e10vq
United
States
Securities And Exchange Commission
Washington, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report Pursuant To Section 13 Or 15(D) Of The
Securities Exchange Act Of 1934 For The |
Quarterly Period Ended October 29, 2005
Or
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o |
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Transition
Report Pursuant To Section 13 Or 15(D) Of The
Securities Exchange Act Of 1934 |
Commission file number 000-51217
SEARS HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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20-1920798 |
(State of Incorporation)
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(I.R.S. Employer Identification No.) |
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3333 Beverly Road, Hoffman Estates, Illinois
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60179 |
(Address of principal executive offices)
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(Zip Code) |
Registrants Telephone Number, Including Area Code: (847) 286-2500
Indicate by check mark whether the Registrant [1] has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months and [2] has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes þ No o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
As of November 26, 2005, the Registrant had 160,977,961 common shares, $0.01 par value, outstanding.
SEARS HOLDINGS CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
SEARS HOLDINGS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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millions, except per share data |
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13 Weeks Ended |
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39 Weeks Ended |
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October 29, |
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October 27, |
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October 29, |
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October 27, |
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2005 |
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2004 |
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2005 |
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2004 |
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REVENUES |
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Merchandise sales and services |
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$ |
12,118 |
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$ |
4,426 |
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$ |
32,868 |
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$ |
13,893 |
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Credit and financial products revenues |
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84 |
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171 |
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Total revenues |
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12,202 |
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4,426 |
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33,039 |
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13,893 |
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COSTS AND EXPENSES |
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Cost of sales, buying and occupancy |
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8,783 |
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3,324 |
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24,009 |
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10,520 |
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Selling and administrative |
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2,972 |
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994 |
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7,669 |
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2,921 |
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Depreciation and amortization |
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263 |
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6 |
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650 |
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14 |
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Provision for uncollectible accounts |
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21 |
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38 |
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Gain on sales of assets |
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(15 |
) |
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(807 |
) |
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(25 |
) |
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(911 |
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Restructuring charges |
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59 |
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104 |
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Total costs and expenses |
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12,083 |
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3,517 |
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32,445 |
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12,544 |
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Operating income |
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119 |
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909 |
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594 |
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1,349 |
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Interest expense, net |
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(70 |
) |
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(25 |
) |
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(184 |
) |
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(86 |
) |
Bankruptcy-related recoveries |
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1 |
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1 |
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33 |
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13 |
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Other income |
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22 |
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1 |
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33 |
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4 |
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Income before income taxes, minority interest and
cumulative
effect of change in accounting principle |
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72 |
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886 |
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476 |
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1,280 |
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Income taxes |
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28 |
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334 |
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183 |
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483 |
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Minority interest |
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(14 |
) |
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(7 |
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Income before cumulative effect of change in accounting
principle |
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58 |
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552 |
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300 |
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797 |
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Cumulative effect of change in accounting principle,
net of tax |
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(90 |
) |
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NET INCOME |
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$ |
58 |
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$ |
552 |
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$ |
210 |
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$ |
797 |
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EARNINGS PER COMMON SHARE |
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BASIC |
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Earnings per share before cumulative effect of change in
accounting principle |
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$ |
0.35 |
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$ |
6.19 |
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$ |
2.00 |
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$ |
8.91 |
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Cumulative effect of change in accounting principle |
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(0.60 |
) |
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Earnings per share |
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$ |
0.35 |
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$ |
6.19 |
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$ |
1.40 |
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$ |
8.91 |
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DILUTED |
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Earnings per share before cumulative effect of change in
accounting principle |
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$ |
0.35 |
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$ |
5.45 |
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$ |
1.98 |
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$ |
7.93 |
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Cumulative effect of change in accounting principle |
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(0.59 |
) |
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Earnings per share |
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$ |
0.35 |
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$ |
5.45 |
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$ |
1.39 |
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$ |
7.93 |
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Average common shares outstanding |
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163.5 |
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89.2 |
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149.8 |
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89.4 |
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Diluted weighted average common shares outstanding |
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163.6 |
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101.6 |
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151.4 |
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101.4 |
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See accompanying notes.
1
SEARS HOLDINGS CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
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millions, except per share data |
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October 29, |
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October 27, |
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January 26, |
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2005 |
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2004 |
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2005 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
922 |
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$ |
2,564 |
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$ |
3,435 |
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Receivables |
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724 |
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|
649 |
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|
646 |
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Merchandise inventories |
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10,750 |
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3,902 |
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3,281 |
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Prepaid expenses, deferred charges and other current assets |
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463 |
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200 |
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150 |
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Deferred income taxes |
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438 |
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29 |
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Assets held for sale |
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1,724 |
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Total current assets |
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15,021 |
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7,315 |
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7,541 |
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Property and equipment, net |
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9,944 |
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288 |
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315 |
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Deferred income taxes |
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730 |
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Goodwill |
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1,731 |
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Tradenames and other intangible assets |
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3,648 |
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Other assets |
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396 |
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62 |
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65 |
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TOTAL ASSETS |
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$ |
30,740 |
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$ |
7,665 |
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$ |
8,651 |
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LIABILITIES |
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Current liabilities |
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Short-term borrowings |
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$ |
152 |
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$ |
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$ |
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Current portion of long-term debt and capitalized lease
obligations |
|
|
644 |
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|
48 |
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|
45 |
|
Merchandise payables |
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4,314 |
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|
1,107 |
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|
927 |
|
Income taxes payable |
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|
492 |
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|
31 |
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|
94 |
|
Other current liabilities |
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|
3,404 |
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|
799 |
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|
705 |
|
Unearned revenues |
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|
1,073 |
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|
10 |
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|
13 |
|
Other taxes |
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|
789 |
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|
323 |
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|
297 |
|
Liabilities of operations held for sale |
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133 |
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Total current liabilities |
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11,001 |
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|
|
2,318 |
|
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|
2,081 |
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Long-term debt and capitalized lease obligations |
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3,264 |
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|
368 |
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|
|
366 |
|
Pension and postretirement benefits |
|
|
2,161 |
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|
878 |
|
|
|
1,008 |
|
Minority interest and other liabilities |
|
|
3,369 |
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|
1,029 |
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|
727 |
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|
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Total Liabilities |
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|
19,795 |
|
|
|
4,593 |
|
|
|
4,182 |
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SHAREHOLDERS EQUITY |
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Preferred stock, 20 shares authorized; no shares outstanding |
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Common stock $0.01 par value; 500 shares authorized; 161, 89,
and 89 shares outstanding, respectively |
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2 |
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|
1 |
|
|
|
1 |
|
Capital in excess of par value |
|
|
9,933 |
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|
2,076 |
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|
3,291 |
|
Retained earnings |
|
|
1,550 |
|
|
|
1,031 |
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|
|
1,340 |
|
Treasury stock at cost |
|
|
(465 |
) |
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|
(36 |
) |
|
|
(86 |
) |
Accumulated other comprehensive loss |
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|
(75 |
) |
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|
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|
(77 |
) |
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|
|
|
|
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|
Total Shareholders Equity |
|
|
10,945 |
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|
|
3,072 |
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|
|
4,469 |
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|
|
|
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|
|
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
|
$ |
30,740 |
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|
$ |
7,665 |
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|
$ |
8,651 |
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|
|
|
|
|
|
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|
See accompanying notes.
2
SEARS HOLDINGS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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|
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|
39 Weeks Ended |
|
millions |
|
October 29, |
|
|
October 27, |
|
|
|
2005 |
|
|
2004 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
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|
Net income |
|
$ |
210 |
|
|
$ |
797 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
650 |
|
|
|
14 |
|
Cumulative effect of change in accounting principle, net of tax |
|
|
90 |
|
|
|
|
|
Provision for uncollectible accounts |
|
|
38 |
|
|
|
|
|
Gain on sales of assets and other income |
|
|
(58 |
) |
|
|
(915 |
) |
Bankruptcy-related recoveries |
|
|
(33 |
) |
|
|
(13 |
) |
Income tax benefit on nonqualified stock options |
|
|
49 |
|
|
|
|
|
Net cash received from bankruptcy related settlements |
|
|
30 |
|
|
|
13 |
|
Change in, net of effects of Merger: |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
(92 |
) |
|
|
381 |
|
Credit card receivables |
|
|
(192 |
) |
|
|
|
|
Merchandise inventories |
|
|
(1,466 |
) |
|
|
(663 |
) |
Other operating assets |
|
|
(20 |
) |
|
|
47 |
|
Other operating liabilities (1) (2) |
|
|
987 |
|
|
|
510 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
193 |
|
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Acquisitions of businesses, net of cash acquired |
|
|
(1,409 |
) |
|
|
|
|
Proceeds from sales of property and investments |
|
|
96 |
|
|
|
524 |
|
Purchases of property and equipment |
|
|
(333 |
) |
|
|
(179 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(1,646 |
) |
|
|
345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Repayments of debt |
|
|
(760 |
) |
|
|
(40 |
) |
Proceeds from termination of interest rate swaps |
|
|
60 |
|
|
|
|
|
Common shares purchased |
|
|
(434 |
) |
|
|
|
|
Debt issue costs paid |
|
|
(21 |
) |
|
|
|
|
Proceeds from the exercise of options |
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(1,056 |
) |
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
(2,513 |
) |
|
|
476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
|
|
3,435 |
|
|
|
2,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
922 |
|
|
|
2,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Data: |
|
|
|
|
|
|
|
|
(1)Income taxes paid |
|
$ |
112 |
|
|
$ |
4 |
|
(2)Cash interest paid |
|
|
184 |
|
|
|
42 |
|
See accompanying notes.
3
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
Sears Holdings Corporation (Holdings or the Company) is a Delaware corporation formed for the
purpose of consummating the business combination of Kmart Holding Corporation (Kmart) and Sears,
Roebuck and Co. (Sears), which was completed on March 24, 2005 (the Merger). The Company is a
broadline retailer with approximately 2,300 full-line and 1,200 specialty retail stores in the
United States operating through Kmart and Sears and 370 full-line and specialty retail stores in
Canada operating through Sears Canada Inc. (Sears Canada), a 54%-owned subsidiary. Sears Canada
is a publicly traded company whose shares are traded on the Toronto Stock Exchange. Holdings
common stock is traded on The NASDAQ National Market under the symbol SHLD.
The Merger has been accounted for as a purchase business combination, with Kmart designated as the
acquirer. Therefore, the historical financial statements of Kmart became the historical financial
statements of Holdings, the registrant. The accompanying condensed consolidated statements of
operations and cash flows for the 39-week period ended October 29, 2005 include the results of
operations of Sears from March 25, 2005 forward. Therefore, Holdings operating results for the
39-week period ended October 29, 2005 include approximately 31 weeks of Sears results and 39 weeks
of Kmarts results. See Note 2 for summary unaudited pro forma information and details on the
purchase accounting.
Effective March 23, 2005, the Company changed its fiscal year end from the last Wednesday in
January to the Saturday closest to January 31st. As the change in fiscal year end reflects a
change of only three days, the historical financial statements have not been recast to reflect this
change. Sears Canadas fiscal year end is the Saturday closest to December 31st. The results of
operations for Sears Canada are reported to Holdings on a one-month lag. Therefore, the condensed
consolidated statements of operations for the 13-week period ended October 29, 2005 include
operating results for Sears Canada for the period from July 3, 2005 through October 1, 2005. For
the 39-week period ended October 29, 2005, the condensed consolidated statements of operations and
cash flows include operating results for Sears Canada from March 25, 2005 through October 1, 2005.
These interim unaudited condensed consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange Commission (SEC).
Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments (which include normal recurring adjustments)
considered necessary for a fair presentation have been included. All significant intercompany
accounts and transactions have been eliminated. Operating results for the interim period are not
necessarily indicative of the results that may be expected for the full year. The Company
typically earns a disproportionate share of its operating income in the fourth quarter due to
seasonal customer buying patterns.
Readers of these interim period statements should refer to the audited consolidated financial
statements and notes thereto, which are included in Kmarts Annual Report on Form 10-K for its
fiscal year ended January 26, 2005. For information relating to Sears prior to the Merger, readers
should refer to the audited consolidated financial statements and notes thereto, which are included
in Sears Annual Report on Form 10-K for its fiscal year ended January 1, 2005.
Certain prior period amounts have been reclassified to conform to the current interim period
presentation.
4
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 2 THE MERGER
On March 24, 2005, Kmart and Sears completed the Merger pursuant to the Agreement and Plan of
Merger, dated as of November 16, 2004 (the Merger Agreement). Upon consummation of the Merger,
Kmart and Sears became wholly-owned subsidiaries of Holdings.
Under the terms of the Merger Agreement, Kmart shareholders received one share of Holdings common
stock for each Kmart share owned. Approximately 94.9 million shares of Holdings common stock were
issued in exchange for all outstanding common stock of Kmart based on the one-for-one ratio. Sears
shareholders had the right to elect to receive $50 in cash or 0.5 of a share of Holdings common
stock for each Sears share owned. Sears shareholder elections were prorated to ensure that, in the
aggregate, 55 percent of Sears shares were converted into Holdings shares and 45 percent of Sears
shares were converted to cash. Shares of Sears restricted common stock were converted into
Holdings common stock on a 0.5 for 1 basis. In aggregate, 62.2 million shares of Holdings common
stock were issued to Sears shareholders at a value of approximately $6.5 billion (based on the
average closing price of $104.33 of Kmarts common stock during the period from November 15, 2004
through November 19, 2004, two business days before and after the date the Merger was announced).
In addition, approximately $5.4 billion in cash was paid in consideration for (i) all outstanding
common stock of Sears, based upon the proration provisions of the Merger Agreement, and (ii) all
outstanding stock options of Sears. Including transaction costs of $18 million, the total
consideration paid was approximately $11.9 billion.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, the Merger has been treated as a purchase business combination for accounting
purposes, with Kmart designated as the acquirer. In identifying Kmart as the acquiring entity, the
companies took into account the relative share ownership of the Company after the Merger, the
composition of the governing body of the combined entity and the designation of certain senior
management positions. As such, the historical financial statements of Kmart became the historical
financial statements of Holdings. The purchase price for the acquisition of Sears, including
transaction costs, has been allocated to the assets acquired and liabilities assumed based on
estimated fair values at the date of the Merger, March 24, 2005. The following purchase price
allocation is preliminary and further refinements may be necessary.
|
|
|
|
|
millions |
|
|
|
|
Cash |
|
$ |
3,963 |
|
Merchandise inventories |
|
|
6,134 |
|
Other current assets |
|
|
1,861 |
|
Property and equipment |
|
|
9,854 |
|
Goodwill |
|
|
1,731 |
|
Tradenames and other intangible assets |
|
|
4,080 |
|
Other assets |
|
|
501 |
|
|
|
|
|
Total assets acquired |
|
$ |
28,124 |
|
|
|
|
|
|
Merchandise payables, accrued expenses and other current
liabilities |
|
$ |
6,337 |
|
Unearned revenues (including non-current portion) |
|
|
1,896 |
|
Total debt and capital leases |
|
|
4,421 |
|
Deferred income taxes |
|
|
1,249 |
|
Pension and postretirement benefits |
|
|
1,563 |
|
Minority interest and other liabilities |
|
|
796 |
|
|
|
|
|
Total liabilities assumed |
|
$ |
16,262 |
|
|
|
|
|
Net assets acquired |
|
$ |
11,862 |
|
|
|
|
|
5
\
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company has allocated approximately $4.1 billion to identifiable intangible assets, of
which approximately $2.9 billion relates to the indefinite lived tradenames of Sears, Kenmore,
Craftsman, Lands End and Diehard. The remaining intangible assets include finite lived
tradenames, favorable leases, contractual arrangements and customer lists, which will be amortized
over their estimated useful lives.
Selected Unaudited Pro Forma Combined Financial Information
The unaudited pro forma financial information in the table below summarizes the combined results of
operations of Kmart and Sears for the 13-week period ended October 27, 2004 and the 39-week periods
ended October 29, 2005 and October 27, 2004 as though the Merger had occurred as of the beginning
of fiscal 2004. The unaudited pro forma financial information is presented for informational
purposes only and is not indicative of the results of operations that would have been achieved if
the Merger had taken place at the beginning of each period, or that may result in the future. In
addition, the following unaudited pro forma financial information has not been adjusted to reflect
any operating efficiencies that may be realized as a result of the Merger.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 weeks ended |
|
39 weeks ended |
|
|
October 29, |
|
October 27, |
|
October 29, |
|
October 27, |
millions, except per share data |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
As reported |
|
Pro forma |
|
Pro forma |
|
Pro forma |
Revenues |
|
$ |
12,202 |
|
|
$ |
12,838 |
|
|
$ |
38,176 |
|
|
$ |
39,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
119 |
|
|
$ |
321 |
|
|
$ |
543 |
|
|
$ |
692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of change in accounting
principle |
|
$ |
58 |
|
|
$ |
150 |
|
|
$ |
231 |
|
|
$ |
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
58 |
|
|
$ |
150 |
|
|
$ |
141 |
|
|
$ |
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share before cumulative effect of
change in accounting principle |
|
$ |
0.35 |
|
|
$ |
0.93 |
|
|
$ |
1.42 |
|
|
$ |
1.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.35 |
|
|
$ |
0.93 |
|
|
$ |
0.87 |
|
|
$ |
1.84 |
|
NOTE 3 RESTRUCTURING ACTIVITIES
During fiscal 2005, the Company has initiated a number of restructuring activities. As a result,
the Company has recorded $59 million and $104 million in restructuring charges during the 13- and
39-week periods ended October 29, 2005, respectively, as follows:
Kmart
During fiscal 2005, the Company initiated actions to integrate the home office functions of Kmart
and Sears and align its workforce accordingly. Approximately 1,435 Kmart associates were notified
that their positions had been relocated, were under review, or had been eliminated. In connection
therewith, the Company recorded restructuring charges of $6 million and $51 million during the 13-
and 39-week periods ended October 29, 2005, respectively. The year-to-date restructuring charge of
$51 million includes $16 million of severance, benefits and outplacement service costs for
approximately 730 impacted Kmart associates and $35 million of relocation expenses for 523
associates who have accepted relocation offers. The Company estimates that the total costs related
to the relocation, severance and outplacement services associated with these actions will be
6
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
approximately $63 million. The remaining costs to be incurred will be recognized over the
associates remaining service periods in accordance with SFAS No. 146, Accounting for Costs
Associated with Disposal and Exit Activities. As of October 29, 2005, total cash payments of $19
million had been made in connection with these actions, with the remaining reserve balance of $32
million at October 29, 2005 representing payments to be made throughout the remainder of 2005 and
early 2006 in accordance with the Companys severance and relocation plans.
Sears
In addition, the Company notified approximately 780 former Sears employees of the decision to
eliminate their positions in connection with the home office integration efforts. In connection
therewith, the Company recorded a reserve of $59 million for costs associated with severance,
benefits and outplacement services for the impacted individuals. In accordance with Emerging
Issues Task Force (EITF) No. 95-3, Recognition of Liabilities in Connection with a Purchase
Business Combination, costs associated with these integration actions are reflected as a component
of purchase accounting as an increase to goodwill. As of October 29, 2005, the Company had made
payments totaling approximately $54 million in respect of these restructuring actions, with a
reserve balance of $5 million at October 29, 2005 representing payments to be made throughout the
remainder of 2005 in accordance with the Companys severance plan.
Sears Canada
During the third quarter of fiscal 2005, Sears Canada implemented a series of productivity
improvement initiatives, which included a workforce reduction of approximately 1,200 associates,
primarily within Sears Canadas merchandising operations. In connection with Sears Canadas
restructuring activities, the Company has recorded a restructuring charge of $53 million for the 13
weeks ended October 29, 2005 for costs associated with severance, benefits and outplacement
services to be provided to the impacted individuals. The reserve balance of $53 million at October
29, 2005 represents payments to be made to the impacted individuals throughout the remainder of
2005 in accordance with Sears Canadas severance plan.
NOTE 4 CHANGE IN ACCOUNTING PRINCIPLE
Effective January 27, 2005, the Company changed its method of accounting for certain indirect
buying, warehousing and distribution costs. Prior to this change, the Company had included
indirect buying, warehousing and distribution costs as inventoriable costs. Beginning in the
fiscal year ending January 28, 2006, such costs are expensed as incurred, which is the method of
accounting previously followed by Sears. The Company believes that this change provides a better
measurement of operating results in light of the anticipated changes to the Companys supply chain
to realize cost savings from the Merger, the anticipated closure of certain facilities and the
combined capacity of the existing distribution and headquarters facilities. In accordance with
Accounting Principles Board Opinion (APB) No. 20, Accounting Changes, changes in accounting
policy to conform the acquirers policy to that of the acquired entity are treated as a change in
accounting principle. The indirect buying, warehousing and distribution costs that were
capitalized to inventory as of January 26, 2005 are reflected in the first quarter 2005 condensed
consolidated statement of operations as a cumulative effect of change in accounting principle in
the amount of $90 million net of income taxes of $58 million. The pro forma effect of application
of the change to prior years quarterly net income and net income per share is not significant.
7
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 5 ASSETS HELD FOR SALE
The Company securitizes certain of Sears Canadas credit card receivables through trusts. Under
the Sears Canada securitization program, trusts purchase undivided interests in the credit card
receivable balances funded by issuing short- and long-term debt, primarily commercial paper and
senior and subordinated notes. These debt instruments entitle the holder to a series of scheduled
cash flows under preset terms and conditions, the receipt of which is dependent upon cash flows
generated by the related trusts assets. The trusts meet the definition of a qualified special
purpose entity. In accordance with Financial Accounting Standards Board Interpretation (FIN) No.
46(R), Consolidation of Variable Interest Entities, qualifying special purpose entities are not
consolidated. As a result, the Sears Canada securitized credit card receivables and related
borrowings are not presented in the condensed consolidated balance sheets.
The undivided co-ownership interest in the receivable balances is sold on a fully serviced basis
and the Company receives no fee for ongoing servicing responsibilities. The Company receives
proceeds equal to fair value for the assets sold and retains rights to future cash flows arising
after the investors in the securitization trusts have received the contracted return. The
co-owners have no recourse to the Companys retained interest in the receivables sold other than in
respect of amounts in the cash reserve account and the interest-only strip receivable. Under the
securitization program, there is a daily distribution of collections from credit card receivables
and a reinvestment of those amounts by the trusts to purchase additional credit card receivables in
order to maintain existing outstanding debt levels.
On November 15, 2005, Sears Canada completed the sale of its Credit and Financial Services
operations to JPMorgan Chase & Co. (JPMorgan Chase) for approximately $1.9 billion in cash
proceeds net of securitized receivables and other related costs and taxes. In addition, Sears
Canada and JPMorgan Chase have entered into a long-term marketing and servicing alliance with an
initial term of ten years. On December 2, 2005, Sears Canadas Board of Directors declared that the
net after-tax proceeds from the sale will be used to fund a cash distribution to shareholders in
the amount of approximately $1.7 billion with the balance of sale proceeds to be used for general
corporate purposes. The cash distribution to shareholders is scheduled to be paid on December 16,
2005.
The assets and liabilities of Sears Canadas credit business are reported separately as assets and
liabilities of operations held for sale in the condensed consolidated balance sheet at October 29,
2005. The major classes of assets and liabilities held for sale include:
|
|
|
|
|
|
|
October 29, |
|
millions |
|
2005 |
|
Credit card receivables, net of $35 allowance |
|
$ |
1,224 |
|
Other assets |
|
|
500 |
|
|
|
|
|
Total assets held for sale |
|
|
1,724 |
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
133 |
|
|
|
|
|
Total liabilities of operations held for sale |
|
$ |
133 |
|
|
|
|
|
The following table summarizes the Sears Canada credit card receivables:
|
|
|
|
|
|
|
October 29, |
|
millions |
|
2005 |
|
Managed accounts |
|
$ |
2,186 |
|
Less: co-ownership interest held by third parties |
|
|
(873 |
) |
|
|
|
|
Co-ownership retained by the Company |
|
|
1,313 |
|
Less: long-term portion of deferred customer accounts
receivable |
|
|
(54 |
) |
|
|
|
|
Total |
|
$ |
1,259 |
|
|
|
|
|
8
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 6 DERIVATIVE FINANCIAL INSTRUMENTS
During the second quarter of fiscal 2005, the Company entered into a series of six- and nine-month
foreign currency forward contracts totaling $1.0 billion Canadian notional value designed to hedge
the Companys net investment in Sears Canada against adverse changes in exchange rates. The
aggregate fair value of the forward contracts as of October 29, 2005 was negative $40 million.
These hedges qualify for hedge accounting and, as such, an unrealized loss of $40 million was
recorded as a component of accumulated other comprehensive loss in the Companys condensed
consolidated balance sheet as of October 29, 2005.
