Sears Reports Second Quarter 2004 Results
Sears, Roebuck and Co. (NYSE: S) today reported net income of $53 million, or $0.24 per share on an average base of 216.5 million common equivalent shares, for the second quarter ended July 3, 2004, compared with net income of $309 million, or $1.04 per share on an average base of 298.0 million common equivalent shares in the second 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.
"Like much of the industry, we experienced weak demand in June," said Chairman and CEO Alan J. Lacy. "That, combined with the overhang of our spring apparel assortment and inventory issues, resulted in a disappointing quarter."
Sears' second quarter 2004 earnings included two pretax charges, including $41 million, or $0.12 per share, for severance costs associated with the restructuring of the company's home office organization and field initiatives to gain efficiency, primarily in back office operations. The second charge of $39 million, or $0.12 per share, was for additional depreciation expense due to shortening the estimated remaining useful lives for the assets sold to Computer Sciences Corporation under the previously announced purchased services arrangement.
In the second quarter of 2003, Sears recorded a pretax charge of $28 million, or $0.06 per share, for severance costs associated with productivity improvement initiatives.
Domestic
The Domestic segment, which includes all domestic retail formats as well as the company's corporate functions, reported operating income of $42 million for the second quarter of 2004, compared with operating income of $466 million in the second quarter of 2003. The prior year results included operating income of $358 million and $6 million, respectively, from the divested domestic Credit and Financial Products and NTB businesses.
Merchandise sales and services revenues for the 2004 second quarter were $7.7 billion, compared with $7.9 billion in the prior year period. Prior year revenues include $106 million attributable to NTB. Strong showings in certain key product areas and approximately $38 million earned under the company's long-term alliance with Citigroup, were more than offset by sales declines in most apparel categories, as well as air conditioning. Overall, domestic comparable store sales decreased 2.9 percent in the second quarter of 2004.
"We were encouraged by the performance of several businesses during the quarter, ranging from lawn mowers and patio furniture in our Lawn & Garden business, to projection televisions and digital cameras in our Consumer Electronics business," Lacy said. "We are also pleased with early customer response in the merchandise categories that are being reset, such as Home Fashions and Kids. In addition, the overall performance of our off-mall formats was positive, including The Great Indoors, Hardware and Dealer stores."
The gross margin rate for the quarter increased to 27.9 percent in the current year from 27.5 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 second quarter were $1.8 billion, which included a $21 million pretax charge for establishment of additional insurance reserves resulting from the financial difficulties being experienced by one of Sears' third party insurance providers. The prior year selling and administrative expenses of $2.0 billion included approximately $243 million related to divested businesses.
Interest of $41 million for the second quarter included $19 million attributable to interest related to the legacy debt of the former Credit and Financial Products business.
Other income of $31 million for the second quarter included $18 million related to proceeds received in connection with the gain upon the disposition of the company's remaining interest in the Sears Tower.
Sears Canada
Sears Canada reported operating income of $11 million for the second quarter of 2004, compared with operating income of $23 million in the second quarter of 2003.
Revenues for the second quarter increased 4.6 percent to $1.1 billion due primarily to the effects of foreign exchange.
The gross margin rate declined to 27.4 percent in the current year quarter from 28.7 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.
Selling and administrative expenses as a percentage of revenues increased to 26.0 percent in the current year quarter from 25.3 percent in the prior year, primarily due to increased employee-related costs.
Significant Developments
As previously announced, the company has entered into an agreement to acquire ownership or leasehold interest in up to 61 off-mall stores from Kmart and Wal-Mart for approximately $620 million in cash. Most of the new stores will be converted to a new mid-size format based on the new Sears Grand format.
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 $23.9 billion at the prior year quarter end and $5.3 billion at year end. The company retired $600 million of domestic term debt in the second quarter of 2004 and expects to retire an additional $200 million by year-end 2004.
