Saddled with lower gross margins in its full-line stores due to clearance activity and a highly promotional retail environment, Sears said second-quarter operating income in its retail and related services segment reached $183 million, down from $300 million in the year-ago period.
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.
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.
The earnings report dovetailed with Sears’ sale of its credit business to Citigroup, which paid about $3 billion in cash for the portfolio. Sears will also get back $3 billion in invested capital, and will receive some $200 million a year for 10 years as part of a long-term marketing/servicing pact with Citigroup.
Sears also expects to save an additional $200 million a year as Citigroup absorbs the costs of the retailer’s zero-percent financing program.
Citigroup will continue to market Sears’ proprietary credit card and its Sears MasterCard, and will also retain most of the credit division’s 8,300 employees. The company plans to use the cash infusion to pay down debt and return cash to shareholders, ostensibly through dividends and stock buybacks.
Some 60 percent of Sears’ total profits are derived from its credit business, and retail sales of big-ticket items could be impacted by the stricter qualifications Citigroup is expected to impose on card applicants.
In a conference call, Sears noted that:
- Excluding AC sales, majap sales grew by the low single-digits for the quarter, while CE sales saw a mid-teens decline due to “price deflation and a lack of new technology,” according to VP/CFO Glenn Richter.
- Sears’ major appliance initiative, which includes a shift in commission structure to encourage more opening price point sales, would be fully implemented by the end of the third quarter.