By  on December 7, 2005

NEW YORK — Edward Lampert is hitting back at his critics.

In his letter to shareholders on Tuesday, the chairman of Sears Holdings Corp. blasted naysayers of his strategy for the parent of Sears, Roebuck and Kmart as the company posted third-quarter results that were lower than a year ago but still managed to beat earnings expectations.

Apparel sales at Sears, Roebuck hurt same-store sales results, while Kmart saw lower demand for electronics and home products. Kmart also saw lower transaction volumes across most businesses, although its apparel sales outperformed other categories and posted positive comps during the period, the company said.

"I will simply say that I am pleased with the progress we are making at Sears Holdings," Lampert wrote to shareholders. "We are hiring great people, creating a winning culture and focusing relentlessly on profitability. We have accomplished much in eight months and have a long way to go. We will continue to get better, which also entails recognizing the mistakes we make and correcting them."

The chairman said he's observed in the past year a significant degree of interest in the press about Sears Holdings. "This is not surprising: As a well-known, high-profile American company, Sears will always attract considerable attention. There is no shortage of commentators who are eager to make known their perspectives on our company and its prospects. Some of these do so ‘on the record'; others cloak themselves in anonymity or do not disclose the true motives that are driving their comments," he wrote.

Calling the attention flattering, Lampert cautioned investors who read what is written about the company to do so with an "appropriate amount of healthy skepticism." He noted that the success of critics and so-called experts is in some cases based more on the controversy generated by their articles and not by the accuracy of their predictions.

He pointed out, "Most observers and financial pundits missed the turnaround at IBM, missed the turnaround at American Express, missed the turnaround at J.C. Penney, missed the emergence of Google and missed the resurrection of Kmart — until it was abundantly clear that those companies had succeeded. In all those cases and in many others, imposing the right disciplines; adjusting the cost structure; creating an atmosphere of teamwork and collaboration, and being willing to learn while having the confidence to stay the course in the face of skepticism — were the necessary preconditions of success. We are not yet even one year into the merger, and we have plenty of work ahead of us, but that is the culture that we are committed to building at Sears Holdings."For the three months ended Oct. 29, income was $58 million, or 35 cents a share, compared with $552 million, or $5.45, in the same year-ago quarter. Year-ago results, which do not include results from Sears, Roebuck, include an $807 million gain from selling certain Kmart stores. Kmart Holding Corp. and Sears, Roebuck merged in March. Assuming the merger took place at the beginning of the year, last year's profits were $150 million, or 93 cents, on an adjusted basis.

Revenues for the quarter were $12.2 billion versus $4.43 billion. Including Sears, Roebuck results, revenues last year were $12.84 billion. Total same-store sales were down 7.4 percent, while by nameplate Sears, Roebuck same-store sales in the U.S. fell by 10.8 percent and Kmart store comps decreased by 2.8 percent.

For the nine months, income dropped 52.2 percent to $141 million, or 87 cents, versus $295 million, or $1.84, on an adjusted basis. Revenues fell by 2.4 percent to $38.18 billion versus $39.12 billion.

Sears said it expects to end 2005 with $3 billion in cash.

Lampert in his letter noted that apparel results in Sears, Roebuck stores in the quarter were "disappointing." He explained Sears' attempted to be more "fashion-forward," relying on the introduction of new proprietary brands that have yet to be embraced by its customers. Also hampering apparel sales was the unseasonably cool spring and warm fall seasons.

One bright spot seems to be the receptiveness of customers to the "more complete Lands' End apparel and home products presented in Sears stores," Lampert wrote. Sears bought Lands' End in 2002.

The chairman noted that "our customers are embracing the quality and value represented by Lands' End. Our store associates, who we value both as employees and as customers, have been excited by the newly displayed Lands' End product. We have provided customers with the ability to order from in-store — either online or by phone — Lands' End product that would not otherwise be available in the store."

He emphasized the results were still "early," and that "this is only the beginning, but we could not be more pleased with the initial results." Lampert also noted the company's expectations that this year will "represent the second-best year in the history of Lands' End" in terms of EBITDA performance, or earnings before interest, taxes, depreciation and amortization.Recently, Sears Holdings has been focused on a revamp of its apparel and merchandising leadership. Among some of the changes is a new president for Lands' End, David McCreight. The company created a single apparel design organization in New York under the leadership of Lisa Schultz. On Monday, Peter Whitsett, senior vice president and Kmart merchandising officer, became senior vice president, merchandising, for Sears Holdings. Whitsett will continue to lead Kmart's merchandising efforts.

And despite the critics, the turnaround at Sears Holdings has some supporters.

"While we believe Sears Holdings remains several years away from being a formidable competitor in the industry, we believe that management will make financial and strategic moves that will more than adequately reward shareholders in the meantime," observed Lehman Brothers analyst Robert Drbul in a research note.

The analyst added he believes the company will pursue opportunistic investments that could include acquisitions of other companies, joint ventures and strategic alliances.

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