Outlook
The company anticipates third quarter earnings per share to be between $0.00 and $0.10, including $0.03 to $0.05 per share of negative carrying cost on the company's remaining legacy debt. The outlook assumes third quarter domestic comparable store sales to be down low single-digits. 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 $2.66 and $2.86, reflecting the year-to-date results and a reduced revenue outlook based upon first-half trends. 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 third quarter and full-year 2004 revenues, gross margins 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 successful execution of, and customer reactions to, the company's strategic initiatives, including the full-line store strategy and the proposed acquisition, 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; 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 second 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 , under "Presentations & Audio Archives," or go directly to eventDetails&c=63737&eventID=919413. 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 1-866-499-4546, access code: 7072. A replay of the conference call will also be available on the company's website at , under "Presentations & Audio Archives," or go directly to eventDetails&c=63737&eventID=919413 .
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 For the 26
Weeks Ended Weeks Ended
July 3, 2004 and July 3, 2004 and
June 28, 2003 June 28, 2003
(millions, except earnings per
common share) 2004 2003 2004 2003
REVENUES
Merchandise sales and services $8,700 $ 8,851 $16,403 $16,325
Credit and financial products
revenues 81 1,345 172 2,751
Total revenues 8,781 10,196 16,575 19,076
COSTS AND EXPENSES
Cost of sales, buying and
occupancy 6,282 6,402 11,903 11,876
Selling and administrative 2,064 2,299 3,958 4,409
Provision for uncollectible
accounts 11 461 27 944
Depreciation and amortization 262 230 490 455
Interest, net 68 287 144 566
Special charges and impairments 41 28 41 28
Total costs and expenses 8,728 9,707 16,563 18,278
Operating income 53 489 12 798
Other income, net 36 13 52 14
Income before income taxes, minority
interest and cumulative effect of
change in accounting principle 89 502 64 812
Income tax expense (32) (186) (23) (301)
Minority interest (4) (7) (8) (10)
Income before cumulative effect of
change in accounting principle 53 309 33 501
Cumulative effect of change in
accounting principle - - (839) -
NET INCOME/ (LOSS) $ 53 $ 309 $ (806) $ 501
EARNINGS/ (LOSS) PER COMMON SHARE
Basic
Earnings per share before
cumulative effect of change in
accounting principle $ 0.25 $ 1.04 $ 0.15 $ 1.63
Cumulative effect of change in
accounting principle $ - $ - $ (3.86) $ -
Earnings/ (loss) per share $ 0.25 $ 1.04 $ (3.71) $ 1.63
Diluted
Earnings per share before
cumulative effect of change in
accounting principle $ 0.24 $ 1.04 $ 0.15 $ 1.63
Cumulative effect of change in
accounting principle $ - $ - $ (3.86) $ -
Earnings/ (loss) per share $ 0.24 $ 1.04 $ (3.71) $ 1.63
Average common equivalent shares
outstanding 216.5 298.0 217.1 307.9
SEARS, ROEBUCK AND CO.
CONSOLIDATED BALANCE SHEET
(millions)
July 3, June 28, January 3,
2004 2003 2004
Assets
Current assets
Cash and cash equivalents $ 3,559 $ 2,921 $ 9,057
Domestic credit card receivables - 29,465 -
Sears Canada credit card
receivables 1,813 1,849 1,998
Less allowance for
uncollectible accounts 31 1,953 42
Net credit card receivables 1,782 29,361 1,956
Other receivables 557 733 733
Merchandise inventories, net 5,543 5,447 5,335
Prepaid expenses, deferred charges
and other current assets 891 620 407
Deferred income taxes 588 839 708
Total current assets 12,920 39,921 18,196
Property and equipment, net 6,565 6,909 6,788
Deferred income taxes 245 627 378
Goodwill 943 945 943
Tradenames and other intangible
assets 709 703 710
Other assets 545 1,268 708
Total assets $21,927 $50,373 $27,723
Liabilities
Current liabilities
Short-term borrowings $ 770 $ 5,464 $ 1,033
Current portion of long-term debt
and capitalized lease obligations 678 5,050 2,950
Merchandise payables 3,014 2,879 3,106
Income taxes payable 462 724 1,867
Other liabilities 2,408 3,156 2,950
Unearned revenues 1,256 1,256 1,244
Other taxes 496 496 609
Total current liabilities 9,084 19,025 13,759
Long-term debt and capitalized lease
obligations 4,123 21,462 4,218
Pension and postretirement benefits 1,635 2,336 1,956
Minority interest and other
liabilities 1,384 1,318 1,389
Total liabilities 16,226 44,141 21,322
Commitments and Contingent Liabilities
Shareholders' Equity
Common shares 323 323 323
Capital in excess of par value 3,516 3,501 3,519
Retained earnings 10,731 8,861 11,636
Treasury stock - at cost (8,740) (5,463) (7,945)
Deferred ESOP expense (12) (34) (26)
Accumulated other comprehensive loss (117) (956) (1,106)
Total shareholders' equity 5,701 6,232 6,401
Total liabilities and
shareholders' equity $21,927 $50,373 $27,723
Total common shares outstanding 213.1 282.6 230.4
SEARS, ROEBUCK AND CO.
