Sears Reports Record Second Quarter 2002 Earnings
EPS $1.31 vs. Prior Year Comparable EPS of $0.96 Revises Guidance Upward for the Year Announces Accounting Change
Sears, Roebuck and Co. (NYSE: S) today reported record second quarter 2002 net income of $420 million, or $1.31 per share, a 36 percent per share increase over the prior year comparable second quarter of $0.96 per share. The increase is due to the continuing performance improvements in the company's retail and credit businesses.
"Profits for the quarter showed solid increases across all segments," said Chairman and Chief Executive Officer Alan J. Lacy. "Margin rate improvements continue to benefit the retail businesses, while Credit and Financial Products results were driven by the growth of the Sears Gold MasterCard product and a favorable interest rate environment."
"First half earnings exceeded our expectations," said Lacy. "As a result, we now expect 2002 full year comparable earnings per share to be approximately $5.15, a 22 percent increase over the prior year amount of $4.22." This outlook takes into account the negative impact on sales from the re- positioning and restructuring initiatives. Previous expectation was for full year comparable earnings per share to increase approximately 17 percent.
Second quarter 2001 was affected by three non-comparable items, which consisted of a charge related to the adoption of a new accounting standard for receivables securitzations, a charge relating to HomeLife Corporation and a charge related to the exit of the skin care and color cosmetics business. These items resulted in a total pre-tax charge of $809 million, or $1.56 per share.
Reported second quarter 2002 net income was $420 million or $1.31 per share, compared with a net loss of $197 million, or ($0.60) per share, in the second quarter of 2001.
Retail and Related Services
Retail and Related Services operating income, excluding non-comparable items, increased $87 million to $300 million from $213 million in the prior year. "Our Retail and Related Services segment continues to show improvement in profitability. These results demonstrate the benefits of our focus on gross margin rate expansion, expense control, and inventory management," said Lacy.
Revenues for the second quarter of 2002 were $7.7 billion or 0.8 percent below last year's second quarter revenues of $7.8 billion. Sales increases by product repair services, dealer stores, direct to customer and commercial sales were more than offset by declines in revenue in the full-line stores. Sales declined in softlines as a result of lower apparel sales and exits from the custom window treatment and installed floor covering businesses, partially offset by increased hardline sales.
Retail and Related Services gross margin rate improved by 30 basis points to 27.2 percent. Full-line hardlines and softlines businesses, and nearly all other retail formats, contributed to the margin improvement.
Selling and administrative spending was 3.6 percent lower than second quarter 2001 due to expense decreases in full-line stores, partially offset by higher investment in The Great Indoors. Selling and administrative expenses were 21.0 percent of sales compared with 21.6 percent last year.
Credit and Financial Products
Credit and Financial Products' operating income, excluding non-comparable items, increased by $67 million or 19.4 percent to $412 million as favorable funding costs and higher revenues offset higher provision and selling and administrative expenses.
Second quarter domestic Credit and Financial Products revenues increased 3.5 percent from a year ago to $1.3 billion, due primarily to higher average receivable balances. Credit receivables at the end of the second quarter grew 8.8 percent over the prior year to $28.2 billion.
Funding costs declined by $118 million or 32.3 percent from last year's quarter due to a favorable interest rate environment.
The domestic provision for uncollectible accounts, on a comparable basis, increased by $43 million or 12.3 percent over last year's period, partially due to receivables growth. The net charge-off rate for the quarter decreased to 5.32 percent from 5.42 percent last year primarily due to decreased customer bankruptcy filings.
Year-over-year delinquencies decreased 39 basis points from 7.26 percent to 6.87 percent, indicating stable portfolio quality. The domestic allowance for uncollectible accounts of $1.4 billion is 5.10 percent of ending credit receivables compared with 5.24 percent at the end of last quarter. These amounts reflect the change in accounting policy discussed below.
Sears Canada
Sears Canada's operating income of $23 million compares with operating income of $11 million in last year's second quarter. The $12 million profit improvement is primarily related to gross margin rate expansion partially offset by decreased revenues. Sears Canada revenue decreased 0.5 percent to $1.0 billion in the second quarter of 2002, in part due to a 1.0 percent decline in the value of the Canadian dollar relative to the U.S. dollar.
Corporate and Other
Segment operating loss for the quarter of $69 million was essentially flat with last year's operating loss of $71 million. Revenues from the home improvement services businesses included in the Corporate and Other segment decreased by 17.9 percent to $92 million primarily due to the sale of the Sears Termite and Pest Control business in the last half of 2001.
