Sears Reports First Quarter 2004 Results
Sears, Roebuck and Co. (NYSE: S) today reported a net loss before the cumulative effect of a change in accounting principle of $20 million, or $0.09 per share on an average base of 220.4 million common equivalent shares, for the first quarter ended April 3, 2004, compared with net income of $192 million, or $0.60 per share on an average base of 318.1 million common equivalent shares in the first quarter of 2003. The prior year quarterly results include the results of the domestic Credit and Financial Products and National Tire & Battery businesses divested in the fourth quarter of 2003.
The company's first quarter 2004 results include a previously announced one-time, non-cash, after-tax charge of $839 million, or $3.81 per share, for the cumulative effect of a change in accounting principle related to its pension and post-retirement medical benefit plans. Effective Jan. 4, 2004, the company began recognizing experience gains and losses related to its domestic pension and post-retirement plans on a more current basis. The charge represents the recognition of unamortized experience losses at the beginning of 2004 in accordance with the new accounting method. Net loss after the effect of the cumulative effect of this accounting change was $859 million, or $3.90 per share for the first quarter of 2004.
"Overall, the quarter met our expectations with both revenues and earnings within our previously communicated guidance," said Chairman and CEO Alan J. Lacy.
Domestic
The Domestic segment, which includes all domestic retail formats as well as the company's corporate functions, reported an operating loss of $39 million for the first quarter of 2004, compared with operating income of $299 million in the first quarter of 2003. The prior year results included operating income of $399 million and $6 million, respectively, from the divested domestic Credit and Financial Products and National Tire & Battery businesses.
Merchandise sales and services revenues for the first quarter were $6.8 billion, as compared to $6.7 billion in the prior year period. Prior year revenues include $100 million attributable to the National Tire & Battery business. Increases in several key full-line store home group categories coupled with approximately $33 million earned under the company's long-term alliance with Citigroup contributed to this overall increase. Overall, domestic comparable store sales increased 1.6 percent in the first quarter of 2004. In the home group, strong growth in lawn and garden and tool businesses as well as growth in home electronics were somewhat offset by comparable store sales declines in apparel.
"Our sales performance in the first quarter was mixed," Lacy said. "Our strong assortment and value proposition drove improved home group comparable store sales, while we were disappointed not to fully participate in the industry-wide improvement in apparel sales."
The gross margin rate for the quarter increased to 26.8 percent in the current year from 26.4 percent in the prior year primarily due to the income from revenues earned under the long-term alliance with Citigroup.
Selling and administrative expenses for the first quarter were $1.6 billion, which included a $30 million curtailment gain related to previously announced changes to the company's retiree medical benefits offered to employees under the age of forty. The prior year selling and administrative expenses of $1.8 billion include approximately $240 million related to divested businesses.
Interest of $49 million for the first quarter included $38 million attributable to interest related to the legacy debt of the former Credit and Financial Products business and debt retirement costs.
Sears Canada
Sears Canada reported an operating loss of $2 million for the first quarter of 2004, compared with operating income of $10 million in the first quarter of 2003, primarily due to a $12 million charge recorded within selling and administrative expenses in the first quarter of 2004 related to the company's decision to license Sears Canada's Auto Centers to three tire retailers and other restructuring activities.
Revenues for the first quarter increased to $1.0 billion, compared with $843 million in the prior year quarter due to the effects of foreign exchange as well as increased sales across most formats.
The gross margin rate declined to 28.8 percent in the current year quarter from 30.1 percent in the prior year, due to a number of factors including a change in sales mix and increased promotional activity. Selling and administrative expenses as percentage of revenues increased to 28.2 percent in the current year quarter from 27.3 percent.
Share Repurchase Program
During the first quarter of 2004, the company repurchased 18.6 million common shares at a total cost of approximately $852 million, or an average price of $45.69 per share. As of April 3, 2004, the company had remaining authorization to repurchase approximately $726 million of common shares by Dec. 31, 2006, under its existing share repurchase program approved by the Sears 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.
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 $3.5 billion as of the end of the current fiscal year quarter, down from $23.7 billion at the prior year quarter end and $5.3 billion at year end. The company retired $1.8 billion of domestic term debt in the first quarter of 2004 and expects to retire an additional $800 million by year-end 2004. The company paid $1.3 billion for income taxes in the first quarter of 2004 associated with the sale of its domestic Credit and Financial Products business.
Outlook
The company anticipates second quarter earnings per share to be between $0.78 and $0.83. The outlook assumes second quarter comparable store sales to be flat or up slightly. For the full year, the company remains on track with its expectation of earnings per share, before the cumulative effect of change in accounting principle, between $3.60 and $3.80. This 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. The second quarter and full year earnings per share exclude any effects that may result from our ongoing efforts to streamline the organization to improve efficiency and effectiveness.
