Sears Reports Third Quarter 2003 Results
Sears, Roebuck and Co. (NYSE: S) today reported net income of $147 million, or $0.52 per share, for the third quarter ended September 27, 2003, compared with net income of $189 million, or $0.59 per share, in the third quarter of 2002.
Sears' third quarter 2003 earnings included a pretax charge of $141 million ($89 million after-tax), or $0.32 per share, related to the company's previously announced refinement of its business strategy for The Great Indoors.
"The third quarter results were in line with our expectations," said Chairman and CEO Alan J. Lacy. "We are pleased with our return to sales growth following two years of a fundamental repositioning and restructuring of our core business. While we have much still to do, we believe the business is well-positioned for profitable growth."
Retail and Related Services
Retail and Related Services reported an operating loss of $85 million for the third quarter of 2003, compared with operating income of $42 million in the third quarter of 2002. Included in these results is the pretax charge of $141 million related to The Great Indoors, which consists of asset impairment charges of $99 million on exited and certain ongoing stores, inventory clearance costs of $29 million and other exit costs of $13 million. Of the $141 million charge, $112 million is reflected in special charges and impairments and $29 million in cost of sales.
Revenues for the third quarter were $7.3 billion, an increase of 1.1 percent over the same period last year primarily due to the 1.2 percent increase in domestic comparable store sales. In the home group, the lawn and garden and fitness businesses continued to experience strong performances across all formats, while home appliances showed solid improvements in the quarter. Within apparel (and accessories), improved merchandise offerings resulted in comparable store sales increases in the women's ready-to-wear, men's and footwear categories.
"We are pleased with the performance of the Lands' End and Covington brands. We completed the roll-out of Lands' End merchandise to another 470 stores during the month of September and now carry the brand in all of our full-line stores nationwide," Lacy said. "We continue to see a broader sales improvement provided by our Lands' End brands in Sears' full-line stores, as comparable store apparel sales for stores carrying the merchandise out- performed those without." Lacy added, "Overall sales trends improved during the quarter, reflecting continuing progress against our goals of upgrading merchandise offerings, enhancing the customer experience and improving our marketing efforts."
The company's domestic gross margin rate for the quarter declined from 27.5 percent to 26.2 percent, as improvements in sourcing were more than offset by an increase in promotional and clearance activities and the $29 million charge for inventory clearance activities in connection with The Great Indoors' restructuring.
Selling and administrative expenses declined $58 million with decreases across virtually all retail business formats attributable to continuing productivity improvement efforts. Selling and administrative expenses as a percentage of sales were 23.1 percent as compared to 24.1 percent in the prior year.
Credit and Financial Products
Credit and Financial Products reported operating income of $366 million for the quarter, up $82 million compared to the 2002 third quarter. The 2002 third quarter results included a $189 million increase to the domestic allowance for uncollectible accounts.
Third quarter domestic Credit and Financial Products revenues of $1.3 billion decreased $56 million from the prior year, as a slight increase in average receivable balances was more than offset by a lower yield. The lower yield is attributable to the lower interest rate environment, reduced late fees and an increase in the size of the MasterCard portfolio, which carries a lower yield than Sears' private label card.
Domestic credit card receivables at the end of the third quarter decreased 1.0 percent from the prior year to $29.0 billion. Funding costs were below last year's quarter, as interest expense decreased due to the lower interest rate environment and lower debt balances.
The domestic provision for uncollectible credit card accounts was $550 million in the third quarter, compared with $588 million in last year's period, a decrease of $38 million. The third quarter of 2002 included a $189 million increase to the allowance for uncollectible accounts resulting from receivables growth and an increase in charge-off and delinquency trends. The net charge-off rate for the third quarter of 2003 was 7.55 percent, compared with 5.55 percent a year ago primarily driven by the seasoning of the MasterCard portfolio, an increase in bankruptcy filings, as well as the ongoing sale of charged-off receivables to a third party.
Year-over-year delinquencies rose to 7.62 percent from 7.24 percent, reflecting continued seasoning of the MasterCard portfolio. The domestic allowance for uncollectible credit card accounts at the end of the third quarter of 2003 was $1.9 billion, or 6.55 percent of ending credit receivables, compared with 6.45 percent at the end of the 2003 second quarter.
Share Repurchase Program
During the quarter, Sears repurchased 20.6 million common shares for a total cost of $892 million, at an average price of $43.33 per share. As of September 27, 2003, the company had remaining authorization to repurchase $339 million common shares by December 31, 2006, under its existing share repurchase program approved by the Sears board of directors on July 15, 2003.
On October 8, the Sears board of directors authorized $3.0 billion for repurchase of the company's common shares. This authorization, combined with the company's existing share repurchase program, positions Sears to execute its plan to return a portion of the proceeds from the sale of its Credit and Financial Products business to its shareholders. The shares will 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.