Also during the second quarter of fiscal 2005, the Company terminated interest rate swaps with a
notional value of approximately $1.0 billion that had converted certain of the Companys fixed rate
debt to floating rate debt. The Companys variable rate borrowings were reduced to approximately
$340 million as a result of these interest rate swap terminations and the retirement of certain of
the Companys variable rate debt. The Company received $60 million in cash proceeds from the swap
terminations, representing the aggregate fair value of these swaps as of the termination date. As
the hedges related to these swaps qualified for hedge accounting, an offsetting adjustment was
recorded to the carrying amount of the designated hedged debt, which remains outstanding, and this
adjustment will be amortized to interest expense over the remaining term of the debt.
NOTE 7 BORROWINGS
Total borrowings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
millions |
|
October 29, |
|
|
October 27, |
|
|
January 26, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
Short-term borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured commercial paper |
|
$ |
152 |
|
|
$ |
|
|
|
$ |
|
|
Long-term debt, including current portion: |
|
|
|
|
|
|
|
|
|
|
|
|
Convertible subordinated notes, net |
|
|
|
|
|
|
40 |
|
|
|
43 |
|
Notes and debentures outstanding |
|
|
3,047 |
|
|
|
44 |
|
|
|
52 |
|
Capital lease obligations |
|
|
861 |
|
|
|
332 |
|
|
|
316 |
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
4,060 |
|
|
$ |
416 |
|
|
$ |
411 |
|
|
|
|
|
|
|
|
|
|
|
|
Memo: Sears Canada debt |
|
$ |
719 |
|
|
$ |
|
|
|
$ |
|
|
Debt Repurchase Authorization
In May 2005, the Finance Committee of the Board of Directors of the Company authorized the
repurchase, subject to market conditions and other factors, of up to $500 million of the
outstanding indebtedness of the Company and its subsidiaries in open market or privately negotiated
transactions. The source of funds for the proposed purchases is expected to be the Companys cash
from operations or borrowings under the Companys $4.0 billion, five-year credit agreement (the
Credit Agreement). During the 13- and 39- weeks ended October 29, 2005, the Companys
subsidiary, Sears Roebuck Acceptance Corp. (SRAC), repurchased $36 million and $150 million of
its outstanding notes, respectively, thereby reducing the unused balance of this authorization to
$350 million.
Credit Agreement
The Credit Agreement is available for general corporate purposes and includes a $1.5 billion letter
of credit sublimit. The Credit Agreement is a revolving credit facility under which SRAC and Kmart
Corporation are the borrowers. The Credit Agreement is guaranteed by Holdings and certain of its
direct and indirect subsidiaries
9
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
and is secured by a first lien on domestic inventory, credit card accounts receivable and the
proceeds thereof. Availability under the Credit Agreement is determined pursuant to a borrowing
base formula, based on domestic inventory and credit card accounts receivable, subject to certain
limitations. As of October 29, 2005, the Company had $592 million of letters of credit outstanding
under the Credit Agreement with $3.4 billion of availability remaining under the Credit Agreement.
There were no borrowings under the facility during the third quarter. The Credit Agreement does
not contain provisions that would restrict borrowings or letter of credit issuances based on
material adverse changes or credit ratings. The Company capitalized $19 million of debt issuance
costs in connection with entering into the Credit Agreement. These costs are being amortized over
the five-year life of the Credit Agreement.
Letter of Credit Agreement
The Company has an additional letter of credit agreement (the LC Agreement) with a commitment
amount of up to $600 million. As of October 29, 2005, there were $305 million of letters of credit
outstanding under the LC Agreement.
Under the terms of the LC Agreement, the Company has the ability to post cash, inventory or letters
of credit, including letters of credit issued under the Credit Agreement, as collateral. However,
the Credit Agreement prohibits the Company from using inventory as collateral under the LC
Agreement. The cash collateral account is subject to a pledge and security agreement pursuant to
which if the Company elects to post cash collateral, it must maintain cash in an amount equal to
100.5% of the face value of letters of credit outstanding. The Company had $306 million posted as
collateral under the LC Agreement as of October 29, 2005, consisting of $150 million in the form of
a letter of credit and $156 million in cash. The Company continues to classify the cash collateral
as cash and cash equivalents due to its ability to substitute these letters of credit with letters
of credit under the Credit Agreement, which does not require cash collateral, and its ability to
provide letters of credit under the Credit Agreement as collateral. There are no provisions in the
LC Agreement that would restrict issuances based on credit ratings, but issuances could be
restricted under certain circumstances based on a material adverse change.
Cash Collateral
The Company posts cash collateral for certain self-insurance programs. The Company continues to
classify the cash collateral as cash and cash equivalents in the accompanying condensed
consolidated balance sheets due to the Companys ability to convert the cash to letters of credit
at any time at its discretion. As of October 29, 2005, $71 million of cash was posted as
collateral for self-insurance programs.
Convertible Notes
On January 31, 2005, ESL Investments, Inc. (ESL) and its affiliates converted, in accordance with
their terms, all of the outstanding 9% convertible subordinated notes of Kmart and six months of
accrued interest into an aggregate of 6.3 million shares of Kmart common stock. In consideration
of ESLs conversion of the notes prior to maturity, ESL received a $3 million payment from Kmart.
The cash payment was equivalent to the approximate discounted after-tax cost of the future interest
payments that would have otherwise been paid by Kmart to ESL and its affiliates in the absence of
the early conversion. In conjunction with the conversion, the Company recognized the remaining
related unamortized debt discount of $17 million as interest expense.
Inter-company Loan
The Company has transferred certain domestic real estate assets to a wholly-owned consolidated
subsidiary and segregated the assets into a trust owned by the consolidated subsidiary. The trust
has issued mortgage-backed securities which are collateralized by these real estate assets. As of
October 29, 2005, these debt
10
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
securities were entirely held by a wholly-owned consolidated subsidiary of the Company and the net
book value of the securitized real estate was $1.1 billion.
NOTE 8 BENEFIT PLANS
The following table summarizes the components of net periodic expense for the Companys retirement
plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
millions |
|
October 29, |
|
|
October 27, |
|
|
October 29, |
|
|
October 27, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Components of net periodic expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits earned during the period |
|
$ |
23 |
|
|
$ |
|
|
|
$ |
52 |
|
|
$ |
|
|
Interest costs |
|
|
87 |
|
|
|
38 |
|
|
|
239 |
|
|
|
115 |
|
Expected return on plan assets |
|
|
(81 |
) |
|
|
(35 |
) |
|
|
(216 |
) |
|
|
(104 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic expense |
|
$ |
29 |
|
|
$ |
3 |
|
|
$ |
75 |
|
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sears Benefit Plans
Expense associated with the Sears benefit plans is included in the condensed consolidated financial
statements subsequent to the effective date of the Merger. Certain domestic full-time and
part-time employees of Sears are eligible to participate in noncontributory defined benefit plans
after meeting age and service requirements. Substantially all full-time Canadian employees as well
as some part-time employees are eligible to participate in contributory defined benefit plans.
Pension benefits are based on length of service, compensation and, in certain plans, social
security or other benefits. Funding for the various plans is determined using various actuarial
cost methods.
During the first quarter of fiscal 2005, Holdings announced that the Sears domestic pension plan
would be frozen effective January 1, 2006. Domestic associates will earn no additional benefits
after December 31, 2005. Benefits earned through December 31, 2005 will be paid out to eligible participants following
retirement. The effect of this plan change, which is to reduce the projected benefit obligation of
the Sears domestic pension plan by approximately $80 million, is recorded as a component of
purchase accounting.
In connection with the decision to freeze the Sears domestic pension plan, Holdings revised the
target allocation of the Sears domestic pension plan assets to approximately 42.5% fixed income,
42.5% equity, and 15% alternative investments that incorporate absolute return investment
strategies. Previously, the plan asset allocation was approximately 70% equity and 30% fixed
income. The Company annually reviews its long-term return rate assumption, which is currently 8%.
In addition to providing pension benefits, Sears provides domestic and Canadian employees and
retirees certain medical benefits. Certain domestic Sears retirees are also provided life
insurance benefits. The Company shares the cost of the retiree medical benefits with retirees
based on years of service. Generally, the Companys share of these benefit costs will be capped at
Sears contribution calculated during the year of retirement. Sears postretirement benefit plans
are not funded. The Company has the right to modify or terminate these plans.
During the third quarter of fiscal 2005, Holdings announced that the Companys subsidization of
retiree medical costs under the Sears domestic retiree medical plan will be eliminated January 1,
2006 for those Sears retirees under age 65 as of December 31, 2005. The effect of this plan
change, which is to reduce the projected benefit obligation associated with the plan by
approximately $174 million, is recorded as a component of purchase accounting.
11
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Contributions
Contributions were made to the Kmart and Sears domestic pension plans in the amount of $238 million
and $0, respectively, for the 13-week period ended October 29, 2005 and $240 million and $33
million, respectively, for the 39-week period ended October 29, 2005. There are no minimum required
pension contributions for the remainder of fiscal 2005 to either the Kmart or the Sears domestic
pension plan.
NOTE 9 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
millions |
|
October 29, |
|
|
October 27, |
|
|
October 29, |
|
|
October 27, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Average common shares outstanding |
|
|
163.5 |
|
|
|
89.2 |
|
|
|
149.8 |
|
|
|
89.4 |
|
Dilutive effect of stock options |
|
|
0.1 |
|
|
|
6.4 |
|
|
|
1.6 |
|
|
|
6.0 |
|
9% convertible subordinated notes |
|
|
|
|
|
|
6.0 |
|
|
|
|
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares |
|
|
163.6 |
|
|
|
101.6 |
|
|
|
151.4 |
|
|
|
101.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of net income available to common shareholders to net income available to
common shareholders with assumed conversions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
millions, except per share data |
|
October 29, |
|
|
October 27, |
|
|
October 29, |
|
|
October 27, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income available to common shareholders |
|
$ |
58 |
|
|
$ |
552 |
|
|
$ |
210 |
|
|
$ |
797 |
|
Interest and accretion of debt discount on 9% convertible
notes, net of tax |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders with
assumed conversions |
|
$ |
58 |
|
|
$ |
554 |
|
|
$ |
210 |
|
|
$ |
804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.35 |
|
|
$ |
6.19 |
|
|
$ |
1.40 |
|
|
$ |
8.91 |
|
Diluted |
|
$ |
0.35 |
|
|
$ |
5.45 |
|
|
$ |
1.39 |
|
|
$ |
7.93 |
|
The 9% convertible subordinated notes and accrued interest were converted into 6.3 million
shares of Kmart common stock on January 31, 2005.
Kmarts outstanding treasury shares were retired and cancelled in connection with the Merger.
NOTE 10 STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the fair value method in accordance with
SFAS No. 123(R), Accounting for Stock-Based Compensation. The fair value of each stock option is
estimated as of the date of grant using the Black-Scholes option-pricing model. Total stock-based
compensation expense of approximately $11 million is expected to be recognized in 2005.
12
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Upon consummation of the Merger, 8,011 shares of restricted stock were granted to Aylwin B. Lewis,
currently Chief Executive Officer and President of Holdings, at a grant price of $124.83 per share.
The grant vests in installments over three years from the grant date, subject to satisfaction of
certain performance criteria. The Company will recognize compensation expense of $1 million over
the vesting period.
In addition, on March 28, 2005, Alan J. Lacy, Vice Chairman of Holdings, was granted 75,000 shares
of restricted stock at a grant price of $131.11 per share. The grant vests in full on June 30,
2006. The Company will recognize compensation expense of $10 million over the vesting period. At
the same time, Mr. Lacy was also granted a stock option to purchase 200,000 shares of common stock
with an exercise price of $131.11 per share. The option vests in equal installments over four
years, subject to acceleration in certain circumstances. The Company will recognize compensation
expense of $11 million over the vesting period.
Upon the completion of the Merger, each option to purchase shares of Kmart common stock held by
directors or executives of Kmart (whether vested or unvested) was converted into the right to
purchase an equivalent number of shares of Holdings common stock at an exercise price per share
equal to the exercise price per share of the option before the conversion. In addition, each
restricted share of Kmart common stock was converted into a restricted share of Holdings common
stock.
Upon adoption of the Merger Agreement by Sears stockholders, a pro rata portion of shares of Sears
common stock owned by Sears employees that were subject to restrictions and that were granted at
least six months prior to the adoption of the Merger Agreement became free of restrictions. As a
result, the holders were able to make an election to receive shares of Holdings or cash with
respect to such shares. The restricted shares of Sears stock that did not vest were each converted
into 0.5 of a share of Holdings common stock and will continue to vest over their original vesting
period. Approximately 250,000 shares of Holdings common stock resulted from this conversion. The
Company remeasured these shares to fair value at $124.83 per share (as of the acquisition date) and
will recognize compensation expense of $31 million over the remaining vesting period.
Options to acquire approximately 490,000 shares of Holdings common stock were outstanding as of
October 29, 2005.
NOTE
11 CLAIMS RESOLUTION AND BANKRUPTCY-RELATED SETTLEMENTS
Claims Resolution
On May 6, 2003, Kmart Corporation (the Predecessor Company) emerged from reorganization
proceedings under Chapter 11 of the federal bankruptcy laws pursuant to the terms of a plan of
reorganization. Kmart Corporation is presently an indirect, wholly-owned subsidiary of the
Company.
The Company continues to make progress in the reconciliation and settlement of various classes of
claims associated with the discharge of the Predecessor Companys liabilities subject to compromise
pursuant to the plan of reorganization. Since June 30, 2003, the first distribution date
established in the plan of reorganization, approximately 25 million shares of the 31.9 million
shares set aside for distribution have been distributed to holders of Class 5 claims and
approximately $4 million in cash has been distributed to holders of Class 7 claims. Due to the
significant volume of claims filed to-date, it is premature to estimate with any degree of accuracy
the ultimate allowed amount of such claims for each class of claims under the plan of
reorganization. Accordingly, the Companys current distribution reserve for Class 5 claim settlements is 15 percent
of the total shares expected to be distributed. Differences between amounts filed and the
Companys estimates are being investigated and will be resolved in connection with its claims
resolution process. The claims reconciliation process may result in material adjustments to
current estimates of allowable claims.
13
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
During the first quarter of fiscal 2005, the Company reduced the distribution reserve from 20
percent to 15 percent, resulting in the distribution of approximately 1.5 million additional shares
to claimants who had previously received shares for allowed claims. In connection with this
action, Kmart received an additional 66,889 shares in the first quarter as a result of
bankruptcy-related settlements entered into prior to the April 1, 2005 distribution date in which
the Company was assigned Class 5 claims.
The remaining shares in the distribution reserve will be issued to claimants on a pro-rata basis
if, upon settlement of all claims, the ultimate amount allowed for Class 5 claims is consistent
with the plan of reorganization. The next scheduled distribution under the plan of reorganization
is expected to commence on or about January 1, 2006.
Bankruptcy-Related Settlements
The Company recognized recoveries of $1 million and $33 million for the 13- and 39-week periods
ended October 29, 2005, respectively, related to vendors who had received cash payments for
pre-petition obligations (critical vendor claims) or preference payments. In conjunction with
these recoveries, the Company was assigned 7,302 and 216,965 shares of common stock (weighted
average price of $124.35 and $119.15 per share) with an approximate value of $1 million and $26
million for the 13- and 39-week periods ended October 29, 2005, respectively. Of the 216,965
shares, 50,748 were cancelled on the effective date of the Merger.
NOTE
12 SHAREHOLDERS EQUITY
The following table summarizes the changes in shareholders equity during the 39-week period ended
October 29, 2005:
(millions)
|
|
|
|
|
Balance, beginning of year |
|
$ |
4,469 |
|
Acquisition of Sears |
|
|
6,491 |
|
Stock options exercised |
|
|
100 |
|
Conversion of subordinated note |
|
|
63 |
|
Income tax benefit on nonqualified stock options |
|
|
49 |
|
Common shares repurchased |
|
|
(434 |
) |
Net income |
|
|
210 |
|
Other comprehensive income |
|
|
2 |
|
Other |
|
|
(5 |
) |
|
|
|
|
Balance, October 29, 2005 |
|
$ |
10,945 |
|
|
|
|
|
On March 25, 2005, ESL and its affiliates exercised an option to purchase approximately 6.5
million shares of Holdings common stock granted pursuant to an investment agreement dated January
24, 2003 between Kmart Corporation, ESL and Third Avenue Trust, on behalf of certain of its
investment series (Third Avenue). In accordance with the investment agreement, Holdings issued
shares of its common stock upon the receipt of $84 million. As a result of these transactions, ESL
and its affiliates do not own any more options to purchase shares of Holdings pursuant to the
investment agreement.
On April 26, 2005, Third Avenue Trust exercised options to purchase 140,000 shares of Holdings
common stock for a purchase price of $2 million. Third Avenue acquired these options pursuant to
an assignment and
assumption agreement, dated May 5, 2003, by and between ESL and Third Avenue. All of the options
assigned to Third Avenue under the assignment and assumption agreement were exercised as a result
of this transaction.
During the 13 weeks ended October 29, 2005, the Company repurchased 3.7 million of its common
shares at a total cost of $434 million under a common share repurchase program. This program,
approved by the Board of
14
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Directors during the third quarter of fiscal 2005, authorized the
repurchase of up to an aggregate of $1.0 billion of the Companys common shares. As of October 29,
2005, the Company had $566 million of remaining authorization under this program.
Comprehensive Income and Accumulated Other Comprehensive Loss
The following table shows the computation of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
|
|
October 29, |
|
|
October 27, |
|
|
October 29, |
|
|
October 27, |
|
millions |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income |
|
$ |
58 |
|
|
$ |
552 |
|
|
$ |
210 |
|
|
$ |
797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (income)/loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest rate swaps |
|
|
(3 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
(1 |
) |
Unrealized loss on foreign currency forwards |
|
|
(30 |
) |
|
|
|
|
|
|
(40 |
) |
|
|
|
|
Foreign currency translation adjustments |
|
|
48 |
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive (income)/loss |
|
|
15 |
|
|
|
|
|
|
|
2 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
73 |
|
|
$ |
552 |
|
|
$ |
212 |
|
|
$ |
796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table displays the components of accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
millions |
|
October 29, |
|
|
October 27, |
|
|
January 26, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
Cumulative unrealized derivative losses |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
Unrealized loss on foreign currency forwards |
|
|
4 |
|
|
|
|
|
|
|
|
|
Minimum pension liability, net of tax |
|
|
(77 |
) |
|
|
|
|
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(75 |
) |
|
$ |
|
|
|
$ |
(77 |
) |
|
|
|
|
|
|
|
|
|
|
NOTE
13 INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes which requires that deferred tax assets and liabilities be recognized using enacted tax
rates for the effect of temporary differences between the financial reporting and tax bases of
recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by
a valuation allowance if it is more likely than not that some portion of or all of the deferred tax
asset will not be realized.
During the first quarter of fiscal 2005, the Company recognized a reversal of approximately $1.1
billion of its pre-Merger deferred income tax valuation allowance as a result of the Merger and the
combined tax attributes resulting from the Merger. Pursuant to SFAS No. 109, the recognition of
this reversal is included in the Companys purchase accounting adjustments as a reduction to
goodwill attributable to the Merger. Given the Companys current and forecasted levels of
profitability, as well as its ability to realize the deferred tax assets through tax strategies if
necessary, management believes that this portion of the deferred tax asset will more likely than
not be realized.
In connection with the Merger, deferred tax assets of $284 million, with a corresponding valuation
allowance, were recorded related to state tax benefits of Sears that are not expected to be
realized. As a result, the consolidated valuation allowance as of October 29, 2005 is $460 million
and relates to the uncertainty around the realization of certain state deferred tax assets. The
Company will continue to assess the likelihood of
15
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
realization of these state deferred tax assets
and will reduce the valuation allowance on such assets in the future if it becomes more likely than
not that the net deferred tax assets will be utilized.
NOTE
14 INVESTMENTS IN AFFILIATED COMPANIES
On March 2, 2004, Footstar, Inc. (FTS) and its direct and indirect subsidiaries, including the
Meldisco subsidiaries of FTS, filed for Chapter 11 protection in the United States Bankruptcy Court
for the Southern District of New York. FTS continues to operate its businesses and manage its
properties as debtors-in-possession. Prior to FTSs bankruptcy filing, Kmart was a party to a
master agreement with FTS that provided FTS with a non-transferable, exclusive right and license to
operate the footwear departments in Kmart stores. Pursuant to that agreement, subsidiaries of
Meldisco, substantially all of which were 49% owned by Kmart and 51% owned by FTS, operated the
footwear departments pursuant to license agreements between those subsidiaries and Kmart.
In August 2004, FTS filed a motion with the bankruptcy court to assume the master agreement and the
license agreements. Kmart objected to that motion and filed a separate motion to terminate the
master agreement and the license agreements. On July 2, 2005, FTS and Kmart entered into a
comprehensive settlement agreement that resolved all outstanding disputes between Kmart and FTS.
On August 25, 2005, the bankruptcy court entered an order approving the settlement agreement, and,
consistent with the terms of the settlement agreement, permitting FTS and Kmart to amend and FTS to
assume the master agreement. Among other things, the settlement (i) required FTS to pay Kmart $45
million to cure its monetary defaults under the master agreement, (ii) provides that the master
agreement will terminate at the end of 2008 rather than in 2012, (iii) eliminated Kmarts equity
interests in the Meldisco subsidiaries effective as of January 2, 2005 in exchange for payments to
Kmart based on a set percentage of gross sales, and (iv) permits Kmart to require FTS to vacate up
to 550 stores that close or convert to the Sears Essentials format, provided that Kmart buys FTSs
inventory at each converting or closing store at book value. The settlement also permits Kmart to
require FTS to vacate additional closing or converting stores in exchange for a per-store fee.
On August 26, 2005, FTS made the $45 million cure payment to Kmart. Holdings recorded a gain of $21
million, classified within other income, related to the settlement agreement in the third quarter
of 2005. The cure payment was a final settlement of all of Kmarts claims in respect of its
interest in the Meldisco businesses through and including August 25, 2005.
In addition, during the third quarter of fiscal 2005 Kmart received payments totaling approximately
$15 million as additional license fees earned from January 2, 2005 to August 27, 2005. This amount
has been recognized as additional merchandise sales and service revenue in the third quarter of
fiscal 2005.
FTS has filed a plan of reorganization with the bankruptcy court. Kmarts results with respect to
the amended footwear master agreement may be affected by whether (i) FTS obtains bankruptcy court
approval of its plan of reorganization and successfully emerges from bankruptcy and (ii) FTS is
able to successfully manage its business in the future.
As of October 29, 2005, ESL and its affiliates owned 9.9% of the common stock of FTS.
NOTE
15 REAL ESTATE TRANSACTIONS
During fiscal 2004, the Company entered into multiple agreements with Home Depot U.S.A., Inc. (a
subsidiary of The Home Depot, Inc.) (Home Depot) to sell four properties and assign 14 leased
properties for an
16
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
aggregate purchase price of $271 million. The gain on sales of assets for the 13
and 39-week periods ended October 27, 2004 include $198 million and $241 million, respectively,
attributable to these agreements.
Also during fiscal 2004, Kmart agreed to sell four owned properties, assign 45 leased properties
and lease one owned store to Sears for a total purchase price of approximately $576 million.
Included in the gain on sales of assets for the 13 and 39-week periods ended October 27, 2004 is a
gain of $599 million related to this agreement.
The Company also sold certain other real and personal property assets, resulting in net gains of
$15 million and $25 million for the 13 and 39-weeks ended October 29, 2005, respectively, and $10
million and $71 million for the 13 and 39-weeks ended October 27, 2004, respectively. Included
within this gain for the 39-week period ended October 27, 2004 was $18 million related to the sale
of the Companys Trinidad subsidiary and its associated property, $12 million related to the sale
of corporate airplanes and $41 million from sales of other real and personal property.
During the 39-weeks ended October 29, 2005 and October 27, 2004, the Company purchased 19 and 28
previously leased operating properties for $98 million and $103 million, respectively. In the
normal course of business, the Company considers opportunities to purchase leased operating
properties, as well as offers to sell owned, or assign leased, operating and non-operating
properties. These transactions may, individually or in the aggregate, result in material proceeds
or outlays of cash. In addition, the Company reviews leases that will expire in the short-term in
order to determine the appropriate action to take with respect to them.
NOTE
16 RELATED PARTY DISCLOSURE
The Companys Board of Directors has delegated authority to direct investment of the Companys
surplus cash to Edward S. Lampert, subject to various limitations that have been or may be from
time to time adopted by the Board of Directors and/or the Finance Committee of the Board of
Directors. Mr. Lampert is Chairman of the Companys Board of Directors and is the Chairman and
Chief Executive Officer of ESL. Neither Mr. Lampert nor ESL will receive compensation for any such
investment activities undertaken on behalf of the Company. ESL beneficially owned approximately
40% of the Companys outstanding common stock as of October 29, 2005.
