Aug 29, 2008 4 min read

CHICAGO (AP) – Beleaguered retailer Sears Holdings Corp. reported a hefty drop in second-quarter profit as sales slumped, despite a restructuring aimed at drawing back shoppers who’ve taken their checkbooks elsewhere. The company led by financier Edward Lampert also delivered a downbeat outlook, predicting sales and gross profit margins will feel continued pressure from the sluggish economy.

The performance – the latest in a string of dismal news for the Hoffman Estates-based operator of Sears and Kmart stores, left some analysts unimpressed.

“While they now have the excuse of a slower economy to hide behind and they used it as such in their release, results were weak,” Credit Suisse analyst Gary Balter told investors in a research note. “Despite the weakness, the company is clinging to the belief that its second half will be stronger, helped by massive expense cuts and by pulling inventory lower. … We have seen this picture before and it is not a happy ending.”

Sears said Thursday that it earned $65 million, or 50 cents per share, in the three months ended Aug. 2. That’s down 62 percent from a year-ago profit of $173 million, or $1.15 per share. Excluding the effect of the reversal of a $62 million reserve item, earnings per share were 21 cents for the second quarter.

Revenue fell to $11.76 billion from $12.26 billion a year earlier. Same-store sales, or sales at stores opened at least a year, dropped 6.2 percent in the U.S. Same-store sales are considered a key indicator of a retailer’s health.

Analysts surveyed by Thomson Reuters expected earnings of 33 cents per share on revenue of $11.7 billion. Those estimates typically exclude one-time items.

Led by Lampert, who acquired Kmart in 2003 and Sears, Roebuck and Co. in 2005, Sears has spent much of the past several years struggling with declining sales as customers shun the retailer for its competitors. Its once hefty war chest of cash on hand has shriveled thanks to massive share buybacks and the value of much of its property holdings has dwindled as the commercial real estate market continues to wane.

Meanwhile, a slew of executives have left the retailer, which is continuing to search for a permanent chief executive to replace interim CEO and President W. Bruce Johnson. The company offered no update Thursday on the search process.

“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,” Johnson said in a statement. He said the company was successful in reducing domestic inventory levels by $500 million, which should lead to lower markdowns and help improve gross margin rates in the second half of the year.

Same-store sales – a key metric of retail health – fell 6.7 percent at Sears and 5.6 percent at Kmart. That’s a marked improvement from the first quarter, when the company saw comparable-store sales decline 9.8 percent at Sears while falling 7.1 percent at Kmart. The company said categories such as home appliances and tools especially hard-hit.

And the company said Thursday that it intends to further reduce domestic inventories to better align the levels with expected sales – a move that mirrors what other retailers are doing.

But that may not be enough to turn around the company’s fortunes. With a large exposure to big-ticket, home-related merchandise, Sears faces huge challenges as shoppers, squeezed by the rising costs of staples such as gas and food, have cut back on nonessentials. Same-store sales fell across most categories at the company’s U.S. Kmart and Sears stores, but continued to be offset by gains in sales of consumer electronics, the company said.

Sears said that for the full year, earnings before interest, taxes, depreciation and amortization will be comparable to, but no longer exceed, last year’s results. The current estimates reflect same-store sales that are expected to be flat to down modestly for the rest of the year, the company said.

“It seems even from their perspective it’s been a pretty rough year so far,” said Morningstar analyst Kim Picciola. “But I think the sales environment is going to remain challenging through the remainder of the year and they’re going to continue to feel the pain, particularly in accessories like appliances and tools that are directly related to home.”

Sears shares rose $3.94, 4.5 percent, to $90.92 in trading Thursday.

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AP Business Writer Anne D’Innocenzio contributed to this report.

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