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 22, 1998
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
Item 5. Other Events.
On October 22, 1998, 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.
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 22, 1998 By:/s/ALAN J. LACY
ALAN J. LACY
Chief Financial Officer
and President, Credit
EXHIBITS
99. Sears, Roebuck and Co. press release dated October 22, 1998.
E-1
CONTACT:
William H. Parke
(847) 286-5998
FOR IMMEDIATE RELEASE:
October 22, 1998
SEARS REPORTS THIRD-QUARTER 1998 RESULTS
Earnings Affected by Sale of Western Auto and Retirement of High-
Cost Debt
HOFFMAN ESTATES, Ill. -- Sears, Roebuck and Co. reported
third-quarter 1998 net income of $44 million, or $0.11 per
share, compared with $353 million, or $0.89 per share, in the
third quarter of 1997. Both periods were affected by non-
comparable items.
Excluding the non-comparable items, third-quarter 1998 net
income was $298 million, or $0.76 per share, a 1.0 percent
decrease from net income of $301 million, or $0.76 per share for
the comparable 1997 period. The slight decrease in net income
resulted from lower than expect-ed revenue growth in the domestic
retail and services businesses coupled with a decline in credit
income, substantially offset by improvement in other income and a
lower effective tax rate.
The non-comparable items affecting the third quarter of 1998
were an impairment charge related to the previously announced
sale of Western Auto, an extraordinary loss on the retirement of
high-cost debt, and the impact of SFAS No. 125 accounting, which
in aggregate reduced net income by $254 million, or $0.65 per share.
Significant non-comparable items in the third quarter of 1997 included a
charge to convert Western Auto operations to the Parts America
format, a one time gain for the change in current associates' post-retirement
life insurance benefits, and the impact of SFAS No. 125 accounting, which in
aggregate increased net income by $52 million, or $0.13 per
share.
Net income for the first nine months of 1998 was $513
million, or $1.30 per share. Excluding the impact of significant
non-comparable items, net income was $728 million, or $1.84 per
share, an 8.0 percent decrease from net income of $791 million,
or $1.99 for the comparable 1997 period. The decrease in net income is
primarily a result of the increase in the provision for uncollectible
accounts and higher levels of depreciation expense.
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Third-quarter 1998 revenues were $9.75 billion, a slight
decrease from revenues of $9.78 billion in the third quarter of
1997. For the first nine months of 1998, revenues were $29.16
billion, a 3.3 percent increase over revenues of $28.21 billion
in the same period last year.
"Home appliance and electronics sales were strong, but these
results were offset by slower softgood sales, which were affected
by the impact of storms and unseasonable weather in major
markets," said Chairman and Chief Executive Officer Arthur C.
Martinez. "Growth in our services business in the quarter was
also below expectations, and management is actively taking the
steps necessary to accelerate performance. The lower-than-
anticipated revenues from our full-line stores and services businesses were
the primary factors in third-quarter results. However, we are
very encouraged by the progress being made in our important
credit business, which has exceeded our expectations."
Looking ahead to the holiday selling season, Martinez said,
"Our stores are well merchandised, inventories are at appropriate
levels and our aggressive fourth-quarter marketing campaign will make Sears
top-of-mind with customers."
Domestic Operations
Third quarter domestic operations revenues were $8.97
billion, versus revenues of $8.99 billion in the comparable 1997
period. Revenue results included a 1.6 percent increase in
domestic retail revenues, which included a comparable store sales
decrease of 0.2 percent, a 1.2 percent increase in services
revenues and a 12.3 percent decrease in credit revenues. The
decrease in credit revenues was attributable to reduced late fee
income and a lower level of owned credit card receivables.
Domestic gross margin as a percentage of merchandise sales
and services in the third quarter of 1998 was 25.8 percent versus
25.7 percent in 1997. Excluding the charge for Parts America
format conversions in the prior year, margin rate was flat with
last year.
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<PAGE>
Page 3
Domestic operations selling and administrative expense as a
percentage of revenues was 20.8 percent in the third quarter of
1998 versus 20.0 percent in the third quarter of 1997. The prior
year was favorably impacted by a change in current associates'
post-retirement life insurance benefits and the impact of
securitization accounting, partially offset by the charge for
converting Western Auto to the Parts America format. Excluding
these non-comparable items, selling and administrative expense as a
percentage of revenues increased 10 basis points. The increase
was primarily due to higher expenses within the credit and
services businesses, partially offset by an improvement in retail
expense leverage.
