Hoffman Estates, IL, January 28—Sears reported an 86 percent drop in fourth-quarter net earnings Thursday after shedding its profitable credit-card unit a year earlier, its results now solely dependent on sagging retail sales.
The $378 million quarterly profit, which outpaced Wall Street's estimates as a result of reduced costs, ended a year of lower sales that CEO Alan Lacy acknowledged was another "disappointing financial performance."
Executives of the Hoffman Estates, Ill.-based company voiced confidence for improvement as a result of the impending merger with Kmart Holding Corp.
They expect the deal to close in early March. It will create the nation's third-largest retailer with, initially, about $55 billion in annual revenue, 2,350 full-line and off-mall stores and 1,100 specialty retail stores in the United States.
Analysts are less certain.
"Sears' poor fourth-quarter and full-year results provide further evidence of the difficulties that a combined Kmart-Sears will face in effectively competing long-term with the likes of Wal-Mart and Target," Morningstar Inc. analyst Anthony Chukumba wrote in a note to investors.
George Rosenbaum, chairman of Leo J. Shapiro and Associates, a Chicago-based market research firm, said the merger offers strong pluses for both sides, including more convenient store locations and the addition of Martha Stewart products for Sears and an infusion of Sears' top brands for Kmart. But he thinks it could prove slow and difficult to implement.
"Sears is probably at a turning point where things could get much worse if this merger doesn't create some improvements in the merchandise that Sears is able to offer in its stores," he said. "From the
Kmart perspective, similarly and even more so."
Net income for the last three months of 2004 was $378 million, or $1.76 per share, down 86 percent from the record $2.7 billion, or $10.84 per share, of a year earlier when Sears sold its credit-card unit to Citigroup. Analysts interviewed by Thomson First Call had estimated earnings at $1.66 per share.
Revenues declined 4.6 percent to $11.1 billion from $11.6 billion, with comparable-store sales flat in the quarter after a decline in December.
Sears did not field questions during its conference call or give guidance for the rest of the year, citing the quiet period while regulators review the merger. Lacy blamed several factors for the company's poor 2004 showing -- disruptions from the continuing overhaul of its 870 department stores, weak seasonal transitions, tough competition and misgauged inventory levels.
"The year was marked by further restructuring and repositioning of our core retail business, which slowed short-term results but positions us well for the future," Lacy said. The CEO maintained that apparel -- long a Sears weak spot -- is "on the right track" as a result of improvements to the quality and fashion content of its offerings.
Lacy said Sears Holdings, the planned name of the merged company, intends to convert several hundred Kmart stores to Sears over the next three years, mainly in urban and high-density suburban markets that match the demographics and average income of Sears shoppers. He said it will be the largest expansion of Sears store locations in the company's 119-year history.
"The merger will also greatly accelerate Kmart's strategy of differentiating its product offerings from those of its key competitors," he said. "Post-merger, Kmart should significantly benefit from the planned cost-sharing of several of Sears' leading proprietary brands."
Lacy said the merger presents opportunities to cut costs and overlapping areas but did not cite specifics.
Retail consultant Howard Davidowitz, chairman of New York-based Davidowitz & Associates, saw little encouraging in the results, calling it "more of the same" for struggling Sears.
"Sears underperformed most companies, as always," he said.
