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Profits sink at Sears

Hampered by weak apparel sales, then hobbled by $80 million in severance and other costs, second quarter profits went into free fall at Sears, Roebuck and Co., dropping 82.8 percent, to $53 million from $309 million.

Alarmed by the poorer-than-expected performance, anxious investors hammered the retailer's stock, at one point driving it down more than 10 percent in unusually heavy trading. But by the time the dust had settled Thursday, July 22, the stock had bounced back, and closed the trading day down $1.00, or 2.9 percent.

Sales at the nation's largest department store chain dipped 1.7 percent, to $8.7 billion from $8.9 billion last year. Overall, domestic same-store sales were off 2.9 percent.

"Like much of the industry, we experienced weak demand in June," said Sears Chairman and CEO Alan Lacy.

The retailer said, "Strong showings in certain key product areas and approximately $38 million earned under the company's long-term alliance with Citigroup, were more than offset by sales declines in most apparel categories, as well as air conditioning."

But a number of business segments, including home, were strong performers, he noted. Lacy said the retailer is "pleased with early customer response in the merchandise categories that are being reset, such as home fashions and kids. In addition, the overall performance of our off-mall formats was positive, including The Great Indoors, Hardware and Dealer Stores."

Not all the news was bad, and average gross margin improved modestly, while continued cost cutting yielded substantial savings. Margins edged up to 27.8 percent from 27.7 percent. And costs were pared to 23.7 percent of sales from 26 percent a year ago, generating savings of $235 million.

Sears, Roebuck & Co.

Qtr. 7/3 (x000) 2004 2003 % chg
Sales $8,700,000 $8,851,000 -1.7
Oper. income (EBIT) 354,000 150,000 136.0
Net income 53,000a 309,000a -82.8
Per share (diluted) 0.24 1.04 -76.9
Average gross margin 27.8% 27.7% --
SG&A expenses 23.7% 26.0% --
6 months 2004 2003 % chg
Sales 16,403,000 16,325,000 0.05
Oper. income (EBIT) 542,000 40,000 --
Net income (806,000)b 501,000b --
Per share (diluted) (3.71) 1.63 --
Average gross margin 27.8% 27.7% --
SG&A expenses 23.7% 26.0% --
a-Second-quarter results include an $11 million provision for uncollectible accounts, down from $461 million in the year-ago period; a $41 million charge stemming from severance costs tied to the restructuring of the home office organization and back-office cost-cutting moves, compared with $28 million in prior-year severance costs; a $39 million charge for additional depreciation expense due to shortening the estimated remaining useful lives for assets sold to Computer Sciences Corp., under a previously announced purchased services agreement; $36 million in miscellaneous income, compared with $13 million a year ago; a $4 million minority interest loss, compared with $7 million a year ago.
b-Six-month results include a $27 million provision for uncollectible accounts vs. $944 milli9on last year; a $41 million charge for severance costs tied to restructuring, compared with $28 million in severance costs the year before; a $39 million additional depreciation charge; $52 million in miscellaneous income vs. $14 million a year ago; an $8 million minority interest loss, compared with $10 million the preceding year; and a one-time charge of $839 million stemming form a change in accounting.

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