By  on January 28, 2005

NEW YORK — In its last earnings report as Sears, Roebuck & Co., the retailer posted an 86.2 percent drop in fourth-quarter income. Chief executive officer Alan Lacy highlighted an off-mall strategy even as the possibility of a second bidder for the company emerged.

The acquisition of Sears by Kmart Holding Corp., slated to be done in March, could be complicated with another bidder, which one analyst believes to be Vornado Realty Trust.

A regulatory filing by the real estate investment trust, in which it plans to issue up to $2.5 billion in equity and $5 billion in debt, gave rise to speculation Thursday that the REIT might make a run to outbid Kmart’s $11 billion offer for Sears.

Sears did not address the possibility of Vornado as a second bidder, and the firm could not be reached for comment.

On a conference call with investors, chairman and ceo Lacy focused on quarterly results, which showed softness in the apparel segment. Lacy also said the retailer was “looking for strong, national brands to supplement its private label [apparel] brands.”

“While our apparel sales were disappointing in 2004, I am confident that the business is on the right track,” Lacy said on the call. “We have made significant strides in improving the quality and fashion content of our apparel offerings and we remain focused on further enhancing our assortment through the broader rollout of our exclusive A line and Structure brands this spring.”

Regarding a second bidder, Prudential Equity Group retail analyst Wayne Hood wrote in a report that Vornado’s regulatory filing raises the issue that “Vornado could be positioning itself, perhaps with a partner, to make a second bid for Sears.” Vornado already owns 4 percent of Sears. The retailer is expected to receive antitrust approval for the proposed deal with Kmart midnight Thursday.

Meanwhile, for the three months ended Jan. 1, Sears’ income was $378 million, or $1.76 a diluted share, compared with $2.75 billion, or $10.84, in the same year-ago quarter. Last year’s results included gains from the sale of its domestic credit card and tire and battery businesses. The earnings per share of $1.76 beat the consensus among Wall Street analysts of $1.66. Part of the gain came from cost-cutting initiatives, and in part from a lower-than-expected tax rate.Revenues for the quarter were down 8.4 percent to $11.23 billion from $12.25 billion a year ago. Sears said last year’s results include $560 million attributable to an extra week in the year-ago report. Domestic same-store sales were flat in the quarter, with sales increases in October and November offset by a decline in December.

On the conference call to Wall Street analysts, Lacy said he was “disappointed” with the company’s financial performance, although the company did make significant progress on two key strategic initiatives such as repositioning its core full-line business and expanding off the mall.

Lacy explained that the merger with Kmart would give Sears the opportunity to “rapidly grow off mall in locations closer and more convenient to our customers.” He said the company was two years into the off-mall growth strategy and that Sears is gaining market share in each of the locales in which it had opened a new off-mall location.

“The numbers were disappointing, as expected. The upside to consensus was driven in part by a lower tax rate. If we look at the trends of the underlying business, apparel is a sore on their side,” said Christine Augustine, retail analyst at Bear Stearns & Co. Inc.

Lacy disclosed that the company was working on defining its assortments to better “match customer demographics and buying patterns” and that it expects to build on the success of more fashion-forward brands such as “Apostrophe, which posted a mid-20s comps increase during the year. Finally, we will continue to look for strong national brands to supplement our private label offerings.”

Augustine interpreted the search for strong national brands to mean bringing in established brands that can either be repositioned exclusively in Sears or have limited distribution. “While the company has said publicly that it wants to keep Lands’ End, the brand has clearly struggled under Sears….I also find it interesting that the company never talks about its Covington [label] anymore.”

She noted that Lands’ End could play a larger role in the off-mall stores, particularly if the Kmart stores to be converted to Sears are in densely populated suburban areas where annual household income is at least $75,000.Lacy noted that the upcoming merger was proceeding on plan.

For the year-end results, the loss was $489 million, or $2.26 a diluted share, versus income of $3.4 billion, or $11.86, a year ago. Revenues fell by 12.2 percent to $36.1 billion from $41.12 billion, which included a 1.8 percent decline in sales to $35.72 billion from $36.37 billion.

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