Sears 2008 Annual Report Download - page 31

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Selling and Administrative Expenses
For fiscal 2007, Kmart’s selling and administrative expense rate was 20.5%, as compared to 19.4% for fiscal
2006. Fiscal 2006 selling and administrative expenses included a $19 million gain, representing Kmart’s portion
of the settlement in the Visa/MasterCard antitrust litigation. Excluding this gain, Kmart’s selling and
administrative expense rate was 19.5% for fiscal 2006. While total selling and administrative expenses declined
$86 million in fiscal 2007, the current year selling and administrative rate increased, reflecting lower expense
leverage against sales for the year. The reduction in selling and administrative expenses was due mainly to a
reduction in payroll and benefits expense, including lower performance-based compensation. The reduction in
payroll and benefits expense was offset by small increases in a number of other categories.
Gains on Sales of Assets
Kmart recorded $1 million and $71 million in gains on sales of assets during fiscal 2007 and fiscal 2006,
respectively. Gains recorded on sales of assets in fiscal 2006 included a $41 million gain recognized in
connection with our 2005 sale of Kmart’s former corporate headquarters in Troy, Michigan.
Restructuring Charges
Kmart recorded restructuring charges of $9 million during fiscal 2006. The charges were for relocation
assistance and employee termination-related costs incurred in connection with Holdings’ home office integration
efforts initiated in fiscal 2005. No such charges were recorded in fiscal 2007.
Operating Income
Operating income was $402 million in fiscal year 2007, as compared to operating income of $948 million in
fiscal 2006, a decline of $546 million. As discussed above, declines primarily reflect the negative gross margin
impact of lower sales levels, as well as a decline in Kmart’s gross margin rate in 2007 as a result of markdowns
taken to clear excess levels of inventory. In addition to the above-noted decline in gross margin, the decline
reflects, to a lesser degree, the impact of higher depreciation and amortization expense, and lower gains on sales
of assets in fiscal 2007, partially offset by the favorable impact of lower selling and administrative expenses and
a decrease in restructuring costs.
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