Sears 2Q Loss Narrows, Kmart Margins Improve

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Hoffman Estates, IL–Sears Holdings Corp. said today that its second-quarter loss narrowed and profit margins increased at its Kmart chain.

But the earnings results fell short of expectations as the company faces stiffer competition and slowing consumer spending, especially in groceries, caused declines in comparable store sales.

The net loss narrowed to $39 million, or 35 cents a share in the second quarter ended July 31 from $94 million, or 79 cents a share, a year earlier. Excluding certain items, the loss was 36 cents a share, twice as wide as retail analysts’ average estimate of 18 cents. Revenue slipped slightly to $10.46 billion, down from $10.55 billion last year but missing analysts’ prediction of $10.52 billion.

Sales at its U.S. stores open at least a year fell 2.2%, with declines of 1.4% at Kmart and 2.8% at Sears’ domestic stores. Although Kmart held expenses and maintained margins in its apparel sales, the store faced strong competition from rivals like Target, Walmart and wholesale clubs who are battling over food sales. Sears’ suffered from lower sales in key categories, including tools, power lawn and garden merchandise, and consumer electronics.

Kmart Margins Continue to Improve

“Kmart continued to improve its performance during the second quarter, as an improvement in its gross margin rate led to increased profitability,” said W. Bruce Johnson, Sears Holdings’ interim chief executive officer and president. “Overall, our total revenues declined only slightly despite the uncertain economic environment faced by our customers.”

Gross margin rose to 27% from 26.5% on a 2.3 percentage-point climb at Kmart. Sears’ gross margin fell 40 basis points, primarily from lower margins in home services. Sears’ Canadian operation also saw its gross margin fall, by 150 basis points.

“This is probably as good as it gets for Sears, and this isn’t great,” International Strategy & Investment Group analyst Greg Melich said, pointing out that rising apparel costs would probably weigh on gross margins next year, and same-store sales would suffer because of fewer government stimulus programs for energy-efficient appliances.

With many retailers starting to resort to discounting in an effort to lure in shoppers, Sears has been struggling to increase traffic and may be forced to cut prices encourage spending.  “That would be a significant hindrance to any kind of growth for the company,” said Brian Sozzi, retail analyst at Wall Street Strategies.

“Competition really did ramp up this quarter,” said Morningstar analyst R.J. Hottovy. “And retailers are fighting each other for a share of consumers’ wallets.”

During the quarter, Sears’ share-repurchase effort resumed, with $272 million of stock being bought. There is $309 million remaining under prior authorizations. The company’s market value is about $7.6 billion.


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