Forward-Looking Statements
This release contains guidance on second quarter and full-year 2004 revenues and earnings per share and our expectations regarding additional debt retirement. 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 and spending; the success of the full-line store strategy and other strategies; 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; Sears' ability to integrate and operate Lands' End successfully; the successful integration of Sears' retail businesses with Citigroup's operation of the Credit and Financial Products business, which involves significant training and the integration of complex systems and processes; 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 first 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 1:00 p.m. EDT/12:00 noon CDT today. The replay number is 1-800-253-1052, access code: 7239. 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, including approximately 870 full-line stores 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 Ended
April 3, 2004 and March 29, 2003
(millions, except earnings per common share) 2004 2003
REVENUES
Merchandise sales and services $7,703 $7,474
Credit and financial products revenues 91 1,406
Total revenues 7,794 8,880
COSTS AND EXPENSES
Cost of sales, buying and occupancy 5,621 5,474
Selling and administrative 1,894 2,110
Provision for uncollectible accounts 16 483
Depreciation and amortization 228 225
Interest, net 76 279
Total costs and expenses 7,835 8,571
Operating (loss)/ income (41) 309
Other income, net 16 1
(Loss)/ income before income taxes,
minority interest and cumulative
effect of change in accounting principle (25) 310
Income tax benefit/(expense) 9 (115)
Minority interest (4) (3)
(Loss)/ income before cumulative effect
of change in accounting principle (20) 192
Cumulative effect of change in
accounting principle (839) -
NET (LOSS)/ INCOME $ (859) $ 192
(LOSS)/ EARNINGS PER COMMON SHARE
Basic
(Loss)/ earnings per share before
cumulative effect of change in
accounting principle $(0.09) $ 0.60
Cumulative effect of change in
accounting principle $(3.81) $ -
(Loss)/ earnings per share $(3.90) $ 0.60
Diluted
(Loss)/ earnings per share before
cumulative effect of change in
accounting principle $(0.09) $ 0.60
Cumulative effect of change in
accounting principle $(3.81) $ -
(Loss)/ earnings per share $(3.90) $ 0.60
Average common equivalent shares
outstanding 220.4 318.1
SEARS, ROEBUCK AND CO.
CONSOLIDATED BALANCE SHEET
(millions)
April 3, March 29, January 3,
2004 2003 2004
Assets
Current assets
Cash and cash equivalents $ 4,235 $ 3,846 $ 9,057
Domestic credit card receivables - 29,558 -
Sears Canada credit card
receivables 1,897 1,719 1,998
Less allowance for
uncollectible accounts 40 1,843 42
Net credit card receivables 1,857 29,434 1,956
Other receivables 489 716 733
Merchandise inventories, net 5,609 5,730 5,335
Prepaid expenses, deferred
charges and other current assets 774 708 407
Deferred income taxes 689 790 708
Total current assets 13,653 41,224 18,196
Property and equipment, net 6,603 6,794 6,788
Deferred income taxes 256 621 378
Goodwill 943 942 943
Tradenames and other intangible
assets 709 703 710
Other assets 555 1,124 708
Total assets $22,719 $51,408 $27,723
Liabilities
Current liabilities
Short-term borrowings $ 864 $ 6,775 $ 1,033
Current portion of long-term
debt and capitalized lease
obligations 1,531 3,909 2,950
Merchandise payables 2,864 2,685 3,106
Income taxes payable 581 555 1,867
Other liabilities 2,362 3,216 2,950
Unearned revenues 1,270 1,209 1,244
Other taxes 485 445 609
Total current liabilities 9,957 18,794 13,759
Long-term debt and capitalized
lease obligations 4,066 22,021 4,218
Pension and postretirement benefits 1,656 2,414 1,956
Minority interest and other
liabilities 1,374 1,245 1,389
Total liabilities 17,053 44,474 21,322
Commitments and Contingent Liabilities
Shareholders' Equity
Common shares 323 323 323
Capital in excess of par value 3,518 3,503 3,519
Retained earnings 10,716 8,617 11,636
Treasury stock - at cost (8,759) (4,458) (7,945)
Deferred ESOP expense (19) (41) (26)
Accumulated other comprehensive loss (113) (1,010) (1,106)
Total shareholders' equity 5,666 6,934 6,401
Total liabilities and
shareholders' equity $22,719 $51,408 $27,723
Total common shares outstanding 212.7 317.1 230.4
SEARS, ROEBUCK AND CO.