Further, to clarify the expectations that the Board of Directors has with respect to the investment
of the Companys surplus cash, the Board has renounced, in accordance with Delaware law, any
interest or expectancy of the Company associated with any investment opportunities in securities
that may come to the attention of Mr. Lampert or any employee, officer, director or advisor to ESL
and its affiliated investment entities who also serves as an officer or director of the Company
(each, a Covered Party) other than (a) investment opportunities that come to such Covered Partys
attention directly and exclusively in such Covered Partys capacity as a director, officer or
employee of the Company, (b) control investments in companies in the mass merchandising, retailing,
commercial appliance distribution, product protection agreements, residential and commercial
product installation and repair services and automotive repair and maintenance industries and (c)
investment opportunities in companies or assets with a significant role in the Companys retailing
business, including investment in real estate currently leased by the Company or in suppliers for
which the Company is a substantial customer representing over 10% of such companies revenues, but
excluding pre-existing investments of ESL.
Holdings employs certain employees of ESL. William C. Crowley is a director and the Executive Vice
President and Chief Financial and Administrative Officer of the Company while continuing his role
as President and Chief Operating Officer of ESL. The Vice President of Business Development and
the Senior Vice President of Real Estate for the Company are also employed by ESL.
17
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 17 FINANCIAL GUARANTEES
The Company issues various types of guarantees in the normal course of business. The Company had
the following guarantees outstanding as of October 29, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
millions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank |
|
|
SRAC |
|
|
|
|
|
|
|
|
|
Issued |
|
|
Issued |
|
|
Other |
|
|
Total |
|
Standby letters of credit |
|
$ |
839 |
|
|
$ |
133 |
|
|
$ |
|
|
|
$ |
972 |
|
Commercial letters of credit |
|
|
145 |
|
|
|
215 |
|
|
|
|
|
|
|
360 |
|
Secondary lease obligations and performance guarantee |
|
|
|
|
|
|
|
|
|
|
130 |
|
|
|
130 |
|
The secondary lease obligations relate to certain store leases of previously divested Sears
businesses. The Company remains secondarily liable if the primary obligor defaults. As of October
29, 2005, the Company had a $19 million liability recorded in other liabilities, which represents
the Companys current estimate of potential obligations related to these leases. The performance
guarantee relates to certain municipal bonds issued in connection with the Companys headquarters
building. This guarantee expires in 2007.
NOTE
18 SUMMARY OF SEGMENT DATA
Holdings is continuing the process of integrating Kmart and Sears. To date, for purposes of
reviewing results of operations and making asset-allocation decisions, senior management has
continued to utilize principally the reporting structures which existed independently for Sears and
Kmart prior to the Merger. As a result, the Company currently has three reportable segments:
Kmart, Sears Domestic and Sears Canada, compared to one segment in the prior year. The
accompanying summary of segment data for the 39-week period ended October 29, 2005 includes the
results of operations of Sears subsequent to March 24, 2005, the date of the Merger. Sears
Canadas results are reported to Holdings on a one-month lag. Therefore, the results of operations
for the 13-week period ended October 29, 2005 include operating results for Sears Canada for the
period from July 3, 2005 to October 1, 2005. For the 39-week period ended October 29, 2005, the
results of operations include operating results for Sears Canada from March 25, 2005 to October 1,
2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 27, |
|
millions |
|
October 29, 2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sears |
|
|
Sears |
|
|
|
Kmart |
|
|
Sears |
|
|
Holdings |
|
|
Holdings |
|
|
|
|
|
|
|
Domestic |
|
|
Canada |
|
|
|
|
|
|
|
|
|
Merchandise sales and services |
|
$ |
4,172 |
|
|
$ |
6,803 |
|
|
$ |
1,143 |
|
|
$ |
12,118 |
|
|
$ |
4,426 |
|
Credit and financial products revenues |
|
|
|
|
|
|
|
|
|
|
84 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
4,172 |
|
|
|
6,803 |
|
|
|
1,227 |
|
|
|
12,202 |
|
|
|
4,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, buying and occupancy |
|
|
3,145 |
|
|
|
4,805 |
|
|
|
833 |
|
|
|
8,783 |
|
|
|
3,324 |
|
Selling and administrative |
|
|
942 |
|
|
|
1,716 |
|
|
|
314 |
|
|
|
2,972 |
|
|
|
994 |
|
Depreciation and amortization |
|
|
13 |
|
|
|
214 |
|
|
|
36 |
|
|
|
263 |
|
|
|
6 |
|
Provision for uncollectible accounts |
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
21 |
|
|
|
|
|
Gain on sales of assets |
|
|
(17 |
) |
|
|
|
|
|
|
2 |
|
|
|
(15 |
) |
|
|
(807 |
) |
Restructuring charges |
|
|
6 |
|
|
|
|
|
|
|
53 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
4,089 |
|
|
|
6,735 |
|
|
|
1,259 |
|
|
|
12,083 |
|
|
|
3,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
83 |
|
|
$ |
68 |
|
|
$ |
(32 |
) |
|
$ |
119 |
|
|
$ |
909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
7,745 |
|
|
$ |
18,654 |
|
|
$ |
4,341 |
|
|
$ |
30,740 |
|
|
$ |
7,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 39 Weeks Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 27, |
|
millions |
|
October 29, 2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sears |
|
|
Sears |
|
|
|
Kmart |
|
|
Sears |
|
|
Holdings |
|
|
Holdings |
|
|
|
|
|
|
|
Domestic |
|
|
Canada |
|
|
|
|
|
|
|
|
|
Merchandise sales and services |
|
$ |
13,354 |
|
|
$ |
17,141 |
|
|
$ |
2,373 |
|
|
$ |
32,868 |
|
|
$ |
13,893 |
|
Credit and financial products revenues |
|
|
|
|
|
|
|
|
|
|
171 |
|
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
13,354 |
|
|
|
17,141 |
|
|
|
2,544 |
|
|
|
33,039 |
|
|
|
13,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, buying and occupancy |
|
|
10,164 |
|
|
|
12,112 |
|
|
|
1,733 |
|
|
|
24,009 |
|
|
|
10,520 |
|
Selling and administrative |
|
|
2,840 |
|
|
|
4,175 |
|
|
|
654 |
|
|
|
7,669 |
|
|
|
2,921 |
|
Depreciation and amortization |
|
|
33 |
|
|
|
541 |
|
|
|
76 |
|
|
|
650 |
|
|
|
14 |
|
Provision for uncollectible accounts |
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
38 |
|
|
|
|
|
Gain on sales of assets |
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
(25 |
) |
|
|
(911 |
) |
Restructuring charges |
|
|
51 |
|
|
|
|
|
|
|
53 |
|
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
13,063 |
|
|
|
16,828 |
|
|
|
2,554 |
|
|
|
32,445 |
|
|
|
12,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
291 |
|
|
$ |
313 |
|
|
$ |
(10 |
) |
|
$ |
594 |
|
|
$ |
1,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
7,745 |
|
|
$ |
18,654 |
|
|
$ |
4,341 |
|
|
$ |
30,740 |
|
|
$ |
7,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
19 LEGAL PROCEEDINGS
Pending against Sears and certain of its officers and directors are a number of lawsuits, described
below, that relate to Sears credit card business and public statements about it. The Company
believes that all of these claims lack merit and is defending against them vigorously.
§ |
|
On and after October 18, 2002, several actions were filed in the
United States District Court for the Northern District of Illinois
against Sears and certain current and former officers alleging
that certain public announcements by Sears concerning its credit
card business violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The
Court has consolidated the actions and certified the consolidated
action as a class action. Discovery is underway. The trial is
scheduled to begin in September 2006. |
§ |
|
On and after November 15, 2002, several actions were filed in the
United States District Court for the Northern District of Illinois
against Sears, certain officers and directors, and alleged
fiduciaries of Sears 401(k) Savings Plan (the Plan), seeking
damages and equitable relief under the Employee Retirement Income
Security Act of 1974 (ERISA). The plaintiffs purport to
represent participants in the Plan, and allege breaches of
fiduciary duties under ERISA in connection with the Plans
investment in Sears common shares and alleged communications made
to Plan participants regarding Sears financial condition. The
Court has consolidated these actions and certified the
consolidated action as a class action. Discovery is underway. No
trial date has been set. |
§ |
|
On October 23, 2002, a purported derivative suit was filed in the
Supreme Court of the State of New York (the New York Court)
against Sears (as a nominal defendant) and certain current and
former directors seeking damages on behalf of Sears. The complaint
purports to allege a breach of fiduciary duty by the directors
with respect to Sears management of its credit business. Two
similar suits were subsequently filed in the Circuit Court of Cook
County, Illinois (the Illinois State Court), and a third was
filed in the
United States District Court for the Northern District of Illinois. The New
York Court derivative suit was dismissed on June 21, 2004 and the plaintiff has
appealed. The two Illinois State Court derivative suits were dismissed on
September 30, 2004. The order of dismissal became final on December 1, 2004,
and the |
19
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
|
time to appeal has expired. The Illinois federal court suit has been
stayed pending resolution of the New York Court derivative action. |
|
§ |
|
On June 17, 2003, an action was filed in the Northern
District of Illinois against Sears and certain
officers, purportedly on behalf of a class of all
persons who, between June 21, 2002 and October 17,
2002, purchased the 7% notes that SRAC issued on June
21, 2002. An amended complaint was filed, naming as
additional defendants certain former officers, SRAC
and several investment banking firms who acted as
underwriters for SRACs March 18, May 21 and June 21,
2002 notes offerings. The amended complaint alleges
that the defendants made misrepresentations or
omissions concerning its credit business during the
class period and in the registration statements and
prospectuses relating to the offerings. The amended
complaint alleges that these misrepresentations and
omissions violated Sections 10(b) and 20(a) of the
Securities Exchange Act and Rule 10b-5 promulgated
thereunder, and Sections 11, 12 and 15 of the
Securities Act of 1933 and purports to be brought on
behalf of a class of all persons who purchased any
security of SRAC between October 24, 2001 and October
17, 2002, inclusive. The defendants filed motions to
dismiss the action. On September 24, 2004, the court
granted these motions in part, and denied them in
part. The court dismissed the claims related to the
March 18 and May 21, 2002 note offerings because the
plaintiff did not purchase notes in those offerings.
The court dismissed the Section 10(b) and Rule 10b-5
claims against several of the individual defendants
because the plaintiff failed to adequately plead such
claims. The court sustained the remaining claims. By
leave of court, the plaintiffs filed a second amended
complaint on November 15, 2004. Defendants (other
than one of the underwriter defendants) filed motions
to partially dismiss the second amended complaint on
January 10, 2005. The defendant that did not move to
partially dismiss filed an answer to the second
amended complaint on January 28, 2005, denying all
liability. On September 14, 2005, the court granted
the pending motions to dismiss in part, and denied
them in part. The court dismissed the Section 11
claim with respect to SRACs May 21, 2002 notes on
the ground that the plaintiffs lacked standing, and
the Section 12 claims with respect to SRACs March
18, 2002 notes and May 21, 2002 notes on the ground
that the plaintiffs could not allege damages. The
court dismissed the Section 15 claim on the ground
that the plaintiffs had failed to allege a predicate
violation of the Securities Act of 1933 on the part
of SRAC. The court dismissed the Section 10(b) and
Rule 10b-5 claims as to some, but not all, of the
individual defendants. The court sustained the
remaining claims. By leave of court, the plaintiffs
filed a third amended complaint on October 28, 2005.
The non-underwriter defendants filed a motion to
partially dismiss the third amended complaint on
November 15, 2005. |
Following the announcement of the Merger on November 17, 2004, several actions have been filed
relating to the transaction. These lawsuits are in their preliminary stages, and defendants have
not yet been required to respond to certain of the complaints. The Company believes that all of
these claims lack merit and intends to defend against them vigorously.
§ |
|
Three actions have been filed in the Circuit Court of Cook County, Illinois. These actions
assert claims on behalf of a purported class of Sears stockholders against Sears and certain
of its officers and directors, together with Kmart, Edward S. Lampert, William C. Crowley and
other affiliated entities, alleging breach of fiduciary duty in connection with the merger.
The plaintiffs allege that the merger favors interested defendants by awarding them
disproportionate benefits, and that the defendants failed to take appropriate steps to
maximize the value of a merger transaction for Sears stockholders. The actions have been
consolidated, and an amended complaint was filed in early January 2005. The amended complaint
asserts similar breach-of-fiduciary duty claims, as well as alleging that defendants have made
insufficient and misleading disclosures in connection with the mergers, and seeks injunctive
relief. The plaintiffs have moved for expedited discovery. On February 1, 2005, the court
granted the defendants motion to stay or dismiss these actions in favor of then-pending
parallel litigation in the New York Supreme Court. Plaintiffs appealed the stay order to the
Appellate Court of Illinois-First District. On October 28, 2005, following the
dismissal with prejudice of the New York actions and the New York plaintiffs
failure to appeal, the Appellate Court of Illinois dismissed the appeal as
moot. The cases are now pending in the Circuit Court, and the defendants intend
to renew their motion to dismiss. |
20
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
§ |
|
Two actions were filed in the Supreme Court of the
State of New York, New York County, asserting
substantially similar claims against Sears and
certain of its officers and directors. The parties
agreed to consolidate these two actions. Pending
consolidation, the defendants moved to dismiss the
complaint in both actions for lack of standing and
failure to state a cause of action. On February 15,
2005, the Court ordered that the two cases be
consolidated as a single action. On February 16,
2005, the plaintiffs filed a superceding consolidated
amended class action complaint. The amended complaint
asserts claims on behalf of a purported class of
Sears stockholders against Sears and certain of its
officers and directors for breach of fiduciary duty
in connection with the merger on the grounds that
defendants allegedly failed to take proper steps to
maximize the value of a merger transaction for Sears
stockholders. Additionally, the plaintiffs claim that
the defendants made insufficient and misleading
disclosures in connection with the mergers. The
amended complaint also names Kmart, Edward S. Lampert
and ESL, Inc. as defendants on the grounds that they
aided and abetted the alleged breaches of fiduciary
duty. The amended complaint seeks provisional and
permanent injunctive relief, as well as damages. On
March 24, 2005, the Court denied plaintiffs motions
for expedited discovery and a preliminary injunction
against the closing of the mergers. On July 29,
2005, the Court granted all defendants motions to
dismiss the action with prejudice. The time to
appeal has expired, and plaintiffs have not filed an
appeal. |
§ |
|
One action has been filed in the United States
District Court for the Northern District of Illinois.
This action asserts claims under the federal
securities laws on behalf of a purported class of
Sears stockholders against Sears and Alan J. Lacy,
for allegedly failing to make timely disclosure of
merger discussions with Kmart during the period
November 8 through 16, 2004, and seeks damages. The
court appointed a lead plaintiff and lead counsel,
and an amended complaint was filed on March 11, 2005.
The amended complaint, names Edward S. Lampert and
ESL Partners, L.P., as additional defendants, and
purports to assert claims on behalf of sellers of
Sears stock during the period September 9 through
November 16, 2004. All defendants have moved to
dismiss, and briefing on the motions was completed in
early July 2005. |
Effective May 11, 2005, Sears terminated for cause its Master Services Agreement (the Agreement)
with Computer Sciences Corporation (CSC). CSC has been providing information technology
infrastructure support services, including desktops, servers, and systems to support Sears-related
websites, voice and data networks and decision support technology to Sears and its subsidiaries
under the 10-year Agreement entered into in June 2004. CSC is obligated to continue providing
these services for an extended period following termination of the Agreement. CSC disputes Sears
assertion that grounds for termination for cause existed and claims that, as a result of
terminating this Agreement, Sears is liable to CSC for damages.
CSC had filed a lawsuit in the United States District Court for the Northern District of Illinois
(the District Court) on March 18, 2005 seeking a declaratory judgment that CSC was not in
material breach of the Agreement and an injunction to prevent Sears from terminating the Agreement
for cause. On April 14, 2005, the District Court denied CSCs motion for a preliminary injunction
and granted Sears motion to compel arbitration. On April 22, 2005 the District Court denied CSCs
motion for reconsideration of the District Courts April 14th ruling, and CSC appealed
the District Courts ruling to the United States Court of Appeals for the Seventh Circuit. That
appeal remains pending. On April 14, 2005, CSC filed an emergency claim with the American
Arbitration Association (AAA), seeking to enjoin Sears from terminating the Agreement for cause.
The AAA denied CSCs request for emergency relief on April 18, 2005. In compliance with the
District Courts order compelling arbitration, the parties began selecting an arbitration panel.
While arbitrator selection was in progress, the parties agreed to suspend arbitration and the
appeal while they voluntarily mediate their disputes. Mediation and settlement efforts are
ongoing.
In March 2002, a class action was filed in the United States District court for the Eastern
District of Michigan on behalf of participants or beneficiaries of the Kmart Corporation Retirement
Savings Plan against various current and former employees and former directors of Kmart Corporation
alleging breach of fiduciary duty under the Employee Retirement Income Security Act for excessive
investment in the Predecessor Companys stock, failure to provide complete and accurate information
about the Predecessor Companys common stock
21
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
and failure to provide accurate information regarding
the Predecessor Companys financial condition. In July 2002, the plaintiffs filed proofs of claim
with the bankruptcy court in an aggregate amount of $180 million. In July 2005, tentative agreement
was reached to settle this action. The settlement is subject to final court approval. Kmart is not
a defendant in this action. The settlement is expected to be covered by insurance, except for
$50,000 that Kmart expects to contribute as part of the settlement. Once the settlement is
approved, Kmart will move to have the proofs of claim filed expunged.
In November 2003, the Creditor Trust created pursuant to the Predecessor Companys plan of
reorganization (the Creditor Trust) filed suit in the Oakland County (Michigan) Circuit Court
against six former executives of the Predecessor Company (the Officer Defendants) and
PricewaterhouseCoopers LLP, the Predecessor Companys independent auditor. The allegations against
the Officer Defendants include violations of their fiduciary duty and breach of contract related to
their employment agreements with the Predecessor Company. Kmart is not a defendant in this action.
The claims against the Officer Defendants were ordered to arbitration by the Oakland County Circuit
Court based on the terms of the employment agreements. In July 2005, in the first of six scheduled
arbitrations involving the Officer Defendants, the arbitration panel found in favor of the
Predecessor Companys former chief executive officer, Charles Conaway, on all of the Creditor
Trusts claims against him.
The Creditor Trust has also filed complaints in the United States Bankruptcy Court for the Northern
District of Illinois (the Bankruptcy Court) against four of the Predecessor Companys former
executives to recover amounts aggregating approximately $2 million paid to them as retention loans.
The former executives filed counterclaims/third party complaints against the Creditor Trust and
Kmart requesting that the Bankruptcy Court set-off whatever contractual severance payments they
were entitled to receive against the amounts of the retention loans. Kmart filed motions to dismiss
the counterclaims, which the Bankruptcy Court has now granted.
In Capital Factors v. Kmart Corporation, the United States District Court for the
Northern District of Illinois ruled that the Bankruptcy Court did not have the authority to
authorize the payment of pre-petition claims of certain trade vendors by the Company. An appeal of
the ruling and subsequent motions for rehearing were denied. In order to satisfy its fiduciary
responsibility to pursue claims against the critical vendors during the pendency of the appeal, in
January 2004 the Company filed suit against a total of 1,189 vendors that received these payments
seeking to recover in excess of $174 million paid to the critical vendors. To date, Kmart has
settled approximately 750 critical vendor claims for a total recovery the Company values at
approximately $61 million.
Kmart is a defendant in a pending pre-petition nationwide class action relating to proper access to
facilities for the disabled under the Americans with Disabilities Act. The class action is pending
in the United States District Court in Denver, Colorado. On July 14, 2005, the court certified a
nationwide class of Kmarts approximately 1,500 stores. On August 22, 2005, the 10th
Circuit Court of Appeals granted Kmart leave to file an interlocutory appeal challenging class
certification, which Kmart has done. At the same time, the parties are engaged in settlement
discussions. The Company is not presently able to determine the outcome of this case.
As previously reported in Kmarts Annual Report on Form 10-K for its fiscal year ended January 26,
2005, the staff of the SEC has been investigating, and the U.S. Attorney for the Eastern District
of Michigan has undertaken an inquiry into, the manner in which Kmart recorded vendor allowances
before a change in accounting principles at the end of fiscal 2001 and the disclosure of certain
events bearing on the Predecessor
Companys liquidity in the fall of 2001. Kmart has cooperated with the SEC and the U.S. Attorneys
office with respect to these matters.
On August 23, 2005, the SEC filed a complaint in the United States District Court for the Eastern
District of Michigan against the Predecessor Companys former chief executive officer and its
former chief financial
22
SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
officer alleging that they misled investors about the Predecessor Companys
liquidity and related matters in the months preceding its bankruptcy in violation of federal
securities law. The complaint seeks permanent injunctions, disgorgement with interest, civil
penalties and officer and director bars. Kmart is not named as a defendant in the action. In its
press release announcing the filing of the complaint, the SEC stated that its Kmart investigation
is continuing.
The Creditor Trust was determined to be the preferred available mechanism for resolving any legal
claims the Company might have based on information from these investigations. The trustee of the
Creditor Trust is charged with responsibility for determining which claims to pursue and,
thereafter, litigating the claims. As discussed above, the Creditor Trust has commenced litigation
against former officers of the Predecessor Company based on information from these investigations.
The Company is subject to various other legal and governmental proceedings, many involving
litigation incidental to the businesses. Some matters contain class action allegations,
environmental and asbestos exposure allegations and other consumer-based claims that involve
compensatory, punitive or treble damage claims in very large amounts as well as other types of
relief. The consequences of these matters are not presently determinable but, in the opinion of
management of the Company after consulting with legal counsel, and taking into account insurance
and reserves, the ultimate liability is not expected to have a material adverse effect on annual
results of operations, financial position, liquidity or capital resources of the Company.
Additional information regarding legal proceedings may be found in Kmarts Annual Report on Form
10-K for its fiscal year ended January 26, 2005.
NOTE 20 SUBSEQUENT EVENTS
Orchard Supply Hardware
On November 23, 2005, the Company closed the sale of 19.9% of the voting stock of Orchard Supply
Hardware Stores Corporation (OSH) to the private equity fund of Ares Management LLC (Ares).
Prior to the sale, OSH had been a wholly-owned subsidiary of the
Company. The private equity fund paid $59 million in
cash for the 19.9% equity interest and a three-year option to purchase, for $127 million,
additional shares of OSH that currently represent 30.2% of OSHs outstanding voting stock. Also,
OSH subsidiaries entered into arrangements for $250 million in financing, consisting of a $130
million senior secured revolving credit facility and a $120 million commercial mortgage-backed
loan. Approximately $56 million of the revolving credit facility has been drawn down at closing.
After the closing of the transaction, the Company has an 80.1% interest in OSH that would be
reduced to approximately 19.9% should the private equity fund of Ares exercise its option.
Sears Canada
On November 15, 2005, Sears Canada completed the sale of its Credit and Financial Services
operations to JPMorgan Chase & Co. (JPMorgan Chase) for approximately $1.9 billion in cash
proceeds net of securitized receivables and other related costs and taxes. In addition, Sears
Canada and JPMorgan Chase have entered into a long-term marketing and servicing alliance with an
initial term of ten years. On December 2, 2005, Sears
Canadas Board of Directors declared that the net after-tax proceeds from the sale will be used to
fund a cash distribution to shareholders in the amount of approximately $1.7 billion with the
balance of sale proceeds to be used for general corporate purposes. The cash distribution to
shareholders is scheduled to be paid on December 16, 2005.
Holdings expects that its after-tax proceeds from this distribution
will approximate $820 million.
On
December 5, 2005 Holdings announced its intention to acquire the
49.5 million outstanding shares of common stock of Sears Canada
which it does not currently own. To acquire that 46% equity interest,
Holdings plans to offer C$16.86 (Canadian dollars) per share for an
aggregate purchase price of C$835 million or $720 million in
U.S. dollars. Holdings also announced that it entered into an
agreement with the largest shareholder of Sears Canada (other than
Holdings) pursuant to which the investor, Natcan Investment
Management, Inc., has agreed to tender all common shares owned or
controlled by it (approximately 9.1% of the outstanding common shares
of Sears Canada) into Sears Holdings offer for the same
consideration. If the transaction is consummated, Sears Canada would
become a wholly-owned subsidiary of Holdings.
23
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with Part II, Item 7 of Kmart Holding
Corporations Annual Report on Form 10-K for the year ended January 26, 2005. The information
contained herein is not a comprehensive discussion and analysis of the financial condition and
results of operations of the Company, but rather an update of the previous disclosures.
