Sears 2007 Annual Report Download - page 30

Download and view the complete annual report

Please find page 30 of the 2007 Sears annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 110

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110

Domestic’s home services and Lands’ End businesses contributed to the overall improved gross margins for
Holdings during fiscal 2006. As was the case within other apparel businesses during fiscal 2006, the
improvement in Lands’ End’s gross margin reflected more extensive and effective use of direct-sourced
merchandise, as well as the favorable impact of pricing initiatives and stronger in-season sales results.
The selling and administrative expense rate was 21.8% in fiscal 2006, as compared to 22.0% (reported) and
22.4% (pro forma) for fiscal 2005. The fiscal 2006 improvement primarily reflects improved expense
management, with the most notable improvements made at Sears Canada due in part to the sale of Sears
Canada’s Credit and Financial Products business in late fiscal 2005.
Depreciation and amortization was $1.1 billion for fiscal 2006, as compared to $0.9 billion (reported) and
$1.1 billion (pro forma) for fiscal 2005. The increased expense for fiscal 2006, as compared to the reported
expense for fiscal 2005, was primarily attributable to the inclusion of Sears for the entire year in fiscal 2006.
Gains on sales of assets were $82 million in fiscal 2006, as compared to $39 million (reported) and
$40 million (pro forma) for fiscal 2005. The increase in fiscal 2006 was primarily attributable to a $41 million
pre-tax gain recognized in 2006 in connection with the 2005 sale of our former Kmart headquarters in Troy,
Michigan.
Fiscal 2005 included a $317 million gain on sale of business, which reflected a minority interest gain on the
sale of Sears Canada’s Credit and Financial Services operations in November 2005. This gain had no impact on
Holdings’ net income as our entire impact was offset by increased minority interest expense. See Note 5 of Notes
to Consolidated Financial Statements for further detail.
Restructuring charges were $28 million and $111 million (reported and pro forma) for fiscal 2006 and fiscal
2005, respectively. These charges included charges of $19 million and $57 million in fiscal 2006 and fiscal 2005,
respectively, for employee-related termination costs associated with Sears Canada restructuring initiatives
implemented during fiscal 2005, including a workforce reduction of approximately 1,200 associates, as well as
$9 million and $54 million in fiscal 2006 and fiscal 2005, respectively, at Kmart for relocation assistance and
employee termination-related costs associated with Holdings’ home office integration efforts. See Note 6 of
Notes to Consolidated Financial Statements for further detail.
For fiscal 2006, interest and investment income was $253 million, as compared with $130 million (reported)
and $159 million (pro forma) in fiscal 2005. The increased interest and investment income in fiscal 2006 was
primarily due to total return swap income recognized during the year.
Other income is primarily comprised of bankruptcy-related recoveries. Bankruptcy-related recoveries
decreased $26 million in fiscal 2006 and represent amounts recovered from vendors who had received cash
payment for pre-petition obligations. See Note 13 of Notes to Consolidated Financial Statements for further
detail. The impact of lower bankruptcy-related recoveries in fiscal 2006 as compared with fiscal 2005 was
partially offset by increased income recorded relative to foreign currency forward contracts for which hedge
accounting was not applied. See Note 8 of Notes to Consolidated Financial Statements for further details.
The effective tax rate increased to 37.8% in fiscal 2006 from 36.4% in fiscal 2005, with the increase
primarily attributable to the fact that the effective rate in fiscal 2005 benefited from the November 2005 sale of
Sears Canada’s Credit and Financial Services business being taxed at a capital gains rate, lowering the effective
tax rate for fiscal 2005.
Effective January 27, 2005, we determined that it would be preferable to conform one of the accounting
practices utilized by Kmart to that of Sears. We changed our method of accounting for certain indirect overhead
costs from inventoriable costs to period expenses. In accordance with Accounting Principles Board Opinion
No. 20, “Accounting Changes,” a change in accounting policy to conform the acquirer’s policy to that of the
30