Segment Income Statements
(millions)
For the 13 Weeks Ended April 3, 2004 and March 29, 2003
Domestic Sears Canada
2004 2003* 2004 2003
Merchandise sales and services $6,789 $6,707 $ 914 $767
Credit and financial products
revenues - 1,330 91 76
Total revenues 6,789 8,037 1,005 843
Costs and expenses
Cost of sales, buying and
occupancy 4,970 4,938 651 536
Selling and administrative 1,611 1,880 283 230
Provision for uncollectible
accounts - 471 16 12
Depreciation and amortization 198 198 30 27
Interest, net 49 251 27 28
Total costs and expenses 6,828 7,738 1,007 833
Operating (loss) income $ (39) $ 299 $ (2) $ 10
Foreign exchange rate (quarterly
average) 0.7593 0.6578
SEARS, ROEBUCK AND CO.
Segment Income Statements
(millions)
For the 13 Weeks Ended April 3, 2004 and March 29, 2003
Consolidated
2004 2003
Merchandise sales and services $7,703 $7,474
Credit and financial products revenues 91 1,406
Total revenues 7,794 8,880
Costs and expenses
Cost of sales, buying and occupancy 5,621 5,474
Selling and administrative 1,894 2,110
Provision for uncollectible accounts 16 483
Depreciation and amortization 228 225
Interest, net 76 279
Total costs and expenses 7,835 8,571
Operating (loss) income $ (41) $ 309
Net (loss)/ income before cumulative
effect of change in accounting principle $ (20) $ 192
Cumulative effect of change in
accounting principle $ (839) $ -
Net (loss)/ income $ (859) $ 192
EPS - Diluted $(3.90) $ 0.60
Average shares o/s 220.4 318.1
* Domestic segment detail for the 13 weeks ended March 29, 2003
Retail & Credit &
Related Financial Corporate & Total
Services Products Other Domestic
Merchandise sales and services $6,644 $ - $ 63 $6,707
Credit and financial products
revenues - 1,330 - 1,330
Total revenues 6,644 1,330 63 8,037
Costs and expenses
Cost of sales, buying and
occupancy 4,914 - 24 4,938
Selling and administrative 1,561 218 101 1,880
Provision for uncollectible
accounts - 471 - 471
Depreciation and amortization 183 4 11 198
Interest, net 9 242 - 251
Total costs
and expenses 6,667 935 136 7,738
Operating (loss) income $ (23) $ 395 $(73) $ 299
SEARS, ROEBUCK AND CO.
SUPPLEMENTAL INFORMATION - INVENTORY, STORE COUNT AND SUMMARY OF
SIGNIFICANT ITEMS
($ in millions, except earnings per share)
Domestic Inventories:
April 3, March 29, January 3,
2004 2003 2004
-LIFO $4,980 $5,170 $4,728
-FIFO $5,560 $5,784 $5,308
Domestic Retail Stores:
April 3, March 29, January 3,
2004 2003 2004
Full-line 872 870 871
Specialty 1,103 1,304 1,105
Lands' End 16 15 16
Total 1,991 2,189 1,992
Summary of Significant Items:
For the 13 Weeks For the 13 Weeks
Ended April 3, 2004 Ended March 29, 2003
Earnings Earnings
Pretax Per Share Pretax Per Share
As Reported $(25) $(3.90) $310 $0.60
Significant items:
Cumulative effect of
change in accounting
for retirement plans - 3.81 - -
Curtailment gain on
medical plans (30) (0.09) - -
Negative carry related
to Credit legacy debt
and related debt
retirement costs 38 0.11 - -
Proforma effects on the prior
year:
Divested Businesses
As reported - - (405) (0.80)
Zero-percent financing
costs - - 56 0.12
Proforma revenues earned
under Citigroup
alliance - - 32 0.07
Total divested
businesses - - (317) (0.61)
Retirement plan accounting
change (1) - - 11 0.02
Adjusted* $(17) $(0.07) $ 4 $0.01
Average common equivalent
shares outstanding 220.4 318.1
* The adjustments to pretax earnings and earnings per share to remove
the effects of the change in accounting for retirement plans
and the results of operations of the divested businesses provide a
better presentation of the results of the ongoing operations of
the company.
(1) Represents the effect on the 13 weeks ended March 29, 2003
assuming that the change in accounting for retirement plans
occurred at the beginning of fiscal 2003.
SOURCE: Sears, Roebuck and Co.
CONTACT: Media, Edgar P. McDougal, +1-847-286-9669, or Investor, Scott
A. Bohaboy, +1-847-286-7419, both of Sears, Roebuck and Co.
Web site: http://www.sears.com/