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Despite Credit Woes, Sears Net Advances

NEW YORK — Sears, Roebuck & Co. managed to end the year on an up note with some signs of health in its retail division, despite little topline growth and few signs of relief in its addled credit unit.<br><br>The credit business posted declining...

NEW YORK — Sears, Roebuck & Co. managed to end the year on an up note with some signs of health in its retail division, despite little topline growth and few signs of relief in its addled credit unit.

The credit business posted declining profits in the fourth quarter and is expected to continue on its downward path this year.

Sears’ overall net income, which was inflated by the sale of its investment in Advance Auto Parts Inc., rose 71.7 percent to $848 million, or $2.67 a diluted share, from $494 million, or $1.52, a year ago.

Sale of the investment produced an aftertax gain of $179 million after tax, or 56 cents a share, and generated aftertax cash proceeds of $335 million. Noncomparable items a year ago totaled $163 million after tax, or 50 cents a share, and related to productivity initiatives, product category exits and a litigation settlement.

Exclusive of noncomparable items, the retailer’s income inched up 1.8 percent to $669 million, or $2.11 a share, compared with $657 million, or $2.02, a year ago. The increase was attributed to improvement in Sears’ retail segment, partially offset by a decline in the credit unit.

Profits were 20 cents a share ahead of Wall Street’s projections of $1.91 for the quarter. Investors approved and traded up shares of the firm up $1.83, or 6.9 percent, to close at $28.53 on the New York Stock Exchange Thursday.

Revenues for the 13 weeks ended Dec. 28 inched up 2.4 percent to $12.52 billion from $12.22 billion a year ago.

Exclusive of special items and securitization income, Sears’ divisional results were as follows:

Operating income in the retail unit rose 9.7 percent to $726 million from $662 million in the year-ago quarter. Sales were up 2.8 percent to $9.73 billion from $9.47 billion. Without Lands’ End, the firm’s retail revenues fell 4 percent. Comparable-store sales slid 7.3 percent, with a high-single digit decline in apparel.

The credit division’s operating profits slid 14.8 percent to $363 million from $426 million a year ago. Revenues increased 4.4 percent to $1.39 billion from $1.33 billion a year ago.

This story first appeared in the January 17, 2003 issue of WWD.  Subscribe Today.

Chairman and chief executive Alan Lacy described the year just past as one of “tremendous change.”

The firm has been engaged in a massive turnaround effort, which includes the retooling of its stores, as well as two major apparel merchandising initiatives: the acquisition of Lands’ End last spring and the introduction of Covington, a private label offering for men, women and children.

On a conference call with analysts, Lacy noted that Covington, since its September unveiling in stores, brought in sales of more than $200 million. Lands’ End, which launched in 183 doors last month — a little later than expected due to the West Coast dock lockout — has met with success so far.

“The vast majority of the stores that had Lands’ End saw a significant lift in overall apparel sales versus the stores that didn’t,” said Lacy. “The people who appear to be buying Lands’ End in our stores in December were not people who we typically see on our apparel floor.” The ceo said Sears is still waiting for research that would tell if the brand has attracted Sears’ hardlines customers or shoppers who are new to Sears altogether.

There has been some clash between Lands’ End and Covington, though, with similar looks in certain categories, such as men’s. Lacy attributed this to the timing of the Lands’ End acquisition and said Covington’s design would be adjusted accordingly, moving a bit more fashion forward toward “new classic, as opposed to traditional classic,” which is considered Lands’ End’s niche.

Lands’ End is set to roll out in about 400 of Sears’ 870 full-line stores this spring, and across the whole chain in the fall.

The reset of the full-line stores wasn’t the only action at Sears, though. As reported, in October, the firm endured a plummeting stock price — eventually, on Nov. 13, hitting a 52-week low of $19.71, less than a third of its 52-week high of $59.90, which hit on June 3. The selloff was sparked first by the sudden departure of the president of Sears’ credit business amid questions of his “personal credibility” and then an unexpected increase — by $222 million — in its domestic provision for uncollectible accounts.

Paul Liska, who was Sears’ chief financial officer, took the reins as head of the credit unit, while Glenn Richter filled the position of cfo. However, Wall Street’s confidence in the firm was shaken.

In 2003, Sears is looking for its earnings per share to rise by a percentage in the low- to mid-single digits. This will come from operating income growth in the midteens at the retail division and an operating income decline in the low- to mid-single digit range for the credit business. Sears is looking for its department store comps to continue to dip in the first half and then rise during the latter six months of the year.

“It appears that the credit problems that were such a disaster in the third quarter have continued in the fourth and will weigh on earnings throughout much of the next year,” noted WR Hambrecht & Co. analyst Bill Dreher. “Unfortunately, that’s going to counterbalance what appears to be some decent traction they’re gaining on the broadlines side.”

While the improvement in its retail operations will help, Dreher said Sears has a distance to go before it regains its credibility on Wall Street. “People tend to have a very long memory when it comes to money and there’s been a lot of shareholder value blown since the third-quarter disaster. This solid fourth-quarter performance is a step in the right direction, but it’s going to take another few quarters of similar strong performance to regain investors’ confidence.”

For the full year, reported profits jumped 87.2 percent to $1.38 billion, or $4.29 a diluted share, from $735 million, or $2.24, a year ago. Overall revenues for the 52 weeks inched up 0.9 percent to $41.37 billion from $41 billion last year.