SPECIAL CHARGES DEFLATE SEARS’ FIRST-QUARTER NET

Byline: Evan Clark

NEW YORK — One-time items took a bite out of Sears, Roebuck & Co.’s first-quarter profits, but a same-store sales decline in apparel that approached double-digits didn’t help either.
Reflecting on the firm’s 37.5 percent drop in net income, chairman and chief executive officer Alan Lacy acknowledged Sears “still has a long way to go.” However, the process is well under way, with centralized checkout installed in 800 of its 870 stores by the end of this month.
While the firm still faces a myriad of execution risks associated with its restructuring, the ceo on a conference call with analysts, maintained: “We’re on pace to achieve the 50 percent improvement in operating income by 2004.”
Net income for the quarter dropped to $110 million, or 34 cents a share, compared with $176 million, or 53 cents, a year ago.
One-time items aggregating in a $190 million, or 59 cents per share, reduction in the period’s bottom line, included an accounting change, a charge to convert the firm’s Eaton’s stores to the Sears Canada nameplate and a gain from the partial sale of the firm’s Advance Auto Parts investment. The year-ago quarter also included net securitization income of $26 million, or 8 cents.
Exclusive of the special items, profits doubled to $300 million, or 93 cents a share, compared with $150 million, or 45 cents, a year ago.
Adjusted earnings per share, at the time of their preannouncement last week, beat Wall Street’s estimates by 32 cents and drove Sears’ stock to a four-year high of $54.18 on April 10. On Thursday, shares of the Hoffman Estates, Ill.-based retailer rose 4 cents to close at $53.75 on the New York Stock Exchange.
Overall, revenues for the 13 weeks ended March 30 inched up 2 percent to $9.04 billion from $8.86 billion during the year-ago quarter. Comparable-store sales decreased 2.9 percent in the quarter and are expected to continue dropping in the low- to mid-single-digit range for the rest of the year.
Paul Liska, executive vice president and chief financial officer, on the call, added that comparable-store sales in apparel were down by high-single digits. Sales of spring apparel also were down despite the earlier Easter, “due, in part, to lower promotional activity and fewer clearance sales, the latter the result of having less liability inventory.”
Greater efficiency saved the day in the retail and related services unit, which posted an operating income, excluding one-time items, of $87 million compared with a year-ago loss of $56 million. The top line continued to suffer, though, as revenues slid 1.4 percent to $7.65 billion.
In a statement, Lacy noted: “These results demonstrate the benefits of improved inventory management, improved promotional profitability and providing our customers with more relevant merchandise assortments.”
Retail gross margins, however, perked up 170 basis points to 26 percent for the quarter on strengthening in nearly all of the firm’s retail formats.
“In the full-line stores, the margin improvement was driven by better product sourcing, reduced promotional and clearance activity and the exit of lower margin merchandise lines,” said Liska.
Overall, domestic retail inventories for the quarter declined by $616 million, or approximately 10 percent on a first-in- first-out, or FIFO, basis, compared with a year ago.
On the call, Lacy said Sears’ new classic brand for women, men and children, which will be launched this fall, “is another example of us becoming less department store-like.
“We’ve traditionally had a number of propriety brands presented as life styles [and] presented as collections on the floor, which has basically chopped up the selling floor and none of them have really achieved any brand recognition or critical mass with customers,” he said.
Replacing eight current proprietary brands — including Crossroads and Trader Bay — with one brand will offer a more consistent message and clearer value proposition to Sears’ customers, said the ceo, who expects the brand to produce “several hundred million dollars” of annual volume once it’s fully implemented.
Operating income for the credit and financial products business jumped 21.4 percent to $443 million, excluding one-time items. Sales jumped 26 percent to $1.39 billion.
Sears’ provision for uncollectible accounts increased 11.1 percent to $371 million, on a comparable basis. The net charge-off rate for the quarter increased 36 basis points to 5.43 percent and year-over-year delinquencies decreased 19 basis points to 7.31 percent.

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