SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) October 17, 1997
SEARS, ROEBUCK AND CO.
(Exact name of registrant as specified in charter)
New York 1-416 36-1750680
(State or Other (Commission File Number) (IRS Employer
Jurisdiction of Identification No.)
Incorporation)
3333 Beverly Road, Hoffman Estates, Illinois 60179
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 286-2500
<PAGE>
Item 5. Other Events.
On October 17, 1997, the registrant issued its third quarter earnings
press release attached hereto as Exhibit 99.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
The Exhibit Index on page E-1 is incorporated herein by reference.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEARS, ROEBUCK AND CO.
Date: October 17, 1997 By:/S/Alan J. Lacy
ALAN J. LACY
Executive Vice President
and Chief Financial Officer
<PAGE>
EXHIBITS
99. Sears, Roebuck and Co. press release dated October 17, 1997.
E-1
Exhibit 99
CONTACT:
William H. Parke
(847) 286-5998
FOR IMMEDIATE RELEASE:
October 16, 1997
SEARS REPORTS THIRD QUARTER RESULTS
Excluding Unusual Items, Earnings Per Share Increased 11.8 Percent to $0.76
Credit Card Loss Provision Up 85 Percent; Earnings Outlook Revised
HOFFMAN ESTATES, ILL. -- Sears, Roebuck and Co. today reported third-
quarter 1997 net income of $353 million, or $0.89 per common share.
Quarterly results include a charge for the cost of converting Western Auto
operations to the new Parts America format and a one-time gain for the
recently announced change in current associates' post-retirement life
insurance benefits. These items, in addition to the positive impact from the
adoption of the new accounting standard for credit card securitizations (SFAS
No. 125), increased net income by
$52 million.
Excluding the impact of these items, third-quarter net income was
$301 million, an increase of 11.8 percent per common share to $0.76, versus
$279 million, or $0.68 per common share, in the third quarter of 1996.
Net income for the first nine months was $652 million, or $1.64 per
common share. Excluding the impact of noncomparable items, net income for
the first nine months of 1997 was $791 million, an increase of 16.4 percent
per common share to $1.99, versus $704 million, or $1.71 per common share, in
the prior year period.
Third-quarter 1997 revenues were $9.83 billion, an 8.4 percent
improvement over revenues of $9.07 billion in the third quarter of 1996. For
the first nine months of 1997, revenues were $28.32 billion, an 8.1 percent
increase over revenues of $26.19 billion in the 1996 period.
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Page 2
"We are extremely pleased with the performance of Sears Canada which,
due to its past cost cutting initiatives, is well positioned to convert
revenue increases to the bottom line," said Chairman and Chief Executive
Officer Arthur C. Martinez. "Domestically, our home services
and direct response businesses both delivered profit improvements in excess
of 20 percent.
On the retail side, sales increases were below plan levels due largely to
unseasonable weather,
and our credit business experienced a significant increase in charge-offs."
Domestic Operations
Third-quarter income from domestic operations increased 18.5 percent
to $346 million, from $292 million in the third quarter of 1996. The quarter
was positively impacted by the adoption of SFAS No. 125 and the change in
post-retirement life insurance benefits which resulted in after-tax gains of
$38 million and $37 million, respectively, partially offset by the after-tax
charge of $23 million for the conversion to Parts America. Excluding the
impact of these items, third-quarter income from domestic operations was $294
million versus $292 million in the prior-year period.
For the first nine months of 1997, income from domestic operations
was $686 million. Excluding the impact of noncomparable items, income from
domestic operations for the first nine months of 1997 was $789 million, up
6.0 percent from $745 million in the prior-year period.
Third quarter domestic operations revenues were $9.04 billion, a 9.1
percent increase over $8.28 billion in the 1996 period. The improvement was
driven by a 7.1 percent increase in domestic retail revenues, benefiting from
a comparable store sale increase of 2.2 percent and the addition of new off-
the-mall stores, and a 19.0 percent increase in credit revenues.
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<PAGE>
Page 3
Nine month revenues for domestic operations were $25.98 billion, an
8.6 percent increase from revenues of $23.93 billion for the same period in
1996.
Domestic gross margin as a percentage of merchandise sales and
services in the third quarter of 1997 decreased to 25.8 percent from 26.1
percent in the comparable 1996 period, principally due to the charge for
converting Western Auto to the Parts America format. Excluding the impact of
the charge for Parts America conversions, Sears gross margin declined
slightly from the comparable prior year period.