NTB Sale
On September 22, 2003, Sears announced it had entered into an agreement to sell its National Tire & Battery ("NTB") business and related inventory to TBC Corporation for total cash consideration of approximately $260 million. This transaction, which is subject to the normal regulatory reviews and closing conditions, is expected to close by the end of this year.
Outlook
The company expects full-year earnings per share to be between $4.80 and $5.00 per share. This full-year expectation excludes any effect that may result from the sale of the Credit and Financial Products business, but includes the charge for the refinement of the business strategy for The Great Indoors and the impact of the expected sale of NTB. Within this full-year earnings per share expectation, the company anticipates that fourth quarter Retail and Related Services' operating income, excluding the expected gain upon the closing of the sale of NTB which will be recorded in other income, will increase in the low double-digit range. The company expects comparable store sales to increase low single-digit and gross margin to be flat to the prior year fourth quarter.
Credit and Financial Products would remain on plan for a full-year mid- single digit decline in operating income. The company intends to update its outlook based upon the impacts of the anticipated sale of the Credit and Financial Products business as soon as practical after the close of the transaction.
Forward-Looking Statements
This release contains guidance on full-year 2003 earnings per share, segment operating income, comparable store sales, margins and other company performance measures, as well as the timing of the expected closing of the sale of NTB. 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 the possibility that either the Credit and Financial Products or the NTB sale does not close or either closing is delayed; competitive conditions in retail and credit; changes in consumer confidence and spending; delinquency and charge-off trends in the credit card portfolio; consumer debt levels and the level of consumer bankruptcies; the success of initiatives to address increased delinquencies and credit losses and improve credit profitability; 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; the 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 third 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 www.sears.com/investors, under "Events and Webcasts." 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 1-800-947-6621, access code: 7239. A replay of the conference call will also be available on the company's website at www.sears.com/investors, under "Events and Webcasts."
About Sears
Sears, Roebuck and Co. is a broadline retailer with significant service and credit businesses. In 2002, the company's revenue was $41.4 billion. The company offers its wide range of apparel, home and automotive products and services to families in the U.S. through Sears stores nationwide, including approximately 870 full-line stores. Sears also offers a variety of merchandise and services through its Web sites, sears.com, thegreatindoors.com and landsend.com, and a variety of specialty catalogs.
SEARS, ROEBUCK AND CO.
CONSOLIDATED INCOME
For the 13 Weeks For the 39 Weeks
Ended Ended
September 27, 2003 September 27, 2003
and September 28, and September 28,
2002 2002
(millions, except earnings per
common share) 2003 2002 2003 2002
REVENUES
Merchandise sales and services $8,409 $8,239 $24,734 $24,639
Credit and financial products
revenues 1,385 1,430 4,136 4,209
Total revenues 9,794 9,669 28,870 28,848
COSTS AND EXPENSES
Cost of sales, buying and
occupancy 6,137 5,934 18,013 17,902
Selling and administrative 2,229 2,340 6,666 6,637
Provision for uncollectible
accounts 567 603 1,511 1,685
Depreciation and amortization 226 219 681 650
Interest 281 298 847 866
Special charges and impairments 112 - 112 111
Total costs and expenses 9,552 9,394 27,830 27,851
Operating income 242 275 1,040 997
Other income, net 2 10 16 98
Income before income taxes,
minority interest and cumulative
effect of accounting change 244 285 1,056 1,095
Income taxes (91) (94) (392) (382)
Minority interest (6) (2) (16) 23
Income before cumulative effect
of accounting change 147 189 648 736
Cumulative effect of change in
accounting for goodwill - - - (208)
NET INCOME $147 $189 $648 $528
EARNINGS PER COMMON SHARE
Basic
Earnings per share before
cumulative effect of
accounting change $0.53 $0.60 $2.18 $2.32
Cumulative effect of change
in accounting for goodwill - - - (0.66)
Earnings per share $0.53 $0.60 $2.18 $1.66
Diluted
Earnings per share before
cumulative effect of
accounting change $0.52 $0.59 $2.17 $2.29
Cumulative effect of change
in accounting for goodwill - - - (0.65)
Earnings per share $0.52 $0.59 $2.17 $1.64
Average common and dilutive
common equivalent shares
outstanding 281.0 320.1 298.7 321.7
SEARS, ROEBUCK AND CO.
