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Sears’ Q4 Sales, Earnings Stumble

2/26/2009 10:47:00 AM Eastern

Update! Hoffman Estates, Ill. — Sears Holdings said falling consumer confidence took a toll on its business in the fiscal fourth quarter, sending sales and earnings lower.

Net income for the three months, ended Jan. 31, fell 55 percent to $190 million, and net sales slipped 12 percent to $13.3 billion.

Same-store sales fell 8.3 percent in the U.S., reflecting an 11 percent drop at Sears stores and a 5 percent decline at Kmart locations. The downturn was felt across most major categories, but was driven by products impacted by the weak housing market, such as appliances, and by the slowdown in consumer spending, including home and household goods, the company said.

Earnings results include a charge of $336 million to cover the cost of 32 store closings and severance, and an impairment charge the company’s Orchard Supply Hardware subsidiary. The closings include 17 Kmart stores, three Sears Grand stores, two Sears Essentials locations and four The Great Indoors stores.

In a statement, interim president/CEO W. Bruce Johnson said Sears' business, and retail in general, is "enveloped" in turmoil as a result of falling consumer confidence brought on by the weak economy.

"We maintained our focus on providing great product and service value to our customers, many of whom feel the impact of lower incomes and tighter credit," he said, and pointed to improved performance at Kmart, which increased its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) 18 percent to $321 million in the quarter.

In a research note, Credit Suisse retail analyst Gary Balter also lauded the company's strong cash position (more than $1.2 billion at year’s end), which it used to pay vendors early. This may have helped Sears obtain better vendor margins, he suggested, which softened gross margin declines caused by aggressive, share-grabbing promotions in major appliances and other categories.

Paying vendors early also differentiates Sears' from Circuit City, Balter said, which was brought down when manufacturers stopped supporting the CE chain. Nevertheless, he described Kmart as "particularly poorly positioned to compete longer-term," and said Sears stores are vulnerable to further market share gains from Best Buy, Home Depot and Lowe’s.

In a rare and lengthy “Message from the Chairman” posted on Sears’ investor Web page, financier and former Goldman Sachs manager Edward Lampert took federal regulators to task for creating "the cycle of panic and fear" that has frozen the credit markets and crippled some retailers as a result.

Lampert also emphasized Sears’ fiscal conservatism and cited its five key strategic pillars, which include customer retention, brand building, productivity improvement, technology investment and promoting a culture of excellence.

In his closing comments Lambert said "I believe that we are well positioned now at Sears Holdings to operate through a difficult economy, and we are preparing to rebound strongly when the economy stabilizes and turns back up. Many of our large businesses are highly related to the economy and to housing — appliances, tools, lawn and garden, electronics and fitness.

"They are not just economically related, but credit related as well, as they are all big ticket items that are typically purchased on credit. As one can see from the results of Lowe’s, Home Depot and Best Buy, nobody is immune to these macroeconomic impacts. When these sectors rebound, we expect our earnings to rebound as well."