In the third quarter of 1998, the domestic provision for
uncollectible accounts was $281 million, a 19.2 percent decrease
from $348 million in the third quarter of 1997. The decrease in
the provision is due to favorable trends in delinquency rates,
charge-off experience and bankruptcies. "Third-quarter results for
our credit business were most encouraging," Martinez said.
"We continue to see statistics for delinquencies and charge-offs
improving, benefiting from operational measures
we have put into place over the past year." Managed credit card
receivable balances increased 0.4 percent from the third quarter
of 1997, and the allowance for doubtful accounts decreased $20
million during the third quarter of 1998.
Depreciation expense for domestic operations increased $10
million, or 5.3 percent to $187 million in the third quarter of
1998, primarily due to the capital improvement program in
progress to modernize and expand selling space in full-line
stores and grow certain specialty retail businesses.
The third-quarter results also include a $24 million after-
tax extraordinary loss for the retirement of high-cost debt. The
recent drop in interest rates made it economically attractive for
Sears to retire some higher cost debt. In addition, Sears
repurchased 9.6 million shares of its common stock under an
existing share repurchase plan.
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Page 4
International Operations
International operations in the third quarter of 1998
include Sears 55 percent ownership interest in Sears Canada.
International operating results were down slightly in the third
quarter of 1998 providing $5 million of Sears consolidated net
income compared with $7 million in the third quarter of 1997.
Sears Canada enjoyed strong operating results in the quarter, but
the negative effects of a lower exchange rate and the timing of
certain holding company costs were offsetting.
Outlook
For the fourth quarter, the company expects favorable credit
performance and continued aggressive expense management to
mitigate revenue and margin risk should retail and service trends
not improve. For the full year, the company expects to achieve a
mid-single digit percentage increase in earnings per share,
excluding non-comparable items. Martinez added that for 1999,
the company's objective continues to be to deliver a double-digit
percentage increase in earnings per share.
The statements contained in this outlook are forward looking
and as such involve risks and uncertainties that could cause
actual results to differ materially. The company's forward-
looking statements are based on
assumptions about many important factors, including competitive
conditions in the retail industry, changes in consumer confidence
and spending, general United States economic conditions such as
higher interest rates, the outcome of pending bankruptcy reform
legislation, and normal business uncertainty. While the company
believes that its assumptions are reasonable, it cautions that it
is impossible to predict the impact of certain factors which
could cause actual results to differ materially from predicted
results.
Through its network of 838 full-line Stores and more than 2,700
off-the-mall stores, Sears provides apparel, home and automotive
products and related services for families throughout America,
serving more than 60 million
households.
# # #
SEARS, ROEBUCK AND CO.
CONSOLIDATED INCOME
<TABLE>
<CAPTION>
For the 13 Weeks Ended Oct. 3, 1998 For the 39 Weeks Ended Oct. 3, 1998
and Sept. 27, 1997 and Sept. 27, 1997
(millions, except earnings per share) 1998 1997 % Change 1998 1997 % Change
<S> <C> <C> <C> <C> <C> <C>
Revenues
Merchandise and service $8,646 $8,528 1.4% $25,662 $24,618 4.2%
Credit revenues 1,102 1,254 -12.1% 3,496 3,596 -2.8%
Total revenues 9,748 9,782 -0.3% 29,158 28,214 3.3%
Costs and expenses
Cost of sales, buying and occupancy 6,413 6,335 1.3% 19,147 18,304 4.6%
Selling and administrative 2,033 1,980 2.7% 6,016 5,873 2.4%
Depreciation and amortization 204 190 7.3% 623 573 8.6%
Provision for uncollectible accounts 288 357 -19.0% 1,037 898 15.6%
Interest 341 328 3.8% 1,078 1,021 5.6%
Western Auto impairment loss 296 - - 296 - -
Reaffirmation charge - - - - 475 -
Total costs and expenses 9,575 9,190 4.2% 28,197 27,144 3.9%
Operating income 173 592 -70.8% 961 1,070 -10.2%
Other income, net 15 1 - 24 137 -
Income before income taxes and
minority interest 188 593 -68.2% 985 1,207 -18.4%
Income taxes (113) (234) -51.5% (428) (542) -21.0%
Minority interest (7) (6) 16.7% (20) (13) 56.2%
Net income before extraordinary loss 68 353 -80.7% 537 652 -17.7%
Extraordinary loss on debt extinguishment 24 - - 24 - -
Net income $ 44 $ 353 -87.5% $ 513 $ 652 -21.4%
Net income consists of:
Domestic operations $ 39 $ 346 -88.8% $ 499 $ 686 -27.3%
International operations 5 7 -18.8% 14 (34) 141.9%
Net income $ 44 $ 353 -87.5% $ 513 $ 652 -21.4%
Earnings per share:
Basic $ 0.11 $ 0.90 $ 1.32 $ 1.66
Diluted $ 0.11 $ 0.89 $ 1.30 $ 1.64
Average common and common
equivalent shares outstanding 391.4 398.5 393.7 398.3
</TABLE>
<TABLE>
SEARS, ROEBUCK AND CO.
