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Apparel mistakes look bad for Sears

FinanceServices and ShoppingClothing, Accessories, and ShoesBuybackInventoriesCredit and DebtSears, Roebuck and Co.

In its first full quarter as a pure retailer, Sears, Roebuck and Co. stumbled, posting a loss and conceding that falling clothing sales were largely self-inflicted wounds.

The Hoffman Estates-based retailer's results were in line with guidance it gave to Wall Street, and the company's stock rose 1 percent, to $42.14, on Wednesday despite reporting a loss of 9 cents a share before special items.

But steps that Sears has taken to shore up its apparel business don't appear to be paying off. And since selling its credit card business in November, Sears' fortunes are wholly dependent on its store operations.

"Our sales performance in the first quarter was mixed," Sears Chief Executive Alan Lacy said. "We were disappointed we didn't fully participate in an industrywide improvement in apparel sales."

In March, for example, eight of 12 department store chains exceeded Wall Street's monthly sales forecasts, but Sears was among the handful of laggards.

For the quarter, Sears posted higher sales of hardlines such as appliances, electronics, tools, lawn and garden and fitness products. Hot sellers included plasma TVs, Craftsman laser-guided tools and Honda-brand lawn mowers.

Some retail experts have started asking if Sears should devote its retail operations to hardlines, but Sears has consistently said it is committed to being more of a one-stop shopping experience. In June 2002, to improve its apparel reputation, Sears bought the popular Lands' End clothing line. The brand has been in all 870 Sears stores since September.

On Wednesday, explanations for declining apparel sales were an overriding theme in Sears' quarterly earnings conference call.

"Results looked better than expected, but they're struggling to get their retail operations where they need to be" after selling the credit card operations, said one analyst who asked not to be named. "In their key hardlines, they've been able to stabilize market share pretty well, but apparel is still the problem."

Faulty decisions

The apparel unit made several missteps in the first quarter, Lacy said.

For one thing, Sears was slow to stock spring inventory.

"We wanted to make sure we had sufficient time to clear out winter apparel," Lacy said. In reality, consumers were ready to buy spring products in February, he conceded.

Sears also worried about getting stuck with unwanted inventory and therefore overcompensated by buying too little.

"In hindsight, we adopted too conservative of an approach to our inventory buy for the spring, with total apparel inventories down 14 percent compared to last year," he said.

In addition, executive turnover in the apparel ranks haunted Sears.

"We lost some institutional knowledge," Lacy said. "[That] resulted in some disruption to how we approach spring."

To top things off, some Lands' End products arrived late to stores, he said.

That blunder prompted one analyst Wednesday to encourage Lacy to seek restitution from the pokey Lands' End supplier.

"Is there some way, particularly on the Lands' End supplier part of it, they can help pay you back?" Morgan Stanley analyst Gregory Melich asked Lacy. "It seems like a pretty big miss for a supplier to not get Lands' End stuff as asked."

Sears, however, on Wednesday said Lands' End is meeting expectations.

Within apparel, there were some first-quarter winners. Menswear sold well, as did proprietary Sears brands Covington and Apostrophe.

An expansion of Sears' towel lines also has had an "extremely favorable" response, Lacy said. Footwear sales also rose.

Separately, Sears, which bought back almost a third of its stock in 2003, said that it repurchased 18.6 million shares, or 8 percent of its outstanding stock, at an average price of $45.69 in the quarter.

Sears has authorization to buy an additional $700 million in stock.

Costly accounting changes

Sears lost $859 million, or $3.90 a share, in the first quarter, mainly due to accounting changes related to pension and medical benefits. That compares with a profit of $192 million, or 60 cents a share, for the same period last year, when Sears still had a credit business.

Sears reported a $41 million operating loss for the first quarter, compared with operating income of $309 million last year, which included operating income of $399 million and $6 million, respectively, from the divested credit and National Tire & Battery businesses.

In January, Sears said it would suffer a loss of 9 cents to 14 cents a share, excluding special items, in the first quarter.

Sears insists its apparel problems are getting fixed. By the end of the second quarter, Sears should have a more appropriate level of clothing inventory, in plenty of time for the back-to-school season, Lacy said. In the second quarter, Sears expects to earn 78 cents to 83 cents a share.

"We did self-inflict some of our current issues in apparel by not having enough product," Lacy said. But "we think that strategically we're on a very good track, and when we get the execution issues behind us, we'll be in good shape in the fall season."

Copyright © 2014, Los Angeles Times
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