Sears 2009 Annual Report Download - page 33

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Gross Margin
Sears Domestic’s gross margin dollars declined $212 million to $7 billion in 2009. The decline was mainly
a result of the impact of lower overall sales on Sears Domestic’s gross margin and included a $10 million charge
recorded in cost of sales for margin related expenses taken in connection with store closings. Sears Domestic’s
gross margin for 2008 included a $21 million charge for markdowns recorded in connection with store closings.
Sears Domestic’s gross margin rate was 29.7% in fiscal 2009 and 28.6% in fiscal 2008, an increase of 110 basis
points. The increase in gross margin rate was mainly the result of improvements in merchandise cost and reduced
clearance markdowns as a result of better inventory management.
Selling and Administrative Expenses
Sears Domestic’s selling and administrative expenses decreased $195 million to $6.2 billion in fiscal 2009,
with the decrease mainly reflecting a focus on controlling costs. The decrease includes a reduction in payroll and
benefits expense of $148 million, a reduction in advertising expenses of $82 million, and was offset by slight
increases in various other expense categories. Selling and administrative expenses for 2009 were impacted by
domestic pension plan expense of $170 million, store closing costs and severance of $39 million, and a $15
million gain related to settlement of Visa/MasterCard antitrust litigation. Selling and administrative expenses for
2008 were impacted by the positive impact of the reversal of a $62 million reserve because of a favorable verdict
in connection with a legal settlement and a $29 million charge related to store closing and severance.
Our selling and administrative expense rate was 26.3% for fiscal 2009 and 25.3% for fiscal 2008. The
increase in our selling and administrative expense rate is primarily the result of the significant items noted above.
Depreciation and Amortization
Depreciation and amortization expense decreased by $52 million to $672 million during fiscal 2009. The
decrease is primarily attributable to having fewer assets available for depreciation.
Impairment Charges
We recorded impairment charges of $339 million during fiscal 2008 related to impairment of goodwill and
long-lived assets. We did not record any such impairments in fiscal 2009. Impairment charges recorded during
fiscal 2008 are further described in our discussion of “Fiscal 2008 Compared to Fiscal 2007” and our discussion
of critical accounting policies in Note 14 in Notes to Consolidated Financial Statements.
Operating Income
Sears Domestic reported operating income of $133 million in fiscal 2009 and an operating loss of $237
million in fiscal 2008. The increase in Sears Domestic’s operating results was primarily the result of the above
noted significant items and reductions in selling and administrative expenses, partially offset by lower gross
margin dollars given lower overall sales. Operating income in 2009 includes expenses of $228 million related to
domestic pension plans and store closings and severance, as well as a $15 million gain related to settlement of
Visa/MasterCard antitrust litigation. The operating loss for 2008 includes the above-noted impairment and store
closing charges of $389 million and the positive impact of the reversal of a $62 million reserve because of a
favorable verdict in connection with a pre-merger legal matter.
Fiscal 2008 Compared to Fiscal 2007
Total Revenues and Comparable Store Sales
Merchandise sales and services revenues declined $2.5 billion, or 9.1%, to $25.3 billion for fiscal 2008 from
$27.8 billion for fiscal 2007. The decline in fiscal 2008 was due primarily to an aggregate 9.5% decrease in
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