Sears Holdings Reports Third Quarter Results
Sears Holdings Corporation (NASDAQ: SHLD) ("Holdings," "we," "us," "our" or the "Company") today reported net income of $2 million, or $0.01 per diluted share, for the third quarter ended November 3, 2007, compared with net income of $196 million, or $1.27 per diluted share, for the third quarter ended October 28, 2006. The third quarter 2006 results included $101 million in pre-tax gains ($64 million after tax or $0.42 per diluted share) on total return swap investments outstanding during that period. Excluding these gains, earnings per diluted share were $0.85 for the third quarter of fiscal 2006. The year-over-year decline in income is primarily the result of a $223 million decline in gross margin, reflecting both sales declines, as well as an overall decline in our gross margin rate for the quarter.
"We are very disappointed in our performance for the third quarter. We cannot blame our results entirely on the retail and macro-economic environments. We have much on which to improve and are working hard to do so," said Aylwin Lewis, Sears Holdings' chief executive officer and president. "Nevertheless, the Company continues to generate cash, and we continue to invest in our customer relationships, our multi-channel experience, and our information technology systems. Importantly, we believe that our stores and websites are ready to serve our customers and provide them more reasons to shop with us."
Revenues and Comparable Store Sales
Sears Domestic's comparable store sales declined 4.2% for the quarter, while Kmart's comparable store sales declined 5.0%. Total domestic comparable store sales declined 4.6%. We experienced lower sales across most merchandise categories at both Kmart and Sears Domestic, with notable declines in apparel and lawn and garden at both formats, partially offset by increased sales within home electronics, notably at Sears Domestic. We believe the overall comparable store sales results reflect increased competition, the negative impact of unfavorable economic conditions, such as a weak housing market and growing consumer credit concerns, as well as the unfavorable impact of unseasonably warm weather, prevalent during much of the third quarter, on sales of apparel and other seasonal merchandise. For the quarter, our total revenues declined $0.4 billion to $11.5 billion in fiscal 2007, as compared to $11.9 billion for the third quarter of fiscal 2006.
For our fiscal November month-to-date period (Sunday, November 4, 2007 through Tuesday, November 27, 2007), our domestic comparable store sales have declined 0.4%, with Sears Domestic's comparable store sales increasing 1.9% and Kmart's comparable store sales declining 3.3%. While we have experienced higher sales at Sears Domestic for this period, the increase in comparable store sales was driven by sales of home electronics which generally have a lower margin rate than other categories.
Operating Income
Our operating income for the quarter decreased $230 million to $46 million in fiscal 2007, as compared to $276 million in the third quarter of fiscal 2006, mainly due to lower gross margin generated at both Kmart and Sears Domestic. For the quarter, we generated $3.2 billion in total gross margin as compared to $3.4 billion in the third quarter last year. The $0.2 billion decline was made up of separate $0.1 billion declines at both Kmart and Sears Domestic. Our gross margin rate decreased by approximately 90 basis points to 27.4% and was impacted by incremental markdowns taken to clear seasonal merchandise and higher inventory levels due to lower sales. Given that we do not expect any significant near-term improvement in the overall retail environment, we believe that our sales and gross margin for the balance of fiscal 2007 will likely continue to be pressured by the above-noted unfavorable economic factors.
Financial Position
We had cash and cash equivalents of $1.5 billion at November 3, 2007 (of which $0.8 billion was domestic and $0.7 billion was at Sears Canada) as compared to $2.1 billion at October 28, 2006 and $4.0 billion at February 3, 2007. During the third quarter, cash and cash equivalents declined $1.1 billion from the $2.6 billion balance at the end of the second quarter. The $1.1 billion net decline in cash and cash equivalents for the quarter primarily reflects $0.9 billion used for share repurchases (as detailed below) and $0.9 billion used to build inventories for the holiday selling season (net of merchandise payables), partially offset by $0.6 billion of cash generated through short-term borrowings. The $0.6 billion in short-term borrowings under our five-year revolving credit facility has been repaid as of November 27, 2007.
Merchandise inventories at November 3, 2007 were $12.0 billion, as compared to $11.5 billion as of October 28, 2006. The increase reflects the addition of $0.2 billion of previously consigned pharmacy inventory, an increase in Sears Canada inventory primarily due to the change in exchange rates, increased home electronics inventory at Sears Domestic and the effect of lower than expected sales levels. As we expect difficult economic conditions to persist in the near term, we intend to manage our inventories in the fourth quarter with the goal of reducing our fiscal year-end domestic merchandise inventories to levels below last year-end's levels.
