Sears 2008 Annual Report Download - page 25

fixed assets associated with our stores) due to events and changes in circumstances during the third quarter of
2008 that indicated an impairment might have occurred. The impairment review was triggered by the increased
severity of the economic turmoil and weakening in the U.S. economy during the third quarter, which had a
negative impact on the performance of our stores. As a result of this review, we recorded an impairment charge
of $76 million during the third quarter of fiscal 2008. This impairment charge includes a charge for the 22 stores
that we decided to close in the third quarter and early fourth quarter of fiscal 2008. We also recorded a $22
million impairment charge related to the property and equipment at 24 stores we decided to close in January
2009.
During the fourth quarter of 2008, we performed our annual impairment test of goodwill and intangible
assets pursuant to SFAS No. 142 “Goodwill and Other Intangible Assets.” As a result of our tests, we recorded
an impairment charge of $262 million related to the fair value of goodwill associated with our Orchard Supply
Hardware (“OSH”) subsidiary. SFAS No. 142 requires interim tests for impairment of goodwill and intangible
assets be performed should indicators of such an impairment arise as a result of changes in existing business
conditions. We did not perform an interim test of goodwill during fiscal 2008 as we did not have any indicators
of potential impairment prior to the fourth quarter.
See Notes 1 and 14 in Notes to Consolidated Financial Statements, as well as the discussion of our critical
accounting policies and estimates below, for further information on the $360 million of impairment charges we
recorded during fiscal 2008.
Operating Income
We reported operating income of $302 million in fiscal 2008, as compared to operating income of $1.6
billion for fiscal 2007. Excluding the effects of one-time charges discussed above, operating income declined
$863 million in fiscal 2008 as compared to fiscal 2007, mainly due to lower gross margin dollars, partially offset
by a decrease in selling and administrative expense, as well as lower depreciation and amortization expense.
Interest and Investment Income
We earned $46 million in interest and investment income in fiscal 2008, as compared to $135 million in
fiscal 2007. Interest and investment income for fiscal 2008 is mainly comprised of a dividend of $10 million
from our investment in Sears Mexico and interest income of $25 million. Interest and investment income for
fiscal 2007 was mainly comprised of a dividend of $20 million from Sears Mexico and interest income of $107
million, partially offset by investment losses of $14 million on total return swaps outstanding during the fiscal
year ended February 2, 2008. There were no total return swaps outstanding during the 2008 fiscal year. The
decrease in interest income in fiscal 2008 is primarily due to lower overall cash and cash equivalent balances
maintained during the first three quarters of fiscal 2008 as compared to the same period in fiscal 2007.
Interest Expense
We incurred $272 million in interest expense during fiscal 2007, as compared to $286 million last year. The
reduction in interest expense is mainly the result of a reduction in long-term borrowings and lower short-term
interest rates, partially offset by an increase in the amount of short-term borrowings under our revolving credit
facility.
Other Income
Other income in fiscal 2008 is primarily comprised of mark-to-market gains on Sears Canada hedge
transactions. Total net gains of $81 million were recorded on these transactions in fiscal 2008. Other income also
includes gains on negotiated repurchases of debt securities prior to their maturity and bankruptcy-related
recoveries. We recorded $13 million in gains related to the repurchases of debt securities in fiscal 2008. We had
25