Sears Holdings Corporation Reports Fourth Quarter and Full Year 2005 Results
Sears Holdings Corporation (NASDAQ: SHLD) today filed its Annual Report on Form 10-K for the fiscal year end January 28, 2006. Sears Holdings Corporation ("Holdings" or the "Company") was formed in connection with the business combination of Kmart Holding Corporation ("Kmart") and Sears, Roebuck and Co. ("Sears"), which was completed on March 24, 2005. Sears Holdings is the nation's third largest broadline retailer with approximately 2,300 full-line and 1,100 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. For accounting purposes, the business combination was treated as a purchase of Sears by Kmart. As such, the historical financial statements of Kmart became the historical financial statements of Holdings.
The condensed consolidated statements of operations included below for the 13 weeks and year ended January 28, 2006 are not comparable to the prior year periods because the prior year periods do not include Sears' results. Additionally, the results for the year ended January 28, 2006 are not representative of the Company's ongoing operations as they only include the results of Sears from March 25, 2005 forward. In order to provide information on the trends and on-going performance of the combined Company, pro forma results are presented as though Kmart and Sears had been combined as of the beginning of fiscal 2004. The Company has also provided its calculation of Pro Forma Adjusted EBITDA for Holdings, including a breakdown of Pro Forma Adjusted EBITDA between its domestic and Canadian operations. Pro Forma Adjusted EBITDA, while a non-GAAP measure, is used by management for purposes of evaluating ongoing operating performance of the Company. Reconciliation of the pro forma results of operations to the GAAP results of operations has also been included.
Fourth Quarter and Full Year Earnings Per Share
Earnings per share on a diluted basis were $4.03 for the 13 weeks ended January 28, 2006, as compared to $3.09 per share for the 13 weeks ended January 26, 2005. For the full year, earnings per share on a diluted basis were $5.59 for fiscal 2005 and $11.00 for fiscal 2004.
Significant asset sales and restructuring charges greatly impacted the Company's fiscal 2005 and fiscal 2004 diluted earnings per share on both a reported and pro forma basis. While these types of items periodically affect the Company's results, they vary significantly in amount from period to period, and had a disproportionate effect on the Company's results for the periods presented. The impact of these items on diluted earnings per share is shown in the following table:
13 Weeks Ended Year Ended
Reported Pro Forma Reported Pro Forma
2005 2004 2005 2004 2005 2004 2005 2004
Pro Pro Pro
Reported Forma Forma Forma
Gain on sales
of assets (1) $0.05 $0.21 $0.05 $0.13 $0.16 $5.78 $0.15 $1.35
Accounting
change (2) -- -- -- -- (0.58) (0.55) --
Restructuring
charges(3) (0.02) -- (0.02) -- (0.35) (0.33) (0.16)
EPS effect of
above items 0.03 0.21 0.03 0.13 (0.77) 5.78 (0.73) 1.19
Total EPS $4.03 $3.09 $4.03 $3.62 $5.59 $11.00 $4.85 $5.40
1 ( ) Gain on Sale of Assets: In fiscal 2004, Kmart completed multiple sale
and lease assignment transactions relative to certain properties,
including significant transactions with The Home Depot, Inc. ("Home
Depot") and Sears. These transactions resulted in aggregate gains of
$946 million, or $5.78 per diluted share, being recorded as part of
fiscal 2004 reported earnings as compared to $39 million, or $0.16
per diluted share, for fiscal 2005, a difference of $5.62 per diluted
share. The fiscal 2004 pro forma gain on sale of assets impact of
$1.35 per diluted share excludes the impact of gains recognized in
fiscal 2004 for sales of properties to Sears.
(2) Accounting Change: In accordance with Accounting Principles Board
Opinion ("APB") No. 20, "Accounting Changes", changes in accounting
policy to conform the acquirer's 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 have been reflected in the fiscal
2005 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.
3 ( ) Restructuring Charges: During fiscal 2005, the Company recorded $111
million in restructuring charges, or $0.35 per diluted share, in
connection with the merger and integration of Sears' and Kmart's
headquarters support functions, as well as in connection with
productivity initiatives at Sears Canada. The fiscal 2004 pro forma
restructuring charges included a $41 million, or $0.16 per diluted
share, charge recorded by Sears in connection with certain
productivity initiatives.
