Sears Reports Lower Than Expected Third Quarter EPS of $0.59
Provision Increase Leads to Revised 2002 Outlook
Sears, Roebuck and Co. (NYSE: S) today reported third quarter 2002 net income of $189 million, or $0.59 per share, a 26 percent decrease from the prior year third quarter earnings of $0.80 per share. These results reflect a $222 million increase in the domestic provision for uncollectible accounts.
2002 Outlook
Sears has reduced its 2002 full-year outlook for comparable earnings per share to $4.86 per share, a 15 percent increase over the prior year amount of $4.22. The company had previously expected comparable earnings per share of $5.15 for 2002, or a 22 percent increase. The company continues to expect comparable earnings increases in the low- to mid-thirty percent range in its retail and related services segment. The company now expects its credit and financial products segment to report a low- to mid-single digit decrease in comparable earnings for the year.
"On October 7, in conjunction with discussing the change in management of our Credit and Financial Products business, we reaffirmed our previous earnings guidance for the year," said Chairman and Chief Executive Officer Alan J. Lacy. "Today's revision to that guidance reflects additional increases in the allowance for uncollectible accounts as a result of analysis over the past week. However, the credit business remains highly profitable, and I have complete confidence in our credit strategy and the management team."
Retail and Related Services
Retail and Related Services operating income decreased to $42 million from $82 million in the prior year.
Revenues for the third quarter of 2002 were $7.26 billion or 0.7 percent below last year's third quarter revenues of $7.31 billion. Sales increases in direct to customer resulting from the company's acquisition of Lands' End, product repair services, dealer stores and hardware stores were more than offset by revenue declines in the full-line stores.
The decrease in full-line store sales reflects the significant store disruption from the implementation of strategic initiatives. Softline revenues declined as a result of lower apparel sales and exits from the custom window treatment and installed floor covering businesses. Hardline revenues also declined in the third quarter with increases in home appliance sales being offset by decreases in home office, home electronics and home improvement.
Retail and Related Services gross margin rate improved by 180 basis points to 27.5 percent. Full-line hardlines businesses, and all other retail formats, as well as the inclusion of Lands' End, contributed to the margin improvement. Softlines margin declined 120 basis points in the quarter primarily due to increased promotional activity.
Selling and administrative spending was 8 percent higher than third quarter 2001 primarily due to the addition of Lands' End's selling and administrative expenses since the third quarter of last year. Selling and administrative expenses were 24.1 percent of sales compared with 22.2 percent last year, reflecting decreased expense leverage in a slower sales environment.
Credit and Financial Products
Credit and Financial Products' operating income was $284 million, down 28 percent compared to the prior year, as favorable funding costs and higher revenues were offset by higher provision and selling and administrative expenses.
Third quarter domestic Credit and Financial Products revenues increased 4 percent from a year ago to $1.4 billion, due primarily to higher average receivable balance growth. Credit receivables at the end of the third quarter grew 11.5 percent over the prior year to $29.3 billion.
Funding costs declined by $89 million or 26.0 percent from last year's quarter due to a favorable interest rate environment.
The domestic provision for uncollectible accounts increased $222 million over the prior year period due to a $189 million increase to the allowance for uncollectible accounts. The allowance increase reflects receivables growth, recent increases in charge-off trends and a cautious economic outlook for the remainder of the year. The net charge-off rate for the quarter decreased to 5.55 percent from 5.62 percent last year, reflecting increased charge-offs offset by the effect of receivables growth.
Year-over-year delinquencies declined 17 basis points from 7.41 percent to 7.24 percent, benefiting from the aforementioned effect of receivables growth. The domestic allowance for uncollectible accounts of $1.6 billion is 5.57 percent of ending credit receivables compared with 5.10 percent at the end of last quarter.
Sears Canada
Sears Canada's operating income of $8 million compares with an operating loss of $4 million in last year's third quarter. The $12 million profit improvement is primarily related to gross margin rate expansion partially offset by decreased revenues. Sears Canada revenue decreased 4.9 percent to $954 million in the third quarter of 2002, in part due to a 1.2 percent decline in the value of the Canadian dollar relative to the U.S. dollar.
