Sears 2010 Annual Report Download - page 29

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Depreciation and Amortization
Depreciation and amortization expense decreased $3 million in 2010 to $149 million. The decrease is
primarily attributable to having fewer assets available for depreciation.
Operating Income
Kmart recorded operating income of $353 million in 2010 and $190 million in 2009. Operating income
increased due to the improved margin rate and decreased selling and administrative expenses noted above.
Kmart’s operating income for 2010 includes expenses of $13 million related to store closings and severance.
Kmart’s operating income for 2009 includes expenses of $65 million related to store closings and severance,
partially offset by a $17 million gain related to settlement of Visa/MasterCard antitrust litigation.
2009 Compared to 2008
Revenues and Comparable Store Sales
Kmart’s comparable store sales and total sales declined 0.8% and 2.9%, respectively, in 2009. The decline
in total revenues primarily reflects the impact of having 41 fewer stores in operation. The 0.8% decline in Kmart
comparable store sales during 2009 was primarily driven by declines in the apparel and food and consumables
categories. This decline was partially offset by the benefit of assuming the operations of its footwear business
from a third party effective January 2009, as well as an increase in the toys category.
Gross Margin
Kmart generated $3.7 billion in gross margin in 2009 and $3.8 billion in 2008. The $72 million decline is
mainly a result of the impact of lower overall sales on Kmart’s gross margin and includes a $27 million charge
recorded in cost of sales for margin related expenses taken in connection with store closings in 2009. Gross
margin for 2008 included a charge of $15 million recorded in cost of sales for margin related expenses taken in
connection with store closings announced during that year. Kmart’s margin rate increased 20 basis points to
23.5%, from 23.3% in 2008, mainly as a result of improvements in merchandise cost and reduced clearance
markdowns as a result of better inventory management.
Selling and Administrative Expenses
Kmart’s selling and administrative expenses decreased $70 million to $3.4 billion in 2009. The decline in
selling and administrative expenses primarily reflects a reduction in payroll expenses of $38 million, a reduction
in advertising expenses of $20 million, as well as reductions in various other expense categories. Selling and
administrative expenses for 2009 include charges related to store closings and severance of $35 million, as well
as a $17 million gain related to settlement of Visa/MasterCard antitrust litigation. Selling and administrative
expenses for 2008 include charges of $12 million related to store closings and severance. Our selling and
administrative expense rate was 21.5% for 2009 and 21.3% in 2008, and increased primarily as a result of the
above noted significant items, as well as lower expense leverage given lower overall sales.
Depreciation and Amortization
Depreciation and amortization expense increased by $14 million in 2009 to $152 million. The increase is
primarily due to the addition of property and equipment in the Kmart segment during the year.
Impairment Charges
We recorded impairment charges of $21 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.
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