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Sears 3Q profits slashed to penny a share as sales, margins fall  

Hoffman Estates, Ill. – Noting that management was “very disappointed,” Sears Holdings today 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, the company said.

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 that, “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 yesterday at $116.45, traded as low as $98.25 this morning and were still down more than 12% at noon.

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