The Squishy Results At Sears Holdings

When companies hit hard times, it pays to keep a close eye on their financial reporting for signs they may be overstating their strength.

Take Sears Holdings' second-quarter results. Alongside slumping sales and earnings, there was a bright spot: a sizable drop in selling and administrative costs.

That contributed to a 4.2% pop in the stock price when earnings were posted Aug. 28. But Sears subsequently released a filing with the Securities and Exchange Commission showing the expenses in question were substantially reduced by insurance payments relating to a matter from March 2000.

That is hardly a recurring source. Arguably, it should have been flagged in the earnings release, especially because another one-time gain, a reversal of legal reserves, was clearly broken out.
The numbers involved aren't a trifle.

Sears, led by Chairman Edward Lampert, said second-quarter selling and administrative costs fell $46 million year-on-year, excluding the reserve reversal. The retailer added that the $46 million drop came "mainly as a result of our focus on controlling costs."

But the subsequent SEC filing said the insurance payment reduced selling and administrative expense at Sears-branded U.S. stores by $23 million, which is more than 12% of companywide second-quarter operating income of $187 million.

Sears responds that the insurance payment was offset by other special items, thus keeping its cost-reduction claims intact. But those $22 million in offsets, which weren't disclosed in the SEC filing, include legal charges, store closures and severance payments, which sound like general costs of doing business.

If not, Sears might want to break them out as exceptionals in its next filing.

Source: Wall Street Journal