Sears Holdings Corp Thursday (1 March) reported higher sales and earnings for both the fourth quarter and full year, with much of the pickup attributable to improvements in its apparel business.

In an earnings report loaded with the special items and pro-forma expressions that have become standard since the acquisitions of Sears and Kmart and their subsequent combination, net income for the 14 weeks ended 3 February rose 26.5% to US$820m, or $5.33 a diluted share, from $648m, or $4.03, in the 13-week 2005 quarter.

Net revenue for sales and services was up 1.5% to $16.29bn from $16.04bn as domestic comparable-store sales declined 3.1%, including a 4.9% drop at Sears and a 0.9% dip at Kmart. Gross margins improved to 29.8% of sales from 28.3% on the strength of apparel.

The company attributed the drop in same-store sales to "the impact of increased competition and lower transaction volumes", but noted that increases in apparel and pharmacy helped to offset softness in other areas.

Aylwin Lewis, president and chief executive officer of the Hoffman Estates, Illinois-based retailer, commented, "Our improved apparel results are an indication of what can happen when we enhance our offerings and services to better meet customers' needs."

In a separate letter to shareholders, Edward Lampert, the hedge-fund wizard who is chairman and a major shareholder, noted that Lands' End had a "record year in profitability" with "significant improvement in the profit performance of Lands' End merchandise in our Sears stores." He also cited "continued improvement" in the apparel businesses of both Sears and Kmart, observing that "Kmart is further along in partnering with our sourcing and design groups."

He wrote, "Sears apparel has turned around the decline that occurred in 2005 when it moved away from the styles our customers wanted to buy. The team has made significant progress this year, and is focused on creating the kind of breakthrough improvement that would return Sears to its previous levels of profitability in this area."

The earnings report said that Sears erred in 2005 by turning to a more "fashion-forward" apparel assortment.

Lampert's note also bemoaned Sears' EBITDA (earnings before interest, taxes, depreciation and amortization) performance, telling shareholders that Sears had the second-lowest EBITDA margins of the top ten retailers in the US, ahead of only low-margin operator Costco. Sears ranks fifth in sales in this group.

While EBITDA as a percentage of sales at Sears sits at 6.9%, "Lowe's, Kohl's, Home Depot and Target all have EBITDA margins above 10%," the chairman said. "We also lag many of our competitors on a sales and profit-per-square foot basis. Narrowing these gaps in margins and space productivity represents a significant value-creation opportunity for Sears Holdings shareholders."

For the full year, net income rushed ahead 73.7% to $1.49bn, or $9.57 a diluted share, from $858m, or $5.59, in fiscal 2005. Sales were up 8.4% to $53.01bn from $49.91bn but were down when compared to the $53.96bn in sales had Kmart and Sears been part of the same company for the entirety of 2005. Comparable-store sales declined 3.7%.
Gross margin was 28.7% of sales compared to 27.4% in 2005.

Sears operates about 3,800 full-line and specialty stores.