Sears Softens Policy On Debtors Decision Could Cost Retail Giant $400 Million, Cut Into Earnings

Sears, Roebuck & Co. said it could return as much as $400 million to customers it persuaded to pay credit-card debts after they filed for bankruptcy, which analysts said at worst would reduce earnings by a fifth.

Creditors often attempt to get people to agree to pay their debts after they seek bankruptcy protection. Sears, though, didn’t report some of those agreements to the judges - meaning it was collecting on debts the courts had wiped out.

The issue opens a financial and public relations can of worms for the second-largest U.S. retailer, analysts said. Two class-action complaints have been filed so far and Sears may be forced to pay penalties. The affair also recalls the 1992 scandal when Sears paid $8 million to settle charges it made unnecessary car repairs.

“It is an ill wind that will leave potential serious damage,” said Kurt Barnard, president of Barnard’s Retail Marketing Report.

Sears shares fell $3.87-1/2 to $47 on trading of 6.4 million shares, four times its three-month daily average.

Hoffman Estates, Ill.-based Sears Wednesday filed a motion in a U.S. Bankruptcy Court in Boston saying it will make repayments in cases where it didn’t file the so-called debt affirmations.

Sears will return to the court today for a hearing on potential compensatory and punitive damages. Judge Carol Kenner invited Sears to explain why the court shouldn’t impose a punitive damage of $500 for each of 2,733 cases in its district, or about $1.37 million.

Sears is making the payments to customers, even though it isn’t required to. That, plus a $100 gift certificate as an apology and its speedy response shouldn’t result in long-term damage, analysts said.

“This is not a major auto company stonewalling customers who may have bought a car with bad brakes,” said analyst Ed Weller of Robertson Stephens & Co. “This is model corporate behavior on the model of Johnson & Johnson dealing with the Tylenol problem.”

Chairman Arthur Martinez told analysts that customers across the U.S. had agreed to keep paying on $400 million in payments due dating back to 1992, which would hurt its earnings for the year.

He said the retailer wasn’t sure yet how many of the agreements weren’t cleared by the courts, so the repayments could be much lower.

Sears holds a secured interest in purchases made with its card, giving the company the right to reclaim purchased items when the buyer defaults on the credit card debt, or tries to wipe it out by filing for bankruptcy.

Sears then can say it will repossess the items to persuade debtors who file for bankruptcy to reaffirm their debts to the company.

The potential amount of damage to earnings ranged widely. Analyst Peter Schaeffer of Dillon Read estimated that Sears’s earnings could be cut by 25 cents to 50 cents a share.

If Sears had to repay all of the $400 million plus interest and penalties, earnings could be reduced by 82 cents a share, said analysts, though they expect the impact to be lower.

Sears, which had net income of $1.27 billion, or $3.12 a share last year, was expected to earn $3.62 a share in 1997, the average estimate of 33 analysts polled by IBES International Inc.

In 1992, Sears paid $8 million to California in an out-of-court settlement after customers accused employees of suggesting unneeded repairs. The company’s 2,700 auto repair advisers were taken off a commission-based pay scale and put on hourly wages.

“This is a ding, but it’s not major catastrophe,” said Dave Lunt, who manages Norwest Investment Management’s Value Growth mutual fund, which has 225,000 Sears shares. “Judging by what the market has done to others for similar things, this is pretty minor.”

About 300,000 people filed for Chapter 7 in 1996 who were in debt to Sears, said spokeswoman Drummond. Sears entered into reaffirmation agreements with 132,000 of those, or 44 percent.

The retailer tries to get customers to agree to continue paying debt to Sears both to recover the money and to allow the retailer to extend a modest line of credit - about $200 - for important household purchases, she said.

Debtors often agree to pay because they’re fearful of large creditors or are ignorant about their bankruptcy rights, said Charles Tatelbaum, a Clearwater, Fla., attorney.