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Sears Holdings profits improve amid soft sales

Fourth quarter operating profits at Sear’s Holdings on an adjusted basis improved. 22% and same store sales at Sears flagship stores turned modestly positive.

Total company same store sales at domestic stores declined 1.6%, comprised of a 3.7% decrease at Kmart and an increase at Sears of 0.8%. Much of the weakness was caused by the consumer electronics category, which if excluded from the mix would have seen domestic comps decline only 0.2%, consisting of a 2.4% increase at Sears and a 2.5% decrease at Kmart. The company also indicated that is online business grew 25% in the fourth quarter.

At Sears domestic stores strength in apparel, home appliance and home categories was partially offset by declines in the consumer electronics, sporting goods and lawn and garden categories, as well as at Sears Auto Centers. It is worth noting that Sears apparel category has now achieved comparable store sales increases for six consecutive quarters.

Kmart's fourth quarter comp decline was reflected a significant decrease in the consumer electronics category, as well as declines in the pharmacy and grocery and household categories. The decline in pharmacy was attributed to the conversion of brand name drugs to equivalent generic drugs.

Adjusted operating profits for the combined increased 22% to $429 compared to $351 million. However, the company’s net income figures including various charges and fluctuating tax rates meant the company had a net loss of $489 million, or $4.61 a share, compared to a loss of $2.4 billion or $22.47 a share.

"Sears Holdings made progress in 2012 improving the profitability of our business, but we know there's more work to be done in 2013," said Edward S. Lampert, Sears Holdings' chairman and CEO. Our focus continues to be on our core customers, our Members, and finding ways to provide them value and convenience through Integrated Retail and our Shop Your Way Membership platform. We have invested significantly in our online ecommerce platforms, our membership rewards program and the technology needed to support these initiatives."

For the 14 week fourth quarter, Sears Holdings revenues decreased $224 million to $12.3 billion for the quarter ended February 2, 2013, as compared to revenues of $12.5 billion for the quarter ended January 28, 2012. The decrease was primarily due to the separation at the end of the third quarter of the Sears Hometown and Outlet businesses, the effect of having fewer Kmart and Sears Full-line stores in operation and lower comparable store sales, partially offset by the inclusion of an additional week of revenues in the fourth quarter of 2012.

Full year revenues decreased $1.7 billion to $39.9 billion for the 53 weeks ended February 2, 2013, as compared to revenues of $41.6 billion last year.

From a liquidity standpoint, Sears Holdings’ CFO Rob Schriesheim said the company has a number of actions planned in the coming year to enhance its financial position.

"We are an asset-rich enterprise with substantial liquidity, unencumbered real estate and well-established stand-alone businesses, including Lands' End and Sears Canada," Schriesheim said. "In addition to our asset monetizations, we currently expect to reduce 2013 peak domestic inventory by $500 million from the 2012 level of $8.6 billion at the end of the third quarter as a result of stores already or expected to be closed, initiatives underway to reduce slow-moving inventory and modest productivity improvement."

Those actions are expected to generate $300 million of cash after consideration of related payables and the company plans to further reduce its fixed cost base by another $200 million.

Sears Holdings ended the year with a cash balance of $618 million, slightly less than the year earlier level of $754 million due to contributions to pension plans and other retirement benefits. The company’s total debt level also declined to $3.1 billion from $3.5 billion and it has $2.3 billion in borrowing capacity available under its credit facility.