Sears Holdings Corporation ("Holdings," "we," "us," "our" or the "Company") (Nasdaq: SHLD) today (August 30) reported net income of $176 million, or $1.17 per diluted share, for the second quarter ended August 4, 2007, compared with net income of $294 million, or $1.88 per diluted share, for the second quarter ended July 29, 2006.
The second quarter 2006 results included a $36 million pre-tax gain, $22 million after tax or $0.14 per diluted share, representing our portion of proceeds received during the second quarter last year related to the settlement of Visa/MasterCard antitrust litigation. Excluding this gain, earnings per diluted share were $1.74 for the second quarter of fiscal 2006. The decline in our second quarter results from the same quarter last year primarily reflects lower operating results at both Sears Domestic and Kmart, partially offset by improved operating results at Sears Canada. Earnings per diluted share for the current year second quarter benefited from lower average diluted shares outstanding during the current year quarter as compared with the second quarter of fiscal 2006.
"We are disappointed with our second quarter results. Our gross margins came under pressure from sales declines and increased promotional activity, and as a result, our net income was significantly below last year and our expectations," said Aylwin Lewis, Sears Holdings' chief executive officer and president. "In response, we are enhancing our marketing message to more clearly articulate the advantages of our products and service offerings, including our recently announced Ultimate Appliance Promise."(1)
Second Quarter Revenues and Comparable Store Sales
As previously announced August 13, 2007, Sears Domestic's comparable store sales declined 4.3% for the quarter, while Kmart's comparable store sales declined 3.8%. Total domestic comparable store sales declined 4.1%. We experienced lower sales across most merchandise categories at both Kmart and Sears Domestic, partially offset by increased sales of women's apparel at both Kmart and Sears Domestic, as well as within consumer electronics and footwear at Sears Domestic. For the quarter, our total revenues declined $0.6 billion to $12.2 billion in fiscal 2007, as compared to $12.8
billion for the second quarter of fiscal 2006.
Operating Income
For the quarter, our operating income decreased $178 million to $339 million in fiscal 2007, as compared to $517 million in the second quarter of fiscal 2006. The decline in operating income was mainly attributable to lower gross margin dollars generated at both Kmart and Sears Domestic as a result of the above-noted sales declines, as well as a decline in the gross margin rate realized at Sears Domestic. Sears Domestic's gross margin rate declined across most full-line store merchandise categories primarily due to increased markdown activity, most notably within spring and summer seasonal apparel categories. These negative factors were only partially offset by lower overall consolidated expenses and improved operating results at Sears Canada.
Financial Position
We had cash and cash equivalents of $2.6 billion at August 4, 2007 (of which $2.0 billion was domestic and $0.6 billion was at Sears Canada) as compared to $3.7 billion at July 29, 2006 and $4.0 billion at February 3, 2007. The decline in domestic cash and cash equivalents from February 3, 2007 primarily reflects share repurchases made pursuant to our share repurchase program as further discussed below. Additionally, we spent $274 million on capital expenditures and made debt repayments of $304 million,
net of new borrowings, during the first half of fiscal 2007.
Merchandise inventories at August 4, 2007 were $10.2 billion, as compared to $9.5 billion as of July 29, 2006. The increase primarily reflects the acquisition of previously consigned pharmacy inventory at Kmart (approximately $170 million), planned increases resulting from efforts aimed at improving in-stock levels (approximately $155 million), including an increase in this respect of approximately $65 million in Lands' End inventory, the impact of lower than forecast sales levels (approximately $135 million), and earlier receipt of product (approximately $120 million). Merchandise payables were $3.4 billion at August 4, 2007, as compared to $3.3 billion as of July 29, 2006.
Share Repurchase
We repurchased 9.6 million of our common shares at a total cost of $1.5 billion under our share repurchase program during the second 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 August 24, 2007, we had remaining authorization to repurchase $1.4 billion 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 26 Weeks Ended
August 4, July 29, August 4, July 29,
2007 2006 2007 2006
Operating income per
statement of income $339 $517 $732 $848
Plus depreciation and
amortization 261 276 524 565
Less gain on sale of
assets (5) (7) (10) (24)
Before excluded items 595 786 1,246 1,389
Legal settlement gain -- -- (30) --
Sears Canada post-
retirement benefit plans
curtailment gain -- -- (27) --
Hurricane related
recoveries (3) -- (18) --
Vice Chairman separation
expense -- 8 -- 8
Visa/MasterCard
settlement -- (36) -- (36)
Restructuring charges -- 14 -- 23
Adjusted EBITDA as
defined $592 $772 $1,171 $1,384
% to revenues 4.8% 6.0% 4.9% 5.6%
Adjusted EBITDA for our domestic (United States operations) and Sears
Canada operations are as follows:
13 Weeks Ended 26 Weeks Ended
Adjusted EBITDA % To Revenues Adjusted EBITDA % To Revenues
August July August July August July August July
4, 29, 4, 29, 4, 29, 4, 29,
2007 2006 2007 2006 2007 2006 2007 2006
Domestic
operations $489 $679 4.5% 5.9% $1,017 $1,253 4.7% 5.6%
Sears
Canada 103 93 7.9% 7.4% 154 131 6.6% 5.7%
Total
Adjusted
EBITDA $592 $772 4.8% 6.0% $1,171 $1,384 4.9% 5.6%
Quarterly Report on Form 10-Q
We plan to file our Quarterly Report on Form 10-Q for the second quarter 2007 with the SEC on August 30, 2007.
(1) Sears Ultimate Appliance Promise is a powerful way to show our
customers that we are committed to being the only place they will ever
need to shop for appliances. It means we promise to offer: the largest
selection of appliances; the best price -- guaranteed; worry-free
1-year service -- guaranteed; and next day delivery & installation
plus haul-away -- guaranteed. -Sears Holdings Corporation
Comment and add to the story without registration, but keep the comments meaningful please. Links are not accepted.
