Hoffman Estates, IL, November 16, 2006--Sears reported quarterly earnings that more than tripled, due to sizable gains from investments, cost cutting and improved demand for clothing.
The company reported net income of $196 million, or $1.27 per share, in the fiscal third quarter that ended on October 28, up from $58 million, or 35 cents per share, in the same period a year earlier.
Analysts, on average, expected 98 cents a share, according to Reuters Estimates.
Total revenue declined by about 2 percent to $11.94 billion.
The company, led by hedge fund manager Edward Lampert, reported a steep decline in cash to $2.1 billion from $3.7 billion at the end of the prior quarter, as it built up inventory for the holiday shopping season.
The stock, which had risen some 55 percent this year, fell 3 percent in early Nasdaq trading.
Gary Balter, retail analyst with Credit Suisse, said investors were likely disappointed by the heavy inventory investment and a 3 percent decline in same-store sales.
Investors watch Sears Holdings' cash position closely because the company has given Lampert authority to invest excess money as he sees fit, prompting rampant speculation that he intends to buy stakes in other retailers.
Rumors have circulated that he may be interested in companies ranging from Home Depot Inc. to Gap Inc., although analysts have largely dismissed them. The company does not comment on such rumors.
Earlier this week, minority shareholders of Sears Canada Ltd. rejected a buyout offer from Sears Holdings.
Balter said Sears' big inventory increases would position the company well to support stronger apparel demand, but "this is a cash flow story, and over time we want that cash for other purposes," he wrote in a note to clients.
Results in the latest period included income of 42 cents per share from derivative deals called "total return swaps," which the company said involved substantial risks and returns that could vary significantly from quarter to quarter.
Total return swaps allow an investor to take on the risk of buying shares of a stock with borrowed money, without actually borrowing the money or buying shares.
If the underlying stock performs well, the investor can generate big returns without putting up much money upfront. But if the stock sinks, big losses can ensue.
Sears did not disclose which stocks were involved in the swaps, and a spokesman declined to comment beyond the contents of the news release.
Under Lampert's leadership, Sears has reported declining sales but hefty profit growth thanks to cost-cutting efforts.
"More of the same from Sears," said Erik Gordon, a marketing professor at Johns Hopkins University who follows Sears closely. "Lower revenue from stores, declining same-store sales, and higher earnings on cost cutting and financial transactions. It's not retailing, but it's pretty good investing."
At Sears stores, same-store sales were down 4.8 percent for the quarter. The company reported pronounced declines in home decor and lawn and garden sales, but women's apparel had strong growth, reversing years of disappointing trends.
"The underlying trends were positive," Credit Suisse's Balter wrote. "Women's apparel, formerly a drag for the company, showed 'pronounced gains' under new merchant Lisa Schultz." Schultz was named head of apparel design for Sears and Kmart last year.
The retailer noted that last year, it brought in too much fashion-oriented clothing, which hurt demand.
