NEW YORK — A slew of extraordinary items allowed Sears, Roebuck & Co. to overcome a paltry performance by its stores and post solid gains in second-quarter profits.
The results dramatized the pressure that will be brought to bear on Sears’ stores now that the sale of its credit and financial services unit to Citigroup is under way.
Triple-digit percentage gains from credit and financial products, special items and weak year-ago comparisons offset double-digit declines at retail. For the three months ended June 28, the Hoffman Estates, Ill.-based department store chain reported net income climbed 34.9 percent to $309 million, or $1.04 a diluted share. By comparison, last year, Sears recorded profits of $229 million, or 71 cents.
Earnings per share easily eclipsed the Wall Street consensus estimate of 95 cents.
Net income was bolstered, however, by a $93 million benefit, or 20 cents a share on a pretax basis, from the sale of previously charged-off credit card accounts, offset by a $28 million, or 6 cent, pretax charge for severance costs.
Excluding those items, EPS would have been 90 cents, which was still well within Sears’ second-quarter guidance of 85 cents to $1. A pretax charge of $300 million, or 59 cents, in the prior-year quarter also helped provide for an easier year-over-year comparison.
Sears shares advanced 5 cents, or 0.1 percent, to close at $38.25 in New York Stock Exchange trading Thursday.
By division, operating income in the retail and related services segment plunged 39 percent to $183 million from $300 million a year ago, due to promotional activity deflating gross margin by 10 basis points.
A 118 basis-point expansion of selling, general and administrative expenses associated with the inclusion of the Lands’ End business and severance costs also chipped away at segment income.
Fortunately for Sears, that was easily offset by operating profits from the credit and financial products unit, which more than tripled, growing 217 percent to $355 million from $112 million a year ago.
However, continued soft top-line performance and promotional pressures forced the company to lower its full-year earnings forecast.
Net revenues for the period increased fractionally, or 0.5 percent, to $10.2 billion from $10.14 billion a year ago. Of that, merchandise sales and services inched up 1.1 percent to $8.85 billion from $8.75 billion, while revenues from the recently sold credit and financial services unit receded 3.2 percent to $1.36 billion from $1.39 billion last year.While comparable-store sales improved over the course of the quarter, overall, they fell 3.5 percent. With second-half core retail operating income forecasted to be flat, in tandem with flat to low-single-digit comps and an anticipated mid-single-digit decline in credit and financial services operating income, Sears has lowered its full-year guidance to between $4.80 and $5 a share, on average 15 cents below the previous forecast of $4.95 to $5.15. The revised guidance excludes any effect from Tuesday’s sale of its credit and financial products division, Sears said.
With the anticipated sale of its credit and financial products unit to Citigroup, Sears is betting that it can continue its massive turnaround on improved top-line performance, relying partly on returns from its June 2002 acquisition of Lands’ End, the continued rollout of its private Covington line and improved merchandise offerings.
On a conference call with analysts, chief executive officer Alan Lacy said there were signs of this strategy coming to fruition.
“We continue to make good progress with the repositioning efforts of our full-line stores,” said Lacy. “Sales trends generally improved during the quarter. Apparel sales benefited from the contribution of Lands’ End merchandise with comparable-store sales in stores carrying the Lands’ End brand 2 to 4 percent better than those without. Covington has exceeded $200 million in sales, well on its way to becoming a $500 million brand.”
Lacy added tailoring store assortments to better reflect local demographics has also benefited apparel sales.
As reported, Sears inked a definitive agreement with Citigroup to sell its credit and financial products business for total consideration of approximately $32 billion. The price represents roughly a 10 percent premium to Sears’ $29 billion gross domestic credit card receivables portfolio. Sears said it will realize pretax cash proceeds of roughly $6 billion, half of which represents the premium on receivables with the remainder coming in the form of the reclamation of Sears’ net invested capital.
Offloading the division eliminates certain headaches for the company and has other benefits, but it dramatically changes the composition of the business, said Fitch Ratings fixed-income analyst Philip Zahn. Though Sears will lose its profitable credit card business, the company also will pay off most of its debt, he said, adding that, while the firm will boast a stronger balance sheet, going forward, it also will be a more cyclical company as a pure-play retailer.As for the future, Zahn said that it was too soon to make a call on the retail-only Sears’ prospects based on the second-quarter results.
“I think the second half will give us a better indication as to how things are going with the retail business,” said Zahn. “Where we stand today, it’s a little too soon to tell. They’re still rolling out Lands’ End and Covington into all of their stores.”
As for relying on retailing exclusively, Zahn said, “As a strategy, it seems solid. It’s the execution that’s the hard part.”
In good news from the balance sheet, domestic retail inventories remained essentially steady from a year ago, notching up 0.9 percent to $5.45 billion from $5.4 billion.
Overall, for the first half of the year, Sears reported a 47.8 percent improvement in net income to $501 million, or $1.63 a diluted share. That compares with last year’s profits of $339 million, or $1.05. Revenues for the period sagged slightly, dropping 0.5 percent to $16.33 billion from $16.4 billion a year ago.
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