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) January 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 January 22, 1998, the registrant issued its fourth quarter
earnings press release attached hereto as Exhibit 99. In addition, the
registrant expects credit income for 1998 to decline more than 20 percent
from 1997 levels. The registrant also stated that it expects that given
the seasonal nature of the retail business, and the related disproportionate
significance of the credit business in the first quarter, profits for the
first quarter of 1998 will decline more than 50 percent from 1997 levels.
The above statements and those made in the Outlook section of the
press release are forward looking and as such involve risks and uncertainties
that could cause actual results to differ materially. The registrant's
forward looking statements are based on assumptions about many important
factors, including likely first-quarter results, the anticipated decline in
credit results, economic fluctuations, the ongoing government investigation
relating to bankruptcy practices, and normal business uncertainty. While the
registrant 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.
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: January 22, 1998 By:/S/Gary L. Crittenden
GARY L. CRITTENDEN
Executive Vice President
and Chief Financial Officer
EXHIBITS
99. Sears, Roebuck and Co. press release dated January 22, 1998.
Exhibit 99
CONTACT:
William H. Parke
(847) 286-5998
FOR IMMEDIATE RELEASE:
January 22, 1998
SEARS REPORTS FOURTH QUARTER RESULTS
Credit Card Loss Provision Jumps
Retail and Services Achieve Strong Profit Improvement
HOFFMAN ESTATES, Ill. -- Sears, Roebuck and Co. today reported
fourth-quarter 1997 net income of $536 million, or $1.35 per share, compared
with $567 million, or $1.42 per share, in the fourth quarter of 1996.
Excluding the positive impact from the adoption of the new accounting
standard for credit card securitizations (SFAS No. 125), net income was $512
million, or $1.29 per share. Quarterly results were adversely impacted by an
increase in the provision for uncollectible accounts, reflecting the
continuing trend of increased delinquencies and charge-offs.
The profitability of our retail and services businesses improved
strongly, benefiting from a successful holiday season, but quarterly results
were negatively affected by continued unfavorable trends in our credit
business," said Chairman and Chief Executive Officer Arthur C. Martinez.
Sears 1997 net income declined 6.6 percent to $1.19 billion, or $2.99
per share, from $1.27 billion, or $3.12 per share for 1996. Results for 1997
were impacted by several significant noncomparable items, which in the
aggregate lowered net income by $115 million. Most notable of these items
are the estimated costs relating to Sears handling of certain credit
reaffirmation agreements, the gain on the sale of Advantis data services
business, and the positive impact from the adoption of SFAS No. 125.
Excluding the impact of these and other noncomparable items, net
income for 1997 was $1.30 billion, an increase of 4.8 percent to $3.27 per
share, versus $1.27 billion, or $3.12 per share for 1996.
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Fourth-quarter 1997 revenues were $13.15 billion, a 9.2 percent
improvement over revenues of $12.04 billion in the fourth quarter of 1996.
Annual revenues were $41.47 billion,
an 8.5 percent increase over revenues of $38.24 billion in the 1996 period.
Since 1997 was a 53 week fiscal year for the company, fourth quarter revenues
benefited from an extra week versus the previous year. Without the extra
week, revenues would have increased approximately three percent.
Domestic Operations
Fourth-quarter 1997 income from domestic operations decreased 2.7
percent to $517 million, from $531 million in the fourth quarter of 1996,
largely due to a 109.5 percent, or $360 million, increase in the provision
for uncollectible accounts. The provision includes a $244 million addition
to the bad debt reserve. The quarter was positively affected by the adoption
of SFAS No. 125, which increased after-tax income by $24 million. Excluding
the impact of this item, fourth-quarter income from domestic operations was
$493 million. "Our retail and services businesses performed very well in
both the quarter and year periods, except for the automotive business, which
had a difficult year as disruptions caused by the conversion of our tire and
parts formats negatively affected results," said Martinez. "We are
particularly pleased with the profit improvement our home stores business
delivered in the quarter due to strong revenue performance coupled with
improved margin rate," Martinez added.
