Sears Reports Second Quarter 2003 Results
Sears, Roebuck and Co. (NYSE: S) today reported net income of $309 million, or $1.04 per share, for the second quarter ended June 28, 2003, compared with net income of $229 million, or $0.71 per share, in the second quarter of 2002.
"We delivered a solid quarter that was consistent with our expectations," said Chairman and CEO Alan J. Lacy. "We are pleased that sales in core businesses such as lawn and garden, tools and apparel have shown signs of strengthening, especially considering the difficult economic environment."
Sears' second quarter 2003 earnings included a pretax gain of $93 million, or $0.20 per share, on the sale of previously charged-off credit card accounts, which was partially offset by a pretax charge of $28 million, or $0.06 per share, for severance costs associated with a productivity improvement program to further streamline the company's home office and field operations.
In the second quarter of 2002, Sears refined its methodology for determining its allowance for uncollectible accounts to include the uncollectible portion of current credit card accounts and credit card fee balances. As a result, the 2002 second quarter results included a pretax charge of $300 million, or $0.59 per share.
Retail and Related Services
Retail and Related Services reported operating income of $183 million for the second quarter of 2003, compared with operating income of $300 million in the second quarter of 2002. The decrease reflects lower gross margins on full-line store sales due to clearance activity and a highly promotional retail environment.
Revenues for the second quarter were $7.8 billion, an increase of 0.9 percent over the same period last year. A revenue increase from the addition of Lands' End, which was acquired in June 2002, was partially offset by revenue decreases in retail stores. Comparable store sales for the quarter declined 3.5 percent. In hardlines, lawn and garden experienced strong performances in both full-line and dealer stores.
"Sales trends generally improved during the quarter, reflecting continuing progress against our goals of upgrading merchandise offerings, enhancing the customer experience in Sears stores and strengthening our marketing," Lacy said. "Apparel sales benefited from the contribution of Lands' End merchandise. In fact, comparable sales for apparel in stores carrying the Lands' End brand were 2-4 percent better than those without. We are encouraged by these initial results and look forward to completing our rollout to all Sears stores by year end."
The company's gross margin rate for the quarter declined 10 basis points from the prior year, as a significant increase in promotional activity was largely offset by improvements in sourcing and the inclusion of the higher- margin Lands' End business.
Selling and administrative expenses increased by $107 million due primarily to the inclusion of Lands' End. In addition, selling and administrative expenses in Retail and Related Services included a charge of $16 million for severance costs related to the company's productivity improvement program. The remaining portion of the severance charge was recorded in the corporate and other segment.
Credit and Financial Products
Credit and Financial Products reported operating income of $355 million for the quarter, up $243 million compared to the 2002 second quarter, which included a $300 million charge related to a refinement in the method for determining the allowance for uncollectible credit card accounts. In addition, the current year quarter included a $93 million gain on the sale of previously charged-off accounts.
Second quarter domestic Credit and Financial Products revenues decreased approximately 4.2 percent from a year ago to $1.27 billion, as an increase in average receivable balances was more than offset by a lower yield. The lower yield is attributable to the lower interest rate environment, reduced late fees and an increase in the size of the MasterCard portfolio, which carries a lower yield than Sears' private label card.
Domestic credit card receivables at the end of the second quarter increased 4.2 percent over the prior year to $29.4 billion. Funding costs were even with last year's quarter, as favorability from the lower interest rate environment was offset by greater interest expense associated with higher debt balances to support the increase in receivables.
The domestic provision for uncollectible credit card accounts was $446 million in the second quarter, compared with $693 million in last year's period, a decrease of $247 million due primarily to the $300 million charge taken in the second quarter of 2002. The current year provision also benefited from a $93 million gain realized during the current quarter as Sears sold approximately $2.5 billion of previously charged-off accounts. The sale generated pretax proceeds of $178 million and the resulting gain was recorded as a reduction of the provision for uncollectible accounts. Consequently, the net charge-off rate for the quarter was 4.57 percent, compared with 5.32 percent a year ago. Excluding the benefit of the sale of the charged off accounts, the net charge-off rate for the quarter would have been 6.71 percent.
Year-over-year delinquencies rose to 7.41 percent from 6.87 percent, reflecting continued seasoning of the MasterCard portfolio. The domestic allowance for uncollectible credit card accounts at the end of the second quarter was $1.9 billion, or 6.45 percent of ending credit receivables, compared with 6.06 percent of ending credit receivables at the end of the 2003 first quarter.
Share Repurchase Program
During the quarter, Sears repurchased 34.9 million shares of its common stock for a total cost of $1.02 billion, at an average price of $29.19 per share. As of June 28, 2003, the company had remaining authorization to repurchase $230 million of shares by December 31, 2004, under its existing share repurchase program.
On July 15, the Sears board of directors authorized an incremental $1 billion to replenish the existing share repurchase program, bringing the total authorized under the program to approximately $1.2 billion. The shares will be purchased in the open market or through privately negotiated transactions. Timing will depend on prevailing market conditions, alternative uses of capital and other factors.
Outlook
In Retail and Related Services, the company anticipates that full-year operating income will be roughly flat with the previous year. This assumes comparable store sales of flat to up low-single digit in the second half. Credit and Financial Products remains on plan for a mid-single digit decline in operating income, including the benefit from the sale of charged-off receivables. Sears expects that the gain will be largely offset by lower than planned late fees, due to lower delinquent accounts resulting from risk mitigation activities.
The company expects full-year earnings per share (EPS) to be between $4.80 and $5.00. This compares with its previous forecast of EPS between $4.95 and $5.15. This full-year expectation excludes any effect that may result from the sale of the Credit and Financial Products business.
Forward-Looking Statements
This release contains guidance on full-year 2003 earnings per share, as well as comparable store sales, margins and other company performance measures. These statements are forward-looking statements based on assumptions about the future that are subject to risks and uncertainties, and actual results may differ materially from the results projected in the forward looking statements. Risks and uncertainties that may cause actual results to differ materially include competitive conditions in retail and credit; changes in consumer confidence and spending; delinquency and charge-off trends in the credit card portfolio; consumer debt levels and the level of consumer bankruptcies; the success of initiatives to address increased delinquencies and credit losses and improve credit profitability; the success of the full- line store strategy and other strategies; the possibility that the company will identify new business and strategic options for one or more of its business segments, potentially including selective acquisitions, dispositions, restructurings, joint ventures and partnerships; Sears' ability to integrate and operate Lands' End successfully; the successful integration of Sears retail businesses with a third-party credit card program, which involves significant training and the integration of complex systems and processes; the outcome of pending legal proceedings; anticipated cash flow; social and political conditions such as war, political unrest and terrorism or natural disasters; the possibility of negative investment returns in the company's pension plan; changes in interest rates; the volatility in financial markets; changes in the company's debt ratings, credit spreads and cost of funds; the possibility of interruptions in systematically accessing the public debt markets; general economic conditions and normal business uncertainty. In addition, Sears typically earns a disproportionate share of its operating income in the fourth quarter due to seasonal buying patterns, which are difficult to forecast with certainty. The company intends these forward- looking statements to speak only as of the time of this release and does not undertake to update or revise them as more information becomes available.
Webcast
Sears will webcast its second quarter earnings conference call at 10:30 a.m. EDT/9:30 a.m. CDT today. Investors and the media are invited to listen to the call through the company's website at www.sears.com/investors, under "Events and Webcasts." A telephone replay of the call will be available beginning at approximately 12:30 p.m EDT/11:30 a.m. CDT today. The replay number is 1-888-562-6126, access code: 3276. A replay of the conference call will also be available on the company's website at www.sears.com/investors, under "Events and Webcasts."
About Sears
Sears, Roebuck and Co. is a broadline retailer with significant service and credit businesses. In 2002, the company's revenue was $41.4 billion. The company offers its wide range of apparel, home and automotive products and services to families in the U.S. through Sears stores nationwide, including approximately 870 full-line stores. Sears also offers a variety of merchandise and services through its Web sites, sears.com, thegreatindoors.com and landsend.com, and a variety of specialty catalogs.
