Sears 4Q Earnngs Up 27%

Hoffman Estates, IL, March 2, 2007--Sears Holdings Corp. turned in a nearly 27% surge in fourth-quarter profit on Thursday as tighter costs and gains from property sales helped offset static retail sales at the Sears Roebuck stores and a loss on some investments.

In his annual letter to shareholders, Sears Holdings Chairman Edward Lampert insisted that he was bent on growing the company, but mostly through profitability and investments rather than new stores.

"Some commentators have asserted that we want to shrink the company, but that is simply not so," he said in a filing with the Securities and Exchange Commission. "No great company would aspire to become smaller, and we certainly do not."

But, he added, "Our objective is disciplined growth. We do not want to grow simply for the sake of becoming bigger.

"In the near term we believe the greatest value will come not from increasing our store base, but primarily from better utilizing our existing assets to deliver more value to our customers and ultimately our shareholders," he said. Lampert's authority extends to investing excess cash as he see fit even if it's outside the retail arena.

To that end, Lampert amassed $4 billion in cash and cash-equivalents at the end of the quarter compared with $4.4 billion last year. The company said it made $820 million, or $5.33 a share, compared with last year's profit of $648 million, or $4.03 a share.

The results were loaded with a bevy of items that the company said "significantly impacted" the financial performance.

There was a $7 million after-tax, or 11 cents a share, loss on the company's total return swap investments; and

an after-tax charge of $45 million, or 29 cents a share linked to a pre-merger legal matter that ended unfavorably.

Gains, which offset the previous items, included an after-tax increase of $31 million, or 20 cents a share, from real estate sales as well as a benefit of $25 million, or 17 cents a share, tied to settlements on certain tax matters.

Total revenue climbed 1.3% to $ 16.29 billion, thanks mostly to the extra week in the quarter. Merchandise sales and services revenue at Kmart stores climbed 2.4% to $5.89 billion and costs were relatively flat. At the Sears Roebuck U.S. stores, merchandise sales and services edged up less than 1% to $8.78 billion but the costs fell 2.5%.

On an adjusted bases of earnings before interest, taxes, depreciation and amortization, Sears Holdings domestic operations results rose more than 19% to $1.56 billion, or 10.6% of sales. A year ago, the domestic operations produced EBITDA of $1.3 billion, or 9% of sales for the quarter.

The results were ahead of Wall Street's forecast. Analysts, on average, expected Sears Holdings to earn $5.18 a share on revenue of $15.95 billion, according to Thomson Financial.

"We are making progress as evidenced by our improved financial performance in fiscal 2006, but recognize we still have much work to do," said Aylwin Lewis, Sears Holdings' chief executive and president, in a statement. "Our improved apparel results are an indication of what can happen when we enhance our offerings and services to better meet customers' needs."

At Sears' domestic stores, sales at stores open at least one year, a key industry growth measure, fell 4.9%, while Kmart same-store sales rose fell 0.9%.

In the aggregate, same-store sales were down 3.1%. The company blamed the lower numbers on tougher competition for lawn and garden, and appliances and said there were fewer transactions.

At Sears domestic, same-store sales fell for both the quarter and year across most categories and formats, partially offset by increases in women's apparel. In 2005, Sears domestic modified its apparel assortment to a more "fashion forward" offering that mostly failed, leading to hefty sales declines in the category. The company said it has mostly corrected those problems.

Lampert conceded that competition has grown more aggressive and that Sears Holdings' annual adjusted EBITDA to revenues was lame in comparison to his rivals.

"Among the top 10 retailers, Sears Holdings is fifth in terms of sales but we are further down, at ninth, based on EBITDA margin," he said in the SEC filing.