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Drop in Apparel, Home Doesn’t Stall Sears Net

NEW YORK — Double-digit same-store declines in apparel and home fashions didn’t stop Sears, Roebuck & Co. from far outstripping profit expectations in the second quarter.<br><br>However, this fall’s launches of Lands’ End and...

NEW YORK — Double-digit same-store declines in apparel and home fashions didn’t stop Sears, Roebuck & Co. from far outstripping profit expectations in the second quarter.

However, this fall’s launches of Lands’ End and Covington apparel in Sears’ stores should provide it with “critical mass” in softlines for the first time, according to Alan Lacy, chairman and chief executive officer.

Earnings landed at $420 million, or $1.31 a diluted share, for the period, 17 cents ahead of Wall Street’s best guess of $1.14.

Results were also persuasive enough for Sears to up profit expectations for the year to $5.15 a share from previous projections of $4.94, despite admonitions that comparable-store sales will finish the year with a low- to mid-single-digit decrease. In 2001, the retailer posted earnings per share of $4.22.

The improved results and outlook cheered investors, who sent shares of the Hoffman Estates, Ill.-based department store up $1.42, or 3.2 percent, to close at $45.75 in New York Stock Exchange trading.

On a conference call, Lacy noted that while the equity markets have softened severely recently, Sears’ stock has been hit especially hard because of fear over second-quarter earnings in the absence of a preannouncement, reports of softening trends in home appliances, concerns over the firm’s credit portfolio and the misrepresentation of Sears’ weekly sales updates.

While profits spoke for themselves, Lacy reasserted the health of Sears’ home appliance and credit businesses. The weekly sales updates, however, will be discontinued after the third quarter.

The quarter’s earnings compared with year-ago losses of $197 million, or 60 cents, which included three noncomparable items aggregating in an aftertax charge of $513 million, or $1.56 a share. Excluding the nonrecurring items, earnings rose 32.9 percent.

Total revenues for the period ended June 29 retreated 0.4 percent to $10.14 billion from $10.18 billion a year ago.

“Profit increases for the quarter showed solid increases across all segments,” said Lacy in a statement. “Margin rate improvements continue to benefit the retail business, while credit and financial products results were driven by the growth of the Sears Gold MasterCard product and a favorable interest rate environment.”

Operating profits at Sears’ retail and related services division climbed 40.8 percent to $300 million from $213 million a year ago. Gross margins at the division increased 30 basis points with contributions from both soft and hardlines.

Sales at the division slid 0.9 percent to $8.75 billion from $8.83 billion a year ago. Lower apparel sales and exits from other soft goods categories were partially offset by a greater topline contribution from hard goods. Apparel comped down with a percentage drop in the low teens, while home fashions were off in the mid-20s.

In the credit and financial products segment, operating profits, before special items, inflated 19.4 percent to $412 million from $345 million a year ago. Driving operating income were favorable funding costs and higher revenues, which were offset somewhat by higher provision and selling and administrative expenses. Delinquencies slid 39 basis points to 7.26 percent against a year ago. The division’s revenues, due primarily to higher average receivable balances, pushed ahead 3 percent to $1.39 billion from $1.35 billion a year ago.

Lacy noted that Sears has made “good progress” in its three-year drive to revitalize its full-line stores and will finish remodeling 50 of its 870 doors during the third quarter. Sears also remains on track to save $270 million through its restructuring this year, which will ramp up to $600 million annually by 2004.

Also in the works is the firm’s September launch of Covington, its first for-the-whole-family propriety brand, and the launch of Lands’ End merchandise in more than 180 stores across 10 markets in late October.

Lacy noted, of Covington: “Our customers want simplicity. They want the store to be understandable and they very much want Sears to be able to offer them, most notably, classic casual apparel.” Covington, which replaces eight other proprietary brands, the chief executive officer added, will help the firm accomplish that and create “critical mass for the first time in a brand in softlines.”

For the first half, profits totaled $339 million, or $1.05 a diluted share, and stood against year-ago losses of $21 million, or 6 cents.

In addition to the sizable charges in the second quarter a year ago, Sears adjusted the way it accounted for the allowance for uncollectible accounts in its credit business. The change has no effect on the second quarter, but imposed a noncash charge of $191 million on first-quarter earnings, which will be restated. Before the accounting change, earnings in the half amounted to $738 million, or $2.29 a diluted share.

“In light of the current environment, every company is stepping back and reviewing their accounting methods,” noted Lacy. “We are no different.” While Sears’ old method was acceptable and applied consistently, he added, the new method is more conservative and preferable.

Corporate revenues for the half of $19.18 billion represented a 0.7 percent improvement of the year-ago turnover of $19.04 billion.