Sears 2008 Annual Report Download - page 33

Selling and Administrative Expenses
Selling and administrative expenses declined $283 million during fiscal 2008 and includes a $29 million
charge related to store closing and severance reserves, the positive impact of the reversal of a $62 million reserve
because of a favorable verdict in connection with a pre-Merger legal matter concerning Sears’ redemption of
certain bonds in 2004, as well as insurance proceeds of $23 million related to a Sears, Roebuck and Co. matter
from March 2000. Selling and administrative expenses for fiscal 2007 include a gain of $19 million for insurance
recoveries received on claims filed for certain property damaged by hurricanes during fiscal 2005. Excluding
these items, selling and administrative expenses decreased $246 million in fiscal 2008 as compared to the same
period in fiscal 2007.
The reduction in selling and administrative expenses is due to a reduction in payroll expenses of $192
million, as well as a decrease in advertising costs of $56 million. For fiscal 2008, Sears Domestic’s selling and
administrative expense rate was 25.3%, as compared to 24.1% for fiscal 2007. The increase in the selling and
administrative expense rate for fiscal 2008 primarily reflects the impact of lower expense leverage given lower
overall sales results.
Depreciation and Amortization
Depreciation and amortization expense decreased by $78 million during fiscal 2008 as compared to the
same period in fiscal 2007. The decrease in fiscal 2008 is primarily attributable to additional property and
equipment becoming fully depreciated during the year, thereby decreasing our depreciable asset base.
Impairment Charges
Sears Domestic recorded an impairment charge of $56 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 $21 million during the fourth quarter of 2008
related to our decision to close additional Sears Domestic stores in January 2009. 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 regarding impairment charges.
We performed our annual goodwill and intangible assets impairment test in accordance with SFAS No. 142
“Goodwill and Other Intangible Assets” during the fourth quarter of fiscal 2008. The goodwill impairment test
involves a two-step process as described in the “Summary of Significant Accounting Policies” in Note 1 below.
The first step is a comparison of each reporting unit’s fair value to its carrying value. If the carrying value of the
reporting unit is higher than its fair value, there is an indication that impairment may exist and the second step
must be performed to measure the amount of impairment loss. As a result of impairment analysis, we determined
that the entire amount of goodwill recorded at Sears Domestic’s subsidiary, OSH, was impaired and recorded a
charge of $262 million. See Note 14 to the Consolidated Financial Statements for further information regarding
impairment charges.
Operating Income (Loss)
Sears Domestic recorded an operating loss of $237 million in fiscal 2008, as compared to operating income
of $784 million in fiscal 2007, a decline of $1.0 billion. Excluding the above-noted significant items, operating
income declined $698 million and primarily reflects lower total gross margin dollars generated as a result of
lower overall sales levels and a decline in gross margin rate, partially offset by a reduction in selling and
administrative expenses.
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