Sears 2009 Annual Report Download - page 28

The remaining 40 basis point decline was primarily the result of a decline in gross margin rate at Sears
Domestic, which declined mainly due to increased markdown activity across most merchandise categories. The
impact of increased markdowns on Sears Domestic throughout fiscal 2008 was somewhat mitigated by fewer
markdowns taken in the seasonal and winter apparel category during the fourth quarter of 2008 as our purchases
of merchandise were more consistent with the sales trends.
Selling and Administrative Expenses
Selling and administrative expenses decreased $408 million to $11.1 billion during fiscal 2008. The
decrease includes a $259 million reduction in payroll and benefits expense, as well as a $94 million reduction in
advertising expense. Fiscal 2008 selling and administrative expenses include a $41 million charge related to store
closing and severance reserves and the positive impact of the reversal of a $62 million reserve because of a
favorable verdict in connection with a legal settlement. Fiscal 2007 selling and administrative expenses include a
$27 million curtailment gain recorded in connection with changes made to Sears Canada’s benefit plans and a
$19 million gain related to insurance recoveries for certain Sears Domestic properties damaged by hurricanes
during fiscal 2005.
Our selling and administrative expense rate was 23.6% in fiscal 2008 and 22.6% for fiscal 2007. While we
took a number of actions to decrease our expenses during 2008, the selling and administrative expense rate
increased, primarily reflecting lower expense leverage resulting from lower overall sales levels.
Depreciation and Amortization
Depreciation and amortization expense decreased by $68 million to $981 million during fiscal 2008. The
decrease was primarily attributable to additional property and equipment becoming fully depreciated during the
year, thereby decreasing our depreciable asset base.
Impairment Charges
In accordance with accounting standards governing the impairment or disposal of long-lived assets, we
performed an impairment test of certain of our long-lived assets (principally the value of buildings and other
fixed assets associated with our stores) due to events and changes in circumstances during the third quarter of
2008 that indicated an impairment might have occurred. The impairment review was triggered by the increased
severity of the economic turmoil and weakening in the U.S. economy during the third quarter of 2008, which had
a negative impact on the performance of our stores. As a result of this review, we recorded an impairment charge
of $76 million during the third quarter of fiscal 2008. This impairment charge includes a charge for the 22 stores
that we decided to close in the third quarter and early fourth quarter of 2008. We also recorded a $22 million
impairment charge related to the property and equipment at 24 stores we decided to close in January 2009.
During the fourth quarter of 2008, we performed our annual impairment test of goodwill and intangible
assets pursuant to accounting standards governing goodwill and other intangible assets. As a result of our tests,
we recorded an impairment charge of $262 million related to the fair value of goodwill associated with our OSH
subsidiary. Accounting standards require interim tests for impairment of goodwill and intangible assets be
performed should indicators of such an impairment arise as a result of changes in existing business conditions.
We did not perform an interim test of goodwill during fiscal 2008 as we did not have any indicators of potential
impairment prior to the fourth quarter.
See Note 14 in Notes to Consolidated Financial Statements for further information regarding the $360
million of impairment charges we recorded during fiscal 2008.
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