Sears 2010 Annual Report Download - page 26

Gross Margin
We generated $12.2 billion in gross margin in 2009 and $12.7 billion in 2008. The total decline of $433
million primarily reflects the impact of lower overall sales on our gross margin and includes a $50 million
decline related to the impact of foreign currency exchange rates on gross margin at Sears Canada. Our gross
margin was also impacted by charges of $37 million and $36 million recorded in cost of sales for margin related
expenses taken in connection with store closings announced during 2009 and 2008, respectively.
While gross margin dollars declined, our margin rate increased 60 basis points to 27.7% in 2009 from
27.1% for 2008. The increase was a result of improvements in margin rate of 110 basis points at Sears Domestic,
20 basis points at Kmart, and 90 basis points at Sears Canada. Increases in our margin rate stem from
improvements in merchandise cost and reduced clearance markdowns as a result of better inventory
management.
Selling and Administrative Expenses
Our selling and administrative expenses decreased $406 million in 2009 to $10.7 billion, with the decrease
mainly reflecting our focus on controlling costs given the economic environment. The decrease includes a $187
million reduction in payroll and benefits expense, a $180 million reduction in advertising expense, a $53 million
reduction in insurance expense, and a decrease of $27 million related to the impact of foreign currency exchange
rates. Selling and administrative expenses for 2009 were impacted by domestic pension plan expense of $170
million and store closing costs and severance of $82 million, partially offset by a gain of $32 million recorded in
connection with the settlement of Visa/MasterCard antitrust litigation. Selling and administrative expenses for
2008 were impacted by a $41 million charge related to store closing and severance, as well as the positive impact
of the reversal of a $62 million reserve because of a favorable verdict in connection with a legal settlement.
Selling and administrative expenses as a percentage of total revenues (“selling and administrative expense
rate”) were 24.2% for 2009 and 23.6% for 2008. The increase in our selling and administrative expense rate is
primarily the result of the above noted significant items, as well as lower expense leverage given lower overall
sales.
Depreciation and Amortization
Depreciation and amortization expense decreased by $55 million during 2009 to $926 million. The decrease
is primarily attributable to having fewer assets available for depreciation.
Impairment Charges
We recorded impairment charges of $360 million during 2008 related to impairment of goodwill and long-
lived assets. We did not record any such impairments in 2009. Impairment charges recorded during 2008 are
further described in Note 14 in Notes to Consolidated Financial Statements.
Gain on Sales of Assets
We recorded a total gain on the sales of assets of $74 million during 2009 and $51 million in 2008. The
increase in gains on sales of assets was due to a $44 million gain recognized by Sears Canada on the sale of its
former headquarters, as well as $13 million related to the sale of pharmacy lists for Kmart stores closed during
the year. Gains on sales of assets in 2008 included a $32 million gain on the sale of Sears Canada’s Calgary
downtown full-line store.
Sears Canada sold its headquarters office building and adjacent land in Toronto, Ontario in August 2007.
Sears Canada leased back the property under a leaseback agreement through March 2009, at which time it
finished its relocation of all head office operations to previously underutilized space in the Toronto Eaton Centre,
Ontario. Given the terms of the leaseback, for accounting purposes, the excess of proceeds received over the
carrying value of the associated property was deferred, and the resulting gain was recognized when Sears Canada
no longer occupied the associated property.
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