SEARS NET UP 22.6%
MARTINEZ CALLS RTW A HIGHLIGHT OF 2ND QUARTER

Byline: DAVID MOIN and TOM RYAN

NEW YORK--The softer side of Sears helped produce firm figures for the company's Merchandise Group.
The retailer reported Wednesday that its 22.6 percent earnings gain in the second quarter was driven primarily by an 18 percent gain in home sales, but it also cited a healthy 8 percent gain in apparel sales. This year, retailers generally have been reporting apparel gains under 5 percent.
"We think we can continue to outperform the industry," Arthur Martinez, chairman and chief executive officer of the Merchandise Group, said in an interview Wednesday. "The highlight was our entire
ready-to-wear business. It was the eighth consecutive quarter of double-digit sales increases" for that segment.
He cited dresses, sportswear, special sizes and juniors as particularly strong.
Earnings for the quarter, which ended July 2, rose to $199.3 million from $162.5 million a year earlier. Sales gained 11.1 percent to $7.6 billion from $6.8 billion, with same-store sales ahead 9.7 percent. Sears has been devoting more space and advertising to fashion than it did a year ago, and executives are out to pick up on trends faster. Martinez said space for apparel is being freed up as furniture gets removed from Sears stores and moved to the company's burgeoning Home life furniture stores. Non-selling space is also being converted to apparel areas, he noted.
"We've added 1.5 million square feet for apparel in the last 12 months and that's a lot of space, but it's only 15 percent of what will eventually be added," Martinez said.
"Sears apparel is getting better and better," said Peter N. Schaeffer, an analyst at Dillon Read. "Most of the apparel growth so far has come from existing customers who came in for a hammer and appliances before, and now have started shopping Sears for clothing."
Schaeffer added that "the softer side of Sears" ad campaign, started last fall, is attracting new customers and said growth should continue.
The apparel performance, according to Edward F. Johnson of Johnson Redbook Service, was particularly notable in light of the poor weather through much of the quarter and the ongoing consumer penchant for home goods.
Apparel now represents about 28 percent of Sears sales, up from 26 percent a year earlier. The company's goal is to increase apparel to 40 percent.
Profit contribution of domestic operations of the merchandise group gained 19 percent in the quarter to $200.1 million from $167.7 million. Sales gained 13 percent to $6.8 billion from $6 billion.
International operations, which include Canada and Mexico, lost $800,000, compared to the $5.2 million loss a year ago. Sales slid 2 percent to $811.5 million from $827.8 million.
Credit results improved in the quarter due to a decline in delinquent payments and an increase in gross receivable balances. Credit revenues rose 9 percent to $884.3 million.
Total gross margins as a percent of sales held steady at 28.9 percent. Domestic gross margins improved in all major divisions, but strong home-group sales caused overall margins to decline to 29.2 percent from 29.5 percent.
Selling, general and administrative expenses as a percent of sales dipped to 26.6 percent from 26.8 percent. In the half, the merchandise group's earnings jumped 45.4 percent to $328.8 million from $226.1 million. Sales rose 11.7 percent to $14.5 billion from $13 billion.
Overall, the company's net earnings declined 50 percent to $503.4 million, or $1.27 a share, from $1 billion, or $2.63, but the shortfall was largely due to a special gain of $635.1 million last year from the initial public offering of The Allstate Corp. Excluding the gain, profits were up 9.8 percent. Revenues rose 7 percent to $13 billion from $12.2 billion.
Earnings came in about 7 to 10 cents above Wall Street's expectations. Sears stock fell 5/8 to 46 Wednesday on the New York Stock Exchange.

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