Sears Reports First Quarter 2003 Results
Sears, Roebuck and Co. (NYSE: S) today reported net income of $192 million, or $0.60 per share, for the first quarter ended March 29, 2003, compared with net income of $110 million, or $0.34 per share, in the first quarter of 2002.
"Sears' performance was in line with our guidance despite a challenging quarter for the consumer and retail sector as a whole," said Chairman and Chief Executive Officer Alan J. Lacy. "While we are feeling the effects of major merchandise category exits and edits as well as the weak economic conditions, we continue to improve the fundamentals of our retail and credit operations."
First quarter 2002 reported results included an after-tax charge of $208 million recorded as a cumulative effect of an accounting change related to the adoption of FASB Statement No. 142, "Goodwill and Other Intangible Assets". The first quarter of 2002 also included a pretax charge of $111 million, or $40 million after-tax, related to Sears Canada's conversion of existing Eatons stores to the Sears Canada banner, and a pretax gain of $71 million in other income, or $58 million after-tax, from the sale of a portion of the company's investment in Advance Auto Parts. In aggregate, these items reduced first quarter 2002 net income by $190 million, or $0.59 per share. First quarter 2003 reported results were not affected by any such accounting changes, special charges or gains on the sale of investments.
Retail and Related Services
As anticipated, Retail and Related Services experienced lower store sales during the light post-Christmas period and reported an operating loss of $23 million for the first quarter of 2003. The segment posted very strong operating income of $87 million in the first quarter of 2002, which generally is the lowest quarterly period of the year in terms of merchandise sales and profits.
"Substantial progress was made in our merchandise repositioning efforts with the launch of the Whole Home brand in home fashions and the continued rollout of Lands' End," Lacy said. "While our repositioning efforts are still underway, we have set the groundwork for restoring top-line growth in the second half of this year."
Revenues for the first quarter were $6.6 billion, down 1.8 percent from the same period last year. Increased revenues due to the addition of Lands' End, which was acquired in June 2002, were more than offset by decreases in Full-line store revenues. Comparable store sales for the quarter declined 6.7 percent, due to the weak retail environment, the effects of merchandise category exits and edits, and the later Easter holiday. In hardlines, lawn and garden performed especially well in both Full-line stores and Dealer stores. The revenue decline was more pronounced in softlines than hardlines, reflecting the later Easter selling season and the fact that the majority of the merchandise edits and exits were in softlines.
The gross margin rate for the quarter was flat to prior year as an increase in seasonal clearance activity was offset by the inclusion of Lands' End and continued improvements in sourcing. Selling and administrative expenses increased by $49 million due to the inclusion of Lands' End, which was partially offset by expense reductions in most of the remaining retail businesses.
Credit and Financial Products
Credit and Financial Products reported operating income of $395 million for the quarter, down $48 million, or 10.8 percent, compared to the prior year first quarter primarily due to an increase in the provision for uncollectible accounts, partially offset by favorable funding costs and lower operating expenses.
First quarter domestic Credit and Financial Products revenues increased approximately 1 percent from a year ago to $1.33 billion, as the increase in average receivable balances was largely offset by a lower yield. The lower yield is attributable to a reduced finance charge rate on credit products due to the lower interest rate environment, an increase in the size of the MasterCard portfolio, which has a lower yield than the proprietary card, and lower late fees.
Domestic credit card receivables at the end of the first quarter increased 9.4 percent over the prior year to $29.5 billion. Funding costs declined by $29 million, or 10.7 percent, from last year's quarter due to a favorable interest rate environment.
"The Credit and Financial Products segment continued to perform as expected during the first quarter, including the typical post-holiday decline in receivables," Lacy said. "Delinquencies and charge-offs, as well as profitability, are tracking to plan."
The domestic provision for uncollectible accounts increased by $100 million, or 27 percent, over last year's period. The higher provision was due to increased charge-offs as a result of higher balances, seasoning of the MasterCard portfolio and higher bankruptcies. The net charge-off rate for the quarter increased to 6.11 percent from 5.43 percent last year.
Year-over-year delinquencies increased 56 basis points to 7.87 percent from 7.31 percent, reflecting the seasoning of the MasterCard portfolio. The domestic allowance for uncollectible accounts of $1.8 billion is 6.06 percent of ending credit receivables, compared with 5.79 percent at the end of last quarter.
In March, the company announced plans to evaluate strategic alternatives for the Credit and Financial Products segment, including the possible sale of all or a portion of the segment. The evaluation is progressing as scheduled and the company expects to conclude its evaluation and any related actions that arise from the evaluation in the second half of 2003.
Sears Canada
Sears Canada's first quarter operating income of $10 million compares with an operating loss of $105 million in last year's first quarter. The prior year results include a pretax charge of $111 million for severance costs, asset impairment and other exit costs associated with the conversion of seven stores operating under the Eatons banner to Sears Canada stores.
First quarter 2003 results demonstrated significant improvement in margin rate over the prior year, which more than offset the decline in revenues.
