Byline: Vicki M. Young

NEW YORK — Sears, Roebuck & Co., making good on its first-quarter profits preview earlier this month, reported Monday a 71 percent increase in earnings per share.
Sears posted $235 million in income, or 65 cents per share, for the quarter ended April 1, compared with $146 million, or 38 cents, in the year-ago period. Revenue for the quarter from sales, services and credit income was up 3.7 percent to $8.97 billion.
The earnings-per-share result was in line with Wall Street expectations, since many analysts had upped their estimates based on Sears’ April 5 guidance report. The original earnings-per-share estimate was in the range of 46 cents.
Shares of Sears closed Monday at 36 3/4, up 3/16, in trading on the New York Stock Exchange.
At first blush, the results don’t look shabby. However, the reasons for the increase in earnings suggest that much of the improvement could just be a short-term gain. As Sears noted, the rally in the quarter was due to the “strength of Sears retail and credit businesses, coupled with the company’s share repurchase program.”
Arthur C. Martinez, who will retire as chairman and chief executive officer by yearend, explained in a statement that his company’s “robust cash flow allowed us to repurchase over 17 million outstanding shares of Sears stock, further enhancing earnings-per-share growth.”
Higher retail sales and improved gross margins gave the retailer operating income growth in the latest quarter, while the increase in credit income was helped by a lower provision for uncollectible accounts and reductions in selling and administrative expenses.
After the preview, some analysts expressed concern that the drivers for this quarter’s results were onetime benefits.
Jeff Edelman, broad lines retail analyst at PaineWebber, wrote in a research report that the step-up in first-quarter earnings “is largely due based on nonrecurring benefits and thus not necessarily sustainable, longer term.” The boost from the stock repurchase has “magnified impact on the seasonally small first quarter,” he wrote.
He added, “We estimate more than half of the step-up in earnings is once again coming from Sears’ credit operations. Specifically, we believe this is a on-time gain in credit due to reversals in charge-offs and the bad debt reserve.”
Michael B. Exstein, retail analyst at Credit Suisse First Boston Corp., said in a research report this month that he believed the change in Sears’ guidance was largely credit-driven. “Although credit quality has improved, we believe it will become more challenging in the future.”
Exstein explained that the retailer’s credit card portfolio was likely to be a smaller contributor to results in the future because growth in receivables for proprietary cards was “unlikely.”
As for retail sales in the first quarter, Martinez said Sears had increases in appliances, lawn and garden, and sporting goods, contributing a 2.7 percent rise in domestic comparable-store sales. “In soft goods, homeware, fine jewelry, cosmetics and fragrances were strong, but were offset by women’s, men’s and children’s apparel results which were impacted by the Easter holiday shift,” he explained.
PaineWebber’s Edelman noted earlier this month, “While sales have been improving, the apparel side still continues to underperform, despite being up against easy comparisons. By our estimates, soft-line comps declined 3.3 percent in [the first quarter] versus a positive 3.3 percent comp for hard lines in that same period.”
As reported, Martinez’s plan to make shopping easier at Sears involves reducing the size of its apparel business, resulting in a double-digit reduction in the vendor list this year, for the second year in a row.
In the latest quarter, it was Sears Canada that contributed the biggest boost to the retailer’s bottom line.
The operation’s revenue jumped 19 percent to add $966 million to Sears’ total $8.97 billion in revenues. As reported, Sears Canada Inc. chairman Paul Walters has emerged as a leading candidate to become the new chairman and ceo of Sears in the U.S. when Martinez retires.
Neither Edelman nor Exstein is convinced that a turnaround is in the works at Sears. According to Edelman, Sears continues to search for direction, and Martinez’s replacement “undoubtedly will have to spend time putting together a game plan, with the hopes of a long-lasting turnaround further down the road.” Exstein pointed out that Sears still faced intense competition in the second and third quarters from Wal-Mart, which is rolling out its private label credit card, and Home Depot.
PaineWebber has a “neutral” rating on the company, while Credit Suisse First Boston rated the company a “hold.”