Fourth-quarter domestic operations revenues were $12.00 billion, a
9.9 percent increase over $10.92 billion in the 1996 period. The improvement
was driven by an 8.7 percent increase in domestic retail revenues, as the
company posted a comparable store sales increase of 2.2 percent on top of the
5.4 percent increase a year ago. Revenues also benefited from the addition
of new full-line and specialty stores which opened in the fourth quarter, as
well as a 20.8 percent increase in credit revenues.
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Income from domestic operations for 1997 was $1.20 billion.
Excluding the impact of noncomparable items, income from domestic operations
for 1997 was $1.28 billion, the same as the prior-year period. Revenues for
domestic operations increased 9.0 percent to $37.98 billion from revenues of
$34.85 billion in 1996.
Domestic gross margin as a percentage of merchandise and service
sales in the fourth quarter of 1997 remained flat with the comparable 1996
period, at 27.9 percent. The quarter benefited from a favorable year-over-
year LIFO adjustment. On a FIFO-inventory basis, domestic gross margin
declined 20 basis points due to a reduction in the retail gross margin rate
largely offset by a margin improvement in the company's services businesses.
Domestic operations selling and administrative expense as a
percentage of revenues improved to 18.5 percent in the fourth quarter of 1997
from 19.5 percent in the fourth quarter of 1996. The improvement was
primarily attributable to leveraging payroll and other employee- related
costs, and the extra week of revenues included in the fourth quarter of 1997.
Depreciation expense for domestic operations increased $17 million,
or 9.9 percent, to $196 million in the fourth 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 specialty businesses.
Interest expense for domestic operations increased $49 million, or
15.8 percent, in the fourth quarter of 1997, due primarily to the additional
week of expense in 1997 compared with 1996.
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Domestic credit revenues increased 20.8 percent in the fourth quarter
from the same period a year ago. The increase was due to higher receivable
balances, increased late fees as new pricing initiatives took effect, and the
extra week of revenues included in the fourth quarter of 1997, partially
offset by the effects of SFAS No. 125. Net interest margin, which includes
credit finance charges and late fees, increased $317 million in the fourth
quarter on a pre-SFAS No. 125 basis due to the strong credit revenue
performance.
In the fourth quarter of 1997, the domestic provision for
uncollectible accounts was $688 million, a 109.5 percent increase from $328
million in the fourth quarter of 1996. The provision includes a $244 million
addition to the bad debt reserve, reflecting an increase in the delinquency
rate of the credit card portfolio and balance growth.
Excluding the impact of SFAS No. 125, the provision for uncollectible
accounts would have been $824 million in the fourth quarter, an increase of
$496 million or 151.1 percent over the prior-year period. For the full year,
the provision for uncollectible accounts increased 91.9 percent to $2.08
billion, excluding the impact of SFAS No. 125.
International Operations
Sears Canada, the only remaining consolidated international operation
following the sale of a majority interest in Sears Mexico in the first
quarter, continued to post substantial improvements in its operations. In
the quarter, revenues increased 15.9 percent and net income grew 9.8 percent
compared with the prior-year period. Despite the strong performance of Sears
Canada, international operations posted fourth-quarter income of $19 million,
compared with $36 million in 1996. The decline was primarily attributable to
higher U.S. tax expense in 1997 and income from Sears Mexico included in the
prior year.
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Page 5
International operations posted a loss of $15 million for the year,
including an after-tax loss of $36 million on the sale of the controlling
interest in Sears Mexico recorded in the first quarter, as compared with a
loss of $5 million in 1996.
Outlook
Martinez said: "Looking ahead to 1998, we expect that the continued
improvement in our retail and services businesses will exceed the anticipated
decline in credit results. In the first quarter, however, it is likely that
profits will decline substantially from 1997 levels due to the projected
decrease in credit results and the later Easter holiday." Martinez added
that the company is optimistic about producing mid-single digit earnings
growth for the full year.
