Sears Reports $112M Q3 Loss

Alan Wolf -- TWICE, 11/19/2009

Hoffman Estates, Ill. - Sears Holdings reported a net loss of $112 million for its fiscal third quarter, ended Oct. 31, citing soft sales and higher costs due to store closings, severance payments and pension plan obligations.

Total revenues fell 4.7 percent to $10.2 billion, due primarily to lower comp-store sales at Sears and 56 fewer Kmart and Sears full-line stores than the year-ago period.

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The sales decline was partially offset by an increase of $42 million due to the favorable impact of foreign currency exchange rates.

Domestic comp-store sales declined 2.3 percent, reflecting flat comps at Kmart and a 4.6 percent decline in comp sales at Sears. The latter were due in part to decreases in Sears' major appliance business, although majap sales declines have lessened from previous quarters, the company said.

The company cut its operating loss by $96 million year over year, to $106 million, which included expenses of $54 million related to domestic pension plan obligations and store closings and severance. The retailer closed seven underperforming stores during the quarter and 14 locations during the year-ago period.

Improved inventory management, which resulted in lower inventory levels and reduced markdowns, and well as better margins on major appliances, led to an increase in Sears' gross margin rate, to 27.2 percent, while selling and administrative expenses were trimmed by $101 million.

W. Bruce Johnson, who remains interim CEO, said the company saw "some encouraging signs of progress in the third quarter," including the higher margin rates, reduced costs, modest 0.5 percent comp gain at Kmart, and lessening sales declines at Sears.

"As we approach this important selling season, we are focused on executing our holiday strategy and meeting our customers' needs," Johnson said.

As part of that strategy, Sears said it will offer a 50-inch, 1080p LG plasma TV for $880 this Saturday as part of the chain's fourth weekend of pre-Black Friday promotions. The deal represents one of the industry's deepest discounts this month, based on current sales events and leaked Black Friday circulars.

In a research note, Credit Suisse retail analyst Gary Balter said Sears has relied primarily on expense reduction to drive earnings, which can only carry the company so far. "We have seen this type of retail management played out, where one attempts to cut their way to fruitarian," he observed. "It may work in other sectors, and can work in the short run in retailing, but the gap in productivity catches up over time. With Kmart less than one quarter of Wal-Mart's productivity and Sears losing share each quarter, it is difficult to see how EBITDA [earnings before interest, taxes, depreciation and amortization] turns around except [within Sears Holdings' Canadian operation]."