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Sears Holdings Hurt by Sears

James Mammarella -- Home Textiles Today, March 2, 2009

Subpar performance at Sears stores walloped Sears Holdings with a billion-dollar reversal in operating profit during 2008, causing a big part of the 93% plunge in full year net earnings as reported last week, although the results did beat analysts' estimates.

U.S. Sears stores became a huge drag on Sears Holdings in 2008, as the division posted an operating loss of $237 million — plummeting from the 2007 divisional operating profit of $784 million — and undercutting the fortunes of the whole company.

While operating profits fell at Kmart and Sears Canada, the divisions did turn in $172 million and $367 million, respectively — but the corporate total was just $302 million, down from $1.59 billion in the prior year.

Full year net profit of $53 million, or 42 cents per diluted share, was 93% below earnings of $826 million, or $5.70 EPS last year.

Fourth-quarter results were not as anemic, but net income still fell 55% to $190 million, while EPS was down 51% to $1.55.

In its press release — the company does not host quarterly earnings conference calls with analysts — Sears Holdings interim ceo and president Bruce Johnson referred to the “very difficult year for the U.S. economy,” and pointed out, “We are pleased with Kmart's performance, which increased its adjusted EBITDA [by 18%] in the quarter from the prior year despite the difficult environment.”

Sears Holdings outlined a number of “strong medicine” steps taken during fiscal 2008, such as 32 planned store closings and two rounds of layoffs, cutting $1.2 billion from inventory, cutting U.S. overhead by $211 million; and financial matters like the repurchase of 2.9 million shares and $29 million in debt, and a reduction in short term borrowing.

The 3,900-unit retailer posted Q4 sales of $13.3 billion, down 11.9%, while full year sales of $46.8 billion fell 7.8%.

Domestic comp sales fell 8.3% in the quarter, comprised of a 5.0% drop at Kmart and an 11.0% fall at Sears. For the year comps fell 8.0%, based on a 6.1% drop at Kmart and a 9.5% fall at Sears.

Last week, Sears Holdings chairman Edward Lampert posted his annual “Message from the Chairman” on the investor section of searsholdings.com — this year the epistle weighed in at 8,516 words, or more than a dozen pages. Lampert summed up with: “I am proud of the people at Sears Holdings, over 300,000 strong. For over one hundred years we have served customers through good times and bad, and have continuously adapted to changes in society and technology to do so. It hasn't always been easy but our associates have always been up for the challenge. In the future there will be many opportunities for us and we intend to seize them.”

Before getting to that point, Lampert wrote at length about his philosophy of managing Sears Holdings Corp. (SHC), of the 2008 restructuring into five business units (operating, support, brands, online, and real estate) and the “five key pillars” of the company's strategy:

  • Creating lasting relationships with customers by empowering them to manage their lives;

  • Attaining best in class productivity and efficiency;

  • Building brands;

  • Reinventing the company continuously through technology and innovation;

  • Reinforcing 'The SHC Way' by living the company's values every day.

Lampert also discussed the Federal Reserve and the Bear Stearns buyout, the nationalization of Fannie Mae and Freddie Mac, free markets, short-selling in the stock market, pension regulation — and finally asserted, “The two most important books that any student of current events should be reading in this environment are both by Friedrich Hayek, the esteemed Austrian economist.” Lampert agrees with Hayek that “socialist policies” and “heavy intervention in markets and society at large” by the government are likely to have damaging consequences.

Applying this information as a means to “put into perspective the environment in which companies like ours are operating,” Lampert noted that Sears Holdings has, since its March 2005 origin in the acquisition of Sears by Kmart, invested $1 billion in its pension funds, cut its debt by $2 billion, and will soon have less that $950 million, “a modest amount,” of long-term legacy debt. He said that rating agencies ought therefore to confer higher value to Sears Holdings' credit metrics and a balance sheet that compares “favorably to competitors like Macy's and J.C. Penney, which carry higher and investment grade credit ratings.”

In concluding his 2008 review, Lampert said the year-long search for a new Sears Holdings ceo continues and “as of the end of the fiscal year, we have not made a single employment offer to anyone to serve as our ceo....But, thanks to Bruce Johnson's efforts and our board's confidence in him as interim ceo, we can be highly selective in our search.”

Sears Holdings Corporation

Qtr. 1/31 (millions) 2009 2008 % change
(loss)
a. Q4 2008 results include a charge of $336 million ($187 million after tax and minority interest or $1.53 per diluted share) related to a goodwill impairment charge at Orchard Supply Hardware subsidiary and costs associated with store closings and severance, of which $284 million ($155 million after tax and minority interest or $1.27 per diluted share) relates to non-cash items. This charge was partially offset by mark-to-market gains on Sears Canada hedge transactions of $9 million ($4 million after tax and minority interest or $0.03 per diluted share), a tax benefit of $8 million ($0.07 per diluted share) related to the resolution of certain income tax matters, and gains on negotiated repurchases of debt securities prior to maturity of $9 million ($5 million after tax or $0.04 per diluted share). Excluding these items, net income for the fourth quarter of fiscal 2008 was $360 million, or $2.94 per diluted share.
b. Full year 2008 results include charges of $437 million ($248 million after tax and minority interest or $1.94 per diluted share) related to goodwill and asset impairments, store closings and severance, of which $360 million ($201 million after tax or $1.57 per diluted share) relates to non-cash items. These charges were partially offset by mark-to-market gains on Sears Canada hedge transactions of $81 million ($33 million after tax and minority interest or $0.26 per diluted share), the positive impact of the reversal of a $62 million ($37 million after tax or $0.29 per diluted share) reserve because of the overturning of an adverse jury verdict relating to the redemption of certain Sears, Roebuck and Co. bonds in 2004, a tax benefit of $8 million ($0.06 per diluted share) related to the resolution of certain income tax matters, and gains on negotiated repurchases of debt securities prior to maturity of $13 million ($8 million after tax or $0.06 per diluted share). Excluding significant items, net income was $215 million, or $1.69 per diluted share, for the full year in fiscal 2008.
Sales $13,280 $15,074 (11.9)%
Oper. Income (EBIT) 325 794 (59.1)
Net income 190a 426 (55.4)
Per share (diluted) 1.55a 3.17 (51.1)
Average gross profit 27.5% 27.7% --
SG&A expenses 21.2% 20.8% --
Fiscal Year
Sales $46,770 $50,703 (7.8)%
Oper. Income (EBIT) 302 1586 (81.0)
Net income 53b 826 (93.6)
Per share (diluted) 0.42b 5.70 (92.6)
Average gross profit 27.1% 27.7% --
SG&A expenses 23.6% 22.6% --


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