Fitch Ratings Revises Sears' Outlook To Negative

Business Wire, Sept 26, 2002

Business Editors

NEW YORK--(BUSINESS WIRE)--Sept. 26, 2002

Fitch Ratings has revised its Rating Outlook on Sears, Roebuck and Co. (Sears) and Sears Roebuck Acceptance Corp. (SRAC) to Negative from Stable. Fitch currently rates Sears' and SRAC's senior notes 'A-' and commercial paper 'F2'. Approximately $17.0 billion of debt is affected by this action.

The change in the Outlook reflects Sears' weak sales trends, the unknown impact from its mostly completed major store modification effort, particularly in light of the current economy, and concerns surrounding the overall retail environment. In addition, Sears faces growing competition from the discounters, as well as specialty apparel and hard goods retailers. Another concern is the expansion of appliance offerings by the home improvement retailers, which could cut into Sears core appliance business over the intermediate term. Sears has recorded mid-single digit comparable store sales declines over the past year, due to weak apparel sales and disruptions from store remodeling activities. The company expects comparable store sales to continue to decline over the balance of 2002.

Despite these challenges, Sears has made good progress in reducing costs in its retail business, and has managed its inventories carefully, enabling it to generate improved margins in 2002. The company's operating margin (Earnings before interest and taxes) increased to 9.4% in the twelve months ended 6/30/02, from 8.9% in 2001. In addition, Sears has begun to generate growth in its credit business, as receivable growth from the Sears Gold MasterCard has more than offset declines in the Sears Card. A portion of the decline in the Sears card receivables is due to the substitution of the Sears Gold MasterCard for the Sears card. Overall portfolio quality trends have been steady, though Fitch foresees the potential that these trends could be pressured by prolonged economic weakness.

Looking ahead, Fitch will be monitoring Sears' progress in turning around its apparel business, and sustaining its leadership position in appliances in a difficult retail environment. Fitch will also continue to monitor trends in Sears' credit business.

Sears sells apparel, home and automotive products through approximately 870 full-line stores and 1,300 specialty stores nationwide. The specialty stores include Sears' dealer stores, National Tire and Battery, Sears Hardware, Orchard Hardware (in California) and The Great Indoors. In June 2002, Sears acquired Lands' End, a direct merchant of traditionally styled, classic clothing offered to customers through catalogs and online. Sears also has a sizable credit business, with receivables of more than $28 billion, and a services business that is engaged in product installation and repair, service contracts and home improvements. In addition, Sears is the majority owner of Sears Canada.