Change in Accounting Method
The company announced a change in its accounting for the allowance for uncollectible accounts in the credit business. Sears historical allowance methodology provided for uncollectible principal and accrued finance charges on past due accounts. Sears has changed its allowance methodology to include current balances and accrued credit card fees in the methodology. The company believes that this change in its methodology moves it appropriately to a more conservative position in regard to its allowance for uncollectible accounts. As a result of the accounting change, the company recorded a cumulative effect, non-cash charge of $191 million as of the beginning of the fiscal 2002 year. The change did not impact second quarter 2002 results.
Forward-Looking Statements
This release contains guidance on 2002 comparable earnings per share, which is a forward-looking statement based on assumptions about the future that are subject to risks and uncertainties, such as competitive conditions in retail; changes in consumer confidence and spending; changes in interest rates; delinquency and charge-off trends in the credit card receivables portfolio; continued consumer acceptance of the Sears Gold MasterCard Program; the successful execution of and customer reactions to Sears' Full-line store strategy and other performance improvement initiatives; Sears' ability to integrate and operate Lands' End successfully; anticipated cash flow; 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. While the company believes its forecasts and assumptions are reasonable, it cautions that actual results may differ materially. The company intends these forward-looking statements to speak only as of the time of this presentation and does not undertake to update or revise them as more information becomes available.
About Sears
Sears, Roebuck and Co. is a broadline retailer with significant service and credit businesses. In 2001, the company's annual revenue was more than $41 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 site, http://www.sears.com/ . In June 2002, Sears acquired Lands' End, a direct merchant of traditionally styled, classic Lands' End clothing offered to customers around the world through regular mailings of its specialty catalogs and online at http://www.landsend.com/. The company makes available by phone a recorded message on sales performance of its domestic stores. The message is updated weekly and can be heard by calling (847) 286-6111.
SEARS, ROEBUCK AND CO.
CONSOLIDATED INCOME
For the 13 Weeks Ended For the 26 Weeks Ended
June 29, 2002 June 29, 2002
and June 30, 2001 and June 30, 2001
(millions, except earnings
per common share) 2002 2001 % Change 2002 2001 % Change
REVENUES
Merchandise sales
and services $8,753 $8,834 -0.9% $16,400 $16,588 -1.1%
Credit and financial
products revenues 1,389 1,349 3.0% 2,779 2,452 13.3%
Total revenues 10,142 10,183 -0.4% 19,179 19,040 0.7%
COSTS AND EXPENSES
Cost of sales,
buying and
occupancy 6,342 6,439 -1.5% 11,968 12,275 -2.5%
Selling and
administrative 2,236 2,256 -0.9% 4,297 4,287 0.2%
Provision for
uncollectible
accounts 401 361 11.1% 782 552 41.7%
Provision for
previously
securitized
receivables - 522 -100.0% - 522 -100.0%
Depreciation and
amortization 221 225 -1.8% 431 440 -2.0%
Interest 276 404 -31.7% 568 716 -20.7%
Special charges and
impairments - 287 - 111 287 -61.3%
Total costs
and expenses 9,476 10,494 -9.7% 18,157 19,079 -4.8%
Operating income (loss) 666 (311) - 1,022 (39) -
Other income, net 10 7 - 88 8 -
Income (loss) before
income taxes and
minority interest 676 (304) - 1,110 (31) -
Income taxes (249) 112 - (397) 14 -
Minority interest (7) (5) - 25 (4) -
Income (loss) before
cumulative effect of
accounting changes 420 (197) - 738 (21) -
Cumulative effect of
change in accounting
for allowance
for uncollectible
accounts - - - (191) - -
Cumulative effect of
change in accounting
for goodwill - - - (208) - -
NET INCOME (LOSS) $420 $(197) - $339 $(21) -
EARNINGS PER COMMON
SHARE
Basic
Earnings (loss)
per share before
cumulative
effect of a
changes in
accounting
principle $1.33 $(0.60) - $2.33 $(0.06) -
Cumulative effect
of changes in
accounting $- $- - $(1.26) $- -
Earnings (loss)
per share $1.33 $(0.60) - $1.07 $(0.06) -
Diluted
Earnings (loss)
per share before
cumulative
effect of a
changes in
accounting
principle $1.31 $(0.60) - $2.29 $(0.06) -
Cumulative effect
of changes in
accounting $- $- - $(1.24) $- -
Earnings (loss)
per share $1.31 $(0.60) - $1.05 $(0.06) -
Average common and
dilutive common
equivalent shares
outstanding 321.1 326.6 322.5 329.2
SEARS, ROEBUCK AND CO.
