Sears Reports Third Quarter 2004 Results
Sears, Roebuck and Co. (NYSE: S) today reported a net loss of $61 million, or $0.29 per share on an average base of 210.7 million common equivalent shares, for the third quarter ended October 2, 2004, compared with net income of $147 million, or $0.52 per share on an average base of 281.0 million common equivalent shares in the third quarter of 2003. The prior year results include the results of the domestic Credit and Financial Products and National Tire & Battery (NTB) businesses divested in the fourth quarter of 2003.
"A number of factors contributed to a disappointing third quarter, including softer retail demand, larger than expected costs associated with seasonal transitions and a slower ramp up of sales following certain business resets," said Chairman and CEO Alan J. Lacy.
Sears' third quarter 2003 earnings included a pretax charge of $141 million, or $0.32 per share, related to the company's refinement of its business strategy for The Great Indoors.
Domestic
The Domestic segment, which includes all domestic retail formats as well as the company's corporate functions, reported an operating loss of $106 million for the third quarter of 2004, compared with operating income of $222 million in the third quarter of 2003. The prior year results included operating income of $369 million and $6 million, respectively, from the divested domestic Credit and Financial Products and NTB businesses, and a pretax charge of $141 million related to the company's refinement of its business strategy for The Great Indoors. Of the $141 million charge, $112 million was reflected in special charges and impairments and $29 million in cost of sales, buying and occupancy.
Merchandise sales and services revenues for the 2004 third quarter were $7.1 billion, compared with $7.4 billion in the prior year period. Prior year revenues include $115 million attributable to NTB. Sales decreases across most categories within the full-line stores more than offset sales increases in certain specialty store formats and the $39 million of revenues earned under the long-term alliance with Citigroup. Overall, domestic comparable store sales decreased 4.0 percent in the third quarter of 2004.
The gross margin rate for the quarter decreased to 25.9 percent in the current year from 26.7 percent in the prior year as weaker sales drove increased promotional and clearance markdowns within the home and apparel businesses which more than offset the revenues earned under the long-term alliance with Citigroup.
Selling and administrative expenses for the third quarter were $1.7 billion. The prior year selling and administrative expenses of $2.0 billion included $184 million related to divested businesses.
Interest of $39 million for the 2004 third quarter included $14 million attributable to interest expense related to the legacy debt of the former Credit and Financial Products business.
Sears Canada
Sears Canada reported operating income of $21 million for the third quarter of 2004, compared with operating income of $20 million in the third quarter of 2003.
Revenues for the third quarter increased 11.2 percent to $1.2 billion due to increased sales across most formats as well as the effects of foreign exchange.
The gross margin rate declined to 27.7 percent in the current year quarter from 29.2 percent in the prior year, primarily due to a change in sales mix weighted more heavily toward lower margin products, including home appliances and furniture, and increased promotional activity.
Selling and administrative expenses as a percentage of revenues decreased to 25.0 percent in the current year quarter from 25.7 percent in the prior year, primarily due to a reduction in advertising costs.
Significant Developments
On September 29, 2004, the company closed the acquisition of ownership or leasehold interest in 50 stores from Kmart Holding Corporation for $575.9 million. The company has paid 30 percent of the overall purchase price for these properties, with the remaining 70 percent to be paid upon Sears taking possession of the stores. Sears will take possession of the stores in spring 2005 and expects to convert them to Sears nameplates by the fourth quarter of 2005. Sears also agreed to make lease payments to Wal-Mart under subleases for six Wal-Mart stores. Sears has taken possession of two Wal-Mart stores and has targeted possession of an additional two stores in 2005 and the remaining two stores in 2006.
Financial Position
As a result of the sale of the domestic Credit and Financial Products business in November 2003 and related liability management actions, the company's domestic term debt position has been reduced to $2.9 billion as of the end of the current fiscal year quarter, down from $22.7 billion at the prior year quarter end and $5.3 billion at year end. The company retired $23 million of domestic term debt in the third quarter of 2004 and expects to retire an additional $150 million by year-end 2004.
