Fitch Cuts Sears Ratings On Sales, Strategy

SAN FRANCISCO -- Fitch Ratings said Friday it downgraded ratings of Sears Holdings Corp. because of negative same-store sales and an unclear long-term retail strategy. Fitch cut Sears' long-term issuer default rating to B+ from BB, and its secured bank facility rating to BB+/RR1 from BBB-. About $3.6 billion of total debt is affected. The outlook is stable. "The rating actions reflect significant pressure on operating margins on negative comparable store sales trends and continued share repurchases in the current challenging operating environment leading to weaker credit metrics," Fitch said in a statement.

Source: Fox Business

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

Sears 2Q Profit Plummets 62%

Sears Holdings Corp. said second-quarter profit fell 62% as the company continued to struggle to attract customers to its stores despite a high-stakes restructuring. The company also said that it expects that its sales and gross profit margins will continue to be pressured amid a sluggish economy. The company said Thursday that it earned $65 million in the three-month period ended Aug. 2, compared with $173 million in the year-ago period.

The second-quarter 2008 results included the positive impact of the reversal of a $62 million reserve because of the overturning of a Feb. 2, adverse jury verdict related to the redemption of certain Sears, Roebuck and Co. bonds in 2004. Revenue declined to $11.76 billion from $12.26 billion in the year-ago period. Overall same-store sales dropped 6.2% in the United States. Same-store sales declined 6.7% at Sears, and 5.6% at Kmart. Especially hard hit were categories such as home appliances and tools that have been hurt by the housing slump.

"Our second-quarter results reflect the continued effects of a slowing economy, which contributed to the earnings declines we have experienced since the third quarter of 2007,” interim CEO and president W. Bruce Johnson said.

He added that while it was a difficult quarter, the company was successful in reducing domestic inventory levels by $500 million. Johnson believes that should lead to lower markdowns and help improve gross margin rates in the second half of the year. The company said it intends to further reduce domestic merchandise inventories to better align current levels with expected sales.

Source: Chain Store Age

Sears profit drops 62%, outlook weak

Sears Holdings Corp., citing the deteriorating economy's chilling effect on consumer spending, reported fiscal second-quarter earnings that were down by a worse-than-expected 62 percent.

The Hoffman Estates retailer's results would have been even gloomier had Sears not recorded a one-time gain related to a legal dispute.

In the quarter ended August 4, Sears earnings dropped to $65 million, or 50 cents a diluted share, down from the year-ago quarter's $173 million, or $1.15 a share. Per-share results benefited from a 15 percent decline in the number of diluted shares outstanding.

Revenues declined 4.1 percent to $11.76 billion from $12.26 billion a year earlier.

The second-quarter results "reflect the continued effects of a slowing economy, which contributed to the earnings declines we have experienced since the third quarter of 2007, said interim Chief Executive Officer W. Bruce Johnson.

While it was a "difficult quarter," Johnson said, the company has lowered its inventory levels by $500 million,which should lead to less promotional pricing, and improved profit margins, in the year's second half.

Sears' earnings were helped by the reversal of a pretax $65 million reserve the company had earlier been obliged to take in connection with a jury's verdict in a bond-redemption dispute. Without the help of that onetime item, earnings would have been 21 cents a share -- well below the 33 cents that analysts had been anticipating.

Both of the holding company's operating segments saw a decline in "comparable-store" sales, which measure sales at outlets open at least twelve months. At the parent''s U.S.-based Sears stores, comparable-store sales showed a punishing 6.7 percent decline; at the company's lower-end Kmart segment, comp-store sales drooped 6.2 percent.

As bad as they were, the declines were less damaging than the 9.8 percent dropoff Sears stores suffered in the first quarter, or the 7.1 percent first-quarter decline Kmart's stores experienced.The August quarter's results "reflect increasing competition and weakness in the general economy," the company said, and sales were off "across most major categories.

"Consumer electronics sales showed an upturn, Sears noted, but sales of home appliances and tools were down in response to the U.S. housing market's implosion. Sales were also pressured because consumers are being obliged to spend significantly higher proportion of their expendable income on staples such as food and gasoline.

In the latest quarter, Sears spent $437 million to buy back 5.6 million of its common shares; its share-buyback authorization has now dwindled to $206 million. Since the program was first instituted in late 2005, the company noted, Sears has spent a total of $4.8 billion to buy back 38.7 million of its shares.

