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Sears job cuts will total 3,300

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This story contains corrected material, published July 24, 2004.

Plagued by poor clothing sales, Sears, Roebuck and Co.'s second-quarter profits were about a third less than what Wall Street expected, and the nation's biggest department store chain warned of a bleaker outlook for the rest of the year.

It wasn't good news for Sears' employees, either.

Under pressure to prove it can perform as a pure retailer since last year's sale of its profitable credit business, Sears announced Thursday that about 3,300 jobs, or 1.6 percent of its U.S. workforce, are in the process of being eliminated this year. That includes layoffs of nearly 200 workers at its Hoffman Estates headquarters.

The difficulty in finding a silver lining in Sears' quarterly results prompted retail observers to question everything from the company's apparel strategy to the staying power of its management.

"At what stage of the game do you stop and say, `Is this a business we should keep investing in?'" Credit Suisse First Boston analyst Michael Exstein said of Sears' apparel problems (this sentence as published has been corrected in this text).

The clock also is ticking on Sears Chief Executive Alan Lacy, others said.

"He's running out of reasons" to explain Sears' disappointing results, said Sid Doolittle, retail consultant with Chicago's McMillan/Doolittle. "Alan is on borrowed time."

New York retail consultant Howard Davidowitz said: "If I was a Sears director, I'd say, `Oh God, we're a train wreck.' Management gets paid to get results."

Analysts were expecting Sears to earn about 70 cents a share in the second quarter.

Sears ended up earning 24 cents a share, after two pre-tax charges totaling 24 cents a share. One was a charge of 12 cents a share for severance costs related to the elimination of about 3,300 jobs.

In the second quarter of 2003, Sears earned $1.04 a share. Those results included the profits of the credit business as well as its National Tire & Battery unit. Both were sold in late 2003.

Sears had operating income of $42 million in the second quarter. In the same period last year, it had operating income of $466 million, with most coming from its credit and financial-services arm.

The poor quarterly results were felt on Wall Street, too. Sears' stock fell nearly 3 percent, or $1 per share, to close at $33.93. In December, Sears' shares were trading near $55.

Sears said it was "disappointed" with its second-quarter results and pointed out that much of the retail industry experienced weak demand in June. But it concedes some problems are Sears-specific and have yet to be solved.

In the first quarter, Sears posted poor sales partly due to being slow to stock spring clothing and, when it did, buying too little. It assured investors that its problems would be fixed.

But "we continue to be affected by product assortment and inventory issues" in apparel, Lacy said Thursday. "We lacked a sufficient amount of fashion-oriented spring products in what has been a strong fashion-driven season."

As such, same-store sales, which are those at stores open at least a year, fell 2.9 percent in the second quarter.

While Sears hopes to have its apparel problems fixed for the fall season, second-half sales will be flat, the company said.

"Due to lower levels of apparel inventory compared to last year, we anticipate that apparel sales will remain soft in the third quarter," Lacy said.

That means 2004 is shaping up to be the fourth straight year of falling sales for Sears.

To improve its apparel selection, Sears bought the Lands' End clothing line in June 2002. Results have been mixed.

"Lands' End total brand sales were flat in the first half of the year due to reduced store inventory levels," Lacy said, but the line's revenues and profit margins should widen in the second half.

Demand for Lands' End varies greatly from store to store, and this fall the line's choices will be tailored to meet shopping patterns at individual stores. "In the top 300 stores, we'll put additional product in," Lacy said. "In the bottom 300 stores, we're reducing it."

Another disappointment was sales of air-conditioning units because of unseasonably cool weather.

In response to criticism about his leadership, a spokesman said Lacy realizes pressure comes with the CEO territory.

Lacy has "plans to fix and grow the company," spokesman Chris Brathwaite said. "There are a number of strategic initiatives under way that position Sears for growth."

Sears did have some bright spots in its quarterly results.

Its trendier clothing line, Apostrophe, enjoyed a 20 percent sales increase. Sears will soon roll out Structure and A Line, also aimed at the more fashion conscious.

"We're confident that both the quality and level of apparel inventory will be in good shape for fall and holiday seasons," Lacy said.

Children's footwear sales were up by a double-digit percentage as Sears moved to a self-serve format. Also up were sales of lawn and garden products.

Sears' specialty outlets--hardware stores, the Great Indoors and its independently owned dealer store network--also saw improvement.

Steel shortages resulted in some appliances being out of stock, but sales in that sector--when stripping out air-conditioner results--remained solid.

Of the 3,300 jobs being shed, about 3,000 are support workers performing administrative and back-office tasks in the field. Sears declined to say how many of those jobs are from the Chicago area. Another 340 headquarters positions were eliminated, of which half were unfilled jobs.

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