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| SHLD > SEC Filings for SHLD > Form 10-Q on 28-May-2009 | All Recent SEC Filings |
28-May-2009
Quarterly Report
The following discussion should be read in conjunction with Part II, Item 7 of our Annual Report on Form 10-K for the year ended January 31, 2009.
OVERVIEW OF HOLDINGS
Holdings, the parent company of Kmart and Sears, was formed in connection with the March 24, 2005 Merger of these two companies. We are a broadline retailer with approximately 2,300 full-line and 1,250 specialty retail stores in the United States operating through Kmart and Sears and approximately 390 full-line and specialty retail stores in Canada operating through Sears Canada, a 73%-owned subsidiary. We currently conduct our operations in three business segments: Kmart, Sears Domestic and Sears Canada. The nature of operations conducted within each of these segments is discussed within the "Business Segments" section of Part I, Item 1 of our Annual Report on Form 10-K for the year ended January 31, 2009.
CONSOLIDATED RESULTS OF OPERATIONS
COSTS AND EXPENSES
Cost of sales, buying and occupancy 7,182 8,045
Gross margin dollars 2,873 3,023
Gross margin rate 28.6 % 27.3 %
Selling and administrative 2,573 2,815
Selling and administrative expense as a percentage of total
revenues 25.6 % 25.4 %
Depreciation and amortization 226 248
Gain on sales of assets (54 ) (32 )
Total costs and expenses 9,927 11,076
Operating income (loss) 128 (8 ) Interest expense (59 ) (66 ) Interest and investment income 5 11 Other loss (16 ) (1 )
Income (loss) before income taxes 58 (64 ) Income tax (expense) benefit (24 ) 28
Net income (loss) 34 (36 ) Income attributable to noncontrolling interest (8 ) (20 )
NET INCOME (LOSS) ATTRIBUTABLE TO HOLDINGS' SHAREHOLDERS $ 26 $ (56 )
EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO HOLDINGS'
SHAREHOLDERS
Diluted earnings (loss) per share $ 0.21 $ (0.43 )
Diluted weighted average common shares outstanding 121.0 131.7
References to comparable store sales amounts within the following discussion include sales for all stores operating for a period of at least 12 full months, including remodeled and expanded stores, but excluding store relocations and format changes.
Net Income (Loss) Attributable to Holdings' Shareholders and Earnings (Loss) per Share Summary
Net income attributable to Holdings' shareholders for the first quarter of 2009 was $26 million ($0.21 per diluted share) as compared to a net loss attributable to Holdings' shareholders of $56 million ($0.43 loss per diluted share) in the first quarter of 2008, and was affected by a number of significant items. Excluding these items, net income attributable to Holdings' shareholders for the first quarter of fiscal 2009 was $47 million, or $0.38 per diluted share. Significant items affecting our first quarter 2009 results include:
• a previously deferred gain on the August 2007 sale of Sears Canada's former headquarters building of $44 million ($19 million after tax and noncontrolling interest or $0.16 per diluted share) was recognized as Sears Canada ceased use of the building under the lease-back agreement signed at the time of the sale;
• domestic pension plan expense of $42 million ($25 million after tax or $0.20 per diluted share);
• mark-to-market losses on Sears Canada hedge transactions of $14 million ($6 million after tax and noncontrolling interest or $0.05 per diluted share); and
• a charge of $17 million ($9 million after tax and noncontrolling interest or $0.08 per diluted share) related to costs associated with store closings and severance.
As we previously reported, the Company has a legacy pension obligation for past service performed by Kmart and Sears, Roebuck and Co. associates. The annual pension expense included in our financial statements related to these legacy domestic pension plans was relatively minimal in recent years. However, due to the severe decline in the capital markets that occurred in the latter part of 2008 our domestic pension expense will increase by an estimated $160 to $175 million in 2009.
In the second quarter of 2008, we realized a gain of $62 million ($37 million after tax or $0.29 per diluted share) from the overturning of an adverse jury verdict relating to the redemption of certain Sears, Roebuck and Co. bonds in 2004. We do not expect a similar event this year; whereas, we do expect domestic pension expense to increase in the second quarter of 2009 by an amount comparable to the increase experienced in the first quarter.
Comparable Store Sales and Total Revenues
For the first quarter in fiscal 2009, total revenues declined $1.0 billion, or 9.2%, to $10.1 billion, as compared to $11.1 billion for the first quarter of fiscal 2008. The decrease includes a $208 million decline due to unfavorable foreign currency exchange rates and was primarily due to lower comparable store sales.
Domestic comparable store sales declined 7.4% in the aggregate, with Sears Domestic comparable store sales declining 11.7% and Kmart comparable store sales declining 2.1% for the quarter. The decline at Sears Domestic continues to be driven by categories directly impacted by housing market conditions (including the home appliances, lawn & garden and tools categories) and lower apparel sales. The decline in comparable store sales at Kmart was driven by a decline in apparel, partially offset by an increase in sales of home electronics, as well as the benefit of assuming the operations of its footwear business from a third party effective January 2009. See further discussion in the "Segment Operations" section below regarding changes in revenue in each of our segments.
Gross Margin
For the first quarter of fiscal 2009, we generated $2.9 billion in gross margin, as compared to $3.0 billion in the first quarter of fiscal 2008. The total decline of $150 million includes a $63 million decline related to the negative impact of foreign currency exchange rates on gross margin at Sears Canada. Gross margin dollar declines primarily reflect the negative gross margin impact of lower overall sales.
While gross margin dollars declined, gross margin as a percentage of total revenues (our "gross margin rate") increased. Our gross margin rate increased 130 basis points to 28.6% in the first quarter of fiscal 2009, as compared to 27.3% for the first quarter of fiscal 2008. The increase in gross margin rate includes increases of 240 basis points at Sears Domestic and 70 basis points at Kmart and was mainly the result of improved inventory management. The increase in domestic gross margin rate was partially offset by a decline in gross margin rate at Sears Canada.
Selling and Administrative Expenses
For the quarter, our selling and administrative expenses decreased $242 million as compared to the first quarter in fiscal 2008. The decline in selling and administrative expenses mainly reflects our focus on controlling costs and includes a decrease in advertising expenses of $107 million as well as an $84 million decrease in payroll and benefits expense. These declines were somewhat offset by expenses incurred for domestic pension plans of $42 million and store closing costs and severance of $17 million. Our selling and administrative expenses as a percentage of total revenues ("selling and administrative expense rate") was 25.6% for fiscal 2009, as compared to 25.4% for the first quarter of fiscal 2008. The slight increase in our selling and administrative expense rate is primarily the result of lower expense leverage given lower overall sales results.
Depreciation and Amortization
Depreciation and amortization expense decreased by $22 million during the first quarter of fiscal 2009 as compared to the same period in fiscal 2008. The decrease is primarily attributable to additional property and equipment becoming fully depreciated since the first quarter of fiscal 2008, thereby decreasing our depreciable asset base.
Gains on Sales of Assets
We recorded total gains on sales of assets of $54 million during the first quarter of 2009, as compared to $32 million in the first quarter of fiscal 2008. The increase in gains on sales of assets was due to a $44 million gain recognized by Sears Canada on the sale of its former headquarters.
Sears Canada sold its headquarters office building and adjacent land in Toronto, Ontario in August 2007. Sears Canada leased back the property under a leaseback agreement through March 2009, at which time it finished its relocation of all head office operations to previously underutilized space in the Toronto Eaton Centre, Ontario. Given the terms of the leaseback, for accounting purposes, the excess of proceeds received over the carrying value of the associated property was deferred, and the resulting gain was recognized when Sears Canada no longer occupied the associated property.
Operating Income / Loss
For the quarter, we reported operating income of $128 million, as compared to an operating loss of $8 million for the first quarter of fiscal 2008. Operating income for the first quarter of 2009 includes expenses of $59 million
related to domestic pension plans and previously announced store closings and severance, as well as a gain on sale of assets at Sears Canada of $44 million. Excluding these items, operating income increased $151 million and was primarily the result of reductions in selling and administrative expenses, partially offset by lower gross margin dollars given lower overall sales.
Other Income / Loss
Other income / loss is primarily comprised of mark-to-market and settlement losses on Sears Canada hedge transactions (see Notes 3 and 4 to the Condensed Consolidated Financial Statements for further information regarding these transactions). Total net mark-to-market and settlement losses of $18 million were recorded on these transactions in the first quarter of fiscal 2009.
SEGMENT OPERATIONS
The following discussion of our business segment results is organized into three segments: Kmart, Sears Domestic and Sears Canada.
Kmart
Kmart results and key statistics were as follows:
13 Weeks Ended millions, except number of stores May 2, May 3, 2009 2008 Merchandise sales and services $ 3,593 $ 3,733 Cost of sales, buying and occupancy 2,735 2,866 Gross margin dollars 858 867 Gross margin rate 23.9 % 23.2 % Selling and administrative 814 856 Selling and administrative expense rate 22.7 % 22.9 % Depreciation and amortization 36 33 Gain on sales of assets (9 ) (1 )
Total costs and expenses 3,576 3,754
Operating income (loss) $ 17 $ (21 )
Number of stores 1,364 1,382
Comparable Store Sales and Total Revenues
For the quarter, Kmart's comparable store sales and total sales declined 2.1% and 3.8%, respectively. The decline in total revenues primarily reflects the impact of lower comparable store sales. The 2.1% decline in Kmart comparable store sales during the first quarter of fiscal 2009 was primarily driven by a high single digit percentage decline recorded within the apparel category, partially offset by a low single digit percentage increase in the hardlines category (resulting from increased sales of home electronics) and the benefit of assuming the operations of its footwear business from a third party effective January 2009.
Gross Margin
For the quarter, Kmart generated $858 million in gross margin in fiscal 2009, as compared to $867 million in the first quarter of fiscal 2008, with the $9 million decline attributable to the negative gross margin impact of lower
overall sales. For the first quarter of fiscal 2009, Kmart's gross margin rate was 23.9%, as compared to 23.2% for the first quarter of fiscal 2008, an increase of 70 basis points. The increase in gross margin rate was mainly the result of improved inventory management.
Selling and Administrative Expenses
For the quarter, Kmart's selling and administrative expenses decreased $42 million as compared to the first quarter in fiscal 2008. The decline in selling and administrative expenses mainly reflects a reduction in advertising expenses of $22 million and a $17 million reduction in payroll expenses. These reductions were somewhat offset by expenses incurred for store closing and severance of $4 million. Our selling and administrative expense rate was 22.7% for fiscal 2009, as compared to 22.9% for the first quarter of fiscal 2008, and declined primarily as a result of the noted reduction in advertising and payroll expenses.
Operating Income / Loss
For the quarter, Kmart recorded operating income of $17 million, as compared to an operating loss of $21 million in the first quarter of fiscal 2008, an increase of $38 million. The increase is mainly due to reductions in selling and administrative expenses, partially offset by lower gross margin dollars generated as a result of lower overall sales.
Sears Domestic
Sears Domestic results and key statistics were as follows:
13 Weeks Ended millions, except number of stores May 2, May 3, 2009 2008 Merchandise sales and services $ 5,572 $ 6,100 Cost of sales, buying and occupancy 3,825 4,329 Gross margin dollars 1,747 1,771 Gross margin rate 31.4 % 29.0 % Selling and administrative 1,528 1,654 Selling and administrative expense rate 27.4 % 27.1 % Depreciation and amortization 166 183 (Gain) loss on sales of assets (1 ) 1
Total costs and expenses 5,518 6,167
Operating income (loss) $ 54 $ (67 )
Number of:
Full-line Stores(1) 926 933
Specialty Stores 1,245 1,166
(1) The period ended May 2, 2009 includes 856 Full-line stores and 70 Sears Essentials/Grand stores;
The period ended May 3, 2008 includes 858 Full-line stores and 75 Sears Essentials/Grand stores
Comparable Store Sales and Total Revenues
For the quarter, Sears Domestic's comparable store sales and total sales declined 11.7% and 8.7%, respectively. The decline in total revenues primarily reflects the impact of lower comparable store sales. Comparable store sales declines were driven by low double digit percentage declines in categories directly impacted by housing market conditions (including the home appliances, lawn & garden and tools categories) as well as a low double digit percentage decline recorded in the apparel category.
