Sears/Kmart Issues First Financials

Hoffman Estates, Ill.— Total fiscal first-quarter revenue for Sears Holdings — the combined retail operation of Sears and Kmart — hit $7.6 billion, up from a year-earlier $4.6 billion.

The quarterly financial report is the first since Kmart acquired Sears on March 24.

However, the revenue includes all Kmart results for the first quarter and only five weeks for Sears. The company, therefore, said it believes the results of operations are not representative of ongoing results.

To that end, pro forma reporting for the first quarter, ended April 30, includes results of Sears for the full 13 weeks. Revenue, then, was flat, at $12.76 billion for the three months, compared with $12.77 billion in the same quarter last year.

Merchandise sales and services revenue at Sears' domestic segment edged up 0.5 percent in the first quarter, due to strong home services sales, partially offset by a 3.1 percent decrease in domestic comparable-store sales. Within domestic sales, cooler-than-anticipated weather conditions caused declines in certain seasonal businesses, said Sears.

Lower sales also resulted from efforts initiated in 2005 to reduce reliance on certain promotional events and strategies historically executed to drive transactional volumes at the expense of lower margin rates, said Sears.

In the first quarter, Sears lost $9 million, compared with a $91 million gain in the first three months of last year. These results include a $90 million after-tax charge for accounting changes, and without the charge, the company recorded $81 million in net income.

Kmart's purchase of Sears took place in about the middle of the first quarter, so on a pro forma basis, Sears reported a loss of $78 million in the quarter, which includes the $90 million charge, compared with $38 million in profit year-on-year.

The merger also brought about a decline in cash and increase in inventory. Sears ended the first quarter with $1.6 billion in cash. Prior to the merger Sears and Kmart had about $7.4 billion in cash, with the decrease reflecting the $5.4 billion paid to former Sears shareholders. Inventory at the end of the quarter climbed to $9.5 billion, a $6.1 billion rise over the prior year as a result of the merger.

According to the company's 10-Q filing, Sears has introduced its private-label brands, including Kenmore and Craftsman, into eight Kmart stores to help the discount chain differentiate itself from other mass market retailers. The company expects to continue the expansion, and is also evaluating placing exclusive Kmart brands — ostensibly Martha Stewart — in Sears stores.

The company has also opened 10 Sears Essentials stores since May 31, and expects to have at least 50 of the new prototypes operating by year's end. The new format features a smaller footprint than traditional Sears stores, and offers quick-turn, traffic-driving merchandise like food and convenience items. The company plans to convert 400 Kmart stores into Sears Essential stores by 2007.