Sears, Roebuck and Co. reported net income of $309 million, or $1.04 per share, for the second quarter ended June 28, 2003, compared with net income of $229 million, or $0.71 per share, in the second quarter of 2002.
“We delivered a solid quarter that was consistent with our expectations,” said Chairman and CEO Alan J. Lacy. “We are pleased that sales in core businesses such as lawn and garden, tools and apparel have shown signs of strengthening, especially considering the difficult economic environment.”
Sears second quarter 2003 earnings included a pretax gain of $93 million, or $0.20 per share, on the sale of previously charged-off credit card accounts, which was partially offset by a pretax charge of $28 million, or $0.06 per share, for severance costs associated with a productivity improvement program to further streamline the company’s home office and field operations.
In the second quarter of 2002, Sears refined its methodology for determining its allowance for uncollectible accounts to include the uncollectible portion of current credit card accounts and credit card fee balances. As a result, the 2002 second quarter results included a pretax charge of $300 million, or $0.59 per share.
Retail and Related Services reported operating income of $183 million for the second quarter of 2003, compared with operating income of $300 million in the second quarter of 2002. The decrease reflects lower gross margins on full-line store sales due to clearance activity and a highly promotional retail environment.
Revenues for the second quarter were $7.8 billion, an increase of 0.9 percent over the same period last year. A revenue increase from the addition of Lands End, which was acquired in June 2002, was partially offset by revenue decreases in retail stores. Comparable store sales for the quarter declined 3.5 percent. In hardlines, lawn and garden experienced strong performances in both full-line and dealer stores.
“Sales trends generally improved during the quarter, reflecting continuing progress against our goals of upgrading merchandise offerings, enhancing the customer experience in Sears stores and strengthening our marketing,” Lacy said. “Apparel sales benefited from the contribution of Lands End merchandise. In fact, comparable sales for apparel in stores carrying the Lands End brand were 2-4 percent better than those without. We are encouraged by these initial results and look forward to completing our rollout to all Sears stores by year end.”
The company’s gross margin rate for the quarter declined 10 basis points from the prior year, as a significant increase in promotional activity was largely offset by improvements in sourcing and the inclusion of the higher- margin Lands End business.
Selling and administrative expenses increased by $107 million due primarily to the inclusion of Lands End. In addition, selling and administrative expenses in Retail and Related Services included a charge of $16 million for severance costs related to the company’s productivity improvement program. The remaining portion of the severance charge was recorded in the corporate and other segment.
Credit and Financial Products reported operating income of $355 million for the quarter, up $243 million compared to the 2002 second quarter, which included a $300 million charge related to a refinement in the method for determining the allowance for uncollectible credit card accounts. In addition, the current year quarter included a $93 million gain on the sale of previously charged-off accounts.
Second quarter domestic Credit and Financial Products revenues decreased approximately 4.2 percent from a year ago to $1.27 billion, as an increase in average receivable balances was more than offset by a lower yield. The lower yield is attributable to the lower interest rate environment, reduced late fees and an increase in the size of the MasterCard portfolio, which carries a lower yield than Sears private label card.
Domestic credit card receivables at the end of the second quarter increased 4.2 percent over the prior year to $29.4 billion. Funding costs were even with last year’s quarter, as favorability from the lower interest rate environment was offset by greater interest expense associated with higher debt balances to support the increase in receivables.
The domestic provision for uncollectible credit card accounts was $446 million in the second quarter, compared with $693 million in last year’s period, a decrease of $247 million due primarily to the $300 million charge taken in the second quarter of 2002. The current year provision also benefited from a $93 million gain realized during the current quarter as Sears sold approximately $2.5 billion of previously charged-off accounts. The sale generated pretax proceeds of $178 million and the resulting gain was recorded as a reduction of the provision for uncollectible accounts. Consequently, the net charge-off rate for the quarter was 4.57 percent, compared with 5.32 percent a year ago. Excluding the benefit of the sale of the charged off accounts, the net charge-off rate for the quarter would have been 6.71 percent.
Year-over-year delinquencies rose to 7.41 percent from 6.87 percent, reflecting continued seasoning of the MasterCard portfolio. The domestic allowance for uncollectible credit card accounts at the end of the second quarter was $1.9 billion, or 6.45 percent of ending credit receivables, compared with 6.06 percent of ending credit receivables at the end of the 2003 first quarter.
During the quarter, Sears repurchased 34.9 million shares of its common stock for a total cost of $1.02 billion, at an average price of $29.19 per share. As of June 28, 2003, the company had remaining authorization to repurchase $230 million of shares by December 31, 2004, under its existing share repurchase program.
On July 15, the Sears board of directors authorized an incremental $1 billion to replenish the existing share repurchase program, bringing the total authorized under the program to approximately $1.2 billion. The shares will be purchased in the open market or through privately negotiated transactions. Timing will depend on prevailing market conditions, alternative uses of capital and other factors.
In Retail and Related Services, the company anticipates that full-year operating income will be roughly flat with the previous year. This assumes comparable store sales of flat to up low-single digit in the second half. Credit and Financial Products remains on plan for a mid-single digit decline in operating income, including the benefit from the sale of charged-off receivables. Sears expects that the gain will be largely offset by lower than planned late fees, due to lower delinquent accounts resulting from risk mitigation activities.
The company expects full-year earnings per share (EPS) to be between $4.80 and $5.00. This compares with its previous forecast of EPS between $4.95 and $5.15. This full-year expectation excludes any effect that may result from the sale of the Credit and Financial Products business.
CONSOLIDATED INCOME
For the 13 Weeks For the 26 Weeks
Ended Ended
June 28, 2003 June 28, 2003
and June 29, 2002 and June 29, 2002
(millions, except earnings per
common share) 2003 2002 2003 2002
REVENUES
Merchandise sales and services $8,851 $8,753 $16,325 $16,400
Credit and financial products
revenues 1,345 1,389 2,751 2,779
Total revenues 10,196 10,142 19,076 19,179
COSTS AND EXPENSES
Cost of sales, buying and
occupancy 6,402 6,342 11,876 11,968
Selling and administrative 2,327 2,236 4,437 4,297
Provision for uncollectible
accounts 461 701 944 1,082
Depreciation and amortization 230 221 455 431
Interest 287 276 566 568
Special charges and impairments - - - 111
Total costs and expenses 9,707 9,776 18,278 18,457
Operating income 489 366 798 722
Other income, net 13 10 14 88
Income before income taxes and
minority interest 502 376 812 810
Income taxes (186) (140) (301) (288)
Minority interest (7) (7) (10) 25
Income before cumulative effect
of accounting change 309 229 501 547
Cumulative effect of change in
accounting for goodwill - - - (208)
NET INCOME $309 $229 $501 $339
