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Sears’ Sales And Earnings Tumble

2/28/2008 03:09:00 PM Eastern

Hoffman Estates, Ill. — Sears Holdings reported sales and earnings declines for its fiscal fourth quarter and full year, ended Feb. 2.

The company attributed the poor results at its Sears and Kmart stores to lower sales, particularly in major appliances, and significantly higher markdowns amid a weak housing market and deteriorating economy.

Sears also said it considering selling its private label brands, including Kenmore appliances, through other retail outlets to help buttress its business.

For the quarter, net income fell 47.5 percent to $426 million and operating income fell 43 percent to $794 million. Net sales fell 6.8 percent to $15.1 billion for the three month period, and total same-store sales declined 4.5 percent.

For the full year, net income fell 45 percent to $826 million and operating income fell 36 percent to $1.6 billion. Net sales fell 4.3 percent to $50.7 billion, and total same-store sales declined 4.3 percent.

Sears said same-store sales experienced their steepest declines last month.

“Our fourth quarter and full year results continued to be negatively impacted by the worsening economic conditions faced by both our customers and competitors, as well as increased markdowns taken to clear excess inventory,” said W. Bruce Johnson, who became Sears Holdings’ interim CEO and president following last month’s departure of chief executive Aylwin Lewis. “Given the challenging retail environment, we will work to improve and tighten our management of costs and inventory levels in 2008. Further, we believe that our recently announced restructuring” — which broke out the business by product category, brand and support services — “will position us to navigate the difficult conditions that lie ahead and operate our businesses more efficiently and effectively.”

Specifically, seasonally adjusted majap and CE comps fell 1.6 percent across the board for the full fiscal year, with gains in electronics offsetting declines in appliances. Sears said slower sales overall prompted increased markdown activity to clear higher inventory levels, resulting in lower gross margins. The company also attributed margin declines to a higher proportion of sales in CE, a traditionally low-margin category. Earnings were further impacted by a higher operating expense rate as a percentage of sales; the negative effect of calendar shifts; and a number of other one-time events.

In a lengthy and infrequent “Message from the Chairman,” posted on Sears’ investor information Web page, Edward Lampert, the architect of the Sears and Kmart merger, said much of the company’s poor performance was due to an over-optimistic inventory buildup at the end of 2006. “At the time, we believed that the performance of several of our businesses justified the increase in our inventory investment to grow our earnings,” he wrote. “Unfortunately, we did not foresee the severe economic turbulence ahead. In hindsight, 2007 was not a good year in which to operate with increased inventory.”

To help boost business, Lampert said Sears is considering selling its proprietary brands, including Kenmore and Craftsman, through other retail outlets to increase their market share. “There is an opportunity for us to rethink our brand distribution strategy to create value,” he noted.

Lampert also defended his decision to invest Sears’ cash reserves in stock buy-backs and debt reduction rather than major store remodels due to their higher return, but stressed that the company continues to invest significantly in products, services, inventory mix, visual presentation, recruitment and training, and marketing and communications.

He added that last month’s organizational and management changes will help accelerate improvements in the company’s performance, and that Sears remains one of the top-performing retail stocks over the past five years.

Broken out by business, Kmart’s fourth quarter operating income fell nearly 58 percent to $237 million, net sales dropped 11.4 percent to $5.2 billion, and same store sales declined 5.2 percent. For the full year, operating income fell 57.6 percent to $402 million, net sales dropped 7.5 percent to $17.3 billion, and same store sales declined 4.7 percent.

At Sears stores, fourth quarter operating income fell 48.3 percent to $366 million, net sales dropped 8.5 percent to $8 billion, and same store sales declined 4 percent. For the full year, operating income fell 40.7 percent to $784 million, net sales dropped 4.6 percent to $27.8 billion, and same store sales declined 4 percent.

Sears closed five Kmart stores last year, bringing the current total to 1,382. Its Sears store count remains unchanged at 935 locations.