CONSOLIDATED BALANCE SHEET
(millions)
June 29, June 30, December 29,
2002 2001 2001
Assets
Current Assets
Cash and cash equivalents $1,019 $476 $1,064
Credit card receivables 29,812 27,615 29,321
Less allowance for
uncollectible accounts 1,485 1,129 1,166
Net credit card receivables 28,327 26,486 28,155
Other receivables 635 628 658
Merchandise inventories 5,396 5,596 4,912
Prepaid expenses and deferred
charges 617 585 458
Deferred income taxes 1,010 1,170 858
Total current assets 37,004 34,941 36,105
Property and equipment, net 6,797 6,604 6,824
Deferred income taxes 365 232 415
Other assets 2,578 990 973
Total assets $46,744 $42,767 $44,317
Liabilities
Current liabilities
Short-term borrowings $3,981 $3,326 $3,557
Current portion of long-term
debt and capitalized lease
obligations 4,325 3,243 3,157
Accounts payable and other
liabilities 6,831 6,488 7,176
Unearned revenues 1,180 1,131 1,136
Other taxes 471 475 558
Total current liabilities 16,788 14,663 15,584
Long-term debt and capitalized
lease obligations 20,348 18,870 18,921
Postretirement benefits 1,645 1,867 1,732
Minority interest and other
liabilities 1,868 1,334 1,961
Total liabilities 40,649 36,734 38,198
Commitments and Contingent
Liabilities
Shareholders' Equity
Common shares 323 323 323
Capital in excess of par value 3,516 3,523 3,500
Retained earnings 7,605 6,806 7,413
Treasury stock - at cost (4,506) (4,071) (4,223)
Deferred ESOP expense (48) (77) (63)
Accumulated other comprehensive
loss (795) (471) (831)
Total shareholders' equity 6,095 6,033 6,119
Total liabilities and
shareholders' equity $46,744 $42,767 $44,317
Total common shares
outstanding 316.8 324.3 320.4
SEARS, ROEBUCK AND CO.
Segment Income Statements
(millions)
For the 13 Weeks Ended June 29, 2002 and June 30, 2001
Excluding Non-Comparable Items and Securitization
Credit &
Retail & Related Services Financial Products
2002 2001 2002 2001
Merchandise sales and
services $7,699 $7,760 $-
Credit and financial
products revenues - - 1,321 1,276
Total Revenues 7,699 7,760 1,321 1,276
Costs and expenses
Cost of sales,
buying and
occupancy 5,602 5,674 - -
Selling and
administrative 1,616 1,677 264 212
Provision for
uncollectible
accounts - - 393 350
Provision for
previously
securitized
receivables - - - -
Depreciation and
amortization 176 185 5 4
Interest 5 11 247 365
Special charges and
impairments - - - -
Total costs
and
expenses 7,399 7,547 909 931
Operating income
(loss) $300 $213 $412 $345
Net Income (loss)
before cumulative
effect of changes in
accounting
Cumulative effect of
changes in accounting
Net Income (loss)
EPS - Diluted
Average shares o/s
Excluding Non-Comparable Items and Securitization Income
Corporate & Other Sears Canada
2002 2001 2002 2001
Merchandise sales and services $92 $112 $962 $962
Credit and financial products
revenues - - 68 73
Total Revenues 92 112 1,030 1,035
Costs and expenses
Cost of sales, buying and
occupancy 35 46 705 719
Selling and administrative 110 122 246 245
Provision for uncollectible
accounts - - 8 11
Provision for previously
securitized receivables - - - -
Depreciation and amortization 16 15 24 21
Interest - - 24 28
Special charges and
impairments - - - -
Total costs and expenses 161 183 1,007 1,024
Operating income (loss) $(69) $(71) $23 $11
Net Income (loss) before
cumulative effect of changes in
accounting
Cumulative effect of changes in
accounting
Net Income (loss)
EPS - Diluted
Average shares o/s
Reconciling Items
Securitization
Total Impact
2002 2001 2002 2001
Merchandise sales and services $8,753 $8,834 $- $-
Credit and financial products
revenues 1,389 1,349 - -
Total Revenues 10,142 10,183 - -
Costs and expenses
Cost of sales, buying and
occupancy 6,342 6,439 - -
Selling and administrative 2,236 2,256 - -
Provision for uncollectible
accounts 401 361 - -
Provision for previously
securitized receivables - -
