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Fitch Lowers Sears' Rating

CHICAGO-Fitch Ratings has moved Sears from a BBB to a BBB-, citing difficulties the retail giants difficulties with sales and margins.

By Dees Stribling | Updated on October 25, 2004

CHICAGO-Fitch Ratings has lowered its ratings of the senior unsecured notes of Sears, Roebuck & Co. and Sears Roebuck Acceptance Corp. (SRAC) to BBB- from BBB, and SRAC’s commercial paper rating to F3 from F2. “It’s taking a little longer than anticipated for Sears to overcome its operating weaknesses,” Philip M. Zahn, an analyst at Fitch who tracks Sears, tells GSR. “There are new people in place there, and they have new ideas, but it will take time for them to turn things around.”

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.

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