Sears Reports Record Second Quarter 2000 Earnings
Strong Retail and Credit Businesses Drive 29 Percent Earnings Per Share Increase
Sears, Roebuck and Co. (NYSE: S) reported record second-quarter 2000 net income of $388 million, or $1.11 per share, compared with reported 1999 second-quarter net income of $331 million, or $0.86 per share, an increase of 29 percent on a per share basis.
The increase in earnings per share was primarily due to strength in Sears retail and credit businesses coupled with the company's share repurchase program. In retail, robust hardlines sales and improved selling and administrative expenses resulted in operating income growth of 9.8 percent over the second quarter of the prior year. Credit operating income increased by 26.3 percent due to higher revenues, improved portfolio quality, securitization activity, and reductions in selling and administrative expense. Operating income in the company's home services business also improved over 1999.
"We continue to benefit from the strength of our retail and credit businesses, which both contributed to strong growth in operating income and record earnings this quarter," said Chairman and Chief Executive Officer Arthur C. Martinez. "In our retail business, we posted solid sales growth and lower selling and administrative expenses, while our credit business saw further improvement in portfolio quality and lower operating costs. Our strong cash flow allowed us to repurchase over 10 million shares of Sears stock during the quarter and our return on equity over the last twelve months has expanded to 25.1 percent."
For the first six months of 2000, net income was $623 million or $1.76 per share, compared with $477 million or $1.24 per share for the first half of last year, an increase of 42 percent on a per share basis.
Revenues
Revenues for the second quarter of 2000 increased 4.6 percent to $10.08 billion, compared with $9.64 billion for the same period a year ago. The revenue increase was primarily due to improvements in Sears full-line and dealer stores, Sears Canada and credit. Domestic comparable store sales increased 2.7 percent.
"In the second quarter, we continued to see strong momentum in our hardlines business led by appliances and electronics," said Martinez. "In softgoods, footwear, fine jewelry, cosmetics and fragrances showed solid growth but, consistent with difficult industry trends, were offset by apparel results. The Great Indoors and Sears dealer stores also enjoyed strong performance for the quarter."
Revenues in the services segment, which include Sears Home Services and Sears Direct Response businesses, were $732 million in the quarter, roughly flat with a year ago. Sears Canada's revenue increased 9.8 percent, to $1.02 billion in the second quarter of 2000, due to strong comparable store sales growth in its full-line retail stores. Second quarter domestic credit revenues increased 6.2 percent from a year ago, to $1.03 billion. The increase primarily reflects improved yield and higher securitization revenue.
All revenue amounts reflect the application of SEC Staff Accounting Bulletin 101 (SAB 101), which affected the classification of revenue and related costs of licensed businesses. There was no effect on operating income related to the implementation of SAB 101.
Gross margin and selling and administrative costs
Consolidated gross margin as a percent of merchandise sales and services was 26.4 percent in the second quarter of 2000 compared with 27.1 percent in the comparable 1999 period. The change reflects a decrease in retail margins partially offset by improvements in the services margin rate. Retail gross margin declined in the second quarter primarily due to increased markdown activity and a higher sales mix of hardlines products.
Selling and administrative expense as a percentage of total revenues was 21.0 percent in the second quarter of 2000 compared to 21.4 percent in the prior year period. The improvement reflects selling and administrative expense leverage across all segments, partially offset by increased investment in on-line initiatives and integration costs associated with Sears Canada's acquisition of Eatons.
Provision for uncollectible accounts
In the second quarter of 2000, the consolidated provision for uncollectible accounts was $215 million, flat with the second quarter of 1999. The domestic allowance for doubtful accounts remained at $725 million, consistent with the year-end 1999 and first quarter 2000 levels.
Sears, Roebuck and Co. is a leading retailer of apparel, home and automotive products and services, with annual revenue of nearly $40 billion. The company serves families across the United States through approximately 860 full-line department stores, more than 2,100 specialized retail locations, and a variety of online offerings accessible through the company's Web site, http://www.sears.com/ . Sears, Roebuck and Co. owns a majority stake in Sears Canada.
SEARS, ROEBUCK AND CO.