Depreciation and amortization 221 225 - -
Interest 276 404 - -
Special charges and impairments - - - -
Total costs and expenses 9,476 9,685 - -
Operating income (loss) $666 $498 $- $-
Net Income (loss) before cumulative
effect of changes in accounting $420 $316 $- $-
Cumulative effect of changes in
accounting $- $- $- $-
Net Income (loss) $420 $316 $- $-
EPS - Diluted $1.31 $0.96 $- $-
Average shares o/s
Reconciling Items
Non-comparable items Consolidated GAAP
2002 2001 2002 2001
Merchandise sales and services $- $- $8,753 $8,834
Credit and financial products
revenues - - 1,389 1,349
Total Revenues - - 10,142 10,183
Costs and expenses
Cost of sales, buying and
occupancy - - 6,342 6,439
Selling and administrative - - 2,236 2,256
Provision for uncollectible
accounts - - 401 361
Provision for previously
securitized receivables - 522 - 522
Depreciation and amortization - - 221 225
Interest - - 276 404
Special charges and
impairments - 287 - 287
Total costs and
expenses - 809 9,476 10,494
Operating income (loss) $- $(809) $666 $(311)
Net Income (loss) before
cumulative effect of changes in
accounting $- $(513) $420 $(197)
Cumulative effect of changes in
accounting $- $- $- $-
Net Income (loss) $- $(513) $420 $(197)
EPS - Diluted $- $(1.56) $1.31 $(0.60)
Average shares o/s 321.1 326.6
For the 26 Weeks Ended June 29, 2002 and June 30, 2001
Credit & Financial
Retail & Related Services Products
2002 2001 2002 2001
Merchandise sales and
services $14,467 $14,566 $- $-
Credit and financial
products revenues - - 2,639 2,576
Total Revenues 14,467 14,566 2,639 2,576
Costs and expenses
Cost of sales, buying
and occupancy 10,607 10,827 - -
Selling and
administrative 3,128 3,207 492 406
Provision for
uncollectible
accounts - - 764 684
Provision for
previously
securitized
receivables - - - -
Depreciation and
amortization 344 361 10 9
Interest 1 14 518 767
Special charges and
impairments - - - -
Total costs
and expenses 14,080 14,409 1,784 1,866
Operating income (loss) $387 $157 $855 $710
Net Income (loss) before
cumulative effect of
changes in accounting
Cumulative effect of
changes in accounting
Net Income (loss)
EPS - Diluted
Average shares o/s
Excluding Non-Comparable Items and Securitization Income
Corporate & Other Sears Canada
2002 2001 2002 2001
Merchandise sales and services $150 $196 $1,783 $1,826
Credit and financial products
revenues - - 140 151
Total Revenues 150 196 1,923 1,977
Costs and expenses
Cost of sales, buying and
occupancy 56 83 1,305 1,365
Selling and administrative 204 222 473 491
Provision for uncollectible
accounts - - 18 21
Provision for previously
securitized receivables - - - -
Depreciation and amortization 28 29 49 41
Interest - - 49 58
Special charges and impairments - - - -
Total costs and expenses 288 334 1,894 1,976
Operating income (loss) $(138) $(138) $29 $1
Net Income (loss) before
cumulative effect of changes in
accounting
Cumulative effect of changes in
accounting
Net Income (loss)
EPS - Diluted
Average shares o/s
Total
2002 2001
Merchandise sales and services $16,400 $16,588
Credit and financial products
revenues 2,779 2,727
Total Revenues 19,179 19,315
Costs and expenses
Cost of sales, buying and
occupancy 11,968 12,275
Selling and administrative 4,297 4,326
Provision for uncollectible
accounts 782 705
Provision for previously
securitized receivables -
Depreciation and amortization 431 440
Interest 568 839
Special charges and impairments - -
Total costs and expenses 18,046 18,585
Operating income (loss) $1,133 $730
Net Income (loss) before cumulative
effect of changes in accounting $720 $466
Cumulative effect of changes in
accounting $- $-
Net Income (loss) $720 $466
EPS - Diluted $2.23 $1.41
Average shares o/s
Reconciling Items
Securitization Impact Non-comparable items
2002 2001 2002 2001
Merchandise sales and
services $- $- $- $-
Credit and financial products
revenues - (275) - -
