Sears Holdings posts loss in its first quarterly report


CHICAGO - Giving its first glimpse into its financial performance, the recently formed Sears Holdings Corp. disappointed investors yesterday with a first-quarter loss amid declining sales.

The company formed by the March merger of Sears, Roebuck and Co. and Kmart Holding Corp. lost $9 million, or 7 cents a share, in the fiscal quarter that ended April 30. The company also disclosed that it laid off 850 workers during the quarter, mostly from Sears Holdings' headquarters in Hoffman Estates, Ill.

The quarter includes all 13 weeks of Kmart's results and five weeks of Sears' results. Had Sears been included for the full quarter, the company would have lost $78 million, compared with a $38 million profit a year ago.

The Sears Holdings results included a $90 million charge related to the way Sears accounts for certain inventory costs. Without that charge, Sears Holdings would have earned $81 million, or 65 cents a share.

The results sent shares of Sears Holdings sharply lower. They closed down $13.41, or 8.6 percent, at $141.50.

"It's the same old story," said Kimberly Picciola, an equity analyst with Morningstar Inc. in Chicago. "Their retail operations continue to flounder."

Shoppers continue to shun Kmart and Sears, a problem that beset both retailers long before they formed the nation's third-largest retailer.

In the first quarter, sales at Kmart and Sears stores open at least a year dropped 3.7 percent and 3.1 percent, respectively. The chains blamed the weather for slow sales of seasonal product lines. Kmart's results also were hurt by the construction to convert several locations to the Sears' nameplate.

Despite yesterday's sell-off, many investors are sticking with the company because of the reputation of Edward S. Lampert, the financier who lifted Kmart out of bankruptcy, watched its stock skyrocket and later acquired Sears.

Lampert recently was deemed the world's most highly paid hedge fund manager. The Greenwich, Conn., financier earned an estimated $1.02 billion last year, making him the first to crack the $1 billion mark.

"Some investors are willing to pay a premium based on Eddie Lampert's track record," Picciola said. "But the long-term objectives of this company are still unclear."

As a retailer, though, Lampert has a track record of ceding market share for better profits. He reaffirmed that philosophy in a letter to shareholders yesterday.

"Too often our predecessor companies pursued higher sales and accepted lower profits to meet objectives that did not increase the value of the companies," Lampert wrote. In contrast, Sears Holdings' goals are "creating value rather than solely building market share or sales."

Sears Holdings' capital expenditures, he noted, were $106 million, down from $143 million spent at Kmart and Sears combined during the first quarter period last year.

Sears Holdings also eliminated 780 jobs at Hoffman Estates in the first quarter, with about 3,000 workers remaining. An additional 70 workers at Kmart headquarters in Troy, Mich., lost their jobs.

Sears Holdings has told about 1,400 additional Kmart workers that their jobs will be eliminated or relocated to Hoffman Estates or a Dallas processing center. Of those, about 300 have accepted a relocation offer. The rest are undecided.

Many expect Sears Holdings to sell real estate and other assets, but Lampert repeated that acquisitions could be in the offing.

"We will opportunistically pursue investments in, and acquisitions of, other companies, joint ventures and strategic alliances," he wrote in his letter.

Lampert also was disappointed by the recent downgrade of Sears Holdings' short-term debt to junk bond status.

"We'll seek to persuade the rating agencies that this rating underestimates the financial strength, the asset values and the operating performance of the company," Lampert wrote. "If our results bear out, we will request the rating agencies to quickly and significantly upgrade our credit rating."

After three months, Lampert's fingerprints are all over Sears, said Richard D. Hastings, senior retail analyst for Bernard Sands LLC, the New York credit services company.

"Although new management had only a short time to make changes, some of what they did previously at Kmart - to cut the costs out of the business, transform gross margin and improve cash flow - seem to be showing up at Sears U.S. stores," Hastings said.

Sears' operating income experienced "a nice turnaround despite tough weather conditions," he said.

Hastings noted that although the Kmart division's sales dropped 3.7 percent, that was an improvement over the 12.9 percent decline in the first fiscal quarter last year.

Sears Holdings also said in a Securities and Exchange Commission filing yesterday that it plans to expand the number of Kmart stores that will stock such Sears brands as Kenmore and Craftsman.

Sears Holdings "expects to continue expansion of the Craftsman and Kenmore brands of Sears into Kmart locations and will continue to evaluate putting brands exclusive to Kmart into the Sears locations," the company said.

The SEC filing also noted that the board has given Lampert, who controls about 40 percent of Sears' stock through his ESL Investments, the power to invest the company's surplus cash, subject to checks and balances. Neither Lampert nor ESL will be paid for that investing.

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