Sears Posts Big Profit Gains as Sales Volume Shrinks

James Mammarella, March 1, 2010

With U.S. Sears stores in a fourth-quarter 6.1% comp store drop, the 1.7% comp gain by Kmart made the downstairs chain a hero and, along with tightly controlled expenses, helped produce major profit gains by Sears Holdings for Q4 and the full 2009 retail year.

The scale of the surge in profitability by Sears Holdings was evident its report of a 141.3% increase in Q4 earnings per share, to $3.74. For the full year, EPS zoomed 373.8% to $1.99.

These gains came even as quarterly retail sales were flat at $13.2 billion, and full year sales contracted by 5.8% to $44.0 billion.

The company offered somewhat different readings of its gains. For Q4, Sears said the upswing was “the result of the significant items noted below [mainly the amounts for pension, store closings and severance] and an increase in gross margin dollars due to the increase in gross margin rate.”

For the full year, Sears pointed to “the result of reductions in selling and administrative expenses, partially offset by lower gross margin dollars given lower overall sales.”

Sears Holdings interim president and ceo Bruce Johnson noted that the Kmart comp gain was the second consecutive quarterly uptick for that division. “Our improved performance is especially encouraging given the challenging economic environment, particularly related to big-ticket items,” he said in a release. The company does not hold analyst calls.

The 3,900-unit merchandiser said it closed 27 underperforming units during Q4 and shuttered 62 locations for the full year.

Edward Lampert, chairman, after addressing Sears Holdings performance and outlook in his annual “Chairman's Letter,” then wrote at length about government tax policy, pension fund regulations and in particular, taxes on e-commerce.

Lampert underscored the company's initiative to connect with shoppers more directly through its and efforts, which include home improvement and style information, shopping rewards programs and the like.

He emphasized cost control, noting, “We delivered better results by focusing on product sourcing, supply chain efficiencies, franchising, labor model optimization, and consolidation of functions. Year over year, our gross margin rate was up 60 basis points and we reduced our selling and administrative expenses by over $400 million.”

He also touched on the importance of Sears Holdings' brand exclusives, including Lands' End, Cannon, Jaclyn Smith and Country Living. Lampert indicated that the company will build on the expansion of Lands' End shop-in-shops, which were added to 68 Sears stores last year — but made no specific mention of the soft home business in any respect.

As part of his letter, Lampert provided a footnote that links to a lengthy rebuttal of the anti-sales tax position of dominant online retailer The rebuttal was conducted under the aegis of the Center on Budget and Policy Priorities, a think tank that concentrates on “fiscal policy and public programs that affect low- and moderate-income families and individuals.”

Sears Holdings Corporation

Qtr. 1/30 (millions) 2010 2009 %change
a. Q4 per share diluted earnings of $3.74 included store closing costs and hedge gains or losses which amounted to $0.25 per share net; without including these amounts, earnings per diluted share = $3.99.
Sales $13,247 $13,280 0%
Oper Income (EBIT) $749 $325 130.4
Net income $430 $190 126.3
Per share (diluted) $3.74a $1.55 141.3
Average gross margin 28.5% 27.5% --
SG&A expenses 21.0% 21.2% --
12 months
Sales $44,043 $46,770 (5.8)%
Oper Income (EBIT) $713 $302 136.1
Net income $235 $53 343.4
Per share (diluted) $1.99 $0.42 373.8
Average gross margin 27.7% 27.1% --
SG&A expenses 24.2% 23.6% --

Having referred, in previous annual letters, to everything from SEC policy on short selling to New York Giants Super Bowl winning quarterback Eli Manning, this year Lampert directed readers to the recent book “Intellectuals and Society” by Hoover Institution economist Thomas Sowell.

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