if it wants to differentiate itself, Dion said.

``It's hard to tell the difference today between Zellers, Wal-Mart, The Bay and in some respects even Sears, because they are all slugging it out on price.''

The strategy spearheaded by Kosich is working, it just needs more time, said Eaton's financial chief Stephen.

``Our financial position remains strong, we have negligible long-term debt and adequate availability of operating lines of credit.''

Dave Murdoch, vice-president of merchandising, pointed to the fact that sales in ``priority'' fashion categories rose 19.6 per cent in the second quarter. ``And we have improved upon that trend in the third quarter.''

An executive team, including Ballantyne, Stephen and Murdoch, will run things until a replacement is found.