Share Repurchase
During the third quarter of 2004, the company repurchased 6 million common shares at a total cost of approximately $225 million, or an average price of $36.64 per share. As of October 2, 2004, the company had remaining authorization to repurchase approximately $500 million of common shares by December 31, 2006, under its existing share repurchase program approved by the board of directors in October 2003. The remaining shares may be purchased in the open market, through self-tender offers or through privately negotiated transactions. Timing will depend on prevailing market conditions, alternative uses of capital and other factors.
Outlook
"Based on our sales and margin performance over the past two quarters, coupled with a more cautious holiday outlook, we have adopted a more conservative outlook for the fourth quarter. While we remain optimistic about a favorable holiday shopping season, we believe that it is appropriate to lower our fourth quarter sales and margin assumptions," Lacy said.
For the year, the company now expects earnings per share, before the cumulative effect of change in accounting principle, but including $0.24 per share related to the second quarter special charges and additional depreciation, to be between $1.46 and $1.66. This outlook reflects the lower than expected year-to-date results, assumes fourth quarter domestic comparable store sales to be flat and lowers the projected fourth quarter gross margin rates. This full-year outlook includes the negative carrying cost of approximately $0.20 to $0.25 per share on the company's remaining legacy debt related to its former Credit and Financial Products business.
Forward-Looking Statements
This release contains guidance on full-year 2004 earnings per share and fourth quarter revenues and gross margins, statements regarding the conversion and opening of the Kmart and Wal-Mart stores acquired by Sears, and statements about our expectations concerning additional debt retirement and share repurchases. These statements are forward-looking statements based on assumptions about the future that are subject to risks and uncertainties, and actual results may differ materially from the results projected in the forward looking statements. Risks and uncertainties that may cause actual results to differ materially include competitive conditions in retail and related services industries; changes in consumer confidence, tastes, preferences and spending; the availability and level of consumer debt; the successful execution of, and customer response to, the company's strategic initiatives, including the full-line store strategy and the conversion and integration of the Kmart and Wal-Mart stores and other new store locations; the possibility that the company will identify new business and strategic options for one or more of its business segments, potentially including selective acquisitions, dispositions, restructurings, joint ventures and partnerships; trade restrictions, tariffs and other factors potentially affecting the company's ability to find qualified vendors and access products in an efficient manner; the company's ability to successfully implement its initiatives to improve its inventory management capabilities; the outcome of pending legal proceedings; anticipated cash flow; social and political conditions such as war, political unrest and terrorism or natural disasters; the possibility of negative investment returns in the company's pension plan; changes in interest rates; volatility in financial markets; changes in the company's debt ratings, credit spreads and cost of funds; the possibility of interruptions in systematically accessing the public debt markets; general economic conditions and normal business uncertainty. In addition, Sears typically earns a disproportionate share of its operating income in the fourth quarter due to seasonal buying patterns, which are difficult to forecast with certainty. The company intends these forward-looking statements to speak only as of the time of this release and does not undertake to update or revise them as more information becomes available.
Webcast
Sears will webcast its third quarter earnings conference call at 10:30 a.m. EDT/9:30 a.m. CDT today. Investors and the media are invited to listen to the call through the company's website at http://www.sears.com/investors , under "Presentations & Audio Archives". Software necessary to listen to the webcast (Windows Media or Real Player) can be downloaded from the webcast site. Downloading the software may take up to 22 minutes with a 56k modem. A telephone replay of the call will be available beginning at approximately 12:30 p.m. EDT/11:30 a.m. CDT today. The replay number is 1-800-873-2089, access code: 7502. A replay of the conference call will also be available on the company's website at http://www.sears.com/investors , under "Presentations & Audio Archives".
About Sears
Sears, Roebuck and Co. is a leading broadline retailer providing merchandise and related services. With revenues in 2003 of $41.1 billion, the company offers its wide range of home merchandise, apparel and automotive products and services through more than 2,300 Sears-branded and affiliated stores in the U.S. and Canada, which includes approximately 870 full-line and 1,100 specialty stores in the U.S. Sears also offers a variety of merchandise and services through sears.com, landsend.com and specialty catalogs. Sears is the only retailer where consumers can find each of the Kenmore, Craftsman, DieHard and Lands' End brands together -- among the most trusted and preferred brands in the U.S. The company is the largest provider of product repair services with more than 14 million service calls made annually.
SEARS, ROEBUCK AND CO.
