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Sears Loss Narrows in Q4, but Revenue Falls 23%

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Sears Holdings Corp. reported fourth quarter and fiscal year financial performance Thursday, and although the results represented the fourth straight year of sales declines and eleventh consecutive quarterly loss, the loss narrowed compared to last year, and earnings beat Wall Street expectations.

In the quarter ended Jan. 31, revenues decreased approximately $2.5 billion, or 23 percent, to $8.1 billion. Approximately $1.1 billion of the decline was associated with Sears Canada, which was de-consolidated in October 2014, while $530 million was from the separation of the Lands’ End business, which was completed in the first quarter of 2014. Almost $500 million of the lost revenue came from Kmart and Sears full-line store closures. Domestic comparable store sales declined 4.4%, comprised of a decrease of 2 percent at Kmart and a decrease of 7 percent at Sears Domestic, which contributed to $313 million of the decline.

At Kmart, apparel, toys, jewelry and seasonal items were top performers, but were offset by declines in consumer electronics and grocery and household. Excluding the impact of the consumer electronics and grocery and household goods businesses, comparable store sales would have increased 2.8%. Sears Domestic was also negatively impacted by consumer electronics industry trends. Excluding the impact of consumer electronics, Sears Domestic comparable store sales would have decreased 4.6%, primarily driven by decreases in Sears Auto Centers and apparel.

In the year ended Jan. 31, revenues decreased 14 percent, or approximately $5.0 billion, to $31.2 billion, with $1.7 billion of the decline due to the Sears Canada deconsolidation, $1.3 billion from the Lands’ End separation completed in the first quarter of 2014, and $1.3 billion in lower revenue from fewer Kmart and Sears full-line stores. For the year, domestic comparable store sales declined 1.8%, driven by a decrease of 1.4% at Kmart and a decrease of 2.1% at Sears Domestic, which contributed to $421 million of the decline.

For the year, Kmart had positive performance in several categories, most notably apparel and jewelry, partially offset by declines in the consumer electronics and grocery and household categories. Excluding the impact of the consumer electronics and grocery and household goods businesses, comparable store sales would have increased 0.8% for the year. For the year, excluding the impact of consumer electronics, Sears Domestic comparable store sales would have decreased 0.5%, reflecting improved performance in the home appliance and mattress categories offset by declines in Sears Auto Centers, apparel and lawn and garden.

Gross margin as a percent of sales increase 100 basis points in the fourth quarter, to 24.4%. Kmart’s gross margin rate increased 170 basis points primarily driven by an increase in the apparel category due to lower promotional activity, as well as improvements in toys, grocery and household and drugstore. Sears Domestic’s gross margin rate increased 120 basis points for the quarter with improvement experienced in a majority of categories, most notably home appliances and apparel.

For the year, gross margin rate fell by 130 basis points. Kmart’s gross margin rate for the year decreased 50 basis points primarily driven by decreases in home, consumer electronics and seasonal, which were partially offset by an improvement in the apparel category. Sears Domestic’s gross margin rate decreased 140 basis points for the year primarily driven by decreases in apparel, tools, home and consumer electronics, partially offset by an improvement in mattresses.

SG&A expenses decreased $611 million in the fourth quarter of 2014 compared to the prior year quarter. For the year, SG&A decreased $1.2 billion in 2014 compared to the prior year and included several significant items. Excluding these items, they declined $394 million primarily due to a decline in payroll and advertising expenses.

The company reported a net loss of $159 million, or $1.50 per share, for the fourth quarter compared to a loss of $358 million, or $3.37 per share, for the prior year period.

For the full fiscal year, Sears Holdings reported a net loss of $1.68 billion, or $15.82 per share, compared to $1.37 billion, or a $12.87 per share loss, in the prior year.

The company said the creation of the real estate investment trust, or REIT, that it first discussed publicly in November, and to which it would sell around 300 of its 1,700 stores, is slated to be formed in May or June. The REIT is expected to generate about $2 billion.

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