An accounting charge in the year-ago quarter provided a comparison that helped mask a poor first quarter at

Sears

(S) - Get Report

. The company warned the second quarter likely won't meet Wall Street's expectations.

With revenue slipping and credit delinquencies continuing to mount in its finance unit, the department store chain said it earned $192 million, or 60 cents a share, in the first quarter, up from $110 million, or 34 cents a share, a year ago.

Analysts were forecasting earnings of 57 cents a share in the latestquarter. Last year, Sears took a charge of $208 million for goodwill under FASB 142 for the first quarter. Before that writedown Sears earned $318 million, or 99 cents a share. The goodwill write-off dealt with Sears' Orchard Supply and NTB stores.

Overall revenue in the first quarter this year was $8.88 billion, down from $9.04 billion a year ago. In the company's merchandise sales and services segment, revenue was $7.47 billion, down from $7.65 billion a year ago.

Sears said sales fell in the post-Christmas period, causing afirst-quarter loss of $23 million in its retail and related servicessegment. Comparable-store sales fell 6.7% in the quarter.

The sales decline also helped lead to a jump in inventory levels.The value of the company's inventory, on a last in, first out basis,rose $482 million from the year-ago quarter to $5.17 billion.

More than $100 million of the increase came as a result of weaker sales in the company's softline products, such as apparel, companyofficials told investors and analysts during a conference call. Most ofthe rest of the increase came as a result of the company's acquisition of Lands' End, both from acquiring Lands' End's own inventory for its catalog and Internet operations and from bulking up Lands' End inventory to stock Sears' retail stores.

TheStreet Recommends

Sears also lost ground on its expense structure in the quarter. Inits retail division, the company's gross profit margins, the differencebetween what a company charges for its products and what itpays for them, fell $91 million in the quarter. As a portion ofretail sales, gross margins stayed relatively stable, falling just 1basis point to 26.04%.

Company officials said they were pleased with the retail segment'smargin performance, given the tough consumer environment and theprevalence of margin-gutting promotional prices in the retail sector.

But the company fared worse with its retail operating expenses.Sales and administrative expenses increased $49 million to $1.56billion. As a portion of retail sales, such expenses increased 12 basispoints to 23.49%.

CEO Alan Lacy acknowledged that the company needed to improve itsproductivity, particularly in its retail area.

"We have much to do to get our cost structure to where we want it tobe," Lacy said.

In credit and financial products, operating income fell 10.8% to$395 million, primarily reflecting a $100 million increase in thedomestic provision for uncollectible accounts. Sears said charge-offsrose to 6.11% from 5.43% last year because of "higher balances,seasoning of the MasterCard portfolio and higher bankruptcies."Year-over-year delinquencies increased 56 basis points to 7.87%.

Sears officials said the increases in delinquencies and charge-offswere not as bad as they planned for. Meanwhile, the company increasedits reserves for bad credit card debt from 5.79% of receivables to 6.06%of receivables. Company officials said they felt "comfortable" with theprovision.

Sears recently said it's trying to sell its credit operation. Thecompany has seen its stock drop in recent months as investors havequestioned the health of its credit portfolio.

The company predicted second-quarter earnings of 85 cents to $1 ashare, assuming same-store sales fall by a percentage in the mid singledigits. It expects to earn $4.95 to $5.15 for all of 2003. Analystspolled by Thomson Financial/First Call were predicting earnings of $1.18 a share in thesecond quarter and $4.86 for the full year.

On the conference call, some analysts expressed skepticism that thecompany would be able to meet its rosier outlook for the second half ofthe year. But Sears officials stood by their guidance.

"We see additional opportunities to improve on in the second half,"Lacy said.