CONSOLIDATED INCOME
(millions, except earnings per share)
For the 13 Weeks Ended For the 26 Weeks Ended
July 1, 2000 and July 3, 1999 July 1, 2000 and July 3, 1999
2000 1999* %Change 2000 1999* %Change
Revenues
Merchandise and
services $8,975 $8,599 4.4% $16,804 $16,127 4.2%
Credit revenues 1,101 1,037 6.2% 2,245 2,165 3.7%
Total revenues 10,076 9,636 4.6% 19,049 18,292 4.1%
Costs and expenses
Cost of sales,
buying and
occupancy 6,606 6,271 5.3% 12,475 11,929 4.6%
Selling and
administrative 2,112 2,058 2.6% 4,066 3,977 2.2%
Depreciation and
amortization 210 215 -2.3% 419 424 -1.2%
Provision for
uncollectible
accounts 215 215 0.0% 460 506 -9.1%
Interest 310 313 -1.0% 626 647 -3.2%
Total costs
and expenses 9,453 9,072 4.2% 18,046 17,483 3.2%
Operating income 623 564 10.5% 1,003 809 24.0%
Other income, net 5 (12) - 6 (14) -
Income before income
taxes and minority
interest 628 552 13.8% 1,009 795 26.9%
Income taxes (232) (209) 11.0% (372) (301) 23.6%
Minority interest (8) (12) -33.3% (14) (17) -17.6%
Net income $388 $331 17.2% $623 $477 30.6%
Earnings per share:
Basic $1.12 $0.87 28.7% $1.77 $1.25 41.6%
Diluted $1.11 $0.86 29.1% $1.76 $1.24 41.9%
Average common and
dilutive common
equivalent shares
outstanding 348.4 383.6 354.2 384.4
*1999 amounts restated to reflect licensed business operations under SEC
Staff Accounting Bulletin No. 101 (SAB 101). The restatement
reclassified amounts within the statement of income but did not affect
operating income or net income.
SEARS, ROEBUCK AND CO.
SUPPLEMENTAL INFORMATION
(millions, except number of stores)
For the 13 Weeks Ended For the 26 Weeks Ended
July 1, 2000 and July 3, 1999 July 1, 2000 and July 3, 1999
2000 1999 %Change 2000 1999 %Change
Total Revenues:
Retail $7,290 $6,997 4.2% $13,603 $13,131 3.6%
Services 732 736 -0.5% 1,355 1,383 -2.0%
Credit 1,033 973 6.2% 2,104 2,036 3.3%
International 1,021 930 9.8% 1,987 1,742 14.1%
Total revenues $10,076 $9,636 4.6% $19,049 $18,292 4.1%
Operating income
as reported:
Retail $190 $173 9.8% $193 $104 85.6%
Services 99 94 5.3% 164 169 -3.0%
Credit 398 315 26.3% 780 610 27.9%
Corporate (94) (63) 49.2% (182) (136) 33.8%
International 30 45 -33.3% 48 62 -22.6%
Total operating
income $623 $564 10.5% $1,003 $809 24.0%
July 1, July 3,
2000 1999
Domestic
inventories
-- LIFO $5,033 $4,491
-- FIFO $5,653 $5,183
For the 13 Weeks Ended For the 26 Weeks Ended
July 1, 2000 and July 3, 1999 July 1, 2000 and July 3, 1999
Pretax
LIFO charge $12 $12 $24 $24
Jan. 1, July 1,
2000 Opened Closed 2000
Domestic retail stores:
Full-line stores 858 3 (3) 858
Specialty formats 2,153 44 (23) 2,174
Total 3,011 47 (26) 3,032
Gross square feet 146.4 0.8 (0.6) 146.6
SEARS, ROEBUCK AND CO.
SUPPLEMENTAL INFORMATION - CREDIT SEGMENT
(millions)
The following credit information relates to the domestic managed portfolio
of credit card receivables which is comprised of on-book credit card
receivables, credit card receivables underlying retained interest
securities and securities which have been sold to third parties.
The effective financing rate is based on both domestic on-book debt of the
company and securitization interest of the Sears Master Trust.