CONSOLIDATED INCOME
For the 13 Weeks For the 39 Weeks
Ended Ended
October September October September
2, 27, 2, 27,
(millions, except earnings per 2004 2003 2004 2003
common share)
REVENUES
Merchandise sales and services $8,210 $8,409 $24,613 $24,734
Credit and financial products
revenues 85 1,385 257 4,136
Total revenues 8,295 9,794 24,870 28,870
COSTS AND EXPENSES
Cost of sales, buying and occupancy 6,062 6,137 17,965 18,013
Selling and administrative 2,009 2,229 5,967 6,638
Provision for uncollectible
accounts 16 567 43 1,511
Depreciation and amortization 227 226 717 681
Interest, net 66 281 210 847
Special charges and impairments - 112 41 140
Total costs and expenses 8,380 9,552 24,943 27,830
Operating (loss)/ income (85) 242 (73) 1,040
Other income, net 6 2 58 16
(Loss)/ income before income taxes,
minority interest and
cumulative effect of change in
accounting principle (79) 244 (15) 1,056
Income tax benefit/ (expense) 25 (91) 2 (392)
Minority interest (7) (6) (15) (16)
(Loss)/ income before cumulative
effect of change
in accounting principle (61) 147 (28) 648
Cumulative effect of change in
accounting principle - - (839) -
NET (LOSS)/ INCOME $ (61) $ 147 $ (867) $ 648
(LOSS)/ EARNINGS PER COMMON SHARE
Basic
(Loss)/ earnings per share
before cumulative
effect of change in accounting
principle $ (0.29) $ 0.53 $ (0.13) $ 2.18
Cumulative effect of change in
accounting principle $ - $ - $ (3.90) $ -
(Loss)/ earnings per share $ (0.29) $ 0.53 $ (4.03) $ 2.18
Diluted
(Loss)/ earnings per share
before cumulative
effect of change in accounting
principle $ (0.29) $ 0.52 $ (0.13) $ 2.17
Cumulative effect of change in
accounting principle $ - $ - $ (3.90) $ -
(Loss)/ earnings per share $ (0.29) $ 0.52 $ (4.03) $ 2.17
Average common equivalent shares
outstanding 210.7 281.0 215.0 298.7
SEARS, ROEBUCK AND CO.
CONSOLIDATED BALANCE SHEET
(millions)
October 2, September 27, January 3,
2004 2003 2004
Assets
Current assets
Cash and cash equivalents $ 2,734 $ 1,546 $ 9,057
Sears Canada credit card
receivables 1,929 1,939 1,998
Less allowance for
uncollectible accounts 33 51 42
Net credit card receivables 1,896 1,888 1,956
Other receivables 567 632 733
Merchandise inventories, net 6,400 6,243 5,335
Prepaid expenses, deferred
charges and other current
assets 645 517 407
Deferred income taxes 674 818 708
Assets held for sale -- 27,818 --
Total current assets 12,916 39,462 18,196
Property and equipment, net 6,632 6,660 6,788
Deferred income taxes 295 443 378
Goodwill 956 945 943
Tradenames and other intangible
assets 709 710 710
Other assets 1,144 870 708
Total assets $22,652 $49,090 $27,723
Liabilities
Current liabilities
Short-term borrowings $ 823 $ 6,179 $ 1,033
Current portion of long-term
debt and capitalized lease
obligations 786 2,595 2,950
Merchandise payables 3,123 3,305 3,106
Income taxes payable 558 607 1,867
Other liabilities 3,075 3,146 2,950
Unearned revenues 1,262 1,245 1,244
Other taxes 487 472 609
Liabilities held for sale -- 10,602 --
Total current liabilities 10,114 28,151 13,759
Long-term debt and capitalized
lease obligations 4,070 12,121 4,218
Pension and postretirement
benefits 1,619 2,010 1,956
Minority interest and other
liabilities 1,431 1,319 1,389
Total liabilities 17,234 43,601 21,322
Commitments and Contingent
Liabilities
Shareholders' Equity
Common shares 323 323 323
Capital in excess of par value 3,502 3,503 3,519
Retained earnings 10,623 8,945 11,636
Treasury stock - at cost (8,942) (6,306) (7,945)
Deferred ESOP expense (6) (27) (26)
Accumulated other comprehensive
loss (82) (949) (1,106)
Total shareholders' equity 5,418 5,489 6,401
Total liabilities and
shareholders' equity $22,652 $49,090 $27,723
Total common shares
outstanding 207.6 263.3 230.4
SEARS, ROEBUCK AND CO.