SEARS, ROEBUCK AND CO.
CONSOLIDATED INCOME
For the 13 Weeks For the 26 Weeks
Ended Ended
June 28, 2003 June 28, 2003
and June 29, 2002 and June 29, 2002
(millions, except earnings per
common share) 2003 2002 2003 2002
REVENUES
Merchandise sales and services $8,851 $8,753 $16,325 $16,400
Credit and financial products
revenues 1,345 1,389 2,751 2,779
Total revenues 10,196 10,142 19,076 19,179
COSTS AND EXPENSES
Cost of sales, buying and
occupancy 6,402 6,342 11,876 11,968
Selling and administrative 2,327 2,236 4,437 4,297
Provision for uncollectible
accounts 461 701 944 1,082
Depreciation and amortization 230 221 455 431
Interest 287 276 566 568
Special charges and impairments - - - 111
Total costs and expenses 9,707 9,776 18,278 18,457
Operating income 489 366 798 722
Other income, net 13 10 14 88
Income before income taxes and
minority interest 502 376 812 810
Income taxes (186) (140) (301) (288)
Minority interest (7) (7) (10) 25
Income before cumulative effect
of accounting change 309 229 501 547
Cumulative effect of change in
accounting for goodwill - - - (208)
NET INCOME $309 $229 $501 $339
EARNINGS PER COMMON SHARE
Basic
Earnings per share before
cumulative effect of a change
in accounting principle $1.04 $0.72 $1.63 $1.72
Cumulative effect of change
in accounting for goodwill - - - (0.65)
Earnings per share $1.04 $0.72 $1.63 $1.07
Diluted
Earnings per share before
cumulative effect of a change
in accounting principle $1.04 $0.71 $1.63 $1.70
Cumulative effect of change
in accounting for goodwill - - - (0.65)
Earnings per share $1.04 $0.71 $1.63 $1.05
Average common and dilutive
common equivalent shares
outstanding 298.0 321.1 307.9 322.5
SEARS, ROEBUCK AND CO.
CONSOLIDATED BALANCE SHEET
(millions)
June 28, June 29, December 28,
2003 2002 2002
Assets
Current Assets
Cash and cash equivalents $2,921 $1,019 $1,962
Credit card receivables 31,323 29,812 32,595
Less allowance for
uncollectible accounts 1,957 1,485 1,836
Net credit card receivables 29,366 28,327 30,759
Other receivables 728 635 863
Merchandise inventories 5,447 5,396 5,115
Prepaid expenses and deferred
charges 620 617 535
Deferred income taxes 839 1,010 749
Total current assets 39,921 37,004 39,983
Property and equipment, net 6,909 6,797 6,910
Deferred income taxes 627 365 734
Goodwill 945 936 944
Tradenames and other intangible
assets 703 725 704
Other assets 1,268 917 1,134
Total assets $50,373 $46,744 $50,409
Liabilities
Current liabilities
Short-term borrowings $5,464 $3,981 $4,525
Current portion of long-term
debt and capitalized lease
obligations 5,050 4,325 4,808
Accounts payable and other
liabilities 6,759 6,831 7,485
Unearned revenues 1,256 1,180 1,199
Other taxes 496 471 580
Total current liabilities 19,025 16,788 18,597
Long-term debt and capitalized
lease obligations 21,462 20,348 21,304
Pension and Postretirement
benefits 2,336 1,645 2,491
Minority interest and other
liabilities 1,318 1,868 1,264
Total liabilities 44,141 40,649 43,656
Commitments and Contingent
Liabilities
Shareholders' Equity
Common shares 323 323 323
Capital in excess of par value 3,501 3,516 3,505
Retained earnings 8,861 7,605 8,497
Treasury stock - at cost (5,463) (4,506) (4,474)
Deferred ESOP expense (34) (48) (42)
Accumulated other comprehensive
loss (956) (795) (1,056)
Total shareholders' equity 6,232 6,095 6,753
Total liabilities and
shareholders' equity $50,373 $46,744 $50,409
Total common shares
outstanding 282.6 315.9 316.7
SEARS, ROEBUCK AND CO.
