Sears 2007 Annual Report Download - page 27

Total revenues for fiscal 2007 were $50.7 billion, as compared to revenues of $53.0 billion for fiscal 2006.
The decrease in fiscal 2007 revenues as compared to fiscal 2006 was primarily due to the above-noted impact of
lower domestic comparable store sales, and to a lesser degree, the inclusion of an additional week of sales in
fiscal 2006 (comprised of 53 weeks) as compared to fiscal 2007 (comprised of 52 weeks). We recorded a total of
$711 million in revenues during the 53rd week of fiscal 2006. Theses declines were partially offset by sales
increases at Sears Canada, primarily reflecting the impact of favorable exchange rates, as the Canadian dollar
strengthened in fiscal 2007.
As we noted previously, we took specific actions in 2007 to make our products, brands and service offerings
more responsive to the needs of our customers and thereby improve the trend in domestic sales results in the
future. The benefits derived from our efforts may be mitigated by continued weakness in the general economy, in
addition to the impact of continued market share pressure as competitors engage in heavy promotional activity.
We expect these competitive trends to continue in the foreseeable future, which may negatively affect both our
sales performance and results of operations.
Gross Margin Rate
Gross margin as a percentage of merchandise sales and services revenue (“gross margin rate”) was 27.7% in
fiscal 2007, as compared to 28.7% in fiscal 2006. The 100 basis point decline consisted of declines at both Kmart
and Sears Domestic, offset by an increase at Sears Canada.
Our gross margin rate decreased across most domestic merchandise categories during fiscal 2007 primarily
due to increased markdown activity, partially offset by increases in initial markons as a result of improved direct
sourcing, contract negotiations and pricing efforts. Increased markdowns were taken throughout the year to clear
higher levels of inventory, most notably within categories which are more seasonal in nature such as apparel and
lawn and garden. Increased markdowns in seasonal apparel categories also resulted from the unfavorable impact
of unseasonably warm weather prevalent during much of the fall in fiscal 2007. As noted previously, we
experienced increased sales of consumer electronics during the year; however, these products have lower average
margins which negatively impacted the overall margin rate of Holdings for fiscal 2007. Additionally, our buying
and occupancy costs are relatively fixed in nature, and therefore did not decrease as sales decreased during 2007.
As a result, buying and occupancy costs were not absorbed by sales at the same rate as in 2006 and contributed
40 basis points to the total decline in margin of 100 basis points during the year.
Selling and Administrative Expense Rate
Selling and administrative expenses as a percentage of total revenues (“selling and administrative expense
rate”) were 22.6% in fiscal 2007, as compared to 21.8% for fiscal 2006. While total selling and administrative
expenses declined $106 million in fiscal 2007, mainly as the result of reduced payroll and benefits expense,
including lower performance-based compensation, the current year selling and administrative rate increased,
primarily reflecting lower expense leverage resulting from lower overall sales levels.
Interest and Investment Income
We recorded interest and investment income of $135 million in fiscal 2007, as compared with $253 million
in fiscal 2006. The decreased interest and investment income in fiscal 2007 was primarily due to total return
swap losses of $14 million recognized in the current year as compared to total return swap income of $74 million
recognized in fiscal 2006. Additionally, we earned less interest income during 2007 due to decreases in cash
balances throughout the year. These declines were partially offset by a $20 million dividend received from our
investment in Sears Mexico.
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