Corporate and Other
Segment operating loss for the quarter of $59 million improved from last year's operating loss of $80 million. Revenues from the home improvement services businesses included in the Corporate and Other segment decreased by 16 percent to $91 million primarily due to the sale of the Sears Termite and Pest Control business in the last half of 2001. The decline in revenue was offset by an improvement in margin rate for the home improvement businesses. In addition selling and administrative expenses declined due primarily to lower costs related to the implementation of strategic initiatives.
Forward-Looking Statements
This release contains guidance on 2002 comparable earnings per share, which is a forward-looking statement based on assumptions about the future that are subject to risks and uncertainties, such as competitive conditions in retail; changes in consumer confidence and spending; changes in interest rates; delinquency and charge-off trends in the credit card receivables portfolio; continued consumer acceptance of the Sears Gold MasterCard Program; the successful execution of and customer reactions to Sears' Full-line store strategy and other performance improvement initiatives; Sears' ability to integrate and operate Lands' End successfully; anticipated cash flow; labor unrest on the West Coast; the possibility of increased hostilities in the Middle East; 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. While the company believes its forecasts and assumptions are reasonable, it cautions that actual results may differ materially. The company intends these forward-looking statements to speak only as of the time of this presentation and does not undertake to update or revise them as more information becomes available.
About Sears
Sears, Roebuck and Co. is a broadline retailer with significant service and credit businesses. In 2001, the company's annual revenue was more than $41 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 site, www.sears.com . In June 2002, Sears acquired Lands' End, a direct merchant of traditionally styled, classic Lands' End clothing offered to customers around the world through regular mailings of its specialty catalogs and online at www.landsend.com .
SEARS, ROEBUCK AND CO.
CONSOLIDATED INCOME
For the 13 Weeks Ended For the 39 Weeks Ended
September 28, 2002 and September 28, 2002 and
September 29, 2001 September 29, 2001
(millions, except
earnings per common
share) 2002 2001 % Change 2002 2001 % Change
REVENUES
Merchandise sales
and services $8,239 $8,348 -1.3% $24,639 $24,936 -1.2%
Credit and
financial products
revenues 1,430 1,382 3.5% 4,209 3,834 9.8%
Total revenues 9,669 9,730 -0.6% 28,848 28,770 0.3%
COSTS AND EXPENSES
Cost of sales,
buying and
occupancy 5,934 6,178 -3.9% 17,902 18,453 -3.0%
Selling and
administrative 2,340 2,197 6.5% 6,637 6,484 2.4%
Provision for
uncollectible
accounts 603 377 59.9% 1,685 929 81.4%
Provision for
previously
securitized
receivables - - - - 522 -100.0%
Depreciation and
amortization 219 209 4.8% 650 649 0.2%
Interest 298 378 -21.2% 866 1,094 -20.8%
Special charges and
impairments - - - 111 287 -
Total costs and
expenses 9,394 9,339 0.6% 27,851 28,418 -2.0%
Operating income 275 391 -29.7% 997 352 183.2%
Other income, net 10 22 98 30 -
Income before income
taxes and
minority interest 285 413 -31.0% 1,095 382 186.6%
Income taxes (94) (150) (382) (136) 180.9%
Minority interest (2) (1) 23 (5) -
Income before cumulative
effect of accounting
change 189 262 -27.9% 736 241 205.4%
Cumulative effect of
change in accounting
for goodwill - - - (208) - -
NET INCOME $189 $262 $528 $241
EARNINGS PER COMMON SHARE
Basic
Earnings per share
before cumulative
effect of a change
in accounting
principle $0.60 $0.81 $2.32 $0.74 213.5%
Cumulative effect of
change in accounting
for goodwill $- $- $(0.66) $- -
Earning per share $0.60 $0.81 -25.9% $1.66 $0.74 124.3%
Diluted
Earnings per share
before cumulative
effect of a change
in accounting
principle $0.59 $0.80 $2.29 $0.73 213.7%
Cumulative effect
of change in
accounting for
goodwill $- $- $(0.65) $- -
Earning per share $0.59 $0.80 -26.3% $1.64 $0.73 124.7%
Average common and
dilutive common
equivalent shares
outstanding 320.1 326.9 321.7 329.5
SEARS, ROEBUCK AND CO.
