In Fitch's system, a BBB rating means there's currently a low expectation of credit risk, and a company's ability to pay its long-term financial commitments is considered adequate. The minus denotes relative status within the rating, so Sears' downgrading in this case represents downward movement only within BBB, which is the lowest investment-grade category. An F3 rating also means adequate ability to pay, except that it applies to short-term obligations.

Sears' comparable store sales declined 1.9% in the first nine months of 2004, above a 2.7% decline in 2003. According to the rating service, 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.

Moreover, according to Fitch, while Sears has made 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.