OVERVIEW AND CONSOLIDATED OPERATIONS
Overview
Sears Holdings Corporation (Holdings or the Company) was formed for the purpose of consummating
the business combination of Kmart Holding Corporation (Kmart) and Sears, Roebuck and Co.
(Sears), which was completed on March 24, 2005 (the Merger) pursuant to the Agreement and Plan
of Merger, dated as of November 16, 2004 (the Merger Agreement). Upon consummation of the
Merger, Kmart and Sears became wholly-owned subsidiaries of the Company. The Company is a
broadline retailer with approximately 2,300 full-line and 1,200 specialty retail stores in the
United States operating through Kmart and Sears and 370 full-line and specialty stores in Canada
operating through Sears Canada Inc. (Sears Canada), a 54%-owned subsidiary.
The Merger has been accounted for as a purchase business combination, with Kmart designated as
the acquirer. Therefore, the historical financial statements of Kmart became the historical
financial statements of Holdings, the registrant. The accompanying condensed consolidated
statements of operations and cash flows for the 39-week period ended October 29, 2005 include
the results of operations of Sears from March 25, 2005 forward. Therefore, Holdings
operating results for the 39-week period ended October 29, 2005 include approximately 31 weeks
of Sears results and 39 weeks of Kmarts results.
Effective March 23, 2005, the Company changed its fiscal year from the last Wednesday in January to
the Saturday closest to January 31st. As the change in fiscal year end reflects a
change of only three days, the historical financial statements have not been recast to reflect this
change. Sears Canadas fiscal year end is the Saturday closest to December 31. The results of
operations for Sears Canada are reported to Holdings on a one-month lag. Therefore, the condensed
consolidated statement of operations for the 13-week period ended October 29, 2005 includes
operating results for Sears Canada from July 3, 2005 through October 1, 2005. For the 39-week
period ended October 29, 2005, the condensed consolidated statements of operations and cash flows
include operating results for Sears Canada from March 25, 2005 through October 1, 2005.
In aggregate, 62.2 million shares of Holdings common stock were issued to Sears shareholders at a
value of approximately $6.5 billion (based on the average closing price of $104.33 of Kmarts
common stock during the period from November 15, 2004 through November 19, 2004, two business days
before and after the date the Merger was announced). In addition, approximately $5.4 billion in
cash was paid in consideration for (i) all outstanding common stock of Sears, based upon the
proration provisions of the Merger Agreement, and (ii) all outstanding stock options of Sears.
Including transaction costs of $18 million, the total consideration paid was approximately $11.9
billion.
The Merger created a new retail company with significant earnings and cash flow opportunities as a
result of the scale of the combined company. Through the leading proprietary brands owned by Sears
and those exclusively offered by Kmart, Holdings believes that the Companys retail operations will
be able to better distinguish themselves from competitors.
24
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
The combination also expands the points of distribution for Sears and Kmart products in key
markets, especially in Kmarts urban and high-density suburban locations where the Company believes
itself to have a competitive advantage relative to other retailers. The advantages include Kmarts
and Sears name recognition in these locations. In addition, the Merger will accelerate Sears
strategy for stand-alone stores located outside of malls, with Kmarts real estate adding important
urban and highdensity suburban locations, resulting in more rapid and lower-cost store base growth
than Sears would have been able to accomplish on its own.
In order to realize the opportunities provided by the Merger, the Company is working to become more
customer-focused while taking the necessary actions to improve the profitability of its business
model.
Building long-term customer relationships
Holdings interacts with customers in a variety of ways through its various retail formats, as well
as directly in customers homes. The Companys goal is to make its products, brands and services
more responsive to the needs of its customers and to build long-term relationships with those
customers. In order to achieve this goal, the Company is making a number of changes to its store
formats and associated product offerings and closely monitoring customer response to these changes.
The Companys strategies and plans will continue to evolve as it incorporates learnings from
customer response to these changes. Specific initiatives to date include:
§ |
|
launching Sears Essentials, a new retail format. This mid-size
store format offers customers the best of both, meeting the
everyday needs of customers as well as offering
more-destination-focused purchase categories. As of October 29,
2005, Holdings had opened 50 Sears Essentials stores, which have
achieved varying degrees of success. The Company continues to
evaluate alternatives that would allow it to capture the potential of
providing Sears brands and, particularly appliances, to our customers
from our existing Kmart stores. While the Company continues to
believe that Sears Essentials offers an attractive means to provide
customers with these products, the Company has also found success
with selling Sears branded products and appliances in Kmarts. As a
result, the Company has reduced the number of stores planned for
conversion to the Sears Essentials format in 2006. The Company will
continue to assess the pace and planned location of Sears Essentials
in future years and of offering Sears products in existing or
remodeled Kmart stores based on customer response and the capital
required; |
§ |
|
introducing select Sears private label branded products, including
Kenmore and Craftsman products, into certain Kmart stores,
enabling the Company to better differentiate itself from other
mass market retailers; |
§ |
|
remodeling Kmart stores, where the expected financial returns
merit the required capital outlay, to include home appliances.
The Company intends to continue its roll-out of home appliances,
including Sears Kenmore products, into both Sears Essentials and
Kmart locations over the next several years as a means of
expanding its points of distribution in response to competitor
outlet growth. As of October 29, 2005, a total of 88 Kmart stores
offered broad assortments of home appliances; |
§ |
|
completing a national roll-out of Sears credit card payment
acceptance to all Kmart locations and offering Kmart customers the
opportunity to apply for Sears credit cards and related financial
services at Kmart locations; and |
§ |
|
testing multiple new initiatives at select locations, including
the addition of certain Sears customer services to Kmart stores
including Sears Auto Centers, licensed businesses such as hearing
and optical centers, and auto and truck rental services. |
Improving Profitability
The Company is committed to improving its profitability through increasing the efficiency and
effectiveness of its operations. Actions to date include:
25
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
§ |
|
initiating and continuing efforts to improve gross margins,
particularly at Sears, by reducing reliance on certain promotional
events. The impact of these efforts on Sears Domestics operating
results is discussed in the Results of Operations section below; |
§ |
|
integrating the home office functions of Kmart and Sears to reduce
the overall cost structure of Holdings. As of October 29, 2005,
Holdings has eliminated approximately 1,500 positions between
Sears and Kmarts combined home office functions. In addition, a
majority of the 523 Kmart associates who were offered and accepted
relocations opportunities have been relocated as of October 29,
2005; |
§ |
|
improving efficiencies and cost effectiveness of the supply chain,
including the identification of transportation synergies and the
consolidation of international buying offices; |
§ |
|
lowering the fixed costs associated with marketing expenditures by
reducing the number of creative agencies utilized by Sears; |
§ |
|
optimizing Kmart and Sears terms with vendors by sourcing goods on
a combined basis, where possible, to obtain better costs, vendor
support and terms, as well as leveraging the use of common
suppliers where practical; and |
§ |
|
implementing a rigorous process to ensure that the Companys
capital is expended on only those efforts that have higher
potential for creating long-term value for shareholders. |
Results of Operations
The condensed consolidated statements of operations for the 13- and 39-week periods ended October
29, 2005 are not comparable to the prior year periods because the prior year periods do not include
Sears results. Additionally, the condensed consolidated statement of operations for the 39-week
period ended October 29, 2005 is not representative of the Companys operations as it only includes
Sears results of operations from March 25, 2005 forward. Therefore, the Company believes that an
understanding of its reported results, trends and on-going performance is not complete without
presenting results on a pro forma basis.
The Holdings consolidated results of operations on both a reported and pro forma basis are
summarized below. The pro forma adjustments are described on page
40. 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.
The unaudited pro forma financial information in the tables below summarizes the combined results
of operations of Kmart and Sears for the 13-week period ended October 27, 2004 and the 39-week
periods ended October 29, 2005 and October 27, 2004 as though the Merger had occurred as of the
beginning of fiscal 2004. The unaudited pro forma financial information is presented for
informational purposes only and is not indicative of the results of operations that would have been
achieved if the Merger had taken place at the beginning of each period, or that may result in the
future. In addition, the following unaudited pro forma information has not been adjusted to
reflect any operating efficiencies that may be realized as a result of the Merger.
26
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported |
|
|
Pro forma |
|
|
|
13 Weeks Ended |
|
|
13 Weeks Ended |
|
|
|
October 29, |
|
|
October 27, |
|
|
October 29, |
|
|
October 27, |
|
millions, except per common share data |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Merchandise sales and services |
|
$ |
12,118 |
|
|
$ |
4,426 |
|
|
$ |
12,118 |
|
|
$ |
12,753 |
|
Credit and financial products revenues |
|
|
84 |
|
|
|
|
|
|
|
84 |
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
12,202 |
|
|
$ |
4,426 |
|
|
$ |
12,202 |
|
|
$ |
12,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, buying and occupancy |
|
|
8,783 |
|
|
|
3,324 |
|
|
|
8,783 |
|
|
|
9,336 |
|
Gross margin rate |
|
|
27.5 |
% |
|
|
24.9 |
% |
|
|
27.5 |
% |
|
|
26.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative |
|
|
2,972 |
|
|
|
994 |
|
|
|
2,972 |
|
|
|
3,090 |
|
Selling and administrative expense as a percentage of total revenues |
|
|
24.4 |
% |
|
|
22.5 |
% |
|
|
24.4 |
% |
|
|
24.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
263 |
|
|
|
6 |
|
|
|
263 |
|
|
|
283 |
|
Provision for uncollectible accounts |
|
|
21 |
|
|
|
|
|
|
|
21 |
|
|
|
16 |
|
Gain on sales of assets (1) |
|
|
(15 |
) |
|
|
(807 |
) |
|
|
(15 |
) |
|
|
(208 |
) |
Restructuring charges (1) |
|
|
59 |
|
|
|
|
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
12,083 |
|
|
|
3,517 |
|
|
|
12,083 |
|
|
|
12,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
119 |
|
|
|
909 |
|
|
|
119 |
|
|
|
321 |
|
Interest expense, net |
|
|
(70 |
) |
|
|
(25 |
) |
|
|
(70 |
) |
|
|
(84 |
) |
Bankruptcy-related recoveries |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Other income |
|
|
22 |
|
|
|
1 |
|
|
|
22 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority interest and cumulative effect of change in
accounting principle |
|
|
72 |
|
|
|
886 |
|
|
|
72 |
|
|
|
246 |
|
Income taxes |
|
|
28 |
|
|
|
334 |
|
|
|
28 |
|
|
|
89 |
|
Minority interest |
|
|
(14 |
) |
|
|
|
|
|
|
(14 |
) |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of change in accounting principle |
|
|
58 |
|
|
|
552 |
|
|
|
58 |
|
|
|
150 |
|
Cumulative effect of change in accounting principle, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
58 |
|
|
$ |
552 |
|
|
$ |
58 |
|
|
$ |
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share before cumulative effect of change in accounting
principle |
|
$ |
0.35 |
|
|
$ |
5.45 |
|
|
$ |
0.35 |
|
|
$ |
0.93 |
|
Diluted earnings per share (1) |
|
$ |
0.35 |
|
|
$ |
5.45 |
|
|
$ |
0.35 |
|
|
$ |
0.93 |
|
|
|
(1) Diluted earnings per share impact of certain significant items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets |
|
$ |
0.06 |
|
|
$ |
4.95 |
|
|
$ |
0.06 |
|
|
$ |
0.81 |
|
Restructuring charges |
|
|
(0.13 |
) |
|
|
|
|
|
|
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(0.07 |
) |
|
$ |
4.95 |
|
|
$ |
(0.07 |
) |
|
$ |
0.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These
items include Kmarts store sale and lease assignment
transactions with The Home Depot, Inc. and Sears in the as reported 2004 period and the
transaction with The Home Depot, Inc. in the pro forma 2004
period as described in Note 15 to the condensed consolidated
financial statements and charges described in Note 3 to the condensed
consolidated financial statements associated with Kmart and Sears Canada restructuring initiatives
implemented during the fiscal 2005 periods. Items like these periodically affect the Companys results; however, the amounts of
these types of items may vary significantly from period to period and have a disproportionate effect on the periods presented,
which affects the comparability of the Companys financial performance. Management considers the total impact of these items,
along with reported results, when it reviews and evaluates the Companys financial performance.
27
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported |
|
|
Pro forma |
|
|
|
39 Weeks Ended |
|
|
39 Weeks Ended |
|
|
|
October 29, |
|
|
October 27, |
|
|
October 29, |
|
|
October 27, |
|
millions, except per common share data |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Merchandise sales and services |
|
$ |
32,868 |
|
|
$ |
13,893 |
|
|
$ |
37,919 |
|
|
$ |
38,869 |
|
Credit and financial products revenues |
|
|
171 |
|
|
|
|
|
|
|
257 |
|
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
33,039 |
|
|
$ |
13,893 |
|
|
$ |
38,176 |
|
|
$ |
39,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, buying and occupancy |
|
|
24,009 |
|
|
|
10,520 |
|
|
|
27,681 |
|
|
|
28,721 |
|
Gross margin rate |
|
|
27.0 |
% |
|
|
24.3 |
% |
|
|
27.0 |
% |
|
|
26.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative |
|
|
7,669 |
|
|
|
2,921 |
|
|
|
8,994 |
|
|
|
9,076 |
|
Selling and administrative expense as a percentage of total revenues |
|
|
23.2 |
% |
|
|
21.0 |
% |
|
|
23.6 |
% |
|
|
23.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
650 |
|
|
|
14 |
|
|
|
826 |
|
|
|
871 |
|
Provision for uncollectible accounts |
|
|
38 |
|
|
|
|
|
|
|
54 |
|
|
|
42 |
|
Gain on sales of assets (1) |
|
|
(25 |
) |
|
|
(911 |
) |
|
|
(26 |
) |
|
|
(321 |
) |
Restructuring charges (1) |
|
|
104 |
|
|
|
|
|
|
|
104 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
32,445 |
|
|
|
12,544 |
|
|
|
37,633 |
|
|
|
38,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
594 |
|
|
|
1,349 |
|
|
|
543 |
|
|
|
692 |
|
Interest expense, net |
|
|
(184 |
) |
|
|
(86 |
) |
|
|
(217 |
) |
|
|
(269 |
) |
Bankruptcy-related recoveries |
|
|
33 |
|
|
|
13 |
|
|
|
33 |
|
|
|
13 |
|
Other income |
|
|
33 |
|
|
|
4 |
|
|
|
43 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority interest and cumulative effect
of change in accounting principle |
|
|
476 |
|
|
|
1,280 |
|
|
|
402 |
|
|
|
493 |
|
Income taxes |
|
|
183 |
|
|
|
483 |
|
|
|
172 |
|
|
|
184 |
|
Minority interest |
|
|
(7 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of change in accounting principle |
|
|
300 |
|
|
|
797 |
|
|
|
231 |
|
|
|
295 |
|
Cumulative effect of change in accounting principle, net of tax |
|
|
(90 |
) |
|
|
|
|
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
210 |
|
|
$ |
797 |
|
|
$ |
141 |
|
|
$ |
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share before cumulative effect of change in
accounting principle |
|
$ |
1.98 |
|
|
$ |
7.93 |
|
|
$ |
1.42 |
|
|
$ |
1.84 |
|
Diluted earnings per share(1) |
|
$ |
1.39 |
|
|
$ |
7.93 |
|
|
$ |
0.87 |
|
|
$ |
1.84 |
|
|
|
(1) Diluted EPS impact of selected significant items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets |
|
$ |
0.10 |
|
|
$ |
5.59 |
|
|
$ |
0.09 |
|
|
$ |
1.22 |
|
Restructuring charges |
|
|
(0.32 |
) |
|
|
|
|
|
|
(0.28 |
) |
|
|
(0.16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(0.22 |
) |
|
$ |
5.59 |
|
|
$ |
(0.19 |
) |
|
$ |
1.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These items include Kmarts store sale and lease assignment transactions with The Home Depot, Inc. and Sears
in the 2004 as reported period and the transaction with The Home
Depot, Inc. in the pro forma 2004 period as described in Note 15 to
the condensed consolidated financial statements and charges described
in Note 3 to the condensed consolidated financial statements associated with Kmart and
Sears Canada restructuring initiatives implemented during the fiscal 2005 periods. Items like these periodically
affect the Companys results; however, the amounts of these types of items may vary significantly from period to
period and have a disproportionate effect on the periods presented, which affects the comparability of the Companys
financial performance. Management considers the total impact of these items, along with reported results, when it
reviews and evaluates the Companys financial performance.
28
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
Holdings Reported Results
13-week period ended October 29, 2005 compared to the 13-week period ended October 27, 2004
Total revenues increased $7.8 billion, or 176%, to $12.2 billion for the 13 weeks ended October 29,
2005, as compared to total revenues of $4.4 billion for the 13 weeks ended October 27, 2004. The
increase was primarily attributable to the addition of Sears revenues of $8.0 billion in 2005,
partially offset by a $0.3 billion, or 5.7%, decline in Kmarts revenues, due to a reduction in the
total number of Kmart stores in operation and a comparable store sales decline of 2.8%. While
Kmarts overall comparable store sales declined as a result of lower transaction volumes across
most businesses, most notably home products and electronics, its apparel business outperformed
other businesses and had positive comparable store sales during the period.
Gross margin as a percentage of merchandise sales and services revenue was 27.5% for the 13 weeks
ended October 29, 2005, as compared to 24.9% for the 13 weeks ended October 27, 2004. The increase
was primarily attributable to the addition of Sears, which had a higher overall gross margin rate
than Kmart in the current year period, partially offset by a decrease in Kmarts gross margin rate.
Kmarts gross margin rate as a percentage of merchandise sales and services revenue was 24.6% for
the 13 weeks ended October 29, 2005, as compared to 24.9% for the 13 weeks ended October 27, 2004.
The decrease was primarily attributable to increased promotional and clearance markdowns.
Selling and administrative expenses as a percentage of total revenues was 24.4% for the 13 weeks
ended October 29, 2005, as compared to 22.5% for the 13 weeks ended October 27, 2004. The increase
was primarily attributable to the addition of Sears, which had a higher cost structure than Kmart
in the current year period.
Depreciation and amortization was $263 million for the 13 weeks ended October 29, 2005, as compared
to $6 million for the 13 weeks ended October 27, 2004. The increase was primarily attributable to
the addition of Sears, which accounted for $250 million of the combined expense in the current year
period.
Restructuring charges were $59 million for the 13 weeks ended October 29, 2005. These charges
included a $53 million charge for employee-related termination costs associated with Sears Canada
restructuring initiatives implemented during the third quarter of fiscal 2005, including a
workforce reduction of approximately 1,200 associates, as well as a $6 million charge at Kmart for
relocation assistance and employee termination-related costs associated with Holdings home office
integration efforts.
Included in operating income were gains on sales of assets of $15 million and $807 million for the
13 week periods ended October 29, 2005 and October 27, 2004, respectively. During fiscal 2004, the
Company entered into multiple agreements with The Home Depot, Inc. to sell four properties and
assign 14 leased properties for an aggregate purchase price of $271 million. The gain on sales of
assets for the 13 weeks ended October 27, 2004 included $198 million attributable to these
agreements. Also during fiscal 2004, Kmart agreed to sell four owned properties, assign 45 leased
properties and lease one owned store to Sears for a total purchase price of approximately $576
million. Included in the gain on sales of assets for the 13 weeks ended October 27, 2004 was a gain
of $599 million related to this agreement.
Operating income was $119 million for the 13 weeks ended October 29, 2005, as compared to $909
million for the 13 weeks ended October 27, 2004. The decrease was primarily attributable to $790
million less in gains on the sale of assets realized by Kmart in the
current year. Further, the addition of Sears, which had $36 million in operating income in the
current year period, was offset by a $36 million decline in Kmart operating results, excluding the impact of gain on asset
sales.
29
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
Interest expense increased $45 million in the current year period primarily as a result of the
inclusion of Sears debt in the current year period. Other income increased by $21 million in the
current year period due to a gain recognized in connection with the settlement pertaining to
Kmarts license agreement with Footstar, Inc. (FTS) for the operation of Kmarts footwear
departments. The effective tax rate was 38.9% for the 13 weeks ended October 29, 2005, as compared
to 37.7% for the 13 weeks ended October 27, 2004, with the increase primarily attributable to the
inclusion of Sears in the current year period.
39-week period ended October 29, 2005 compared to the 39-week period ended October 27, 2004
Total revenues increased $19.1 billion, or 138%, to $33.0 billion for the 39 weeks ended October
29, 2005, as compared to total revenues of $13.9 billion for the 39 weeks ended October 27, 2004.
The increase was primarily attributable to the addition of Sears revenues of $19.7 billion in
fiscal 2005, partially offset by a decline in Kmarts revenues of $0.5 billion, or 3.9%, due to a
reduction in the total number of Kmart stores in operation and a comparable store sales decline of
2.1%. Kmarts comparable store sales declined primarily as a result of lower transaction volumes.
Total sales benefited from $153 million of sales being recorded during the first quarter of fiscal
2005 as a result of three additional days being included in the fiscal 2005 period due to the
Companys change from a Wednesday to a Saturday month end. However, this favorable impact was more
than offset by a reduction in the total number of Kmart stores in operation.
Gross margin as a percentage of merchandise sales and services revenue was 27.0% for the 39 weeks
ended October 29, 2005, as compared to 24.3% for the 39 weeks ended October 27, 2004. The increase
was primarily attributable to the addition of Sears, which had a higher overall gross margin rate
than Kmart in the current year period, partially offset by a decrease in Kmarts gross margin rate
due primarily to increased promotional markdowns.
Selling and administrative expenses as a percentage of total revenues was 23.2% for the 39 weeks
ended October 29, 2005, as compared to 21.0% for the 39 weeks ended October 27, 2004. The increase
was primarily attributable to the addition of Sears, which had a higher cost structure than Kmart
in the current year period.
Depreciation and amortization was $650 million for the 39 weeks ended October 29, 2005, as compared
to $14 million for the 39 weeks ended October 27, 2004. The increase was primarily attributable to
the addition of Sears, which accounted for $617 million of the combined expense in the current year
period.
Restructuring charges were $104 million for the 39 weeks ended October 29, 2005. These charges
included a $53 million charge for employee-related termination costs associated with Sears Canada
restructuring initiatives implemented during the third quarter of fiscal 2005, including a
workforce reduction of approximately 1,200 associates, as well as $51 million at Kmart for
relocation assistance and employee termination-related costs associated with Holdings home office
integration efforts.
Included in operating income were gains on sales of assets of $25 million and $911 million for the
39-week periods ended October 29, 2005 and October 27, 2004, respectively. During fiscal 2004, the
Company entered into multiple agreements with The Home Depot, Inc. to sell four properties and
assign 14 leased properties for an aggregate purchase price of $271 million. The gain on sales of
assets for the 39 weeks ended October 27, 2004 included $241 million attributable to these
agreements. Also during fiscal 2004, Kmart agreed to sell four owned properties, assign 45 leased
properties and lease one owned store to Sears for a total purchase price of approximately $576
million. Included in the gain on sales of assets for the 39 weeks ended October 27, 2004 was a gain
of $599 million related to this agreement. Additionally, the Company sold certain other real and
personal property, resulting in net gains of $25 million and $71 million for the 39-week periods
ended October 29, 2005 and October 27, 2004, respectively. Included within these gains for the 39-week period
ended October
30
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
27, 2004 were $18 million related to the sale of the Companys Trinidad subsidiary
and its associated property, $12 million related to the sale of corporate airplanes and $41 million
from sales of other real and personal property.
Operating income was $594 million for the 39 weeks ended October 29, 2005, as compared to $1.35
billion for the 39 weeks ended October 27, 2004. The decrease was primarily attributable to $886
million less in gains on the sale of assets realized by Kmart in the current year and, to a lesser
degree, a decline in Kmart operating results, including restructuring charges of $51 million
recorded in the current year period, partially offset by the addition of Sears, which had $303
million in operating income in the current year period.
Interest expense increased $98 million in the current year period as a result of the inclusion of
Sears debt in the current year period, as well as additional interest expense incurred upon the
conversion of Kmarts 9% subordinated convertible notes. Bankruptcy-related recoveries increased
$20 million in the current year period and represent amounts recognized from vendors who had
received cash payment for pre-petition obligations. Other income increased by $29 million in the
current year period primarily due to a gain of $21 million recognized in connection with the
settlement with FTS. The effective tax rate increased to 38.4% in 2005 from 37.7% in 2004, with
the increase primarily attributable to the inclusion of Sears in the current year period.
