Sears Q3 Losses Widen Kmart Loss Narrows

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Hoffman Estates, IL—Sears Holdings reported today a third quarter loss wider than expected, mostly due to lower sales in apparel and appliances in its namesake Sears stores.

Loss widened to $218 million, or $1.98 a share, for the three months ended October 30, from $127 million, or $1.09 a share, in the year-earlier third quarter.  Excluding items such as pension expenses, closed-store reserves and severance, the loss widened to $1.71 from 81 cents as revenue dropped 5% to $9.68 billion. Retail analysts’ average estimates were for a loss of $1.08 on $9.9 billion in revenue.

The company, which also owns Kmart, had quarterly revenue of $9.68 billion, down 5%, while U.S. comparable store sales fell 4.8%. By division, Sears posted an 8.2% plunge in comparable sales. Business at its Kmart held up better, but the discount chain’s same store sales edged down 0.7%.

Warmer Weather Hurt Apparel Sales

Total company gross margin narrowed to 26.4% from 27.2%, in part hurt by increased discounts at Sears Canada and reduced margins in home services and appliances at Sears U.S. “These declines were partially offset by an increase in gross margin rate of 90 basis points at Kmart in part because of an increase in sales of higher margin merchandise such as apparel and sporting goods,” the company stated. Also hurting the bottom line was operating costs dropping only 3.2%.

“While Kmart improved profitability, our third quarter results were disappointing, in large part due to lower sales of apparel and appliances at Sears,” said W. Bruce Johnson, Sears Holdings’ interim president/ceo. “Our seasonal apparel sales were down, with the unusually warm weather being a contributing factor.”

Apparel, Sporting Goods Sales Help Kmart

At Kmart, losses narrowed to $15 million from $39 million as slowing demand for food, consumables and pharmacy categories offset increases in apparel, toys and consumer electronics.

Selling, general and administrative expenses reached 27.2% of quarterly sales from the prior year’s 26.1%, in part as the company promoted Shop Your Way, its rewards program, and as it pushed sales online collaborating with UK’s NEXT on exclusive merchandise. Sears plans to expand online sales and promote its rewards program, as well as on social- and digital-media efforts, along with closing under-performing Kmart and Sears stores.

Retail analysts have faulted hedge fund investor Eddie Lampert, who’s ESL Investments owns a majority share, for resisting store remodels or updates.

Sears’ third quarter showing and a deteriorating balance sheet, “significantly changes for the worse what was already a bad trend,” Credit Suisse retail analyst Gary Balter said. “Sears is saddled by its locations and by stronger competition in its space.”

“Inventories built by almost $1.8 billion in the quarter, and while management attributed some of that to investing in better-performing areas at Kmart, we expect gross margins to come under more pressure in the holiday season,” said Paul Swinand, analyst for Morningstar.