February 26, 2009 / 4:52 PM / 9 years ago

UPDATE 3-Sears results top estimates, more stores to close

* EPS $2.94 excl items vs. estimate $2.68

* Closing 24 more stores

* Revenue falls 12 pct

* Shares up 7.8 pct (Adds analyst comment, stock rise, other details)

By Karen Jacobs

ATLANTA, Feb 26 (Reuters) - Retailer Sears Holdings Corp SHLD.O posted stronger-than-expected quarterly results on Thursday as it cut costs during the recession, and said it was closing 24 additional stores, sending its shares up nearly 8 percent.

The company controlled by hedge fund manager Edward Lampert has seen same-store sales decline at its Kmart and Sears, Roebuck stores, but analysts give it credit for keeping a tight grip on costs and inventory over the past year.

Sears is “managing inventories, cutting overhead where it can and that certainly is helping to weather this difficult environment,” said Morningstar analyst Kim Picciola.

Still, some cautioned that the department store operator faces an uphill battle as the weak housing market cuts into sales.

“Assuming (same-store sales) continue to run 7-10 percent lower, holding SG&A (expenses) becomes a more difficult feat to manage,” Morgan Stanley analyst Gregory Melich said in a research note. He added more store closures could come this year.

Sears said net income fell 55 percent to $190 million, or $1.55 a diluted share, for the fourth quarter ended Jan. 31, from $426 million, or $3.17 a share, a year earlier.

The results included special items. Sears said it had costs of $74 million tied to store closings, including $29 million related to the previously announced shuttering of eight stores.

Excluding items, profit came to $2.94 a share, compared with $2.68 a share expected by analysts, according to Reuters Estimates.

Revenue fell 12 percent to $13.3 billion in the fourth quarter. U.S. sales at stores open at least a year fell 8.3 percent, with Kmart down 5 percent and Sears, Roebuck off 11 percent.

Shares were up $2.79 to $38.62 in Nasdaq trading on Thursday. As of mid-February, 14.8 million shares of Sears Holdings --about 12 percent of its shares outstanding --were held short. That’s down about 18 percent in the past month, suggesting a decrease in bearish sentiment toward the stock.

STORE CLOSURES

The retailer announced the closure of 28 stores during 2008 and on Thursday said it had decided to close 24 additional stores in January out of about 3,900 locations in the United States and Canada. The new round of closures will occur in such states as Florida, Ohio and Indiana and are nearly split between Kmart and Sears stores.

A pretax charge of $45 million was recorded in the fourth quarter from that move, and another charge of about $24 million is expected to be taken during the first half as those stores wind down.

In a letter to stockholders, Lampert said some unprofitable stores have been kept open since the 2005 merger of Sears and Kmart in hopes of turning them around, but added stores will be closely monitored this year.

“Given that we operate in a highly competitive industry, we cannot afford to operate stores without the prospect for an adequate return,” Lampert wrote.

The company said Kmart, which has benefited from increased layaway sales to cost-conscious shoppers, increased its adjusted earnings before interest and taxes from the prior year. Lampert also said the Lands’ End unit had “record profits” in 2008 for the third-straight year.

Selling and administrative expenses fell 10 percent in the quarter and gross margin was 27.5 percent of sales, compared with 27.7 percent a year earlier.

Merchandise inventories stood at $8.8 billion at Jan. 31, down from $10 billion a year earlier.

The Hoffman Estates, Illinois, company, which bought back 2.9 million shares during the fourth quarter, had cash balances of $1.3 billion in late January, compared with $1.6 billion a year ago.

It said it reduced short-term borrowings on its $4 billion revolving credit line to $435 million as of Jan. 31 from $1.9 billion at Nov. 1, 2008.

“The only reason we believe Sears would be in trouble near term would be if vendors stopped supporting the chain, which we do not believe will occur,” Credit Suisse analyst Gary Balter said in a research note. (Reporting by Karen Jacobs; Editing by Gerald E. McCormick, Dave Zimmerman)

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