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Sears Stays Firm on Apparel, Will Adjust Sourcing and Product Assortment in 2016

Increased promotions in apparel accounted for more than half of Sears Holdings Corp.’s (SHLD) $383 million decline in gross margin last quarter, but the struggling retailer said the category will remain a substantial part of its business going forward.

Eddie Lampert, chairman and chief executive officer, on Thursday stressed that Sears Holdings intends to make changes to its apparel business model in order to better serve its customers’ needs and improve profitability.

“We are refining our product strategy to be more focused on basic categories, like denim and activewear,” he shared, speaking during a conference call following the release of the company’s fourth-quarter earnings. “Supply chain continues to be an area of focus to improve both flexibility and profitability. We are increasing our sourcing capabilities that will enable us to grow our direct import penetration and lead to higher gross margin.”

Specifically, Sears plans to improve the performance of its apparel business—which had a substantial impact on its overall profitability in 2015—through changes to sourcing, product assortment, space allocation, pricing, and expense and inventory management practices.

Comps decreased at Kmart and Sears Domestic stores by 7.2% and 6.9% respectively in the three months ended Jan. 30, resulting in an overall decline of 7.1%. While the retailer said this was an improvement from the first three quarters of 2015 (and that last month was the best performer of the fiscal year), it was a lot worse than the same period a year ago, when domestic comps fell 4.4%.

“Like many of our competitors, the holiday selling season proved to be challenging, with historically warm weather, increased promotional activities and intense competition pressuring margins and driving comparable store sales decline. This negatively impacted both our total revenue and margin,” Lampert added.

To that end, revenues decreased $796 million to $7.3 billion for the fourth quarter of 2015, compared to revenues of $8.1 billion a year ago. For the full year, revenues declined by roughly $6.1 billion to $25.1 billion, as compared to $31.2 billion in the prior year. The retailer attributed the majority of this drop to actions it undertook to streamline operations and focus on its transformation into “an asset-light, members-centric, integrated retailer”—a phrase Lampert repeated several times during the conference call.

As announced earlier this month, Sears Holdings plans to accelerate the closing of at least 50 unprofitable stores and said it will continue to evaluate and optimize its cost structure by focusing on store-level marketing expenditures and staffing levels.

In particular, the retailer is aiming to reduce costs by between $550 million and $650 million in 2016. In addition, at least $300 million of asset sales are expected during the first half of the fiscal year, which could include offloading more of its real-estate portfolio.

Last year, Sears Holdings sold around 235 Sears and Kmart branded properties to Seritage Growth Properties, a real-estate investment trust (REIT), raising $2.7 billion of gross cash proceeds.

“This has enabled us to continue to operate Sears and Kmart stores in our current locations with lease terms that provide a structure that we believe will accelerate the transformation of our physical stores by providing us with flexibility in how we manage our store network,” Lampert said.

As of Jan. 30, Sears Holdings operated 1,672 stores across two formats; 1,253 of those locations were leased, and more than half of those agreements are set to expire in less than five years. The retailer also said it plans to generate lease income through partnerships with other stores.

Shares opened Thursday at $16.46 and jumped to as much as $17.48 in midmorning trading.

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