Sears profit falls, shares up on retail rally

ATLANTA (Reuters) - Sears Holdings Corp posted a quarterly profit that fell short of Wall Street expectations, but its shares rose more than 4 percent as investors bet easing oil prices would revive consumer spending.

The retailer controlled by hedge fund manager Edward Lampert said on Thursday its net income dropped 62 percent, driven partly by price markdowns to lure consumers in a weak U.S. economy.

The parent of Kmart and Sears, Roebuck stores said reduced markdowns and cost controls should lead to higher earnings in the second half of the year.

Sears Holdings has been rebuilding its management team, cutting expenses and introducing new merchandise in a bid to reverse a year-long earnings slump.

But analysts said the economy alone was not to blame for the latest disappointing results and questioned how much further the company could rely on existing strategies to turn its business around.

"Sales have been under pressure for so long, even before the retail environment became challenging," said Kim Picciola, a retail analyst with Morningstar.

"One of the concerns is that the company continues to lose market share and in that case, there's only so much it can do in terms of cost-cutting and realigning the organization," she added.

Sears Holdings' net income fell to $65 million, or 50 cents a share, for the quarter ended August 2, from $173 million, or $1.15 a share, a year earlier. The per-share profit decline was aided by a lower share count as Sears repurchased 5.6 million shares.

Excluding the positive impact of a reserve tied to an overturned jury verdict, profit came to 21 cents a share. Analysts on average had expected 33 cents a share, according to Reuters Estimates.

Revenue fell 4 percent to $11.8 billion.

SAME-STORE SALES

Sears Holdings faces competition from many chains, including Kohl's Corp in clothing, Wal-Mart Stores Inc in general merchandise, and Home Depot and Lowe's Cos in appliances and tools.

Sears' stock has fallen 11 percent since the start of the year, and would be even weaker if easing oil prices had not fueled a retail rally since July. But Sears has lagged many of its competitors, which have still managed to attract consumers with lower prices and preserve profits.

Total U.S. same-store sales, at outlets open for a year, fell 6.2 percent, with declines of 6.7 percent at Sears and 5.6 percent at Kmart. Same-store sales at both units have fallen for more than two years.

Housing-related products like appliances and tools led much of the sales weakness, but Sears noted stronger electronics sales.

Still, same-store sales fell less than the 8.6 percent drop in the first quarter, probably because consumers were spending U.S. tax rebate checks, analysts said.

Sears Holdings, based in Hoffman Estates, Illinois, posted a surprise first-quarter loss in May and declining profits for the previous three quarters.

The retailer has been seeking a permanent CEO since January and has seen a number of executives depart lately.

To cope with a weak market, Sears has been clamping down on costs and inventory levels. Selling, general and administrative expenses fell about 4 percent in the second quarter because of lower payroll and advertising costs.

But gross margin shrank to 26.5 percent from 27.7 percent a year earlier, hurt by increased markdowns to move goods.

The company cut its full-year forecast for earnings before interest, taxes, depreciation and amortization, saying it no longer expects to top last year's EBITDA. But Sears added that it expects higher EBITDA in the second half.

"Controlling expenses and tight inventory demand is going to help them achieve that goal," Picciola said. "Consumer demand is the wild card."

The company's cash position fell to $1.5 billion as of August 2, down from $2.6 billion a year earlier.

Sears Holdings shares rose $2.55, or 2.9 percent, to $89.53 at mid-afternoon on Nasdaq.

(Editing by Dave Zimmerman, Richard Chang)