Effective January 30, 2005, the Company determined that it would be preferable to conform one of
the accounting practices utilized by Kmart to that of Sears. The Company changed its method of
accounting for certain indirect overhead costs from inventoriable costs to period expenses. In
accordance with Accounting Principles Board Opinion No. 20, Accounting Changes, a change in
accounting policy to conform the acquirers policy to that of the acquired entity is treated as a
change in accounting principle. As a result of the accounting change, the Company recorded a
charge of $90 million, net of taxes, in the first quarter of fiscal 2005 for the cumulative effect
of change in accounting principle. The charge represents the amount of indirect costs reflected
within inventory at the beginning of fiscal 2005.
Holdings Pro Forma Results
The following discussion of Holdings pro forma results is provided to facilitate an understanding
of Holdings trends and on-going performance.
13-week period ended October 29, 2005 compared to the pro forma 13-week period ended October 27,
2004
Total revenues declined $0.6 billion, or 5.0%, to $12.2 billion for the 13 weeks ended October 29,
2005, as compared to total revenues of $12.8 billion for the 13 weeks ended October 27, 2004. The
decline was primarily attributable to revenue declines of 6.3% and 5.7% at Sears Domestic and
Kmart, respectively, partially offset by a 6.3% revenue increase at Sears Canada, primarily due to
favorable exchange rates. Domestic comparable store sales were down 7.4% in the aggregate, with
Sears Domestic and Kmart comparable store sales declining 10.8% and 2.8%, respectively. The Sears
Domestic comparable store sales decrease was primarily attributable to efforts initiated in fiscal
2005 to improve gross margin rates by reducing reliance on certain promotional events and weak
apparel sales resulting from weaker than anticipated customer response to fashion offerings within
the full-line stores. While Kmarts overall comparable store sales declined as a result of lower
transaction volumes across most businesses, most notably home products and electronics, its apparel
business outperformed other businesses and had positive comparable store sales during the period.
Gross margin as a percentage of merchandise sales and services revenue was 27.5% for the 13 weeks
ended October 29, 2005, as compared to 26.8% for the 13 weeks ended October 27, 2004. The increase
was primarily attributable to improvement in the Sears Domestic gross margin rate, mainly as a result of improved
inventory
31
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
management and the utilization of more targeted clearance and promotional markdowns
versus historical reliance on storewide events. Sears Domestics gross margin rate as a percentage
of merchandise sales and services revenue was 29.4% for the 13 weeks ended October 29, 2005, as
compared to 28.0% for the 13 weeks ended October 27, 2004. Kmarts gross margin rate as a
percentage of merchandise sales and services revenue was 24.6% for the 13 weeks ended October 29,
2005, as compared to 24.9% for the 13 weeks ended October 27, 2004. The decrease was primarily
attributable to increased promotional and clearance markdowns.
Selling and administrative expenses as a percentage of total revenues was 24.4% for the 13 weeks
ended October 29, 2005, as compared to 24.1% for the 13 weeks ended October 27, 2004. While
selling and administrative expenses decreased by $118 million, selling and administrative expenses
as a percentage of total revenues increased as the impact of reductions in payroll and related
expenditures resulting from cost saving initiatives was offset by reduced expense leverage given
lower overall sales.
Restructuring charges were $59 million during for the 13 weeks ended October 29, 2005. These
charges included a $53 million charge for employee-related termination costs associated with Sears
Canada restructuring initiatives implemented during the third quarter of fiscal 2005, including a
workforce reduction of approximately 1,200 associates, as well as a $6 million charge at Kmart for
relocation assistance and employee termination-related costs associated with Holdings home office
integration efforts.
Operating income was $119 million for the 13 weeks ended October 29, 2005, as compared to $321
million for the 13 weeks ended October 27, 2004. The decrease was primarily attributable to $191
million less in gains on the sale of assets realized by Kmart in the current year and, to a lesser
degree, a $36 million decline in Kmart operating income, excluding the impact of gains on asset
sales, partially offset by Sears, which had $25 million in additional operating income in the
current year period.
Interest expense declined $14 million in the 13 weeks ended October 29, 2005, as compared to the 13
weeks ended October 27, 2004 due primarily to lower average borrowings. Other income increased by
$14 million in the current year period primarily due to a gain of $21 million being recognized in
connection with the settlement pertaining to the footwear license agreement with FTS in the current
year period.
Pro forma 39-week period ended October 29, 2005 compared to the pro forma 39-week period ended
October 27, 2004
Total revenues declined $0.9 billion, or 2.4%, to $38.2 billion for the 39 weeks ended October 29,
2005, as compared to total revenues of $39.1 billion for the 39 weeks ended October 27, 2004. The
decline was primarily attributable to revenue declines of 3.0% and 3.9% at Sears Domestic and
Kmart, respectively, partially offset by a 7.4% revenue increase at Sears Canada, primarily due to
favorable exchange rates. Domestic comparable store sales were down 5.0% in the aggregate, with
Sears Domestic comparable store sales declining 7.2% and Kmart comparable store sales declining
2.1%. The Sears Domestic comparable store sales decrease was primarily attributable to efforts
initiated in fiscal 2005 to improve gross margin rates by reducing reliance on certain promotional
events. Kmarts comparable store sales declined primarily as a result of lower transaction volumes.
Gross margin as a percentage of merchandise sales and services revenue was 27.0% for the 39 weeks
ended October 29, 2005, as compared to 26.1% for the 39 weeks ended October 27, 2004. The increase
was primarily attributable to improvement in the Sears Domestic gross margin rate, mainly as a
result of improved inventory management and the utilization of more targeted clearance and
promotional markdowns versus historical reliance on storewide events. Sears Domestics gross margin
rate as a percentage of merchandise sales and services revenue was 29.0% for the 39 weeks ended
October 29, 2005, as compared to 27.3% for the 39 weeks
ended October 27, 2004. Kmarts gross margin rate as a percentage of merchandise sales and
services revenue
32
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
was
23.9% for the 39 weeks ended October 29, 2005, as compared to 24.3% for the 39
weeks ended October 27, 2004. The decline in gross margin rate was primarily due to increased
promotional markdowns.
Selling and administrative expenses as a percentage of total revenues was 23.6% for the 39 weeks
ended October 29, 2005, as compared to 23.2% for the 39 weeks ended October 27, 2004. While selling
and administrative expenses decreased by $82 million, selling and administrative expenses as a
percentage of total revenues increased as the impact of reductions in payroll and related
expenditures resulting from cost saving initiatives was offset by reduced expense leverage given
lower overall sales.
Restructuring charges for the current year period totaled $104 million as compared to $41 million
for the comparable prior year period. The current year period charges include a $53 million charge
for employee-related termination costs associated with Sears Canada restructuring initiatives,
including a workforce reduction of approximately 1,200 associates, as well as $51 million at Kmart
for relocation assistance and employee termination-related costs associated with Holdings home
office integration efforts. The $41 million charge recorded in the comparable prior year period
reflected a charge recorded by Sears in the second quarter of fiscal 2004 as part of a productivity
initiative.
Operating income was $543 million for the 39 weeks ended October 29, 2005, as compared to $692
million for the 39 weeks ended October 27, 2004. The decrease was primarily attributable to $287
million less in gains on the sale of assets realized by Kmart in the current year and, to a lesser
degree, a $172 million decline in Kmart operating income, excluding gains on asset sales, partially
offset by the inclusion of Sears, which had $310 million in additional operating income in the
current year period.
Interest expense declined $52 million in the 39 weeks ended October 29, 2005, as compared to the 39
weeks ended October 27, 2004 due primarily to lower average borrowings. Bankruptcy-related
recoveries increased $20 million in the current year period and represent amounts recognized from
vendors who had received cash payment for pre-petition obligations.
Effective January 30, 2005, the Company determined that it would be preferable to conform one of
the accounting practices utilized by Kmart to that of Sears. The Company changed its method of
accounting for certain indirect overhead costs from inventoriable costs to period expenses. In
accordance with Accounting Principles Board Opinion No. 20, Accounting Changes, a change in
accounting policy to conform the acquirers policy to that of the acquired entity is treated as a
change in accounting principle. As a result of the accounting change, the Company recorded a
charge of $90 million, net of taxes, in the first quarter of fiscal 2005 for the cumulative effect
of change in accounting principle. The charge represents the amount of indirect costs reflected
within inventory at the beginning of fiscal 2005.
SEGMENT OPERATIONS
Holdings is continuing the process of integrating Kmart and Sears. To date, for purposes of
reviewing results of operations and making asset-allocation decisions, senior management has
continued to utilize principally the reporting structures which existed independently for Sears and
Kmart prior to the Merger. As a result, the following discussion of segment operations is
organized into three principal business segments: Kmart, Sears Domestic and Sears Canada.
33
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
Kmart
Kmart results and key statistics were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kmart |
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
millions, except number of stores |
|
October 29, |
|
|
October 27, |
|
|
October 29, |
|
|
October 27, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Merchandise sales and services |
|
$ |
4,172 |
|
|
$ |
4,426 |
|
|
$ |
13,354 |
|
|
$ |
13,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, buying and occupancy |
|
|
3,145 |
|
|
|
3,324 |
|
|
|
10,164 |
|
|
|
10,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin rate |
|
|
24.6 |
% |
|
|
24.9 |
% |
|
|
23.9 |
% |
|
|
24.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative |
|
|
942 |
|
|
|
994 |
|
|
|
2,840 |
|
|
|
2,921 |
|
Selling and administrative
expenses as a percentage
of total revenues |
|
|
22.6 |
% |
|
|
22.5 |
% |
|
|
21.3 |
% |
|
|
21.0 |
% |
Depreciation and amortization |
|
|
13 |
|
|
|
6 |
|
|
|
33 |
|
|
|
14 |
|
Gain on sales of assets |
|
|
(17 |
) |
|
|
(807 |
) |
|
|
(25 |
) |
|
|
(911 |
) |
Restructuring charges |
|
|
6 |
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
4,089 |
|
|
|
3,517 |
|
|
|
13,063 |
|
|
|
12,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
83 |
|
|
$ |
909 |
|
|
$ |
291 |
|
|
$ |
1,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores |
|
|
|
|
|
|
|
|
|
|
1,426 |
|
|
|
1,486 |
|
13-week period ended October 29, 2005 compared to the 13-week period ended October 27, 2004
Comparable store sales and total sales decreased 2.8% and 5.7% respectively, for the 13 weeks ended
October 29, 2005, as compared to the 13 weeks ended October 27, 2004. Total sales were negatively
impacted by a reduction in the total number of Kmart stores in operation. While Kmarts overall
comparable store sales declined as a result of lower transaction volumes across most businesses,
most notably home products and electronics, the apparel business outperformed other businesses and
had positive comparable store sales during the period.
Gross margin as a percentage of merchandise sales and services revenue was 24.6% for the 13 weeks
ended October 29, 2005, as compared to 24.9% for the 13 weeks ended October 27, 2004. The decrease
was primarily attributable to increased promotional and clearance markdowns.
Selling and administrative expenses as a percentage of revenues was 22.6% for the 13 weeks ended
October 29, 2005, as compared to 22.5% for the 13 weeks ended October 27, 2004. The impact of
reductions in selling and administrative expenses for payroll and related expenditures resulting
from the operation of fewer Kmart stores, as well as cost saving initiatives and reductions in
advertising, was more than offset by reduced expense leverage given lower overall sales.
Restructuring charges related to Holdings home office integration efforts were $6 million during
the 13 weeks ended October 29, 2005, including $2 million of relocation assistance for associates
who have accepted relocation offers and $4 million for costs associated with severance, benefits
and outplacement services.
Operating income was $83 million for the 13 weeks ended October 29, 2005, as compared to $909
million for the 13 weeks ended October 27, 2004. The decrease was primarily attributable to $790
million less in gains on the sale of assets realized this year compared to the prior year period,
the 5.7% decline in merchandise sales and services revenue, the lower gross margin rate as a result
of increased promotional and clearance markdowns, and restructuring charges of $6 million
recognized in the current year, partially offset by lower selling and administrative costs.
34
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
39-week period ended October 29, 2005 compared to 39-week period ended October 27, 2004
Comparable store sales and total sales decreased 2.1% and 3.9%, respectively, for the 39 weeks
ended October 29, 2005, as compared to the 39 weeks ended October 27, 2004. Kmarts comparable
store sales declined primarily as a result of lower transaction volumes across most businesses,
most notably home products and electronics. Total sales benefited from $153 million of sales being
recorded during the first quarter of fiscal 2005 as a result of three additional days being
included in the fiscal 2005 period due to the Companys change from a Wednesday to a Saturday month
end. However, this favorable impact was more than offset by a reduction in the total number of
Kmart stores in operation, including 48 Kmart stores converted to the Sears Essentials format in
2005.
Gross margin as a percentage of merchandise sales and services revenue was 23.9% for the 39 weeks
ended October 29, 2005, as compared to 24.3% for the 39 weeks ended October 27, 2004. The decline
in gross margin rate was primarily due to increased promotional markdowns.
Selling and administrative expenses as a percentage of total revenues was 21.3% for the 39 weeks
ended October 29, 2005, as compared to 21.0% for the 39 weeks ended October 27, 2004. The impact
of reductions in selling and administrative expenses for payroll and related expenditures resulting
from the operation of fewer Kmart stores and cost saving initiatives was offset by reduced expense
leverage given lower overall sales.
Restructuring charges related to Holdings home office integration efforts were $51 million during
the 39 weeks ended October 29, 2005, including $35 million for relocation assistance and $16
million for employee termination-related costs.
Operating income for the 39 weeks ended October 29, 2005 decreased compared to the 39 weeks ended
October 27, 2004 primarily attributable to $886 million less in gains on the sale of assets
realized in the current year and, to a lesser degree, a decline in gross margin and the
restructuring charges of $51 million recorded in the current year period.
Sears Domestic
Sears Domestic operations consist of the following:
|
§ |
|
Full-line Stores: includes merchandise sales as well as the operations of Sears Auto
Centers, Sears Essentials and Sears Grand stores, and online revenues of sears.com |
|
|
§ |
|
Specialty Stores: includes the operations of Dealer Stores, Sears Hardware Stores,
Orchard Supply Hardware, The Great Indoors, Commercial Sales and Outlet stores |
|
|
§ |
|
Direct to Customer: includes Lands End online, catalog and retail store operations as
well as direct marketing of goods and services through specialty catalogs and other direct
channels |
|
|
§ |
|
Home Services: includes product repair services, product protection agreements and
installation services for all major brands of home products; also includes home improvement
services, primarily siding, windows and cabinet refacing, carpet cleaning and the
installation and servicing of residential heating and cooling systems |
35
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
The condensed consolidated statement of operations for Holdings for the 39-week period ended
October 29, 2005 includes Sears results from March 25, 2005 forward. It does not reflect a full
39-week period for Sears or any prior year operating results for comparison. The Company believes
that an understanding of its reported results and its ongoing financial performance is not complete
without presenting the Sears results of operations on a pro forma basis. The presentation below
provides the results of operations on a reported and pro forma basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sears Domestic |
|
Reported |
|
|
Pro Forma |
|
|
Reported |
|
|
Pro Forma |
|
|
|
13 Weeks |
|
|
13 Weeks |
|
|
39 Weeks |
|
|
|
|
millions, except number of stores |
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
39 Weeks Ended |
|
|
|
October 29, |
|
|
October 30, |
|
|
October 29, |
|
|
October 29, |
|
|
October 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
Merchandise sales and services |
|
$ |
6,803 |
|
|
$ |
7,258 |
|
|
$ |
17,141 |
|
|
$ |
21,311 |
|
|
$ |
21,959 |
|
|
Cost of sales, buying and occupancy |
|
|
4,805 |
|
|
|
5,223 |
|
|
|
12,112 |
|
|
|
15,130 |
|
|
|
15,973 |
|
Gross margin rate |
|
|
29.4 |
% |
|
|
28.0 |
% |
|
|
29.3 |
% |
|
|
29.0 |
% |
|
|
27.3 |
% |
|
Selling and administrative |
|
|
1,716 |
|
|
|
1,823 |
|
|
|
4,175 |
|
|
|
5,246 |
|
|
|
5,342 |
|
Selling and administrative expense as a
percentage of total revenues |
|
|
25.2 |
% |
|
|
25.1 |
% |
|
|
24.4 |
% |
|
|
24.6 |
% |
|
|
24.3 |
% |
Depreciation and amortization |
|
|
214 |
|
|
|
248 |
|
|
|
541 |
|
|
|
683 |
|
|
|
766 |
|
Gain on sales of assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(4 |
) |
Restructuring charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
6,735 |
|
|
|
7,294 |
|
|
|
16,828 |
|
|
|
21,058 |
|
|
|
22,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
68 |
|
|
$ |
(36 |
) |
|
$ |
313 |
|
|
$ |
253 |
|
|
$ |
(159 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full-line Stores |
|
|
|
|
|
|
|
|
|
|
926 |
|
|
|
926 |
|
|
|
872 |
|
Specialty Stores |
|
|
|
|
|
|
|
|
|
|
1,146 |
|
|
|
1,146 |
|
|
|
1,139 |
|
Total Domestic Sears Stores |
|
|
|
|
|
|
|
|
|
|
2,072 |
|
|
|
2,072 |
|
|
|
2,011 |
|
Sears Domestic Pro Forma Results
The discussion below pertains to pro forma information in the table above which compares Sears
results for the 13- and 39-week periods ended October 29, 2005 with Sears results for the
comparable 13-and 39-week periods ended October 30, 2004. These pro forma results have been
prepared assuming the Merger occurred at the beginning of fiscal 2004.
13-week period ended October 29, 2005 compared to the pro forma 13-week period ended October 30,
2004
Merchandise sales and services revenue declined $0.5 billion, or 6.3%, to $6.8 billion for the 13
weeks ended October 29, 2005, as compared to total revenues of $7.3 billion for the 13 weeks ended
October 27, 2004. The decline was due to a 10.8% decrease in comparable store sales across all
retail formats partially offset by an increase in the total number of Sears stores in operation
combined with strong Home Services sales. Comparable store sales declines for the period were
recorded across all product categories, except home appliances which generated a modest increase in
comparable store sales, with more pronounced declines in apparel lines and more moderate declines
in non-appliance hardlines categories. The modest increase in home appliances was mainly due to a
higher average sale price per unit sold. The declines recorded in the other product categories
reflect efforts initiated in fiscal 2005 to improve gross margin by reducing reliance on certain
promotional events and weak apparel sales resulting from weaker than anticipated customer response
to fashion offerings within the full-line stores.
36
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
Gross margin as a percentage of merchandise sales and services revenue was 29.4% for the 13 weeks
ended October 29, 2005, as compared to 28.0% for the 13 weeks ended October 27, 2004. The 140
basis point increase was attributable primarily to improved inventory management and the
utilization of more targeted clearance and promotional markdowns versus historical reliance on
storewide events. The rate improvement over the prior year, however, was less in the third
quarter of fiscal 2005 than in the previous two fiscal quarters as poor customer response to full
line apparel offerings resulted in additional markdowns being taken to clear spring and summer
fashion items.
Selling and administrative expenses as a percentage of total revenues was 25.2% for the 13 weeks
ended October 29, 2005, as compared to 25.1% for the 13 weeks ended October 27, 2004. While
selling and administrative expenses decreased by $107 million, selling and administrative expenses
as a percentage of total revenues increased as decreases in payroll and related expenditures
resulting from cost saving initiatives were offset by reduced expense leverage given lower overall
sales.
Depreciation and amortization expense declined $34 million for the quarter due primarily to lower
capital expenditure levels.
Operating income increased $104 million as a result of the lower selling and administrative expense
and lower depreciation and amortization expense, partially offset by the margin impact of lower
overall sales levels.
Pro forma 39-week period ended October 29, 2005 compared to the pro forma 39-week period ended
October 30, 2004
Merchandise sales and services revenues declined $0.6 billion, or 3.0%, to $21.3 billion for the 39
weeks ended October 29, 2005, as compared to total revenues of $22.0 billion for the 39 weeks ended
October 27, 2004. The decline was due to a 7.2% decrease in comparable store sales across all
retail formats, partially offset by an increase in the total number of Sears stores in operation
and strong Home Services sales. The decline in Sears Domestic comparable store sales primarily
reflects the efforts initiated in fiscal 2005 to improve gross margin rates and, to a lesser
extent, weaker than anticipated customer response to fashion offerings within the full-line stores
as discussed above.
Gross margin as a percentage of merchandise sales and services revenue was 29.0% for the 39 weeks
ended October 29, 2005, as compared to 27.3% for the 39 weeks ended October 27, 2004. The 170
basis point increase was attributable primarily to improved inventory management and the
utilization of more targeted clearance and promotional markdowns versus historical reliance on
storewide events.
Selling and administrative expenses as a percentage of total revenues was 24.6% for the 39 weeks
ended October 29, 2005, as compared to 24.3% for the 39 weeks ended October 27, 2004. While
selling and administrative expenses decreased by $96 million, selling and administrative expenses
as a percentage of total revenues increased as decreases in payroll and related expenditures
resulting from cost saving initiatives were offset by reduced expense leverage given lower overall
sales.
37
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
Depreciation and amortization expense declined $83 million for the 39-week period ended October 29,
2005 due primarily to lower capital expenditure levels and additional depreciation recognized in
the prior year period in connection with shortening the estimated remaining useful life of certain
information technology assets that were sold to an outside IT service provider during fiscal 2004.
Operating income increased $412 million as a result of the increased gross margin, lower selling
and administrative costs, and lower depreciation and amortization expense, as well as the
comparable prior year period being unfavorably impacted by the $41 million charge recorded in the
second quarter of fiscal 2004 as part of a productivity initiative.
Sears Canada
Sears Canada, a consolidated, 54%-owned subsidiary of Sears, conducts retail and credit operations.
In November 2005, Sears Canada completed the sale of its Credit and Financial Services operations.
The results of operations for Sears Canada are reported to Holdings on a one-month lag. Therefore,
the condensed consolidated statement of operations for the 13-week period ended October 29, 2005
includes operating results for Sears Canada from July 3, 2005 through October 1, 2005. For the
39-week period ended October 29, 2005, the condensed consolidated statement of operations includes
operating results for Sears Canada from March 25, 2005 through October 1, 2005. The Company
believes that an understanding of its reported results and its ongoing financial performance is not
complete without presenting the Sears Canada results of operations on a pro forma basis. The
presentation below provides the results of operations on a reported and pro forma basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported |
|
|
Pro Forma |
|
|
Reported |
|
|
Pro Forma |
|
|
|
13 Weeks |
|
|
13 Weeks |
|
|
39 Weeks |
|
|
|
|
millions, except number of stores |
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
39 Weeks Ended |
|
|
|
October 29, |
|
|
October 30, |
|
|
October 29, |
|
|
October 29, |
|
|
October 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
Merchandise sales and services |
|
$ |
1,143 |
|
|
$ |
1,069 |
|
|
$ |
2,373 |
|
|
|
3,254 |
|
|
$ |
3,017 |
|
|
Credit and financial products revenues |
|
|
84 |
|
|
|
85 |
|
|
|
171 |
|
|
|
257 |
|
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,227 |
|
|
|
1,154 |
|
|
|
2,544 |
|
|
|
3,511 |
|
|
|
3,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, buying and occupancy |
|
|
833 |
|
|
|
789 |
|
|
|
1,733 |
|
|
|
2,387 |
|
|
|
2,228 |
|
Gross margin rate |
|
|
27.1 |
% |
|
|
26.2 |
% |
|
|
27.0 |
% |
|
|
26.6 |
% |
|
|
26.2 |
% |
|
Selling and administrative |
|
|
314 |
|
|
|
273 |
|
|
|
654 |
|
|
|
908 |
|
|
|
813 |
|
Selling and administrative expense as a
percentage of total revenues |
|
|
25.6 |
% |
|
|
23.7 |
% |
|
|
25.7 |
% |
|
|
25.9 |
% |
|
|
24.9 |
% |
Depreciation and amortization |
|
|
36 |
|
|
|
29 |
|
|
|
76 |
|
|
|
110 |
|
|
|
91 |
|
Provision for uncollectible accounts |
|
|
21 |
|
|
|
16 |
|
|
|
38 |
|
|
|
54 |
|
|
|
42 |
|
Loss (Gain) on sales of assets |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
Restructuring charges |
|
|
53 |
|
|
|
|
|
|
|
53 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
1,259 |
|
|
|
1,107 |
|
|
|
2,554 |
|
|
|
3,512 |
|
|
|
3,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
(32 |
) |
|
$ |
47 |
|
|
$ |
(10 |
) |
|
|
(1 |
) |
|
$ |
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full-line Stores |
|
|
|
|
|
|
|
|
|
|
122 |
|
|
|
122 |
|
|
|
121 |
|
Specialty Stores |
|
|
|
|
|
|
|
|
|
|
248 |
|
|
|
248 |
|
|
|
212 |
|
Total Sears Canada Stores |
|
|
|
|
|
|
|
|
|
|
370 |
|
|
|
370 |
|
|
|
333 |
|
38
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
The discussion below pertains to pro forma information in the table above which compares Sears
Canadas results for the 13- and 39-week periods ended October 29, 2005 with Sears Canadas results
for the comparable 13-and 39-week periods ended October 30, 2004. These pro forma results have
been prepared assuming the Merger occurred at the beginning of fiscal 2004.