SUMMARY OF NON-COMPARABLE ITEMS
<CAPTION>
13 Weeks Ended
Oct. 3, 1998 Sept. 27, 1997
$ EPS $ EPS
<S> <C> <C> <C> <C>
Reported Net Income $ 44 $ 0.11 $ 353 $ 0.89
Non-comparable Items:
SFAS No. 125 Accounting (5) (0.02) 38 0.10
Western Auto Impairment (225) (0.57) -- --
Extraordinary Loss on Debt Extinguishment (24) (0.06) -- --
Parts America Conversion -- -- (23) (0.06)
Post Retirement Life Insurance -- -- 37 0.09
(254) (0.65) 52 0.13
Net income excluding non-comparable items $ 298 $ 0.76 $ 301 $ 0.76
<CAPTION>
39 Weeks Ended
Oct. 3, 1998 Sept. 27, 1997
$ EPS $ EPS
<S> <C> <C> <C> <C>
Reported Net Income $ 513 $ 1.30 $ 652 $ 1.64
Non-comparable Items:
SFAS No. 125 Accounting 34 0.09 112 0.28
Western Auto Impairment (225) (0.57) - -
Extraordinary Loss on Debt Extinguishment (24) (0.06) -
Parts America Conversion -- -- (23) (0.06)
Post Retirement Life Insurance -- -- 37 0.09
Sale of Sears Mexico -- -- (36) (0.09)
Sale of Advantis -- -- 91 0.23
Reaffirmation Charge -- -- (320) (0.80)
(215) (0.54) (139) (0.35)
Net income excluding non-comparable items $ 728 $ 1.84 $ 791 $ 1.99
</TABLE>
<TABLE>
SEARS, ROEBUCK AND CO.
DOMESTIC OPERATIONS INFORMATION
<CAPTION>
For the 13 Weeks Ended Oct. 3, 1998 For the 39 Weeks Ended Oct. 3, 1998
and Sept. 27, 1997 and Sept. 27, 1997
(millions) 1998 1997 % Change 1998 1997 % Change
<S> <C> <C> <C> <C> <C> <C>
Revenues
Merchandise and service $ 7,925 $ 7,803 1.6% $ 23,525 $ 22,487 4.6%
Comparable store sales inc(dec) -0.2% 2.3% 2.4% 2.5%
Credit revenues
Gross finance charges and other revenues 1,154 1,293 -10.8% 3,630 3,706 -2.1%
Funding costs on securitized receivables (110) (102) 7.8% (323) (315) 2.5%
Total credit revenues 1,044 1,191 -12.3% 3,307 3,391 -2.4%
Total revenues 8,969 8,994 -0.3% 26,832 25,878 3.7%
Costs and expenses
Cost of sales, buying and occupancy 5,879 5,800 1.4% 17,548 16,719 5.0%
Gross margin % 25.8% 25.7% 25.4% 25.7%
Selling and administrative 1,862 1,797 3.6% 5,509 5,333 3.3%
% of total revenues 20.8% 20.0% 20.5% 20.6%
Depreciation and amortization 187 177 5.3% 575 529 8.6%
Provision for uncollectible accounts 281 348 -19.2% 1,016 870 16.8%
Interest 316 304 4.3% 999 930 7.5%
Western Auto impairment loss 296 - - 296 - -
Reaffirmation charge - - - - 475 -
Total costs and expenses 8,821 8,426 4.7% 25,943 24,856 4.4%
Operating income $ 148 $ 568 -73.9% $ 889 $ 1,022 -12.9%
Operating income by business format:
Retail $ 89 $ 116 -23.2% $ 228 $ 262 -13.0%
Services 107 120 -10.8% 284 276 2.9%
Credit 291 377 -22.8% 829 639 29.7%
Corporate (43) (45) -4.4% (156) (155) 0.6%
Western Auto impairment loss (296) - - (296) - -
Total operating income $ 148 $ 568 -73.9% $ 889 $ 1,022 -12.9%
Operating income by business format, excluding non-comparable items:
Retail $ 89 $ 93 -4.3% $ 228 $ 239 -4.6%
Services 107 120 -10.8% 284 276 2.9%
Credit 299 315 -5.1% 774 931 -16.9%
Corporate (43) (45) -4.4% (156) (155) 0.6%
Total operating income $ 452 $ 483 -6.4% $ 1,130 $ 1,291 -12.5%
Pretax LIFO charge $ 6 $ 6 $ 30 $ 30
</TABLE>
<TABLE>
SEARS, ROEBUCK AND CO.
