Sears Holdings (SHLD) Q1 Earnings

Sears Holdings Corporation (SHLD) today reported net income of $216 million, or $1.40 per diluted share, for the first quarter ended May 5, 2007, compared with net income of $180 million, or $1.14 per diluted share, for the first quarter ended April 29, 2006 (22% growth). Our quarterly results included the net favorable impact of certain significant items as described in the "Significant Items" section below.

Same Store Sales

Domestic comparable store sales declined 3.9% during the first quarter of fiscal 2007. Sears Domestic comparable store sales declined 3.4% for the quarter, while Kmart comparable store sales declined 4.4%. We believe these declines reflect both increased competition and the impact of external factors such as rising energy costs, a slower housing market and poor weather conditions during the latter part of the first quarter of fiscal 2007. Land's End and children's apparel experienced sales gain, marking the third consecutive quarter of apparel segments improvement.


Operating Income

For the quarter, our operating income increased $62 million to $393 million in fiscal 2007, as compared to $331 million in the first quarter of fiscal 2006. This increase primarily reflects: 1) a gain of $30 million for a legal settlement reached in connection with a contractual dispute, 2) a $27 million curtailment gain recorded for amendments made by Sears Canada to its post-retirement benefit plans, and 3) a $15 million gain for insurance recoveries received on claims filed for certain of our property damaged by hurricanes during fiscal 2005.

Cash

We had cash and cash equivalents of $3.4 billion at May 5, 2007 (of which $3.1 billion is domestic and $0.3 billion is at Sears Canada) as compared to $3.2 billion at April 29, 2006 and $4.0 billion at February 3, 2007. The decline from February 3, 2007 primarily reflects increased merchandise inventories given seasonal shifts in our inventory levels in support of the spring/summer-selling season. Merchandise inventories at May 5, 2007 were approximately $10.3 billion, as compared to $9.6 billion at April 29, 2006. Additionally, we spent $113 million on capital expenditures and made debt repayments of $47 million, net of new borrowings, during the first quarter of fiscal 2007.

Swaps

Gains were partially offset by investment losses of $21 million ($13 million after tax or $0.08 per diluted share)incurred during the quarter on our total return swap investments.

What to think? Not much either way really, earnings improved so we can't complain there. True is is because of "certain item" but cash is cash and profits are profits. It is clear the housing slowdown is hurting Sear as they do a ton of home related sales (appliances, paint, furnishings etc.). Apparel sales continue to improve at Sears and that is good news as once housing turns around, and, yes it will, retail operation should see significant improvement. If we strip out all the "other factors" affecting earnings for 2006 and 2007, earnings were flat. Considering the relationship Sears has with the housing market through both it's appliance sales and "home services" division, this bodes very well. In short, good quarter, not great, but given housing, good is just fine.