Sears Holdings hurt by Sears

Q4 profit down 51%, FY net down 93%

James Mammarella, February 26, 2009

Hoffman Estates, Ill. – Subpar performance at Sears stores walloped Sears Holdings with a billion-dollar reversal in operating profit during 2008, causing a big part of the 93% plunge in full year net earnings as reported today, although the results did beat analysts’ estimates.

U.S. Sears stores became a huge drag on Sears Holdings in 2008, as the division posted an operating loss of $237 million – plummeting from the 2007 divisional operating profit of $784 million – and undercutting the fortunes of the whole company.

While operating profits fell at Kmart and Sears Canada, the divisions did turn in $172 million and $367 million, respectively – but the corporate total was just $302 million.

Full year net profit of $53 million, or 42 cents per diluted share, was 93% below earnings of $826 million, or $5.70 EPS in the prior year.

Fourth-quarter results were not as anemic, but net income still fell 55% to $190 million, while EPS was down 51% to $1.55.

In its press release – the company does not host quarterly earnings conference calls with analysts – Sears Holdings interim ceo and president Bruce Johnson referred to the “very difficult year for the U.S. economy,” and pointed out, “We are pleased with Kmart’s performance, which increased its adjusted EBITDA [by 18%] in the quarter from the prior year despite the difficult environment.”

Sears Holdings outlined a number of “strong medicine” steps taken during fiscal 2008, such as 32 store closings and two rounds of layoffs, cutting $1.2 billion from inventory, cutting U.S. overhead by $211 million; and financial matters including the repurchase of nearly 3 million shares and $29 million in debt, along with a dramatic reduction in short term borrowing.

The 3,900-unit retailer posted Q4 sales of $13.3 billion, down 11.9%, while full year sales of $46.8 billion fell 7.8%.

Domestic comp sales fell 8.3% in the quarter – comprised of a 5.0% drop at Kmart and an 11.0% fall at Sears – and for the year declined 8.0%, based on a 6.1% drop at Kmart and a 9.5% fall at Sears.

Sears Holdings chairman Edward Lampert today posted his annual “Message from the Chairman” on the investor section of – this year the epistle weighed in at 8,516 words, or more than a dozen pages. Lampert sums up with: “I am proud of the people at Sears Holdings, over 300,000 strong. For over one hundred years we have served customers through good times and bad, and have continuously adapted to changes in society and technology to do so. It hasn’t always been easy but our associates have always been up for the challenge. In the future there will be many opportunities for us and we intend to seize them.”

Before getting to that point, Lampert writes at length about his philosophy of managing Sears Holdings Corp. (SHC), of the 2008 restructuring into five business units (operating, support, brands, online, and real estate) and the “five key pillars” of the company’s strategy:

1. Creating lasting relationships with customers by empowering them to manage their lives

2. Attaining best in class productivity and efficiency

3. Building our brands

4. Reinventing the company continuously through technology and innovation

5. Reinforcing “The SHC Way” by living our values every day”

Lampert also discusses the Federal Reserve and the Bear Stearns buyout, the nationalization of Fannie Mae and Freddie Mac, free markets, short-selling in the stock market, pension regulation – and finally asserts, “The two most important books that any student of current events should be reading in this environment are both by Friedrich Hayek, the esteemed Austrian economist.” Lampert agrees with Hayek that “socialist policies” and “heavy intervention in markets and society at large” by the government are likely to have damaging consequences.

Applying this information as a means to “put into perspective the environment in which companies like ours are operating,” Lampert notes that Sears Holdings has since its March 2005 origin in the acquisition of Sears by Kmart invested $1 billion in its pension funds, cut its debt by $2 billion, and will soon have less that $950 million, “a modest amount,” of long-term legacy debt. He points out that rating agencies ought therefore to confer higher value to Sears Holdings’ credit metrics and a balance sheet that compares “favorably to competitors like Macy’s and J.C. Penney, which carry higher and investment grade credit ratings.”

In concluding his review of 2008, Lampert states that the year-long search for a new Sears Holdings ceo continues and “as of the end of the fiscal year, we have not made a single employment offer to anyone to serve as our ceo.” He says, “But, thanks to Bruce Johnson’s efforts and our board’s confidence in him as interim ceo, we can be highly selective in our search.”

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