Sears 2011 Annual Report Download - page 35

Gross Margin
Sears Domestic’s gross margin dollars declined $421 million to $6.4 billion in 2010. Gross margin in 2010
included a $6 million charge recorded in cost of sales for margin related expenses taken in connection with store
closings. Sears Domestic’s gross margin for 2009 included a $10 million charge for markdowns recorded in
connection with store closings. The decline was mainly a result of the impact of lower overall sales on Sears
Domestic’s gross margin and a decline in margin rate. Sears Domestic’s gross margin rate was 28.6% in 2010
and 29.5% in 2009, a decrease of 90 basis points. The decline was mainly due to reduced margin rates in home
services and appliances.
Selling and Administrative Expenses
Sears Domestic’s selling and administrative expenses decreased $125 million to $5.9 billion in 2010 and
included incremental expenses of $102 million related to our continued investment in our multi-channel
capabilities and the continued launch of our Shop Your Way Rewards program. The decrease includes a reduction
in payroll and benefits expense of $80 million, a reduction in advertising expenses of $35 million, and a $42
million reduction in insurance expense, as well as reductions in various other expense categories. Selling and
administrative expenses for 2010 were impacted by domestic pension plan expense of $120 million and store
closing costs and severance of $7 million. 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.
Our selling and administrative expense rate was 26.7% for 2010 and 26.4% for 2009. The increase in our
selling and administrative expense rate is primarily the result lower expense leverage given lower overall sales.
Depreciation and Amortization
Depreciation and amortization expense decreased by $20 million to $620 million during 2010, and included
charges of $10 million and $9 million in 2010 and 2009, respectively, taken in connection with store closings.
The decrease is primarily attributable to having fewer assets available for depreciation.
Gain on Sales of Assets
We recorded a gain on the sales of assets of $46 million during 2010 and $6 million in 2009. We sold a
Sears Auto Center in October 2006, at which time we leased back the property for a period of time. Given the
terms of the contract, for accounting purposes, the excess of proceeds received over the carrying value of the
associated property was deferred. We closed our operations at this location during the first quarter of 2010 and,
as a result, recognized a gain of $35 million on this sale at that time.
Operating Income (Loss)
Sears Domestic reported an operating loss of $149 million in 2010 and operating income of $87 million in
2009. The decrease in Sears Domestic’s operating results was primarily the result of lower gross margin dollars
given lower overall sales and lower margin rate, partially offset by reductions in selling and administrative
expenses and the above noted significant items. Operating income in 2010 included expenses of $143 million
related to domestic pension plans and store closings and severance, as well as a gain of $35 million recognized
on the sale of a Sears Auto Center. Operating income in 2009 included 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.
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