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Joined: 04 Jul 2003
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Posted: Sun Aug 10, 2003 2:41 am Post subject: X MARKS THE SPOT
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Retail
Sears Charges Into Turnaround
Ari Weinberg, 04.17.03, 1:34 PM ET
NEW YORK - According to senior management at Sears, Roebuck and Co., the retailer's revitalization is going according to plan. For Sears investors, that change couldn't come fast enough.
Shares of the 110-year-old Hoffman Estates, Ill.-based retailer are up 23% since the company said on March 26 that it was "exploring strategic options" for its flagging credit card business. In announcing earnings Thursday morning, Sears (nyse: S - news - people ) showed that improvement for its Sears Card and Sears Gold MasterCard portfolios means a better-than-expected increase in net charge-offs. Despite reporting first quarter net income of $192 million, or 60 cents per share, and 3 cents better than the analyst consensus, Sears stock was off 1% in morning trading to $26.38.
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"We're confident we are on the right path," said Sears Chairman and Chief Executive Alan Lacy. "We feel good about the steps and progress we have made." In 2002, Sears made several changes to its business model that included exiting certain retail lines, acquiring catalog clothing retailer Lands' End and remodeling stores.
As the company rolls out Lands' End products to its more than 800 stores by September, Sears expects that the integration, along with favorable comparables from charges taken in the last two quarters of 2002, will push it towards its full year earnings goal of $4.95 to $5.15 per share. But, as several analysts pointed out on the call, Sears has a ways to go. On top of the 60 cents from the first quarter, the company expects to earn 85 cents to $1 per share in the second quarter--below current expectations.
Compared to the first quarter of 2002, retail sales of $6.6 billion were off 1.8% for an operating loss of $23 million. The Lands' End integration--now in place at 400 of 800 stores--added $49 million in expenses during the quarter. For the second quarter, Sears Chief Financial Officer Glenn Richter says the company expects comparable sales to decline in the mid-single digits after a 6.7% drop in same-store sales for the first quarter.
Sears Canada added $10 million in operating income, compared with a $110 million operating loss for the first quarter of 2002.
While the long-term prospects of Sears depend on store makeovers, the immediate concern for investors is the company's ability to slough off its credit unit. Goldman Sachs (nyse: GS - news - people ) is handling the sale of part or all of the portfolio. The company is reportedly looking for $6 billion on its $30.1 billion portfolio. But operating income at the unit was down 10.8% to $395 million for the quarter. "It was better than we planned, with lower-than-expected charge-offs," said Richter.
Charge-offs were 6.11%, up from 5.42% at the end of 2002. Gold MasterCard charge-offs rose to 5.06% from 3.41%.
As Sears shifts its better customers to Sears Gold MasterCard from Sears Card, an interesting trend has developed for delinquent Gold MasterCard accounts--they increased far greater than those at the supposedly down market Sears Card. The Gold MasterCard delinquency rate rose to 4.72%, compared to 3.76% for the prior quarter. Sears card dropped to 10.14% from 10.34%. This comes as the Gold MasterCard portfolio increased by less than $800 million in receivables to $12.3 billion.
"We feel very good about where credit is heading and we're well priced for the risk," said Lacy on the conference call.
But how well Sears is prepared to handle that risk is shown by the additional $1.9 billion in cash and equivalents on its balance sheet. At $3.8 billion, Richter said Sears decided to pre-fund some of its upcoming commitments. But the company will need that only if it can't get the price it wants for its credit cards.
And, despite the company's assessment that credit cards are stabilizing better than expected, the trend in the portfolio could make reported potential buyers like General Electric (nyse: GE - news - people ) or Bank One (nyse: ONE - news - people ) think twice.
More From Forbes
Sears Bets On Retail 03.27.03
The retailer plans to sell its credit-card unit and focus on retail, but is this the right move?
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Sears Chisels Out A Better Quarter 01.16.03
The fourth quarter looks much better, but why all these questions about credit cards and debt?
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