Sears 3Q Profit: a Penny a Share

Sales, Margins Fall Across Categories

James Mammarella, December 3, 2007

Noting that management was "very disappointed," Sears Holdings last week reported third-quarter earnings of $2 million, or $0.01 per diluted share — down drastically from $196 million, or $1.27 EPS for the same period one year ago.

While the quarterly comparison was colored by last year's $101 million pre-tax gain on "total return swap investments outstanding," the company said the reversal of fortunes "is primarily the result of a $223 million decline in gross margin," itself the result of falling sales and margin rates.

Year-to-date, Sears Holdings has generated net income of $394 million — down 41.2% from earnings of $670 million for the first three quarters last year. Operating income of $778 million is down 30.8% from $1.124 billion in the year-ago period.

"We are very disappointed in our performance for the third quarter. We cannot blame our results entirely on the retail and macro-economic environments," said Aylwin Lewis, Sears Holdings president and ceo.

Revenues fell 3.3% to $11.55 billion, in a nearly $400 million shortfall from last year's $11.94 billion. Total U.S. comp store sales for Sears and Kmart combined fell 4.6% in the quarter.

The company reported soft sales in categories across the board, except for consumer electronics, where it noted margins are notoriously slim. The worst merchandise areas were apparel and lawn and garden.

Gross margins fell 90 basis points to 27.4% of sales for the quarter, and are tracking at a rate of 27.7% for the 39 weeks year-to-date, missing last year's rate by 50 basis points.

Inventory levels were higher than a year ago, but the company said it intends to cut enough during the fourth quarter to come in below the 2006 fiscal year-end level.

Sears Holdings gave no earnings guidance, except to point to external factors including "a weak housing market and growing consumer credit concerns," and to say, "We believe that our sales and gross margin for the balance of fiscal 2007 will likely continue to be pressured by the above-noted unfavorable economic factors."

Shares of Sears Holdings, which closed Nov. 28 at $116.45, traded as low as $98.25 the morning of the announcement.

Sears Holdings Corp

Qtr. 11/3 ($millions) 2007 2006 % change
a.Net income in 3Q 2006 benefited from a $101 million pre-tax gain ($64 million after tax or $0.42 per diluted share) on total return swap investments outstanding. Excluding this gain, earnings per diluted share were $0.85 for 3Q 2006.
Sales $11,548 $11,941 (3.3)%
Oper. Income (EBIT) 46 276 (83.3)
Net income 2 196a (99.0)
Per share (diluted) 0.01 1.27a (99.2)
Average gross margin 27.4% 28.3%
SG&A expenses 24.8% 23.7%
Nine months
Sales $35,489 $36,724 (3.7)%
Oper. Income (EBIT) 778 1,124 (30.8)
Net income 394 670 (41.2)
Per share (diluted) 2.66 4.29 (38.0)
Average gross margin 27.7% 28.2%
SG&A expenses 23.4% 22.8%

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