Total Revenues - (275) - -
Costs and expenses
Cost of sales, buying and
occupancy - - - -
Selling and administrative - (39) - -
Provision for
uncollectible accounts - (153) - -
Provision for previously
securitized receivables - - 522
Depreciation and
amortization - - - -
Interest - (123) - -
Special charges and
impairments - - 111 287
Total costs and
expenses - (315) 111 809
Operating income (loss) $- $40 $(111) $(809)
Net Income (loss) before
cumulative effect of changes
in accounting $- $26 $18 $(513)
Cumulative effect of changes
in accounting $- $- $(399) $-
Net Income (loss) $- $26 $(381) $(513)
EPS - Diluted $- $0.08 $(1.18) $(1.55)
Average shares o/s
Consolidated GAAP
2002 2001
Merchandise sales and services $16,400 $16,588
Credit and financial products
revenues 2,779 2,452
Total Revenues 19,179 19,040
Costs and expenses
Cost of sales, buying and
occupancy 11,968 12,275
Selling and administrative 4,297 4,287
Provision for uncollectible
accounts 782 552
Provision for previously
securitized receivables - 522
Depreciation and amortization 431 440
Interest 568 716
Special charges and impairments 111 287
Total costs and expenses 18,157 19,079
Operating income (loss) $1,022 $(39)
Net Income (loss) before cumulative
effect of changes in accounting $738 $(21)
Cumulative effect of changes in
accounting $(399) $-
Net Income (loss) $339 $(21)
EPS - Diluted $1.05 $(0.06)
Average shares o/s 322.5 329.2
SEARS, ROEBUCK AND CO.
SUPPLEMENTAL INFORMATION - DOMESTIC CREDIT CARD RECEIVABLES, INVENTORY
AND STORE COUNT
(millions)
Average Balance
For the 13 Weeks ended For the 26 Weeks ended
June 29, 2002 June 29, 2002
and June 30, 2001 and June 30, 2001
2002 2001 2002 2001
Sears Card credit card
receivables 20,125 23,962 20,904 24,525
Sears Gold MasterCard
credit card receivables 7,488 1,869 6,608 1,616
Managed domestic credit
card receivables $27,613 $25,831 $27,512 $26,141
For the 13 Weeks ended For the 26 Weeks ended
June 29, 2002 June 29, 2002
and June 30, 2001 and June 30, 2001
Domestic managed credit
card receivables- 2002 2001 2002 2001
Net interest margin:
Portfolio yield 18.47% 19.12% 18.51% 19.09%
Effective financing rate 3.55% 5.60% 3.74% 5.82%
Net interest margin 14.92% 13.52% 14.77% 13.27%
Domestic managed net
charge-off rate 5.32% 5.42% 5.37% 5.23%
2002 2001
Jun. 29, Mar. 30, Dec. 29, Sep. 29,
2002 2002 2001 2001
Domestic managed credit
card receivables-
Delinquency rate 6.87% 7.31% 7.58% 7.41%
Allowance for uncollectible
accounts $1,441 $1,415 $1,115 $1,089
Allowance % of domestic on-
book credit
card receivables 5.10% 5.24% 4.04% 4.15%
June 29, June 30,
2002 2001
Domestic
inventories -LIFO $4,854 $4,944
-FIFO $5,469 $5,534
For the 13 Weeks Ended For the 26 Weeks Ended
June 29, 2002 June 29, 2002
and June 30, 2001 and June 30, 2001
Pretax LIFO charge $12 $12 $24 $24
December 29, June 29,
Domestic retail stores: 2001 Opened Closed 2002
Full-line stores 867 11 (8) 870
Specialty formats 1,318 13 (36) 1,295
Total 2,185 24 (44) 2,165
Gross square feet 148.5 2.3 (1.1) 149.7
Ending Balance
June 29, June 30,
2002 2001
Sears Card credit card receivables 19,718 23,633
Sears Gold MasterCard credit card
receivables 8,528 2,333
Managed domestic credit card
receivables $28,246 $25,966
Domestic managed credit card
receivables-
Net interest margin:
Portfolio yield
Effective financing rate
Net interest margin
Domestic managed net charge-off rate
Jun. 30, 2001
Domestic managed credit card
receivables-
Delinquency rate 7.26%
Allowance for uncollectible accounts $1,089
Allowance % of domestic on-book
credit
card receivables 4.19%
Domestic
inventories -LIFO
-FIFO
Pretax LIFO charge
Domestic retail stores:
Full-line stores
Specialty formats
Total
Gross square feet
SOURCE: Sears, Roebuck and Co.
CONTACT: Peggy A. Palter, +1-847-286-8361, or Investor Relations, Pam
White, +1-847-286-1468, both of Sears
Web site: http://www.sears.com/