Sears boosts 2Q earnings with credit

Don Hogsett, July 22, 2002

Shucking off more than $800 million in special charges that dogged the bottom line a year ago, and lifted by surging profits in its growing credit business, Sears, Roebuck & Co. recorded a second-quarter profit of $420 million, bounding back from a year-ago loss of $197 million.

Underscoring the importance of the growing credit business to the nation's fourth-largest retailer, the credit and financial services operation accounted for roughly 14 percent of sales during the quarter but brought in almost 60 percent of the company's operating profits. Operating profits in the credit business grew by 19.4 percent in the quarter, to $412 million, while credit sales were up just 3.5 percent, to $1.3 billion.

Given the big jump-start from the credit segment, Sears' earnings solidly beat the Street, with a per-share profit of $1.31 easily besting a consensus Wall Street forecast of a $1.14 per-share profit.

Operating profits in the giant earnings segment, while still lagging far behind, showed considerable improvement, shooting up by 40.8 percent, to $300 million from $213 million a year ago, lifted by stronger margins and lower costs.

The earnings improvement in the retailing division was earned the hard way, in spite of lower sales, which slipped by 1.1 percent, to $8.75 billion from $8.83 billion a year ago.

"First-half earnings exceeded our expectations," said Alan Lacy, chairman and ceo, and the retailer boosted its profit forecast for all of 2002, to about $5.15 a share, up about 22 percent from last year's per-share profit of $4.22.

"Profits for the quarter showed solid increases across all segments," said Lacy. "Margin rate improvements continue to benefit the retail business, while Credit and Financial Products results were driven by the growth of the Sears Gold MasterCard product and a favorable interest rate environment.

Briefly referring to home fashions during its conference call, Lacy said second-quarter sales were down in the mid-20's due to the exit from the installed floor coverings and the custom decorating businesses.

Excluding these, he said, home fashion sales were down in the low single-digits. In comparison, he added the balance of soft line sales, which is apparel, were down in the low teens.

By the end of October, Sears will have remodeled 50 of its stores, which will include the rollout of home accents and closet shop. These new businesses will be in 566 stores by then. In spring, 400 stores will have been remodeled, by fall '03 the remodel program will be complete, Lacy stated.

Sears, Roebuck & Co.

Qtr. 6/29 (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 second quarter include $8.75 billion in merchandise sales and services, down 0.9 percent from $8.8 billion last year; and $1.39 billion in credit and financial products revenues, up 3.0 percent from $1.35 billion last year. For the six months year-to-date, total sales include $16.40 billion in merchandise sales and services, down 1.1 percent from $16.59 billion a year ago; and $2.78 billion in credit and financial products revenues, up 13.3 percent from $2.45 billion in 2001.
b-Second quarter results include a $401 million provision for uncollectible accounts, up 11.1 percent from $361 million a year ago; and an income-tax benefit of $249 million, compared with a year-before tax payment of $112 million; the 2001 quarter included a $522 million charge for previously securitized receivables and $287 million in special charges and impairments. For the six-month period, results include a $782 million provision for uncollectible accounts, up 41.7 percent from $552 million a year ago; $111 million in special charges and impairments, down 61.3 percent from $287 million last year; a $397 million income-tax benefit vs. a prior-year tax payment of $14 million; a $191 million charge stemming from a change in accounting for uncollectible accounts; and a $208 million charge stemming form a change in accounting for goodwill. The six-month period in 2001 included a $522 million provision for previously securitized receivables.
Sales $10,142,000a $10,183,000a -0.4
Oper. income (EBIT) 1,564,000 1,488,000 5.1
Net income 420,000b (197,000)b
Per share (diluted) $1.31 $(0.60)
Average gross margin 38.0% 37.2%
SG&A expenses 25.5% 25.5%
Six months
Sales 19,179,000a 19,040,000a 0.7
Oper. income (EBIT) 2,914,000 2,478,000 17.6
Net income 339,000b (21,000)b
Per share (diluted) 1.05 (0.06)
Average gross margin 37.0% 35.1%
SG&A expenses 26.2% 25.8%

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