Source: Chicago Tribune

Retailers 'Sell' to Young Virtually

Kohl's, Sears Build Brands As Children Clothe Their Avatars Online

Retailer Kohl's Corp. this month launched a new line of apparel, but the plaid skirts and printed T-shirts won't be sold in its 957 stores. Instead, it's selling them on Stardoll.com, a virtual community for teens and tweens where kids can fork over "Stardollars" -- purchased online at a nominal sum -- to buy apparel for their online characters.

With back-to-school sales off to a slow start, more old-line retailers and clothing labels are reaching out to kids online, enticing them to try virtual versions of their togs in hopes of making actual sales later. Kohl's first virtual line features pieces from its new Abbey Dawn collection, designed by singer Avril Lavigne. In its first 16 days, Kohl's Stardoll boutique logged some 2.2 million visits and sold 1.8 million items. Kohls.com lured 97,000 visitors who clicked through from the boutique site.

Kohl's

In the Kohl's boutique on Stardoll.com, kids can dress an online character in the retailers' brands. More big-name retailers are embracing virtual worlds to reach teens.

This month, casual-wear maker K-Swiss Inc. and lingerie and swimwear designer Eberjey rolled out virtual clothes on There.com. And in late July, retail pioneer Sears Holdings Corp. opened its first online boutique featuring back-to-school apparel and dorm-room furniture on teen site Zwinky.com. Sears said the boutiques logged 750,000 visitors and sold 850,000 virtual items during their first 16 days through mid-August.

These mainline retailers hope the virtual showrooms will be more effective than traditional ads in hooking tweens and teens. Users of the sites already can spend virtual dollars on virtual clothes designed by the sites, or by early adopters such as American Apparel Inc. that went virtual two years ago. The sites are places to fashion digital personalities, called "avatars,"

participants use to explore new styles, relationships and behaviors. Typically, these sites now offer a click through to buy the real products.

"When you look at an ad, it's pretty quick," said Jennifer Weiderman, vice president of global marketing for K-Swiss. "But when they're in this virtual world, this gets them to spend more time [viewing] your product. It's a little bit more sticky."

Ms. Weiderman said she is dialing back her spending on TV ads this year and expects to allocate 15% of her marketing budget to online initiatives, up from 5% last year. Sears and J.C. Penney Co., which last month made virtual versions of its teen and young-adult clothing available to users of Yahoo's instant messenger service, say they've increased online ad spending this year. Kohl's also said it is allocating more of its online ad dollars this year to targeting teens. None would detail the scale of the budget shift.

Details of the arrangements vary, but a retailer or brand typically pays a fee to have a virtual community host and develop its store and products. At There.com, the fee ranges from a few hundred dollars to a few thousand, depending on how elaborate the store is and how many items will be sold. The brand and the Web site sometimes split revenue from the virtual purchases. But since virtual clothes cost from under $1 to $5 -- brands regard this revenue as negligible.

"It's really a way to get shoppers to test-drive your product," said Carlos Mejia, chief financial officer of Eberjey, a maker of lingerie, swimwear and sleepwear. The brand, which largely sells to women ages 20 to 45, hopes to attract teenagers with its virtual line.

Penney decided this year to put back-to-school outfits on Yahoo after learning that, during a seven-week experiment last summer, 1.5 million avatars wore its clothing on Yahoo and 5 million Penney outfits were tried on. "It casts a very modern, current light on the brand with teens," says Mike Boylson, Penney's chief marketing officer. Before Penney's presence on Yahoo, "perhaps J.C. Penney wasn't on their radar before," he says.

Sears is marketing its virtual boutiques on billboards in the virtual world, and is hosting daily fashion shows on the site promoting its products through the end of August.

Not everyone is pleased. Patti Miller, vice president of Children Now, an Oakland, Calif.-based national children's advocacy group, expressed concern over marketing to youngsters via these virtual shops. The Federal Communications Commission in 1990 established rules governing the hourly amount of advertising directed at children. But the newer, Web-based virtual communities that have replaced TV viewing for some kids have no similar restrictions.

"Some of these younger kids, those younger than 8 and even kids up to 12, can't make the distinction between what's advertising and what's not," says Ms. Miller. She says children may not grasp that the virtual stores function as a brand advertisement.

Dave Bazant, Sears' marketing manager for online and emerging media, argues that children who frequent the virtual sites are savvy enough to know that the stores also function as a branding tool.

