Fitch Ratings Downgrades Sears' Sr. Notes to 'BBB-'; Outlook Negative

Business Wire, Oct 25, 2004

CHICAGO -- Fitch Ratings has lowered its ratings of the senior unsecured notes of Sears, Roebuck and Co. (Sears) and Sears Roebuck Acceptance Corp. (SRAC) to 'BBB-' from 'BBB', and SRAC's commercial paper rating to 'F3' from 'F2'. Sears had $2.9 billion of domestic senior term debt and approximately $800 million of commercial paper outstanding as of Oct. 2, 2004. The Rating Outlook is Negative.

Sears' operating performance year to date in 2004 is tracking well below Fitch's expectations, and operating weakness is expected to persist well into 2005. While Sears has made meaningful changes over the past several years to its store environment and merchandise offerings, and has significantly reduced overhead, these changes have yet to translate into stronger sales or margins. This reflects the underperformance of the company's apparel business and growing competitive pressures in its home goods segment.

Sears' comparable store sales declined 1.9% in the first nine months of 2004, on top of a 2.7% decline in 2003. Sales shortfalls have necessitated additional clearance activities, pressuring profit margins. Sears reported pretax earnings, adjusted to exclude non-comparable items and divested businesses, of $6 million in the nine months ended Oct. 2, 2004 compared with $428 million in the same period last year. Earnings in both periods include an estimated $300 million in revenues and cost savings as part of the Sears' ongoing relationship with Citigroup.

Sears will be challenged to reverse these negative operating trends given the tepid pace of the economic recovery, high oil prices, and growing competition from the discounters and big box specialty retailers. While Sears' management strives to improve its merchandising and marketing execution, it will also be giving its attention to a new off-mall growth initiative, including the retrofitting of the recently acquired Kmart and Wal-Mart sites. New additions to the company's management team add additional talent, but it will take time for the impact of these new managers to be felt.

The ratings continue to reflect sizable debt reduction from the proceeds of the sale of the company's credit business. Sears had $5.7 billion of debt as of Oct. 2, 2004 compared with close to $30 billion prior to the sale. Sears' adjusted debt to EBITDAR was 3.6 times in the twelve months ended Oct. 2, 2004 and is expected to move modestly higher for the full year. However, leverage is expected to gradually decline over the next few years to a level that is consistent with the 'BBB-' rating.

The company has solid liquidity with $2.9 billion of cash and investments as of Oct. 2, 2004 and a commercial paper program supported by a $2 billion unsecured, three-year revolver. The cash will be used in part to complete the acquisition of the Kmart sites in early 2005 and to reduce debt over the next few years. Sears is also expected to continue to repurchase shares using proceeds from the sale of the credit business.