CONSOLIDATED BALANCE SHEET
(millions)
September September December
28, 29, 29,
2002 2001 2001
Assets
Current Assets
Cash and cash equivalents $637 $449 $1,064
Retained interest in transferred
credit card receivables -
Credit card receivables 30,810 27,841 29,321
Less allowance for
uncollectible accounts 1,676 1,121 1,166
Ner credit card receivables 29,134 26,720 28,155
Other receivables 452 631 658
Merchandise inventories 5,961 6,002 4,912
Prepaid expenses and deferred
charges 621 516 458
Deferred income taxes 992 911 858
Total current assets 37,797 35,229 36,105
Property and equipment, net 6,748 6,684 6,824
Deferred income taxes 502 256 415
Goodwill 943 291 294
Tradenames and other intangible
assets 700 - -
Other assets 1,313 828 679
Total assets $48,003 $43,288 $44,317
Liabilities
Current liabilities
Short-term borrowings $4,289 $3,503 $3,557
Current portion of long-term
debt and capitalized lease
obligations 4,774 3,246 3,157
Accounts payable and other
liabilities 6,867 6,825 7,176
Unearned revenues 1,189 1,130 1,136
Other taxes 486 424 558
Total current liabilities 17,605 15,128 15,584
Long-term debt and capitalized
lease obligations 20,781 18,918 18,921
Postretirement benefits 1,592 1,812 1,732
Minority interest and other
liabilities 1,811 1,299 1,961
Total liabilities 41,789 37,157 38,198
Commitments and Contingent
Liabilities
Shareholders' Equity
Common shares 323 323 323
Capital in excess of par value 3,512 3,519 3,500
Retained earnings 7,723 6,991 7,413
Treasury stock - at cost (4,489) (4,143) (4,223)
Deferred ESOP expense (42) (69) (63)
Accumulated other comprehensive
loss (813) (490) (831)
Total shareholders' equity 6,214 6,131 6,119
Total liabilities and
shareholders' equity $48,003 $43,288 $44,317
Total common shares
outstanding 317.4 322.1 320.4
SEARS, ROEBUCK AND CO.
Segment Income Statements
(millions)
For the 13 Weeks Ended September 28, 2002 and September 29, 2001
Excluding Non-Comparable Items and Securitization Income
Retail & Related Credit & Financial
Services Products
2002 2001 2002 2001
Merchandise sales and
services $7,261 $7,310 $- $-
Credit and financial
products revenues - - 1,363 1,309
Total Revenues 7,261 7,310 1,363 1,309
Costs and expenses
Cost of sales,
buying and
occupancy 5,266 5,432 - -
Selling and
administrative 1,752 1,620 233 202
Provision for
uncollectible
accounts - - 588 366
Provision for
previously
securitized
receivables - - - -
Depreciation and
amortization 180 169 4 5
Interest 21 7 254 343
Special charges and
impairments - - - -
Total costs
and expenses 7,219 7,228 1,079 916
Operating income $42 $82 $284 $393
For the 39 Weeks Ended September 28, 2002 and September 29, 2001
Excluding Non-Comparable Items and Securitization Income
Retail & Related Credit & Financial
Services Products
2002 2001 2002 2001
Merchandise sales and
services $21,728 $21,876 $- $-
Credit and financial
products revenues - - 4,002 3,885
Total Revenues 21,728 21,876 4,002 3,885
Costs and expenses
Cost of sales,
buying and
occupancy 15,873 16,259 - -
Selling and
administrative 4,880 4,827 725 608
Provision for
uncollectible
accounts - - 1,352 1,050
Provision for
previously
securitized
receivables - - - -
Depreciation and
amortization 524 530 14 14
Interest 22 21 772 1,110
Special charges and
impairments - - - -
Total costs
and
expenses 21,299 21,637 2,863 2,782
Operating income $429 $239 $1,139 $1,103
For the 13 Weeks Ended September 28, 2002 and September 29, 2001
Excluding Non-Comparable Items and Securitization Income
Corporate & Other Sears Canada
2002 2001 2002 2001
Merchandise sales and services $91 $108 $887 $930
Credit and financial products
revenues - - 67 73
Total Revenues 91 108 954 1,003
Costs and expenses
Cost of sales, buying and
occupancy 33 48 635 698
Selling and administrative 106 125 249 250
Provision for uncollectible
accounts - - 15 11
Provision for previously
securitized receivables - - - -
Depreciation and amortization 11 15 24 20
Interest - - 23 28
Special charges and impairments - - - -
Total costs and expenses 150 188 946 1,007
Operating income $(59) $(80) $8 $(4)
For the 39 Weeks Ended September 28, 2002 and September 29, 2001
Excluding Non-Comparable Items and Securitization Income
Corporate & Other Sears Canada
2002 2001 2002 2001
Merchandise sales and services $241 $304 $2,670 $2,756
Credit and financial products
revenues - - 207 224
Total Revenues 241 304 2,877 2,980
Costs and expenses
Cost of sales, buying and
occupancy 89 131 1,940 2,063
Selling and administrative 310 347 722 741
Provision for uncollectible
accounts - - 33 32
Provision for previously
securitized receivables - - - -
Depreciation and amortization 39 44 73 61
Interest - - 72 86
Special charges and impairments - - - -
Total costs and expenses 438 522 2,840 2,983
Operating income $(197) $(218) $37 $(3)
For the 13 Weeks Ended September 28, 2002 and September 29, 2001
Reconciling Items
Securitization
Total Impact
2002 2001 2002 2001
Merchandise sales and services $8,239 $8,348 $- $-
Credit and financial products
revenues 1,430 1,382 - -
Total Revenues 9,669 9,730 - -
Costs and expenses
Cost of sales, buying and
occupancy 5,934 6,178 - -
Selling and administrative 2,340 2,197 - -
Provision for uncollectible
accounts 603 377 - -
Provision for previously
securitized receivables - - -
Depreciation and amortization 219 209 - -
Interest 298 378 - -
Special charges and impairments - - - -
Total costs and expenses 9,394 9,339 - -
Operating income $275 $391 $- $-
Net Income before cumulative effect
of change in accounting $189 $262 $- $-
Cumulative effect of change in
accounting $- $- $- $-
Net Income $189 $262 $- $-
EPS - Diluted $0.59 $0.80 $- $-
Average shares o/s 320.1 326.9 320.1 326.9
For the 39 Weeks Ended September 28, 2002 and September 29, 2001
Reconciling Items
Total Securitization
Impact
2002 2001 2002 2001
Merchandise sales and services $24,639 $24,936 $- $-
Credit and financial products
revenues 4,209 4,109 - (275)
Total Revenues 28,848 29,045 - (275)
Costs and expenses
Cost of sales, buying and
occupancy 17,902 18,453 - -
Selling and administrative 6,637 6,523 - (39)
Provision for uncollectible
accounts 1,385 1,082 - (153)
Provision for previously
securitized receivables - - -
Depreciation and amortization 650 649 - -
Interest 866 1,217 - (123)
Special charges and impairments - - - -
Total costs and expenses 27,440 27,924 - (315)
Operating income $1,408 $1,121 $- $40
Net Income before cumulative effect
of change in accounting $909 $728 $- $26
Cumulative effect of change in
accounting $- $- $- $-
Net Income $909 $728 $- $26
EPS - Diluted $2.83 $2.21 $- $0.08
Average shares o/s 321.7 329.5 321.7 329.5
For the 13 Weeks Ended September 28, 2002 and September 29, 2001
Reconciling Items
Non-comparable items Consolidated GAAP
2002 2001 2002 2001
Merchandise sales and services $- $- $8,239 $8,348
Credit and financial products
revenues - - 1,430 1,382
Total Revenues - - 9,669 9,730
Costs and expenses
Cost of sales, buying and
occupancy - - 5,934 6,178
Selling and administrative - - 2,340 2,197
Provision for uncollectible
accounts - - 603 377