Segment Income Statements
(millions)
For the 13 Weeks Ended July 3, 2004 and June 28, 2003
Domestic Sears Canada Consolidated
2004 2003* 2004 2003 2004 2003
Merchandise sales
and services $7,673 $7,871 $1,027 $ 980 $8,700 $8,851
Credit and financial
products revenues - 1,266 81 79 81 1,345
Total revenues 7,673 9,137 1,108 1,059 8,781 10,196
Costs and expenses
Cost of sales,
buying and
occupancy 5,536 5,703 746 699 6,282 6,402
Selling and
administrative 1,776 2,031 288 268 2,064 2,299
Provision for
uncollectible
accounts - 446 11 15 11 461
Depreciation and
amortization 237 202 25 28 262 230
Interest, net 41 261 27 26 68 287
Special charges
and impairments 41 28 - - 41 28
Total costs and
expenses 7,631 8,671 1,097 1,036 8,728 9,707
Operating income $ 42 $ 466 $ 11 $ 23 $ 53 $ 489
Foreign exchange rate
(quarterly average) 0.7353 0.7109
Net income $ 53 $ 309
EPS - Diluted $ 0.24 $ 1.04
Average shares
outstanding 216.5 298.0
* Domestic segment detail for the 13 weeks ended June 28, 2003
Retail & Credit &
Related Financial Corporate & Total
Services Products Other Domestic
Merchandise sales and
services $7,771 $ - $ 100 $7,871
Credit and financial
products revenues - 1,266 - 1,266
Total revenues 7,771 1,266 100 9,137
Costs and expenses
Cost of sales, buying
and occupancy 5,662 - 41 5,703
Selling and
administrative 1,707 215 109 2,031
Provision for
uncollectible accounts - 446 - 446
Depreciation and
amortization 187 5 10 202
Interest, net 16 245 - 261
Special charges and
impairments 16 - 12 28
Total costs and expenses 7,588 911 172 8,671
Operating income/ (loss) $ 183 $ 355 $ (72) $ 466
SEARS, ROEBUCK AND CO.
Segment Income Statements
(millions)
For the 26 Weeks Ended July 3, 2004 and June 28, 2003
Domestic Sears Canada Consolidated
2004 2003** 2004 2003 2004 2003
Merchandise sales
and services $14,462 $14,578 $1,941 $1,747 $16,403 $16,325
Credit and
financial
products revenues - 2,596 172 155 172 2,751
Total revenues 14,462 17,174 2,113 1,902 16,575 19,076
Costs and expenses
Cost of sales,
buying and
occupancy 10,506 10,641 1,397 1,235 11,903 11,876
Selling and
administrative 3,387 3,911 571 498 3,958 4,409
Provision for
uncollectible
accounts - 917 27 27 27 944
Depreciation and
amortization 435 400 55 55 490 455
Interest, net 90 512 54 54 144 566
Special charges
and impairments 41 28 - - 41 28
Total costs and
expenses 14,459 16,409 2,104 1,869 16,563 18,278
Operating income $ 3 $ 765 $ 9 $ 33 $ 12 $ 798
Foreign exchange
rate (annual
average) 0.7473 0.6844
Net income before
cumulative effect
of change in
accounting
principle $ 33 $ 501
Cumulative effect
of change in
accounting
principle $ (839) $ -
Net (loss)/
income $ (806) $ 501
EPS - Diluted $ (3.71) $ 1.63
Average shares outstanding 217.1 307.9
** Domestic segment detail for the 26 weeks ended June 28, 2003
Retail & Credit &
Related Financial Corporate & Total
Services Products Other Domestic
Merchandise sales and
services $14,415 $ - $ 163 $14,578
Credit and financial
products revenues - 2,596 - 2,596
Total revenues 14,415 2,596 163 17,174
Costs and expenses
Cost of sales, buying
and occupancy 10,576 - 65 10,641
Selling and
administrative 3,268 433 210 3,911
Provision for
uncollectible accounts - 917 - 917
Depreciation and
amortization 370 9 21 400
Interest, net 25 487 - 512
Special charges and
impairments 16 - 12 28
Total costs and expenses 14,255 1,846 308 16,409
Operating income/ (loss) $ 160 $ 750 $(145) $ 765
SEARS, ROEBUCK AND CO.
