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Sears: Credit Division Sale Lets Us Focus on Retail

With the agreement to sell its credit card division to Citigroup for $3 billion last week, Sears, Roebuck and Co. faces the future in a retailing environment plagued by markdowns, promotions and clearance activity.

“Sears had introduced a substantial measure of financial risk into their business model,” said John Prunier of Petsky Prunier LLC, New York, an investment bank specializing in the direct marketing and marketing services sectors. “The decoupling of credit from merchandising has occurred at a natural point in time. Through their ongoing marketing alliance, they will continue to enjoy a welcome revenue stream without having to perform the banking function.”

Still, he said, Sears now will be unable to sell as deeply into less-creditworthy segments of its customer base than if it owned the card itself.

Sears spokesman Edgar P. McDougal said the credit card division sale should be transparent to customers, including offers of credit, with no change in offers regarding credit availability.

“What this allows us to do is remain completely focused on growing our core retail and related services business, which is primarily product repair services,” he said. “As we get closer to the closing date, we'll be in a better position to say how it will impact specific parts of our retail business.”

The Hoffman Estates, IL, company expects to receive $200 million annually from Citigroup based on things such as new account and credit sales generation activities. It also expects annual savings exceeding $200 million as Citigroup absorbs costs associated with Sears' zero percent financing program.

Kurt Barnard, president of Barnard's Retail Forecasting LLC, Upper Montclair, NJ, said the deal is a healthy one for Sears.

“It permits management of Sears to position its department stores in such a way as to confront mounting competition from all sides in a very effective way,” he said. “Sears is a merchandizing and retailing operation and not a financial operation. It is confronted with Home Depot, Lowe's, a lot of fashion apparel stores and the discount stores that are developing into a major element. There are [also] companies like Kohl's, and every department store is a competitor for Sears.”

Also last week, Sears lowered its forecast for the year because of weak retail sales, though it announced solid earnings for the second quarter. Net income for the period ended June 28 was $309 million, up from $229 million a year ago.

The company said the decline in comparable apparel sales has slowed to the low single digits, helped by the continuing rollout of Lands' End merchandise. Comparable apparel sales in stores carrying Lands' End merchandise were 2 to 4 percentage points better than those without it. Also, Sears' new Covington clothing line has generated $200 million and is on pace to become a $500 million-a-year brand, officials said.

September is another important milestone as Lands' End merchandise will be available in all of Sears' 870 department stores by then. Sears acquired Lands' End in June 2002 for $1.9 billion.

“I think so far it's been OK,” David Abella of Rochdale Investment Management, New York, said of the Sears-Lands' End marriage. “I think a lot of the naysayers thought that given the [companies'] slightly different demographics, some thought Lands' End sales would fall off the cliff and [its] catalog sales would fall off” since a Lands' End shopper wouldn't buy because of an association with Sears.

Barnard also expects Sears to improve its performance in the next six to 12 months. He mentioned that the company is experimenting with five off-mall stores that will include food in their assortment of merchandise.

“If that works out, they will roll them out,” he said.

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