Condensed Consolidated Statements of Operations
Holdings' condensed consolidated statements of operations for the 13 weeks and fiscal years ended January 28, 2006 and January 26, 2005 were as follows:
(in millions, except 13 Weeks Ended Fiscal Year Ended
per share amounts) January 28, January 26, January 28, January 26,
2006 2005 2006 2005
Total revenues $16,086 $5,950 $49,124 $19,843
Cost of sales, buying
and occupancy 11,508 4,459 35,505 14,942
Selling and
administrative 3,078 1,042 10,759 3,999
Depreciation and
amortization 282 13 932 27
Provision for
uncollectible credit
card accounts 12 -- 49 --
Gain on sales of assets (14) (36) (39) (946)
Gain on sale of business (317) -- (317) --
Restructuring charges 7 -- 111 --
Total costs and expenses 14,556 5,478 47,000 18,022
Operating income 1,530 472 2,124 1,821
Interest expense, net 53 22 237 108
Bankruptcy-related
recoveries (7) (46) (40) (59)
Other income (5) -- (38) (3)
Income before income
taxes, minority interest
and cumulative effect of
change in accounting
principle 1,489 496 1,965 1,775
Income taxes 533 187 716 669
Minority interest 308 -- 301 --
Income before cumulative
effect of change in
accounting principle $648 $309 $948 $1,106
Cumulative effect of change
in accounting principle,
net of tax -- -- (90) --
Net income $648 $309 $858 $1,106
Per share (diluted basis)
Earnings per share before
cumulative effect of
change in accounting
principle $4.03 $ 3.09 $6.17 $ 11.00
Cumulative effect of
change in accounting
principle -- -- (0.58) --
Earnings per share $4.03 $ 3.09 $5.59 $ 11.00
Diluted weighted average
common shares outstanding 160.7 101.1 153.6 101.4
Fourth Quarter and Full Year Revenues and Operating Income
Total revenues increased $10.1 billion to $16.1 billion for the 13-week period ended January 28, 2006, as compared to total revenues of $6.0 billion for the 13-week period ended January 26, 2005. Full year fiscal 2005 revenues were $49.1 billion, as compared to $19.8 billion for fiscal 2004. The increase during the 13 weeks ended January 28, 2006 was primarily attributable to the addition of Sears revenues of $10.3 billion partially offset by a $0.2 billion decline in Kmart's revenues, due to a reduction in the total number of Kmart stores in operation. During the 13-week period ended January 28, 2006, Kmart comparable store sales increased 0.9% over the 13-week period ended January 26, 2005. The increase in Kmart comparable store sales for the quarter was the first increase since the second quarter of 2001 and was primarily due to increased sales in apparel and home products. Full fiscal year 2005 includes $30.0 billion of revenues related to Sears, representing revenues from March 25, 2005, partially offset by a $0.7 billion decline in Kmart's revenues due to a reduction in the total number of Kmart stores in operation.
Sears Domestic sales declined 6.1% for the 13 weeks ended January 28, 2006, as compared to the 13 weeks ended January 26, 2005. The decline was due to a 12.2% decrease in domestic comparable store sales partially offset by an increase in the total number of Sears stores and strong home services sales. The decline in Sears Domestic comparable store sales reflects efforts initiated in 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.
Operating income was $1.5 billion for the 13 weeks ended January 28, 2006, as compared to $472 million for the 13 weeks ended January 26, 2005. The increase in operating income was primarily due to the addition of $737 million of Sears operating income and a $317 million gain on the sale of business, reflecting a minority interest gain on the sale of Sears Canada's Credit and Financial Services business in November of 2005. The gain had no impact on Holdings' net income as its entire impact was offset by increased minority interest expense. Operating income was $2.1 billion for fiscal year 2005 as compared to $1.8 billion for fiscal year 2004. Fiscal 2005 included the addition of $1.4 billion in Sears operating income generated subsequent to March 24, 2005, which was offset by the collective impact of $906 million less in gains on the sale of assets realized by Kmart in the current year and, to a lesser degree, a $148 million decline in Kmart operating income, including restructuring charges of $54 million. Holdings' operating income for fiscal 2005 also included the $317 million gain on sale of business, reflecting a minority interest gain on the sale of Sears Canada's Credit and Financial Services business in November 2005 as discussed above.
