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Sears Domestic Segment Sales Drop 4%

Hoffman Estates, Ill. — Sears reported $7.1 billion in merchandise sales and services for its domestic stores segment in the third quarter, down 4 percent from the $7.4 billion registered in the year-ago three months.

Plagued by softer retail demand, tough year-ago comparisons when consumers received federal tax rebates, larger-than-expected costs associated with seasonal transitions, and a slower ramp-up of sales following certain business resets, domestic comp-store sales dropped 4 percent in the third quarter, while sales decreased across most categories within full-line stores. This more than offset sales increases in certain specialty store formats and $39 million in revenue earned from an alliance with Citigroup.

The domestic segment reported an operating loss of $106 million in the third quarter, ended October 2, compared with operating income of $222 million in the same period in 2003. The prior-year results included operating income of $375 million from divested businesses and a pretax charge of $141 million. Gross margin in the third quarter decreased to 25.9 percent from 26.7 percent in the same three months a year ago, while expenses were reduced from $2 billion to $1.7 billion.

In a conference call, CEO Alan Lacy said third quarter comps for Sears’ core major appliance business were down by the low single digits due to a weather-related drop-off in room air sales, while category margins were impacted by steep markdowns. The latter were necessary to clear out older inventory in advance of new, more innovative high-performance and high-efficiency products this fall, particularly within the cooking and cleaning segments. Majap sales were lead by the new French door-style Kenmore Trio refrigerator, along with strong showings by Kenmore Elite’s next generation HE4T washer/dryer pair from Whirlpool, Kenmore refrigerators with built-in PUR water filtration, and its cooking and dishwasher lines.

Lacy noted that Sears is now in “good shape” with majap inventory following tightness earlier this year — particularly in stainless steel models — due to a global run on steel. However, he anticipates that majap vendors will pass along cost increases in steel and oil to retailers and consumers beginning early next year.

In CE, comp sales were down by the mid-single digits last quarter due to disruptions from department retrofits. Sears also took “aggressive markdowns” in electronics to move out old products, although the reset has since yielded a 65 percent increase in sales of plasma and LCD TVs, a 20 percent hike in A/V accessories, and a 100 percent spike in sales of digital cameras, Lacy said. “The reset has narrowed and sharpened our focus,” he said, and has led to “improved quality and breadth of offerings in core [CE] categories.”

CE also experienced higher than normal inventory levels during the third quarter due to early receipt of thin panel TVs, digital cameras and other products.

For the nine months, Sears domestic merchandise sales and services reached $21.6 billion, down from $22 billion in the same period in 2003. Operating loss for the nine months slid to $103 million, compared with an operating profit of $987 million in the same period a year earlier.

Consolidated Sears merchandise sales and services for the third quarter moved downward to $8.2 billion from a year-on-year $8.4 billion. The retailer recorded a $61 million net loss in the three months, compared with a $147 million net income in the same quarter the previous year.

Consolidated Sears merchandise sales and services for the nine months edged downward to $24.6 million from $24.7 million, while the net loss skied to $867 million from income of $648 million in the same period in 2003.

Although Lacy said he was disappointed by the third quarter results, and professed to a “more conservative outlook for the balance of the year,” he said that Sears is continuing to make progress along a number of fronts including merchandising and store level improvements.

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