For the 13 Weeks Ended For the 26 Weeks Ended
July 1, 2000 and July 3, 1999 July 1, 2000 and July 3, 1999
2000 1999 2000 1999
Average domestic
credit card
receivables:
Managed credit card
receivables $25,244 $26,469 $25,698 $27,039
Securitized
balances
sold (6,367) (6,566) (6,420) (6,529)
Retained
interest in
transferred
credit card
receivables (2,695) (3,765) (2,889) (4,040)
Owned credit
card
receivables $16,182 $16,138 $16,389 $16,470
July 1, July 3,
2000 1999
Ending domestic credit
card receivables:
Managed credit card
receivables $25,144 $26,103
Securitized balances
sold (6,893) (6,381)
Retained interest in
transferredcredit card
receivables (1,985) (3,600)
Other receivables 58 104
Owned credit card
receivables $16,324 $16,226
For the 13 For the 26
weeks ended weeks ended
July 1, 2000 July 1, 2000
and July 3, 1999 and July 3, 1999
2000 1999 2000 1999
Domestic managed credit
card receivables --
Net interest margin:
Portfolio yield 19.71% 19.37% 19.98% 19.61%
Effective financing rate 5.91% 5.74% 5.91% 5.73%
Net interest margin 13.80% 13.63% 14.07% 13.88%
Domestic managed net
charge-off rate (A) 5.09% 7.11% 5.39% 7.08%
2000 1999
July 1 Apr. 1 Jan. 1 Oct. 2 July 3
Domestic managed
credit card
receivables --
Delinquency
rate (A) 7.15% 7.20% 7.58% 7.57% 7.29%
Allowance for
uncollectible
accounts $725 $725 $725 $773 $850
Allowance % of
domestic owned
credit card
receivables 4.46% 4.48% 4.26% 4.78% 5.27%
(A) The 1999 domestic managed net charge-off rate includes all of the
accounts in the domestic portfolio. Twelve percent of the accounts
were converted to the new Total Systems Services, Inc. ("TSYS")
account processing system in October 1998, 38% were converted in March
1999, and 50% were converted in April 1999. Balances are generally
charged-off earlier under the TSYS system than under the proprietary
system. Delinquency rates calculated on the Company's pre-TSYS
proprietary system are not comparable to delinquencies calculated on
the TSYS system due to differences in methodology. For a description
of the anticipated effects on delinquency rates of the TSYS
conversion, see Sears quarterly report on Form 10-Q dated
May 14, 1998.
SEARS, ROEBUCK AND CO.
CONSOLIDATED BALANCE SHEET
(millions)
July 1, July 3, January 1,
2000 1999 2000
Assets
Current Assets
Cash and cash equivalents $345 $397 $729
Retained interest in
transferred credit card
receivables 1,985 3,600 3,144
Credit card receivables,
net 17,125 16,771 18,033
Other receivables 311 384 404
Merchandise inventories 5,628 5,000 5,069
Prepaid expenses and
deferred charges 561 604 579
Deferred income taxes 764 729 709
Total current assets 26,719 27,485 28,667
Property and equipment, net 6,345 6,332 6,450
Deferred income taxes 318 531 367
Other assets 1,487 1,502 1,470
Total assets $34,869 $35,850 $36,954
Liabilities
Current liabilities
Short-term borrowings $2,557 $3,814 $2,989
Current portion of
long-term debt and
capitalized leases 2,338 612 2,165
Accounts payable and
other liabilities 6,319 5,977 6,992
Unearned revenues 1,086 950 971
Other taxes 462 451 584
Total current liabilities 12,762 11,804 13,701
Long-term debt and
capitalized leases 12,245 14,042 12,884
Postretirement benefits 2,070 2,258 2,180
Minority interest and
other liabilities 1,343 1,463 1,350
Total liabilities 28,420 29,567 30,115
Commitments and Contingent Liabilities
Shareholders' Equity
Common shares 323 323 323
Capital in excess of par value 3,542 3,566 3,554
Retained income 6,414 5,149 5,952
Treasury stock -- at cost (3,418) (2,233) (2,569)
Deferred ESOP expense (113) (160) (134)
Accumulated other comprehensive
income (299) (362) (287)
Total shareholders' equity 6,449 6,283 6,839
Total liabilities and
shareholders' equity $34,869 $35,850 $36,954
Total common shares
outstanding 343.0 380.3 369.1
SOURCE: Sears, Roebuck and Co.
Contact: Peggy A. Palter of Sears, Roebuck and Co., 847-286-8361
Website: http://www.sears.com/