Charge causes big loss at Sears

HOFFMAN ESTATES, ILL. — Hit by a one-time accounting charge of $839 million tied to pension benefits Sears, Roebuck and Co. recorded a first quarter loss of $859 million.

Even without the special charge, the retailer would have posted a $20 million loss despite stronger retail sales, improving margins and deep cuts in costs after the sale of its large credit card and financial services business.

Merchandise sales and services improved 3.1 percent, to $7.7 billion from $7.5 billion, and would have climbed higher but for weak apparel sales, which offset gains in the company's home group. Same-store sales increased 1.6 percent.

The retailer said, "In the home group, strong growth in lawn and garden and tool businesses, as well as growth in home electronics, were somewhat offset by comparable store sales declines in apparel."

Alan Lacy, chairman and CEO, said, "Our sales performance in the first quarter was mixed. Our strong assortment and value proposition drove improved home group comparable store sales, while we were disappointed not to fully participate in the industry-wide improvement in apparel sales."

Average gross margin improved 20 basis points, or two-tenths of a percentage point, to 27 percent from 26.8 percent a year ago, mostly due to income generated by the retailer's long-term agreement with Citigroup, which earlier acquired Sears credit card and financial services business.

Operating costs were cut back substantially, to 24.6 percent of sales from 28.2 percent last year, but mostly because of one-time items that affected costs both this year and last, including the sale of the credit card business. Measured in absolute dollars, costs were slashed 10.2 percent, to $1.9 billion from $2.1 billion last year, a savings of $216 million. This year's costs reflected a $30 million gain regarding changes to the company's retiree medical benefits. Expenses in the prior-year period include about $240 million related to the sold-off business.

Taking a bite out of the bottom line, Sears Canada reported an operating loss of $2 million, compared with a year-ago profit of $10 million, mostly due to a $12 million charge stemming from the decision to license Sears Canada's Auto Centers to three tire retailers and other restructuring activities.

The company said that sales at Sears Canada increased 18.6 percent, to $1 billion from $843 million last year, due largely to the effects of foreign exchange, as well as stronger sales across most retail formats. Canadian margins weakened to 28.8 percent of sales from 30.1 percent a year ago, "due to a number of factors including a change in sales mix and increased promotional activity," the company said. Expenses at Sears Canada increased to 28.2 percent of sales from 27.3 percent a year ago.