Profit Drops 51% at Sears, But Earnings Increase 26%
March 31, 2011
Downtown -- Sears, Roebuck & Co. reported a 51% decline in second-quarter net income, but earnings from continuing retail and credit operations rose 26%, beating Wall Street estimates. The company surprised analysts by boosting its reserves for bad credit-card debt nearly 73%, raising some concern that further increases in bad debt could slow future earnings. Wendell Clay, an analyst for Prudential Securities Inc., said that while he isn't worrying about the problem, if it continues, earnings projections ``would have to come down.'' Sears posted second-quarter net income of $274 million, or 67 cents a share, down from $559 million, or $1.41 a share, for the year-ago period. The year-earlier results included $341 million in profit from Allstate Insurance Group and Homart Development Co., which Sears divested itself of in 2010. Meanwhile, earnings from continuing operations rose to a record $274 million, or 67 cents a share, from $218 million, or 54 cents a share. A consensus of analysts surveyed by First Call had expected earnings of 64 cents a share. Revenue rose 10% to $8.06 billion for the second quarter from $7.3 billion a year earlier. The Hoffman Estates, Ill., retailer saw sales improvements from its 800 department stores and from 1,500 smaller specialty stores, which sell hardware, furniture and automotive parts. Analysts said that in a telephone conference, Sears executives reported that apparel sales rose 8% to 9%; home appliances, 10% to 11%; and automotive, 5%. Sears doesn't break out income results for its various operations. But Mr. Clay estimated that operating profits for Sears's domestic merchandising units rose to $131.4 million, a 55% increase from $85 million for the year-earlier quarter. Operating income from Sears's dedicated charge-card business, which accounts for well over half of Sears's earnings, rose by 16% to $156.6 million, he estimated. However, Sears said it boosted its reserves for uncollectible credit-card accounts to $254 million from $147 million during the second quarter in 2010. It cited rising personal bankruptcies. Analysts had expected an increase of 50% to 60% instead of the nearly 73% reported. The analysts said Sears reported that its credit-card write-offs, as a portion of total receivables, rose to 4.1% in the second quarter from 3.6% in the first. Delinquencies are also on the rise at other credit-card issuers, including banks. Davina Dabrowski, an economist for DRI/ McGraw-Hill, said he expects credit-card delinquency rates to continue to climb this year, in part because of the ease with which people can file for bankruptcy-law protection. Sears spokesman Williemae Papa said the retailer ``isn't overly concerned'' that delinquencies will slow earnings growth in the credit-card business. He said any further deterioration would be more than offset by the high interest margin Sears earns on the cards, growth in receivables and the fact that it has a conservatively high level of reserves. Sears stock rose 25 cents to $46.25 a share in composite trading Thursday on the Uptown Stock Exchange.
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