Sears Holdings Starts With a Loss

Don Hogsett, June 13, 2005

Hoffman Estates, Ill. — Nicked by a $90 million one-time, non-cash accounting charge, Sears Holdings Corp. — the newly combined Kmart and Sears — recorded a small $9 million first quarter loss.

But pull the non-cash accounting charge out of the equation, and the retailer actually beat the Street, besting analysts' expectations, with a profit of $81 million, or 65 cents a share, exceeding a consensus forecast of a 63 cent per-share profit.

Releasing financial results for the first time as a newly combined company, Sears Holdings reported sales of $7.6 billion during the opening quarter. Same-store sales at Kmart declined 3.7 percent, while total sales were off 2.3 percent, the retailer said, blaming lower transaction volumes and the impact of poor weather on sales of seasonal items.

Merchandise sales and services at Sears U.S. edged up 0.5 percent. The retailer said, “The slight increase was due to strong home services sales partially offset by a 3.1 percent decrease in domestic comparable-store sales.”

Jittery investors were clearly dismayed, and after a long run-up following the merger of Sears and Kmart, the new company's stock took a pounding June 7, the day the news came out, skidding 8.7 percent, or $13.41 a share, to $141.50 in heavy trading on the NASDAQ market. The sell-off continued the following day, the stock declining another $1.30 a share, or 0.9 percent, to $140.20.

After Kmart paid for its buyout of Sears, the combined company's cash position fell to $1.6 billion from $7.4 billion before the deal was completed. Even so, Edward Lampert, the investor who first bought Kmart, then put it together with Sears and now functions as chairman, told shareholders in a letter posted on the Sears Web site that he's still ready to spend more money to upgrade stores and make further acquisitions. Lampert said Sears “will opportunistically pursue” investments in, and acquisitions of, other companies.

(As if Sears and Kmart had been merged at the beginning of 2004
Sears Holdings Corp.

Qtr. 4/30 (x000) 2005 2004 % Change
a. First quarter results include a $7 million gain on the sale of assets, compared with a $36 million gain during the same period a year ago; $17 million in bankruptcy-related recoveries, compared with $7 million last year; miscellaneous income of $8 million, compared with $3 million last year; and a $90 million, non-cash charge stemming from a change in accounting.
Sales $12,763,000 $12,769,000 0.0
Oper. Income (EBIT) 376,000 379,000 -0.8
Net income (78,000)a 38,000a
Average gross margin 26.4% 25.7%
SG&A expenses 24.0% 23.2%

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