Total revenues increased 6.3% and 7.4% for the 13- and 39-week periods ended October 29, 2005,
respectively, versus the comparable prior year periods. The increases were due primarily to
favorable exchange rates.
The gross margin rate for the 13-week period ended October 29, 2005 increased primarily due to
improved inventory controls which resulted in less liquidation losses. For the 39-week period
ended October 29, 2005, the favorable impact of improved inventory controls was partially offset by
liquidation losses in the first quarter of fiscal 2005.
Selling and administrative expense as a percentage of total revenue for the 13- and 39-week periods
ended October 29, 2005 increased due primarily to increased marketing costs. In addition, the
13-week period included $18 million of expense for associate stock-based compensation, which
resulted from a change in the Sears Canada plan to allow associates to take cash payments in lieu
of shares. The plan change was made to avoid dilution of the share base.
Restructuring charges of $53 million were recognized for the 13 weeks ended October 29, 2005 for
productivity initiatives, which included a workforce reduction of approximately 1,200 associates.
Operating income declined $79 million and $102 million for the 13- and 39-week periods ended
October 29, 2005, respectively, due primarily to the $53 million restructuring charge recorded in
the third quarter of 2005 and higher selling and administrative expenses, partially offset by
increased gross margin due to increased total revenues.
39
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
PRO FORMA RECONCILIATION
The following tables provide a reconciliation from the as reported results to the pro forma results
presented above for Sears Holdings for the 13-week period ended October 27, 2004 and for Sears
Domestic and Sears Canada for the 13-week period ended October 30, 2004.
Sears Holdings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
13-week period ended October 27, 2004 |
|
millions, except per common share data |
|
|
|
|
|
|
|
|
|
Pre- |
|
|
|
|
|
|
|
|
|
As |
|
|
As |
|
|
merger |
|
|
Purchase |
|
|
Pro |
|
|
|
reported |
|
|
reported |
|
|
Activity(1) |
|
|
Acctng |
|
|
Forma |
|
Merchandise sales and services |
|
$ |
12,118 |
|
|
$ |
4,426 |
|
|
$ |
8,327 |
|
|
$ |
|
|
|
$ |
12,753 |
|
Credit and financial products revenues |
|
|
84 |
|
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
12,202 |
|
|
|
4,426 |
|
|
|
8,412 |
|
|
|
|
|
|
|
12,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, buying and occupancy |
|
|
8,783 |
|
|
|
3,324 |
|
|
|
6,012 |
|
|
|
|
|
|
|
9,336 |
|
Gross margin rate |
|
|
27.5 |
% |
|
|
24.9 |
% |
|
|
27.8 |
% |
|
|
|
% |
|
|
26.8 |
% |
Selling and administrative |
|
|
2,972 |
|
|
|
994 |
|
|
|
2,076 |
|
|
|
20 |
(2) |
|
|
3,090 |
|
Selling and administrative as %
of total revenues |
|
|
24.4 |
% |
|
|
22.5 |
% |
|
|
24.7 |
% |
|
|
|
% |
|
|
24.1 |
% |
Depreciation and amortization |
|
|
263 |
|
|
|
6 |
|
|
|
228 |
|
|
|
49 |
(3) |
|
|
283 |
|
Provision for uncollectible accounts |
|
|
21 |
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
16 |
|
Gain on sales of assets |
|
|
(15 |
) |
|
|
(807 |
) |
|
|
|
|
|
|
599 |
(4) |
|
|
(208 |
) |
Restructuring charges |
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
12,083 |
|
|
|
3,517 |
|
|
|
8,332 |
|
|
|
668 |
|
|
|
12,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
119 |
|
|
|
909 |
|
|
|
80 |
|
|
|
(668 |
) |
|
|
321 |
|
Interest (expense) income, net |
|
|
(70 |
) |
|
|
(25 |
) |
|
|
(66 |
) |
|
|
7 |
(5) |
|
|
(84 |
) |
Bankruptcy-related recoveries |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Other income |
|
|
22 |
|
|
|
1 |
|
|
|
7 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority
interest and cumulative effect of
change in accounting principle |
|
|
72 |
|
|
|
886 |
|
|
|
21 |
|
|
|
(661 |
) |
|
|
246 |
|
Income tax expense (benefit) |
|
|
28 |
|
|
|
334 |
|
|
|
9 |
|
|
|
(254 |
)(6) |
|
|
89 |
|
Minority interest |
|
|
(14 |
) |
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle |
|
|
58 |
|
|
|
552 |
|
|
|
5 |
|
|
|
(407 |
) |
|
|
150 |
|
Cumulative effect of change in
accounting principle, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
|
58 |
|
|
$ |
552 |
|
|
$ |
5 |
|
|
$ |
(407 |
) |
|
$ |
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share before
cumulative effect of change in
accounting principle |
|
$ |
0.35 |
|
|
$ |
5.45 |
|
|
|
|
|
|
|
|
|
|
$ |
0.93 |
|
Diluted earnings per share |
|
$ |
0.35 |
|
|
$ |
5.45 |
|
|
|
|
|
|
|
|
|
|
$ |
0.93 |
|
|
|
|
(1) |
|
Represents the 2004 results of operations for the period August 1, 2004 through
October 30, 2004 for Sears Domestic and the period July 4, 2004 through October 2, 2004 for Sears
Canada. |
|
(2) |
|
Represents an increase to selling and administrative expense resulting from the
adjustment to Sears pension and postretirement plans based on the adjustment of such liabilities
to fair value. |
|
(3) |
|
Represents an increase in depreciation and amortization expense resulting from the
adjustment to Sears property and equipment and identifiable intangible assets based on the
adjustment of such assets to fair value. |
|
(4) |
|
On September 29, 2004, Sears acquired ownership or leasehold interest in 50 Kmart
stores for approximately $575 million. During the thirteen weeks ended October 27, 2004, Kmart
recognized a gain on the sale amounting to $599 million. This adjustment eliminates the gain on
the sale recognized by Kmart. |
|
(5) |
|
Represents a decrease to interest expense resulting from the adjustment to Sears
debt based on the adjustments of such liabilities to fair value. |
|
(6) |
|
Represents the aggregate pro forma effective income tax effect (38.4%) of notes (3)
through (5) above. |
40
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
Sears Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
13-week period ended October 30, 2004 |
|
millions |
|
As |
|
|
As |
|
|
Pre-merger |
|
|
Purchase |
|
|
Pro |
|
|
|
reported |
|
|
reported |
|
|
Activity(1) |
|
|
Acctng |
|
|
forma |
|
Merchandise sales and services |
|
$ |
6,803 |
|
|
$ |
|
|
|
$ |
7,258 |
|
|
$ |
|
|
|
$ |
7,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, buying and occupancy |
|
|
4,805 |
|
|
|
|
|
|
|
5,223 |
|
|
|
|
|
|
|
5,223 |
|
Gross margin rate |
|
|
29.4 |
% |
|
|
|
% |
|
|
28.0 |
% |
|
|
|
% |
|
|
28.0 |
% |
Selling and administrative |
|
|
1,716 |
|
|
|
|
|
|
|
1,803 |
|
|
|
20 |
(2) |
|
|
1,823 |
|
Selling and administrative as %
of total revenues |
|
|
25.2 |
% |
|
|
|
% |
|
|
24.8 |
% |
|
|
|
% |
|
|
25.1 |
% |
Depreciation and amortization |
|
|
214 |
|
|
|
|
|
|
|
200 |
|
|
|
48 |
(43 |
|
|
248 |
|
Gain on sales of assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
6,735 |
|
|
|
|
|
|
|
7,226 |
|
|
|
68 |
|
|
|
7,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
68 |
|
|
$ |
|
|
|
$ |
32 |
|
|
$ |
(68 |
) |
|
$ |
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sears Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
13-week period ended October 30, 2004 |
|
millions |
|
As |
|
|
As |
|
|
Pre-merger |
|
|
Purchase |
|
|
Pro |
|
|
|
reported |
|
|
reported |
|
|
Activity(1) |
|
|
Acctng |
|
|
forma |
|
Merchandise sales and services |
|
$ |
1,143 |
|
|
$ |
|
|
|
$ |
1,069 |
|
|
$ |
|
|
|
$ |
1,069 |
|
Credit and financial product revenues |
|
|
84 |
|
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,227 |
|
|
|
|
|
|
|
1,154 |
|
|
|
|
|
|
|
1,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, buying and occupancy |
|
|
833 |
|
|
|
|
|
|
|
789 |
|
|
|
|
|
|
|
789 |
|
Gross margin rate |
|
|
27.1 |
% |
|
|
|
% |
|
|
26.2 |
% |
|
|
|
% |
|
|
26.2 |
% |
Selling and administrative |
|
|
314 |
|
|
|
|
|
|
|
273 |
|
|
|
|
|
|
|
273 |
|
Selling and administrative as %
of total revenues |
|
|
25.6 |
% |
|
|
|
% |
|
|
23.7 |
% |
|
|
|
% |
|
|
23.7 |
% |
Depreciation and amortization |
|
|
36 |
|
|
|
|
|
|
|
28 |
|
|
|
1 |
(3) |
|
|
29 |
|
Provision for uncollectible accounts |
|
|
21 |
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
16 |
|
Gain on sales of assets |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges |
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
1,259 |
|
|
|
|
|
|
|
1,106 |
|
|
|
1 |
|
|
|
1,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(32 |
) |
|
$ |
|
|
|
$ |
48 |
|
|
$ |
(1 |
) |
|
$ |
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the 2004 results of operations for the period August 1, 2004 through
October 30, 2004 for Sears Domestic and the period July 4, 2004 through October 2, 2004 for Sears
Canada. |
|
(2) |
|
Represents an increase to selling and administrative expense resulting from the
adjustment to Sears pension and postretirement plans
based on the adjustment of such liabilities to fair value. |
|
(3) |
|
Represents an increase in depreciation and amortization expense resulting from the
adjustment to Sears property and equipment and
identifiable intangible assets based on the adjustment of such assets to fair value. |
41
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
The following tables provide a reconciliation from the as reported results to the pro forma
results presented above for Sears Holdings for the 39-week periods ended October 29, 2005 and
October 27, 2004, respectively, as well as for Sears Domestic and Sears Canada for the 39-week
periods ended October 29, 2005 and October 30, 2004, respectively.
Sears Holdings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39-week period ended October 29, 2005 |
|
|
39-week period ended October 30, 2004 |
|
millions, except per common share data |
|
|
|
|
|
Pre- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
merger |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre- |
|
|
|
|
|
|
|
|
|
As |
|
|
Activity |
|
|
Purchase |
|
|
Pro |
|
|
As |
|
|
merger |
|
|
Purchase |
|
|
Pro |
|
|
|
reported |
|
|
(1) |
|
|
Acctng |
|
|
forma |
|
|
reported |
|
|
Activity(1) |
|
|
Acctng |
|
|
forma |
|
Merchandise sales and services |
|
$ |
32,868 |
|
|
$ |
5,051 |
|
|
$ |
|
|
|
$ |
37,919 |
|
|
$ |
13,893 |
|
|
$ |
24,976 |
|
|
$ |
|
|
|
$ |
38,869 |
|
Credit and financial products revenues |
|
|
171 |
|
|
|
86 |
|
|
|
|
|
|
|
257 |
|
|
|
|
|
|
|
253 |
|
|
|
|
|
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
33,039 |
|
|
|
5,137 |
|
|
|
|
|
|
|
38,176 |
|
|
|
13,893 |
|
|
|
25,229 |
|
|
|
|
|
|
|
39,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, buying and occupancy |
|
|
24,009 |
|
|
|
3,672 |
|
|
|
|
|
|
|
27,681 |
|
|
|
10,520 |
|
|
|
18,193 |
|
|
|
8 |
(2) |
|
|
28,721 |
|
Gross margin rate |
|
|
27.0 |
% |
|
|
27.3 |
% |
|
|
|
% |
|
|
27.0 |
% |
|
|
24.3 |
% |
|
|
27.2 |
% |
|
|
|
% |
|
|
26.1 |
% |
Selling and administrative |
|
|
7,669 |
|
|
|
1,314 |
|
|
|
11 |
(3) |
|
|
8,994 |
|
|
|
2,921 |
|
|
|
6,094 |
|
|
|
61 |
(3) |
|
|
9,076 |
|
Selling and administrative as %
of total revenues |
|
|
23.2 |
% |
|
|
25.6 |
% |
|
|
|
% |
|
|
23.6 |
% |
|
|
21.0 |
% |
|
|
24.2 |
% |
|
|
|
% |
|
|
23.2 |
% |
Depreciation and amortization |
|
|
650 |
|
|
|
147 |
|
|
|
29 |
(4) |
|
|
826 |
|
|
|
14 |
|
|
|
712 |
|
|
|
145 |
(4) |
|
|
871 |
|
Provision for uncollectible accounts |
|
|
38 |
|
|
|
16 |
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
42 |
|
Gain on sales of assets |
|
|
(25 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(26 |
) |
|
|
(911 |
) |
|
|
(9 |
) |
|
|
599 |
(5) |
|
|
(321 |
) |
Restructuring charges |
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
104 |
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
32,445 |
|
|
|
5,148 |
|
|
|
40 |
|
|
|
37,633 |
|
|
|
12,544 |
|
|
|
25,073 |
|
|
|
813 |
|
|
|
38,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
594 |
|
|
|
(11 |
) |
|
|
(40 |
) |
|
|
543 |
|
|
|
1,349 |
|
|
|
156 |
|
|
|
(813 |
) |
|
|
692 |
|
Interest (expense) income, net |
|
|
(184 |
) |
|
|
(35 |
) |
|
|
2 |
(6) |
|
|
(217 |
) |
|
|
(86 |
) |
|
|
(200 |
) |
|
|
17 |
(6) |
|
|
(269 |
) |
Bankruptcy-related recoveries |
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
13 |
|
Other income |
|
|
33 |
|
|
|
10 |
|
|
|
|
|
|
|
43 |
|
|
|
4 |
|
|
|
53 |
|
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority
interest and cumulative effect of
change in accounting principle |
|
|
476 |
|
|
|
(36 |
) |
|
|
(38 |
) |
|
|
402 |
|
|
|
1,280 |
|
|
|
9 |
|
|
|
(796 |
) |
|
|
493 |
|
Income tax expense (benefit) |
|
|
183 |
|
|
|
4 |
|
|
|
(15 |
)(7) |
|
|
172 |
|
|
|
483 |
|
|
|
5 |
|
|
|
(304 |
)(7) |
|
|
184 |
|
Minority interest |
|
|
(7 |
) |
|
|
6 |
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle |
|
|
300 |
|
|
|
(46 |
) |
|
|
(23 |
) |
|
|
231 |
|
|
|
797 |
|
|
|
(10 |
) |
|
|
(492 |
) |
|
|
295 |
|
Cumulative effect of change in
accounting principle, net of tax |
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
210 |
|
|
|
(46 |
) |
|
|
(23 |
) |
|
|
141 |
|
|
$ |
797 |
|
|
$ |
(10 |
) |
|
$ |
(492 |
) |
|
$ |
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share before
cumulative effect of change in
accounting principle |
|
$ |
1.98 |
|
|
|
|
|
|
|
|
|
|
$ |
1.42 |
|
|
$ |
7.93 |
|
|
|
|
|
|
|
|
|
|
$ |
1.84 |
|
Diluted earnings per share |
|
$ |
1.39 |
|
|
|
|
|
|
|
|
|
|
$ |
0.87 |
|
|
$ |
7.93 |
|
|
|
|
|
|
|
|
|
|
$ |
1.84 |
|
|
|
|
(1) |
|
Represents the 2005 results of operations for the period January 30, 2005 through
March 24, 2005 for Sears Domestic and the period January 2, 2005 through March 24, 2005 for Sears
Canada and the 2004 results of operations for the period February 1, 2004 through October 30, 2004
for Sears Domestic and the period January 4, 2004 through October 2, 2004 for Sears Canada. |
|
(2) |
|
Represents an increase to cost of sales, buying and occupancy expense resulting from
the adjustment to Sears inventory based on the adjustment of such assets to fair value. |
|
(3) |
|
Represents an increase to selling and administrative expense resulting from the
adjustment to Sears pension and postretirement plans based on the adjustment of such liabilities
to fair value. |
|
(4) |
|
Represents an increase in depreciation and amortization expense resulting from the
adjustment to Sears property and equipment and
identifiable intangible assets based on the adjustment of such assets to fair value. |
|
(5) |
|
On September 29, 2004, Sears acquired ownership or leasehold interest in 50 Kmart
stores for approximately $575 million. During the thirteen weeks ended October 27, 2004, Kmart
recognized a gain on the sale amounting to $599 million. This adjustment eliminates the gain on
the sale recognized by Kmart. |
|
(6) |
|
Represents a decrease to interest expense resulting from the adjustment to Sears
debt based on the adjustments of such liabilities to fair value. |
|
(7) |
|
Represents the aggregate pro forma effective income tax effect (38.4%) of notes (2)
through (6) above. |
42
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
Sears Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39-week period ended October 29, 2005 |
|
|
39-week period ended October 30, 2004 |
|
millions |
|
|
|
|
|
Pre- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
merger |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre- |
|
|
|
|
|
|
|
|
|
As |
|
|
Activity |
|
|
Purchase |
|
|
Pro |
|
|
As |
|
|
merger |
|
|
Purchase |
|
|
Pro |
|
|
|
reported |
|
|
(1) |
|
|
Acctng |
|
|
forma |
|
|
reported |
|
|
Activity(1) |
|
|
Acctng |
|
|
forma |
|
Merchandise sales and services |
|
$ |
17,141 |
|
|
$ |
4,170 |
|
|
$ |
|
|
|
$ |
21,311 |
|
|
$ |
|
|
|
$ |
21,959 |
|
|
$ |
|
|
|
$ |
21,959 |
|
|
Cost of sales, buying and occupancy |
|
|
12,112 |
|
|
|
3,018 |
|
|
|
|
|
|
|
15,130 |
|
|
|
|
|
|
|
15,971 |
|
|
|
2 |
(2) |
|
|
15,973 |
|
Gross margin rate |
|
|
29.3 |
% |
|
|
27.6 |
% |
|
|
|
% |
|
|
29.0 |
% |
|
|
|
% |
|
|
27.3 |
% |
|
|
|
% |
|
|
27.3 |
% |
Selling and administrative |
|
|
4,175 |
|
|
|
1,060 |
|
|
|
11 |
(3) |
|
|
5,246 |
|
|
|
|
|
|
|
5,281 |
|
|
|
61 |
(3) |
|
|
5,342 |
|
Selling and administrative as %
of total revenues |
|
|
24.4 |
% |
|
|
25.4 |
% |
|
|
|
% |
|
|
24.6 |
% |
|
|
|
% |
|
|
24.0 |
% |
|
|
|
% |
|
|
24.3 |
% |
Depreciation and amortization |
|
|
541 |
|
|
|
116 |
|
|
|
26 |
(4) |
|
|
683 |
|
|
|
|
|
|
|
628 |
|
|
|
138 |
(4) |
|
|
766 |
|
Gain on sales of assets |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
Restructuring charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
41 |
|
|
|
|
|
Total costs and expenses |
|
|
16,828 |
|
|
|
4,193 |
|
|
|
37 |
|
|
|
21,058 |
|
|
|
|
|
|
|
21,917 |
|
|
|
201 |
|
|
|
22,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
313 |
|
|
$ |
(23 |
) |
|
$ |
(37 |
) |
|
$ |
253 |
|
|
$ |
|
|
|
$ |
42 |
|
|
$ |
(201 |
) |
|
$ |
(159 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sears Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39-week period ended October 29, 2005 |
|
|
39-week period ended October 30, 2004 |
|
millions |
|
|
|
|
|
Pre- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre- |
|
|
|
|
|
|
|
|
|
|
|
|
|
merger |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
merger |
|
|
|
|
|
|
|
|
|
As |
|
|
Activity |
|
|
Purchase |
|
|
Pro |
|
|
As |
|
|
Activity |
|
|
Purchase |
|
|
Pro |
|
|
|
reported |
|
|
(1) |
|
|
Acctng |
|
|
forma |
|
|
reported |
|
|
(1) |
|
|
Acctng |
|
|
forma |
|
Merchandise sales and services |
|
$ |
2,373 |
|
|
$ |
881 |
|
|
$ |
|
|
|
$ |
3,254 |
|
|
$ |
|
|
|
$ |
3,017 |
|
|
$ |
|
|
|
$ |
3,017 |
|
Credit and financial product revenues |
|
|
171 |
|
|
|
86 |
|
|
|
|
|
|
|
257 |
|
|
|
|
|
|
|
253 |
|
|
|
|
|
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,544 |
|
|
|
967 |
|
|
|
|
|
|
|
3,511 |
|
|
|
|
|
|
|
3,270 |
|
|
|
|
|
|
|
3,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, buying and occupancy |
|
|
1,733 |
|
|
|
654 |
|
|
|
|
|
|
|
2,387 |
|
|
|
|
|
|
|
2,222 |
|
|
|
6 |
(2) |
|
|
2,228 |
|
Gross margin rate |
|
|
27.0 |
% |
|
|
25.8 |
% |
|
|
|
% |
|
|
26.6 |
% |
|
|
|
% |
|
|
26.4 |
% |
|
|
|
% |
|
|
26.2 |
% |
Selling and administrative |
|
|
654 |
|
|
|
254 |
|
|
|
|
|
|
|
908 |
|
|
|
|
|
|
|
813 |
|
|
|
|
|
|
|
813 |
|
Selling and administrative as %
of total revenues |
|
|
25.7 |
% |
|
|
26.3 |
% |
|
|
|
% |
|
|
25.9 |
% |
|
|
|
% |
|
|
24.9 |
% |
|
|
|
% |
|
|
24.9 |
% |
Depreciation and amortization |
|
|
76 |
|
|
|
31 |
|
|
|
3 |
(4) |
|
|
110 |
|
|
|
|
|
|
|
84 |
|
|
|
7 |
(4) |
|
|
91 |
|
Provision for uncollectible accounts |
|
|
38 |
|
|
|
16 |
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
42 |
|
Gain on sales of assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
(5 |
) |
Restructuring charges |
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
2,554 |
|
|
|
955 |
|
|
|
3 |
|
|
|
3,512 |
|
|
|
|
|
|
|
3,156 |
|
|
|
13 |
|
|
|
3,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
(10 |
) |
|
$ |
12 |
|
|
$ |
(3 |
) |
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
114 |
|
|
$ |
(13 |
) |
|
$ |
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the 2005 results of operations for the period January 30, 2005 through March 24, 2005 for Sears Domestic and the period January 2, 2005 through March 24, 2005 for Sears Canada and the 2004 results
of operations for the period February 1, 2004 through October 30, 2004 for Sears Domestic and the period January 4, 2004 through October 2, 2004 for Sears Canada. |
|
(2) |
|
Represents an increase to cost of sales, buying and occupancy expense resulting from the adjustment of Sears inventory to fair value. |
|
(3) |
|
Represents an increase to selling and administrative expense resulting from the adjustment to Sears pension and postretirement plans based on the adjustment of such liabilities to fair value. |
|
(4) |
|
Represents an increase in depreciation and amortization expense resulting from the adjustment to Sears property and equipment and
identifiable intangible assets based on the adjustment of such assets to fair value. |
43
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
As of October 29, 2005, the Company had $0.9 billion of cash and cash equivalents. The Company
ended fiscal 2004 with approximately $3.4 billion of cash and cash equivalents. Prior to the
consummation of the Merger on March 24, 2005, Kmart and Sears had a combined total of approximately
$7.4 billion in cash. As a result of the Merger, $5.4 billion of cash was paid in consideration
for (i) all outstanding common stock of Sears, based upon the proration provisions of the Merger
Agreement, and (ii) all outstanding stock options of Sears.
The Company had total merchandise inventories of approximately $10.8 billion as of October 29, 2005
compared to $3.9 billion as of October 27, 2004. The increase in reported merchandise inventories
is mainly due to the acquisition of Sears. Sears Domestic merchandise inventories totaled $5.9
billion as of October 29, 2005 compared to pro forma Sears Domestic merchandise inventories of
approximately $6.7 billion as of October 30, 2004. The 11.9% reduction in Sears Domestic
merchandise inventories was primarily the result of improved inventory management controls put into
place during fiscal 2005. Pro forma Sears Domestic inventory at October 30, 2004 was adjusted to
take into account the impact of purchase accounting as if the Merger had taken place at the
beginning of fiscal 2004.
