Sears records 1Q profit decline

Don Hogsett, April 29, 2002

HOFFMAN ESTATES, ILL — Weighed down by one-time charges tied to a change in accounting and the re-formatting of its Canadian stores, first-quarter profits at Sears, Roebuck and Co. fell by 37.5 percent, to $110 million from $176 million last year.

Taking a $190 million cumulative bite out of the bottom line were three separate one-time items — an accounting change covering the write-down of goodwill; and the cost of converting existing Eaton's stores to the Sears Canada nameplate, offset by a gain from the sale of a part of the company's investment in Advance Auto Parts.

But excluding one-time items, earnings excluding the one-time items more virtually doubled, climbing to $300 million, or 93 cents a share, from $150 million or 45 cents a share the prior year, the company reported.

Driving the earnings improvement was a strong margin improvement and lower costs in the core retail business despite a drop in sales, and a substantial gain in credit and financial products.

Overall sales at Sears grew by 2.0 percent, to $9.0 billion from $8.9 billion last year, driven by a big improvement in credit revenues. Sales in the financial products unit shot up by 26.0 percent, to $1.4 billion from $1.1 billion last year, offsetting a small decline in merchandise sales and services. Sales in the core retail business, capped by sluggish consumer spending, most notably at department stores, dipped by 1.4 percent, to $7.6 billion from $7.8 billion last year.

Despite the slight drop-off in sales, average gross margin scored solid gains in the retail segment, widening by 170 basis points, or 1.7 percentage points, to 26.0 percent from 24.3 percent the preceding year. At the same time, the retailer hacked away at costs, reducing operating expenses by 1.2 percent. Measured as a percentage of sales, operating costs declined by 20 basis points, to 22.3 percent from 22.5 percent a year ago. The retailer credit decreases in costs at full-line stores and direct-to-customer, partly offset by higher investment in The Great Indoors format.

"Despite lower sales, our retail and related services profits showed a solid increase, driven by margin rate improvements across virtually all of our retail formats," said Chairman and ceo Alan Lacy.

Looking ahead, Lacy commented, "due to the strong first-quarter performance, we expect 2002 full-year comparable earnings per share to increase approximately 17 percent from the prior-year amount of $4.22."

Sears, Roebuck & Co.

Qtr. to 3/30 (x000) 2002 2001 % change
Average gross margin and SG&A expenses are stated as a percentage of sales for merchandise sales and services, excluding credit and financial products. a-Total sales in the first quarter include $1.4 billion in sales form credit and financial products, up 26.0 percent from $1.1 billion the previous year. b-First-quarter results include a $381 million provision for uncollectible accounts, up 99.5 percent from $191 million the preceding year. Results also include a $111 million impairment charge and a $208 million charge stemming form a change in accounting. Also included in first-quarter results are $78 million in miscellaneous income, up from $1 million a year ago; and $32 million in earnings from a minority interest.
Sales $9,037,000a $8,857,000a 2.0
Oper. income (EBIT) 759,000 584,000 30.0
Net income 110,000b 176,000b -37.5
Per share (diluted) 0.34 0.53 -35.8
Average gross margin 26.0% 24.3%
SG&A expenses 22.3% 22.5%

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