CHICAGO – 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. work force – would be eliminated.

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?”‘ said Credit Suisse First Boston analyst Michael Exstein.

The clock also is ticking on Sears Chief Executive Officer 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.”

Added New York retail consultant Howard Davidowitz: “If I was a Sears’ director, I’d say, “Oh God, we’re a train wreck.’ Management gets paid to get results.”

Sears operates nearly 900 “full-line” stores, including one in Lewiston.

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 pretax 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 at about $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, sales in Sears 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 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, however, so this fall, for the first time, the line’s assortments will be tailored to meet the shopping patterns of 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 notable disappointment was sales of air-conditioning units because of unseasonably cool weather.

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

But he has “plans to fix and grow the company,” spokesman Chris Brathwaite said. “There are a number of strategic initiatives underway that position Sears for growth.”

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Sears did have some bright spots in its quarterly results.

Its trendier clothing line, Apostrophe, enjoyed a 20 percent rise in sales. Sears will soon roll out Structure and A Line, two more lines for 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 selling format. Also up in the second quarter 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 certain appliance models being out of stock, but sales in that sector – when stripping out air-conditioner results – remained solid.

Of the 3,300 jobs to be shed, about 3,000 are support workers performing administrative and back-office functions in the field.

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(c) 2004, Chicago Tribune.

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