"It's fairly transparent -- kids are not very naïve these days," says Mr. Bazant. He notes that Sears is careful to not aggressively push its wares in these sites because teens and tweens are "turned off by direct advertising. We're not giving away our product for free. Most of these items, they have to purchase."

The online pitches are striking a chord with Jen Rediger's daughters, 13-year-old Tyler and 9-year-old Kenzie. In the first week that the Kohl's store opened on Stardoll, they spent about 70 Star Dollars, or $7, on virtual skirts and shoes. Ms. Rediger, 32, an interior designer who lives in Hoschton, Ga., says she doesn't mind her daughters being exposed to such marketing because "it's not worse than what they see on television."

Tyler has already asked her mom to take her to Kohl's to buy the real versions. "They look really cool on my doll," she says. "It's my style so I think I'll wear it a lot."

Source: Wall Street Journal

Sears: Finally, a Reason to Brag

The retailer's Lands' End unit has proved a bright spot in dark times. Now it faces a leadership vacuum.

Recently, Sears (SHLD) no longer seems to be where America shops for much of anything. Sales skidded 9.8% in the latest quarter, leading to a $56 million loss as consumers shunned the dreary shopping experience for more focused low-price options such as Wal-Mart (WMT) and Target (TGT). With Chairman Edward S. Lampert warning that bad times could last into 2009—and the search for a CEO still under way—the stock has fallen by more than half in a year. The numbers are the worst since Lampert combined Kmart and Sears in 2005.

But one part of the $50.7 billion company is sparkling: Lands' End (SHLD). The apparel subsidiary is thriving with its reputation for impeccable customer service and sturdy-but-stylish designs. While Sears doesn't break out numbers, retail analyst Anne Brouwer of Chicago's McMillan/Doolittle estimates the unit made $200 million on $2.2 billion in sales last year. The Lands' End Web site, where the brand rings up 80% of sales, is among the retailing industry's top 10 by several measures. And offline sales are rising as Sears has put Lands' End boutiques in more than 200 of its 935 mall stores. Retail consultant Howard Davidowitz calls the business "Sears' shining star."

The challenge is to keep the momentum going. On July 18, after barely three years as Lands' End chief, David W. McCreight left to become president of athletic-apparel maker Under Armour (UA). While McCreight, 45, generated record earnings growth at the unit, some feel he never adjusted to rural life at Lands' End Dodgeville (Wis.) headquarters. Hired as chief merchant in 2003, McCreight came up with the idea of stand-alone boutiques in Sears. As president, he freshened product lines and spurred innovation, including a new packing process. McCreight also moved a half-dozen customer service agents to a space right outside his corner office, so he could pull up a chair and participate in calls.

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Now Lands' End finds itself without a captain at a time when the retail environment and the parent company are both ailing. Hiring a successor is complicated by the fact that Sears itself doesn't have a permanent chief executive: Lampert appointed supply chain executive W. Bruce Johnson as interim CEO last February after Aylwin B. Lewis stepped down (See "Aylwin B. Lewis: Now, to Lunch"). For now, Lands' End veterans Lisa Fitzgerald and Kelly Ritchie are running the unit until a replacement is found. "David took this company to the next level," gushes Ritchie. "He expected greatness."

Lands' End was not such a gem when Sears acquired the company in 2002 for $1.9 billion. At the time, its apparel was available only online or through catalogs, and was generally seen as well-made but staid preppy gear. Seeking a chance to broaden its apparel offerings, Sears quickly began stocking Lands' End shirts and slacks in stores, though it kept the two brands' Web sites separate. But Lands' End got lost in the aisles until Lampert took over Sears and pushed to build the brand. In mid-2005, a month after McCreight became president, Sears opened the first Lands' End boutique in a White Plains (N.Y.) store.

With its own look and branding, McCreight's store-within-a-store worked. He says transforming the brand's catalog image into a physical space was "a once-in-a-lifetime career opportunity." Analyst Brouwer figures the Lands' End boutiques bring in at least $200 in sales per square foot annually. That's just a third what a top retailer such as Nordstrom (JWN) produces, she says, but it's far ahead of the $137 per square foot Sears averages from its goods and apparel.

Lampert also let McCreight run the place without interference from Sears' main office in suburban Chicago. That allowed Lands' End to do things that tight-fisted bosses at Sears might never have O.K.'d. Only manufacturing is outsourced. Design, packaging, and—most important—customer service are kept close by. Call center staff have no time limit with customers. When a woman who had had a double mastectomy phoned to ask for the bathing suit she loved, minus the bra, her suggestion was passed along to designers who created one for her. The company went on to sell thousands more.

