Heavy discounts on appliances squeezed Sears Holdings Corp in the first quarter even as a key measure of revenue rose, bolstered by federal rebates in the US for those same appliances.
The company’s falling net income stood out among the batch of recent earnings reports from major retailers. Home-improvement rivals Lowe’s Cos and Home Depot Inc both said their net income and total revenue rose as consumers spent not only on appliances but on home renovations and seasonal goods like patio furniture.
“This was the quarter of the government appliance stimulus, of much better and earlier weather, and of improving confidence,” Gary Balter, an analyst at Credit Suisse, wrote in a note on Thursday.
“Within that, Sears was very aggressive in promotions to grow their leading appliance market share but could not convert that to higher-margin products.”
That is, analysts said many customers came to Sears stores only for the deeply discounted appliances and bypassed tools, clothing, electronics and other departments, where revenue fell.
Sears Holdings’ first-quarter net income fell 38 percent to US$16 million, or US$0.14 per share, in the quarter that ended May 1. A year earlier, it was US$26 million, or US$0.21 per share.
The results contrast sharply with Sears’ recent success in boosting both revenue and net income as it closed underperforming stores and slashed expenses.
In addition to Sears stores, the company’s portfolio includes the low-price Kmart chain, mail-order and online retailer Lands’ End and popular brands such as Craftsman, Diehard and Kenmore. The company is led by financier Edward Lampert.
Thursday’s earnings report exposed another big flaw at Sears — its lack of investment in its stores, particularly in customer service.
Analyst Brian Sozzi with Wall Street Strategies also noted that rivals heavily marketed the appliance rebates, while Sears did not.
He speculated that Sears deepened discounts as the quarter progressed because it wasn’t getting the traffic it expected. Balter estimates that the price cuts were as high as 30 percent.
‘EXPECTED TRAFFIC’
Spokesman Christian Brathwaite countered that Sears, based in Hoffman Estates, Illinois, did not deepen discounts as the quarter progressed and received “the expected traffic” from the home appliance stimulus program.
“Year-over-year for the quarter, we had lower margin rates as a result of our promotional stance, but drove a strong increase in sales and an increase in gross margin dollars in appliances,” he added. “None of our products were sold near or below costs.”
Revenue fell slightly to US$10.05 billion from US$10.06 billion a year ago because the company has 63 fewer stores than in last year’s first quarter.
Adjusted for a gain on the sale of real estate, pension expenses and other one-time items, Sears earned US$0.16 per share.
Analysts surveyed by Thomson Reuters, who typically exclude one-time items, expected the company to report a profit of US$0.14 per share on revenue of US$10.21 billion.
Sears said some of the benefit from the rebates could appear in its second-quarter results because revenue from last month’s appliance sales won’t be booked until the items are delivered in that quarter.
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