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Sears Stumbles; Investors Losing Faith In Strategy

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By DAVE CARPENTER, The Associated Press

Published: November 30, 2007

CHICAGO - Sears Holdings Corp. stumbled to its worst performance yet under Edward Lampert, earning just $2 million in a dismal third quarter that heightened questions about his strategy and Sears' future as a retailer, and prompted a huge sell-off in its stock Thursday.

Sears blamed its 99 percent profit decline on stiff competition and economic factors that weakened margins and sales at its Sears and Kmart department stores. The company also signaled little hope for improvement in the near future, in a challenging retail environment.

Wall Street pummeled Sears' stock amid a growing exodus of those who had thought Lampert, the hedge-fund guru who combined the two faltering chains in 2005, would figure out a way to turn the company around.

The stock fell $15.88, or 13.7 percent, to $100.46.

"I think a lot of people who had been hanging on departed this morning," said Neil Stern, a retail consultant for McMillan/Doolittle in Chicago. "Until the performance of retail comes around, it's a bit difficult to see what other rabbits are going to come out of the hat."

The Hoffman Estates, Ill.-based company, which earlier this week said it may buy out the rest of retro-themed retailer Restoration Hardware, narrowly avoided its first loss with net income of a penny a share. That was down from a profit of $196 million, or $1.27 per share, a year ago and far off the consensus estimate of 50 cents per share from analysts surveyed by Thomson Financial.

Sales for the quarter ended Nov. 3 slipped 3 percent to $11.5 billion from $11.9 billion.

"We are very disappointed in our performance for the third quarter," said Aylwin Lewis, chief executive and president. "We cannot blame our results entirely on the retail and macroeconomic environments. We have much on which to improve and are working hard to do so."

Lampert, who heads ESL Investments, no longer comments routinely on quarterly earnings.
Retail consultant George Rosenbaum thinks acquiring Restoration Hardware - a widely questioned move - would be a "bold and correct move," enabling Sears to add a trendier brand to its current offerings. That's not nearly enough, though, he added.

"They can't cut costs any more, or only marginally," he said. "They have to become merchants."

Comparable sales, or those from stores open at least 13 months, declined 4.2 percent for the quarter at Sears stores and 5 percent at Kmart, with notable declines in clothing and in lawn and garden goods at both.

Sears attributed the weaker sales to increased competition, light consumer spending because of the weak housing market and credit concerns, and unseasonably warm weather, which hurt sales of apparel and other seasonal merchandise. A falloff in home construction has cut into its sales of major appliances.

"I think Sears is feeling the pain more than some of its close rivals, given its weak competitive position and its exposure to the home furnishings sector," said Morningstar analyst Kim Picciola.

Strong investment income had initially brought higher profits under Lampert, but that trend has long stopped, leaving Sears without a strong buffer for lackluster sales. Sears had $30 million in interest and investment gains for the quarter, compared with $140 million during the same period last year.

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