Such moves make for satisfied customers. Robin Bourjaily, 34, a stay-at-home mom from LaGrange, Ill., has shopped at LandsEnd.com for years. Now she's been swinging by the Lands' End boutique at a nearby Sears to let her three kids try on the clothes. And if Bourjaily can't find what she wants in stock, she can order at an in-store kiosk, and Lands' End pays for the shipping. It's a winning combination that McCreight's successor will need to build on.

Source: Business Week

Sears looks for relevancy in teen market

(July 2) Continuing with its efforts to become more relevant with the teenage consumer, Sears Holdings will introduce a new own-brand juniors collection at its Kmart stores this holiday season. Rather than a collection of snowflake and Santa-decorated sweaters, the Attention line offers contemporary styling for young women who want to make an appearance without wearing the holidays on their sleeves.

Sears Holdings may not yet have the trendy cachet of, say, Target, but it’s not for a lack of trying. Announcing its latest private label brand targeting juniors comes on the heels of last week’s news of Sears’ partnership with the juggernaut of all things teen, MTV, to launch “The American Mall.”

Premiering exclusively on MTV this August, the film will tie in to a multi-layered integrated marketing campaign built around the movie targets the core MTV audience on-air, online and in stores-in time for the back-to-school shopping season.

In March, the company added a special prom section on its Sears.com site called “Prom Premiere 2008,” which enabled users to view different styles of prom dresses and even share their favorites with friends via the popular social networking tool, Facebook.

These moves, among others, keeps Sears firmly in the mix for the teen dollar—a demographic now coveted by the mid-tier in this tough retail economy.

Source: Retailing Today

Eddie Lampert’s latest bid to lift Sears

Eddie Lampert used to be the smartest investor in retailing, if not the best investor of his generation. That was the case last summer when shares of Sears (SHLD) hovered above $170. In his recent letter to shareholders, Lampert presented a chart showing that even as Sears stock collapsed in the latter half of last year, his five-year return on investment in Sears Holdings, the combination of Kmart and Sears, exceeded 900%. His return, in fact, beat that of every other major retailer.

No more. Since May, as Sears stock has tumbled to $75, another retailer, Urban Outfitters, has risen to trump Lampert’s investment. Shares of the hot specialty retailer, at $33, are up more than eight-fold since 2003. Gamestop, the fast-growing videogame retailer that FORTUNE recently wrote about, is not far behind. “I guess you’re telling me I need to get moving,” Lampert said when I called him this morning.

Indeed. Lampert, who runs an $11.5 billion hedge fund called ESL Investments, owns 65.6 million shares of Sears Holdings, worth $4.9 billion. He is one of America’s most secretive investors - and to retail-industry veterans, a walking conundrum. While they criticize him for under-investing in Sears and Kmart, he cites the value of pruning until he discovers the right strategy to spend money on. “Only when you find something that leads to better results,” he says, “do you get behind it with a significant amount of capital.”

Lampert, 45, has made mistakes, as he readily admits. One error was ramping up inventory last year, while failing to anticipate a drop in consumer spending. Another mistake was buying back 33 million Sears Holdings shares at an average price of $132 between 2004 and 2007. (Ouch.) But Lampert, who made his billions by playing contrarian, refuses to let the rising chorus of critics distract him. “We’re the $50 billion company that people think doesn’t have any customers or relevance,” he says.

Even as Lampert loses customers to Wal-Mart and Target, among other rivals, Sears has lots going for it: plenty of cash, relatively low debt, vast real estate (now is not the time to sell, obviously) and maybe most important, its private-label brands. Kenmore appliances, Craftsman tools, DieHard batteries and Lands’ End, the clothing maker, are leaders in their categories. Since only Sears and Kmart carry them, however, these brands have serious distribution challenges. “We have to increase awareness and make them more accessible,” says Lampert, who operates out of a spare hedge-fund office in Connecticut but nonetheless is a hands-on Sears chairman.

A new strategy for the brands may be coming. In addition to searching for a new CEO (Russell Reynolds is conducting the Sears CEO search - and it’s slow going), Lampert disclosed that he is looking for an executive to oversee the company’s multi-billion bevy of private brands. He needs a brand ace to figure out how to innovate and distribute them more broadly. One option, actually, was debated at Yale professor Jeffrey Sonnenfeld’s recent CEO Summit in New York. There, brand experts from India - including a renowned professor and a prominent industrialist - said that Indian investors are eager to expand into retailing globally and would likely be interested in owning, or at least carrying, brands like Craftsman and Kenmore.

