So far, 2004 is probably not going exactly the way Sears ( S) was hoping, even with the relatively soft full-year guidance the company provided in January. The department store chain is poised to report a much lower second-quarter profit, as it continues to struggle with waning consumer demand and waits to see the fruits of a campaign to open stores in non-mall formats. Analysts are calling for earnings of 71 cents a share in the quarter when Sears reports Thursday, down from a prior estimate for 77 cents a share. That would compare with 90 cents a share in the year-earlier period. Revenue is seen down 11% at $9.1 billion. "Sears continues to struggle with top-line sales despite the overhaul of its full-line stores over the last several years," said Bear Stearns analyst Christine Augustine, in a recent research note. She is expecting the company to earn 70 cents a share, a penny below the consensus. (Bear Stearns does investment banking for Sears.) The company is coming off the first quarter's poor results, when it reported a loss for the first time in five years due in part to a big accounting change. And Sears recently projected that current third-quarter same-store sales -- the main gauge of retailer health -- will be down from the prior year's 1.2% increase. Shares of Sears have taken a hit recently. The stock is currently trading near its 52-week intraday low of $34.03 reached Monday. Investors will be expecting an update on Sears' apparel and inventory management strategies in its second-quarter report. As its dismal monthly same-store sales indicate, both are still a problem. June's same-store sales decline of 3.1%, May's drop of 3.7% and April's decline of 1.8% helped temper analysts' expectations throughout the quarter, causing them to lower EPS estimates accordingly.
Sears has said consumer demand lately is weak, especially in its home group and apparel units. But ongoing inventory issues are another reason for weak apparel sales. In the past, Sears has not had enough inventory or has the wrong seasonal inventory. "Business at the full-line stores has been inconsistent, and inventory levels in softlines have been out of balance for over 12 months -- too heavy in 2003 and too light so far in 2004," Augustine said in a July 12 note. The inventory merchandising issues have been hard to fix, in part because the company's merchandising division has been through huge management changes over the last two years. Sears said in early July, though, that it expects apparel offerings and inventory to be improved by September as it transitions to fall merchandise. The company is also expected to launch some new brands, including Structure for men and a career brand for women called A Line. It's important to note that Sears is not alone in its weak sales, said one buy-side analyst who preferred not to be named. Other names in the department store space, such as Kohl's ( KSS), Dillard's ( DDS), Wal-Mart ( WMT), Target ( TGT) and most names in the dollar-store space, have mostly reported lower same-store sales lately. "The moderate suppliers have all been struggling," said the analyst. " J.C. Penney ( JCP) is the only one doing well, and I think that's really a company-specific turnaround." Most of Sears' stores are in malls, the analyst said, noting that malls have experienced decreased traffic levels in the past couple years, as consumers tend to favor smaller, closer-to-home lifestyle centers. Sears is typically an anchor store. It currently has 870 full-line stores and 1,100 specialty stores. While the company's transition to off-mall stores is expected eventually to be a huge positive for the company, it's a move most analysts don't see adding to the bottom line until at least 2005, when the company expects to have 12-14 off-mall Sears Grand stores in its portfolio.
One other problem nags at Sears' future ability to be successful with its off-mall stores: retail behemoth Wal-Mart. "While the acquisition of off-mall locations may provide growth opportunities for Sears, we believe Sears faces execution risk as it competes against superior operators such as Wal-Mart," Augustine said. On June 30, Sears announced that it will acquire up to 54 off-mall stores from Kmart ( KMRT) and seven stores from Wal-Mart, in existing Sears markets. Some of Sears' fortunes depend on the durability of Lands' End, the apparel line it acquired in June 2002. Its reputation for quality could boost Sears' overall image, said the buy-side analyst. But while Lands' End could help "lift the quality perception" of Sears, Sears could also be "destroying" it, he said. That's because Sears has a known
penchant for heavy discounting . So marking down Lands' End could take away its perceived value. "Is Lands' End going to help Sears, or is Sears going to drag down Lands' End?" he asked. Looking ahead, Sears backed its previous full-year earnings guidance $3.60 to $3.80 a share during its first-quarter conference call, but analysts' consensus has since dropped to $3.63 a share from $3.73 a share. Results would be down from a profit of $4.36 a share in 2003.