Sears Holdings Reports Second Quarter Results
Sears Holdings Corporation ("Holdings" or "the Company") (NASDAQ: SHLD) today reported net income of $294 million, or $1.88 per diluted share, for the second quarter ended July 29, 2006, compared with net income of $161 million, or $0.98 per diluted share, for the second quarter ended July 30, 2005. The second quarter 2006 results include a $36 million pre-tax gain, or $22 million net of taxes ($0.14 per diluted share), representing the Company's portion of proceeds received during the second quarter of 2006 related to the settlement of Visa/MasterCard antitrust litigation. Excluding the impact of this gain, second quarter 2006 net income was $272 million, or $1.74 per diluted share. In addition, the prior year second quarter results included $42 million in merger-related restructuring charges at Kmart, or $26 million net of taxes ($0.16 per diluted share). Excluding the impact of these charges, prior year second quarter net income was $187 million, or $1.14 per diluted share. The improvement in second quarter 2006 earnings reflects improved profitability at both Kmart and Sears Domestic, largely due to reduced expenses and an increase of 120 basis points in gross margin rate from 27.2% in 2005 to 28.4% in 2006.
"Sears Holdings' resolve to improve the profitability of this business remains strong and is borne out in the company's second quarter results," said Aylwin Lewis, Sears Holdings' chief executive officer and president. He added, "While we are making progress, we must continue to focus on our customers, improve the shopability of our stores and continue to give our customers reasons to shop our stores more frequently."
Second Quarter Revenues and Comparable Store Sales
For the quarter, domestic comparable stores sales declined 3.8% in the aggregate, with Sears Domestic comparable store sales declining 6.3% and Kmart comparable store sales declining 0.6%. The comparable store sales declines at both Kmart and Sears Domestic reflect the impact of increased competition and lower transaction volumes. At Kmart, comparable store sales declines in home goods were partially offset by increased sales within a number of merchandise categories, including apparel, general merchandise, pharmacy and food and other consumable goods. At Sears Domestic, comparable store sales declined across most categories and formats, with more pronounced sales declines within both the home fashion and lawn and garden categories.
Total revenues declined $0.4 billion to $12.8 billion for the 13 weeks ended July 29, 2006, as compared to total revenues of $13.2 billion for the 13 weeks ended July 30, 2005. Sears revenues were $8.3 billion for the 13 weeks ended July 29, 2006 as compared to $8.6 billion for the 13 weeks ended July 30, 2005 primarily reflecting the impact of comparable store sales declines, partially offset by an increase in the total number of Sears Full-line stores in operation, resulting mainly due to conversions from the Kmart format. Total revenues at Kmart declined $0.1 billion as compared to the prior year period, primarily reflecting a reduction in the total number of Kmart stores in operation.
Operating Income
Operating income was $517 million for the 13 weeks ended July 29, 2006, as compared to $324 million for the 13 weeks ended July 30, 2005. The increase in operating income was due to an increase of $92 million of Kmart operating income, as well as a $77 million increase in Sears Domestic operating income mainly due to lower expenses as a result of realizing merger synergies and a reduction of selling and administrative costs which decreased from $3.0 billion (22.8% of revenues) last year to $2.8 billion (22.1% of revenues) this year. The second quarter 2006 results include a $36 million one-time gain, recorded as a reduction of selling and administrative expenses, representing the Company's portion of proceeds received during the second quarter of 2006 related to the settlement of Visa/MasterCard antitrust litigation. Excluding the impact of this gain, second quarter operating income was $481 million. In addition, the prior year results included $42 million in merger-related restructuring charges at Kmart. Excluding the impact of these charges, the prior year second quarter operating income was $366 million. Revenues declined from $13.2 billion last year to $12.8 billion this year, however, the impact of this decline was largely offset by an improvement in gross margin rate to 28.4% this year, an increase of 120 basis points from the prior year rate.
Financial Position
The Company had cash and cash equivalents of $3.7 billion at July 29, 2006 (of which $3.2 billion is domestic and $0.5 billion is at Sears Canada) as compared to $2.1 billion at July 30, 2005 and $4.4 billion at January 28, 2006. The decline in cash from fiscal 2005 year end is attributable to share repurchases, cash used in the acquisition of additional interests in Sears Canada, capital expenditures and debt repayments, partially offset by cash generated from operations.
Merchandise inventories at July 29, 2006 were approximately $9.5 billion, as compared to $9.0 billion as of July 30, 2005. The increase reflects planned increases due to earlier receipt of product this year and increases in categories where the Company believes business trends support higher inventory levels. Merchandise payables were $3.3 billion at July 29, 2006, as compared to $3.5 billion as of July 30, 2005.
