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Sears expects lower profit; shares drop

The retailer is likely to miss analysts' forecasts once again. It plans to buy back an additional $1 billion of stock.

July 11, 2007|From Reuters

CHICAGO — Sears Holdings Corp. forecast lower quarterly profit Tuesday and said it needed to better control its costs and stock more items that its shoppers demand, sending shares down 10%.

The company, which runs the Sears and Kmart chains, also said its board had approved the repurchase of as much as an additional $1 billion of common stock.

Under the control of hedge fund manager Edward Lampert, Sears has been seen as much as a financial stock as a retail stock. In May, Lampert said Sears was considering acquisitions and other ways to use its cash.

Tuesday's forecast suggests Sears will miss analysts' expectations for the second quarter in a row. But now, Wall Street may be taking a closer look at its retail operations.

"While investors have sought to value Sears as something other than a retailer, its recent results demonstrate that it is not immune to the current challenging sales environment impacting retailers with big-ticket home exposure," Goldman, Sachs & Co. analyst Adrianne Shapira, who rates the shares "neutral," wrote in a research note.

Shapira said the second-quarter performance "was particularly important" as it would show whether the first-quarter shortfall was "an anomaly or the start of a new trend."

Sears stock has fallen 6.2% since the beginning of the year, while the Standard & Poor's Multiline Retail Industry index has risen nearly 6%.

On Tuesday, Sears shares fell $17.20 to $154.21.

Sales at Kmart stores open at least one year fell 3.9% in the first nine weeks of the 13-week second quarter, with declines across most categories at the discount chain.

Same-store sales fell 4% at U.S. Sears stores, with declines across most categories, although demand for women's apparel and footwear improved.

At those stores, comparable-store sales of home appliances fell more sharply than most other categories did, but the decline was not as steep as it was in the first quarter.

Shapira expects similar pressure at other retailers that sell home furnishings and appliances such as Macy's Inc., J.C. Penney Co., Kohl's Corp., Bed Bath & Beyond Inc., Williams-Sonoma Inc. and Ethan Allen Interiors Inc.

Shares in all of those companies were lower Tuesday.

The bleak outlook from Sears came the same day that Home Depot Inc. forecast a deeper profit drop for 2007.

"Although we believe our business has suffered from many of the same factors that have led other retailers to announce disappointing results and lowered expectations, our recent performance underscores our ongoing need to become more relevant to consumers while improving our discipline around expense management," Sears Holdings Chief Executive Aylwin Lewis said in a statement.

Should the sales trends continue, Sears Holdings said it expected quarterly profit of $160 million to $200 million, or $1.06 to $1.32 a share, including special items.

Excluding an after-tax gain of about $12 million from bankruptcy-related settlements and derivative transactions known as total return swaps, Sears expects to earn 98 cents to $1.24 a share, below estimates.

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