“Fascinating,” says Lampert. As for the opportunity, he uttered only that. As you read this, he is probably contemplating the possibilities.

Source: Fortune

Sears Swings to a Loss As Weak Sales Hit Results

Sears Holdings Corp. swung to a surprise loss in its most recent quarter, as sales continue to weaken and margins shrank.

The retailer blamed a tough economy, weak housing market, pressure on consumers from fuel and food costs, and intense competition. Margins were hurt by discounting needed to clear inventory that piled up late last year.

The results show that the deterioration of the storied retailer under the control of hedge fund manager Edward S. Lampert, who took over the company in 2005, is continuing if not accelerating. Sears's earnings announcement offered no hope for a change in direction soon.

"Given that we do not expect any significant near-term improvement in the overall retail environment, we believe that our sales and gross margin for the balance of fiscal 2008 will continue to be pressured," the company said in a statement.

Sears shares were down 4.2% at $85.60 in late morning trading on the Nasdaq Stock Market.

For the quarter ended May 3, the department- and discount-store retailer posted a net loss of $56 million, or 43 cents a share, compared with prior-year net income of $223 million, or $1.45 a share. The quarter included items that added 10 cents a share to earnings.

Sears, which gets about one-third of its sales from home goods and appliances, said revenue fell 5.8% to $11.07 billion. Analysts polled by Thomson Reuters were expecting earnings of 15 cents a share on $11.41 billion in revenue.

The company did say sales declines "have moderated somewhat" in the current quarter. It also said it would buy back an additional $500 million in stock and said it expects higher cash flow in 2008 than it posted a year ago. Sears has $143 million left under its previous buyback plans.

The company's underlying business continues to weaken sharply. U.S. sales at stores open at least a year fell 9.8% at namesake Sears stores and 7.1% at the Kmart discount chain. Sears said same-store sales fell across "most major categories ... most notably within the home appliance, lawn and garden, and apparel categories."

Gross margin slid to 27.3% from 28.2% on increased markdowns. Inventories, at $10.3 billion, are little changed if not up slightly from levels at the end of the company's fiscal fourth quarter Feb. 2.

Sears has been suffering amid a misplaced bet that the U.S. economy would improve. Despite the fact that sales of its home-related goods slowed early last year, the company had added to inventories in anticipation of better year-end sales. Instead, consumer spending weakened further, leaving the company with racks of unsold clothing, stacks of linens and rows of lawn mowers.

Those issues further stressed a retailer already struggling already with waning business and rising complaints about stores and service that made it hard to stop customer losses to more focused rivals. Sears' once-dominant place supplying refrigerators and washing machines to American homes has been chipped away by Lowe's Cos. and Best Buy Co., while its clothing business has suffered at the hands of department-store retailers Kohl's Corp. and J.C. Penney Co.

The company still is searching for a new chief executive to replace Aylwin B. Lewis, who was ousted in January.

In an effort to bring shoppers back to its stores, Sears recently went on a markdown spree at both namesake and Kmart stores, offering Midnight Madness discounts on Web purchases and "Friends and Family" store discounts, among other profit-sapping price cuts. The company also is hoping to snap up customers' economic stimulus payments, with an offer for a bonus gift card with 10% of the value of any gift card purchased with a customer's entire check.

The company reported cash and cash equivalents of $1.4 billion at the end of the quarter, down from $3.5 billion a year earlier and $1.6 billion at the end of its fourth quarter. Analysts have been watching the company's cash position, as less cash could limit management's ability to spend big to revitalize sales and stores.

Source: Wall Street Journal

Sears cites tough business conditions

HOFFMAN ESTATES, Ill., May 5 (Reuters) - Sears Holdings Corp (SHLD.O: Quote, Profile, Research) said on Monday that it has seen no improvement in business amid the tough economy but added that it was tightly managing expenses and expected to generate cash this year.

Chairman Eddie Lampert told shareholders at the retailer's annual meeting that he wished he could say business was getting better, but added "we haven't seen any evidence of that so far this year."

Lampert said the retailer would look to make its standing stores more productive. Though there are no plans to open more Great Indoors stores that sell a wide range of home goods, the company added that it would invest in off-mall format outlets such as dealer stores that sell appliances, electronics and other goods.

Source: Reuters