Share Repurchase
During the second quarter of 2006, the company repurchased 0.7 million common shares at a total cost of $91 million, or an average price of $137.67 per share. As of July 29, 2006, the Company had remaining authorization to repurchase $406 million of common shares under its existing share repurchase program approved by the board of directors. 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.
Investment of Available Capital
As noted above, the Company had total domestic cash and cash equivalents of $3.2 billion at July 29, 2006. Since the merger between Kmart and Sears, the Company's cash flows have exceeded its working capital, financing and capital investment needs, and management expects that the Company's cash flows will continue to exceed its operating cash needs for the foreseeable future.
The Company regularly evaluates how best to use available capital to increase shareholder value. The Company has and will continue to invest in its businesses to improve the customer experience and provide the opportunity for attractive returns. The Company has also repurchased $1.1 billion of its common shares since the merger and expects to continue to repurchase shares subject to market conditions and board authorization. In addition, the Company may pursue investments in the form of acquisitions, joint ventures and partnerships where the Company believes attractive returns can be obtained. Further, the Company may determine under certain market conditions that available capital is best utilized to fund investments that it believes offer the Company attractive return opportunities, whether or not related to its ongoing business activities.
As previously reported, the Company's Board of Directors has delegated authority to direct investment of the Company's surplus cash to its Chairman, 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 Finance Committee of the Board of Directors. As of July 29, 2006, the Company's surplus cash was primarily invested in short-term, highly liquid investments. The Company is currently using, and may in the future use, a portion of its available capital to invest in marketable securities and other financial instruments, including derivatives. These investments may include significant and highly concentrated direct investments and/or related derivative positions with respect to the equity securities of public companies. Derivative contracts would be recorded on the Company's balance sheet at fair value and, for non-hedge contracts, changes in fair value would be recognized currently in earnings as unrealized gains or losses.
"Our strong financial position and cash flow generation provide us with the flexibility to capitalize on a wide range of market opportunities as they arise. In addition to investing in our business and acquiring our shares, we are prepared to invest substantial amounts of capital if we identify other attractive investment opportunities which have the potential for returns we believe appropriately compensate the Company for the associated risks." said Edward S. Lampert, Chairman of Holdings.
Any such investments will involve risks, and shareholders should recognize that Holdings' balance sheet may change depending on the extent of excess funds and the timing, magnitude and performance of investments which the Company may make. Furthermore, such investments would be subject to volatility that may affect both the recorded value of the investments as well as the Company's periodic earnings.
Adjusted EBITDA
For purposes of evaluating operating performance, the Company's management uses an Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") measurement computed as operating income appearing 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, nonrecurring gains and restructuring charges. Adjusted EBITDA is used by management to evaluate the operating performance of the Company's 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 the Company's 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;
-- Adjusted EBITDA excludes the one-time gain resulting from the
settlement of Visa/MasterCard litigation;
-- Management considers merger transaction costs to result from
extraordinary activities that are not part of normal operations;
-- 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
-- Management considers gains/ (losses) on the sale of assets to result
from investing decisions rather than ongoing operations.
Adjusted EBITDA was determined as follows:
13 Weeks Ended 26 Weeks Ended
July 29, July 30, July 29, July 30,
2006 2005 2006 2005
Pro Forma
Operating income per
statement of income $517 $324 $848 $424
Plus depreciation and amortization 276 280 565 563
Less gain on sale of assets (7) (4) (24) (11)
Before excluded items 786 600 1,389 976
Vice Chairman Separation Expense 8 -- 8 --
Visa/MasterCard settlement (36) -- (36) --
Merger transaction costs -- -- -- 34
Restructuring charges 14 42 23 45
Adjusted EBITDA as defined $772 $642 $1,384 $1,055
% to revenues 6.0% 4.9% 5.6% 4.1%
Adjusted EBITDA for the Company's domestic (United States operations) and Sears Canada operations is as follows:
13 Weeks Ended 26 Weeks Ended
Adjusted % To Adjusted % To
EBITDA Revenues EBITDA Revenues
July July July July July July July July
29, 30, 29, 30, 29, 30, 29, 30,
2006 2005 2006 2005 2006 2005 2006 2005
Pro Pro
Forma Forma
Domestic operations $679 $588 5.9% 4.9% $1,253 $952 5.6% 4.0%
Sears Canada 93 54 7.4% 4.5% 131 103 5.7% 4.5%
Total Adjusted EBITDA $772 $642 6.0% 4.9% $1,384 $1,055 5.6% 4.1%
Quarterly Report on Form 10-Q
The Company plans to file with the SEC its Quarterly Report on Form 10-Q for the second quarter 2006 on or before September 7, 2006.
Forward-Looking Statements
Results are preliminary and unaudited. This press release contains forward-looking statements about the Company's goals. Forward-looking statements are subject to risks and uncertainties that may cause the Company's 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 include, but are not limited to, statements about the expected benefits of the business combination of Sears and Kmart, the potential benefits of our investments and future financial and operating results. Such statements are based upon the current beliefs and expectations of the Company's 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. 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.
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 3,800 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. 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 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 26 Weeks Ended
Reported Reported Pro forma
millions, except per
common share data July 29, July 30, July 29, July 30, July 30,
2006 2005 2006 2005 2005
REVENUES
Merchandise sales and
services $12,785 $13,114 $24,783 $20,749 $25,800
Credit and financial
products revenues - 78 - 87 173
Total revenues 12,785 13,192 24,783 20,836 25,973
COSTS AND EXPENSES
Cost of sales, buying and
occupancy 9,158 9,541 17,823 15,202 18,874
Gross margin dollars 3,627 3,573 6,960 5,547 6,926
Gross margin rate 28.4% 27.2% 28.1% 26.7% 26.8%
Selling and administrative 2,827 3,009 5,548 4,737 6,078
Selling and administrative
expense as a percentage of
total revenues 22.1% 22.8% 22.4% 22.7% 23.4%
Depreciation and
amortization 276 280 565 387 563
Gain on sales of assets (7) (4) (24) (10) (11)
Restructuring charges 14 42 23 45 45
Total costs and
expenses 12,268 12,868 23,935 20,361 25,549
Operating income 517 324 848 475 424
Interest expense, net 42 72 89 114 147
Bankruptcy-related recoveries (11) (15) (12) (32) (32)
Other income (16) (2) (27) (11) (21)
Income before income taxes,
minority interest and
cumulative effect of change
in accounting principle 502 269 798 404 330
Income taxes 201 103 319 155 144
Minority interest 7 5 5 7 13
Income before cumulative
effect of change in
accounting principle 294 161 474 242 173
Cumulative effect of change
in accounting principle
(net of income tax benefit
of $58) - - - (90) (90)
NET INCOME $294 $161 $474 $152 $83
EARNINGS PER COMMON SHARE
Diluted earnings per share
before cumulative effect
of change in accounting
principle $1.88 $0.98 $3.01 $1.66 $1.06
Diluted earnings per share $1.88 $0.98 $3.01 $1.05 $0.51
Diluted weighted average
common shares outstanding 156.5 165.1 157.3 145.4 163.6
Sears Holdings Corporation
Condensed Balance Sheets
Amounts are Preliminary and
Subject to Change (Unaudited)
millions July 29, July 30, Jan. 28,
2006 2005 2006
ASSETS
Current assets
Cash and cash equivalents $3,690 $2,138 $4,440
Receivables 803 1,822 811
Merchandise inventories 9,455 8,953 9,068
Other current assets 917 1,086 888
Total current assets 14,865 13,999 15,207
Property and equipment, net 9,395 10,084 9,823
Goodwill 1,885 1,911 1,684
Tradenames and other intangible
assets 3,454 4,039 3,448
Other assets 462 485 411
TOTAL ASSETS $30,061 $30,518 $30,573
LIABILITIES
Current liabilities
Short-term borrowings and current
portion of long-term debt $295 $822 $748
Merchandise payables 3,274 3,460 3,458
Unearned revenues 1,082 1,019 1,047
Other current liabilities 5,244 4,256 5,097
Total current liabilities 9,895 9,557 10,350
Long-term debt and capitalized lease
obligations 3,475 3,333 3,268
Pension and postretirement benefits 2,361 2,614 2,421
Minority interest and other liabilities 2,719 3,713 2,923
Total Liabilities 18,450 19,217 18,962
Total Shareholders' Equity 11,611 11,301 11,611
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $30,061 $30,518 $30,573
Total common shares outstanding 155.9 164.9 159.8
Sears Holdings Corporation
Segment Results
(Unaudited)
Amounts are Preliminary and Subject to Change
2006 - Reported 13 Weeks Ended July 29, 2006
millions
Sears Sears
Kmart Domestic Canada Holdings
Merchandise sales and services
revenue $4,472 $7,051 $1,262 $12,785
Cost of sales, buying and occupancy 3,389 4,884 885 9,158
Gross margin dollars 1,083 2,167 377 3,627
Gross margin rate 24.2% 30.7% 29.9% 28.4%
Selling and administrative 874 1,669 284 2,827
Selling and administrative expense as
a percentage of total revenues 19.5% 23.7% 22.5% 22.1%
Depreciation and amortization 18 224 34 276
Gain on sales of assets - (7) - (7)
Restructuring charges - - 14 14
Total costs and expenses 4,281 6,770 1,217 12,268
Operating income $191 $281 $45 $517
Number of:
Kmart Stores 1,398 - - 1,398
Full-Line Stores - 934 123 1,057
Specialty Stores - 1,091 254 1,345
Total Stores 1,398 2,025 377 3,800
2005 - Reported 13 Weeks Ended July 30, 2005
millions
Sears Sears
Kmart Domestic Canada Holdings
Merchandise sales and services $4,642 $7,337 $1,135 $13,114
Credit and financial products
revenues - - 78 78
Total revenues 4,642 7,337 1,213 13,192
Cost of sales, buying and occupancy 3,529 5,180 832 9,541
Gross margin dollars 1,113 2,157 303 3,573
Gross margin rate 24.0% 29.4% 26.7% 27.2%
Selling and administrative 964 1,718 327 3,009
Selling and administrative expense as
a percentage of total revenues 20.8% 23.4% 27.0% 22.8%
Depreciation and amortization 10 235 35 280
Gain on sales of assets (2) - (2) (4)
Restructuring charges 42 - - 42
Total costs and expenses 4,543 7,133 1,192 12,868
Operating income $99 $204 $21 $324
Number of:
Kmart Stores 1,445 - - 1,445
Full-Line Stores - 906 122 1,028
Specialty Stores - 1,150 246 1,396
Total Stores 1,445 2,056 368 3,869
2006 - Reported 26 Weeks Ended July 29, 2006
millions Sears Sears
Kmart Domestic Canada Holdings
Merchandise sales and services
revenue $8,726 $13,748 $2,309 $24,783
Cost of sales, buying and occupancy 6,630 9,545 1,648 17,823
Gross margin dollars 2,096 4,203 661 6,960
Gross margin rate 24.0% 30.6% 28.6% 28.1%
Selling and administrative 1,729 3,289 530 5,548
Selling and administrative expense as
a percentage of total revenues 19.8% 23.9% 23.0% 22.4%
Depreciation and amortization 33 464 68 565
Gain on sales of assets (17) (7) - (24)
Restructuring charges 4 - 19 23
Total costs and expenses 8,379 13,291 2,265 23,935
Operating income $347 $457 $44 $848
Number of:
Kmart Stores 1,398 - - 1,398
Full-Line Stores - 934 123 1,057
Specialty Stores - 1,091 254 1,345
Total Stores 1,398 2,025 377 3,800
2005 - Reported 26 Weeks Ended July 30, 2005
millions Sears Sears
Kmart Domestic Canada Holdings
Merchandise sales and services $9,182 $10,338 $1,229 $20,749
Credit and financial products
revenues - - 87 87
Total revenues 9,182 10,338 1,316 20,836
Cost of sales, buying and occupancy 6,997 7,304 901 15,202
Gross margin dollars 2,185 3,034 328 5,547
Gross margin rate 23.8% 29.3% 26.7% 26.7%
Selling and administrative 1,920 2,462 355 4,737
Selling and administrative expense as
a percentage of total revenues 20.9% 23.8% 27.0% 22.7%
Depreciation and amortization 20 327 40 387
Gain on sales of assets (8) - (2) (10)
Restructuring charges 45 - - 45
Total costs and expenses 8,974 10,093 1,294 20,361
Operating income $208 $245 $22 $475
Number of:
Kmart Stores 1,445 - - 1,445
Full-Line Stores - 906 122 1,028
Specialty Stores - 1,150 246 1,396
Total Stores 1,445 2,056 368 3,869
2005 - Pro Forma 26 Weeks Ended July 30, 2005
millions Sears Sears
Kmart Domestic Canada Holdings
Merchandise sales and services $9,182 $14,508 $2,110 $25,800
Credit and financial products
revenues - - 173 173
Total revenues 9,182 14,508 2,283 25,973
Cost of sales, buying and occupancy 6,997 10,322 1,555 18,874
Gross margin dollars 2,185 4,186 555 6,926
Gross margin rate 23.8% 28.9% 26.3% 26.8%
Selling and administrative 1,920 3,533 625 6,078
Selling and administrative expense as
a percentage of total revenues 20.9% 24.4% 27.4% 23.4%
Depreciation and amortization 20 469 74 563
Gain on sales of assets (8) (1) (2) (11)
Restructuring charges 45 - - 45
Total costs and expenses 8,974 14,323 2,252 25,549
Operating income $208 $185 $31 $424
Sears Holdings Corporation
Adjusted EBITDA
Amounts are Preliminary and Subject to Change
13 Weeks Ended
July 29, 2006 July 30, 2005
Domestic Sears Sears Domestic Sears Sears
Operations Canada Holdings Operations Canada Holdings
Operating income per
statement of income $472 $45 $517 $303 $21 $324
Plus depreciation
and amortization 242 34 276 245 35 280
Less gain on sale
of assets/businesses (7) - (7) (2) (2) (4)
Before excluded items 707 79 786 546 54 600
Vice Chairman
Separation Expense 8 - 8 - - -
Visa/MasterCard
Settlement (36) - (36) - - -
Restructuring charges - 14 14 42 - 42
Adjusted EBITDA
as defined $679 $93 $772 $588 $54 $642
% to revenues 5.9% 7.4% 6.0% 4.9% 4.5% 4.9%
26 Weeks Ended
July 29, 2006 July 30, 2005
Domestic Sears Sears Domestic Sears Sears
Operations Canada Holdings Operations Canada Holdings
Pro Pro Pro
Forma Forma Forma
Operating income
per statement of
income $804 $44 $848 $393 $31 $424
Plus depreciation and
amortization 497 68 565 489 74 563
Less gain on sale of
assets/businesses (24) - (24) (9) (2) (11)
Before excluded items 1,277 112 1,389 873 103 976
Vice Chairman
Separation Expense 8 - 8 - - -
Visa/MasterCard
Settlement (36) - (36) - - -
Merger transaction costs - - - 34 - 34
Restructuring charges 4 19 23 45 - 45
Adjusted EBITDA
as defined $1,253 $131 $1,384 $952 $103 $1,055
% to revenues 5.6% 5.7% 5.6% 4.0% 4.5% 4.1%
Sears Holdings Corporation
Pro Forma Reconciliation
The following tables provide a reconciliation from the as reported results to the pro forma results presented for Sears Holdings, Sears Domestic and Sears Canada for the 26-week period ended July 30, 2005.
Sears Holdings 26-week period ended July 30, 2005
As Pre-merger Purchase Pro
millions reported Activity Accounting Forma
Merchandise sales and services $20,749 $5,051 $- $25,800
Credit and financial products
revenues 87 86 - 173
Total revenue 20,836 5,137 - 25,973
Cost of sales, buying and occupancy 15,202 3,672 - 18,874
Selling and administrative 4,737 1,330 11 6,078
Depreciation and amortization 387 147 29 563
Gain on sales of assets (10) (1) - (11)
Restructuring charges 45 - - 45
Total costs and expenses 20,361 5,148 40 25,549
Operating income (loss) 475 (11) (40) 424
Interest expense (income), net 114 35 (2) 147
Bankruptcy-related recoveries (32) - - (32)
Other income (11) (10) - (21)
Income before income taxes, minority
interest and cumulative effect of
change in accounting principle 404 (36) (38) 330
Income tax expense (benefit) 155 4 (15) 144
Minority interest 7 6 - 13
Income before cumulative effect of
change in accounting principle 242 (46) (23) 173
Cumulative effect of change in
accounting principle, net of tax (90) - - (90)
NET INCOME (LOSS) $152 $(46) $(23) $83
Sears Domestic
26-week period ended July 30, 2005
As Pre-merger Purchase Pro
millions reported Activity Accounting Forma
Merchandise sales and services
revenue $10,338 $4,170 $- $14,508
Cost of sales, buying and occupancy 7,304 3,018 - 10,322
Selling and administrative 2,462 1,060 11 3,533
Depreciation and amortization 327 116 26 469
Gain on sales of assets - (1) - (1)
Total costs and expenses 10,093 4,193 37 14,323
Operating income (loss) $245 $(23) $(37) $185
Sears Canada
26-week period ended July 30, 2005
As Pre-merger Purchase Pro
millions reported Activity Accounting Forma
Merchandise sales and services $1,229 $881 $- $2,110
Credit and financial product revenues 87 86 - 173
Total revenues 1,316 967 - 2,283
Cost of sales, buying and occupancy 901 654 - 1,555
Selling and administrative 355 270 - 625
Depreciation and amortization 40 31 3 74
Gain on sales of assets (2) - - (2)
Restructuring charges - - - -
Total costs and expenses 1,294 955 3 2,252
Operating income (loss) $22 $12 $(3) $31
SOURCE: Sears Holdings Corporation
CONTACT: Sears Holdings Public Relations, +1-847-286-8371
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