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Originally published May 23, 2013 at 1:33 PM | Page modified May 23, 2013 at 6:10 PM

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Sears reports bigger-than-expected 1Q loss

It was another ugly quarter for Sears Holdings Corp.

AP Retail Writers

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NEW YORK —

It was another ugly quarter for Sears Holdings Corp.

The beleaguered department-store chain reported a steeper-than-expected loss for its first quarter on slumping sales.

It also announced that it is considering selling its protection-agreement business in an ongoing effort to raise cash as it struggles to reverse its fortunes. The unit runs the part of the business that sells customers service contracts that guarantee to fix or replace appliances if they break within a certain timeframe.

The steep loss drove Sears' shares down more than 12 percent in after-hours trading.

Like many retailers, Sears' business in the first couple of months of the year was hurt by poor weather and new economic pressures on its customers, including rise in the payroll tax. But the latest results show that Sears' path toward profitability will be more elusive than the chain may have thought. Critics say that Sears still has not given shoppers a compelling reason to spend money there.

"I do not subscribe to the view that the macro factors are the sole reason for our poor performance," hedge fund billionaire and Sears Chairman Eddie Lampert, who added the title of Sears CEO in February, told investors in a call following the earnings results Thursday.

Lampert succeeded Louis D'Ambrosio, who had been CEO since February 2011 but left because of family health reasons.

"They have an impact. But even with that impact, we should have been doing a lot better than we are," Lampert said.

Lampert has a tough road ahead. He engineered the combination of Sears and Kmart in 2005, about two years after he helped bring Kmart out of bankruptcy.

Last year, the Hoffman Estates, Ill.-based company announced plans to restore profitability by aggressively cutting costs, reducing inventory, selling off some assets and spinning off others. Those moves helped it reduce net debt by $400 million and generated $1.8 billion in cash from the asset sales in the latest fiscal year.

But the company has struggled with its stores.

Sears' middle-income shoppers have been hit hard by a slowly recovering economy, but critics have long said the company hasn't done enough to invest in its stores to compete with Wal-Mart Stores Inc., Target Corp. and others. The company has posted six straight years of declining sales at stores open at least a year.

Last November, Sears said it would consider ways to raise at least $500 million in 2013. As one of the options, the company said Thursday it's in the process of evaluating strategic alternatives for its protection-agreement business including a possible sale and joint venture.

During the hour-long call with investors, Lampert told investors that Sears would continue to offer such service agreements to customers even if it sold the business. He likened it to how most retailers have sold their credit card business to financial institutions but still offer branded credit cards.

Lampert declined to discuss how big the service agreement business is, but he said that the company is also looking at other assets to sell as it tries to improve its profits.

In an effort to assure analysts, company officials said on the call that Sears has $7 billion of liquidity or assets that can be converted to cash very quickly.

During an interview with The Associated Press, Lampert said that he has spent a lot of time with suppliers. He also noted that most vendors have been comfortable with selling to Sears.

"Liquidity hasn't been the issue," he added. Rather, he says it's the challenge of generating a profit given the assets the company has.

Meanwhile, Sears has said that it has been making changes in stores, such as giving iPads and iPod Touch devices to sales staff to research products and help customers on the sales floor.

The company is also focusing on a loyalty program, called "Shop Your Way." The program now accounts for 60 percent of its revenue. Lampert says that members spend 18 percent more than nonmembers, and annual sales per member have increased by over 8 percent.

Sears launched this month at its namesake department stores a program that will allow shoppers unable to qualify for credit to lease such big purchases as electronics, home appliances, furniture and mattresses. The program, tested last September in 10 stores, is being rolled out to all 900 department stores. Sears launched the program with leasing service WhyNotLeaseIt.

But those efforts haven't been enough, says Brian Sozzi, CEO and chief equities strategist at Belus Capital Advisers.

"Sears is becoming more irrelevant by the day," Sozzi. He described some of the efforts to get shoppers back in the stores as "Band-Aids."

For the quarter, Sears said it lost $279 million, or $2.63 per share. That compares with a profit of $189 million, or $1.78 per share, a year earlier.

Not including one-time items, the company said it lost $1.29 per share, worse than the 60 cents per share analysts expected.

Revenue fell 9 percent to $8.45 billion, above the $8.37 billion Wall Street expected. The company said that the decrease in revenue was due primarily because it has fewer Kmart and Sears full-scale stores in operation and lower revenue at stores opened at least a year. It also cited the separation of its Sears Hometown and Outlet business, which happened in the third quarter of 2012.

Sears said revenue at stores open at least a year fell 3.6 percent, with the company noting that much of the country experienced a cooler spring than last year. The metric is a key gauge of financial health because it strips out the effect of newly opened and closed locations.

At Kmart's domestic stores, revenue at stores opened at least a year fell 4.6 percent. The largest declines at the discounter were in grocery, household goods, pharmacy and drugstore items.

Sears' domestic business suffered a 2.4 percent drop, primarily due to weakness in seasonal goods like lawn and garden products. Excluding the lawn and garden items, that metric would have been up 0.3 percent. Sears saw the seventh straight quarter of sales gains in clothing. Some analysts believe that Sears has benefited from the woes of J.C. Penney Co. The rival's business has been in free fall after a strategy implemented by its former CEO Ron Johnson to eliminate most discounts backfired. Penney has rehired Johnson's predecessor Mike Ullman, who is adding back sales. A revitalized Penney could derail Sears' clothing sales, analysts say.

Sears' shares fell $7.17 to $51 in after-hours trading, after closing down 20 cents to $58.17 in regular trading.

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