Mixed profit story as Sears pares its forecast

Don Hogsett, July 21, 2003

HOFFMAN ESTATES, IL Raising $93 million from the previously announced sale of bad debt in its credit card business, Sears, Roebuck and Co. boosted second-quarter profits by 34.9 percent, to $309 million from $229 million a year ago.

But honing in on the company's core retailing business — and giving an idea of what Sears will look like once it peels off its entire credit operation to Citigroup later this year — operating profits in the retailing business plunged by almost 40 percent, declining by 39.0 percent, to $183 million from $300 million last year, a daunting profit shortfall of $117 million.

Overall company profits, combining retail and credit, were relatively flat, edging up by 0.5 percent, to $10.2 billion from $10.1 billion last year. Merchandise sales actually performed somewhat better, improving by 0.9 percent, to $7.8 billion from $7.7 billion..

Putting operating profits under pressure in the core retail business was a triple whammy of weaker margins, rising costs and higher interest costs. Average gross margin narrowed by 10 basis points, or one-tenth of a percentage point, to 27.1 percent from 27.2 percent a year ago. The higher cost of sales in the quarter — $5.66 billion vs. $5.60 billion last year, pulled $60 million away from the bottom line. At the same time operating costs jumped up by 110 basis points, or 1.1 percentage points, to 22.2 percent of sales form 21.0 percent a year ago. In absolute dollars, costs climbed higher by 6.6 percent, to $1.7 billion from $1.6 billion, stripping another $107 million out of the unit's operating profits.

In one more blow to the retailing unit's bottom line, interest expense more than tripled, to $16 million from $5 million, pulling another $11 million out of earnings.


QTR. 6/28 (x000) 2003 2002 % change
Average gross margin and SG&A expenses are stated for the company's merchandise sales and services, unit, excluding the credit division.
a-Total sales and services, combining merchandise sales and services and credit revenues. Merchandise sales and services increased by 1.1 percent during the quarter, to $8.9 billion from $8.8 billion last year. For the six months, merchandise sales and declined by 0.5 percent, to $16.3 billion from $16.4 billion. Credit revenues during the first quarter declined by 3.2 percent, to $1.3 billion from $1.4 billion. For the six months, credit revenues declined by 1.0 percent.
b-Second-quarter net income net income includes a $461 million provision for uncollectible accounts, down 34.2 percent from a year ago; and a $7 million loss form the company's minority interest in a joint venture, unchanged from last year. Six-month net income includes a $944 million provision for uncollectible accounts, down 12.8 percent from $1.1 billion a year ago; and a $10 million loss from the company's minority stake in a joint venture, compared with a prior-year profit of $25 million. 2002 net income was also reduced by a $208 million charge stemming form a change in accounting for goodwill.
Sales $10,196,000a $10,142,000a 1.1
Oper. income (EBIT) 1,237,000 1,343,000 -7.9
Net income 309,000a 229,000a 34.9
Per share (diluted) 1.04 0.71 46.5
Average gross margin 27.1% 27.2%
SG&A expenses 22.2% 21.0%
Sales 19,076,000a 19,179,000a -0.5
Oper. income (EBIT) 2,308,000 2,483,000 -7.0
Net income 501,000b 339,000b 47.8
Per share (diluted) 1.63 1.05 55.2
Average gross margin 27.3% 27.0%
SG&A expenses 27.2% 26.2%

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