Outlook
Given the current economic environment and cautious consumer sentiment, the company expects that near-term retail sector growth will be modest. Correspondingly, the company anticipates second quarter earnings per share will be between $0.85 and $1.00. The second quarter outlook assumes a mid- single digit comparable store sales decrease. In addition, though the company will continue to improve margins through better sourcing and the addition of Lands' End, improvement will be offset by additional markdowns reflective of higher inventory levels and the very promotional environment. For the full year, the company remains on track with its expectation of earnings per share between $4.95 and $5.15. This full-year expectation excludes any effect that may result from activities related to the strategic review of the Credit and Financial Products segment.
Forward-Looking Statements
This release contains guidance on second quarter and full-year 2003 earnings per share, as well as comparable store sales, margins, and other company performance measures. This release also contains statements about the company's expectations regarding possible strategic alternatives for its Credit and Financial Products business and the timeline for completing a review of such alternatives. 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. For example, there can be no assurances that the company will identify an acceptable purchaser or negotiate acceptable terms for the sale and ongoing operation of all or part of its Credit and Financial Products business and there can be no assurances as to the timing of such a transaction or transactions. These outcomes depend on many factors outside the company's control, such as the willingness of third parties to accept terms that are acceptable to the company. Further risks and uncertainties that may cause actual results to differ materially include 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 a third-party credit card program, 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 first 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 12:30 p.m. EDT/11:30 a.m. CDT today through Friday, April 18, 2003. The replay number is 1-888-562-6126, access code: 3276. 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 Ended
March 29, 2003 and March 30, 2002
(millions, except earnings per common share)
2003 2002
REVENUES
Merchandise sales and services $7,474 $7,647
Credit and financial products revenues 1,406 1,390
Total revenues 8,880 9,037
COSTS AND EXPENSES
Cost of sales, buying and occupancy 5,474 5,626
Selling and administrative 2,110 2,061
Provision for uncollectible accounts 483 381
Depreciation and amortization 225 210
Interest 279 292
Special charges and impairments - 111
Total costs and expenses 8,571 8,681
Operating income 309 356
Other income, net 1 78
Income before income taxes and minority
interest 310 434
Income taxes (115) (148)
Minority interest (3) 32
Income before cumulative effect of
accounting change 192 318
Cumulative effect of change in accounting
for goodwill - (208)
NET INCOME $192 $110
EARNINGS PER COMMON SHARE
Basic
Earnings per share before cumulative effect
of a change in accounting principle $0.60 $0.99
Cumulative effect of change in accounting
for goodwill $- $(0.65)
Earning per share $0.60 $0.34
Diluted
Earnings per share before cumulative effect
of a change in accounting principle $0.60 $0.98
Cumulative effect of change in accounting
for goodwill $- $(0.64)
Earning per share $0.60 $0.34
Average common and dilutive common
equivalent shares outstanding 318.1 324.0
SEARS, ROEBUCK AND CO.
CONSOLIDATED BALANCE SHEET
(millions)
March 29, March 30, Dec. 28,
2003 2002 2002
Assets
Current Assets
Cash and cash equivalents $3,846 $949 $1,962
Credit card receivables 31,287 28,509 32,595
Less allowance for uncollectible
accounts 1,847 1,162 1,836
Net credit card receivables 29,440 27,347 30,759
Other receivables 710 619 863
Merchandise inventories 5,730 5,249 5,115
Prepaid expenses and deferred charges 708 629 535
Deferred income taxes 790 994 749
Total current assets 41,224 35,787 39,983
Property and equipment, net 6,794 6,629 6,910
Deferred income taxes 621 433 734
Goodwill 942 110 944
Tradenames and other intangible assets 703 - 704
Other assets 1,124 644 1,134
Total assets $51,408 $43,603 $50,409
Liabilities
Current liabilities
Short-term borrowings $6,775 $3,485 $4,525
Current portion of long-term debt
and capitalized lease obligations 3,609 4,414 4,808
Accounts payable and other liabilities 6,455 6,492 7,485
Unearned revenues 1,209 1,165 1,199
Other taxes 445 427 580
Total current liabilities 18,493 15,983 18,597
Long-term debt and capitalized lease
obligations 22,321 18,084 21,304
Pension and Postretirement benefits 2,414 2,351 2,491
Minority interest and other liabilities 1,246 1,375 1,264
Total liabilities 44,474 37,793 43,656
Commitments and Contingent Liabilities
Shareholders' Equity
Common shares 323 323 323
Capital in excess of par value 3,503 3,505 3,505
Retained earnings 8,617 7,449 8,497
Treasury stock - at cost (4,457) (4,587) (4,474)
Deferred ESOP expense (41) (54) (42)
Accumulated other comprehensive loss (1,011) (826) (1,056)
Total shareholders' equity 6,934 5,810 6,753
Total liabilities and shareholders'
equity $51,408 $43,603 $50,409
Total common shares outstanding 317.1 313.9 316.7
SEARS, ROEBUCK AND CO.
