Sears Trims Holiday View

The company swings to a third-quarter loss.
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Updated from 10:25 a.m. EDT

Sears

(S) - Get Report

swung to a loss in the third quarter, missing analyst forecasts by a wide margin, and said sales would trail estimates in the all-important Christmas quarter.

Sears lost $61 million, or 29 cents a share, in the three months to Sept. 30, compared with earnings of $147 million, or 52 cents a share, last year. Last year included the results of the domestic Credit and Financial Products and National Tire & Battery, which have since been sold.

Analysts were forecasting earnings of 1 cent a share in the most recent quarter. Sales fell 17% to $8.30 billion, about $20 million shy of forecasts.

For all of 2004, the company put earnings at $1.46 to $1.66 a share, including a charge of 24 cents a share recorded in the second quarter and carrying costs of 20 cents to 25 cents a share related to the divested credit operation. Analysts were forecasting $2.67, a figure that didn't look comparable to the Sears estimate.

"We're disappointed with the quarter," said Sears Chairman and CEO Alan Lacy in a conference call with analysts. "Given last year's tax rebates, it's a difficult year-over-year comparison for the third quarter, but the comparisons are easier in the fourth quarter and we're looking forward to a strong holiday season."

Sears' third quarter reflected softer retail demand, bad weather, higher-than-expected costs for seasonal transitions and a slower ramp up of sales following various repositionings, the company said.

"Based on our sales and margin performance over the past two quarters, coupled with a more cautious holiday outlook, we have adopted a more conservative outlook for the fourth quarter," Sears said. "While we remain optimistic about a favorable holiday shopping season, we believe that it is appropriate to lower our fourth quarter sales and margin assumptions."

The company's U.S. sales totaled $7.1 billion, down from $7.4 billion in the same quarter last year, while comparable store sales decreased 4%. On an operating basis, Sears' domestic business swung to a loss of $106 million after bringing in $222 million last year. Gross margins shrank to 25.9% from 26.7 percent, and selling costs fell to $1.7 billion from $2 billion.

Sales in Canada rose 11.2% to $1.2 billion, helped by favorable currency exchange rates.

Richard Hastings, chief analyst with Bernard Sands LLC, said Sears' financial results show that the company is "tilting in the wrong direction."

"Apparel performance has been poor for years, but management has felt comforted by the double delight of finance charge income for selling big ticket items that also generate solid gross margin dollars per unit," Hastings wrote in a research note Thursday. "That philosophy, however, was not enough for Sears then, and it certainly isn't an option for tomorrow."

During the quarter, Sears bought 50 stores from

Kmart

(KMRT)

for $575.9 million, and it agreed to make lease payments to

Wal-Mart

(WMT) - Get Report

under subleases for six Wal-Mart stores.

It also repurchased 6 million common shares at a total cost of $225 million, or an average price of $36.64 a share. As of October 2, the company had remaining authorization to repurchase approximately $500 million of common shares by the end of 2006.

Shares of Sears were recently down $2.08, or 5.6%, to $34.84.