CONSOLIDATED BALANCE SHEET
(millions)
September 27, September 28, December 28,
2003 2002 2002
Assets
Current assets
Cash and cash equivalents $1,546 $637 $1,962
Credit card receivables 1,974 30,810 32,595
Less allowance for
uncollectible accounts 54 1,676 1,836
Net credit card receivables 1,920 29,134 30,759
Other receivables 600 452 863
Merchandise inventories 6,243 5,961 5,115
Prepaid expenses and deferred
charges 517 619 535
Deferred income taxes 818 992 749
Assets held for sale 27,818 - -
Total current assets 39,462 37,795 39,983
Property and equipment, net 6,660 6,748 6,910
Deferred income taxes 443 502 734
Goodwill 945 940 944
Tradenames and other
intangible assets 710 704 704
Other assets 870 1,314 1,134
Total assets $49,090 $48,003 $50,409
Liabilities
Current liabilities
Short-term borrowings $6,179 $4,289 $4,525
Current portion of long-term
debt and capitalized lease
obligations 2,595 4,774 4,808
Accounts payable and other
liabilities 7,058 6,867 7,485
Unearned revenues 1,245 1,189 1,199
Other taxes 472 486 580
Liabilities held for sale 10,602 - -
Total current liabilities 28,151 17,605 18,597
Long-term debt and capitalized
lease obligations 12,121 20,781 21,304
Pension and postretirement
benefits 2,010 2,189 2,491
Minority interest and other
liabilities 1,319 1,214 1,264
Total liabilities 43,601 41,789 43,656
Commitments and Contingent Liabilities
Shareholders' Equity
Common shares 323 323 323
Capital in excess of par value 3,503 3,512 3,505
Retained earnings 8,945 7,723 8,497
Treasury stock - at cost (6,306) (4,489) (4,474)
Deferred ESOP expense (27) (42) (42)
Accumulated other comprehensive
loss (949) (813) (1,056)
Total shareholders' equity 5,489 6,214 6,753
Total liabilities and
shareholders' equity $49,090 $48,003 $50,409
Total common shares
outstanding 263.3 316.4 316.7
SEARS, ROEBUCK AND CO.
Segment Income Statements
(millions, except earnings per share)
For the 13 Weeks Ended September 27, 2003 and September 28, 2002
Credit & Financial
Retail & Related Services Products
2003 2002 2003 2002
Merchandise sales and services $7,342 $7,261 $- $-
Credit and financial products
revenues - - 1,307 1,363
Total revenues 7,342 7,261 1,307 1,363
Costs and expenses
Cost of sales, buying
and occupancy 5,415 5,266 - -
Selling and administrative 1,694 1,752 157 233
Provision for uncollectible
accounts - - 550 588
Depreciation and amortization 182 180 4 4
Interest 24 21 230 254
Special charges and
impairments 112 - - -
Total costs and expenses 7,427 7,219 941 1,079
Operating income (loss) $(85) $42 $366 $284
Net income
EPS - Diluted
Average shares o/s
Corporate & Other Sears Canada
2003 2002 2003 2002
Merchandise sales and services $107 $91 $960 $887
Credit and financial products
revenues - - 78 67
Total revenues 107 91 1,038 954
Costs and expenses
Cost of sales, buying and
occupancy 42 33 680 635
Selling and administrative 111 106 267 249
Provision for uncollectible
accounts - - 17 15
Depreciation and amortization 13 11 27 24
Interest - - 27 23
Special charges and impairments - - - -
Total costs and expenses 166 150 1,018 946
Operating income (loss) $(59) $(59) $20 $8
Net income
EPS - Diluted
Average shares o/s
Total
2003 2002
Merchandise sales and services $8,409 $8,239
Credit and financial products revenues 1,385 1,430
Total revenues 9,794 9,669
Costs and expenses
Cost of sales, buying and occupancy 6,137 5,934
Selling and administrative 2,229 2,340
Provision for uncollectible accounts 567 603
Depreciation and amortization 226 219
Interest 281 298
Special charges and impairments 112 -
Total costs and expenses 9,552 9,394
Operating income (loss) $242 $275
Net income $147 $189
EPS - Diluted $0.52 $0.59
Average shares o/s 281.0 320.1
For the 39 Weeks Ended September 27, 2003 and September 28, 2002
Credit & Financial
Retail & Related Services Products
2003 2002 2003 2002
Merchandise sales and services $21,757 $21,728 $- $-
Credit and financial products
revenues - - 3,903 4,002
Total revenues 21,757 21,728 3,903 4,002
Costs and expenses
Cost of sales, buying
and occupancy 15,991 15,873 - -
Selling and administrative 4,978 4,880 590 725
Provision for uncollectible
accounts - - 1,467 1,652
Depreciation and amortization 552 524 13 14
Interest 49 22 717 772
Special charges and
impairments 112 - - -
Total costs and expenses 21,682 21,299 2,787 3,163
Operating income (loss) $75 $429 $1,116 $839
Income before cumulative
effect of accounting
change
Cumulative effect of change
in accounting
Net Income
EPS - Diluted
Average shares o/s
Corporate & Other Sears Canada
2003 2002 2003 2002
Merchandise sales and services $270 $241 $2,707 $2,670
Credit and financial products
revenues - - 233 207
Total revenues 270 241 2,940 2,877
Costs and expenses
Cost of sales, buying and
occupancy 107 89 1,915 1,940
Selling and administrative 333 310 765 722
Provision for uncollectible
accounts - - 44 33
Depreciation and amortization 34 39 82 73
Interest - - 81 72
Special charges and impairments - - - 111
Total costs and expenses 474 438 2,887 2,951
Operating income (loss) $(204) $(197) $53 $(74)
Income before cumulative effect of
accounting change
Cumulative effect of change in
accounting
Net Income
EPS - Diluted
Average shares o/s
Total
2003 2002
Merchandise sales and services $24,734 $24,639
Credit and financial products revenues 4,136 4,209
Total revenues 28,870 28,848
Costs and expenses
Cost of sales, buying and occupancy 18,013 17,902
Selling and administrative 6,666 6,637
Provision for uncollectible accounts 1,511 1,685
Depreciation and amortization 681 650
Interest 847 866
Special charges and impairments 112 111
Total costs and expenses 27,830 27,851
Operating income (loss) $1,040 $997
Income before cumulative effect of
accounting change $648 $736
Cumulative effect of change in accounting $- $(208)
Net Income $648 $528
EPS - Diluted $2.17 $1.64
Average shares o/s 298.7 321.7
SEARS, ROEBUCK AND CO.
SUPPLEMENTAL INFORMATION - DOMESTIC CREDIT CARD RECEIVABLES, INVENTORY
AND STORE COUNT
($ in millions)
Average Balance
For the 13 Weeks For the 39 Weeks Ending Balance
Ended Sept. 27, Ended Sept. 27, Sept. 27, Sept. 28,
2003 and Sept. 28, 2003 and Sept. 28, 2003 2002
2002 2002
2003 2002 2003 2002 2003 2002
Sears Card
credit card
receivables $16,219 $19,137 $16,961 $20,302 $15,930 $18,466
Sears Gold
MasterCard
credit card
receivables 12,973 9,579 12,653 7,618 13,057 10,815
Total domestic
credit card
receivables $29,192 $28,716 $29,614 $27,920 $28,987 $29,281
For the 13 Weeks Ended For the 39 Weeks Ended
Sept. 27, 2003 and Sept. 27, 2003 and
Sept. 28, 2002 Sept. 28, 2002
Domestic credit card
receivables- 2003 2002 2003 2002
Net interest
margin:
Portfolio yield 17.24% 18.26% 16.90% 18.42%
Effective
financing rate 3.14% 3.51% 3.21% 3.66%
Net interest
margin 14.10% 14.75% 13.69% 14.76%
Domestic net
charge-off
rate:
Sears Card 7.80% 6.52% 5.99% 6.28%
Sears Gold
MasterCard 7.23% 3.62% 6.17% 3.16%
Total 7.55% 5.55% 6.07% 5.43%
2003 2002
September 27, June 28, March 29, Dec. 28, Sep. 28,
2003 2003 2003 2002 2002
Sears Card
delinquency
rate 9.47% 9.33% 10.14% 10.34% 9.74%
Sears Gold
MasterCard
delinquency
rate 5.37% 4.96% 4.72% 3.76% 2.99%
Total domestic
delinquency
rate 7.62% 7.41% 7.87% 7.69% 7.24%
Allowance for
uncollectible
accounts $1,900 $1,900 $1,790 $1,780 $1,630
Allowance % of
domestic credit
card receivables 6.55% 6.45% 6.06% 5.79% 5.57%
September 27, September 28,
2003 2002
Domestic
inventories
-LIFO $5,563 $5,368
-FIFO $6,195 $5,988
For the 13 Weeks Ended For the 39 Weeks Ended
Sept. 27, 2003 and Sept. 27, 2003 and
Sept. 28, 2002 Sept. 28, 2002
Pretax LIFO charge $6 $6 $30 $30
September 27, September 28, December 28,
Domestic retail stores: 2003 2002 2002
Full-line 869 872 872
Specialty 1,314 1,299 1,305
Lands' End 16 15 15
Total 2,199 2,186 2,192
During 2003, the Company opened 22 stores consisting of two Full-line
stores, 19 Specialty stores and one Lands' End outlet store. In
addition, the Company closed 15 stores consisting of five Full-line
stores and 10 Specialty stores.
SOURCE: Sears, Roebuck and Co.
CONTACT: Edgar P. McDougal, +1-847-286-9669, Investor, Pam White,
+1-847-286-1468, both of Sears
Web site: