Sears Suffers Seasonal Disorder

Updated from 9:59 a.m. EDT

Sears ( S) has the first-quarter blues.

The company succumbed to seasonal selling issues for the first time in five years and swung to a quarterly loss, hurt in part by a decline in domestic sales and a big charge from an accounting change. But the department store chain, which has operations in the U.S. and in Canada, outlined several company initiatives to boost upcoming sales and forecast second-quarter earnings ahead of analysts' projections.

Shares of the company were lately moving up 32 cents, or 0.8%, to $42.02.

Including a one-time after-tax charge of $839 million from an accounting change related to a pension and post-retirement medical benefit contribution, Sears had a loss of $859 million, or $3.90 a share, in the latest quarter compared with net income of $192 million, or 60 cents a share, a year earlier. The prior-year's results included operations from the company's credit business and National Tire and Battery; both businesses were divested in the fourth quarter 2003.

In a subsequent conference call with investors and analysts, the company acknowledged certain inventory management mistakes which contributed to poor apparel sales in the quarter, but said the issues should be solved by the back-to-school season. The company also plans to launch two new apparel brands this fall.

Excluding the accounting change, the company lost $20 million, or 9 cents a share, in the first quarter. On this basis, analysts were expecting a loss of 10 cents a share.

Sears said the last time it reported a first-quarter loss was in 1999. Typically, retail companies with a fiscal year ending in December post weak first-quarter results because consumer spending drops off after the holiday season.

"We are generally pleased," the company said on the call. "Customers are responding, but there is still much to do." Specifically, the company plans to re-launch its home fashion, consumer electronics and kids' apparel businesses in the next few months.

Total revenue in the first quarter dropped to $7.8 billion, from $8.9 billion in the first quarter 2003.

In the company's domestic segment, revenue fell to $6.8 billion from the prior year's $8 billion. Same-store sales in the unit increased 1.6%. In the home group of the segment, solid lawn and garden, tool and home electronics sales were somewhat offset by a same-store sales declines in apparel, the company said.

The domestic segment had an operating loss of $39 million for the quarter, compared with operating income of $299 million in the first quarter of 2003.

"Our sales performance in the first quarter was mixed," the company said. "Our strong assortment and value proposition drove improved home group comparable-store sales, while we were disappointed not to fully participate in the industrywide improvement in apparel sales."

On the call, Sears said the disappointing apparel sales were caused in part by a later transition to spring merchandise from winter merchandise as compared with last year. Initially, the company wanted to clear out winter merchandise, but by "early February, the customer was ready to buy spring merchandise."

The company also bought less inventory this year than last year. Sears said that due to organizational shift of its four merchandise units to one central unit, it "lost some institutional knowledge as people settled into new jobs."

"We overcorrected to a degree this year," said Sears, also noting that some product came in later than expected.

As a result, apparel inventory was down 14% from the prior year's levels. Domestic inventory was down 3.9% on a first-in-first-out basis. As a result, total apparel same-stores sales in the quarter were flat with the prior year.

To combat its apparel issues, the company plans to bring in more national plans to supplement its current proprietary brands. It will also launch two new apparel brands this fall. In the men's business, Sears will debut the Structure brand, which it acquired from Limited Brands ( LTD) in September, at 115 stores.

And the company reiterated that its ready to wear, career update line for women called A Line, acquired from Jones Apparel Group ( JNY) in February, will debut in 450 stores this fall.

"Our work is incomplete," the company said. "The new launches are the next steps to beef up the fashion competition of our apparel."

Meanwhile, sales at Sears Canada increased to $1 billion, from $843 million last year, helped in part by favorable currency exchange. The segment had an operating loss of $2 million, compared with operating income of $10 million in last year's quarter. Sears cited a $12 million charge from a licensing agreement between Sears Canada's auto centers and three tire retailers, as well as other restructuring.

In the second quarter, Sears sees earnings of 78 cents to 83 cents, assuming same-store sales are flat to up slightly. Analysts are expecting 77 cents a share.

The company cautioned, however, that "it's difficult for any retailer to have a great vision to the full year, because so much is dependent on the fourth quarter."

For the full year, the company said it is on track to meet its earnings expectation, of $3.60 to $3.80 a share, a guidance it issued on Jan. 29. The estimate does not include the cumulative effect of change in accounting principle but includes costs of 20 cents to 25 cents a share on the company's remaining legacy debt from its former credit and financial products business, Sears said.

Analysts are calling for $3.73 a share for the year.

As originally published, this story contained an error. Please see Corrections and Clarifications.

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