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Sears Q2 Retail Income Drops, Sales Flat

Hoffman Estates, Ill. – Sears reported second-quarter operating income in its retail and related services segment reached $183 million, down from $300 million in the year-ago period, due primarily to clearance activity.

At the same time, the struggling retailer recorded a slight gain in second-quarter revenue for its retail business, up 0.9 percent, to $7.8 billion, from $7.7 billion in the same period in 2002. Comp-store sales for the three months declined 3.5 percent. The revenue increase from Lands’ End, acquired by Sears in June 2002, was partially offset by revenue decreases in retail stores, said Sears.

‘Sales trends generally improved during the quarter, reflecting continuing progress against our goals of upgrading merchandise offerings, enhancing the customer experience in Sears stores and strengthening our marketing,’ said an ever-optimistic Alan Lacy, chairman/CEO.

On the product front, senior VP/CFO Glenn Richter said in a conference call that excluding room air sales, which were impacted by a cool June, majaps enjoyed a low single-digit increase for the quarter. By contrast, CE sales saw a mid-teens decline due to ‘price deflation and a lack of new technology.’

Sears reported a 10-basis-point margin decrease in the second quarter, ended June 28, attributed to a significant increase in promotions, largely offset by sourcing improvements and the inclusion of the higher-margin Lands’ End business. Selling and administrative expenses increased by $107 million in the second quarter, due primarily to the inclusion of Lands’ End and a $16 million charge.

For the six months, Sears retail and related services segment recorded flat sales of $14.42 billion, compared with $14.47 billion in the first half of 2002. Operating income for the period dropped to $160 million, down from $387 million year-on-year.

Consolidated Sears second-quarter net income climbed to $309 million, up from $229 million in the year-ago three months. Earnings included a pretax gain of $93 million on the sale of the previously charged-off credit card accounts, offset by a pre-tax charge of $28 million for severance costs. Total revenue was flat, at $10.2 million, compared with $10.1 million year over year.

Consolidated Sears net income for the first half increased to $501 million, compared with $339 million in the same timeframe in 2002. Sales also were flat for the period, at $19.1 billion, compared with $19.2 billion in the first half of last year.

In other Sears news, Lacy said during the conference call that the company’s major appliance initiative, designed to recapture lost market share through wider assortments, more opening price point models and better in-store service, would be fully implemented by the end of the third quarter. (See TWICE, June 23, p. 1.) He attributed Sears’ share deterioration to aggressive expansion by Lowe’s and The Home Depot, noting that ‘The number of doors selling appliances has exploded.’

While the company has settled on a ‘standard template’ for the department remodels, final tweaks include regional variations in the amount of take-with inventory on hand. ‘You need more take-home inventory in Laredo, Texas than you do in the Bronx,’ Lacy said.

To encourage opening price point volume, Sears has also modified its compensation model, giving sales personnel ‘a little less commission on high-end products and a little more on low-end models,’ Lacy said.

Sears has also made strides in improving its visual merchandising and sales floor service throughout its full-line stores, is moving toward localizing its product mix and has begun changing its advertising message to ‘differentiate us from the competition,’ Lacy said.

In its off-the-mall businesses, Lacy noted that the eight Sears Hardware stores now carrying major appliances are ‘performing very well,’ and that the majap test will likely be expanded to a ‘substantial’ number of other Hardware store locations. Majap sales at the test stores are roughly equivalent to those at a Best Buy, he observed, and while they’re ‘not as powerful as our full-line stores, it’s something one can be happy with.’

Sears Grand, a forthcoming full-line pilot store featuring traffic-driving, quick-turn merchandise like packaged food, DVDs and music CDs, is on track to open in Salt Lake City this October, Lacy said, and the company has committed to three other locations in three different states, including greater Chicago and Las Vegas. Sears plans to open five pilot stores in all, each different in size and assortment, in order to test the concept, which is an ‘important part of our growth strategy going forward,’ he said.

Lacy added that only one new Great Outdoors location was opened this year. While the company is pleased with the upscale emporium’s consumer acceptance and revenue per store, ‘the profit model is not right,’ he said, and management is working to correct it.

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