Gross Margin
Sears Domestic's gross margin dollars declined $24 million in the first quarter of 2009 as compared to the first quarter of 2008. Sears Domestic's gross margin rate was 31.4% during the first quarter of fiscal 2009, as compared to 29.0% in the first quarter of fiscal 2008, an increase of 240 basis points. The increase in gross margin rate was mainly the result of improved inventory management.
Selling and Administrative Expenses
For the quarter, selling and administrative expenses declined $126 million as compared to the first quarter of fiscal 2008. The decline was primarily due to a reduction in payroll expenses of $67 million, as well as a reduction in advertising expenses of $64 million. These reductions were somewhat offset by expenses incurred for pension plans of $42 million and store closing and severance costs of $5 million. For the quarter, Sears Domestic's selling and administrative expense rate was 27.4% in fiscal 2009, as compared to 27.1% for the first quarter of fiscal 2008. The selling and administrative expense rate increase is primarily a result of lower expense leverage given lower overall sales results.
Depreciation and Amortization
Depreciation and amortization expense decreased by $17 million during the first quarter of fiscal 2009 as compared to the same period in fiscal 2008. The decrease is primarily attributable to additional property and equipment becoming fully depreciated since the first quarter of 2008, thereby decreasing our depreciable asset base.
Operating Income / Loss
For the first quarter in fiscal 2009, Sears Domestic recorded operating income of $54 million, as compared to an operating loss of $67 million in the first quarter of fiscal 2008, an increase of $121 million. The increase is primarily the result of lower selling and administrative expenses, partially offset by a decline in gross margin dollars given lower overall sales.
Sears Canada
Sears Canada, a consolidated, 73%-owned subsidiary of Sears, conducts similar retail operations as Sears Domestic.
Sears Canada results and key statistics were as follows:
13 Weeks Ended May 2, May 3, millions, except number of stores 2009 2008 Merchandise sales and services $ 890 $ 1,235 Cost of sales, buying and occupancy 622 850 Gross margin dollars 268 385 Gross margin rate 30.1 % 31.2 % Selling and administrative 231 305 Selling and administrative expense rate 26.0 % 24.7 % Depreciation and amortization 24 32 Gain on sales of assets (44 ) (32 )
Total costs and expenses 833 1,155
Operating income $ 57 $ 80
Number of :
Full-line Stores 122 122
Specialty Stores 269 257
Total Revenues
Sears Canada's total revenues decreased 27.9% for the first quarter of fiscal 2009 as compared to the same period last year. The decrease in total revenues of $345 million includes a $208 million decline due to the impact of unfavorable exchange rates during the quarter. On a Canadian dollar basis, revenues decreased by $137 million, reflecting lower comparable stores sales across all major categories. We believe the decline in comparable store sales is mainly the result of declining consumer confidence and rising unemployment in Canada during the first quarter of 2009.
Gross Margin
Total gross margin dollars decreased $117 million for the first quarter of fiscal 2009 as compared to the same period last year and include a $63 million decline due to the impact of unfavorable exchange rates during the quarter. Gross margin decreased $54 million on a Canadian dollar basis as a result of lower overall sales. For the quarter, Sears Canada's gross margin rate decreased to 30.1% from 31.2% in the first quarter of fiscal 2008 primarily due to increased markdowns taken to clear merchandise as a result of declines in sales.
Selling and Administrative Expenses
For the first quarter of fiscal 2009, Sears Canada's selling and administrative expenses declined $74 million and includes severance expenses of $8 million recorded during the first quarter of 2009. The decrease in expenses primarily reflects a decline of $54 million due to the impact of exchange rates as well as Sears Canada's response to reduce expenses as a result of declining revenues in a difficult economic environment.
Gains on Sales of Assets
Sears Canada recorded total gains on sales of assets of $44 million during the first quarter of 2009, as compared to $32 million in the first quarter of fiscal 2008. During the first quarter of 2009, Sears Canada recognized a $44 million gain related to the August 2007 sale of its former headquarters. During the first quarter of fiscal 2008, Sears Canada benefited from a $32 million gain from the sale of its Calgary downtown full-line store.
Operating Income
Sears Canada's operating income decreased $23 million for the first quarter of fiscal 2009. The decrease in operating income includes a $14 million decline due to the negative impact of foreign currency exchange rates and reflects the above noted decreases in sales, gross margin and selling and administrative expenses.
ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
Cash Balances
Our cash and cash equivalents include all highly liquid investments with original maturities of three months or less at the date of purchase. Our cash balances as of May 2, 2009, May 3, 2008 and January 31, 2009 are detailed in the following table.
millions May 2, May 3, January 31,
2009 2008 2009
Domestic
Cash and equivalents $ 309 $ 512 $ 337
Cash posted as collateral 12 17 14
Credit card deposits in transit 194 127 159
Total domestic cash and cash equivalents 515 656 510 Sears Canada 626 757 663
Total cash and cash equivalents 1,141 1,413 1,173 Restricted cash 108 - 124
Total cash balances $ 1,249 $ 1,413 $ 1,297
We had total cash balances of $1.2 billion at May 2, 2009 as compared to $1.4 billion at May 3, 2008 and $1.3 billion at January 31, 2009. Cash and cash equivalents declined by $32 million during the first quarter of fiscal 2009, mainly as a result of cash used for share repurchases of $40 million, contributions to our pension and post-retirement benefit plans of $52 million and capital expenditures of $76 million. These amounts were offset by a net increase in borrowings of $111 million. The increase in borrowings was primarily due to short-term borrowing under our credit facility to finance inventory purchases made in anticipation of the spring season.
At various times, we have posted cash collateral for certain outstanding letters of credit and self-insurance programs. Such cash collateral is classified within cash and cash equivalents given we have the ability to substitute letters of credit at any time for this cash collateral and it is therefore readily available to us.
Credit card deposits in transit include deposits in-transit from banks for payments related to third-party credit card and debit card transactions.
Restricted cash consists of certain Sears Canada's cash accounts, which have been pledged as collateral for letters of credit obligations issued under its offshore merchandise purchasing program and with counterparties
related to outstanding derivative contracts, as well as funds held in trust in accordance with regulatory requirements governing advance ticket sales related to Sears Travel.
Our May 2, 2009 and January 31, 2009 cash balances exclude $16 million and $38 million, respectively, on deposit with The Reserve Primary Fund, a money market fund which has temporarily suspended withdrawals while it liquidates its holdings to generate cash to distribute. As a result, we reclassified these amounts from cash to the prepaid expenses and other current assets line within our Condensed Consolidated Balance Sheets at May 2, 2009 and January 31, 2009. We expect to receive our remaining $16 million investment during fiscal 2009.
We classify outstanding checks in excess of funds on deposit within other current liabilities and reduce cash and cash equivalents when these checks clear the bank on which they were drawn. Outstanding checks in excess of funds on deposit were $240 million, $290 million and $228 million as of May 2, 2009, May 3, 2008 and January 31, 2009, respectively.
Operating Activities
Holdings used $90 million of cash for operations during the first quarter of fiscal 2009. For the first quarter of fiscal 2008, our operations used cash of $517 million. Our primary source of operating cash flows is the sale of goods and services to customers, while the primary use of cash in operations is the purchase of merchandise inventories. The decrease in cash used for operating activities in the first quarter of fiscal 2009 as compared to the same period in . . .
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