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Sears Holdings Reports Profit, But Comp Sales Down

5/18/2006 09:18:00 AM Eastern

Hoffman Estates, Ill. — Sears Holdings reported net income of $180 million for the first quarter, compared with a net loss of $9 million for the same period last year.

While net income was up, domestic comp-stores sales declined 4.8 percent for the quarter, ended April 29. Sears Domestic comp-store sales declined 8.4 percent, while Kmart’s dipped 0.2 percent. Sears Domestic comp-store sales results reflect declines across all categories and formats except within home appliances, which generated a modest comparable store sales increase.

Sears Holdings said the prior year’s results include a $90 million charge due to the cumulative effect of a change in accounting for certain indirect overhead costs included in inventory. Excluding the change in accounting, the previous year’s first-quarter net income was $81 million.

The improvement in first-quarter 2006 earnings reflects improved profitability at both Kmart and Sears Domestic, largely due to reduced expenses, the company said.

The statements of operations for the 13 weeks ending on April 29 are not comparable to the period last year because it includes the results of Sears, Roebuck and Co. only for the period subsequent to March 24, 2005, the date of its acquisition by Kmart Holding Corporation.

In order to provide a comparable performance measure for Sears Holdings, pro forma results for the prior year period have been presented as though Kmart and Sears had been combined as of the beginning of fiscal 2004.

On a pro forma basis, the company’s income before the cumulative effect of the accounting change in the first quarter of fiscal 2005 was $12 million.

Domestic comp-store sales declined 4.8 percent in the aggregate, with Sears Domestic comp-store sales declining 8.4 percent and Kmart comp-store sales declining 0.2 percent. The decline in Kmart comp-store sales for the quarter was primarily due to lower transaction volumes within home goods partially offset by increased sales in apparel and within food and other consumable goods categories.

Sears Domestic comparable store sales results reflect declines across all categories and formats except within home appliances, which generated a modest comparable store sales increase.

Total revenues increased $4.4 billion, to $12.0 billion, for the quarter as compared to total revenues of $7.6 billion for last year’s first quarter. The increase was primarily attributable to the inclusion of Sears for the full period, ended April 29. Sears revenues were $7.7 billion for the first quarter, compared with $3.1 billion for the same time last year, which period only includes the results of Sears subsequent to March 24, 2005.

Total revenues at Kmart declined $0.3 billion as compared to the prior year period, primarily reflecting a reduction in the total number of Kmart stores in operation.

Operating income was $331 million for the first quarter vs. $151 million for its first quarter last year. The increase in operating income was due to an increase of $135 million of Sears Domestic operating income, as well as a $47 million increase in Kmart operating income mainly due to lower expenses as a result of realizing merger synergies and improved expense management.

On a pro forma basis, operating income improved $231 million, from $100 million in the prior year period, to $331 million, primarily due to a reduction of selling and administrative costs, which decreased from $3.04 billion (23.8 percent of revenues) last year, to $2.72 billion (22.7 percent of revenues) this year.

On a pro forma basis, revenues declined from $12.8 billion last year, to $12.0 billion this year, mainly due to the domestic comp-store sales decline of 4.8 percent as noted above. The decline in comp-store sales was largely offset by an improvement in gross margin rate to 27.8 percent this year, an increase of 140 basis points from the prior year rate.