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Lands' End lifts Sears' 4Q profits

Don Hogsett -- Home Textiles Today, January 20, 2003

Breezing past Wall Street expectations, fourth-quarter profits at Sears, Roebuck and Co. raced ahead by 71.7 percent, to $848 million from $494 million, as substantially wider margins and a lift from the new Lands' End operation offset continued deterioration in the company's credit and financial services business.

In a further big bump to earnings, the retailer raked in $179 million on an after-tax basis, or 56 cents a share, as it sold its remaining stake in Advance Auto Parts Inc.

Excluding one-time items, earnings per share came in at $2.11, breezing past a consensus Wall Street forecast of $1.91 compiled by Thomson Financial/First Call.

Cheered by the better than expected earnings reports, Wall Street traders rewarded Sears' stock, pushing it up in value by 2.2 percent, or 59 cents a share, to $27.29, in mid-day trading Jan. 16, an otherwise down day for stocks.

Overall sales at the big retailer climbed by 2.4 percent, to $12.5 billion form $12.2 billion, with credit sales rising almost twice as fast as merchandise revenues. Merchandise sales and services moved up by 2.2 percent, to $11.1 billion from $10.8 billion, while credit sales moved up by 4.1 percent, to $1.5 billion from $1.4 billion.

But with the growth in the credit business has come a big hit to the bottom line. With consumers defaulting on credit card debt in a soft economy and a weak jobs environment, Sears recorded a $576 million provision for uncollectible accounts, up 38.8 percent from $415 million last year. For all of last year, Sears said it's writing off about $2.3 billion in bad consumer debt, up 68.2 percent from $1.3 billion last year. That means that Sears wrote off last year just about as much as it took in from credit sales for the entire fourth quarter.

In a big assist to the bottom line, average gross margin — calculated on merchandise sales and services, excluding credit — jumped up by 190 basis points, or 1.9 percentage points, to 30.0 percent from 28.1 percent a year ago. Increased margin strength, the retailer said, was due to the inclusion of Lands' End and improved inventory management and product sourcing in full-line stores.

Offsetting some of the margin strength, expenses rose by 130 basis points, or 1.3 percentage points, due to additional expenses related to the inclusion of Lands' End and higher investment in The Great Indoors.

"Despite a challenging retail environment and soft sales, we made strong progress in improving our core retail operations," said Alan Lacy, chairman and ceo. "The acquisition of Lands' End, continued improvement in merchandise assortments, inventory management and vendor sourcing, and an improvement in the cost structure of the full-line stores, all contributed to increased profitability."

Sears, Roebuck & Co.

Qtr. 12/28 (x000) 2002 2001 % change
Average gross margin and SG&A expenses are calculated as a percentage of merchandise sales and services, excluding credit revenues.
a-Total company sales, including $11.1 billion in merchandise sales and services for the fourth quarter, up 2.2 percent from $10.8 billion in the year-ago period; and $1.5 billion in credit revenues for the quarter, up 4.1 percent from the preceding year.
b-For all of 2002, merchandise sales and services totaled $35.7 billion, down 0.2 percent from $35.8 billion in 2001; and $5.7 billion in credit revenues, up 8.3 percent from $5.2 billion the prior year.
c-Fourth-quarter earnings include a $576 million provision for uncollectible accounts, up 38.8 percent from $415 million last year; a pre-tax gain of 274 million from the sale of the company's investment in Advance Auto Parts Inc., compared with miscellaneous income of $15 million in the prior-year period; earnings in the year-ago period included a $255 million one-time charge stemming from productivity initiatives, product category exits, and the Exide battery litigation settlement.
d-For all of 2002, net income included a $2.3 billion provision for uncollectible accounts, compared with $1.3 billion last year; $111 million in special charges and impairments, compared with $542 million last year; $372 million in miscellaneous income, including proceeds from the sale of the company's interest in Advance Auto Parts, compared with $45 million in 2001; and a $208 million charge stemming from a change in accounting for goodwill.
Sales $12,518,000 $12,220,000b 2.4
Oper. income (EBIT) 1,937,000 1,817,000 6.6
Net income 848,000b 494,000b 71.7
Per share (diluted) 2.67 1.52 75.7
Average gross margin 30.0% 28.1%
SG&A expenses 23.6% 22.3%
12 months
Sales 41,366,000c 40,990,000c 0.9
Oper. income (EBIT) 5,596,000 5,342,000 4.8
Net income 1,376,000b 735,000b 87.2
Per share (diluted) 4.29 2.24
Average gross margin 28.2% 26.6%
SG&A expenses 25.9% 24.9%


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