During the third quarter of fiscal 2005, approximately 50 of the Companys stores and facilities
located in the states of Louisiana, Mississippi and Florida were damaged by Hurricanes Katrina,
Rita or Wilma. The Company expects the majority of losses incurred to be covered by insurance.
Investing Activities
During the 39-week period ended October 29, 2005, the Company spent $333 million on capital
expenditures compared to $179 million and $605 million spent by Kmart and Sears, respectively,
during the equivalent 39-week period in the prior year. The current year spending of $333 million
excludes approximately $40 million of capital expenditures made by Sears during the period January
30, 2005 through March 24, 2005 (pre-Merger period).
During the 39-weeks ended October 29, 2005, the Company purchased 19 previously leased operating
properties for $98 million. In the normal course of business, the Company considers opportunities
to purchase leased operating properties, as well as offers to sell owned, or assign leased,
operating and non-operating properties. These transactions may, individually or in the aggregate,
result in material proceeds or outlays of cash. In addition, the Company reviews leases that will
expire in the short-term to determine the appropriate action to take with respect to them.
Financing Activities
The Company considers the securitization of Sears Canadas credit card receivables to be a
financing activity. As such, the Companys financing activities include borrowings, off-balance
sheet debt related to the securitization of Sears Canadas credit card receivables, share issuances
and share and debt repurchases. The Companys total funding as of October 29, 2005, October 27,
2004, and January 26, 2005 was as follows:
44
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
millions |
|
October 29, |
|
|
October 27, |
|
|
January 26, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
Short-term borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured commercial paper |
|
$ |
152 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion: |
|
|
|
|
|
|
|
|
|
|
|
|
Convertible subordinated notes, net |
|
|
|
|
|
|
40 |
|
|
|
43 |
|
Notes and debentures outstanding |
|
|
3,047 |
|
|
|
44 |
|
|
|
52 |
|
Capital lease obligations |
|
|
861 |
|
|
|
332 |
|
|
|
316 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
4,060 |
|
|
|
416 |
|
|
|
411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized borrowing (Sears Canada) |
|
|
873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Funding |
|
$ |
4,933 |
|
|
$ |
416 |
|
|
$ |
411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memo: Sears Canada debt and securitized borrowing |
|
$ |
1,592 |
|
|
$ |
|
|
|
$ |
|
|
The increase in total funding from January 26, 2005 is due primarily to the acquisition of
Sears. Sears and its subsidiaries had approximately $3.9 billion of debt, $0.9 billion of
securitized borrowings, and $0.5 billion of capital lease obligations at the time of the Merger.
On January 31, 2005, ESL Investments, Inc. (ESL) and its affiliates converted, in accordance with
their terms, all of the outstanding 9% convertible subordinated notes of Kmart and six months of
accrued interest into an aggregate of 6.3 million shares of Kmart common stock. In consideration
of ESLs conversion of the notes prior to maturity, ESL received a $3 million payment from Kmart.
The cash payment was equivalent to the approximate discounted after-tax cost of the future interest
payments that would have otherwise been paid by Kmart to ESL and its affiliates in the absence of
the early conversion. In conjunction with the conversion, the Company recognized the remaining
related unamortized debt discount of $17 million as interest expense.
In May 2005, the Finance Committee of the Board of Directors of the Company authorized the
repurchase, subject to market conditions and other factors, of up to $500 million of the
outstanding indebtedness of the Company and its subsidiaries in open market or privately negotiated
transactions. The source of funds for the proposed purchases is expected to be the Companys cash
from operations or borrowings under the Companys $4.0 billion, five-year credit agreement (the
Credit Agreement). During the 13- and 39- week periods ended October 29 2005, the Companys
subsidiary, Sears Roebuck Acceptance Corp. (SRAC), repurchased $36 million and $150 million of
its outstanding notes, respectively, thereby reducing the unused balance of this authorization to
$350 million. In addition, for the 39-week period ended October 29, 2005, the Company made $610
million of scheduled debt repayments.
The Company uses interest rate derivatives to synthetically convert fixed-rate debt to
variable-rate debt to manage its exposure to interest rate risks. The interest rate derivatives
qualify as fair value hedges in accordance with SFAS No. 133 Accounting for Derivative Instruments
and Hedging Activities and are recorded on the balance sheets at market value with an offsetting
entry to the underlying hedged debt.
During the second quarter of fiscal 2005, the Company terminated interest rate swaps with a
notional value of approximately $1.0 billion that had converted certain of the Companys fixed rate
debt to floating rate debt. The Companys variable rate borrowings were reduced to approximately
$340 million as a result of these interest rate swap terminations and the retirement of certain of
the Companys variable rate debt. The Company received $60 million in cash proceeds from the swap
terminations, representing the aggregate fair value of these swaps as of the termination date. As
the hedges related to these swaps qualified for hedge accounting, an offsetting adjustment was
recorded to the carrying amount of the designated hedged debt, which remains outstanding, and this
adjustment will be amortized into interest expense over the remaining term of the debt.
45
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
During the 13 weeks ended October 29, 2005, the Company repurchased 3.7 million of its common
shares at a total cost of $434 million under a common share repurchase program. This program,
approved by the Board of Directors during the third quarter of fiscal 2005, authorized the
repurchase of up to an aggregate of $1.0 billion of the Companys common shares. As of October 29,
2005, the Company had $566 million of remaining authorization under this program.
The Company securitizes certain of its Canadian credit card receivables through trusts. Under the
Sears Canada securitization program, trusts purchase undivided interests in the credit card
receivable balances funded by issuing short- and long-term debt, primarily commercial paper and
senior and subordinated notes. These debt instruments entitle the holder to a series of scheduled
cash flows under preset terms and conditions, the receipt of which is dependent upon cash flows
generated by the related trusts assets. The trusts meet the definition of a qualified special
purpose entity. As a result, the Sears Canada securitized credit card receivables and related
borrowings are not presented in the condensed consolidated balance sheets of Holdings.
On November 15, 2005, Sears Canada completed the sale of its Credit and Financial Services
operations to JPMorgan Chase & Co. (JPMorgan Chase) for approximately $1.9 billion in cash
proceeds net of securitized receivables and other related costs and taxes. In addition, Sears
Canada and JPMorgan Chase have entered into a long-term marketing and servicing alliance with an
initial term of ten years. On December 2, 2005, Sears Canadas Board of Directors declared that the
net after-tax proceeds from the sale will be used to fund a cash distribution to shareholders in
the amount of approximately $1.7 billion with the balance of sale proceeds to be used for general
corporate purposes. The cash distribution to shareholders is scheduled to be paid on December 16,
2005.
The assets and liabilities of Sears Canadas credit business are reported separately as assets and
liabilities of operations held for sale in the condensed consolidated balance sheet at October 29,
2005. The major classes of assets and liabilities held for sale include:
|
|
|
|
|
|
|
October 29, |
|
millions |
|
2005 |
|
Credit card receivables, net of $35 allowance |
|
$ |
1,224 |
|
Other assets |
|
|
500 |
|
|
|
|
|
Total assets held for sale |
|
|
1,724 |
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
133 |
|
|
|
|
|
Total liabilities of operations held for sale |
|
$ |
133 |
|
|
|
|
|
The following table summarizes the Sears Canada credit card receivables:
|
|
|
|
|
|
|
October 29, |
|
millions |
|
2005 |
|
Managed accounts |
|
$ |
2,186 |
|
Less: co-ownership interest held by third parties |
|
|
(873 |
) |
|
|
|
|
Co-ownership retained by the Company |
|
|
1,313 |
|
Less: long-term portion of deferred customer accounts
receivable |
|
|
(54 |
) |
|
|
|
|
Total |
|
$ |
1,259 |
|
|
|
|
|
Liquidity
The Companys primary need for liquidity is to fund capital expenditures and seasonal working
capital requirements of its retail businesses and for general corporate purposes. These needs
generally will be funded
by the Companys operating cash flows and, to the extent necessary, borrowings under the Credit
Agreement. At October 29, 2005, $3.4 billion was available under this facility. While the Company
expects to use the
46
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
Credit Agreement as its primary funding source, it may also access the public
debt markets on an opportunistic basis. The Company may from time to time consider selective
strategic transactions to create value and improve performance, which may include acquisitions,
dispositions, restructurings, joint ventures and partnerships.
Sears
Canadas Board of Directors declared a cash distribution to its
shareholders to be paid on December 16, 2005. Holdings expects
that its after-tax proceeds from this distribution will approximate
$820 million. Further, on December 5, 2005, Holdings
announced its intention to offer to acquire the 46% of Sears Canada
which it does not currently own for a purchase price of
$720 million. Holdings expects to fund the acquisition with cash
on hand.
Debt Ratings
The ratings of the Companys domestic debt securities as of October 29, 2005 appear in the table
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moodys |
|
Standard & |
|
|
|
|
Investors |
|
Poors Ratings |
|
Fitch |
|
|
Service |
|
Services |
|
Ratings |
Unsecured long-term debt |
|
Ba1 |
|
BB+ |
|
BB |
Unsecured commercial paper |
|
NP |
|
|
B |
(1) |
|
|
B |
|
|
|
|
(1) |
|
On November 2, 2005, Standard & Poors Ratings Service raised its ratings of
the Companys short-term debt and commercial paper to B-1 from B. |
Credit Agreement
The Credit Agreement is available for general corporate purposes and includes a $1.5 billion letter
of credit sublimit. The Credit Agreement is a revolving credit facility under which SRAC and Kmart
Corporation are the borrowers. The Credit Agreement is guaranteed by Holdings and certain of its
direct and indirect subsidiaries and is secured by a first lien on domestic inventory, credit card
accounts receivable and the proceeds thereof. Availability under the Credit Agreement is
determined pursuant to a borrowing base formula, based on domestic inventory and credit card
accounts receivable, subject to certain limitations. As of October 29, 2005, the Company had $592
million of letters of credit outstanding under the Credit Agreement with $3.4 billion of
availability remaining under the Credit Agreement. There were no borrowings under the facility
during the third quarter. The Credit Agreement does not contain provisions that would restrict
borrowings or letter of credit issuances based on material adverse changes or credit ratings. The
Company capitalized $19 million of debt issuance costs in connection with entering into the Credit
Agreement. These costs are being amortized over the five-year life of the Credit Agreement.
Letter of Credit Agreement
The Company has an additional letter of credit agreement (the LC Agreement) with a commitment
amount of up to $600 million. As of October 29, 2005, there were $305 million of letters of credit
outstanding under the LC Agreement.
Under the terms of the LC Agreement, the Company has the ability to post cash, inventory or letters
of credit, including letters of credit issued under the Credit Agreement, as collateral. However,
the Credit Agreement prohibits the Company from using inventory as collateral under the LC
Agreement. The cash collateral account is subject to a pledge and security agreement pursuant to
which if the Company elects to post cash collateral, it must maintain cash in an amount equal to
100.5% of the face value of letters of credit outstanding. The Company had $306 million posted as
collateral under the LC Agreement as of October 29, 2005, consisting of $150 million in the form of
a letter of credit and
$156 million in cash. The Company continues to classify the cash collateral
as cash and cash equivalents due to its ability to substitute these letters of credit with letters
of credit under the Credit Agreement, which does not require cash collateral, and its ability to
provide letters of
credit under the Credit Agreement as collateral. There are no provisions in the LC Agreement that
would restrict
47
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
issuances based on credit ratings, but issuances could be restricted under certain
circumstances based on a material adverse change.
Cash Collateral
The Company posts cash collateral for certain self-insurance programs. The Company continues to
classify the cash collateral as cash and cash equivalents in the accompanying condensed
consolidated balance sheets due to the Companys ability to convert the cash to letters of credit
at any time at its discretion. As of October 29, 2005, $71 million of cash was posted as
collateral for self-insurance programs.
OSH Supply Hardware LLC (LLC) Credit Agreement
In November 2005, LLC entered into a five-year, $130 million senior secured revolving credit
facility (the LLC Facility). The LLC Facility is available for LLCs general corporate purposes
and is secured by a first lien on substantially all of LLCs non-real estate assets. Availability
under the LLC Facility is determined pursuant to a borrowing base formula based on inventory and
accounts and credit card accounts receivable, subject to certain limitations.
SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES
In preparing the financial statements, certain accounting policies require considerable judgment to
select the appropriate assumptions to calculate financial estimates. These estimates are complex
and subject to an inherent degree of uncertainty. The Company bases its estimates on historical
experience, terms of existing contracts, evaluation of trends and other assumptions that the
Company believes to be reasonable under the circumstances. The Company continually evaluates the
information used to make these estimates as its business and the economic environment change.
Although the use of estimates is pervasive throughout the financial statements, the Company
considers an accounting estimate to be critical if:
|
§ |
|
it requires assumptions to be made about matters that were highly uncertain at the time
the estimate was made, and |
|
|
§ |
|
changes in the estimate that are reasonably likely to occur from period to period or
different estimates that could have been selected would have a material effect on the
Companys financial condition, cash flows or results of operations. |
Management believes the current assumptions and other considerations used to estimate amounts
reflected in the financial statements are appropriate. However, if actual experience differs from
the assumptions and the considerations used in estimating amounts, the resulting changes could have
a material adverse effect on the Companys condensed consolidated results of operations, and in
certain situations, could have a material adverse effect on its financial condition.
Management has discussed the development and selection of these critical accounting estimates with
the Audit Committee of its Board of Directors and the Audit Committee has reviewed the disclosure
presented below relating to the selection of these estimates.
The following is a summary of the Companys most critical estimates.
Revenue Recognition
Revenues from merchandise sales and services, including delivery fees, are reported net of
estimated returns and allowances and are recognized when the related goods are shipped and all
significant obligations of the
Company have been satisfied. The reserve for returns and allowances is calculated as a percentage
of sales
48
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
based on historical return percentages. Revenues from product installation and repair
services are recognized as the services are provided. Revenues from the sale of long-term service
contracts are deferred and amortized over the lives of the contracts while the service costs are
expensed as incurred.
Valuation of Inventory
Most of the Companys inventory is valued at the lower of cost or market determined primarily using
the retail inventory method (RIM). RIM is an averaging method that is widely used in the retail
industry. To determine inventory cost under RIM, inventory at its retail selling value is
segregated into groupings of merchandise having similar characteristics, which are then converted
to a cost basis by applying specific average cost factors for each grouping of merchandise. Cost
factors represent the average cost-to-retail ratio for each merchandise group based upon the fiscal
year purchasing activity for each store location. Accordingly, a significant assumption under the
retail method is that inventory in each group is similar in terms of its cost-to-retail
relationship and has similar turnover rates. Management monitors the content of merchandise in
these groupings to prevent distortions that would have a material effect on inventory valuation.
RIM inherently requires management judgment and certain estimates that may significantly affect the
ending inventory valuation as well as gross margin. Among others, two significant estimates used
in inventory valuation are the level and timing of permanent markdowns (clearance markdowns used to
clear unproductive or slow-moving inventory) and shrinkage. Amounts are charged to cost of sales,
buying and occupancy at the time the retail value of inventory is reduced through the use of
permanent markdowns.
Factors considered in the determination of permanent markdowns include current and anticipated
demand, customer preferences, age of the merchandise, fashion trends and weather conditions. In
addition, inventory is also evaluated against corporate pre-determined historical markdown
cadences. When a decision is made to permanently markdown merchandise, the resulting gross margin
reduction is recognized in the period the markdown is recorded. The timing of the decision,
particularly surrounding the balance sheet date, can have a significant effect on the results of
operations.
Shrinkage is estimated as a percentage of sales for the period from the date of the last physical
inventory to the end of the fiscal year. Physical inventories are taken at least annually for all
stores on a staggered basis throughout the year and inventory records are adjusted accordingly.
The shrinkage rate from the most recent physical inventory, in combination with historical
experience, is used as the standard for the shrinkage accrual following the physical inventory.
Self Insurance Reserves
The Company uses a combination of third-party insurance and/or self-insurance for a number of risks
including workers compensation, asbestos and environmental, automobile, product and general
liability claims. The Companys liability reflected on the condensed consolidated balance sheets
represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. In
estimating this liability, the Company utilizes loss development factors prepared by independent
third-party actuaries. These development factors utilize historical data to project the future
development of incurred losses. Loss estimates are adjusted based upon actual claims settlements
and reported claims. Although the Company does not expect the amounts ultimately paid to differ
significantly from its estimates, self-insurance reserves could be affected if future claim
experience differs significantly from the historical trends and the actuarial assumptions.
Defined Benefit Retirement Plans
The fundamental components of accounting for defined benefit retirement plans consist of the
compensation cost of the benefits earned, the interest cost from deferring payment of those
benefits into the future and the
49
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
results of investing any assets set aside to fund the obligation.
Such retirement benefits are earned by associates ratably over their service careers. Therefore,
the amounts reported in the income statement for these retirement plans have historically followed
the same pattern. Accordingly, changes in the obligations or the value of assets to fund them have
been recognized systematically and gradually over the associates estimated period of service. The
largest drivers of experience losses in recent years have been the discount rate used to determine
the present value of the obligation and the actual return on pension assets. Kmart recognizes the
changes by amortizing experience gains/losses in excess of the 10% corridor into expense over the
associate service period and by recognizing the difference between actual and expected asset
returns over a five-year period. While the accounting policy for the Sears domestic pension plans
was to immediately recognize any experience gains or loss in excess of the 10% corridor, the
Company will conform the accounting for the Sears domestic plans to that of Kmart. The Sears
domestic pension plans had no unrecognized experience gain or loss as of the date of the Merger.
Effective January 31, 1996, Kmarts pension plans were frozen, and associates no longer earn
additional benefits under the plans. Therefore, there are no assumptions related to future
compensation costs relating to the Kmart pension plans. During the first quarter of 2005, Holdings
announced that the Sears domestic pension plan would be frozen effective January 1, 2006. Domestic
associates will earn no additional benefits after December 31, 2005. Benefits earned through
December 31, 2005 will be paid out to eligible participants following retirement.
Holdings actuarial valuations utilize key assumptions including discount rates and expected
returns on plan assets. The Company is required to consider current market conditions, including
changes in interest rates and plan asset investment returns, in determining these assumptions.
Actuarial assumptions may differ materially from actual results due to changing market and economic
conditions, changes in investment strategies and higher or lower withdrawal rates or longer or
shorter life spans of participants.
In connection with the decision to freeze the Sears domestic pension plan, Holdings revised the
target allocation of the Sears domestic pension plan assets to approximately 42.5% fixed income,
42.5% equity, and 15% alternative investments that incorporate absolute return investment
strategies. Previously, the plan asset allocation was approximately 70% equity and 30% fixed
income. The Company annually reviews its long-term return rate assumption, which is currently 8%.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes which requires that deferred tax assets and liabilities be recognized using enacted tax
rates for the effect of temporary differences between the financial reporting and tax bases of
recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by
a valuation allowance if it is more likely than not that some portion of or all of the deferred tax
asset will not be realized.
During the first quarter of fiscal 2005, the Company recognized a reversal of approximately $1.1
billion of its pre-Merger deferred income tax valuation allowance as a result of the Merger and the
combined tax attributes resulting from it. According to SFAS No. 109, the recognition of this
reversal is included in the Companys purchase accounting adjustments as a reduction to goodwill
attributable to the Merger. Given the Companys current and forecasted levels of profitability, as
well as its ability to realize the deferred tax assets through tax strategies if necessary,
management believes that a significant portion of the deferred tax assets will more likely than not
be realized.
The consolidated valuation allowance as of October 29, 2005 is $460 million and relates to the
uncertainty around the realization of certain state deferred tax assets, including $284 million
related to state tax benefits of Sears, which are not expected to be realized. The Company will
continue to assess the likelihood of realization
50
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
of these state deferred tax assets and will reduce
the valuation allowance on such assets in the future if it becomes more likely than not that the
net deferred tax assets will be utilized.
The tax balances and income tax expense recognized by the Company are based on managements
interpretation of the tax laws of multiple jurisdictions. Income tax expense also reflects the
Companys best estimates and assumptions regarding, among other things, the level of future taxable
income, interpretation of the tax laws, and tax planning. Future changes in tax laws, changes in
projected levels of taxable income, and tax planning could affect the effective tax rate and tax
balances recorded by the Company.
Domestic and foreign tax authorities periodically audit the Companys income tax returns. These
audits include questions regarding its tax filing positions, including the timing and amount of
deductions and the allocation of income among various tax jurisdictions. In evaluating its various
tax filing positions, the Company records tax benefits to the extent that, in managements
judgment, it is probable that the Companys tax position will ultimately be sustained. A number of
years may elapse before a particular matter, for which the Company has established a reserve, is
audited and fully resolved. Managements estimates as of the date of the financial statements
reflect its best judgment giving consideration to all currently available facts and circumstances.
As such, these estimates may require adjustment in the future, as additional facts become known or
as circumstances change.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
To facilitate an understanding of the Companys contractual obligations, the following data is
provided:
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
millions |
|
Total |
|
|
Within 1 Year |
|
|
1-3 Years |
|
|
4-5 Years |
|
|
After 5 Years |
|
Long-term debt |
|
$ |
2,935 |
|
|
$ |
575 |
|
|
$ |
902 |
|
|
$ |
575 |
|
|
$ |
883 |
|
Short-term debt |
|
|
152 |
|
|
|
152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
|
973 |
|
|
|
69 |
|
|
|
119 |
|
|
|
104 |
|
|
|
681 |
|
Operating leases |
|
|
6,624 |
|
|
|
791 |
|
|
|
1,398 |
|
|
|
1,125 |
|
|
|
3,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
10,684 |
|
|
$ |
1,587 |
|
|
$ |
2,419 |
|
|
$ |
1,804 |
|
|
$ |
4,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has no material unconditional purchase obligations as defined by SFAS No. 47,
Disclosure of Long-Term Purchase Obligations.
Defined benefit retirement plans
During the first quarter of fiscal 2005, Holdings announced that the Sears domestic pension plan
will be frozen effective January 1, 2006. Domestic associates will earn no additional benefits
after December 31, 2005. Benefits earned through December 31, 2005 will be paid out to eligible participants following
retirement.
Contributions were made to the Kmart and Sears domestic pension plans in the amount of $238 million
and $0 million, respectively, for the 13-week period ended October 29, 2005 and $240 million and
$33 million, respectively, for the 39-week period ended October 29, 2005. There are no minimum
required pension contributions for the remainder of fiscal 2005 to either the Kmart or the Sears
domestic pension plan.
51
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements made in this Quarterly Report on Form 10-Q and in other public announcements by
the Company contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties
that may cause the Companys actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by these forward-looking
statements. Forward-looking statements include information concerning the Companys future
financial performance, business strategy, plans, goals and objectives. Statements preceded or
followed by, or that otherwise include, the words believes, expects, anticipates, intends,
estimates, plans, forecasts, is likely to, projected and similar expressions or future or
conditional verbs such as will, should, would, may and could are generally
forward-looking in nature and not historical facts. Such statements include, but are not limited
to, statements about the expected benefits of the business combination of Sears and Kmart and
future financial and operating results. Such statements are based upon the current beliefs and
expectations of Holdings management and are subject to significant risks and uncertainties. Actual
results may differ materially from those set forth in the forward-looking statements.
The following factors, among others, could cause actual results to differ from those set forth in
the forward-looking statements: the risk that the businesses of Sears and Kmart will not be
integrated successfully; failure to quickly realize synergies and cost-savings from the Merger; the
effects of substantial headquarters workforce reductions; the ability to attract, motivate and
retain key executives and other associates; disruption from the Merger making it more difficult to
maintain relationships with clients, employees and suppliers; competitive conditions in the retail
and related services industries; changes in consumer confidence, tastes, preferences and spending,
including the impact of fuel costs on spending patterns; marketplace demand for the products of the
Companys key brand partners as well as the engagement of appropriate new brand partners;
operational or financial difficulties at any of the Companys business partners; the availability
and level of consumer debt; the successful execution of, and customer response to, strategic
initiatives, including the full-line store strategy, the conversion of Kmart stores to the Sears
Essentials nameplate and the integration of other new store locations; the pace of growth in store
locations, which may be higher or lower than anticipated; the possibility that new business and
strategic options for one or more business segments will be identified, potentially including
selective acquisitions, dispositions, restructurings, joint ventures and partnerships; trade
restrictions, tariffs, and other factors potentially affecting the ability to do business with
qualified vendors and access products in an efficient manner; the ability to successfully implement
initiatives to improve inventory management capabilities; unanticipated increases in paper, postage
or printing costs; anticipated cash flow and the ability of the Company to maintain sufficient
operating cash flow and liquidity; changes in interest rates; the outcome of pending and/or future
legal proceedings and bankruptcy claims; social and political conditions such as war, political
unrest and terrorism or natural disasters; the possibility of negative investment returns in
pension plans; volatility in financial markets; the terms and availability of debt financing;
changes in debt ratings, credit spreads and cost of funds; unexpected difficulties accessing the
public debt markets; the impact of seasonal buying patterns, which are difficult to forecast with
certainty; uncertainty as to the operating cash flows to be derived by Sears Canada from its
long-term marketing and servicing alliance with JP Morgan Chase; and general economic conditions
and normal business uncertainty. In addition, the Company typically earns a disproportionate share
of its operating income in the fourth quarter due to seasonal buying patterns, which are difficult
to forecast with certainty.