DOMESTIC OPERATIONS INFORMATION (continued)
<CAPTION>
For the 13 Weeks Ended Oct. 3, 1998 For the 39 Weeks Ended Oct. 3, 1998
and Sept. 27, 1997 and Sept. 27, 1997
1998 1997 % Change 1998 1997 % Change
<S> <C> <C> <C> <C> <C> <C>
Total Domestic Revenues:
Retail $ 7,093 $ 6,981 1.6% $ 21,214 $ 20,253 4.8%
Services 832 822 1.2% 2,311 2,235 3.4%
Credit 1,044 1,191 -12.3% 3,307 3,390 -2.4%
Total Domestic Revenues $ 8,969 $ 8,994 -0.3% $ 26,832 $25,878 3.7%
<CAPTION>
(millions, except number Oct. 3, Sept. 27, Jan. 3,
of stores) 1998 1997 1998
<S> <C> <C> <C>
Domestic inventories -LIFO $ 5,340 $ 5,140 $ 4,600
-FIFO $ 6,084 $ 5,900 $ 5,313
Domestic credit card receivables:
Managed credit card receivables $ 27,440 $ 27,337 $ 28,945
Securitized balances sold (6,478) (6,520) (6,404)
Retained interest in transferred
credit card receivables (4,577) (3,212) (3,316)
Other receivables 220 171 161
Owned credit card receivables $ 16,605 $ 17,776 $ 19,386
<CAPTION>
Jan. 3, Oct. 3,
Domestic retail stores: 1998 Opened Closed 1998
<S> <C> <C> <C> <C>
Full-line stores 833 12 (7) 838
Specialty formats 2,697 147 (47) 2,797
Total 3,530 159 (54) 3,635
Gross square feet 151.0 3.5 (1.4) 153.1
</TABLE>
<TABLE>
SEARS, ROEBUCK AND CO.
CONSOLIDATED BALANCE SHEET
(millions)
Oct. 3, Sept. 27, Jan. 3,
1998 1997 1998
<S> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 327 $ 247 $ 358
Retained interest in transferred credit card receivables 4,577 3,212 3,316
Credit card receivables, net 16,792 18,307 19,843
Other receivables 358 287 335
Merchandise inventories 5,864 5,669 5,044
Prepaid expenses and deferred charges 577 439 956
Deferred income taxes 806 915 830
Total current assets 29,301 29,076 30,682
Property and equipment, net 6,493 6,062 6,414
Deferred income taxes 676 798 666
Other assets 1,262 930 938
Total assets $ 37,732 $ 36,866 $ 38,700
Liabilities
Current liabilities
Short-term borrowings $ 5,439 $ 3,987 $ 5,208
Current portion of long-term debt and capitalized leases 2,143 2,428 2,561
Accounts payable and other liabilities 6,379 7,192 6,637
Unearned revenues 823 874 830
Other taxes 419 455 554
Total current liabilities 15,203 14,936 15,790
Long-term debt and capitalized leases 13,022 12,523 13,071
Postretirement benefits 2,432 2,598 2,564
Minority interest and other liabilities 1,403 1,404 1,413
Total liabilities 32,060 31,461 32,838
Commitments and Contingent Liabilities
Shareholders' Equity
Common shares 323 323 323
Capital in excess of par value 3,587 3,596 3,598
Retained income 4,402 3,712 4,158
Treasury stock - at cost (2,109) (1,653) (1,702)
Minimum pension liability (217) (277) (217)
Deferred ESOP expense (185) (215) (204)
Cumulative translation adjustments (129) (81) (94)
Total shareholders' equity 5,672 5,405 5,862
Total liabilities and shareholders' equity $ 37,732 $ 36,866 $ 38,700
Total common shares outstanding 383.1 392.0 390.9
</TABLE>