Share Repurchase
We repurchased 6.7 million common shares at a total cost of $0.9 billion (or $131.72 per share) under our share repurchase program during the third quarter of fiscal 2007. As previously announced on August 13, 2007, our Board of Directors approved the repurchase of up to an additional $1.5 billion of our common shares. The share repurchases may be implemented using a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, the purchase of call options, the sale of put options or otherwise, or by any combination of such methods. Timing will be dependent on prevailing market conditions, alternative uses of capital and other factors. As of November 27, 2007, we had remaining authorization to repurchase $736 million of common shares under the share repurchase program.
Adjusted EBITDA
For purposes of evaluating operating performance, we use an Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") measurement computed as operating income appearing on the statement of income less depreciation and amortization and gains/(losses) on sales of assets. In addition, it is adjusted to exclude certain nonrecurring gains/(losses) and restructuring charges. Adjusted EBITDA is used by management to evaluate the operating performance of our businesses for comparable periods. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items. Management compensates for this limitation by using GAAP financial measures as well in managing our businesses.
While Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of operating performance because:
-- EBITDA excludes the effects of financing and investing activities by
eliminating the effects of interest and depreciation costs;
-- Management considers gains/(losses) on the sale of assets to result
from investing decisions rather than ongoing operations; and
-- Restructuring activities and other significant items, while
periodically affecting our results, may vary significantly from period
to period and have a disproportionate effect in a given period, which
affects the comparability of results;
Adjusted EBITDA was determined as follows:
13 Weeks Ended 39 Weeks Ended
November 3, October 28, November 3, October 28,
2007 2006 2007 2006
Operating income per
statement of income $46 $276 $778 $1,124
Plus depreciation and
amortization 255 278 779 843
Less gain on sale of assets -- (8) (10) (32)
Before excluded items 301 546 1,547 1,935
Sears Canada
post-retirement benefit
plans curtailment gain -- -- (27) --
Hurricane related
recoveries (1) -- (19) --
Vice Chairman separation
expense -- -- -- 8
Visa/MasterCard settlement -- -- -- (36)
Restructuring charges -- 4 -- 27
Adjusted EBITDA as defined $300 $550 $1,501 $1,934
% to revenues 2.6% 4.6% 4.2% 5.3%
Adjusted EBITDA for our domestic (United States operations) and Sears Canada operations are as follows:
13 Weeks Ended
Adjusted EBITDA % To Revenues
November 3, October 28, November 3, October 28,
2007 2006 2007 2006
Domestic operations $197 $439 1.9 % 4.1 %
Sears Canada 103 111 7.9 % 8.9 %
Adjusted EBITDA $300 $550 2.6 % 4.6 %
39 Weeks Ended
Adjusted EBITDA % To Revenues
November 3, October 28, November 3, October 28,
2007 2006 2007 2006
Domestic operations $1,244 $1,692 3.9 % 5.1 %
Sears Canada 257 242 7.1 % 6.8 %
Adjusted EBITDA $1,501 $1,934 4.2 % 5.3 %
Quarterly Report on Form 10-Q
We plan to file our Quarterly Report on Form 10-Q for the third quarter 2007 with the SEC on November 30, 2007.
Forward-Looking Statements
Results are unaudited. This press release contains forward-looking statements about our expectations. Forward-looking statements are subject to risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Risks and uncertainties include the possibility that we fail to offer products and services that satisfy the desires of our customers, whose preferences may change in the future, or other factors outside the control of Holdings. Actual results may differ materially from those set forth in the forward-looking statements. We intend 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.
About Sears Holdings Corporation
Sears Holdings Corporation is the nation's fourth largest broadline retailer, with over $50 billion in annual revenues, and approximately 3,800 full-line and specialty retail stores in the United States and Canada. Sears Holdings is the leading home appliance retailer as well as a leader in tools, lawn and garden, home electronics and automotive repair and maintenance. Key proprietary brands include Kenmore, Craftsman and DieHard, and a broad apparel offering, including such well-known labels as Lands' End, Jaclyn Smith and Joe Boxer, as well as the Apostrophe and Covington brands. We also have Martha Stewart Everyday products, which are offered exclusively in the U.S. by Kmart and in Canada by Sears Canada. We are the nation's largest provider of home services, with more than 13 million service calls made annually. For more information, visit Sears Holdings' website at http://www.searsholdings.com/.
Sears Holdings Corporation
Condensed Consolidated Statements of Income
(Unaudited)
13 Weeks Ended 39 Weeks Ended
November 3, October 28, November 3, October 28,
millions, except per 2007 2006 2007 2006
share data
REVENUES
Merchandise sales and
services $11,548 $11,941 $35,489 $36,724
COSTS AND EXPENSES
Cost of sales, buying and
occupancy 8,387 8,557 25,649 26,380
Gross margin dollars 3,161 3,384 9,840 10,344
Gross margin rate 27.4% 28.3% 27.7% 28.2%
Selling and administrative 2,860 2,834 8,293 8,382
Selling and administrative
expense as a percentage of
total revenues 24.8% 23.7% 23.4% 22.8%
Depreciation and
amortization 255 278 779 843
Gain on sales of assets - (8) (10) (32)
Restructuring charges - 4 - 27
Total costs and expenses 11,502 11,665 34,711 35,600
Operating income 46 276 778 1,124
Interest and investment income (30) (140) (112) (241)
Interest expense 66 89 210 255
Other income (1) - (17) (15)
Income before income taxes and
minority interest 11 327 697 1,125
Income taxes (benefit) expense (5) 119 267 438
Minority interest 14 12 36 17
NET INCOME $2 $196 $394 $670
EARNINGS PER COMMON SHARE
Diluted earnings per share $0.01 $1.27 $2.66 $4.29
Diluted weighted average
common shares outstanding 139.9 154.4 148.2 156.3
Sears Holdings Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
millions November 3, October 28, February 3,
2007 2006 2007
ASSETS
Current assets
Cash and cash equivalents $1,475 $2,096 $3,968
Receivables 963 909 847
Merchandise inventories 12,030 11,508 9,907
Other current assets 717 902 684
Total current assets 15,185 15,415 15,406
Property and equipment, net 8,855 9,247 9,132
Goodwill 1,691 1,880 1,692
Tradenames and other intangible assets 3,370 3,467 3,437
Other assets 467 460 399
TOTAL ASSETS $29,568 $30,469 $30,066
LIABILITIES
Current liabilities
Short-term borrowings and current
portion of long-term debt $1,374 $618 $707
Merchandise payables 4,437 4,195 3,312
Unearned revenues 1,126 1,078 1,073
Other current liabilities 4,389 5,098 4,960
Total current liabilities 11,326 10,989 10,052
Long-term debt and capitalized lease
obligations 2,643 2,914 2,849
Pension and postretirement benefits 1,414 2,092 1,648
Minority interest and other
liabilities 3,471 2,850 2,803
Total Liabilities 18,854 18,845 17,352
Total Shareholders' Equity 10,714 11,624 12,714
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $29,568 $30,469 $30,066
Total common shares outstanding 137.7 153.9 153.8
Sears Holdings Corporation
Segment Results
(Unaudited)
13 Weeks Ended November 3, 2007
millions
Sears Sears
Kmart Domestic Canada Holdings
Merchandise sales and services $3,803 $6,449 $1,296 $11,548
Cost of sales, buying and occupancy 2,979 4,519 889 8,387
Gross margin dollars 824 1,930 407 3,161
Gross margin rate 21.7% 29.9% 31.4% 27.4%
Selling and administrative 855 1,701 304 2,860
Selling and administrative expense as
a percentage of total revenues 22.5% 26.4% 23.5% 24.8%
Depreciation and amortization 28 193 34 255
Total costs and expenses 3,862 6,413 1,227 11,502
Operating (loss) income $(59) $36 $69 $46
Number of:
Kmart Stores 1,387 - - 1,387
Full-Line Stores - 934 123 1,057
Specialty Stores - 1,124 255 1,379
Total Stores 1,387 2,058 378 3,823
13 Weeks Ended October 28, 2006
millions
Sears Sears
Kmart Domestic Canada Holdings
Merchandise sales and services $4,042 $6,655 $1,244 $11,941
Cost of sales, buying and occupancy 3,096 4,611 850 8,557
Gross margin dollars 946 2,044 394 3,384
Gross margin rate 23.4% 30.7% 31.7% 28.3%
Selling and administrative 889 1,662 283 2,834
Selling and administrative expense as a
percentage of total revenues 22.0% 25.0% 22.7% 23.7%
Depreciation and amortization 22 223 33 278
(Gain) loss on sales of assets (9) 1 - (8)
Restructuring charges 4 - - 4
Total costs and expenses 4,002 6,497 1,166 11,665
Operating income $40 $158 $78 $276
Number of:
Kmart Stores 1,394 - - 1,394
Full-Line Stores - 933 123 1,056
Specialty Stores - 1,083 252 1,335
Total Stores 1,394 2,016 375 3,785
39 Weeks Ended November 3, 2007
millions
Sears Sears
Kmart Domestic Canada Holdings
Merchandise sales and services $12,046 $19,815 $3,628 $35,489
Cost of sales, buying and occupancy 9,237 13,884 2,528 25,649
Gross margin dollars 2,809 5,931 1,100 9,840
Gross margin rate 23.3% 29.9% 30.3% 27.7%
Selling and administrative 2,564 4,913 816 8,293
Selling and administrative expense as a
percentage of total revenues 21.3% 24.8% 22.5% 23.4%
Depreciation and amortization 81 601 97 779
Gain on sales of assets (1) (1) (8) (10)
Total costs and expenses 11,881 19,397 3,433 34,711
Operating income $165 $418 $195 $778
Number of:
Kmart Stores 1,387 - - 1,387
Full-Line Stores - 934 123 1,057
Specialty Stores - 1,124 255 1,379
Total Stores 1,387 2,058 378 3,823
39 Weeks Ended October 28, 2006
millions
Sears Sears
Kmart Domestic Canada Holdings
Merchandise sales and services $12,768 $20,403 $3,553 $36,724
Cost of sales, buying and occupancy 9,726 14,156 2,498 26,380
Gross margin dollars 3,042 6,247 1,055 10,344
Gross margin rate 23.8% 30.6% 29.7% 28.2%
Selling and administrative 2,618 4,951 813 8,382
Selling and administrative expense as a
percentage of total revenues 20.5% 24.3% 22.9% 22.8%
Depreciation and amortization 55 687 101 843
Gain on sales of assets (26) (6) - (32)
Restructuring charges 8 - 19 27
Total costs and expenses 12,381 19,788 3,431 35,600
Operating income $387 $615 $122 $1,124
Number of:
Kmart Stores 1,394 - - 1,394
Full-Line Stores - 933 123 1,056
Specialty Stores - 1,083 252 1,335
Total Stores 1,394 2,016 375 3,785
Sears Holdings Corporation
Adjusted EBITDA
13 Weeks Ended
millions November 3, 2007 October 28, 2006
Domestic Sears Sears Domestic Sears Sears
Operations Canada Holdings Operations Canada Holdings
Operating income
per statement
of income $(23) $69 $46 $198 $78 $276
Plus depreciation
and amortization 221 34 255 245 33 278
Less gain on sale of
assets - - - (8) - (8)
Before excluded items 198 103 301 435 111 546
Hurricane related
recoveries (1) - (1) - - -
Restructuring charges - - - 4 - 4
Adjusted EBITDA as
defined $197 $103 $300 $439 $111 $550
% to revenues 1.9% 7.9% 2.6% 4.1% 8.9% 4.6%
39 Weeks Ended
millions November 3, 2007 October 28, 2006
Domestic Sears Sears Domestic Sears Sears
Operations Canada Holdings Operations Canada Holdings
Operating income
per statement
of income $583 $195 $778 $1,002 $122 $1,124
Plus depreciation and
amortization 682 97 779 742 101 843
Less gain on sale
of assets (2) (8) (10) (32) - (32)
Before excluded items 1,263 284 1,547 1,712 223 1,935
Sears Canada
post-retirement
benefit plans
curtailment gain - (27) (27) - - -
Hurricane related
recoveries (19) - (19) - - -
Vice Chairman separation
expense - - - 8 - 8
Visa/MasterCard settlement - - - (36) - (36)
Restructuring charges - - - 8 19 27
Adjusted EBITDA as
defined $1,244 $257 $1,501 $1,692 $242 $1,934
% to revenues 3.9% 7.1% 4.2% 5.1% 6.8% 5.3%
First Call Analyst:
FCMN Contact:
SOURCE: Sears Holdings Corporation
CONTACT: Sears Holdings Public Relations, +1-847-286-8371
Web site: http://www.searsholdings.com/