Sears Reports a Mixed Bag

Sears Holding Corporation (SHLD - Analyst Report), the fourth largest broadline retailer in the U.S., has reported relatively modest second quarter results with a decrease in year-over-year revenue and net income, and improvement in the balance sheet.

Sears reported total revenues of $10.6 billion during the quarter compared to $11.8 billion in the year-earlier quarter. The decrease in year-over-year sales was primarily due to a decline in comparable store sales and the adverse effect of foreign currency. Total comparable store sales decreased 8.6% during the quarter, with the Sears Domestic division accounting for 12.5% decrease and the Kmart division accounting for 3.9% decrease.

The Sears Domestic division was negatively affected by the decline in the housing industry coupled with a decrease in apparel sales. The Kmart comparable store sales also declined largely due to a fall in apparel sales, which was partially offset by an increase in home electronic goods sales.

Sears reported a net loss of $94 million or 79 cents per share during the quarter compared to a net income of $65 million or 50 cents per share in the year-ago quarter. The decrease in year-over-year earnings was primarily due to store closing and severance charges of 32 cents per share, domestic pension plan charges of 22 cents, and mark-to-market loss on Sears Canada hedge transaction of 8 cents.

The company closed 28 underperforming stores during the quarter. The second quarter of 2008 also included a positive impact of 29 cents per share due to the reversal of an adverse jury verdict relating to the redemption of Sears, Roebuck and Co. bonds in 2004.

During the quarter, Sears reported an operating loss of $58 million compared to an operating income of $187 million in the prior year quarter. Operating income was reduced primarily due to the non-recurring items discussed above. Adjusted for significant items, the selling and administrative expenses decreased $212 million year-over-year due to a reduction in payroll and benefits expense ($92 million), reduction in advertising expense ($45 million), and impact of foreign currency exchange rates ($23 million).

At quarter end, Sears had a cash balance of $1.3 billion compared to $1.5 billion in the year-earlier quarter. During the quarter, the company repurchased 1.7 million shares under its share repurchase program at a total cost of $94 million. At quarter end, the company had remaining authorization to repurchase $371 million of common shares.

Sears has strengthened its balance sheet by reducing its domestic long-term debt and capital lease obligations during the quarter by $390 million. Total debt outstanding at quarter end was $3.2 billion compared to $3.6 billion in the year-earlier quarter. The company has also improved its inventory management policies and merchandise inventories reduced year-over-year from $9.8 billion to $9.4 billion.

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