Certain of these and other factors are discussed in more detail in the Companys filings with the
Securities and Exchange Commission and the Annual Reports on Form 10-K of Sears and Kmart for their
fiscal years ended January 1 and January 26, 2005, respectively, all of which may be accessed
through the Commissions website at www.sec.gov.
52
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
While the Company believes that its forecasts and assumptions are reasonable, it cautions that
actual results may differ materially. The Company intends the forward-looking statements to speak
only as of the time made and does not undertake to update or revise them as more information
becomes available.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The nature of market risks faced by the Company at October 29, 2005 are the same as disclosed in
Sears Annual Report on Form 10-K for the year ended January 1, 2005. As of October 29, 2005, 8%
of the Companys funding portfolio, excluding securitized debt of Sears Canada, was variable rate
(including fixed rate debt synthetically converted to variable rate through the use of derivative
financial instruments). Based on the size of this variable rate funding portfolio at October 29,
2005, which totaled approximately $340 million, an immediate 100 basis point change in interest
rates would have affected annual pretax funding costs by approximately $3.4 million. These
estimates do not take into account the effect on revenue resulting from invested cash or the
returns on assets being funded. These estimates also assume that the variable rate funding
portfolio remains constant for an annual period and that the interest rate change occurs at the
beginning of the period. During the second quarter of fiscal 2005, the Company terminated interest
rate swaps, which converted fixed rate debt to floating rate debt, with a notional value of
approximately $1.0 billion. The Companys variable rate borrowings were reduced to approximately
$340 million as a result of these interest rate swap terminations and retirement of variable rate
debt. The Company received $60 million in cash proceeds from the swap terminations, representing
the aggregate fair value of these swaps as of the termination date. As the hedges related to these
swaps qualified for hedge accounting, an offsetting adjustment was recorded to the carrying amount
of the designated hedged debt, which remains outstanding, and this adjustment will be amortized
into interest expense over the remaining term of the debt.
During the second quarter of fiscal 2005, the Company entered into a series of six- and nine-month
foreign currency forward contracts totaling $1.0 billion Canadian notional value designed to hedge
the Companys net investment in Sears Canada against adverse changes in exchange rates. The
aggregate fair value of the forward contracts as of October 29, 2005 was negative $40 million.
These hedges qualify for hedge accounting and, as such, an unrealized loss of $40 million was
recorded as a component of other comprehensive loss in the Companys condensed consolidated balance
sheet as of October 29, 2005. A hypothetical 10% adverse movement in the level of the Canadian
exchange rate relative to the U.S. dollar as of October 29, 2005, with all other variables held
constant, would have resulted in a loss in the fair value of the Companys foreign currency forward
contracts of $94 million as of October 29, 2005.
Item 4. Controls and Procedures
The Companys management, including Aylwin B. Lewis, Chief Executive Officer and President
(principal executive officer) , and William C. Crowley, Executive Vice President and Chief
Financial and Administrative Officer (principal financial officer), have evaluated the
effectiveness of the Companys disclosure controls and procedures, as such term is defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange
Act), as of the end of the period covered by this report. Based upon their evaluation, the
principal executive officer and the principal financial officer concluded that, as of the end of
the period covered by this report, the Companys disclosure controls and procedures were effective
for the purpose of ensuring that the information required to be disclosed in the reports that the
Company files or submits under the Exchange Act with the Securities and Exchange Commission (the
SEC) (1) is recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms, and (2) is accumulated and communicated to the Companys management,
including its principal executive and principal financial officers, as appropriate to allow timely
decisions regarding required disclosure.
53
SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004
In addition, as required by Rule 13a-15(d) under the Exchange Act, the Companys management,
including the Companys principal executive officer and principal financial officer, have evaluated
the Companys internal control over financial reporting to determine whether any changes occurred
during the quarter covered by this report that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial reporting.
The Company considers the acquisition of Sears material to the results of its operations, financial
position and cash flows from the date of acquisition through October 29, 2005 and considers the
internal controls and procedures of Sears to be reasonably likely to materially affect the
Companys internal control over financial reporting. The Company has extended its Sarbanes-Oxley
Act Section 404 compliance program to include Sears.
54
SEARS HOLDINGS CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Pending against Sears and certain of its officers and directors are a number of lawsuits, described
below, that relate to Sears credit card business and public statements about it. The Company
believes that all of these claims lack merit and is defending against them vigorously.
§ |
|
On and after October 18, 2002, several actions were filed in the
United States District Court for the Northern District of Illinois
against Sears and certain current and former officers alleging
that certain public announcements by Sears concerning its credit
card business violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The
Court has consolidated the actions and certified the consolidated
action as a class action. Discovery is underway. The trial is
scheduled to begin in September 2006. |
|
§ |
|
On and after November 15, 2002, several actions were filed in the
United States District Court for the Northern District of Illinois
against Sears, certain officers and directors, and alleged
fiduciaries of Sears 401(k) Savings Plan (the Plan), seeking
damages and equitable relief under the Employee Retirement Income
Security Act of 1974 (ERISA). The plaintiffs purport to
represent participants in the Plan, and allege breaches of
fiduciary duties under ERISA in connection with the Plans
investment in Sears common shares and alleged communications made
to Plan participants regarding Sears financial condition. The
Court has consolidated these actions and certified the
consolidated action as a class action. Discovery is underway. No
trial date has been set. |
|
§ |
|
On October 23, 2002, a purported derivative suit was filed in the
Supreme Court of the State of New York (the New York Court)
against Sears (as a nominal defendant) and certain current and
former directors seeking damages on behalf of Sears. The complaint
purports to allege a breach of fiduciary duty by the directors
with respect to Sears management of its credit business. Two
similar suits were subsequently filed in the Circuit Court of Cook
County, Illinois (the Illinois State Court), and a third was
filed in the United States District Court for the Northern
District of Illinois. The New York Court derivative suit was
dismissed on June 21, 2004 and the plaintiff has appealed. The two
Illinois State Court derivative suits were dismissed on September
30, 2004. The order of dismissal became final on December 1, 2004,
and the time to appeal has expired. The Illinois federal court
suit has been stayed pending resolution of the New York Court
derivative action. |
|
§ |
|
On June 17, 2003, an action was filed in the Northern District of
Illinois against Sears and certain officers, purportedly on behalf
of a class of all persons who, between June 21, 2002 and October
17, 2002, purchased the 7% notes that SRAC issued on June 21,
2002. An amended complaint was filed, naming as additional
defendants certain former officers, SRAC and several investment
banking firms who acted as underwriters for SRACs March 18, May
21 and June 21, 2002 notes offerings. The amended complaint
alleges that the defendants made misrepresentations or omissions
concerning its credit business during the class period and in the
registration statements and prospectuses relating to the
offerings. The amended complaint alleges that these
misrepresentations and omissions violated Sections 10(b) and 20(a)
of the Securities Exchange Act and Rule 10b-5 promulgated
thereunder, and Sections 11, 12 and 15 of the Securities Act of
1933 and purports to be brought on behalf of a class of all
persons who purchased any security of SRAC between October 24,
2001 and October 17, 2002, inclusive. The defendants filed motions
to dismiss the action. On September 24, 2004, the court granted
these motions in part, and denied them in part. The court
dismissed the claims related to the March 18 and May 21, 2002 note
offerings because the plaintiff did not purchase notes in those
offerings. The court dismissed the Section 10(b) and Rule 10b-5
claims against several of the individual defendants because the
plaintiff failed to adequately plead such claims. The court
sustained the remaining claims. By leave of court, the plaintiffs
filed a second amended complaint on November 15, 2004. Defendants
(other than one of the underwriter defendants) filed motions |
55
SEARS HOLDINGS CORPORATION
|
|
to partially dismiss the second amended complaint on January 10, 2005. The defendant that did
not move to partially dismiss filed an answer to the second amended complaint on January 28,
2005, denying all liability. On September 14, 2005, the court granted the pending motions to
dismiss in part, and denied them in part. The court dismissed the Section 11 claim with respect
to SRACs May 21, 2002 notes on the ground that the plaintiffs lacked standing, and the Section
12 claims with respect to SRACs March 18, 2002 notes and May 21, 2002 notes on the ground that
the plaintiffs could not allege damages. The court dismissed the Section 15 claim on the ground
that the plaintiffs had failed to allege a predicate violation of the Securities Act of 1933 on
the part of SRAC. The court dismissed the Section 10(b) and Rule 10b-5 claims as to some, but
not all, of the individual defendants. The court sustained the remaining claims. By leave of
court, the plaintiffs filed a third amended complaint on October 28, 2005. The non-underwriter
defendants filed a motion to partially dismiss the third amended complaint on November 15,
2005. |
Following the announcement of the Merger on November 17, 2004, several actions have been filed
relating to the transaction. These lawsuits are in their preliminary stages, and defendants have
not yet been required to respond to certain of the complaints. The Company believes that all of
these claims lack merit and intends to defend against them vigorously.
§ |
|
Three actions have been filed in the Circuit Court of Cook County,
Illinois. These actions assert claims on behalf of a purported
class of Sears stockholders against Sears and certain of its
officers and directors, together with Kmart, Edward S. Lampert,
William C. Crowley and other affiliated entities, alleging breach
of fiduciary duty in connection with the merger. The plaintiffs
allege that the merger favors interested defendants by awarding
them disproportionate benefits, and that the defendants failed to
take appropriate steps to maximize the value of a merger
transaction for Sears stockholders. The actions have been
consolidated, and an amended complaint was filed in early January
2005. The amended complaint asserts similar breach-of-fiduciary
duty claims, as well as alleging that defendants have made
insufficient and misleading disclosures in connection with the
mergers, and seeks injunctive relief. The plaintiffs have moved
for expedited discovery. On February 1, 2005, the court granted
the defendants motion to stay or dismiss these actions in favor
of then-pending parallel litigation in the New York Supreme Court.
Plaintiffs appealed the stay order to the Appellate Court of
Illinois-First District. On October 28, 2005, following the
dismissal with prejudice of the New York actions and the New York
plaintiffs failure to appeal, the Appellate Court of Illinois
dismissed the appeal as moot. The cases are now pending in the
Circuit Court, and the defendants intend to renew their motion to
dismiss. |
|
§ |
|
Two actions were filed in the Supreme Court of the State of New
York, New York County, asserting substantially similar claims
against Sears and certain of its officers and directors. The
parties agreed to consolidate these two actions. Pending
consolidation, the defendants moved to dismiss the complaint in
both actions for lack of standing and failure to state a cause of
action. On February 15, 2005, the Court ordered that the two cases
be consolidated as a single action. On February 16, 2005, the
plaintiffs filed a superceding consolidated amended class action
complaint. The amended complaint asserts claims on behalf of a
purported class of Sears stockholders against Sears and certain
of its officers and directors for breach of fiduciary duty in
connection with the merger on the grounds that defendants
allegedly failed to take proper steps to maximize the value of a
merger transaction for Sears stockholders. Additionally, the
plaintiffs claim that the defendants made insufficient and
misleading disclosures in connection with the mergers. The amended
complaint also names Kmart, Edward S. Lampert and ESL, Inc. as
defendants on the grounds that they aided and abetted the alleged
breaches of fiduciary duty. The amended complaint seeks
provisional and permanent injunctive relief, as well as damages.
On March 24, 2005, the Court denied plaintiffs motions for
expedited discovery and a preliminary injunction against the
closing of the mergers. On July 29, 2005, the Court granted all
defendants motions to dismiss the action with prejudice. The
time to appeal has expired, and plaintiffs have not filed an
appeal. |
|
§ |
|
One action has been filed in the United States District Court for
the Northern District of Illinois. This action asserts claims
under the federal securities laws on behalf of a purported class
of Sears stockholders against |
56
SEARS HOLDINGS CORPORATION
|
|
Sears and Alan J. Lacy, for allegedly failing to make timely disclosure of merger discussions
with Kmart during the period November 8 through 16, 2004, and seeks damages. The court
appointed a lead plaintiff and lead counsel, and an amended complaint was filed on March 11,
2005. The amended complaint, names Edward S. Lampert and ESL Partners, L.P., as additional
defendants, and purports to assert claims on behalf of sellers of Sears stock during the period
September 9 through November 16, 2004. All defendants have moved to dismiss, and briefing on
the motions was completed in early July. |
Effective May 11, 2005, Sears terminated for cause its Master Services Agreement (the Agreement)
with Computer Sciences Corporation (CSC). CSC has been providing information technology
infrastructure support services, including desktops, servers, and systems to support Sears-related
websites, voice and data networks and decision support technology to Sears and its subsidiaries
under the 10-year Agreement entered into in June 2004. CSC is obligated to continue providing
these services for an extended period following termination of the Agreement. CSC disputes Sears
assertion that grounds for termination for cause existed and claims that, as a result of
terminating this Agreement, Sears is liable to CSC for damages.
CSC had filed a lawsuit in the United States District Court for the Northern District of Illinois
(the District Court) on March 18, 2005 seeking a declaratory judgment that CSC was not in
material breach of the Agreement and an injunction to prevent Sears from terminating the Agreement
for cause. On April 14, 2005, the District Court denied CSCs motion for a preliminary injunction
and granted Sears motion to compel arbitration. On April 22, 2005 the District Court denied CSCs
motion for reconsideration of the District Courts April 14th ruling, and CSC appealed
the District Courts ruling to the United States Court of Appeals for the Seventh Circuit. That
appeal remains pending. On April 14, 2005, CSC filed an emergency claim with the American
Arbitration Association (AAA), seeking to enjoin Sears from terminating the Agreement for cause.
The AAA denied CSCs request for emergency relief on April 18, 2005. In compliance with the
District Courts order compelling arbitration, the parties began selecting an arbitration panel.
While arbitrator selection was in progress, the parties agreed to suspend arbitration and the
appeal while they voluntarily mediate their disputes. Mediation and settlement efforts are
ongoing.
In March 2002, a class action was filed in the United States District court for the Eastern
District of Michigan on behalf of participants or beneficiaries of the Kmart Corporation Retirement
Savings Plan against various current and former employees and former directors of Kmart Corporation
alleging breach of fiduciary duty under the Employee Retirement Income Security Act for excessive
investment in the Predecessor Companys stock, failure to provide complete and accurate information
about the Predecessor Companys common stock and failure to provide accurate information regarding
the Predecessor Companys financial condition. In July 2002, the plaintiffs filed proofs of claim
with the bankruptcy court in an aggregate amount of $180 million. In July 2005, tentative agreement
was reached to settle this action. The settlement is subject to final court approval. Kmart is not
a defendant in this action. The settlement is expected to be covered by insurance, except for
$50,000 that Kmart expects to contribute as part of the settlement. Once the settlement is
approved, Kmart will move to have the proofs of claim filed expunged.
In November 2003, the Creditor Trust created pursuant to the Predecessor Companys plan of
reorganization (the Creditor Trust) filed suit in the Oakland County (Michigan) Circuit Court
against six former executives of the Predecessor Company (the Officer Defendants) and
PricewaterhouseCoopers LLP, the Predecessor Companys independent auditor. The allegations against
the Officer Defendants include violations of their fiduciary duty and breach of contract related to
their employment agreements with the Predecessor Company. Kmart is not a defendant in this action.
The claims against the Officer Defendants were ordered to arbitration by the Oakland County Circuit
Court based on the terms of the employment agreements. In July 2005, in the first of six scheduled
arbitrations involving the Officer Defendants, the arbitration panel found in favor of the
Predecessor Companys former chief executive officer, Charles Conaway, on all of the Creditor
Trusts claims against him.
57
SEARS HOLDINGS CORPORATION
The Creditor Trust has also filed complaints in the United States Bankruptcy Court for the Northern
District of Illinois (the Bankruptcy Court) against four of the Predecessor Companys former
executives to recover amounts aggregating approximately $2 million paid to them as retention loans.
The former executives filed counterclaims/third party complaints against the Creditor Trust and
Kmart requesting that the Bankruptcy Court set-off whatever contractual severance payments they
were entitled to receive against the amounts of the retention loans. Kmart filed motions to dismiss
the counterclaims, which the Bankruptcy Court has now granted.
In Capital Factors v. Kmart Corporation, the United States District Court for the
Northern District of Illinois ruled that the Bankruptcy Court did not have the authority to
authorize the payment of pre-petition claims of certain trade vendors by the Company. An appeal of
the ruling and subsequent motions for rehearing were denied. In order to satisfy its fiduciary
responsibility to pursue claims against the critical vendors during the pendency of the appeal, in
January 2004 the Company filed suit against a total of 1,189 vendors that received these payments
seeking to recover in excess of $174 million paid to the critical vendors. To date, Kmart has
settled approximately 750 critical vendor claims for a total recovery the Company values at
approximately $61 million.
Kmart is a defendant in a pending pre-petition nationwide class action relating to proper access to
facilities for the disabled under the Americans with Disabilities Act. The class action is pending
in the United States District Court in Denver, Colorado. On July 14, 2005, the court certified a
nationwide class of Kmarts approximately 1,500 stores. On August 22, 2005, the 10th
Circuit Court of Appeals granted Kmart leave to file an interlocutory appeal challenging class
certification, which Kmart has done. At the same time, the parties are engaged in settlement
discussions. The Company is not presently able to determine the outcome of this case.
As previously reported in Kmarts Annual Report on Form 10-K for its fiscal year ended January 26,
2005, the staff of the SEC has been investigating, and the U.S. Attorney for the Eastern District
of Michigan has undertaken an inquiry into, the manner in which Kmart recorded vendor allowances
before a change in accounting principles at the end of fiscal 2001 and the disclosure of certain
events bearing on the Predecessor Companys liquidity in the fall of 2001. Kmart has cooperated
with the SEC and the U.S. Attorneys office with respect to these matters.
On August 23, 2005, the SEC filed a complaint in the United States District Court for the Eastern
District of Michigan against the Predecessor Companys former chief executive officer and its
former chief financial officer alleging that they misled investors about the Predecessor Companys
liquidity and related matters in the months preceding its bankruptcy in violation of federal
securities law. The complaint seeks permanent injunctions, disgorgement with interest, civil
penalties and officer and director bars. Kmart is not named as a defendant in the action. In its
press release announcing the filing of the complaint, the SEC stated that its Kmart investigation
is continuing.
The Creditor Trust was determined to be the preferred available mechanism for resolving any legal
claims the Company might have based on information from these investigations. The trustee of the
Creditor Trust is charged with responsibility for determining which claims to pursue and,
thereafter, litigating the claims. As discussed above, the Creditor Trust has commenced litigation
against former officers of the Predecessor Company based on information from these investigations.
The Company is subject to various other legal and governmental proceedings, many involving
litigation incidental to the businesses. Some matters contain class action allegations,
environmental and asbestos exposure allegations and other consumer-based claims that involve
compensatory, punitive or treble damage claims in very large amounts as well as other types of
relief. The consequences of these matters are not presently
determinable but, in the opinion of management of the Company after consulting with legal counsel,
and taking into account insurance and reserves, the ultimate liability is not expected to have a
material adverse effect on
58
SEARS HOLDINGS CORPORATION
annual results of operations, financial position, liquidity or capital
resources of the Company. Additional information regarding legal proceedings may be found in
Kmarts Annual Report on Form 10-K for its fiscal year ended January 26, 2005.
Item 2. Unregistered Sales of Equity Securities and Uses of Proceeds
The following table provides information about shares of common stock the Company acquired during
the third quarter of fiscal 2005, including shares assigned to the Company as part of settlement
agreements resolving claims arising from the Chapter 11 reorganization of Kmart Corporation. During
the 13 weeks ended October 29, 2005, the Company repurchased 3.7 million of its common shares at a
total cost of $434 million under a common share repurchase program. This program, approved by the
Board of Directors during the third quarter of 2005, authorized the repurchase of up to an
aggregate of $1.0 billion of the Companys common shares. As of October 29, 2005, the Company had
$566 million of remaining authorization under this program.
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
|
Approximate Dollar Value |
|
|
|
Total Number |
|
|
|
|
|
|
Purchased as Part of |
|
|
of Shares that May Yet |
|
|
|
of Shares |
|
|
Average Price |
|
|
Publicly Announced |
|
|
Be Purchased Under the |
|
Period |
|
Purchased |
|
|
Paid per Share |
|
|
Plans or Programs2 |
|
|
Plans or Programs |
|
July 31, 2005 August 27, 2005 |
|
|
1,748 |
|
|
$ |
139.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 28, 2005 October 1, 2005 |
|
|
2,573,711 |
|
|
|
120.10 |
|
|
|
2,567,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2005 October 29, 2005 |
|
|
1,094,457 |
|
|
|
116.00 |
|
|
|
1,083,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,669,916 |
|
|
$ |
118.89 |
|
|
|
3,651,199 |
|
|
$ |
566,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes the following numbers of shares acquired as payment of withholding taxes in connection with the vesting of
restricted stock and Bankruptcy-related settlements: |
|
|
|
|
|
July 31, 2005 August 27, 2005 |
|
|
1,748 |
|
August 28, 2005 October 1, 2005 |
|
|
5,917 |
|
October 2, 2005 October 29, 2005 |
|
|
11,052 |
|
|
|
|
2 |
|
During the third quarter of fiscal 2005, the Companys Board of Directors approved a common share repurchase program
authorizing the repurchase of up to an aggregate of $1.0 billion of the Companys common shares. |
Item 6. Exhibits
(a) Exhibits.
An Exhibit Index has been filed as part of this Report on Page E-1.
59
SEARS HOLDINGS CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
SEARS HOLDINGS CORPORATION |
|
|
(Registrant) |
|
|
|
|
|
December 5, 2005
|
|
By
|
|
/s/ William K. Phelan |
|
|
|
|
|
|
|
|
|
William K. Phelan |
|
|
|
|
Vice President and Controller |
|
|
|
|
(Principal Accounting Officer and duly authorized officer |
|
|
|
|
of Registrant) |
60
SEARS HOLDINGS CORPORATION
EXHIBIT INDEX
2 |
|
Agreement and Plan of Merger, dated as of November
16, 2004, by and among Kmart Holding Corporation,
Sears, Roebuck and Co., Sears Holdings
Corporation, Kmart Acquisition Corp. and Sears
Acquisition Corp. (incorporated by reference to
Annex A to the joint proxy statement prospectus
in Part I of the Registrants Registration
Statement on Form S-4, file No. 333-120954). |
|
3.1 |
|
Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to
Registrants Current Report on Form 8-K, dated
March 24, 2005, filed on March 24, 2005 (File No.
000-51217)). |
|
3.2 |
|
Restated By-Laws (incorporated by reference to
Exhibit 3.2 to Registrants Current Report on Form
8-K, dated March 24, 2005, filed on March 24, 2005
(File No. 000-51217)). |
|
4 |
|
Registrant hereby agrees to furnish to the
Commission, upon request, the instruments defining
the rights of holders of each issue of long-term
debt of Registrant and its consolidated
subsidiaries. |
|
10.1 |
|
Registrants 2005 Senior Executive Long-Term
Incentive Program (incorporated by reference to
Exhibit 10 to Registrants Current Report on Form
8-K/A (Amendment No. 1) dated September 29, 2005
(File No. 000-51217)). |
|
10.2 |
|
Amended and Restated Employment Agreement, dated
September 7, 2005, between the Registrant and Alan
J. Lacy (incorporated by reference to Exhibit 10.1
to Registrants Current Report on Form 8-K dated
September 8, 2005 (File No. 000-51217)). |
|
10.3 |
|
First Amendment to the Sears Holdings Corporation
Senior Executive Long-Term Incentive Program
(incorporated by reference to Exhibit 10(a) to
Registrants Current Report on Form 8-K dated
September 29, 2005 (File No. 000-51217)). |
|
10.4 |
|
Sears Holdings Corporation Director Compensation
Program (incorporated by reference to Exhibit
10(b) to Registrants Current Report on Form 8-K
dated September 29, 2005 (File No. 000-51217)). |
|
*10.5 |
|
Revised form of Executive Severance/Non-Compete
Agreement for Senior Executives of the Registrant. |
|
*10.6 |
|
Revised form of Executive Severance/Non-Compete
Agreement for Senior Executives of the Registrant. |
|
*31.1 |
|
Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
|
*31.2 |
|
Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
|
*32 |
|
Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
E - 1