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| SHLD > SEC Filings for SHLD > Form 10-K on 20-Mar-2013 | All Recent SEC Filings |
20-Mar-2013
Annual Report
We have divided our "Management's Discussion and Analysis of Financial Condition
and Results of Operations" into the following six sections:
• Overview of Holdings
• Results of Operations:
Fiscal Year
Holdings' Consolidated Results
Business Segment Results
• Analysis of Consolidated Financial Condition
• Contractual Obligations and Off-Balance Sheet Arrangements
• Application of Critical Accounting Policies and Estimates
• Cautionary Statement Regarding Forward-Looking Information
The discussion that follows should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 8.
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 an integrated retailer
with significant physical and intangible assets, as well as virtual capabilities
enabled through technology. We currently operate a national network of stores
with 2,019 full-line and 54 specialty retail stores in the United States,
operating through Kmart and Sears, and 475 full-line and specialty retail stores
in Canada operating through Sears Canada Inc. ("Sears Canada"), a 51%-owned
subsidiary. Further, we operate a number of websites under the Sears.com and
Kmart.com banners which offer more than 60 million products and provide the
capability for our customers to engage in cross-channel transactions such as buy
online/pick-up in store; buy in store/ship to home; and buy online, return in
store. We are also the home of SHOP YOUR WAY™, a social shopping experience
where members have the ability to earn points, receive additional benefits and
interact/shop with each other through shopyourway.com. The Company is the
leading home appliance retailer as well as a leader in tools, lawn and garden,
fitness equipment and automotive repair and maintenance. Key proprietary brands
include Kenmore®, Craftsman®and DieHard®. We also maintain a broad apparel
offering including such well-known labels as Lands' End®, the Kardashian
Kollection, Jaclyn Smith, Joe Boxer, Sandra Lee and Levi's, as well as Sofia by
Sofia Vergara and the Country Living Home Collection. We are the nation's
largest provider of home services, with more than 14 million service calls made
annually.
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 Item 1 in
this report on Form 10-K. Our business segments have been determined in
accordance with accounting standards regarding the determination, and reporting,
of business segments.
Our focus continues to be on our core customers, our Members, and finding ways
to provide them value and convenience through Integrated Retail and our SHOP
YOUR WAY Membership platform. We have invested significantly in our online
ecommerce platforms, our Membership rewards program and the technology needed to
support these initiatives. Our actions in 2012 were guided by the following
strategic priorities:
Innovation Around Our Customers and Members
We continue to focus on building and growing a deeply engaging membership
program, called SHOP YOUR WAY. SHOP YOUR WAY is more than just a typical loyalty
program. It is a comprehensive platform that transforms customer transactions
into relationships and allows us to know our Members better and to serve them
better as well. It includes the rewards program, our shopyourway.com social
shopping platform, our SHOP YOUR WAY Max free
shipping platform and a variety of other applications and components.
Collectively, these elements change the way we do business both inside and
outside the Company.
We are also focused on providing integrated retail solutions for our Members and
customers. We rolled out tablets and mobile devices to Sears Domestic stores
across the country. The tablets are equipped to help our store associates
provide a better overall shopping experience. Our associates can use tablets to
look at product specifications, compare products side-by-side and search for
inventory if it is not readily available at the store. More information about
products, inventory, pricing and reviews is now available at their fingertips,
which means Members can have more confidence in their product selection.
We have designed other experiences that provide seamless and convenient
integrated experiences for our Members. Building on our Buy Online Pick Up In
Store and Ready in 5 promise, we developed a Return/Exchange in 5 capability
that allows Members to fill out the product return information online. Members
simply drop off or exchange the item they want to return at our Merchandise Pick
Up area within five minutes or less.
Core Retail Excellence
We are also focused on providing great merchandise value to our customers and
Members. In 2012, we launched several innovative brand offerings such as Outdoor
Life, Alphaline electronics accessories, and RoadHandler tires. In January 2013,
we announced that we would be developing two new apparel lines in a
collaborative effort between SHOP YOUR WAY and our Kmart format. We have a long
heritage of building celebrity brands, both at Sears and Kmart. We chose to
partner with Nicki Minaj and Adam Levine for this collaboration because of their
creativity, their global appeal and their strong interest in developing their
clothing brands in a unique and innovative manner.
We are focused on providing flexibility and convenience for our Members through
such things as buy online/pick-up in store, buy in store/ship to home, digital
receipts and returns and exchanges in five minutes or less. We enhanced our
layaway program and added the capability for our Members to make layaway
payments online and have the items from their layaway shipped directly to their
homes when their contract has been completed. We also provide our customers with
easy access to a broad and diverse range of products and categories through
marketplace on sears.com.
Financial and Operational Discipline
In 2012, we also demonstrated our financial flexibility by positively impacting
our liquidity by $1.8 billion, while unlocking the value in our asset portfolio,
as part of our on-going asset re-configuration where we are re-deploying our
capital in support of our member-centric, integrated retail strategy. Actions
taken included:
• the separation of our Sears Hometown and Outlet businesses through a
rights offering transaction, which generated gross proceeds of
approximately $447 million;
• the partial spin-off of 45% of Sears Canada;
• the execution of various real estate transactions which generated cash proceeds of approximately $440 million;
• Reducing inventory by nearly $1.0 billion below last year's level and adjusting our promotional cadence to be more targeted;
• Reducing our fixed cost structure by over $500 million; and
• Capitalizing on an opportunity to reduce risk related to our legacy pension obligation by making a voluntary offer to former employees to pay a lump sum.
We are an asset-rich enterprise with substantial liquidity, unencumbered real estate and well-established stand-alone businesses, including Lands' End and Sears Canada. We expect to generate at least $500 million of additional liquidity through monetization of assets over the next 12 months. In addition to our asset monetizations, we currently expect to reduce 2013 peak domestic inventory by $500 million from the 2012 level of $8.6 billion at the end of the third quarter as a result of stores already or expected to be closed, initiatives underway to reduce slow-moving inventory and modest productivity improvement. This action is expected to generate $300 million of cash after consideration of related payables. We also expect to further reduce our fixed cost base by another $200 million in 2013.
RESULTS OF OPERATIONS
Fiscal Year Our fiscal year end is the Saturday closest to January 31 each year. Fiscal year 2012 consisted of 53 weeks while fiscal years 2011 and 2010 consisted of 52 weeks. Unless otherwise stated, references to years in this report relate to fiscal years rather than to calendar years. The following fiscal periods are presented in this report. Fiscal year Ended Weeks 2012 February 2, 2013 53 2011 January 28, 2012 52 2010 January 29, 2011 52 |
Holdings' Consolidated Results Holdings' consolidated results of operations for 2012, 2011 and 2010 are summarized as follows: millions, except per share data 2012 2011 2010 REVENUES Merchandise sales and services $ 39,854 $ 41,567 $ 42,664 COSTS AND EXPENSES Cost of sales, buying and occupancy 29,340 30,966 31,000 Gross margin dollars 10,514 10,601 11,664 Gross margin rate 26.4 % 25.5 % 27.3 % Selling and administrative 10,660 10,664 10,425 Selling and administrative expense as a percentage of revenues 26.7 % 25.7 % 24.4 % Depreciation and amortization 830 853 869 Impairment charges 330 649 - Gain on sales of assets (468 ) (64 ) (67 ) Total costs and expenses 40,692 43,068 42,227 Operating income (loss) (838 ) (1,501 ) 437 Interest expense (267 ) (289 ) (293 ) Interest and investment income 94 41 36 Other income (loss) 1 (2 ) (14 ) Income (loss) from continuing operations before income taxes (1,010 ) (1,751 ) 166 Income tax expense (44 ) (1,369 ) (27 ) Income (loss) from continuing operations (1,054 ) (3,120 ) 139 Income (loss) from discontinued operations, net of tax - (27 ) 11 Net income (loss) (1,054 ) (3,147 ) 150 (Income) loss attributable to noncontrolling interests 124 7 (17 ) NET INCOME (LOSS) ATTRIBUTABLE TO HOLDINGS' SHAREHOLDERS $ (930 ) $ (3,140 ) $ 133 Amounts attributable to Holdings' shareholders: Income (loss) from continuing operations, net of tax $ (930 ) $ (3,113 ) $ 122 Income (loss) from discontinued operations, net of tax - (27 ) 11 Net income (loss) $ (930 ) $ (3,140 ) $ 133 |
NET INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE
TO HOLDINGS' SHAREHOLDERS
Diluted income (loss) per share from continuing
operations $ (8.78 ) $ (29.15 ) $ 1.09
Diluted income (loss) per share from
discontinued operations - (0.25 ) 0.10
$ (8.78 ) $ (29.40 ) $ 1.19
Diluted weighted average common shares
outstanding 105.9 106.8 111.7
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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 stores that have undergone format changes. In addition, comparable store sales amounts include sales from sears.com and kmart.com shipped directly to customers and have been adjusted for the change in the unshipped sales reserves recorded at the end of each reporting period. Comparable store sales results for 2012 were calculated based on the 52-week period ended January 26, 2013 as compared to the comparable 52-week period in the prior year.
2012 Compared to 2011
Net Loss from Continuing Operations Attributable to Holdings' Shareholders
We recorded a net loss from continuing operations attributable to Holdings'
shareholders of $930 million ($8.78 loss per diluted share from continuing
operations) and $3.1 billion ($29.15 loss per diluted share from continuing
operations) for 2012 and 2011, respectively. Our results for 2012 and 2011 were
affected by a number of significant items, including non-cash charges related to
pension settlements and the impairment of goodwill balances and a $1.8 billion
non-cash charge to establish a valuation allowance against our domestic deferred
tax assets in 2011. Our net loss from continuing operations as adjusted for
these significant items was $215 million ($2.03 loss per diluted share from
continuing operations) for 2012 and $482 million ($4.52 loss per diluted share
from continuing operations) for 2011. The improvement in net loss for the year
reflected an improvement in gross margin rate of 90 basis points and a decrease
in selling and administrative expenses, which were partially offset by a decline
in gross margin dollars, given lower sales.
In addition to our net income (loss) from continuing operations determined in
accordance with GAAP, for purposes of evaluating operating performance, we use
an Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization
("Adjusted EBITDA") measurement as well as Adjusted Earnings per Share
("Adjusted EPS").
Adjusted EBITDA is computed as net income (loss) attributable to Sears Holdings
Corporation appearing on the Statements of Operations excluding income (loss)
attributable to noncontrolling interest, income tax expense, interest expense,
interest and investment income, other income (loss), depreciation and
amortization and gain on sales of assets. In addition, it is adjusted to exclude
certain significant items as set forth below. Our management uses Adjusted
EBITDA to evaluate the operating performance of our businesses, as well as
executive compensation metrics, for comparable periods. Adjusted EBITDA should
not be used by investors or other third parties as the sole basis for
formulating investment decisions as it excludes a number of important cash and
non-cash recurring items.
While Adjusted EBITDA is a non-GAAP measurement, management believes that it is
an important indicator of operating performance because:
• EBITDA excludes the effects of financings and investing activities by
eliminating the effects of interest and depreciation costs;
• Management considers gains/(losses) on the sale of assets to result from investing decisions rather than ongoing operations; and
• Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results.
Adjusted EBITDA was determined as follows:
millions 2012 2011 2010
Net income (loss) attributable to SHC per
statement of operations $ (930 ) $ (3,140 ) $ 133
Income (loss) attributable to noncontrolling
interest (124 ) (7 ) 17
(Income) loss from discontinued operations, net
of tax - 27 (11 )
Income tax expense 44 1,369 27
Interest expense 267 289 293
Interest and investment income (94 ) (41 ) (36 )
Other income (loss) (1 ) 2 14
Operating income (loss) (838 ) (1,501 ) 437
Depreciation and amortization 830 853 869
Gain on sales of assets (468 ) (64 ) (67 )
Before excluded items (476 ) (712 ) 1,239
Impairment charges 330 649 -
Pension settlements 455 - -
Closed store reserve and severance 140 254 26
Domestic pension expense 165 74 120
Transaction costs 12 - -
Hurricane losses - 12 -
Adjusted EBITDA as defined $ 626 $ 277 $ 1,385
% to revenues 1.6 % 0.7 % 3.2 %
Adjusted EBITDA for our segments was as follows:
2012 2011 2010
millions Kmart Sears Domestic Sears Canada Sears Holdings Kmart Sears Domestic Sears Canada Sears Holdings Kmart Sears Domestic Sears Canada Sears Holdings
Operating income
(loss) per statement
of operations $ 5 $ (656 ) $ (187 ) $ (838 ) $ (34 ) $ (1,447 ) $ (20 ) $ (1,501 ) $ 353 $ (149 ) $ 233 $ 437
Depreciation and
amortization 147 578 105 830 149 601 103 853 149 620 100 869
Gain on sales of
assets (37 ) (261 ) (170 ) (468 ) (34 ) (30 ) - (64 ) (7 ) (46 ) (14 ) (67 )
Before excluded
items 115 (339 ) (252 ) (476 ) 81 (876 ) 83 (712 ) 495 425 319 1,239
Closed store reserve
and severance 76 44 20 140 76 160 18 254 13 13 - 26
Impairment charges 10 25 295 330 15 634 - 649 - - - -
Pension settlements - 452 3 455 - - - - - - - -
Domestic pension
expense - 165 - 165 - 74 - 74 - 120 - 120
Transaction costs - 9 3 12 - - - - - - - -
Hurricane losses - - - - - 12 - 12 $ - $ - $ - $ -
Adjusted EBITDA as
defined $ 201 $ 356 $ 69 $ 626 $ 172 $ 4 $ 101 $ 277 $ 508 $ 558 $ 319 $ 1,385
% to revenues 1.4 % 1.7 % 1.6 % 1.6 % 1.1 % -% 2.2 % 0.7 % 3.3 % 2.5 % 6.7 % 3.2 %
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We also believe that use of Adjusted EPS improves the comparability of year-to-year results and is representative of our underlying performance. We have chosen to provide this supplemental information to illustrate the results of operations giving effect to the non-GAAP adjustments shown in the reconciliations below, and to provide an additional measure of performance. The following tables set forth results of operations on a GAAP and "As Adjusted" basis, as well as the impact each significant item used in calculating Adjusted EBITDA had on specific income and expense amounts reported in our Consolidated Statements of Operations during the years 2012, 2011 and 2010.
Year Ended February 2, 2013
Closed Store
Reserve, Store Domestic Gain on Sale of
millions, except per Impairments and Gain on Sales Goodwill Pension Canadian Joint As
share data GAAP Severance of Assets Transaction Costs Impairment Pension Settlements Expense Venture Tax Matters Adjusted
Cost of sales, buying and
occupancy impact $ 29,340 $ (35 ) $ - $ - $ - $ - $ - $ - $ - $ 29,305
Selling and
administrative impact 10,660 (105 ) - (12 ) - (455 ) (165 ) - - 9,923
Depreciation and
amortization impact 830 (22 ) - - - - - - - 808
Impairment charges impact 330 (35 ) - - (295 ) - - - - -
Gain on sales of assets
impact (468 ) - 419 - - - - - - (49 )
Operating loss impact (838 ) 197 (419 ) 12 295 455 165 - - (133 )
Interest and investment
income impact 94 - - - - - - (25 ) - 69
Income tax expense impact (44 ) (74 ) 157 (5 ) - - (62 ) 9 143 124
Loss attributable to
noncontrolling interest
impact 124 (7 ) 8 - (145 ) (1 ) - 12 - (9 )
After tax and
noncontrolling interest
impact (930 ) 116 (254 ) 7 150 454 103 (4 ) 143 (215 )
Diluted loss per share
impact $ (8.78 ) $ 1.09 $ (2.40 ) $ 0.07 $ 1.42 $ 4.29 $ 0.97 $ (0.04 ) $ 1.35 $ (2.03 )
Year Ended January 28, 2012
Closed Store
Domestic Reserve, Store
millions, except per share Pension Impairments and Gain on Sales Goodwill Discontinued
data GAAP Expense Severance Mark-to-Market Losses of Assets Hurricane Losses Impairment Tax Matters Operations As Adjusted
Cost of sales, buying and
occupancy impact $ 30,966 $ - $ (130 ) $ - $ - $ - $ - $ - $ - $ 30,836
Selling and administrative
impact 10,664 (74 ) (124 ) - - (12 ) - - - 10,454
Depreciation and
amortization impact 853 - (8 ) - - - - - - 845
Impairment charges impact 649 - (98 ) - - - (551 ) - - -
Gain on sales of assets
impact (64 ) - - - 33 - - - - (31 )
Operating loss impact (1,501 ) 74 360 - (33 ) 12 551 - - (537 )
Other loss impact (2 ) - - 6 - - - - - 4
Income tax expense impact (1,369 ) (28 ) (134 ) (2 ) 13 (5 ) - 1,819 - 294
Loss from discontinued
operations, net of tax
impact (27 ) - - - - - - - 27 -
Loss attributable to
noncontrolling interest
impact 7 - (1 ) (1 ) - - - - - 5
After tax and
. . .
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