Sears 2008 Annual Report Download - page 30

Depreciation and Amortization
Depreciation and amortization expense increased by $22 million in fiscal 2008 as compared to the same
period in fiscal 2007. The increase in expense is due to the addition of property and equipment in the Kmart
segment during the year.
Impairment Charges
Kmart recorded an impairment charge of $20 million during the third quarter of fiscal 2008 in connection
with impairment testing performed under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-
Lived Assets.” We recorded an additional impairment of $1 million during the fourth quarter of 2008 related to
our decision to close additional Kmart stores in January 2009. See Note 14 to the Consolidated Financial
Statements for further information regarding impairment charges.
Operating Income
Operating income was $172 million in fiscal year 2008, as compared to operating income of $402 million in
fiscal 2007, a decline of $230 million. As discussed above, declines primarily reflect the negative gross margin
impact of lower sales levels, as well as a slight decline in Kmart’s gross margin rate in 2008. In addition to the
above-noted decline in gross margin, the decline in operating income reflects, to a lesser degree, the impact of
$48 million of charges recorded in connection with store closings, severance and fixed asset impairments in
2008.
Fiscal 2007 Compared to Fiscal 2006
Total Revenues and Comparable Store Sales
Comparable store sales and total sales decreased 4.7% and 7.5%, respectively, during fiscal 2007. Total
sales for the 52 weeks in fiscal 2007 decreased 7.5%, or $1.4 billion, compared to the 53 weeks in fiscal 2006,
mainly due to the macroeconomic factors discussed previously. The decrease includes a decline related to the
impact of sales recorded during the 53rd week of fiscal year 2006 in the amount of $301 million. The remaining
decline in sales in fiscal 2007 was due to lower comparable store sales.
The 4.7% decline in Kmart comparable store sales during fiscal 2007 compares to a 0.6% decline in
comparable store sales recorded for fiscal 2006. The decline in comparable store sales during fiscal 2007 was
recorded across most categories, with more pronounced declines within the lawn and garden, home appliance,
apparel, drug store and general merchandise categories. Sales within lawn and garden, as well as home
appliances, were weaker throughout fiscal 2007, reflecting the impact of a weakening residential construction
and housing market. Apparel and general merchandise was affected by the decline in general economic
conditions, which affected sales of basic wear, including jeans, t-shirts and other everyday items. The decline in
apparel sales in 2007 also reflects the impact of weather on sales of our seasonal apparel, which resulted in a mid
single digit decline in sales related to fall apparel. Drug store sales were impacted by increased competition.
Gross Margin
Kmart generated $4.1 billion in total gross margin in fiscal 2007, as compared to $4.6 billion in fiscal 2006,
with the $0.5 billion decline reflecting the negative gross margin impact of lower overall sales, as well as a
decline in Kmart’s gross margin rate. For fiscal 2007, Kmart’s gross margin rate was 23.5% as compared to
24.6% for fiscal 2006, a decline of 1.1%. Reduced leverage of buying and occupancy costs, given lower overall
sales levels, accounted for approximately 0.6% of the total 1.1% decline, with the remaining 0.5% decline
attributable to gross margin rate declines across a number of merchandise categories, most notably in the apparel
and home categories. Increased markdowns had a negative impact on our margins in these categories as we made
efforts to clear excess seasonal apparel, lawn and garden and other home product inventory affected by the
slowdown in the housing market.
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