Segment Income Statements
(millions)
For the 13 Weeks Ended October 2, 2004 and September 27, 2003
Domestic Sears Canada Consolidated
2004 2003* 2004 2003 2004 2003
Merchandise sales and
services $7,141 $7,449 $1,069 $ 960 $8,210 $8,409
Credit and financial
products revenues - 1,307 85 78 85 1,385
Total revenues 7,141 8,756 1,154 1,038 8,295 9,794
Costs and expenses
Cost of sales, buying
and occupancy 5,289 5,457 773 680 6,062 6,137
Selling and
administrative 1,720 1,962 289 267 2,009 2,229
Provision for
uncollectible accounts - 550 16 17 16 567
Depreciation and
amortization 199 199 28 27 227 226
Interest, net 39 254 27 27 66 281
Special charges and
impairments - 112 - - - 112
Total costs and
expenses 7,247 8,534 1,133 1,018 8,380 9,552
Operating (loss)/ income $ (106) $ 222 $ 21 $ 20 $ (85) $ 242
Foreign exchange rate
(quarterly average) 0.7650 0.7234
Net (loss)/ income $ (61) $ 147
(Loss)/earnings per share $(0.29) $ 0.52
Average shares
oustanding 210.7 281.0
* Domestic segment detail for the 13 weeks ended September 27, 2003
Retail & Credit &
Related Financial Corporate & Total
Services Products Other Domestic
Merchandise sales and
services $7,342 $ - $ 107 $ 7,449
Credit and financial
products revenues - 1,307 - 1,307
Total revenues 7,342 1,307 107 8,756
Costs and expenses
Cost of sales, buying and
occupancy 5,415 - 42 5,457
Selling and administrative 1,694 157 111 1,962
Provision for uncollectible
accounts - 550 - 550
Depreciation and amortization 182 4 13 199
Interest, net 24 230 - 254
Special charges and
impairments 112 - - 112
Total costs and expenses 7,427 941 166 8,534
Operating (loss)/ income $ (85) $ 366 $ (59) $ 222
SEARS, ROEBUCK AND CO.
Segment Income Statements
(millions)
For the 39 Weeks Ended October 2, 2004 and September 27, 2003
Domestic Sears Canada Consolidated
2004 2003** 2004 2003 2004 2003
Merchandise sales and
services $21,603 $22,027 $3,010 $2,707 $24,613 $24,734
Credit and financial
products revenues - 3,903 257 233 257 4,136
Total revenues 21,603 25,930 3,267 2,940 24,870 28,870
Costs and expenses
Cost of sales,
buying and
occupancy 15,795 16,098 2,170 1,915 17,965 18,013
Selling and
administrative 5,107 5,873 860 765 5,967 6,638
Provision for
uncollectible
accounts - 1,467 43 44 43 1,511
Depreciation and
amortization 634 599 83 82 717 681
Interest, net 129 766 81 81 210 847
Special charges and
impairments 41 140 - - 41 140
Total costs and
expenses 21,706 24,943 3,237 2,887 24,943 27,830
Operating (loss)/
income $ (103) $ 987 $ 30 $ 53 $ (73) $ 1,040
Foreign exchange rate
(annual average) 0.7532 0.6974
(Loss)/ income before
cumulative effect of
change in accounting
principle $ (28) $ 648
Cumulative effect of
change in accounting
principle $ (839) $ -
Net (loss)/ income $ (867) $ 648
(Loss)/earnings per
share $ (4.03) $ 2.17
Average shares
outstanding 215.0 298.7
** Domestic segment detail for the 39 weeks ended September 27, 2003
Retail & Credit &
Related Financial Corporate & Total
Services Products Other Domestic
Merchandise sales and
services $21,757 $ - $ 270 $22,027
Credit and financial
products revenues - 3,903 - 3,903
Total revenues 21,757 3,903 270 25,930
Costs and expenses
Cost of sales, buying and
occupancy 15,991 - 107 16,098
Selling and administrative 4,962 590 321 5,873
Provision for uncollectible
accounts - 1,467 - 1,467
Depreciation and amortization 552 13 34 599
Interest, net 49 717 - 766
Special charges and
impairments 128 - 12 140
Total costs and
expenses 21,682 2,787 474 24,943
Operating income/ (loss) $ 75 $1,116 $(204) $ 987
SEARS, ROEBUCK AND CO.