Segment Income Statements
(millions, except earnings per share)
For the 13 Weeks Ended June 28, 2003 and June 29, 2002
Credit & Financial
Retail & Related Services Products
2003 2002 2003 2002
Merchandise sales and
services $7,771 $7,699 $- $-
Credit and financial
products revenues - - 1,266 1,321
Total Revenues 7,771 7,699 1,266 1,321
Costs and expenses
Cost of sales, buying
and occupancy 5,662 5,602 - -
Selling and
administrative 1,723 1,616 215 264
Provision for uncollectible
accounts - - 446 693
Depreciation and
amortization 187 176 5 5
Interest expense
(income) 16 5 245 247
Total costs and
expenses 7,588 7,399 911 1,209
Operating income (loss) $183 $300 $355 $112
Net Income
EPS - Diluted
Average shares o/s
Corporate & Other Sears Canada
2003 2002 2003 2002
Merchandise sales and services $100 $92 $980 $962
Credit and financial products
revenues - - 79 68
Total Revenues 100 92 1,059 1,030
Costs and expenses
Cost of sales, buying and
occupancy 41 35 699 705
Selling and administrative 121 110 268 246
Provision for uncollectible
accounts - - 15 8
Depreciation and amortization 10 16 28 24
Interest expense (income) - - 26 24
Total costs and expenses 172 161 1,036 1,007
Operating income (loss) $(72) $(69) $23 $23
Net Income
EPS - Diluted
Average shares o/s
Total
2003 2002
Merchandise sales and services $8,851 $8,753
Credit and financial products
revenues 1,345 1,389
Total Revenues 10,196 10,142
Costs and expenses
Cost of sales, buying and occupancy 6,402 6,342
Selling and administrative 2,327 2,236
Provision for uncollectible accounts 461 701
Depreciation and amortization 230 221
Interest expense (income) 287 276
Total costs and expenses 9,707 9,776
Operating income (loss) $489 $366
Net Income $309 $229
EPS - Diluted $1.04 $0.71
Average shares o/s 298.0 321.1
For the 26 Weeks Ended June 28, 2003 and June 29, 2002
Credit & Financial
Retail & Related Services Products
2003 2002 2003 2002
Merchandise sales and
services $14,415 $14,467 $- $-
Credit and financial
products revenues - - 2,596 2,639
Total Revenues 14,415 14,467 2,596 2,639
Costs and expenses
Cost of sales, buying
and occupancy 10,576 10,607 - -
Selling and
administrative 3,284 3,128 433 492
Provision for
uncollectible
accounts - - 917 1,064
Depreciation and
amortization 370 344 9 10
Interest expense
(income) 25 1 487 518
Special charges and
impairments - - - -
Total costs and
expenses 14,255 14,080 1,846 2,084
Operating income (loss) $160 $387 $750 $555
Net Income before
cumulative effect of
change in accounting
Cumulative effect of
change in accounting
Net Income
EPS - Diluted
Average shares o/s
Corporate & Other Sears Canada
2003 2002 2003 2002
Merchandise sales and services $163 $150 $1,747 $1,783
Credit and financial products
revenues - - 155 140
Total Revenues 163 150 1,902 1,923
Costs and expenses
Cost of sales, buying and
occupancy 65 56 1,235 1,305
Selling and administrative 222 204 498 473
Provision for uncollectible
accounts - - 27 18
Depreciation and amortization 21 28 55 49
Interest expense (income) - - 54 49
Special charges and impairments - - - 111
Total costs and expenses 308 288 1,869 2,005
Operating income (loss) $(145) $(138) $33 $(82)
Net Income before cumulative
effect of change in accounting
Cumulative effect of change in
accounting
Net Income
EPS - Diluted
Average shares o/s
Total
2003 2002
Merchandise sales and services $16,325 $16,400
Credit and financial products revenues 2,751 2,779
Total Revenues 19,076 19,179
Costs and expenses
Cost of sales, buying and
occupancy 11,876 11,968
Selling and administrative 4,437 4,297
Provision for uncollectible accounts 944 1,082
Depreciation and amortization 455 431
Interest expense (income) 566 568
Special charges and impairments - 111
Total costs and expenses 18,278 18,457
Operating income (loss) $798 $722
Net Income before cumulative effect
of change in accounting $501 $547
Cumulative effect of change in accounting $- $(208)
Net Income $501 $339
EPS - Diluted $1.63 $1.05
Average shares o/s 307.9 322.5
SEARS, ROEBUCK AND CO.
