By  on August 18, 2006

Sears Holdings Corp. sacrificed top-line growth for better profits in the second quarter and suggested that it could make investments into derivatives as well as other types of acquisitions.

For the quarter ended July 29, the retailer posted net income that jumped 83 percent to $294 million, or $1.88 a diluted share, from $161 million, or 98 cents, in the prior year on sales that fell 3 percent to $12.8 billion from $13.2 billion. Operating income rose to $517 million from $324 million.

"Sears Holdings' resolve to improve the profitability of this business remains strong and is borne out in the company's second-quarter results," said Aylwin Lewis, chief executive officer and president, in a statement. "While we are making progress, we must continue to focus on our customers, improve the shopability of our stores and continue to give our customers reasons to shop our stores more frequently."

The retailer said domestic same-store sales dropped 3.8 percent in the quarter, with its Sears nameplate falling 6.3 percent and Kmart dropping 0.6 percent. The company cited lower transaction volumes for the declines.

In the quarterly report, the company reminded Wall Street that the board "has delegated authority to direct investment of the company's surplus cash to its chairman, Edward S. Lampert.

"As of July 29, 2006, the company's surplus cash was primarily invested in short-term, highly liquid investments," the company said in the statement, adding that it is "currently using, and may in the future use, a portion of its available capital to invest in marketable securities and other financial instruments, including derivatives."

These investments, Sears said, may be related to "derivative positions with respect to the equity securities of public companies."

The retailer did not name any of those companies, but said the derivative contracts would be recorded on its balance sheet at fair value. "For non-hedge contracts, changes in fair value would be recognized currently in earnings as unrealized gains or losses," the company said.

"Our strong financial position and cash flow generation provide us with the flexibility to capitalize on a wide range of market opportunities as they arise. In addition to investing in our business and acquiring our shares, we are prepared to invest substantial amounts of capital if we identify other attractive investment opportunities which have the potential for returns we believe appropriately compensate the company for the associated risks." Lampert said in the statement.

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