08/21/2013 07:42 EDT | Updated 10/21/2013 05:12 EDT

Sears Canada Revenue Drops 9.6 Per Cent; Company Says Transformation Plan Working

TORONTO - Sears Canada says sales of clothing and accessories — an area where it competes with U.S. retailer Target — picked up in the latest quarter, while categories that have traditionally driven the company's results, like mattresses and furniture, slipped.

"If you think back through 18 months of our transformation, it was the big ticket businesses that really helped and grew through the first 12 months,"chief executive Calvin McDonald said in an interview Tuesday after the company reported disappointing second-quarter results.

"We now have momentum in our apparel business, three quarters in a row. I don't think that's happened for over seven years, where we've put that consistent trend together. And big ticket has slowed a little bit."

Sears (TSX:SCC) reported second-quarter revenue that was down 9.6 per cent from the same time last year. The national retailer's overall revenue for the 13 weeks ended Aug. 3 was $960.1 million, down from $1.06 billion a year earlier.

Part of the revenue decline was a reduced number of locations, but same-store sales were also down 2.5 per cent.

Sears would have posted an $11-million loss in the quarter except for an agreement to vacate two Toronto-area stores by March.

Sears reported Wednesday that its net income was $152.8 million or $1.50 per share, including an after-tax gain of $164.0 million.

Excluding the one-time gain related to giving up leases at two stores in Toronto and Mississauga, Sears would have lost 11 cents per share. Its loss a year earlier was $9.8 million or 10 cents per share.

McDonald attributed the slowdown in furniture and mattress sales to a weaker housing market and the company's transition to a new furniture program that Sears hopes will be more profitable.

Meanwhile, the pickup in same-store apparel sales indicates the company's transformation strategy — which has included a shift to higher-quality clothing items away from electronics — is resonating with customers, McDonald said.

"In the businesses that we overlap (with Target), we've invested in, we're committed to and we continue to see success," said McDonald. "And they're driving our results."

But retail analyst Wendy Evans said the fact that the retailer is struggling in what has traditionally been its strong suit means its hopes of turning the struggling business around are fading.

"I think it's looking very bad," said the Toronto-based founder of Evans and Company Consultants Inc.

"Their apparel sales and accessory sales were up a little bit, but the core business — the hardlines — lost ground. I think that's where they have had tremendous strength, so if they're losing ground there I think it's a bad sign."

Although Sears Canada, a publicly traded subsidiary of Sears Holdings Corp., has made some inroads with customers through its new assortment of clothing and accessories, Evans said she isn't sure if it will be enough to save the company.

"I don't think the odds are looking very good," she said.

"I think it does provide an opportunity for another U.S. or foreign entrant to purchase them, and I guess we'll see what plays out."

McDonald said the company isn't entertaining buyout offers and is focusing instead on continuing with its transformation plan.

He also noted that the retail landscape in Canada has been especially difficult given competition from new entrants as well as a cooler start to the summer and weak consumer confidence.

Minneapolis-based discount retailer Target (NYSE:TGT) reported a drop in its second-quarter earnings on Wednesday, citing cautious consumers and costs associated with the ramp up of its Canadian expansion.

The company, which had 68 stores open by the end of the second quarter and plans to open 56 more before the end of the year, earned $611 million, or 95 cents per share, in the quarter ended Aug. 3, compared with $704 million, or $1.06 per share, a year earlier.

On Tuesday, Sears announced plans to cut 245 jobs and outsource most of its IT work to the Philippines and the majority of its finance and payroll work to India.

"They're after as many cost-cutting measures as they can possibly find," Evans said.

"I think working smart is good, but hollowing out your key people and depending on external organizations in another country would seem to me to be a bit tenuous."

Sears Canada said the job cuts will be mostly at its head office in Toronto. The reductions will affect 138 of the jobs in its information technology department, 99 in finance and eight in payroll.

Sears Canada let go 700 workers across the country earlier this year in a bid to "right-size'' and restructure its business. About 360 of those jobs were from its department stores and another 300 from the distribution centres. The remaining cuts were to head office and other support areas.

About 200 of the latest cuts at Sears are in the Toronto area, 38 are in Montreal and six in Belleville, Ont.

Sears said the workload will be transferred to "external third-party providers whose business expertise includes updated systems and processes that can more efficiently perform the work involved."

While the company didn't provide a specific breakdown on how the work will be re-assigned, spokesman Vincent Power said a "contingent of workers" will be in Canada while the remaining work will be done overseas.

Employees were notified of the cuts Monday and will leave during the next three to six months.

On the Toronto Stock Exchange, Sears Canada shares closed down 22 cents, or 1.79 per cent, at $12.05 on Thursday.

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