Financial Position
As of January 28, 2006, Holdings had approximately $31 billion of assets and $12 billion of equity, as follows:
(in billions) January 28, January 26,
2006 2005
Total assets $30.6 $8.7
Total liabilities 19.0 4.2
Shareholders' equity $11.6 $4.5
The Company's cash and cash equivalents balance increased from $3.4 billion at January 26, 2005 to $4.4 billion at January 28, 2006, including $664 million at Sears Canada. Holdings generated approximately $2.3 billion in operating cash flows during fiscal 2005. The sale by Sears Canada of its Credit and Financial Services business generated $2 billion in proceeds, of which the Company retained $1.2 billion. Significant uses of cash in 2005 included the cash outflow associated with the merger ($1.0 billion), paydown of debt ($815 million), share repurchases ($590 million) and pension contributions ($260 million). At January 28, 2006, Holdings had $3.6 billion available under its five-year credit agreement. Total debt was $3.2 billion (excluding capital lease obligations) at 2005 fiscal year end.
Holdings' inventory level at January 28, 2006 was approximately $9.1 billion. As of the end of the prior year period, the pro forma combined inventory on a FIFO basis for Sears and Kmart was approximately $9.3 billion. Merchandise payables were $3.5 billion at January 28, 2006, as compared to $3.6 billion for Sears and Kmart combined as of January 26, 2005.
During the fiscal year ended January 28, 2006, the Company spent $546 million on capital expenditures compared to $230 million and $868 million spent by Kmart and Sears, respectively, during fiscal 2004. Current year spending excludes approximately $40 million of capital expenditures made by Sears during the period from January 30, 2005 through March 24, 2005.
Sears Canada Take-Over Bid
In December 2005, Holdings announced its intention to acquire the remaining 46% interest in Sears Canada that it does not already own. The Company commenced a take-over bid for the remaining Sears Canada shares on February 9, 2006. The Company has offered C$16.86 (Canadian dollars) per share, or approximately C$835 million ($720 million U.S. dollars) for the minority interest. The take-over bid is open for acceptance until March 17, 2006. The Company believes that 100% ownership of Sears Canada would allow Sears Canada to be able to compete with the other Canadian retailers and the Canadian operations of major US retailers.
Pro Forma Results
The statements of operations for the 13 weeks and full year ended January 28, 2006 are not comparable to the prior year periods because the prior year periods do not include the results of Sears. Additionally, the statement of operations for the year ended January 28, 2006 is not representative of the Company's on-going results as it only includes Sears results from March 25, 2005 forward. Therefore, the Company believes that an understanding of trends and on-going performance is not complete without presenting results on a pro forma basis that include Sears results for all periods presented.
The following pro forma statements of operations summarize the results of Holdings assuming that the merger occurred at the beginning of fiscal 2004.
(in millions, except 13 Weeks Ended Fiscal Year Ended
per share amounts) January 28, January 26, January 28, January 26,
2006 2005 2006(1) 2005
Pro Forma Pro Forma Pro Forma
Total revenues $16,086 $16,844 $54,261 $55,966
Cost of sales, buying
and occupancy 11,508 12,211 39,177 40,895
Gross margin rate 28.3% 27.0% 27.4% 26.4%
Selling and
administrative 3,078 3,370 12,084 12,483
Selling and
administrative expense
as a percentage of
total revenues 19.1% 20.0% 22.3% 22.3%
Depreciation and
amortization 282 325 1,108 1,196
Provision for
uncollectible credit
card accounts 12 22 65 64
Gain on sales of assets (14) (35) (40) (356)
Gain on sale of business (317) -- (317) --
Restructuring charges 7 -- 111 41
Total costs and
expenses 14,556 15,893 52,188 54,323
Operating income 1,530 951 2,073 1,643
Interest expense, net 53 81 270 350
Bankruptcy-related
recoveries (7) (46) (40) (59)
Other income (5) (12) (48) (69)
Income before income taxes,
minority interest and
cumulative effect of
change in accounting
principle 1,489 928 1,891 1,421
Percent to revenues 9.3% 5.5% 3.5% 2.5%
Income taxes 533 307 705 491
Minority interest 308 32 307 46
Income before change
in accounting principle $648 $589 $879 $884
Cumulative effect of
change in accounting
principle -- -- (90) --
Net income $648 $589 $789 $884
Diluted earnings per
share $4.03 $ 3.62 $4.85 $5.40
(1) Includes $34 million
of transaction costs
related to the merger.
Diluted earnings per
share impact of certain
significant items
Gain on sale of
assets $0.05 $0.13 $0.15 $1.35
Cumulative
effect of
change in
accounting
principle -- -- (0.55) --
Restructuring
charges (0.02) -- (0.33) (0.16)
Total $(0.03) $0.13 $(0.73) $1.19
Gain on sale of assets in the pro forma fiscal 2004 period include Kmart's
store sale and lease assignment transactions with Home Depot of $1.35 per
diluted common share for the year ended January 26, 2005. Assets sale
transactions and restructuring activities periodically affect the
Company's 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 Company's
financial performance. Management considers the total impact of these
items, along with reported results, when it reviews and evaluates the
Company's financial performance.
The pro forma information is not indicative of the results of operations that would have been achieved if the merger had taken place at the beginning of fiscal 2004 or that may result in the future. The pro forma information has not been adjusted to reflect any operating efficiencies that may be realized as a result of the merger.
Pro Forma Adjusted EBITDA
For purposes of evaluating operating performance, the Company's management uses a Pro Forma Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Pro Forma Adjusted EBITDA") measurement computed as operating income on the statement of operations less depreciation and amortization and gains/(losses) on sales of assets. In addition, it is adjusted to exclude certain merger-related costs and restructuring charges. Pro Forma Adjusted EBITDA is used by management to evaluate the operating performance of the Company's businesses for comparable periods. Pro Forma 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 the Company's businesses.
While Pro Forma Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of operating performance because:
1. EBITDA excludes the effects of financing and investing activities by
eliminating the effects of interest and depreciation costs;
2. Management considers merger transaction costs to result from
extraordinary activities that are not part of normal operations;
3. Restructuring activities, while periodically affecting the Company's
results, may vary significantly from period to period and have a
disproportionate effect in a given period, which affects the
comparability of results; and
4. Management considers gains/(losses) on the sale of assets to result
from investing decisions rather than ongoing operations.
Pro Forma Adjusted EBITDA is determined as follows:
13 Weeks Ended Fiscal Year Ended
January 28, January 26, January 28, January 26,
2006 2005 2006 2005
Pro Forma Pro Forma Pro Forma
Operating income per
statement of
operations $1,530 $951 $2,073 $1,643
Plus depreciation and
amortization 282 325 1,108 1,196
Less gain on sale of
assets/businesses (331) (35) (357) (356)
Before excluded items 1,481 1,241 2,824 2,483
Merger transaction costs -- -- 34 --
Restructuring charges 7 -- 111 41
Pro Forma Adjusted EBITDA
as defined $1,488 $1,241 $2,969 $2,524
% to revenues 9.2% 7.4% 5.5% 4.5%
Pro Forma Adjusted EBITDA for the Company's domestic (United States operations) and Sears Canada operations is as follows:
13 Weeks Ended
Pro Forma Adjusted EBITDA % To Revenues
January 28, January 26, January 28, January 26,
2006 2005 2006 2005
Pro Forma
Domestic operations $1,303 $1,038 9.0% 6.8%
Sears Canada 185 203 11.4% 12.7%
Total Pro Forma
Adjusted EBITDA $1,488 $1,241 9.2% 7.4%
Fiscal Year Ended
Pro Forma Adjusted EBITDA % To Revenues
January 28, January 26, January 28, January 26,
2006 2005 2006 2005
Pro Forma Pro Forma
Domestic operations $2,622 $2,134 5.3% 4.2%
Sears Canada 347 390 6.8% 8.0%
Total Pro Forma
Adjusted EBITDA $2,969 $2,524 5.5% 4.5%
For a detailed discussion of the Company's financial results, please see the Company's Annual Report on Form 10-K for the year ended January 28, 2006, which has been filed with the Securities and Exchange Commission and posted to the Company's website at .
About Sears Holdings Corporation
Sears Holdings Corporation is the nation's third largest broadline retailer, with approximately $55 billion in annual revenues, and with approximately 3,900 full-line and specialty retail stores in the United States and Canada. Sears Holdings is the leading home appliance retailer as well as one of the leading retailers of 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. It also has Martha Stewart Everyday products, which are offered exclusively in the U.S. by Kmart and in Canada by Sears Canada. The Company is the nation's largest provider of home services, with more than 14 million service calls made annually. For more information, visit Sears Holdings' website at .
Pro forma Reconciliation
The following table provides the as reported results for Holdings presented above for the 13-week period ended January 28, 2006 and a reconciliation from the as reported results to the pro forma results presented above for Holdings for the 13-week period ended January 26, 2005.
Holdings
13 Weeks
Ended
January 28,
2006 13 Weeks Ended January 26, 2005
(millions, Pre-
except per As As merger Purchase Pro
share data) Reported Reported Activity(1) Acctng Forma
Merchandise
sales and
services $16,044 $5,950 $10,766 $-- $16,716
Credit and
financial
products
revenues 42 -- 128 -- 128
Total
revenue 16,086 5,950 10,894 -- 16,844
Cost of sales,
buying and
occupancy 11,508 4,459 7,752 -- 12,211
Gross margin
rate 28.3% 25.1% 28.0% --% 27.0%
Selling and
administrative 3,078 1,042 2,324 5(2) 3,370
Selling and
administrative
as % of
total revenues 19.1% 17.5% 21.3% --% 20.0%
Depreciation and
amortization 282 13 272 40(3) 325
Provision for
uncollectible
credit card
accounts 12 -- 22 -- 22
Gain on sales
of assets (14) (36) -- -- (35)
Gain on sale
of business (317) -- -- -- --
Restructuring
charges 7 -- -- -- --
Total costs
and expenses 14,556 5,478 10,370 45 15,893
Operating income
(loss) 1,530 472 524 (45) 951
Interest
(expense)
income, net (53) (22) (65) 6(4) (81)
Bankruptcy-
related
recoveries 7 46 -- -- 46
Other income 5 -- 13 -- 12
Income before
income taxes
and minority
interest 1,489 496 472 (39) 928
Income tax
expense
(benefit) 533 187 136 (15)(5) 307
Minority
interest 308 -- 32 -- 32
NET INCOME
(LOSS) $648 $309 $304 $(24) $589
Diluted earnings
per share $4.03 $3.09 $3.62
(1) Represents the 2004 results of operations for the period October 31,
2004 through January 29, 2005 for Sears Domestic and the period
October 3, 2004 through January 1, 2005 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) Represents a decrease in interest expense resulting from the
adjustment to Sears debt based on the adjustments of such
liabilities to fair value.
(5) Represents the aggregate pro forma effective income tax effect of
notes (2) through (4) above.
The following table provides a reconciliation from the as reported results presented above to the pro forma results presented above for Holdings for the fiscal years ended January 28, 2006 and January 26, 2005, respectively.
Holdings
Fiscal Year Ended January 28, 2006
(millions, except Pre-
per common As merger Purchase Pro
share data) reported Activity (1) Acctng Forma
Merchandise sales
and services $48,911 $5,051 -- $53,962
Credit and financial
products revenues 213 86 -- 299
Total revenue 49,124 5,137 -- 54,261
Cost of sales, buying
and occupancy 35,505 3,672 -- 39,177
Gross margin rate 27.4% 27.3% --% 27.4%
Selling and
administrative 10,759 1,314 11(3) 12,084
Selling and
administrative as
% of total revenues 21.9% 25.6% --% 22.3%
Depreciation and
amortization 932 147 29(4) 1,108
Provision for
uncollectible credit
card accounts 49 16 -- 65
Gain on sales of assets (39) (1) -- (40)
Gain on sale of business (317) -- -- (317)
Restructuring charges 111 -- -- 111
Total costs and
expenses 47,000 5,148 40 52,188
Operating income (loss) 2,124 (11) (40) 2,073
Interest expense
(income), net 237 35 (2)(6) 270
Bankruptcy-related
recoveries (40) -- -- (40)
Other income (38) (10) -- (48)
Income before income
taxes, minority interest
and cumulative effect of
change in accounting
principle 1,965 (36) (38) 1,891
Income tax expense
(benefit) 716 4 (15)(7) 705
Minority interest 301 6 -- 307
Income before cumulative
effect of change in
accounting principle 948 (46) (23) 879
Cumulative effect of
change in accounting
principle, net of tax (90) -- -- (90)
NET INCOME (LOSS) $858 (46) (23) 789
Diluted earnings
per share $5.59 $4.85
Diluted earnings
per share before
cumulative effect
of change in
accounting principle $6.17 $5.40
(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
January 29, 2005 for Sears Domestic and the period January 4, 2004
through January 1, 2005 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) During fiscal year 2004, Sears acquired ownership or leasehold
interest in 50 Kmart stores for approximately $576 million and 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 of
notes (2) through (6) above.
Fiscal Year Ended January 26, 2005
(millions, except Pre-
per common As merger Purchase Pro
share data) reported Activity (1) Acctng Forma
Merchandise sales
and services $19,843 $35,742 -- $55,585
Credit and financial
products revenues -- 381 -- 381
Total revenue 19,843 36,123 -- 55,966
Cost of sales, buying
and occupancy 14,942 25,945 8(2) 40,895
Gross margin rate 24.7% 27.4% --% 26.4%
Selling and
administrative 3,999 8,418 66(3) 12,483
Selling and
administrative as %
of total revenues 20.2% 23.3% --% 22.3%
Depreciation and
amortization 27 984 185(4) 1,196
Provision for
uncollectible credit
card accounts -- 64 -- 64
Gain on sales of assets (946) (9) 599(5) (356)
Gain on sale of business -- -- -- --
Restructuring charges -- 41 -- 41
Total costs
and expenses 18,022 35,443 858 54,323
Operating income (loss) 1,821 680 (858) 1,643
Interest expense
(income), net 108 265 (23)(6) 350
Bankruptcy-related
recoveries (59) -- -- (59)
Other income (3) (66) -- (69)
Income before income
taxes, minority
interest and cumulative
effect of change in
accounting principle 1,775 481 (835) 1,421
Income tax expense
(benefit) 669 141 (319)(7) 491
Minority interest -- 46 -- 46
Income before
cumulative effect of
change in accounting
principle 1,106 294 (516) 884
Cumulative effect of
change in accounting
principle, net of tax -- -- -- --
NET INCOME (LOSS) 1,106 294 (516) 884
Diluted earnings
per share $11.00 $5.40
Diluted earnings per
share before
cumulative effect of
change in
accounting principle $11.00 $5.40
(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
January 29, 2005 for Sears Domestic and the period January 4, 2004
through January 1, 2005 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) During fiscal year 2004, Sears acquired ownership or leasehold
interest in 50 Kmart stores for approximately $576 million and 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 of
notes (2) through (6) above.
The following table reconciles Pro Forma Adjusted EBITDA to net income as reported for the 13-week periods ended:
January 28, January 26,
2006 2005
Pro Forma Adjusted EBITDA $1,488 $1,241
Restructuring charges (7) --
Pro Forma Adjusted EBITDA after
restructuring charges 1,481 1,241
Depreciation and amortization (282) (325)
Less gain on sale of assets/businesses 331 35
Pro Forma operating income 1,530 951
Interest expense, net (53) (81)
Bankruptcy-related recoveries 7 46
Other income 5 12
Income tax expense (533) (307)
Minority interest expense (308) (32)
Pro Forma net income 648 589
Less pre-merger activity -- 304
Less effect of purchase accounting adjustments -- (24)
Net income as reported $648 $309
The following table reconciles Pro Forma Adjusted EBITDA to net income as reported for the fiscal years ended:
January 28, January 26,
2006 2005
Pro Forma Adjusted EBITDA $2,969 $2,524
Merger transaction costs (34) --
Restructuring charges (111) (41)
Pro Forma Adjusted EBITDA after merger-related
items and restructuring charges 2,824 2,483
Depreciation and amortization (1,108) (1,196)
Less gain on sale of assets/businesses 357 356
Pro Forma operating income 2,073 1,643
Interest expense, net (270) (350)
Bankruptcy-related recoveries 40 59
Other income 48 69
Income tax expense (705) (491)
Minority interest expense (307) (46)
Cumulative effect of change in accounting
principle, net of tax (90) --
Pro Forma net income 789 884
Less pre-merger activity (46) 294
Less effect of purchase accounting adjustments (23) (516)
Net income as reported $858 $1,106
SOURCE: Sears Holdings Corporation
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