Sears CE, Majaps Up In Q4, But Overall U.S. Sales Fall

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Hoffman Estates, Ill. — Sales of major appliances, especially cooking and laundry products, recorded a “strong” fourth quarter at Sears, Roebuck and Co., while digital cameras and entertainment software “performed well.”

These product categories were among those that drove Sears domestic merchandise sales and services revenue numbers to $9.6 billion for the three months, ended Jan. 1. However, the totals fell short of fourth-quarter 2003 figures, which came in at $10.2 billion for the same three months.

Domestic comp-store sales, excluding the 53rd week in the fourth quarter of 2003, decreased 0.2 percent in the fourth quarter of 2004.

The domestic merchandise sales and services segment reported operating income of $471 million in the fourth quarter, up from $49 million the previous year. However, the 2003 results included an operating loss of $642 million for divesture of its credit and financial business, as well as a pre-tax charge of $791 million for retirement of debt.

Gross margin in the domestic end of Sears’ business decreased to 27.2 percent in the fourth quarter, from 29.2 percent the prior year, driven primarily by increased in-season clearance markdowns taken on slower moving inventory and a higher level of promotional markdowns.

Expenses for the fourth quarter in the domestic segment were $1.9 billion and included a $13 million in costs related to the pending Kmart merger. In the fourth quarter of 2003, domestic expenses reached $2.1 billion, including $73 million related to divested businesses.

Consolidated fourth-quarter merchandise and service revenue recorded a small drop to $11.1 billion, down from a year-on-year $11.6 billion. Net income plunged to $378 million in the three months, down from $2.7 billion in the same quarter last year.

“As we forecasted in October, domestic comparable store sales were flat during the fourth quarter, with sales increases in October and November offset by a decline in December,” said Alan Lacy, chairman/CEO. “The year was marked by further restructuring and repositioning of our core retail business, which slowed short-term results, but positions us well for the future.”

In a conference call, Lacy described 2004 as a “very challenging year” due to weak seasonal changes, the cost of store retrofits and heightened retail competition. However, earnings results came in “well within” the company’s expectations, he said, and Sears’ management is pleased with the progress of its full-line store repositioning.

Within CE, that repositioning included a department reset that was completed chain-wide in September, plus a “narrowing and sharpening” of its product mix to focus on three core categories: video, digital cameras and “family fun,” which includes DVD software. Lacy said consumers embraced the changes, raising CE comps by the low single digits during the fourth quarter compared to the prior-year period, led by sales of plasma and LCD TVs, A/V accessories, digital cameras and entertainment software.

White-goods sales also rose by the low-single digits during the fourth quarter, increasing Sears’ majap market share 100 basis points to 37.5 percent, Lacy said, citing market research group The Stevenson Co. He also reminded investors that Sears still sells more major appliances than Lowe’s, The Home Depot and Best Buy combined.

Lacy said that Sears continues to lower its cost structure through preferred vendor relationships and sourcing initiatives; is making ongoing improvements in customer service, in-store signage and fixturing; and has ramped up e-commerce sales, with revenue at Sears.com increasing 40 percent in 2004 over the prior year.

Lacy added that Sears’ acquisition by Kmart is set for March, and that the merger planning process is “going well,” with 12 separate teams working on various aspects of the integration. The deal will greatly accelerate Sears’ off-mall strategy through the conversion of several hundred Kmart stores to Sears units over the next three years in urban and high-density suburban markets, he said.

For the 12 months, domestic merchandise sales and service revenue dropped to $31.1 billion for 52 weeks, compared with $32.2 billion and 53 weeks for the previous year. Domestic segment operating income hit $368 million in 2004, down from $1 billion the previous year.

Consolidated 12-month revenue was $35.7 billion, compared with $36.4 billion in 2003. Sears reported a net loss of $489 million this past year, compared with net profit of $3.4 billion year-over-year. The retailer’s full-year results include an after-tax charge of $839 million, while the 2003 results include a gain on the sale of its credit and financial products business.

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