Sears’ net income falls as customers take deep appliance discounts but skip other aisles

Sears’ net income falls on appliance discounts

NEW YORK — Heavy discounts on appliances squeezed Sears Holdings Corp. in the first quarter even as a key measure of revenue rose, bolstered by federal rebates for those same appliances.

Sears’ shares fell almost 11 percent, or $10.86, to close Thursday at $88.70. The drop was the sharpest of any stock in the Standard & Poor’s 500 Index on a day when just three stocks rose.

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 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 $16 million, or 14 cents per share, in the quarter that ended May 1. A year earlier, it was $26 million, or 21 cents 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 Chairman 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.

Spokesman Christian Brathwaite countered that Sears, based in Hoffman Estates, Ill., 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 $10.05 billion from $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 16 cents per share.

Analysts surveyed by Thomson Reuters, who typically exclude one-time items, expected the company to report profit of 14 cents per share on revenue of $10.21 billion.

Sears said some of the benefit from the rebates could appear in its second-quarter results because revenue from April appliance sales won’t be booked until the items are delivered in that quarter. Costs related to the discounting including marketing and labor were booked in the first quarter, Brathwaite said.

Sales of food and other consumables fell at Kmart, which analyst Sozzi said was a bad sign. He speculated that Wal-Mart Stores Inc.’s aggressive discounts on groceries and Target Corp.’s expansion into food may be stealing shoppers.