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Sears chief buying something?

Report shows earnings increase, sparks speculation

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Shoppers walk past a Sears store in Milpitas, Calif. Sears reported better-than-expected earnings.

Shoppers walk past a Sears store in Milpitas, Calif. Sears reported better-than-expected earnings.

Paul Sakuma, Associated Press

CHICAGO — It wasn't just that Sears Holdings Corp. reported better-than-expected second-quarter earnings on Thursday despite the fact that shoppers were spending less money in their stores that caught analysts' eyes.

It was a couple paragraphs tucked deep into the report about Chairman Edward Lampert's authority to invest some of Sears' surplus cash and Lampert's statement about how Sears is "prepared to invest substantial amounts of capital . . . "

That, they said, is the big news about the nation's third-largest retailer. That is a hint that Lampert, a reclusive billionaire who engineered Kmart's turnaround before engineering a $11.9 billion purchase of Sears, is up to something big. And that something, they say, may have nothing to do with selling more lawnmowers and running shoes at Sears and Kmart.

"He's going to buy something else," said Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based retail consulting and investment banking firm.

The reasons, they say, start with the way the nation's third-largest retailer has exceeded expectations — not by increased sales but by cutting costs.

"One thing for sure is that when you are downsizing the way they're doing, when the customer base you have is not sustaining a fundamentally profitable store, you are not building for the future," said George Rosenbaum, chairman of Leo J. Shapiro and Associates, a Chicago-based retail consulting firm.

Or as Davidowitz said, "No retailer in history has ever survived losing this amount of market share and comp (comparable) store sales. When the quarter comes (that) earnings flatten out and sales keep going down, we're looking at the Titanic."

Analysts don't know where the money might be invested. Lampert did not specify in his statement. He said only that besides buying back company shares and investing in the company itself, "We are prepared to invest substantial amounts of capital if we identify other attractive investment opportunities which have the potential for returns we believe appropriately compensate the company for the associated risks."

According to the company, as of July 29, a portion of that surplus cash was being invested in marketable securities, derivatives and other financial instruments.

Sears shares fell $8.71, or 5.8 percent, to close at $141.29 on the Nasdaq Stock Market.

Sears — which also reported that it repurchased 700,000 common shares at a cost of $91 million in the quarter — did not have a conference call with reporters to discuss the latest results, as most companies do. And a Sears spokesman declined to elaborate on what was in the report or comment on speculation that Sears plans to make any major investments.

The company did stress, though, that it remained committed to doing what it could to improve the shopping experience at its stores.

"While we are making progress, we must continue to focus on our customers . . . and continue to give our customers reasons to shop our stores more frequently," he said.

But analysts contend the numbers do not back that up, saying that Sears is not investing nearly as much money in their stores as other giant retailers, including Wal-Mart.

Morningstar analyst Kim Picciola pointed out that as revenues have fallen, so has the percentage of selling and administrative costs, from 22.8 percent of total revenues in the first quarter to 22.1 percent this quarter.

"That's how you know they are doing things to cut costs out of the business because if they had the same expenses and their sales dropped the (percentage) would be going up," she said.

According to the report, Sears' net income grew to $294 million, or $1.88 per share, from $161 million, or 98 cents per share, a year ago.

Excluding a gain of $22 million, or 14 cents per share, on the settlement of Visa/MasterCard antitrust litigation, Sears earned $272 million, or $1.74 per share, in the latest period.

Total revenues declined to $12.8 billion from $13.2 billion last year.

The results beat Wall Street expectations for profit of $1.67 per share on sales of $12.51 billion, according to a poll by Thomson Financial.