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Sears Lowers Guidance for Holiday

After posting a third-quarter loss, Sears lowered its fourth-quarter sales and margin estimates, saying it has a “more cautious holiday outlook.”

NEW YORK — A month away from Black Friday, and the holidays are already looking gloomy for Sears, Roebuck & Co.

After swinging to both third-quarter and nine-month losses, Sears lowered its fourth-quarter sales and margin estimates — thereby reducing its full-year earnings forecast by almost half — saying it has a “more cautious holiday outlook.”

The company said its conservative guidance stems from the below-plan sales and margin results in the previous two quarters. But examining prior results shows that Sears has struggled since the first quarter of this year to achieve appreciable sales and earnings results.

And while the company had highlighted apparel inventory and merchandising problems as a main source of weakness earlier in the year, sales are now struggling in nearly every category.

In the most recent quarter, the Hoffman Estates, Ill.-based national chain said soft sales drove increased markdowns and promotions in its apparel and home divisions. In the period ended Oct. 2, Sears posted a loss of $61 million, or 29 cents a share, compared with earnings of $147 million, or 52 cents, in the year-earlier period.

Third-quarter 2003 earnings include results of the company’s National Tire & Battery and credit card divisions, both now divested, and a pretax charge of $141 million from a repositioning of The Great Indoors division.

Total revenues in the latest quarter dropped 15.3 percent to $8.3 billion from $9.8 billion last year. Wall Street analysts were calling for a profit of 1 cent on revenues of $8.33 billion. Included in revenues were a 2.4 percent decline in sales and services and a 0.5 percent dip in revenues from credit and financial products.

“Overall, I am disappointed with our results,” said Alan Lacy, chief executive officer of Sears, on a conference call. Besides deeper markdown rates, Lacy cited the “challenging macroeconomic environment, less-than-favorable weather conditions for much of the quarter, the disruption caused by business resets and product transitions completed during the quarter, followed by a slower-than-expected ramp-up of sales.”

Lacy said Sears initiated a review of its business plans for the rest of the year. In addition, the company has initiatives in merchandising, gross margin improvements, productivity and capital expenditures under way to improve long-term performance.

This story first appeared in the October 22, 2004 issue of WWD.  Subscribe Today.

In its U.S. division, Sears reported an operating loss of $106 million in the third quarter versus operating earnings of $222 million a year ago. Total domestic sales were $7.1 billion, down 14.1 percent from $8.8 billion last year, while domestic same-store sales decreased 4 percent.

Sales declines at the company’s 870 full-line stores more than offset sales increases from some of Sears’ 1,100 specialty stores as well as the $39 million in revenues the company received from its credit card alliance with Citigroup. While Lacy said the resets of its consumer electronics and home fashions businesses were more disruptive than anticipated, leading to a midsingle-digit decrease in consumer electronics comps, for example, the company had comp-sales growth in the low teens in its lawn and garden business during the quarter.

Looking to Sears Canada, the roughly 300-store division had a slight rise in third-quarter operating income to $21 million from $20 million last year on an 11.2 percent rise in total revenue to $1.2 billion.

Sears’ results are not surprising when looked at from a macro perspective, said Phil Kahn, an analyst at Fitch Ratings. “The [department store] industry is still a very difficult industry….We’ve seen an uneven turnaround,” Kahn said in an interview. “Some of [Sears’ struggle] has to do with [overall department store] environment and some has to with Sears’ execution and turnaround strategy and merchandise decisions they’ve made.”

Kahn thinks Sears’ recently beefed-up executive team — including former Target Corp. executive Luis Padilla as its new head of merchandising and former J.C. Penney executive Rodney Birkins as its new vice president of sourcing — should help Sears’ turnaround gather steam.

In the first nine months of the year, Sears reported a loss of $867 million, or $4.03, compared with a profit of $648 million, or $2.17, in the year-ago quarter. Total sales in the 39-week period were $24.9 billion, down 13.9 percent from $28.9 billion last year.

Following the earnings news, Standard & Poor’s Ratings Services placed its ratings for Sears and Sears Roebuck Acceptance Corp. on “credit watch” with negative implications. The ratings service noted, however, that Sears’ balance sheet is in good shape, with domestic debt and net debt on target with expectations.

Looking ahead, Sears now expects domestic same-store sales in the fourth quarter to be flat against last year, including a low- to midsingle-digit decrease in apparel, with gross margins down from last year’s 28.9 percent.

For full-year 2004, the company forecast earnings of $1.46 to $1.66 a share, including certain charges taken in the second quarter and before a change in accounting principle. The guidance also includes a 20 cent to 25 cent negative carrying cost on remaining legacy debt from the sale of its credit card business to Citigroup in November 2003 for $32 billion. Previously, Sears had been expecting to earn $2.66 to $2.86 in the full year. Analysts are currently calling for a profit of $2.67.