Sears 2008 Annual Report Download - page 24

Gross Margin
Gross margin declined from $14.1 billion in fiscal 2007 to $12.7 billion in fiscal 2008. The decline of $1.4
billion 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. Gross margin also includes
a charge of $36 million for markdowns recorded in connection with store closings announced during the third
and fourth quarters of fiscal 2008.
Gross margin as a percentage of merchandise sales and services revenue (“gross margin rate”) was 27.1% in
fiscal 2008, as compared to 27.7% in fiscal 2007. The 60 basis point decline consisted of a 100 basis point
decline at Sears Domestic and a 20 basis point decline at Kmart, partially offset by an increase of 10 basis points
at Sears Canada. Our buying and occupancy costs are relatively fixed in nature, and therefore did not decrease as
much as sales decreased during 2008. Reduced leverage of buying and occupancy costs, given lower overall sales
levels in fiscal 2008, accounted for approximately 20 basis points of the total decline in our gross margin rate in
fiscal 2008.
The remaining 40 basis point decline was primarily the result of a decline in gross margin rate at Sears
Domestic, which declined mainly due to increased markdown activity across most merchandise categories. The
impact of increased markdowns on Sears Domestic throughout the year was somewhat mitigated by fewer
markdowns taken in the seasonal and winter apparel category during the fourth quarter of fiscal 2008 as our
purchases of merchandise were more consistent with the sales trends.
Selling and Administrative Expenses
Selling and administrative expenses decreased $408 million during fiscal 2008 as compared to fiscal 2007.
Fiscal 2008 selling and administrative expenses include a $41 million charge related to store closing and
severance reserves and the positive impact of the reversal of a $62 million reserve because of the overturning of
an adverse jury verdict relating to the redemption of certain Sears, Roebuck and Co. bonds in 2004. Fiscal 2007
selling and administrative expenses include a $27 million curtailment gain recorded in connection with changes
made to Sears Canada’s benefit plans and a $19 million gain related to insurance recoveries for certain Sears
Domestic properties damaged by hurricanes during fiscal 2005. Excluding the impact of these items, selling and
administrative expenses decreased $433 million during fiscal 2008 mainly due to a $259 million reduction in
payroll and benefits expense, as well as a $94 million reduction in advertising expense.
Selling and administrative expenses as a percentage of total revenues (“selling and administrative expense
rate”) were 23.6% in fiscal 2008, as compared to 22.6% for fiscal 2007. While total selling and administrative
expenses were reduced in fiscal 2008, the current year selling and administrative expense rate increased,
primarily reflecting lower expense leverage resulting from lower overall sales levels.
Throughout 2008 we took a number of actions to decrease our expenses and in the fourth quarter of 2008 we
announced that we were suspending the Company contribution to the 401(k) plan in fiscal year 2009. We plan to
pursue additional expense reductions in fiscal 2009.
Depreciation and Amortization
Depreciation and amortization expense decreased by $68 million during fiscal 2008 as compared to fiscal
2007. The decrease is primarily attributable to additional property and equipment becoming fully depreciated
during the year, thereby decreasing our depreciable asset base.
Impairment Charges
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we
performed an impairment test of certain of our long-lived assets (principally the value of buildings and other
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