Restructuring Taking Shape at Sears

Updated from 9:54 a.m. EDT

Despite continued sales declines,

Sears

(S) - Get Report

posted strong results Thursday, an early indication that its latest restructuring is starting to pay off.

Sears, which has been busy giving itself a makeover, kept the good news flowing in the retail sector Thursday, posting first-quarter earnings of 93 cents a share and maintaining its strong growth forecast for the rest of 2002.

Just last week the Hoffman Estates, Ill., department-store retailer told investors that earnings would exceed their first-quarter targets as the retail business performed more strongly than expected. Thursday's results essentially matched what the company said previously. At the time the company said it expected to post a 17% gain in 2002 earnings; on Thursday Sears reiterated that projection, while noting that it "continues to be cautious" about the economy and possible unforeseen costs from its ambitious revamping plan.

In a conference call Alan Lacy, Sears' chairman and CEO, said the guidance remained conservative because the company worried about "sales disruptions and execution risks." But investors are clearly looking beyond that, as shares have risen steadily this year on hopes that growth will revive once the restructuring is complete.

The results speak highly both of Sears and of the broader economy; other retailers such as

Williams-Sonoma

(WSM) - Get Report

have been boosting their own estimates in recent days, owing to the surprising strength of the rebound in consumer demand. Sears shares, nearing their 52-week high of $55.20, were off 27 cents lately at $53.44.

On a comparable basis -- which doesn't include the effects of $190 million in charges from eliminating the amortization of goodwill -- earnings more than doubled from a year ago, when the company reported earnings of 45 cents a share. Including charges, net income fell 62%.

The strong first-quarter results are notable particularly because Sears is still in the early stages of revamping its stores. The plan, which calls for redesigning its stores to make them easier to shop, has already resulted in significant cost savings. After all, Sears was able to boost its earnings guidance even while reporting that same-store sales, which measure activity in shops open at least a year and are closely watched by investors, fell slightly below the plan.

Last October, Sears announced an aggressive, three-year restructuring plan, which slashed jobs and called for overhauling the apparel business and revamping the stores. The goal was to get "away from the traditional department store model," Lacy, the CEO, told investors in Thursday's call. Department stores have suffered in recent years as consumers turned to chains like

Kohl's

(KSS) - Get Report

, a department store-discounter hybrid, and

Wal-Mart

(WMT) - Get Report

.

Sears is certainly treading on familiar ground. In the mid-1990s, then-chairman and CEO Arthur Martinez, who joined Sears in 1995, engineered a turnaround that included store closings, the discontinuance of the Sears catalog and an overhaul of the apparel business. Within a year, sales improved markedly. Between 1995 and 1997, Sears stock outperformed the retail sector before slumping amid increased competition from discounters.