Sears Holdings Reports First Quarter Results
Sears Holdings Corporation ("Holdings," "we," "us," "our" or the "Company") (NASDAQ: SHLD) today reported net income of $216 million, or $1.40 per diluted share, for the first quarter ended May 5, 2007, compared with net income of $180 million, or $1.14 per diluted share, for the first quarter ended April 29, 2006. Our quarterly results included the net favorable impact of certain significant items as described in the "Significant Items" section below. Excluding these items, earnings per diluted share were $1.10 for the first quarter of fiscal 2007, as compared to $1.11 per diluted share for the first quarter of fiscal 2006. For the quarter, improved operating results at Sears Canada and lower expenses at Sears Domestic were offset by reduced operating results at Kmart, where a decline in sales resulted in reduced gross margin dollars.
"In part, our domestic operating results reflect the impact of some of the same challenges being faced by our customers, such as rising energy costs and a slower housing market," said Aylwin Lewis, Sears Holdings' chief executive officer and president. "However, as an organization, we need to overcome these factors by better controlling costs and developing innovative solutions that better meet our customers' needs and allow us to generate a more reasonable level of profitability even in the face of such challenges."
A reconciliation of earnings per share excluding the above-noted significant items (a non-GAAP measure) to GAAP diluted earnings per share is set forth below. In addition, earnings per diluted share for the quarter benefited from lower average diluted shares outstanding during the current year quarter as compared with the first quarter of fiscal 2006.
First Quarter Revenues and Comparable Store Sales
Domestic comparable store sales declined 3.9% during the first quarter of fiscal 2007. Sears Domestic comparable store sales declined 3.4% for the quarter, while Kmart comparable store sales declined 4.4%. We believe these declines reflect both increased competition and the impact of external factors such as rising energy costs, a slower housing market and poor weather conditions during the latter part of the first quarter of fiscal 2007. Kmart experienced lower transaction volumes across most merchandise categories, most notably within home goods, health and beauty products, and food and consumables. Similarly, Sears Domestic recorded comparable store sales declines across most merchandise categories and formats, with a notable decline in home appliance sales, which we believe reflects both a slower U.S. housing market and the impact of increased competition.
Our fiscal 2007 first quarter was comprised of the 13-week period ended May 5, 2007, while our fiscal 2006 first quarter was comprised of the 13-week period ended April 29, 2006. This week shift in sales, while having a somewhat favorable impact on total revenues recorded during the first quarter of fiscal 2007 as compared to the first quarter of fiscal 2006, had no impact on the comparable store sales results reported herein. This is due to the fact that, for purposes of reporting comparable sales for the first quarter, weeks 1 through 13 of fiscal 2007 have been compared to weeks 2 through 14 of fiscal 2006, thereby eliminating the impact of the week shift.
For the quarter, total revenues declined $0.3 billion, or 2.5%, to $11.7 billion in fiscal 2007, as compared to $12.0 billion for the first quarter of fiscal 2006. This decline reflects the above-noted impact of lower comparable store sales partially offset by sales increases within both our Lands' End and home services businesses. In addition, the week shift in reporting as detailed above had a favorable impact on total revenues for the first quarter of fiscal 2007, by approximately 0.5%. The largest sales decline for the quarter was recorded at Kmart, where revenues declined $239 million, or 5.6%, primarily as a result of the above-noted comparable store sales declines, as well as a decrease in the total number of Kmart stores in operation.
Operating Income
For the quarter, our operating income increased $62 million to $393 million in fiscal 2007, as compared to $331 million in the first quarter of fiscal 2006. This increase primarily reflects: 1) a gain of $30 million for a legal settlement reached in connection with a contractual dispute, 2) a $27 million curtailment gain recorded for amendments made by Sears Canada to its post-retirement benefit plans, and 3) a $15 million gain for insurance recoveries received on claims filed for certain of our property damaged by hurricanes during fiscal 2005. The favorable impact of these items, as well as improved operating results at Sears Canada and lower expenses at Sears Domestic, were partly offset by lower operating income at Kmart.
