By  on August 31, 2007

Sears Holding Corp. posted a 40 percent year-over-year drop in second-quarter income Thursday due to lower operating results in its Sears Domestic and Kmart units just two weeks after the retailer reduced its guidance range for the period on economic pressures.

"We are disappointed with our second-quarter results," said Aylwin Lewis, Sears' chief executive officer in a statement. "Our gross margins came under pressure from sales declines and increased promotional activity, and, as a result, our net income was significantly below last year and our expectations."

Shares of Sears fell 2.6 percent to $141.83 in Nasdaq trading.

For its second quarter ended Aug. 4, Sears reported net income of $176 million, or $1.17 a diluted share, down 40.1 percent from $294 million, or $1.88 a diluted share, in the year-earlier period. The 2006 second-quarter earnings results included a 14-cent-a-share gain related to antitrust litigation.

Sears posted second-quarter revenue of $12.24 billion, down 4.7 percent from $12.79 billion in the year-ago period.

Analysts expected the Hoffman Estates, Ill.-based company to post earnings of $1.13 a share on revenue of $12.32 billion.

On Aug. 13, Sears lowered its second-quarter forecast to an income range of $170 million to $185 million, or $1.13 to $1.23 a diluted share, from July 10 guidance of earnings between $160 million and $200 million, or between $1.06 and $1.32 a diluted share. At the time, the company reported a second-quarter comparable-store sales decrease of 4.3 percent in its Sears domestic stores and a 3.8 percent decline in its Kmart stores, partially offset by strength of women's apparel at Kmart's and Sears' U.S. stores. Footwear and electronics also did better than average at Sears.

Sears also announced an additional $1.5 billion for its share repurchase program earlier this month.

The retailer ended the quarter with $2 billion in cash and cash equivalents, excluding Sears Canada.

Bear Stearns analyst Christine Augustine, who rates Sears shares at "market weight," noted earlier this week that Sears continues to have one of the highest free cash flow yields in the broadlines sector at 8 percent of sales compared with its peer average of 4 percent."While we believe that [Sears Holding] continues to evaluate various investment options for its significant cash balance, we believe that the probability of [Sears Holding] announcing an acquisition over the near term is slim, given the focus on share repurchases," Augustine said.

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