Capital Markets

In Weak Economy, a Tale of Two Retailers

Quarterly results are hurt at Sears and helped at Costco, but Wall Street is surprised in both cases.
Stephen TaubMay 29, 2008

Two big retailers Thursday reported earnings that surprised Wall Street — one on the upside and one on the downside, but both related to a weak economy.

Sears Holdings Corp., controlled by billionaire hedge fund manager Edward Lampert, reported a $56 million loss, or 43 cents per share, on $11.1 billion in sales in the fiscal first quarter. Wall Street, however, had been looking for a 15-cent-a-share profit on sales of more than $11.4 billion.

What’s more, the embattled retailer said same-store sales at its Sears stores fell 9.8 percent domestically and 7.1 percent at its Kmart stores.

“The comparable store sales declines at both Kmart and Sears Domestic continue to reflect increasing competition and weakness in the general economy and housing market, as well as the impact on our customers of the increased costs of consumer staples such as food and gas,” said the company in a press release.

Sears’s stock slumped more than 4 percent on the news despite the fact the company announced it will repurchase up to an additional $500 million of its shares. This authorization, when added to the $143 million remaining as of May 3 under previous authorizations, provides a current authorization of $643 million.

The news was decidedly better at Costco, although that retailer too was impacted by the weak economy. According to analysts quoted by Bloomberg News, while Sears’s product lines were “squarely in the middle of the economic slowdown,” Costco’s bulk-sales approach — especially for food and gasoline — led affluent buyers to increase their bargain-hunting.

The largest U.S. warehouse club said third-quarter earnings surged 32 percent, to $295.1 million, or 67 cents a share, from a year earlier. Bloomberg noted that earnings beat the average estimate of 21 analysts by 2 cents per share.

Even so, Costco’s share price fell by more than 1 percent after CFO Richard Galanti told analysts via conference call that while the company had “pretty strong” gross margins in its fiscal fourth quarter last year, he does not expect the same for the fourth quarter this year, according to Reuters.