Sears Swings to Quarterly Profit on Lower Expenses

Sears Holdings Corp. on Thursday reported a profit for the fiscal first quarter after posting a loss a year earlier, news that sent its shares up 13%.

The company, formed last year when Kmart bought Sears, Roebuck & Co., also announced that it had agreed to pay $215 million to settle a classaction lawsuit related to the former Sears credit card business, which was sold in late 2003.

Sears’ shares climbed $17.89 to $155.85.

In its earnings report, the Hoffman Estates, Ill.-based company said reduced expenses helped improve profitability at the Sears and Kmart chains in the United States.

“While we’re pleased with the progress we’re making, we continue to look for ways to be more efficient and effective in our business,” Chief Executive Aylwin Lewis said in a statement.

For the quarter ended April 29, Sears earned $180 million, or $1.14 a share, in contrast with a loss of $9 million, or 7 cents, a year earlier. The year-earlier loss included a $90-million charge resulting from an accounting change for certain costs. Excluding that change, Sears would have reported net income of $81 million, or 65 cents a share, for that period.

Analysts, on average, predicted a profit of 65 cents a share in the latest quarter, according to a Thomson Financial poll.

Sears said revenue jumped 57% to $12 billion from $7.63 billion. The year-earlier total included only about five weeks of contributions from the Sears stores acquired by Kmart in late March 2005.

Sales in stores open at least a year, a widely used industry gauge known as same-store sales, declined 4.8% domestically.

Same-store sales fell 8.4% at Sears’ U.S. locations because of declines in all categories except home appliances, the company said. A decline of 0.2% at Kmart was attributed to lower transaction volume from home goods, partially offset by higher apparel and food sales.

Industry observers said the figures showed that the company’s cost-cutting measures were working, but they questioned how much longer Sears could continue to lose market share.

“The real question is whether this is sustainable over the long run,” Morningstar analyst Kim Picciola said. “How much longer can we continue to see a decline in same-store sales and margin improvement from a cut in spending?”

Sears’ management team has “brilliantly” controlled its inventory and cut spending but must focus on getting back some of the company’s lost share, said Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based retail consulting and investment banking firm.

“All things being equal, I would say that within 12 months you will see the earnings start to go the other way, downward, because what they are doing is not sustainable,” he said. “They have hit bottom. They have reached the point where the barrel is going to be empty. There’s only so much you can do with cost-cutting.”

The settlement announced Thursday was related to statements Sears, Roebuck made about its credit card business.

Shareholders accused executives of mischaracterizing the credit card division’s financial situation in an effort to inflate the company’s assets. The alleged violations of federal securities laws caused the plaintiffs to buy Sears stock at “artificially high prices,” according to the lawsuit.

Sears admitted no wrongdoing under the settlement.