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Earnings Preview: Sears to report 2nd-qtr results

NEW YORK (AP) — Sears Holdings Corp. is expected to report a wider loss in its second quarter compared with a year ago. The results, to be released before the markets open Thursday, underscore the challenges it faces as it tries to turn around its ailing business.

WHAT TO WATCH FOR: The company, which operates Kmart and Sears, is expected to offer some insight into how the back-to-school selling season fared, in addition to its turnaround plans.

A string of retailers including Wal-Mart Stores Inc. and Macy's have reported disappointing quarterly results and have issued bleaker outlooks as shoppers grapple with an uncertain economy. In particular, many low-to-middle-income shoppers are continuing to struggle with a 2 percentage-point increase in the Social Security payroll tax since Jan. 1. That means take-home pay for a household earning $50,000 a year has been sliced by $1,000. Analysts will dissect any comments from Sears about how its shoppers are faring.

Such a tough environment is expected to put even more pressure on Chairman and hedge fund billionaire Edward Lampert, who added the role of CEO in January. Lampert succeeded Louis D'Ambrosio, who had been CEO since February 2011 and who left for family reasons.

Lampert has a tough road ahead. He engineered the combination of Sears and Kmart in 2005, about two years after he helped bring Kmart out of bankruptcy.

In May, Sears announced that it's considering selling its protection-agreement business in an ongoing effort to raise cash as it struggles to reverse its fortunes. The unit runs the part of the business that sells customers service contracts that guarantee to fix or replace appliances if they break within a certain timeframe. Analysts will want updates on Sears plans to sell that business.

The strategy follows an announcement last November when Sears said it would consider ways to raise at least $500 million in 2013. Lampert told investors in May that Sears would continue to offer such service agreements to customers even if it sold the business. He likened it to how most retailers have sold their credit card businesses to financial institutions but still offer branded credit cards.

In an effort to assure analysts, company officials said in May that Sears has $7 billion of liquidity or assets that can be quickly converted to cash.

Last year, the Hoffman Estates, Ill.-based company announced plans to restore profitability by aggressively cutting costs, reducing inventory, selling off some assets and spinning off others. Those moves helped it reduce net debt by $400 million and generated $1.8 billion in cash from the asset sales in the latest fiscal year.

But the company has struggled with its stores.

Sears' middle-income shoppers have been hit hard by a slowly recovering economy, but critics have long said the company hasn't done enough to invest in its stores to compete with Wal-Mart, Target Corp. and others. The company has posted six straight years of declining sales at stores open at least a year.

Sears has said that it has been making changes in stores, such as giving iPads and iPod Touch devices to sales staff to research products and help customers on the sales floor.

The company is also focusing on a loyalty program, called "Shop Your Way." The program now accounts for 60 percent of its revenue. Lampert says that members spend 18 percent more than nonmembers, and annual sales per member have increased by over 8 percent.

Sears launched in May at its namesake department stores a program that will allow shoppers unable to qualify for credit to lease such big purchases as electronics, home appliances, furniture and mattresses. The program, tested last September in 10 stores, is being rolled out to all 900 department stores. Sears launched the program with leasing service WhyNotLeaseIt.

Analysts will also want to know how clothing sales are faring. Sears' first quarter marked the seventh straight quarter of sales gains in clothing. But some analysts believe that Sears has benefited from the woes of J.C. Penney Co. The rival's business has been in free fall after a strategy implemented by its former CEO Ron Johnson to eliminate most discounts backfired. In April, Penney rehired Johnson's predecessor Mike Ullman who is adding back more frequent sales. That move could have derailed Sears' clothing sales, analysts say.

WHY IT MATTERS: Sears, which operates more than 2,600 stores in the U.S. and Canada, is considered a bellwether of consumer spending for low- to middle-income shoppers.

WHAT'S EXPECTED: For the second quarter, analysts on average expect the chain to report a loss of $1.10 per share on revenue of $9.01 billion, according to FactSet.

LAST YEAR'S QUARTER: A year ago, Sears lost $1.25 per share, or 86 cents on an adjusted basis, on revenue of $9.47 billion.

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