Sears 2009 Annual Report Download - page 34

comparable store sales. Comparable store sales declines were primarily driven by declines recorded in the
apparel, tools and lawn and garden categories, and to a lesser degree by declines in the home appliances and
household goods categories.
Gross Margin
Sears Domestic generated $7.2 billion in total gross margin for fiscal 2008 and $8.3 billion in fiscal 2007, a
decline of $1.1 billion. The decline primarily reflects the negative margin impact of lower overall sales levels, as
well as a decline in Sears Domestic’s gross margin rate for the year, and includes a $21 million charge recorded
in cost of sales for margin related expenses taken in connection with store closings. Sears Domestic’s gross
margin rate was 28.6% in fiscal 2008 and 29.6% in fiscal 2007, a decline of 100 basis points.
Reduced leverage of buying and occupancy costs, given lower overall sales levels, accounted for
approximately 10 basis points of the total decline in fiscal 2008, with the remaining 90 basis point decline
attributable to gross margin rate declines across a number of merchandise categories, most notably home
appliances and apparel. While we tightly managed inventory levels all year, with the goal of reducing inventory
to below last year’s levels, the economic environment resulted in increased markdowns, which was the primary
reason for the remaining 90 basis point decline in Sears Domestic’s gross margin rate. Gross margin rate
decreases in the apparel category were mainly the result of markdowns taken to clear seasonal merchandise. The
decline in gross margin rate for Sears Domestic was not as great during the fourth quarter of fiscal 2008 as
purchases of seasonal and winter apparel became more consistent with current sales trends.
Selling and Administrative Expenses
Selling and administrative expenses declined $283 million during fiscal 2008, which includes a reduction in
payroll expenses of $192 million, as well as a decrease in advertising costs of $56 million. Fiscal 2008 selling
and administrative expenses include 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 legal
settlement, 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.
Sears Domestic’s selling and administrative expense rate was 25.3% for fiscal 2008 and 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 to $724 million during fiscal 2008. 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 in accordance with accounting standards governing 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 14 in Notes to Consolidated Financial Statements for further information regarding impairment charges.
During the fourth quarter of fiscal 2008, we performed our annual goodwill and intangible assets
impairment pursuant to accounting standards governing goodwill and other intangible assets. The goodwill
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