SUPPLEMENTAL INFORMATION - INVENTORY, STORE COUNT AND SUMMARY OF CERTAIN
SIGNIFICANT ITEMS
($ in millions, except earnings per share)
Domestic Inventories:
October 2, September 27, January 3,
2004 2003 2004
-LIFO $5,666 $5,563 $4,728
-FIFO $6,247 $6,195 $5,308
Domestic Retail Stores:
October 2, September 27, January 3,
2004 2003 2004
Full-line 871 869 871
Specialty 1,115 1,314 1,105
Lands' End 17 16 16
Total Domestic
Retail Stores 2,003 2,199 1,992
Summary of Certain Significant Items Affecting the Consolidated
Results:(1)
For the 13 Weeks For the 13 Weeks
Ended October 2, Ended September 27,
2004 2003
Pretax Per Share Pretax Per Share
Negative carry related to Credit
legacy debt $ 14 $0.04 $ - $ -
Charges associated with the
refinement of TGI business
strategy - - 141 0.32
Proforma effects on the prior
year:
Divested Businesses:
Operating income - - (375) (0.85)
Zero-percent financing costs - - 67 0.15
Pro forma revenues earned
under Citigroup alliance - - 39 0.09
Total divested businesses - - (269) (0.61)
Domestic retirement plan
accounting change (2) - - 18 0.04
Total $ 14 $0.04 $(110) $(0.25)
Average common equivalent shares
outstanding 210.7 281.0
(1) These items relate to the Company's refinement of the business
strategy for The Great Indoors, the results of operations of
divested businesses and the change in accounting for domestic
retirement plans. Management believes that consideration of these
items in addition to reported results provides a better
understanding of the Company's financial performance.
(2) Represents the effect on the 13 weeks ended September 27, 2003
assuming that the change in accounting for retirement plans occurred
at the beginning of fiscal 2003.
SEARS, ROEBUCK AND CO.
SUPPLEMENTAL INFORMATION - INVENTORY, STORE COUNT AND SUMMARY OF CERTAIN
SIGNIFICANT ITEMS
($ in millions, except earnings per share)
Summary of Certain Significant Items Affecting the Consolidated
Results:(1)
For the 39 Weeks For the 39 Weeks
Ended October 2, Ended September 27,
2004 2003
Pretax Per Share Pretax Per Share
Cumulative effect of change in
accounting for retirement plans $ - $3.90 $ - $ -
Curtailment gain on post-retirement
medical plans (30) (0.09) - -
Negative carry related to Credit
legacy debt and related debt
retirement costs 71 0.22 - -
Employment termination costs 41 0.12 28 0.06
Charges associated with the
refinement of TGI business
strategy - - 141 0.30
Accelerated depreciation resulting
from CSC purchased services
transaction 39 0.12 - -
Proforma effects on the prior year:
Divested Businesses:
Operating income - - (1,144) (2.43)
Zero-percent financing costs - - 184 0.39
Pro forma revenues earned
under Citigroup alliance - - 112 0.24
Total divested businesses - - (848) (1.80)
Domestic retirement plan accounting
change (2) - - 51 0.11
Total $121 $4.27 $ (628) $(1.33)
Average common equivalent shares
outstanding 215.0 298.7
(1) These items relate to the Company's refinement of the business
strategy for The Great Indoors, the results of operations of
divested businesses and the change in accounting for domestic
post-retirement medical and retirement plans. Management believes
that consideration of these items in addition to reported results
provides a better understanding of the Company's financial
performance.
(2) Represents the effect on the 39 weeks ended September 27, 2003
assuming that the change in accounting for retirement plans occurred
at the beginning of fiscal 2003.
SOURCE: Sears, Roebuck and Co.
CONTACT: News Media Contact, Edgar P. McDougal, +1-847-286-9669, or
Investor Contact, Scott A. Bohaboy, +1-847-286-7419, both of Sears, Roebuck
and Co.
Web site: http://www.sears.com/
http://www.sears.com/investors