By  on November 17, 2006

Sears Holdings Corp. on Thursday posted third-quarter earnings that fell below Wall Street's consensus estimates, reporting an earnings gain mostly from investments as sales declined at its U.S. nameplates.

Net income for the quarter ended Oct. 28 more than tripled to $196 million, or $1.27 a diluted share, from $58 million, or 35 cents, in the same year-ago period. Revenues fell 2.1 percent to $11.94 billion from $12.2 billion, which included a 1.5 percent decline in merchandise sales and services to $11.91 billion from $12.1 billion. Same-store sales decreased 3 percent at domestic stores, which operate under the Sears and Kmart nameplates.

"After cutting expenses and promotions at Kmart for some time, we believe further improvement will increasingly hinge on sales improvement. Sears domestic may have more room to run on cost savings, but the negative 4.8 comp does little to ease our fears that merchandising initiatives are not enough to slow share losses. However, on the positive side, the $101 million in investment gains in the quarter is another sign that this management team knows how to make money and is building a war chest for potential acquisitions," said Goldman Sachs analyst Adrianne Shapira.

Edward Lampert, chairman of Sears and of ESL Investments, is said to be interested in Home Depot, Anheuser Busch and the Gap, among others. Financial sources said they expect Lampert to move on an acquisition within the next six months.

By retail brand, sales and services at Kmart decreased 3.1 percent to $4.04 billion from $4.17 billion, while same-store sales dipped by 0.7 percent. Kmart's gross margin rate fell to 23.4 percent compared with 24.3 percent a year ago. The company said in a statement that the lower sales and gross margin rate was partially offset by reduced expenses. While sales were lower in some home and hardlines categories, those declines were partially offset by comp gains in apparel and pharmacy. Lisa Schultz was named the new merchant for apparel at both Kmart and Sears last year.

Sales and services at domestic Sears stores fell 2.2 percent to $6.66 billion from $6.8 billion, while comps decreased by 4.8 percent during the quarter. The gross margin rate improved at Sears, rising to 30.7 percent from last year's 29.4 percent. Similar to consumer shopping patterns at Kmart, the home fashion and lawn-and-garden categories saw declines, but were partially offset by "pronounced sales increases" in women's apparel, which the company said reflected "improved assortments in this business relative to last year."

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