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. While the company believes that
its assumptions are reasonable, 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 833 full-line stores and more than 2,600
specialty stores, Sears provides apparel, home and automotive products and
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 fourth
quarter net income by $24 million and reduced reported credit revenues,
selling and administrative expense and the provision for uncollectibles by
$131 million, $34 million and $136 million, respectively. For 1997, SFAS
No. 125 increased net income by $136 million and reduced reported credit
revenues, selling and administrative expense and the provision for
uncollectibles by $321 million, $126 million and $417 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 these
agreements, the Company used its best efforts to identify all debtors with
unfiled reaffirmation agreements during the period and remitted to them all
amounts paid pursuant to such agreements plus interest at 10 percent, and has
written off any remaining balances related to non-filed reaffirmation
agreements. In addition, the Company provided 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
complete the conversion of Western Auto operations to the new Parts America
format in 1997. During the year, nearly 200 Western Auto stores were
converted to the new Parts America format and
96 Western Auto stores in various markets were closed. As of year end, the
Company has substantially completed its conversion to the parts-only format
consisting of 564 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. Retiree life insurance benefits were
eliminated for all active associates not retired by December 31, 1997. This
plan change resulted in a one-time gain of $37 million, or $0.09 per share,
recorded in the third quarter, separate and apart from annual ongoing
savings.
New Accounting Standard for Earnings Per Share
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS No. 128), "Earnings Per Share," which is
effective for fiscal 1997. The statement requires that a basic earnings per
share and a diluted earnings per share be reported. Basic earnings per share
is computed based on the weighted average shares outstanding, while diluted
earnings per share includes the effect of dilutive stock options.
Impact of Noncomparable Items
<TABLE>
<CAPTION>
-------------- -------------
Fourth Quarter Twelve Months
(millions, except per common share) $ EPS $ EPS
<S> <C> <C> <C> <C>
1997 Reported Net Income $536 $1.35 $1,188 $2.99
Noncomparable Items:
SFAS No. 125 Acctg. Change 24 0.06 136 0.35
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 Charges - - (320) (0.80)
-------- ------- ------ ------
24 0.06 (115) (0.28)
1997 Adjusted Net Income $512 $1.29 $1,303 $3.27
-------- ------- ------ ------
-------- ------- ------ ------
1996 Net Income $567 $1.42 $1,271 $3.12
------- ------- ------ ------
------- ------- ------ ------
Percent Change (9.8)% (9.2)% 2.5% 4.8%
</TABLE>
SEARS, ROEBUCK AND CO.
CONSOLIDATED INCOME
<TABLE>
<CAPTION>
14 Weeks Ended Jan.3, 1998 53 Weeks Ended Jan.3, 1998
and 13 Weeks Ended Dec. 28, 1996 and 52 Weeks Ended Dec. 28, 1996
-------------------------------- --------------------------------
(millions, except
per common share) 1997 1996 % Change 1997 1996 % Change
<S> <C> <C> <C> <C> <C> <C>
Revenues
Merchandise sales and
services $11,770 $10,883 8.1 $36,436 $33,812 7.8
Credit revenues 1,379 1,159 19.0 5,033 4,424 13.8
