WWD.com/fashion-news/fashion-features/sears-profits-up-as-retail-falls-733757/
government-trade
government-trade

Sears Profits Up as Retail Falls

NEW YORK — Sears, Roebuck & Co.’s first-quarter profits rose against year-ago results that were depleted by charges and write-offs.<br><br>However, the firm’s retail business, which, as reported, may be its sole surviving unit in...

NEW YORK — Sears, Roebuck & Co.’s first-quarter profits rose against year-ago results that were depleted by charges and write-offs.

However, the firm’s retail business, which, as reported, may be its sole surviving unit in time, posted operating losses for the quarter, and operating income in its credit unit receded.

Net income for the quarter increased 74.5 percent to $192 million, or 60 cents a share, from $110 million, or 34 cents, during the first quarter of 2002. However, the year-ago take was reduced by one-time items totaling $190 million, or 59 cents.

Results, though, beat out Wall Street’s EPS estimate of 57 cents by 3 cents. Shares of the Hoffman Estates, Ill.-based retailer traded down 1 cent to $26.63 Thursday on the New York Stock Exchange.

Overall revenues for the period ended March 29 dipped 1.7 percent to $8.88 billion from $9.04 billion a year ago.

The firm’s retail and related services unit posted operating losses of $23 million for the quarter. This compared with year-ago earnings of $87 million. Retail sales, including a boost from Lands’ End, acquired in June, dipped 1.8 percent to $6.64 billion. Comparable-store sales fell 6.7 percent. On a morning conference call, chief financial officer Glenn Richter said softline sales comped down by a percentage “in the low teens,” while apparel comps were down in the “low-double digits.”

Richter said: “Despite lower sales and a very tough promotional environment, we maintained last year’s improved retail gross margin in the full-line stores. Better product sourcing, the exit of lower-margin merchandise lines and the addition of Lands’ End to our softlines assortment were offset by decreases in margins from higher clearance markdowns.”

In a statement, Alan Lacy, chairman and chief executive officer, said, “While we are feeling the effects of major merchandise category exits and edits as well as the weak economic conditions, we continue to improve the fundamentals of our retail and credit operations.”

Domestic retail inventories for the quarter were up 9.3 percent on a first-in, first-out basis, which reflects lower softline sales and the addition of Lands’ End. Richter described the overall quality of the inventory as “good,” but said the higher levels, along with a tough promotional environment, would create second-quarter margin pressure.

This story first appeared in the April 18, 2003 issue of WWD.  Subscribe Today.

Bear Stearns analyst Christine Augustine noted: “Inventories looked very high and that’s clearly why they’re planning [EPS of] 85 cents to a buck for the second quarter, because they’re going to have to take a lot of markdowns to clear that excess.”

Despite the pressure, Sears is standing by its full-year profit guidance of $4.95 to $5.15 a share.

Sears, in the midst of a massive turnaround, is still pushing through changes in its apparel business. The Covington line, which launched last fall, pulled in $200 million in sales through the end of 2002 and is on track for sales of $500 million this year. The firm has acknowledged that, in its initial incarnation, Covington was too similar to the Lands’ End merchandise now in about 400 of the firm’s 870 doors.

On the call, Lacy noted: “We can basically design Covington to be a bit more fashion forward and have a bit more fashion content to it than we’ve had to date.” While some changes will be seen this spring, most design changes on the line won’t be on the floors until the fall.

Sears’ apparel is being steered by a new hand since Mindy Meads, who hailed from Lands’ End, succeeded Kathryn Bufano as executive vice president of softlines earlier this month.

“Mindy can bring to Sears a lot of the very good things she’s brought to Lands’ End,” noted Lacy. Improvement in the quality of Sears’ private brands and quality should accelerate under the new leadership, said the ceo.

Augustine noted: “What I’m hoping Mindy will do is take another look at what the presentation in the store is for Lands’ End.” The analyst would prefer to see a Lands’ End shop that would highlight the brand.

The turnaround at Sears, however, reaches far beyond its apparel offering.

The firm is considering a sale of all or part of its credit and financial business, a move that, should it come to fruition, would alter its financial profile. The business, although a concern to investors and perhaps a distraction to management, produced Sears’ profits in the quarter.

While the credit business’ operating income contracted 10.8 percent, it still tipped the scales at $395 million. Revenues inched up 0.9 percent to $1.33 billion. Lacy said it continued to perform as expected: “Delinquencies and charge-offs, as well as profitability, are tracking on plan.”

The domestic provision for uncollectible accounts rose $100 million, or 27 percent, from a year ago, to $471 million. The higher provision was attributed to charge-offs from higher balances, seasoning of the MasterCard portfolio and higher bankruptcies.

Rounding out the firm’s corporate structure, Sears Canada pulled in operating profits of $10 million, up from losses of $105 million a year ago, while corporate and other segments’ operating losses widened to $73 million from $69 million.

Should Sears successfully divest its credit business, Augustine said, “you have a retailer in the midst of a turnaround facing an uphill battle with apparel.” The retailer faces competition in the malls from other anchor stores and aggressive pushes by Lowe’s and Home Depot in home appliances.

Sears is testing the waters on new retail formats, though. A new off-the-mall store will bow in Salt Lake City this fall under the Sears Grand nameplate.