Sears 2008 Annual Report Download - page 34

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Fiscal 2007 Compared to Fiscal 2006
Total Revenues and Comparable Store Sales
Merchandise sales and services revenues declined $1.4 billion, or 4.6%, to $27.8 billion for fiscal 2007, as
compared to total revenues of $29.2 billion for fiscal 2006. Total fiscal 2006 revenues benefited from $410
million in sales recorded during the 53rd week of the fiscal year. Excluding the impact of the 53rd week on sales in
fiscal 2006, total revenues declined $1.0 billion in fiscal 2007, with the decline primarily reflecting an aggregate
decrease in comparable store sales.
The 4.0% decline in comparable store sales during fiscal 2007 was due to declines across most categories
and formats, with more pronounced declines in the home appliance, lawn and garden, tools and apparel
categories, partially offset by increases within home electronics. We believe the sales increase in home
electronics reflected our gain in market share in this category, as well as increased market demand for flat-panel
televisions in 2007. Sales within the home appliance, lawn and garden and tools categories were weaker
throughout fiscal 2007, reflecting the impact of a weakening residential construction and housing market, as well
as decreased sales of weather-driven products, such as air conditioners, due to cooler than normal temperatures in
the first half of the year. With regard to apparel, we believe the decline in sales in 2007 reflects both the impact
of cooler temperatures in the spring and unseasonably warm weather during the fall on sales of our seasonal
apparel. As a result we had a low double digit decline in sales related to spring and fall apparel and double digit
increase in markdowns. We believe apparel was also affected by the decline in general economic conditions,
which affected sales of basic wear, including jeans, t-shirts and other everyday items.
Gross Margin
For fiscal 2007, Sears Domestic generated $8.3 billion in total gross margin, as compared to $9.1 billion in
fiscal 2006, with the $0.8 billion decline primarily reflecting the negative margin impact of lower overall sales
levels, as well as a decline in Sears Domestic’s gross margin rate for the year. Sears Domestic’s gross margin
rate was 29.6% in fiscal 2007, as compared to 31.0% in fiscal 2006, a decline of 1.4% as a percentage of total
revenues. Reduced leverage of buying and occupancy costs, given lower overall sales levels, accounted for
approximately 0.3% of the total 1.4% decline, with the remaining 1.1% 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, as well as appliances and other home improvement product inventory affected by the slowdown in the
housing market. The decline was also attributable to a higher proportion of sales of home electronics, which
traditionally have a lower margin rate.
Selling and Administrative Expenses
Total selling and administrative expenses declined $122 million in fiscal 2007. Sears Domestic’s selling and
administrative expense for fiscal 2006 included the favorable impact of a $17 million gain recorded in connection
with settlement of the Visa/MasterCard antitrust litigation, offset by the recognition of a $74 million liability in
the fourth quarter of fiscal 2006 in connection with a pre-Merger legal matter concerning Sears Roebuck’s
redemption of certain bonds in 2004. Excluding these items, the selling and administrative expenses declined $65
million in fiscal 2007. The reduction in selling and administrative expenses was due mainly to a reduction in
payroll and benefits expense, including lower performance-based compensation.
The selling and administrative expense rate was 24.1% for fiscal 2007 as compared to 23.4% for fiscal
2006. Consistent with the discussions of Holdings’ 2007 expenses above, while selling and administrative
expenses declined, the increase in the 2007 rate primarily reflects lower expense leverage against sales for this
fiscal year.
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