SEARS MERCHANDISING: APPAREL SPURS PROFITS TO A 10-YEAR RECORD

Byline: Thomas J. Ryan

NEW YORK — Sears’ restructuring effort continues to click, as the giant retailer’s Merchandising Group turned in its best performance in 10 years in 1994.
In a report that highlighted strength in apparel, Sears Roebuck Tuesday said its Merchandise Group’s profits rose 17.5 percent in the fourth quarter and 18.4 percent last year. The results were spurred by brisk apparel sales in a holiday period that disappointed most other retailers.
“The merchandise group turned in its best performance since 1984,” Edward A. Brennan, chairman and chief executive officer, said in a statement.
Apparel posted a mid-single-digit gain in the fourth quarter, which came on top of a 20 percent increase in the 1993 period, a Sears spokesman said.
Top sellers were dresses, men’s sportswear and footwear, but warm weather hampered sales of outerwear and sweaters.
Earnings for the Merchandising Group in the quarter ended Dec. 31 rose to $365 million from $310 million. Sales rose 6.9 percent to $9.9 billion from $9.3 billion, with same-store sales ahead 6.8 percent.
In the year, earnings in the Merchandising Group rose to $890 million from $752 million. Sales were up 8.7 percent to $32.1 billion from $29.6 billion, with same-store sales ahead 8.3 percent.
Brennan noted that the same-store sales increase in 1994 came on top of an 8.9 percent gain in 1993, reflecting market shares gains over the past two years.
“The growth was driven by robust durable-goods sales throughout the year and strong apparel sales in the fourth quarter, following the completion of the remodeling of 140 stores,” Brennan said.
Income grew due to higher revenues, a lower provision for uncollectible credit accounts and a lower ratio of selling and administrative expenses to sales.
However, gross margins in the year slipped to 29 percent of merchandise sales from 29.3 percent due to strong home goods sales, which typically have lower margins than apparel and heavy promoting. This was offset by a reduction in selling and administrative expenses to 25.8 percent of sales from 26.6 percent due to top line growth and ongoing expense reductions.
Wall Street roundly praised the results, although Sears’ stock dipped 1/4 to 45 7/8 in active trading Tuesday on the New York Stock Exchange.
“They continue to deliver,” said Rosemary Sisson, bond analyst at Salomon Bros. Sisson noted that the small erosion in margins was impressive considering the brutal pricing climate over the holiday period. “Everybody had to be promotional,” she observed.
“They did exceptionally well,” concurred Peter J. Siris, UBS Securities, pointing out that sales gains continue to outpace the competition. He added, “Very clearly Sears has been picked up share dramatically in apparel.”
Siris expects Sears to continue adding apparel as it increases square footage through store renovations over the next several years, including 140 this year. Projects involve adding selling space by reclaiming unused back rooms or shifting furniture and hardware to freestanding stores. Siris noted that at the average Sears store, only 50 percent of the space was for selling. Renovated units are more typical of department stores, featuring 75 to 80 percent of the space for selling.
Apparel currently represents about 28 to 29 percent of the total mix, though the company has projected increasing it to 40 percent by 1996.
Richard L. Church, at Smith Barney, said Sears “squeezed a little better performance out of the retail operation than what we expected and expects the merchandise group to earn $2.65 against $2.29 in 1994. International operations were weak. Income plummeted 68.4 percent to $6 million in the quarter. Sears blamed lower results at Sears Mexico on a merchandise repositioning and the peso devaluation.
The parent, Sears, Roebuck & Co., recorded a profit of $685 million, or $1.74 a share, in the quarter versus $545 million, or $1.39, a year earlier, including extraordinary gains.
The latest quarter included a $195 million extraordinary gain from the early retirement of debt related to Sears Tower, a $104 million provision for additional California earthquake catastrophe losses at Allstate Corp., and an $80 million charge for Allstate’s early retirement program. Excluding these items, earnings in the latest quarter would have been $674 million, or $1.71 a share.
Sears is planning to spin off its 80.2 percent stake in Allstate in mid-1995.
Sales in the quarter were up 5.3 percent to $15.44 billion from $14.66 billion.
For the full year, Sears Roebuck earned $1.45 billion, or $3.66 a share, which included a $781 million Allstate charge related to the California earthquake. In 1993, income was $2.37 billion after a $635 million gain from the initial public offering of Allstate and $176 million in income from continuing operations, partly offset by a $211 million debt charge. Excluding these special items, earnings rose to $2.12 billion, or $5.38 a share, from $1.69 billion, or $4.33, a year earlier.
Sales advanced 6.1 percent to $53.92 billion from $50.84 billion.
Separately, Arthur C. Martinez, chairman and chief executive officer of Sears Merchandise Group, was named to the company’s board of directors. He is expected to succeed Brennan, who has already indicated he will retire this year.
— Fairchild News Service

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