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Sears Holdings Dives into Red Ink

James Mammarella -- Home Textiles Today, June 2, 2008

In a sure sign that painful adjustments are still ahead, Sears Holdings reported a first quarter 2008 net loss of $56 million – compared to net profit of $223 million in the same period one year ago.

The $279 million downward earnings swing came as sales slumped 5.8% to $11.1 billion for the quarter – a falloff of $679 million during the 13-week period ended May 3.

Comp store sales fell 9.8% at Sears U.S., and were down 7.1% at Kmart, for a combined U.S. comp falloff of 8.6%.

Across its domestic stores, the company noted that most major categories scored negative comps, singling out home appliance, lawn and garden, and apparel for particular slides.

Gross margin declined 90 basis points, to 27.3% of sales from 28.2% of sales last year. SG&A costs, meanwhile, ballooned 290 basis points to 25.4% of sales from 22.5%.

Much of the SG&A differential was the result of year-ago benefits, such as legal settlements, benefit plan amendments, and insurance recoveries. The company also suffered somewhat exaggerated SG&A costs in Sears Canada operations, due to changes in foreign currency exchange rates.

Bruce Johnson, interim ceo of the 3,900-store retailer, said sales declines have "moderated somewhat" in the last few weeks, and he sounded a steadfast note. "As a result of actions we have taken and will continue to take to manage our costs, our current forecast for 2008 reflects higher EBITDA than we achieved last year," Johnson said in a prepared statement.

That will be no mean feat, as Sears Holdings reported $594 million in adjusted EBITDA for the first quarter of 2007 — but just $208 million so far this year.

Sears Holdings Corporation

Qtr. 5/3 (millions) 2008 2007 % change
(loss)
a. Fiscal 2007 first quarter results benefited from several one-time items, including a $30 million gain related to the legal settlement of a contractual dispute, a curtailment gain of $27 million related to certain amendments made to Sears Canada's post-retirement benefit plans, and a gain of $15 million for insurance recoveries received on claims filed for certain of our property damaged by hurricanes during fiscal 2005.
b. Selling and administrative expenses increased $99 million as compared to first quarter last year, of which $52 million related to Sears Canada and $47 million related to domestic operations. The increase in Sears Canada was primarily due to changes in foreign currency exchange rates.
Sales $11,068.0 $11,747.0 (5.8)%
Oper. Income (EBIT) (8.0) 409.0 --
Net income (56.0)a 223.0a --
Per share (diluted) (0.43)a 1.45a --
Average gross margin 27.3% 28.2% --
SG&A expenses 25.4%b 22.5%b --


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