------- ------- ---- ------- ------- ----
Total revenues 13,149 12,042 9.2 41,469 38,236 8.5
Costs and expenses
Cost of sales, buying and occupancy 8,471 7,827 8.2 26,783 24,925 7.5
Selling and administrative 2,457 2,371 3.6 8,325 8,030 3.7
Depreciation and amortization 211 195 8.6 786 697 12.8
Provision for uncollectible accounts 699 342 104.3 1,697 1,136 49.4
Interest 388 352 9.9 1,409 1,365 3.2
Reaffirmation charges - - - 475 - -
----- ------ ---- ------- ------ ----
Total costs and expenses 12,226 11,087 10.3 39,475 36,153 9.2
------ ------ ---- ------ ------ ----
Operating income 923 955 (3.2) 1,994 2,083 (4.3)
Other income (loss), net (17) (22) - 106 22 -
------- ------- ----- ------- ------- -----
Income before income taxes 906 933 (2.8) 2,100 2,105 (0.2)
Income taxes 370 366 1.4 912 834 9.4
------- ------- ----- ------ ------- -----
Net income $ 536 $ 567 (5.5) $1,188 $1,271 (6.6)
------- ------- ----- ------- ------- -----
------- ------- ----- ------- ------- -----
Net income consists of:
Domestic operations $ 517 $ 531 (2.7) $1,203 $1,276 (5.7)
International operations 19 36 - (15) (5) -
------ ------- ----- ------- ------- -----
Net income $ 536 $ 567 (5.5) $1,188 $1,271 (6.6)
Earnings per common share, after
allowing for dividends
on preferred shares:
Basic $ 1.37 $ 1.44 (4.9) $ 3.03 $ 3.18 (4.7)
Diluted $ 1.35 $ 1.42 (4.9) $ 2.99 $ 3.12 (4.2)
Average common and common
equivalent shares outstanding 396.5 398.4 397.8 399.1
</TABLE>
<PAGE>
SEARS, ROEBUCK AND CO.
DOMESTIC OPERATIONS INFORMATION
<TABLE>
<CAPTION>
14 Weeks Ended Jan.3, 1998 53 Weeks Ended Jan.3, 1998
and 13 Weeks Ended Dec. 28, 1996 and 52 Weeks Ended Dec. 28, 1996
(millions) 1997 1996 % Change 1997 1996 % Change
<S> <C> <C> <C> <C> <C> <C>
Revenues
Merchandise sales and services $10,689 $9,837 8.7 $33,223 $30,742 8.1
Comparable store sales increase 2.2% 5.4% 2.3% 5.8%
Credit revenues
Gross finance charges
and other revenues 1,431 1,182 21.2 5,195 4,454 16.6
Funding costs on securitized
receivables (122) (97) 25.6 (437) (348) 25.4
Total credit revenues 1,309 1,085 20.8 4,758 4,106 15.9
------- ------- ----- -------- -------- -----
Total revenues 11,998 10,922 9.9 37,981 34,848 9.0
Costs and expenses
Cost of sales, buying and occupancy 7,707 7,091 8.7 24,435 22,620 8.0
Gross margin % 27.9% 27.9% 26.5% 26.4%
Selling and administrative 2,217 2,129 4.1 7,545 7,232 4.3
% of total revenues 18.5% 19.5% 19.9% 20.8%
Depreciation and amortization 196 179 9.9 726 630 15.4
Provision for uncollectible accounts 688 328 109.5 1,658 1,081 53.3
Interest 360 311 15.8 1,290 1,191 8.3
Reaffirmation charges - - - 475 - -
------ ------ ----- ------ ------ ----
Total costs and expenses 11,168 10,038 11.3 36,129 32,754 10.3
------ ------ ----- ------ ------ ------
Operating income $ 830 $ 884 (6.2) $1,852 $2,094 (11.6)
------ ------ ----- ------ ------ ------
------ ------ ----- ------ ------ ------
Pretax LIFO charge (credit) $ (47) $ (27) $ (17) $ 19
Domestic inventories - FIFO - $4,962
- LIFO - $4,232
------ ------
Domestic credit receivables:
Gross credit card receivables $28,596 $26,731
Receivable balances sold (6,404) (6,330)
-------- --------
Owned credit card receivables $22,192 $20,401
------- --------
------- --------
</TABLE>
<TABLE>
<CAPTION>
Dec. 28 Jan. 3,
Domestic merchandising stores 1996 Opened Closed 1998
--------- ------- ------ --------
<S> <C> <C> <C> <C>
Full-line stores 821 21 (9) 833
Specialty stores 2,550 318 (171) 2,697
Total 3,371 339 (180) 3,530
Gross square feet 146.2 8.2 (3.4) 151.0
</TABLE>
