Sears Sees Rise in Fourth Quarter Profits Despite Trading Losses

Sears Holdings forecast a rise in fourth-quarter earnings and its cash position, despite losses tied to derivatives trading.

Sears, whose chairman is hedge fund manager Edward Lampert, said its fourth-quarter forecast includes losses related to derivative transactions, known as total return swap investing.

Such derivative deals helped the retailer post strong third-quarter earnings. But Sears has said the transactions involve substantial risks and returns could vary significantly from quarter to quarter.

Sears said it expects net income of $750 million to $830 million, or $4.87 to $5.39 per share, for the fourth quarter ending Feb. 3. That includes a gain of about $20 million pretax from property sales, and losses for its swaps.

It expects to end the fiscal year with about $3.5 billion in cash and cash equivalents, excluding Sears Canada, up from the $2.1 billion in cash it reported in November.

Investors watch the retailer's cash position closely because the company has given Lampert authority to invest excess money as he sees fit. That has prompted speculation that he intends to buy stakes in other retailers.

Gary Balter, an analyst with Credit Suisse, said the cash position was higher than he expected and "points to a likely external investment next year as no stock was repurchased in the quarter."

While the company gave a strong fourth-quarter outlook, it continues to struggle with sales at its Sears and Kmart stores.

Sears reported on Wednesday that sales its U.S. Sears stores open at least a year fell 5.6% in the nine weeks ended Dec. 30, which included the key holiday shopping season, due to lower sales of lawn and garden products and appliances. It said the decline was partially offset by an improvement in women's apparel sales.

Sales at stores open at least a year at its Kmart chain fell 1.2% over the same period due to lower transaction volumes, although apparel sales rose.

Under Lampert, Sears has reported declining sales but hefty profit growth, thanks in part to cost-cutting. He has said that conventional retail metrics like same-store sales have limited value because they do not reflect how much retailers spend on items like markdowns to drive sales, or whether stores are profitable.