Domestic operations selling and administrative expense as a
percentage of revenues improved to 19.9 percent in the third quarter of 1997
from 20.9 percent in the third quarter of 1996. Selling and administrative
expense was favorably impacted by the change in associate benefits and the
adoption of SFAS No. 125, partially offset by the charge for converting
Western Auto to the Parts America format. Excluding these items, selling and
administrative expense as a percentage of revenues improved to 20.5 percent
from 20.9 percent due to the continued emphasis on cost control.
Depreciation expense for domestic operations increased $24 million,
or 15.5 percent to $179 million in the third quarter of 1997, primarily due
to the capital improvement program in progress to modernize and expand
selling space in full-line stores and grow the off-the-mall businesses.
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Page 4
Domestic credit revenues increased 19.0 percent in the third quarter
from the same period a year ago. The increase is due to higher receivable
balances and increased late fees as new pricing initiatives took effect,
partially offset by the effects of SFAS No. 125. Net interest margin, which
includes credit finance charges and late fees, increased $259 million in the
third quarter on a pre-SFAS No. 125 basis. The improvement is attributable
to the strong revenue performance coupled with reduced funding rates.
In the third quarter of 1997, the domestic provision for
uncollectible accounts was
$393 million, a 44.6 percent increase from $272 million in the third quarter
of 1996. The provision includes a $40 million addition to the bad debt
reserve. Excluding the impact of SFAS No. 125, the provision for
uncollectible accounts would have been $503 million, an increase of $231
million or 85.2 percent over the prior-year period. The increase in the
provision reflects the continuing trend of increased delinquencies and
bankruptcies discussed below, growth in the credit card receivables portfolio
and a reduced rate of debt reaffirmations.
International Operations
International operations in the third quarter of 1997 include only
Sears interest in
55 percent of Sears Canada as a result of the sale in the first quarter of
Sears controlling interest in Sears Mexico. International operations posted
third quarter income of $7 million, compared with a loss of $13 million in
1996. The improvement is primarily attributable to strong revenue growth and
substantial gains in gross margin from the same period a year ago.
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Page 5
For the year-to-date period, international operations posted a loss
of $34 million as compared to a loss of $41 million for same period a year
ago. In the first quarter of 1997, Sears recorded an after-tax loss of $36
million on the sale of its controlling interest in Sears Mexico.
Outlook
"While we are relatively pleased with Sears performance year-to-date,
as we enter the fourth quarter we are concerned about the adverse trends in
our credit card business. As a result, it is unlikely we will be able to
achieve our goal of mid-teens earnings growth in the fourth quarter of 1997,"
Martinez said. "Sears continues to experience an increase in the rate of
delinquencies and charge-offs while a number of other credit card issuers
have recently reported a flattening in their charge-off rates. If our
delinquency and charge-off trends continue, the resulting increases in the
provision for uncollectible accounts could have a significant adverse effect
on the company's overall operating results in future periods. We are taking
steps to mitigate the effect of these trends on earnings, and are assessing
their expected magnitude and duration.
"As we enter the important holiday shopping season, we believe our
retail businesses are well positioned to provide our customers with the right
merchandise mix, in-stock levels and service, supported by the strongest
advertising and merchandising program in our company's history," said
Martinez.
Through its network of 826 full-line Stores and more than 2,500 off-
the-mall stores, Sears provides apparel, home and automotive products and
related services for families throughout
America, serving more than 50 million households.
# # # #
SUPPLEMENTAL INFORMATION
1997 results were impacted by the following items:
Adoption of New Accounting Standard
The Company adopted Statement of Financial Accounting Standard (SFAS) No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," effective January 1, 1997. This statement
provides consistent guidance for distinguishing transfers of financial assets
(securitizations) that are sales from transfers that are secured borrowings.
SFAS No. 125 requires the Company to recognize gains on securitizations which
qualify as sales. The statement also indicates that an allowance for
uncollectible accounts should not be maintained for receivables which are
sold (securitized). Implementation of SFAS No. 125 increased 1997 third
quarter net income by $38 million and reduced reported credit revenues,
selling and administrative expense and the provision for uncollectibles by
$79 million, $31 million and $110 million, respectively. For the nine-month
period, SFAS No. 125 increased net income by $112 million and reduced
reported credit revenues, selling and administrative expense and the
provision for uncollectibles by $190 million, $92 million and $281 million,
respectively.
Sale of Mexico
In April 1997, the Company completed the sale of 60 percent of the
outstanding shares of Sears, Roebuck de Mexico, S.A. de C.V. ("Sears Mexico")
to Grupo Carso S.A. de C.V. for cash proceeds of $103 million. The sale was
recorded in the first quarter resulting in a pretax loss of $21 million and
tax expense of $15 million for an after-tax loss of $36 million. The
transaction reduced the Company's ownership in Sears Mexico to 15.5 percent.
Sale of Advantis
In June 1997, the Company sold its 30 percent equity interest in Advantis, a
joint venture between IBM and the Company, to IBM for $450 million. After
contractually required distributions to third parties, the transaction
resulted in cash proceeds of $276 million, a pretax gain of $150 million and
an after-tax gain of $91 million, or $.23 per share.
Reaffirmation Charges
During the second quarter, Sears reached comprehensive agreements with debtor
class action plaintiffs and Attorneys General in all 50 states relating to
certain reaffirmation agreements with the Company's bankrupt credit-card
holders that were not filed from 1979 through April 1, 1997. Under theses
agreements, the Company will use its best efforts to identify all debtors
with unfiled reaffirmation agreements during the period and remit to them all
amounts paid pursuant to such agreements plus interest at 10 percent, and
write off any remaining balances related to non-filed reaffirmation
agreements. In addition, the Company will provide a fund of $25 million to
be distributed to the debtors participating in the settlement.
In the second quarter the Company recorded a pretax charge or $475 million
($320 million after-tax) for the estimated cost of the settlement of this
matter, including related other expenses. Such an estimate is based on
assumptions as to the ultimate outcome of future events and uncertainties.
Actual results could differ from the estimate.
Parts America Conversion
In August 1997, the Company announced its intention to accelerate its plan to
convert Western Auto operations to the new Parts America format. In 1997,
more than 200 Western Auto stores will be converted to the new Parts America
format and 69 Western Auto stores in 19 markets will be closed due to local
market factors. By year end, the Company will have completed its conversion
to the parts-only format consisting of approximately 600 domestic Parts
America stores. Third-quarter results included a charge of $23 million, or
$0.06 per share, related to this initiative.
Post Retirement Life Insurance
In September 1997, changes to the post-retirement life insurance benefit plan
were announced by the Company. Life insurance benefits will be eliminated
for all active associates not retired by December 31, 1997 and the maximum
death benefit for current retirees will be reduced over a 10 year period.
This plan change resulted in a one-time gain of $37 million, or $0.09 per
share, recorded in the third quarter.
<TABLE>
<CAPTION>
Impact of Noncomparable Items
Third Quarter Nine Months
(millions, except ______________________ ____________________
per common share) $ EPS $ EPS
<S> <C> <C> <C> <C>
1997 Reported Net Income $353 $0.89 $652 $1.64
Noncomparable Items:
SFAS No. 125 Acctg. Change 38 0.10 112 0.28
Parts America Conversion ( 23) (0.06) (23) (0.06)
Post Retirement Life Insurance 37 0.09 37 0.09
Sale of Sears Mexico - - (36) (0.09)
Sale of Advantis - - 91 0.23
Reaffirmation Charges - - (320) (0.80)
_____ ____ _____ ______
52 0.13 (139) (0.35)
1997 Adjusted Net Income $301 $0.76 $791 $1.99
1996 Net Income $279 $0.68 $704 $1.71
Percent Change 8.0% 11.8% 12.3% 16.4%
</TABLE>
SEARS, ROEBUCK AND CO. CONSOLIDATED INCOME
<TABLE>
<CAPTION>
Three Months Ended
(millions, except per Sept. 27, Sept. 28, Percent
common share data) 1997 1996 Change
<S> <C> <C> <C>
Revenues
Merchandise sales and services $ 8,545 $7,965 7.3
Credit revenues 1,283 1,102 16.4
Total revenues 9,828 9,067 8.4
Costs and expenses
Cost of sales, buying and occupancy 6,337 5,903 7.3
Selling and administrative 1,978 1,933 2.4
Depreciation and amortization 192 173 11.0
Provision for uncollectible accounts 401 286 40.1
Interest 328 326 0.8
Reaffirmation charges - - -
Total costs and expenses 9,236 8,621 7.1
Operating income 592 446 32.6
Other income (loss), net (5) 17 -
Income before income taxes 587 463 26.7
Income taxes 234 184 26.6
Net income $ 353 $ 279 26.5
Net income consists of:
