Sears 2008 Annual Report Download - page 26

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no comparable gains in fiscal 2007. We recorded $5 million of bankruptcy-related recoveries during fiscal 2008
as compared to $18 million of such recoveries in fiscal 2007. Bankruptcy-related recoveries represent amounts
collected from vendors who had received cash payment for pre-petition obligations. See Note 10 of Notes to
Consolidated Financial Statements for further information on bankruptcy claims resolution and settlements.
Income Taxes
Our effective tax rate in fiscal 2008 was 46.2% as compared to 37.9% in fiscal 2007. The increase in our tax
rate is primarily due to the fact that a portion of our impairment charge for goodwill is not deductible for tax
purposes. Income tax expense in 2008 also includes a benefit of $8 million related to the resolution of certain tax
matters.
Fiscal 2007 Compared to Fiscal 2006
Net Income
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 significant items,
net income was $806 million, or $5.56 per diluted share, in fiscal 2007.
Net income for fiscal 2006 was $1.5 billion, or $9.58 per diluted share. Fiscal 2006 results include the
impact of a $74 million ($45 million after tax or $0.29 per diluted share) gain derived from our investments in
total return swaps, $36 million ($22 million after tax or $0.14 per diluted share) related to the June 2006
settlement of Visa/MasterCard antitrust litigation, a tax benefit of $31 million ($0.20 per diluted share) related to
the resolution of certain income tax matters, restructuring charges of $28 million ($17 million after tax or $.09
per diluted share), a $41 million gain ($26 million after tax or $0.17 per diluted share) on the sale of Kmart’s
former headquarters building, and a charge of $74 million ($45 million after tax or $0.29 per diluted share)
related to an unfavorable verdict in connection with a pre-Merger legal matter concerning Sears Roebuck’s
redemption of certain bonds in 2004. Excluding significant items, net income was $1.4 billion, or $9.16 per
diluted share, in fiscal 2006.
The decrease in net income in fiscal 2007 reflects lower operating results at both Sears Domestic and Kmart,
partially offset by improved operating results at Sears Canada. 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.
We made a strategic decision in 2006 to begin fiscal 2007 with more inventory than we held in the past in
order to meet higher anticipated customer demand, based on the projected performance of several of our
businesses. The higher inventory investment coupled with the difficult economic environment led to a significant
increase in markdowns to clear product, especially seasonal product that has a shorter life than basic items. This
affected gross margin in two ways; both lower volume due to declining sales (a $2.3 billion sales decline over the
prior year) and a lower gross margin rate due to the increased markdowns (27.7% in fiscal 2007 compared to
28.7% in fiscal 2006).
Interest and investment income also declined during the year as we settled our investments in total return
swaps during the third quarter. The negative impact of these declines on our fiscal 2007 results was only partially
offset by declines in selling, general and administrative expenses, depreciation and amortization, income tax
expense (given lower levels of pre-tax income in fiscal 2007), and reduced interest expense (given lower average
outstanding borrowings).
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