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SHLD > SEC Filings for SHLD > Form 10-Q on 16-Nov-2012All Recent SEC Filings

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Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 28, 2012.
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 2,066 full-line and 52 specialty retail stores in the United States, operating through Kmart and Sears, and 483 full-line and specialty retail stores in Canada operating through Sears Canada Inc. ("Sears Canada"), a 96%-owned subsidiary. We 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 28, 2012. On December 30, 2011, we completed the spin-off to our shareholders of all the capital stock of Orchard Supply Hardware Stores Corporation ("Orchard") that was owned by Holdings immediately prior to the spin-off. Holdings has no significant continuing involvement in the operations of Orchard. Accordingly, the results for Orchard are presented as discontinued operations in the Consolidated Results of Operations.
On October 11, 2012, we completed the separation of our Sears Hometown and Outlet businesses ("SHO") through a rights offering transaction. Holdings has significant continuing cash flows with SHO due to various agreements between Holdings and SHO as discussed herein. Accordingly, the operating results for SHO through the date of the separation are presented within the Consolidated Results of Operations and Sears Domestic segment. However, after the separation date, the Consolidated Results of Operations will not include the operating results of SHO, but will reflect the transactions under certain newly executed agreements, which will impact our future results of operations, including potential decreases in revenues and gross margin. While potential decreases in revenues will likely be offset by increases in revenues as a result of the various agreements referred to above and described in greater details below, we do not anticipate a corresponding increase in gross margin as a result of these agreements.
In connection with the separation, the Company and certain of its subsidiaries have entered into various agreements with SHO, which, among other things, (1) govern the principal transactions relating to the rights offering and certain aspects of our relationship with SHO following the separation, (2) establish terms under which Holdings and certain of its subsidiaries will provide SHO with services, and (3) establish terms pursuant to which Holdings and certain of its subsidiaries will obtain merchandise for SHO.
These agreements were made in the context of a parent-subsidiary relationship and were negotiated in the overall context of the separation. The Company believes that the methods by which costs are allocated are reasonable and are based on prorated estimates of costs expected to be incurred by Holdings. A summary of the nature of related party transactions is as follows:
SHO obtains a significant amount of its merchandise from Holdings, leveraging the benefit of Holdings' purchasing organization. We have also entered into certain agreements with SHO to provide logistics, handling, warehouse and transportation services. SHO also pays a royalty related to the sale of Kenmore, Craftsman and DieHard products and fees for participation in the Shop Your Way Rewards program.

SHO receives commissions from Holdings for the sale of merchandise made through, extended service agreements, delivery and handling services and credit revenues.

Holdings provides SHO with shared corporate services. These services include accounting and finance, legal, human resources, information technology and real estate.

The financial impact of these agreements will be presented within the Consolidated Results of Operations after the separation date. While the Company believes that the methods by which costs are allocated pursuant to these agreements are reasonable and are based on prorated estimates of costs expected to be incurred by Holdings, these agreements may impact our future results of operations.
On November 13, 2012, we completed a partial spin-off (the "spin-off") of our interest in Sears Canada. Prior to the spin-off, Holdings owned approximately 96% of the issued and outstanding common shares of Sears Canada. Following the spin-off, Holdings was beneficial holder of approximately 51% of the issued and outstanding common shares of Sears Canada, and as such, Holdings expects to maintain control of Sears Canada and will continue to consolidate the results of Sears Canada.

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