Provision for previously
securitized receivables - - - -
Depreciation and
amortization - - 219 209
Interest - - 298 378
Special charges and
impairments - - - -
Total costs and
expenses - - 9,394 9,339
Operating income $- $- $275 $391
Net Income before cumulative
effect of change in
accounting $- $189 $262
Cumulative effect of change in
accounting $- $- $-
Net Income $- $- $189 $262
EPS - Diluted $- $- $0.59 $0.80
Average shares o/s 320.1 326.9 320.1 326.9
For the 39 Weeks Ended September 28, 2002 and September 29, 2001
Reconciling Items
Non-comparable items Consolidated GAAP
2002 2001 2002 2001
Merchandise sales and services $- $- $24,639 $24,936
Credit and financial products
revenues - - 4,209 3,834
Total Revenues - - 28,848 28,770
Costs and expenses
Cost of sales, buying and
occupancy - - 17,902 18,453
Selling and administrative - - 6,637 6,484
Provision for uncollectible
accounts 300 - 1,685 929
Provision for previously
securitized receivables - 522 - 522
Depreciation and
amortization - - 650 649
Interest - - 866 1,094
Special charges and
impairments 111 287 111 287
Total costs and
expenses 411 809 27,851 28,418
Operating income $(411) $(809) $997 $352
Net Income before cumulative
effect of change in
accounting $(173) $(513) $736 $241
Cumulative effect of change in
accounting $(208) $- $(208) $-
Net Income $(381) $(513) $528 $241
EPS - Diluted $(1.18) $(1.56) $1.64 $0.73
Average shares o/s 321.7 329.5 321.7 329.5
SEARS, ROEBUCK AND CO.
SUPPLEMENTAL INFORMATION - DOMESTIC CREDIT CARD RECEIVABLES, INVENTORY
AND STORE COUNT
(millions)
Average Balance
For the 13 Weeks For the 39 Weeks
Ended Ended
September 28, 2002 September 28, 2002
and September 29, and September 29,
2001 2001
2002 2001 2002 2001
Sears Card credit card receivables 19,175 23,428 20,331 24,176
Sears Gold MasterCard credit card
receivables 9,541 2,661 7,589 1,962
Managed domestic credit card
receivables $28,716 $26,089 $27,920 $26,138
For the 13 Weeks For the 39 Weeks
Ended Ended
September 28, 2002 September 28, 2002
and September 29, and September 29,
2001 2001
2002 2001 2002 2001
Domestic managed credit card
receivables-
Net interest margin:
Portfolio yield 18.26% 19.34% 18.42% 19.16%
Effective financing rate 3.51% 5.19% 3.66% 5.61%
Net interest margin 14.75% 14.15% 14.76% 13.55%
Domestic managed net charge-off rate 5.55% 5.62% 5.43% 5.36%
Ending Balance
September 28, September 29,
2002 2001
Sears Card credit card receivables 18,513 23,213
Sears Gold MasterCard credit card
receivables 10,768 3,051
Managed domestic credit card
receivables $29,281 $26,264
2002 2001
Sep. 28, Jun. 29, Mar. 30, Dec. 29, Sep. 29,
2002 2002 2002 2001 2001
Domestic managed credit card
receivables-
Delinquency rate 7.24% 6.87% 7.31% 7.58% 7.41%
Allowance for uncollectible
accounts $1,630 $1,441 $1,115 $1,115 $1,089
Allowance % of domestic on-book
credit
card receivables 5.57% 5.10% 4.13% 4.04% 4.15%
September 28, September 29,
2002 2001
Domestic inventories -LIFO $5,368 $5,303
-FIFO $5,988 $5,899
For the 13 Weeks Ended For the 39 Weeks Ended
September 28, 2002 September 28, 2002
and and
September 29, 2001 September 29, 2001
Pretax LIFO charge $6 $6 $30 $30
December 29, September 28,
2001 Opened Closed 2002
Domestic retail stores:
Full-line stores 867 14 (9) 872
Specialty formats 1,318 19 (38) 1,299
Total 2,185 33 (47) 2,171
Gross square feet 148.9 2.8 (1.2) 150.5
SOURCE: Sears, Roebuck and Co.
CONTACT: Media, Peggy A. Palter, +1-847-286-8361, or Investor Relations,
Pam White, +1-847-286-1468, both of Sears, Roebuck and Co.
Web site: