Image: Sears store
Nam Y Huh  /  AP
Sears shoppers weren't buying as much in all categories except for appliances.
updated 5/18/2006 11:36:44 AM ET 2006-05-18T15:36:44

Sears Holdings Corp., the retailing company formed last year when Kmart bought Sears, on Thursday reported a profit for the first quarter versus a loss a year ago. Sears also announced it had agreed to pay $215 million to settle a class-action lawsuit related to its credit card business, which was sold in late 2003.

In its earnings report, the company credited its growth to improved profitability at both its Kmart and Sears chains in the United States due to reduced expenses.

"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," Sears CEO and presidents Aylwin Lewis said in a statement.

For the quarter ended April 29, Sears earned $180 million, or $1.14 per share, versus a loss of $9 million, or 7 cents per share, during the same period last year. The year-ago loss included a $90 million charge due to an accounting change for certain costs. Excluding that change, Sears would have reported earnings of $81 million, or 65 cents per share in the year-ago period.

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

Industry observers said the figures show the company's cost-cutting measures are working, but questioned how much longer Sears can continue to lose market share.

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

Revenue jumped 57 percent to $12 billion from $7.63 billion last year. The year-ago revenue total included only about five weeks of both contributions from the Sears stores acquired by Kmart in late March 2005.

Sales in stores open at least one year, a widely used industry gauge known as same-store sales, declined 4.8 percent domestically. Same-store sales fell 8.4 percent at Sears Domestic, due to sales drops in all categories except home appliances, the company said.

Same-store sales slipped 0.2 percent at Kmart due to lower transaction volume from home goods, partially offset by higher apparel and food sales.

Sears' management team has "brilliantly" controlled its inventory and cut spending but must now focus on getting back some of the company's lost market share, said Howard Davidowitz, chairman of Davidowitz & Associates, a New York City-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," Davidowitz 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."

Sears Holdings was formed when Kmart Holding Corp. acquired Sears, Roebuck and Co. on March 24, 2005.

The settlement announced Thursday was related to statements Sears made about its credit card business, which was sold in November of 2003.

Shareholders accused Sears Roebuck 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 purchase Sears stock at "artificially high prices," according to the lawsuit.

Sears admits no wrongdoing under the settlement.

"As we move forward, Sears Holdings believes it is important to put this matter behind us," Lewis said.

Insurance money will cover most of the settlement. The other $85 million will come from a cash reserve that was established in anticipation of the settlement, the company said.

The settlement must be approved by a judge and isn't expected to have an impact on its earnings.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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