Sears Profits by Paring Advertising Expense
08/17/06 - 01:46 PM EDT
Jeff Bagley
Advertising expenses at Sears have been declining for some time now, but there was a marked decrease in the first quarter. Although the reduction in advertising expense wasn't explicitly stated in the most recent 10-Q filing, management indicated that lower advertising expense was responsible for 100 basis points of the improvement in the SG&A rate for Sears Domestic; for Kmart, lower advertising expense accounted for 20 basis points of the decline.
That equates to a reduction of $67 million and $8.5 million at Sears and Kmart, respectively. Adjusted for taxes, the combined savings comes to almost 29 cents a share. That's substantial. Perhaps too much was spent on advertising to begin with. And, after all, this isn't a retailing story, right? I can't help but be a bit cynical, because one of the first things I learned when studying retail is that advertising spending is discretionary, and managers who need to make the numbers will resort to slashing advertising. This might please investors in the short term, but it brings up serious earnings-quality issues. We'll have to wait until the 10-Q comes out in September to see just how much of the expense savings in the just-reported quarter was a result of lower advertising expense. Can investors rely on the current run rate of profits if a future increase in advertising expense will be necessary to increase customer traffic? Judging from the continued decline in Sears same-store sales, such an investment could well be necessary sooner rather than later.
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