Sears 2008 Annual Report Download - page 23

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diluted share) related to goodwill and asset impairments, store closings and severance, of which $360 million
($201 million after tax or $1.57 per diluted share) relates to non-cash items. These charges were partially offset
by mark-to-market gains on Sears Canada hedge transactions of $81 million ($33 million after tax and minority
interest or $0.26 per diluted share), the positive impact of the reversal of a $62 million ($37 million after tax or
$0.29 per diluted share) reserve because of the overturning of an adverse jury verdict relating to the redemption
of certain Sears, Roebuck and Co. bonds in 2004, a tax benefit of $8 million ($0.06 per diluted share) related to
the resolution of certain income tax matters, and gains on negotiated repurchases of debt securities prior to
maturity of $13 million ($8 million after tax or $0.06 per diluted share). Excluding the significant items above,
net income was $215 million, or $1.69 per diluted share, for the full year in fiscal 2008.
Net income for fiscal 2007 was $826 million, or $5.70 per diluted share. Fiscal 2007 results include the
impact of a gain of $19 million ($12 million after tax or $0.08 per diluted share) for insurance recoveries
received on hurricane claims filed for certain of our property damaged by hurricanes during fiscal 2005 and a
curtailment gain of $27 million ($17 million after tax or $0.12 per diluted share) related to certain amendments
made to Sears Canada’s post-retirement benefit plans. These gains were partially offset by losses of $14 million
($9 million after tax or $0.06 per diluted share) on our total return swap investments. Excluding the significant
items above, net income was $806 million, or $5.56 per diluted share, in fiscal 2007.
Excluding the items noted above, net income decreased $591 million during fiscal 2008. The decrease in net
income for the year reflects a decrease in operating income of $1.3 billion (or $863 million excluding the impact
of certain items noted above), primarily due to lower operating income at Kmart and Sears Domestic, as well as
slightly lower operating income at Sears Canada. The decrease in net income was also due to lower interest and
investment income, partially offset by lower income tax expense.
Declines in the operating results of Sears Domestic and Kmart are primarily the result of a decline in gross
margin across most major merchandise categories, reflecting both sales declines as well as an overall decline in
our gross margin rate for the year due to increased markdowns taken across most merchandise categories and
reduced leverage of buying and occupancy costs. During 2008, we made a concerted effort to reduce our
inventory levels due to the deterioration of the economic climate in the latter half of 2007 and what we
anticipated to be a higher risk environment in 2008.
Total Revenues and Comparable Store Sales
Total revenues for fiscal 2008 were $46.8 billion, as compared to revenues of $50.7 billion for fiscal 2007.
The decline in revenues of $3.9 billion is primarily due to a $2.5 billion decline at Sears Domestic, a $1.0 billion
decline at Kmart, and a $366 million decline at Sears Canada, which includes a decrease of $96 million related to
the impact of exchange rates during fiscal 2008. Exchange rates did not have as significant an impact on the
results of Sears Canada in 2008 as compared to 2007, as rates were less volatile during the current year. The
decrease in fiscal 2008 revenues as compared to fiscal 2007 was primarily due to the impact of lower comparable
store sales at Kmart and Sears Domestic.
Fiscal 2008 domestic comparable store sales were down 8.0% in the aggregate, with Sears Domestic
declining 9.5% and Kmart declining 6.1%. In fiscal 2008, declines were experienced across most major
merchandise categories. Domestic comparable store sales declines continue to be driven by categories most
directly impacted by housing market conditions (including a high single digit percentage decline in home
appliances at Sears Domestic) and a slowdown in consumers’ discretionary spending (including a high single
digit percentage decline in home goods, a mid single digit percentage decline in apparel at Kmart, high single
digit percentage declines in home and household goods at Sears Domestic, and a low double digit percentage
decline in apparel, tools, and lawn and garden at Sears Domestic). If the overall retail environment continues to
be impacted by unfavorable economic factors, our sales will likely continue to be pressured in fiscal 2009.
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