AFTER 25% DECLINE, SEARS WILL REFOCUS

Byline: Evan Clark

NEW YORK — While digesting a 25 percent drop in first-quarter earnings, Sears, Roebuck and Co. detailed for analysts its ongoing hard look at the softer side.
Job number one for the company — fix its core full-line store business, one of the most important aspects of which is getting its apparel back on track.
Matching forecasts previously revised by the company, net income fell 25.1 percent to $176 million, or 53 cents a share, from $235 million, or 65 cents, a year ago. The retail segment saw an operating loss of $56 million which compares to operating income of $21 million in the year-ago first quarter.
Overall revenues for the period ended March 31 dropped 0.8 percent to $8.86 billion compared to $8.93 billion a year ago. Revenues from retail and related services, excluding corporate, credit card and financial revenues, fell 0.3 percent to $6.81 billion. Sales increases at The Great Indoors home fashions stores, Sears online, and hardware stores were offset by declines in full-line stores, commercial sales and automotive stores.
Investors pushed the stock down $1.20 to $36.61 on the New York Stock Exchange Thursday.
In a statement, Alan Lacy, chairman and chief executive, described the retail climate during the quarter as “difficult” and said, “The slowing economy and colder than anticipated weather had an impact on both our hardlines and softlines businesses, as well as our specialty formats.” Increased sales in home fashions and fine jewelry were offset by lower than anticipated results among the other softlines categories.
The gross margin rate for the retail division fell by 70 basis points to 24.3 percent due to increased markdowns in softlines and a shift to hardline goods sales.
Lacy told analysts attending a meeting in Dearborn, Mich., that there’s “a lot going on right now” in the company and its first job will be to reposition its full-line stores which face “much more powerful and higher growth-format competitors.”
Key in this need for change is a revitalization of the firm’s apparel strategy. The Nineties strategy, with the “Softer Side of Sears” tag line, was an attempt to be the value leader in the mall. Lacy acknowledged this strategy didn’t adequately address off-mall competition and failed to meaningfully differentiate the firm’s offering. Also, the company’s softlines suffered from poor image and commanded little customer authority, he said.
The early word on the company’s review of its softlines touched on some positive notes in that few national brands were lacking from Sears’ assortment, the migration to casual was proceeding and the firm’s emphasis on product development and importing should continue.
Leslie Mann, senior vice president of softlines, added, however, that last year Sears edited its apparel assortment, but failed to create the needed clarity.
“We don’t have a bad personality right now in apparel; we don’t have any personality,” she said. While the firm tries to gain relevance with its consumer, she said Sears would much more aggressively position itself in the marketplace. The company’s apparel assortment also has failed to attract the younger, more affluent customer who has responded to Sears’ hard goods, something Sears also plans to remedy.
Ideas to convert the full-line stores to hardlines only, home fashion-decor superstores or mid-market home projects stores were nixed because the revenue channels were “unrealistic” and the capital expenditures too excessive, Lacy noted.
“In any individual part of the store we’re probably going to be outgunned by somebody out there,” said the ceo.
“The opportunity we have going forward is the strength of Sears as an aggregate.” With a relatively fixed store base, he added, the company will have to focus on improving profit margins.
Looking forward, Lacy noted in the statement, “The trends seen in the first quarter are likely to continue through the second quarter.”
He anticipates a high-single to low-double digit percentage decline in earnings for the next quarter. “We are more optimistic about the second half and are forecasting full-year earnings per share to be in line with last year excluding non-comparable items and net securitization income,” he added.

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