Sears Holdings Corp. continued to slash expenses and shutter stores in the second quarter, but the Hoffman Estates, Ill.-based firm couldn’t overcome weakness in apparel and a 10.3 percent sales drop and wound up with an unexpected $94 million loss.
The red ink took Wall Street by surprise and analysts continue to puzzle over chairman Edward Lampert’s plans for the company, which is losing market share and faces tough competition from Wal-Mart Stores Inc., Target Corp. and numerous other broadlines and specialty retailers.
Sears’ stock fell 11.9 percent to $65. Among the other broadline chains reporting results, The Bon-Ton Stores Inc.’s shares vaulted 29.1 percent to $5.23 as the firm said it would be profitable in the second half. And better bottom-line results fueled the shares of Ross Stores Inc., which rose 3.9 percent to $46.40, and Stein Mart Inc., up 7.2 percent to $12.23. Stage Stores Inc.’s stock rose 3.5 percent to $13.19, despite lower profits.
The S&P Retail Index picked up 0.4 percent Thursday to close at 358.41 while the Dow Jones Industrial Average advanced 0.8 percent to 9,350.05 and the S&P 500 reclaimed the 1,000 mark with a 1.1 percent jump to 1,007.37.
Sears didn’t hold a conference call to discuss its results. In the company’s press release, W. Bruce Johnson, Sears’ interim president and chief executive officer, commented, “While the overall retail market remains difficult and its impact is reflected in our results, we continue to take actions to increase the efficiency of our operations.”
The firm, which operates 3,909 stores, decided to close 28 doors in the quarter, 22 of them under the Kmart banner. Adjusting to reflect the planned closures and other items, Johnson said the firm cut its selling and administrative expenses by $212 million in the quarter, making for cuts of about $1 billion over the last 12 months. At the same time, Sears spent $134 million on share repurchases.
Apparel was signaled out as a weakness at the Sears U.S. and Kmart divisions and the company offered few details on its plans, although it did say last week Kmart was introducing a preppy apparel line for back-to-school called Thre3. Comparable-store sales fell 12.5 percent at the Sears U.S. division and 3.9 percent at Kmart.
“They always struggle with apparel and I don’t see that they have turned that sector around,” said Ana Lai, a credit analyst at Standard & Poor’s.
Lai said the Sears division was better positioned for the long term than Kmart by virtue of its emphasis on appliances, sales of which have been hurt lately by the downturn in the housing market.
Jason Asaeda, a Standard & Poor’s equity analyst who downgraded Sears stock to “sell” from “hold” Thursday, said second-quarter results were hurt by aggressive clearance markdowns.
“While we see [Sears] doing a good job of improving its cost structure through expense reductions and store closures, we also see promotional pricing, particularly on Sears apparel, limiting gross margin upside,” Asaeda said.
Many analysts remain Sears skeptics.
“As same-store sales continue to plunge, margins contract and earnings drop, Sears struggles to find its way while shedding little light on its strategy and results for its investors,” said Carol Levenson, director of research at Gimme Credit, in an analysis.
Bill Dreher, an analyst at Deutsche Bank, noted, “It appears the low-hanging fruit has been captured, and [Sears] has limited opportunity to improve the fundamentals of its business.”
Sears’ losses for the quarter translated to a deficit of 79 cents a diluted share, and compared with earnings of $65 million, or 50 cents, a year ago. Excluding charges for store closures and other items, Sears’ losses of 17 cents a share were still well below the 35-cent profit Wall Street was expecting. Sales fell to $10.55 billion from $11.76 billion.
Sears and the other broadline retailers reporting results Thursday all counted Aug. 1 as the end of their fiscal second quarters.
Bon-Ton might have gotten a boost from its more positive outlook, but the regional department store continued to be dogged by both bottom- and top-line weakness in the second quarter.
The York, Pa.-based regional department store chain logged a net loss of $34.8 million, or $2.04 a diluted share, higher than the loss of $33.8 million, or $2.01, reported in last year’s quarter, which included a $17.8 million pretax goodwill impairment charge. However, the loss in the 2009 quarter was 20 cents a share less than analysts had forecast.
Sales fell 9.5 percent, to $609.2 million from $673.4 million, and were down 9.8 percent on a same-store basis. Gross margin improved to 37.1 percent of sales from 35.9 percent in last year’s quarter.
But Bon-Ton drastically reduced its expectations for a full-year loss — to a range of $2.50 to $3.70 from the range of $3.40 to $4.30 provided at the conclusion of the first quarter. The revision implies second-half profits of $1.02 to $2.22 a share based, in part, on expectations of $80 million in selling, general and administrative expense reductions. Top-line expectations were actually reduced, with the firm now expecting a 7 to 9 percent decline in full-year same-store sales, versus its earlier forecast of a drop of 6.5 to 9 percent.
Year-to-date selling, general and administrative expenses fell to $459.8 million, 8.4 percent below the first half of 2008.
In the off-price sector, Ross Stores saw its long-standing emphasis on lower prices pay dividends in the second quarter.
Ross’ profits shot up 45 percent to $103.4 million, or 82 cents a diluted share, from $71.3 million, or 54 cents, a year earlier. Sales for the quarter advanced 7.8 percent to $1.77 billion from $1.64 billion. Inventories fell 9.1 percent from a year earlier.
Michael Balmuth, vice chairman, president and chief executive officer, said the company’s success boiled down to its ability to give shoppers bargains while operating with lower inventories.
And the Pleasanton, Calif.-based off-pricer said the picture is only brightening. “We are optimistic about the important back-to-school and holiday periods,” Balmuth said.
Ross boosted profit projections for the year to $3 to $3.12 a share, up from the range of $2.62 to $2.72 predicted in May.
Stein Mart, which also focuses on bargain shoppers, reversed year-ago losses as expense cuts helped overcome lower sales.
Profits for the quarter tallied $1.5 million, or 4 cents a share, and compared with losses of $8 million, or 19 cents, a year earlier. Sales fell 7.7 percent to $287.5 million from $311.6 million. The Jacksonville, Fla.-based firm cut SG&A expenses by $18.3 million and inventories declined by $64 million from a year earlier.
“Although the customer is still very cautious, response to our updated merchandise offering and new marketing strategy is encouraging,” said David Stovall Jr., president and ceo.
At Stage Stores, inventory management and cost cuts couldn’t stop second-quarter profits from falling.
The Houston-based department store operator recorded a 5.9 percent slide in net income to $9.1 million, or 24 cents a diluted share, 1 cent above analysts’ estimates. A year ago, the firm’s quarterly profits totaled $9.7 million, or 25 cents a share. Revenues in the quarter fell 8.3 percent to $341.7 million from $372.7 million.
The company reduced SG&A expenses by 5.3 percent in the quarter to $83.9 million.
Stage said it expects comp sales to drop between 4 and 7 percent in the third quarter and 7 to 8.5 percent for the full fiscal year. In the second quarter, comps declined 10.7 percent.
The retailer projects a third-quarter loss per share between 21 cents and 29 cents on revenues between $318 million and $328 million. For the year, it issued earnings guidance of between 47 cents and 65 cents a share on net sales of $1.42 billion to $1.44 billion.
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