Sears, Roebuck and Co., which 1 1/2 years ago posted the largest loss in its history, startled investors Thursday by announcing earnings that were 20 percent higher than expected.
Sears said its third-quarter net income totaled $363.5 million, or 91 cents a share, despite a more than $200 million increase in losses by the company’s Allstate Insurance group from the Los Angeles earthquake earlier this year. Analysts had expected the company to report earnings of about 76 cents a share, according to an Institutional Brokers Estimate survey.
Without the additional earthquake losses, net income would have been nearly $546 million, or $1.38 a share. Last year the company reported net income for the quarter of $388.4 million, or 98 cents a share.
“They put up some pretty good numbers. They were about 10 cents better than my estimate,” said Richard Nelson Jr., retail analyst with Chicago-based Duff & Phelps. “The earthquake cost them 47 cents and made for some tough comparisons.”
Running the company has never been more fun for Edward Brennan, Sears’ chairman and chief executive, who was frequently vilified in past years by stockholders unhappy with the company’s performance.
“I’d say we gave them a good surprise,” said Brennan. “We’re delighted.”
But Wall Street barely blinked. Instead of bidding up the company’s stock, Sears shares suffered the same fate as the stock of other major retailers.
They dropped 87 cents on the New York Stock Exchange in the first few hours of trading following the company’s announcement. The stock recovered later in the day, closing at $48.50, up 25 cents.
Retail stocks have generally been under pressure for the last year. Wall Street has become disenchanted with the industry’s prospects as the inflation-wary Federal Reserve pushes interest rates higher.
“Our core retailing and insurance businesses continued to post very good operating performances in the quarter, highlighted by the Merchandise Group’s earnings increase of about 24 percent and Allstate’s significantly improved underwriting performance excluding the impact of the earthquake,” said Brennan. “The fundamentals of our Sears and Allstate businesses are very sound.”
For the first nine months, net income was $769 million, or $1.92 a share, which was reduced by $677.1 million in insurance catastrophe losses from the California quake. In the same period a year earlier, net income was $1.8 billion, or $4.73 a share.
However, the 1993 net income figure included an $87.1 million favorable tax adjustment, a gain of $635.1 million from the initial public offering of Allstate Corp., income of $176.1 million from discontinued operations and a $210.8 million charge related to early paydown of debt.
Revenue in the quarter rose 3.8 percent, to $13.2 billion from $12.7 billion. For the first nine months, revenue rose 6.4 percent, to $38.5 billion from $36.2 billion last year.
The Merchandise Group’s success in the third quarter bodes well for the fourth quarter, according to Nelson.
“They are going to get more aggressive in the fourth quarter,” he said. Additionally, he said the Merchandise Group was indicating that early October sales were up 7 percent.
Even more important, he said, the remodeling of 140 stores has been completed and sales from those stores will be contributing to fourth-quarter income.
“They say those stores are performing better than the chain as a whole. Better than 7 percent,” said Nelson.
Sears’ U.S. stores posted an operating profit of $202.8 million, up from $158 million a year earlier. International stores had a loss of $5.9 million, mainly because of slow sales in Mexico, in contrast to a $1 million profit last year.
In the nine months, the retail division’s operating profit rose 37 percent, to $525.7 million from $385.1 million a year earlier. Revenue increased 9.4 percent, to $22.19 billion from $20.28 billion.
Allstate, now 20 percent publicly held, said third-quarter net income fell to $193.9 million, or 43 cents a share, from $325.7 million, or 72 cents a share, a year earlier.
Estimates of continued losses from January’s California earthquake hurt Allstate’s results, said Jerry Choate, chief executive. Late last month Allstate raised its estimated losses from the earthquake 37 percent, to $1.3 billion, because of delayed claims from damage only now being discovered in the rebuilding process.
“We’re far along in the rebuilding process, and our intent is to not have it affect ongoing results,” Choate said in an interview.
Choate said he was pleased that, despite the catastrophic losses, “the underlying business results were among the best in our company’s history.”
For the first nine months, Allstate’s net income was $320.7 million, or 71 cents a share, down from $1.04 billion, or pro forma earnings per share of $2.42, in 1993.
