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Sears lays out game plan, promises to boost income
Alan Lacy laid out a conservative game plan Wednesday for Sears, Roebuck and Co. focused more on cutting costs than growing revenue.
Sears expects 2002 revenue to be flat, a result of both the slow economy and Sears' selective exit of merchandise lines, Sears new chief executive told Wall Street analysts gathered in downtown Chicago to hear his strategy message. Lacy declined to offer an estimate of next year's profit, saying, "None of us know how much worse it will get."
But Lacy also made a bold promise: Sears will boost its operating income by more than $1 billion, or about 50 percent, within three years. The improvement will come about through a combination of administrative cost reductions and fatter profit margins in its apparel, credit and other businesses.
"We're focused on the right things. We have a tangible game plan," Lacy said. We'll be more competitive with off-mall competition and more differentiated from mall competition. But it will take a couple of years of very hard work to get to this."
Lacy's message clearly put the focus back on Sears' core franchise -- its national chain of 860 department stores -- rather than on its off-mall chains such as National Tire & Battery and Sears Hardware. As part of that effort, Sears is centralizing some checkout stations to help customers get out faster and moving to a self-service format in some departments, including children's and athletic shoes.
Overall, Sears will be less like a department store, Lacy said, but that doesn't mean it will become more like a discounter. "We're going to be Sears," he said.
Lacy also announced Sears was pulling back on the rollout schedule for the Great Indoors, a home remodeling chain, which has proved popular with upscale customers who normally don't shop at Sears.
Sears had been planning to open as many as 15 Great Indoors next year, entering new markets in San Francisco, New Jersey and Washington, D.C. That number has been reduced to seven, including two that were originally scheduled for this year.
The Great Indoors stores are currently too costly to build, Lacy said, and Sears hasn't figured out how to build them for less without "losing the "wow' factor."
Analysts mostly reacted positively to Lacy's message despite its lack of bells and whistles. "It's one of the most detailed strategies of change I've heard in years," said Daniel Barry, retail analyst with Merrill Lynch. "He is touching every area of the business."
By making the company less bureaucratic and more efficient, Lacy will be moving Sears toward the best practices of its most aggressive competitors such as Kohl's Corp. and Target Corp., Barry said. "You wonder why they didn't do it sooner."
Rick Church, Salomon Smith Barney's retail analyst, also liked the comprehensiveness of what he heard, but he said investors have adopted a "show-me attitude" after a decade of cost-cutting messages from Sears.
"It's a little unsettling to hear how their headcount has risen given the write-offs they've taken in past years," Church added.
As previously reported, Sears will lay off 4,900 workers, or more than 20 percent of its salaried workforce, during the next 18 months. The downsizing, which includes removing layers from Sears' extensive field organization, is expected to yield $275 million in savings by mid-2003.
Sears also reported lower third-quarter profit Wednesday but Lacy said he was pleased with the operating income growth in the retail and credit business in the wake of economic turmoil.
Still, those improvements were more than offset by profit declines at Sears Canada and higher corporate expenses, which was partially related to consultants who advised Sears on its headquarters restructuring.
Sears' net income declined 6 percent to $262 million, or 80 cents per diluted share, from $278 million, or 81 cents per diluted share, in the same period last year. Revenue increased 1.7 percent to $9.75 billion.
Funding costs for its lucrative credit card business declined by $39 million as interest rates fell, but Sears had to increase its bad-debt provision by an equal amount. Its charge-off rate for uncollectible accounts increased to 5.6 percent from 5.0 percent last year because of higher customer bankruptcy filings this year.
For the first nine months, Sears' net income plunged 73 percent to $241 million, or 73 cents per diluted share, from $901 million, or $2.57 per diluted share, last year. Revenue rose 1 percent to $28.84 billion from $28.56 billion.
In late trading on the New York Stock Exchange, Sears shares rose 52 cents, to $38.31.