Significant Items
As noted above, a number of items significantly impacted our fiscal 2007 and fiscal 2006 first quarter diluted earnings per share. While these types of items periodically affect our results, they vary significantly in amount from period to period, and had a disproportionate effect on our results for the periods presented. Management considers the total impact of these items, along with reported results, when it reviews and evaluates our financial performance. The impact of these items on diluted earnings per share is shown in the following table:
13 Weeks Ended
May 5, April 29,
2007 2006
Earnings per diluted share $1.40 $1.14
Less:
Legal settlement gain 0.12 --
Sears Canada post-retirement benefit
plans curtailment gain 0.11 --
Hurricane related recoveries 0.06 --
Dividend -- investment in Sears Mexico 0.08 --
Total return swap losses (0.08) --
Gain on sales of assets 0.01 0.06
Restructuring charges -- (0.03)
Earnings per diluted share excluding above items $1.10 $1.11
During the first quarter of fiscal 2007, we recognized: 1) a $30 million gain ($18 million after tax or $0.12 per diluted share) related to the legal settlement of a contractual dispute, 2) a curtailment gain of $27 million ($16 million after tax or $0.11 per diluted share) related to certain amendments made to Sears Canada's post-retirement benefit plans, 3) a gain of $15 million ($9 million after tax or $0.06 per diluted share) for insurance recoveries received on claims filed for certain of our property damaged by hurricanes during fiscal 2005, and 4) a $20 million ($12 million after tax or $0.08 per diluted share) dividend we received on our investment in Sears Mexico. These gains were partially offset by investment losses of $21 million ($13 million after tax or $0.08 per diluted share) incurred during the quarter on our total return swap investments. In addition, the first quarter of fiscal 2007 included $5 million ($2 million after tax or $0.01 per diluted share) of gains on sales of assets, as compared to $17 million ($10 million after tax or $0.06 per diluted share) of such gains in the first quarter of fiscal 2006. The first quarter of fiscal 2006 also included restructuring charges of $9 million ($5 million after tax or $0.03 per diluted share). There were no restructuring charges in the first quarter of fiscal 2007.
Financial Position
We had cash and cash equivalents of $3.4 billion at May 5, 2007 (of which $3.1 billion is domestic and $0.3 billion is at Sears Canada) as compared to $3.2 billion at April 29, 2006 and $4.0 billion at February 3, 2007. The decline from February 3, 2007 primarily reflects increased merchandise inventories given seasonal shifts in our inventory levels in support of the spring/summer-selling season. Additionally, we spent $113 million on capital expenditures and made debt repayments of $47 million, net of new borrowings, during the first quarter of fiscal 2007.
Merchandise inventories at May 5, 2007 were approximately $10.3 billion, as compared to $9.6 billion at April 29, 2006. The increase primarily reflects planned increases resulting from efforts aimed at improving in-stock levels and expanding product assortments this year as well as, acquisition of previously consigned pharmacy inventory at Kmart, earlier receipt of products and lower than forecast sales levels. Merchandise payables were $3.5 billion at May 5, 2007, as compared to $3.6 billion as of April 29, 2006.
Share Repurchase
During the first quarter of 2007, we did not repurchase any shares of our common stock through our share repurchase program, although we received approximately 114,000 shares of our common stock during the quarter in connection with bankruptcy-related settlements. As of May 5, 2007, we had remaining authorization to repurchase $604 million of common shares under our existing share repurchase program. The remaining shares may be purchased in the open market, through self-tender offers or through privately negotiated transactions. Timing will depend on prevailing market conditions, alternative uses of capital and other factors.
Adjusted EBITDA
For purposes of evaluating operating performance, our management uses 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 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 as described
above, 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
millions May 5, April 29,
2007 2006
Operating income per statement of income $393 $331
Plus depreciation and amortization 263 289
Less gain on sale of assets (5) (17)
Before excluded items 651 603
Legal settlement gain (30) --
Sears Canada post-retirement benefit plans
curtailment gain (27) --
Hurricane related recoveries (15) --
Restructuring charges -- 9
Adjusted EBITDA as defined $579 $612
% to revenues 4.9% 5.1%
Adjusted EBITDA for our domestic (United States operations) and Sears Canada operations are as follows:
millions 13 Weeks Ended
Adjusted EBITDA % To Revenues
May 5, April 29, May 5, April 29,
2007 2006 2007 2006
Domestic operations $528 $574 4.9% 5.2%
Sears Canada 51 38 5.0% 3.6%
Total Adjusted EBITDA $579 $612 4.9% 5.1%
Quarterly Report on Form 10-Q
We plan to file with the SEC our Quarterly Report on Form 10-Q for the first quarter 2007 on or about June 1, 2007.
Forward-Looking Statements
Results are preliminary and 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 third 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 .
Sears Holdings Corporation
Statements of Income
(Unaudited)
Amounts are Preliminary and Subject to Change
13 Weeks Ended
millions, except per share data May 5, April 29,
2007 2006
REVENUES
Merchandise sales and services $11,702 $11,998
COSTS AND EXPENSES
Cost of sales, buying and occupancy 8,417 8,665
Gross margin dollars 3,285 3,333
Gross margin rate 28.1% 27.8%
Selling and administrative 2,634 2,721
Selling and administrative expense
as a percentage of total revenues 22.5% 22.7%
Depreciation and amortization 263 289
Gain on sales of assets (5) (17)
Restructuring charges -- 9
Total costs and expenses 11,309 11,667
Operating income 393 331
Interest and investment income (40) (40)
Interest expense 73 83
Other income (6) (8)
Income before income taxes and minority interest 366 296
Income taxes 143 118
Minority interest 7 (2)
NET INCOME $216 $180
EARNINGS PER COMMON SHARE
Diluted earnings per share $1.40 $1.14
Diluted weighted average common
shares outstanding 153.9 158.0
Sears Holdings Corporation
Condensed Balance Sheets
Amounts are Preliminary and Subject to Change
(Unaudited)
millions May 5, April 29, February 3,
2007 2006 2007
ASSETS
Current assets
Cash and cash equivalents $3,413 $3,182 $3,968
Receivables 814 811 847
Merchandise inventories 10,323 9,581 9,907
Other current assets 710 999 684
Total current assets 15,260 14,573 15,406
Property and equipment, net 8,928 9,490 9,132
Goodwill 1,714 1,797 1,692
Tradenames and other intangible assets 3,413 3,453 3,437
Other assets 375 578 399
TOTAL ASSETS $29,690 $29,891 $30,066
LIABILITIES
Current liabilities
Short-term borrowings and current
portion of long-term debt $832 $349 $707
Merchandise payables 3,536 3,634 3,312
Unearned revenues 1,091 1,053 1,073
Other current liabilities 3,969 4,946 4,960
Total current liabilities 9,428 9,982 10,052
Long-term debt and capital lease
obligations 2,669 3,510 2,849
Pension and postretirement benefits 1,486 2,392 1,648
Minority interest and other
liabilities 3,196 2,633 2,803
Total Liabilities 16,779 18,517 17,352
Total Shareholders' Equity 12,911 11,374 12,714
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $29,690 $29,891 $30,066
Total common shares outstanding 153.7 156.5 153.8
Sears Holdings Corporation
Segment Results
(Unaudited)
Amounts are Preliminary and Subject to Change
13 Weeks Ended May 5, 2007
millions
Sears Sears
Kmart Domestic Canada Holdings
Merchandise sales and services $4,015 $6,660 $1,027 $11,702
Cost of sales, buying and occupancy 3,055 4,629 733 8,417
Gross margin dollars 960 2,031 294 3,285
Gross margin rate 23.9% 30.5% 28.6% 28.1%
Selling and administrative 840 1,578 216 2,634
Selling and administrative expense as
a percentage of total revenues 20.9% 23.7% 21.0% 22.5%
Depreciation and amortization 26 206 31 263
(Gain) loss on sales of assets (1) 1 (5) (5)
Restructuring charges -- -- -- --
Total costs and expenses 3,920 6,414 975 11,309
Operating income $95 $246 $52 $393
Number of:
Kmart Stores 1,388 -- -- 1,388
Full-Line Stores -- 935 123 1,058
Specialty Stores -- 1,100 252 1,352
Total Stores 1,388 2,035 375 3,798
13 Weeks Ended April 29, 2006
millions
Sears Sears
Kmart Domestic Canada Holdings
Merchandise sales and services $4,254 $6,697 $1,047 $11,998
Cost of sales, buying and occupancy 3,241 4,661 763 8,665
Gross margin dollars 1,013 2,036 284 3,333
Gross margin rate 23.8% 30.4% 27.1% 27.8%
Selling and administrative 855 1,620 246 2,721
Selling and administrative expense as
a percentage of total revenues 20.1% 24.2% 23.5% 22.7%
Depreciation and amortization 15 240 34 289
Gain on sales of assets (17) -- -- (17)
Restructuring charges 4 -- 5 9
Total costs and expenses 4,098 6,521 1,048 11,667
Operating income (loss) $156 $176 $(1) $331
Number of:
Kmart Stores 1,400 -- -- 1,400
Full-Line Stores -- 935 123 1,058
Specialty Stores -- 1,112 254 1,366
Total Stores 1,400 2,047 377 3,824
Sears Holdings Corporation
Adjusted EBITDA
Amounts are Preliminary and Subject to Change
13 Weeks Ended
millions May 5, 2007 April 29, 2006
Domestic Sears Sears Domestic Sears Sears
Operations Canada Holdings Operations Canada Holdings
Operating income
per statement of
income $341 $52 $393 $332 $(1) $331
Plus depreciation
and amortization 232 31 263 255 34 289
Less gain on sale
of assets -- (5) (5) (17) -- (17)
Before excluded items 573 78 651 570 33 603
Legal settlement gain (30) -- (30) -- -- --
Sears Canada post-
retirement benefit
plans curtailment gain -- (27) (27) -- -- --
Hurricane related
recoveries (15) -- (15) -- -- --
Restructuring charges -- -- -- 4 5 9
Adjusted EBITDA as
defined $528 $51 $579 $574 $38 $612
% to revenues 4.9% 5.0% 4.9% 5.2% 3.6% 5.1%
First Call Analyst:
FCMN Contact:
SOURCE: Sears Holdings Corporation
CONTACT: Sears Holdings Public Relations, +1-847-286-8371
Web site: