May 30, 2008 4 min read

CHICAGO (AP) – Battered retailer Sears Holdings Corp. posted its largest quarterly loss Thursday since Sears and Kmart combined, providing surprising results far below Wall Street forecasts and issuing a dour sales forecast for the remainder of the year. The company said it lost $56 million, or 43 cents per share, in its first quarter as it fought for shoppers and cut prices to clear merchandise from store floors.

That’s a dramatic reversal from the retailer’s year-ago profit of $223 million, or $1.45 per share.

“It was a pretty ugly quarter,” said Morningstar analyst Kim Picciola. “All in all, not only are they facing the challenges from the uncertain macro environment, but they’re still struggling internally from some of their own issues. And I think that shows in the results.”

On an adjusted basis, Sears reported a loss of 53 cents per share for the three months ending May 5, compared with profits of $1.15 per share in the same period last year.

Lead by financier Edward Lampert, who acquired Kmart in 2003 and Sears, Roebuck and Co. in 2005, Sears is in the midst of a high-stakes restructuring aimed at reconnecting with shoppers and reinvigorating atrophied same-store sales, which have fallen for the past nine consecutive quarters.

It said Thursday that customers were forced to spend more money to cover the soaring costs of gas and food. That knocked down sales nearly 6 percent to $11.1 billion.

Analysts surveyed by Thomson Financial expected profit of 15 cents per share on sales of $11.41 billion.

Executives said Sears’ same-store sales slumped 9.8 percent in the U.S., while Kmart saw its comparable store sales shrink 7.1 percent. Total domestic comparable store sales, an important retail industry metric of sales in stores open at least one year, declined 8.6 percent.

Especially hard hit were sales of home appliances and products for lawn and garden care. Clothing sales also fell.

“Our first quarter results reflect the difficult economic environment and intense competition for consumer business,” W. Bruce Johnson, Sears Holdings’ interim chief executive officer and president, said in a statement. “That said, since May 3, 2008, our sales declines have moderated somewhat.”

Declines reflected competition and a weak U.S. economy that’s been battered by turmoil in the housing market, executives said.

But not all news Thursday was grim. Johnson said Sears expected to boost its yearly earnings before interest, taxes, depreciation and amortization. But he offered no specifics about how such results would be achieved.

Credit Suisse analyst Gary Balter called Johnson’s statement “puzzling,” and left investors to speculate whether Lampert planned to lower service levels or sell off some assets.

“As we scratch our head, other than the puzzling statement, the results were as expected and the commentary on inventory coming down in future quarters, sales being challenging and gross margin being difficult are consistent with what we expected,” he told investors in a research note.

Sears, which is fighting to bring back customers and their wallets to its 3,900 stores, said it expects its sales and margins to be pressured for the rest of the year due to tough economic conditions.

Sears’ uphill battle could get worse as the economy continues to sour, shoppers begin to buy items in bulk to save money and consumer sentiment, which fell to its lowest level since October 1992 this week, wanes.

“It’s going to get a lot worse,” said Howard Davidowitz, chairman of retail consulting firm Davidowitz & Associates. “Given these results, I think Lampert really has to now face up to major, major store closings.”

Davidowitz said he thinks Lampert will need to dramatically realign business units – and even consider shutting down the discount Kmart brand – if the retailer has any hope of remaining viable to the American consumer.

Also Thursday, Sears said Thursday its board approved the latest in a series of $500 million stock buybacks.

Shares fell $3.22, or 3.6 percent, to $86.14 Thursday.

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On the Net:

www.searsholdings.com

AP-ES-05-29-08 1646EDT