Segment Income Statements
(millions)
For the 13 Weeks Ended March 29, 2003 and March 30, 2002
Retail & Credit & Financial
Related Services Products
2003 2002 2003 2002
Merchandise sales and services $6,644 $6,768 $- $-
Credit and financial
products revenues - - 1,330 1,318
Total Revenues 6,644 6,768 1,330 1,318
Costs and expenses
Cost of sales, buying and
occupancy 4,914 5,005 - -
Selling and administrative 1,561 1,512 218 228
Provision for uncollectible
accounts - - 471 371
Depreciation and amortization 183 168 4 5
Interest expense (income) 9 (4) 242 271
Special charges and impairments - - - -
Total costs and expenses 6,667 6,681 935 875
Operating income (loss) $(23) $87 $395 $443
SEARS, ROEBUCK AND CO.
Segment Income Statements
(millions)
For the 13 Weeks Ended March 29, 2003 and March 30, 2002
Corporate & Other Sears Canada
2003 2002 2003 2002
Merchandise sales and services $63 $58 $767 $821
Credit and financial products
revenues - - 76 72
Total Revenues 63 58 843 893
Costs and expenses
Cost of sales, buying and
occupancy 24 21 536 600
Selling and administrative 101 94 230 227
Provision for uncollectible
accounts - - 12 10
Depreciation and amortization 11 12 27 25
Interest expense (income) - - 28 25
Special charges and impairments - - - 111
Total costs and expenses 136 127 833 998
Operating income (loss) $(73) $(69) $10 $(105)
SEARS, ROEBUCK AND CO.
Segment Income Statements
(millions)
For the 13 Weeks Ended March 29, 2003 and March 30, 2002
Total
2003 2002
Merchandise sales and services $7,474 $7,647
Credit and financial products revenues 1,406 1,390
Total Revenues 8,880 9,037
Costs and expenses
Cost of sales, buying and occupancy 5,474 5,626
Selling and administrative 2,110 2,061
Provision for uncollectible accounts 483 381
Depreciation and amortization 225 210
Interest expense (income) 279 292
Special charges and impairments - 111
Total costs and expenses 8,571 8,681
Operating income (loss) $309 $356
Net Income before cumulative effect
of change in accounting $192 $318
Cumulative effect of change in accounting $- $(208)
Net Income $192 $110
EPS - Diluted $0.60 $0.34
Average shares o/s 318.1 324.0
SEARS, ROEBUCK AND CO.
SUPPLEMENTAL INFORMATION - DOMESTIC CREDIT CARD RECEIVABLES, INVENTORY
AND STORE COUNT
(millions)
Average Balance Ending Balance
For the 13 Weeks Ended
March 29, 2003 and
March 30, 2002 March 29, March 30,
2003 2002 2003 2002
Sears Card credit card
receivables $17,817 $21,618 $17,160 $20,698
Sears Gold MasterCard credit card
receivables 12,375 5,668 12,380 6,309
Total domestic credit card
receivables $30,192 $27,286 $29,540 $27,007
For the 13 Weeks Ended
March 29, 2003 and March 30, 2002
Domestic credit card receivables- 2003 2002
Net interest margin:
Portfolio yield 16.94% 18.64%
Effective financing rate 3.19% 3.95%
Net interest margin 13.75% 14.69%
Sears Card net charge-off rate 6.83% 6.16%
Sears Gold MasterCard net
charge-off rate 5.06% 2.65%
Total domestic net charge-off
rate 6.11% 5.43%
2003 2002
March 29, Dec. 28, Sep. 28, Jun. 29, Mar. 30,
2003 2002 2002 2002 2002
Sears Card delinquency rate 10.14% 10.34% 9.74% 8.75% 8.77%
Sears Gold MasterCard
delinquency rate 4.72% 3.76% 2.99% 2.57% 2.55%
Total domestic delinquency
rate 7.87% 7.69% 7.24% 6.87% 7.31%
Allowance for uncollectible
accounts $1,790 $1,780 $1,630 $1,441 $1,115
Allowance % of domestic credit
card receivables 6.06% 5.79% 5.57% 5.10% 4.13%
March 29, March 30,
2003 2002
Domestic inventories -LIFO $5,170 $4,688
-FIFO $5,784 $5,290
For the 13 Weeks Ended
March 29, 2003 and March 30, 2002
Pretax LIFO charge $12 $12
December 28, March 29,
Domestic retail stores: 2002 Opened Closed 2003
Full-line stores 872 0 (2) 870
Specialty formats 1,305 2 (3) 1,304
Lands' End retail stores 15 0 0 15
Total 2,192 2 (5) 2,189
Gross square feet 150.4 0.1 (0.3) 150.2
SOURCE: Sears, Roebuck and Co.
CONTACT: News Media, Edgar P. McDougal, +1-847-286-9669, or Investors,
Pam White, +1-847-286-1468, both of Sears, Roebuck and Co.
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