SUPPLEMENTAL INFORMATION - INVENTORY, STORE COUNT AND SUMMARY OF CERTAIN
SIGNIFICANT ITEMS
($ in millions, except earnings per share)
Domestic Inventories:
July 3, June 28, January 3,
2004 2003 2004
-LIFO $4,945 $4,881 $4,728
-FIFO $5,526 $5,507 $5,308
Domestic Retail Stores:
July 3, June 28, January 3,
2004 2003 2004
Full-line 871 869 871
Specialty 1,109 1,307 1,105
Lands' End 16 15 16
Total Domestic Retail
Stores 1,996 2,191 1,992
Summary of Certain Significant Items:(1)
For the 13 Weeks For the 13 Weeks
Ended July 3, 2004 Ended June 28, 2003
Earnings Earnings
Pretax Per Share Pretax Per Share
Negative carry related to
Credit legacy debt $19 $0.05 $ - $ -
Special Charges 41 0.12 28 0.06
Accelerated Depreciation
resulting from CSC Purchased
Services transaction 39 0.12 - -
Proforma effects on the
prior year:
Divested Businesses:
Operating income - - (364) (0.78)
Zero-percent financing
costs - - 60 0.13
Pro forma revenues
earned under Citigroup
alliance - - 40 0.09
Total divested businesses - - (264) (0.56)
Retirement plan accounting
change (2) - - 17 0.04
Total $99 $0.29 $(219) $(0.46)
Average common equivalent
shares outstanding 216.5 298.0
(1) These items relate to the Company's initiatives to streamline its home
office and field operations, the results of operations of divested
businesses and the change in accounting for retirement plans.
Management believes that consideration of these items in addition to
reported results provides a better understanding of the Company's
financial performance.
(2) Represents the effect on the 13 weeks ended June 28, 2003 assuming
that the change in accounting for retirement plans occurred at the
beginning of fiscal 2003.
SEARS, ROEBUCK AND CO.
SUPPLEMENTAL INFORMATION - INVENTORY, STORE COUNT AND SUMMARY OF CERTAIN
SIGNIFICANT ITEMS
($ in millions, except earnings per share)
Summary of Certain Significant Items: (1)
For the 26 Weeks For the 26 Weeks
Ended July 3, 2004 Ended June 28, 2003
Earnings Earnings
Pretax Per Share Pretax Per Share
Cumulative effect of
change in accounting for
retirement plans $ - $3.86 $ - $ -
Curtailment gain on medical
plans (30) (0.09) - -
Negative carry related to
Credit legacy debt and
related debt retirement
costs 57 0.17 - -
Special Charges 41 0.12 28 0.06
Accelerated Depreciation
resulting from CSC Purchased
Services transaction 39 0.12 - -
Proforma effects on the
prior year:
Divested Businesses:
Operating income - - (769) (1.59)
Zero-percent financing
costs - - 116 0.24
Pro forma revenues
earned under Citigroup
alliance - - 72 0.15
Total divested businesses - - (581) (1.20)
Retirement plan accounting
change (2) - - 33 0.07
Total $107 $4.18 $(520) $(1.07)
Average common equivalent
shares outstanding 217.1 307.9
(1) These items relate to the Company's initiatives to streamline its
home office and field operations, the results of operations of
divested businesses and the change in accounting for 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 26 weeks ended June 28, 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: