Sears 2006 Annual Report Download - page 33

The selling and administrative expense rate was 19.4% for fiscal 2006, as compared to 19.9% for fiscal
2005. Fiscal 2006 selling and administrative expenses included a $19 million gain, representing Kmart’s portion
of the settlement in the Visa/MasterCard antitrust litigation. This gain accounted for approximately 10 basis
points of the improvement in the selling and administrative expense rate. The remaining 40 basis point
improvement reflects lower costs across a number of expense categories, most notably store payroll and benefit
costs which were reduced in fiscal 2006 as a result of store payroll efficiency initiatives. The selling and
administrative expense rate was 19.9% for fiscal 2005, as compared to 20.2% for fiscal 2004, and improved
primarily as a function of lower payroll and benefit costs due largely to reduced performance-based incentive
expense.
Kmart recorded $71 million and $40 million in gains on sales of assets during fiscal 2006 and fiscal 2005,
respectively, with the increase for fiscal 2006 primarily attributable to a $41 million pre-tax gain recognized in
fiscal 2006 in connection with the Company’s 2005 sale of Kmart’s former corporate headquarters in Troy,
Michigan. Kmart recorded $946 million in gains on sales of assets during fiscal 2004 attributable to gains on
multiple agreements as discussed in the above review of consolidated results for fiscal 2004.
Kmart recorded restructuring charges of $9 million and $54 million during fiscal 2006 and fiscal 2005,
respectively. The charges were for relocation assistance and employee termination-related costs incurred in
connection with Holdings’ home office integration efforts initiated in fiscal 2005.
Operating income for fiscal 2006 increased compared to fiscal 2005, primarily as a function of improved
expense management, as well as lower restructuring charges, as noted above. The favorable impact on operating
income derived from these factors, as well as the $19 million gain recorded on the settlement of the Visa/
MasterCard antitrust litigation and the increased gains on assets sales, was partially offset by a decline in total
gross margin dollars, as a result of lower overall sales levels, and, to a lesser degree, increased depreciation and
amortization expense. Operating income for fiscal 2005 decreased compared to fiscal 2004 primarily due to
$906 million less in gains on the sale of assets realized in fiscal 2005 and, to a lesser degree, a decline in sales
and gross margin dollars, and restructuring charges of $54 million recorded in fiscal 2005, offset by lower selling
and administrative expense.
Sears Domestic
As noted above, the consolidated statement of income for Holdings includes Sears Domestic’s results only
for the period subsequent to March 24, 2005 for fiscal 2005, and does not include Sears Domestic’s results for
fiscal 2004. The Company believes that an understanding of its reported results and its ongoing financial
performance is not complete without presenting Sears Domestic’s results of operations on a pro forma basis for
fiscal 2005 and fiscal 2004. Accordingly, in addition to providing the reported results for fiscal 2006 and fiscal
2005, the presentation below also provides the results of operations on a pro forma basis for both fiscal 2005 and
fiscal 2004.
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