Domestic operations $ 346 $ 292 18.5
International operations 7 (13) -
Net income $ 353 $ 279 26.5
Earnings per common share, after
allowing for dividends on preferred shares $ 0.89 $ 0.68 30.9
Average common and common
equivalent shares outstanding 398.5 398.4
</TABLE>
SEARS, ROEBUCK AND CO. CONSOLIDATED INCOME
<TABLE>
<CAPTION>
Nine Months Ended
(millions, except per Sept. 27, Sept. 28, Percent
common share data) 1997 1996 Change
<S> <C> <C> <C>
Revenues
Merchandise sales and services $24,667 $22,929 7.6
Credit revenues 3,654 3,265 11.9
Total revenues 28,321 26,194 8.1
Costs and expenses
Cost of sales, buying and occupancy 18,314 17,098 7.1
Selling and administrative 5,868 5,659 3.7
Depreciation and amortization 575 502 14.5
Provision for uncollectible accounts 998 794 25.7
Interest 1,021 1,013 0.8
Reaffirmation charges 475 - -
Total costs and expenses 27,251 25,066 8.7
Operating income 1,070 1,128 (5.2)
Other income (loss), net 124 44 -
Income before income taxes 1,194 1,172 1.9
Income taxes 542 468 15.7
Net income $ 652 $ 704 (7.4)
Net income consists of:
Domestic operations $ 686 $ 745 (7.9)
International operations (34) (41) -
Net income $ 652 $ 704 (7.4)
Earnings per common share, after
allowing for dividends on preferred shares $ 1.64 $ 1.71 (4.1)
Average common and common
equivalent shares outstanding 398.3 399.3
</TABLE>
SEARS, ROEBUCK AND CO. DOMESTIC OPERATIONS INFORMATION
<TABLE>
<CAPTION>
Three Months Ended
______________________________
Sept. 27, Sept. 28, Percent
(millions, except number of stores) 1997 1996 Change
<S> <C> <C> <C>
Revenues
Merchandise sales and services $ 7,819 $ 7,258 7.7
Credit revenues
Gross finance charges and other revenues 1,323 1,115 18.6
Funding costs on securitized receivables (101) (89) 14.3
Total credit revenues 1,222 1,026 19.0
Total revenues 9,041 8,284 9.1
Costs and expenses
Cost of sales, buying and occupancy 5,802 5,363 8.2
Selling and administrative 1,796 1,731 3.7
Depreciation and amortization 179 155 15.5
Provision for uncollectible accounts 393 272 44.6
Interest 303 285 6.5
Reaffirmation charges - - -
_______ _______ ________
Total costs and expenses 8,473 7,806 8.5
Operating income - Domestic operations $ 568 $ 478 18.8
Comparable store sales increase 2.2% 3.8%
Gross margin ratio 25.8% 26.1%
Selling and administrative expense ratio 19.9% 20.9%
Pretax LIFO charge $ 6 $ 22
</TABLE>
SEARS, ROEBUCK AND CO. DOMESTIC OPERATIONS INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended
________________________________
Sept. 27, Sept. 28, Percent
(millions, except number of stores) 1997 1996 Change
<S> <C> <C> <C>
Revenues
Merchandise sales and services $22,536 $20,905 7.8
Credit revenues
Gross finance charges and other revenues 3,764 3,272 15.0
Funding costs on securitized receivables (315) (251) 25.3
Total credit revenues 3,449 3,021 14.1
Total revenues 25,985 23,926 8.6
Costs and expenses
Cost of sales, buying and occupancy 16,729 15,529 7.7
Selling and administrative 5,328 5,103 4.4
Depreciation and amortization 531 451 17.6
Provision for uncollectible accounts 970 753 28.8
Interest 930 880 5.7
Reaffirmation charges 475 - -
Total costs and expenses 24,963 22,716 9.9
Operating income - Domestic operations $ 1,022 $ 1,210 (15.5)
Comparable store sales increase 2.4% 5.9%
Gross margin ratio 25.8% 25.7%
Selling and administrative expense ratio 20.5% 21.3%
Pretax LIFO charge $ 30 $ 46
Domestic inventories - FIFO $ 5,900 $ 5,573
- LIFO $ 5,140 $ 4,825
</TABLE>
<TABLE>
<CAPTION>
Balances At
Sept. 27, Sept. 28,
1997 1996
<S> <C> <C>
Domestic credit receivables:
Gross credit card receivables $26,998 $24,619
Receivable balances sold (6,996) (5,323)
Owned credit card receivables $20,002 $19,296
</TABLE>
<TABLE>
<CAPTION>
Dec. 28, Sept. 27,
Domestic merchandising stores: 1996 Opened Closed 1997
<S> <C> <C> <C> <C>
Full-line stores 821 7 (2) 826
All other formats 2,550 199 (158) 2,591
Total 3,371 206 (160) 3,417
Gross square feet 146.2 3.8 (2.0) 148.0
</TABLE>
