May 1, 2012
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Sears profit forecast cheers investors

May 1, 2012

Retailer Sears Holdings gave a stronger-than-expected quarterly outlook as it benefited from fewer appliance discounts and improved sales of higher-margin goods like apparel and footwear, sending its shares up nearly 12 percent.

The news on Tuesday, the day before the company's annual shareholder meeting, surprised some analysts who were looking for an improvement in earnings before interest, taxes, depreciation and amortization only later in the year.

The operator of Sears department stores and the Kmart discount chain said it expected to report EBITDA of $135 million to $195 million, excluding special items, for the first quarter ended on April 28.

"The results are certainly encouraging; there's no doubt about it," said Imperial Capital Managing Director Mary Ross Gilbert, who was looking for EBITDA of $45 million, and about $55 million to $115 million after adjusting for pension funding costs.

"We were expecting the vast majority of the improvement to come in the fourth quarter," Gilbert said.

Sears now expects a 1.3 percent drop in sales at stores open at least a year in the first quarter. That is an improvement over the 3.4 percent decline of the fourth quarter and the year-earlier 3.6 percent fall.

"While these results are a nice recovery from the fourth quarter, they still do not point to the cash flow trends necessary to finance the business without selling additional assets," Credit Suisse analyst Gary Balter said.

The retailer, which is controlled by Chairman Edward Lampert, in February announced plans to raise cash by selling some prime real estate and spinning off its Sears Hometown and Outlet businesses and certain hardware stores.

Both Balter and Gilbert worried about the company's future cash needs, especially in 2013, when it faces higher pension costs.

Balter estimated Sears would need about $1.4 billion in EBITDA next year, assuming no change in working capital and no asset sales to offset pension, interest, and capital expenditures.

"That remains the challenge and is why we believe that further dismemberment of this chain, including spinning off Canada and selling or spinning Lands' End remains likely," Balter said.

Sears expects to report net income between $155 million and $195 million, or $1.46 to $1.84 a share, for the quarter, compared with a year-earlier net loss of $165 million, or $1.53 a share.

The first-quarter profit outlook includes about $235 million of gains from the sale of certain U.S. and Canadian stores, the company said.

Sears sees same-store sales dropping 1.6 percent at its Kmart unit and 1 percent at its namesake department stores in the United States on weak electronics sales.

Its Canadian arm, Sears Canada, also expects to report a same-store sales decline of 6.2 percent for the quarter, mainly due to weak demand for electronics, home decor, hardware and apparel.

Sears will report its first-quarter results around May 17, it said in a statement on Tuesday.

Shares of Sears were up 11.7 percent at $60.05 in early trading. (Reporting By Dhanya Skariachan in New York; Editing by Lisa Von Ahn)

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