SUPPLEMENTAL INFORMATION - DOMESTIC CREDIT CARD RECEIVABLES, INVENTORY
AND STORE COUNT
($ in millions)
Average Balance Ending Balance
For the 13 Weeks For the 26 Weeks
Ended Ended
June 28, 2003 and June 28, 2003 and
June 29, 2002 June 29, 2002 June 28, June 29,
2003 2002 2003 2002 2003 2002
Sears Card
credit card
receivables $16,784 $20,094 $17,320 $20,878 $16,501 $19,679
Sears Gold
MasterCard
credit card
receivables 12,614 7,519 12,511 6,634 12,942 8,567
Total domestic
credit card
receivables $29,398 $27,613 $29,831 $27,512 $29,443 $28,246
For the 13 Weeks Ended For the 26 Weeks Ended
June 28, 2003 and June 28, 2003 and
June 29, 2002 June 29, 2002
Domestic credit
card
receivables- 2003 2002 2003 2002
Net interest
margin:
Portfolio yield 16.56% 18.47% 16.73% 18.51%
Effective
financing rate 3.31% 3.55% 3.24% 3.74%
Net interest
margin 13.25% 14.92% 13.49% 14.77%
Reported
domestic net
charge-off
rate:
Sears Card 3.37% 6.20% 5.15% 6.17%
Sears Gold
MasterCard 6.16% 2.99% 5.61% 2.83%
Total 4.57% 5.32% 5.34% 5.37%
Domestic net
charge-off rate
(without
consideration
of the Q2 2003
sale of previously
charged-off
accounts):
Sears Card 6.89% 6.20% 6.85% 6.17%
Sears Gold
MasterCard 6.48% 2.99% 5.77% 2.83%
Total 6.71% 5.32% 6.40% 5.37%
2003 2002
June 28, March 29, Dec. 28, Sep. 28, Jun. 29,
2003 2003 2002 2002 2002
Sears Card
delinquency
rate 9.33% 10.14% 10.34% 9.74% 8.75%
Sears Gold
MasterCard
delinquency
rate 4.96% 4.72% 3.76% 2.99% 2.57%
Total domestic
delinquency
rate 7.41% 7.87% 7.69% 7.24% 6.87%
Allowance for
uncollectible
accounts $1,900 $1,790 $1,780 $1,630 $1,441
Allowance % of
domestic credit
card receivables 6.45% 6.06% 5.79% 5.57% 5.10%
June 28, June 29,
2003 2002
Domestic inventories
-LIFO $4,881 $4,854
-FIFO $5,507 $5,469
For the 13 Weeks Ended For the 26 Weeks Ended
June 28, 2003 and June 29, 2002 June 28, 2003 and June 29, 2002
Pretax
LIFO charge $12 $12 $24 $24
June 28, June 29, December 28,
Domestic retail stores: 2003 2002 2002
Full-line 869 870 872
Specialty 1,307 1,295 1,305
Lands' End 15 15 15
Total 2,191 2,180 2,192
During 2003, the Company opened 10 stores consisting of one Full-line
store and nine Specialty stores. In addition, the Company closed 11
stores consisting of four Full-line stores and seven Specialty stores.
SOURCE: Sears, Roebuck and Co.
CONTACT: Edgar P. McDougal, +1-847-286-9669, or Investor Contact, Pam
White, +1-847-286-1468, both of Sears
Web site: http://www.sears.com/