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Sears banks on retail; credit biz on the block

Seeking to boost its sagging share price and bottom line, Sears, Roebuck & Co. is putting up for sale its $30 billion credit card portfolio. The business has vexed management in recent years as consumers stopped paying their bills.

With about 25 million active accounts, the business makes up almost two-thirds of Sears' overall profits, but has been a source of problems in recent years as consumer delinquencies soared in a weakening economy, and the retailer ran into costly legal problems over its debt collection tactics.

The credit card business has been immensely profitable, generating net income of $1.5 billion last year. But as consumers stopped paying their bills, the retailer was forced to boost its provision for doubtful accounts to a staggering $2.3 billion last year, up almost 70 percent from 2001.

Selling off the credit business would not only provide some balm for the bottom line, it would raise billions of dollars in cash, allowing the company to pay down debt and focus on turning around a struggling retail business that has now posted same-store sales declines for 18 consecutive months.

Wall Street clearly embraced the idea, and investors drove the retailer's stock price up by 12.5 percent, or $2.69 a share, to $24.14 in unusually heavy trading on the New York Stock Exchange.

In a conference call with investors, Sears chairman and ceo Alan Lacy said a sale could be completed by the second half of the year, bringing a "premium" price and leaving the company virtually free of debt. But he declined to confirm one estimate of $6 billion to $7 billion.

Wiping out the company's debt would eliminate interest expense that totaled more than $1.1 billion last year.

Lacy told investors, "This is the fourth time in my tenure that I have gone through the process of thinking about whether or not the credit business should be an ongoing part of the business of Sears." But now, he said, the retail business, while still needing improvement, is strong enough to stand by itself. And the sale could bring in several billion dollars, creating "a very powerful shareholder value opportunity."

Even given last week's bump-up, Sears' stock is selling for less than half its price, in the $50s, five years ago. "Having our share price at this ridiculously low level is unacceptable," he said.

The move met with a muted reaction from the nation's big debt rating agencies. Standard & Poor's said it's mulling a downgrade of Sears' credit rating because it would put more pressure on an already challenged retailing business and strip the company "of an historically important foundation to the credit rating and its associated earnings and cash flow."

Fitch Ratings Service views a potential sale as something of a mixed blessing and said the outlook for the retailer remains negative.

"The sale of the credit business would remove what has historically been Sears' largest and most consistent source of earnings and cash flow." But on the upside, Fitch added, "it is assumed that the proceeds from the sale would be used to pay down debt levels, which would leave Sears with a stronger balance sheet and a more focused business operation."

Fitch said its negative outlook for the company "continues to reflect the difficult operating environment and uncertainty as to the timing of the completion of the turnaround of its retail business."

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