Sears Holdings Reports Second Quarter Results

HOFFMAN ESTATES, Ill., Aug. 19 /PRNewswire-FirstCall/ -- Sears Holdings Corporation ("Holdings," "we," "us," "our" or the "Company") (Nasdaq: SHLD) today reported its second quarter 2010 results. In summary, we reported:

• Net loss attributable to Holdings' shareholders for the quarter of $39 million, or $0.35 loss per diluted share, in 2010 and $94 million, or $0.79 loss per diluted share, in 2009;
• Significantly improved profitability in the Kmart format as gross margin increased 230 basis points over the second quarter last year;
• Adjusted loss per diluted share for the second quarter of $0.19 in 2010 and $0.17 in 2009, and adjusted EBITDA for the quarter of $254 million in 2010 and $268 million in 2009.

"Kmart continued to improve its performance during the second quarter, as an improvement in its gross margin rate led to increased profitability," said W. Bruce Johnson, Sears Holdings' interim chief executive officer and president. "Overall, our total revenues declined only slightly despite the uncertain economic environment faced by our customers.  Expense discipline remained constant in the second quarter as reductions in selling and administrative expenses were achieved even as we continued to invest in initiatives designed to improve our customers' experiences, such as our multi-channel capabilities and the launch of our Shop Your Way Rewards program."

Second Quarter Revenues and Comparable Store Sales

Total revenues decreased $93 million to $10.5 billion for the quarter ended July 31, 2010, as compared to total revenues of $10.6 billion for the quarter ended August 1, 2009.  The decline in total revenue for the quarter was primarily a result of a 2.2% decrease in domestic comparable store sales and the effect of having fewer Kmart and Sears Full-line stores in operation, partially offset by an increase of $96 million due to changes in the Canadian foreign exchange rate.

The domestic comparable store sales decrease included declines of 1.4% at Kmart and 2.8% at Sears Domestic.  Kmart's quarterly decrease in comparable store sales was primarily driven by the food and consumables category, partially offset by increases in apparel, including footwear, and toys.  Decreases in sales for the quarter at Sears Domestic were primarily driven by the power lawn and garden, tools, and consumer electronics categories.  Sears Domestic's home appliance category registered a low single digit comparable store sales increase for the quarter due to increases in sales of refrigeration and seasonal air movement products.  

Operating Income

Holdings' operating income for the quarter was $5 million in 2010, as compared to an operating loss of $58 million in 2009.  The increase in operating income of $63 million was primarily the result of an increase in our gross margin rate of 50 basis points.  Selling and administrative expenses were slightly better than last year even though we incurred incremental expenses of $43 million related to our continued investment in our multi-channel capabilities and the launch of our Shop Your Way Rewards program, as well as an increase of $22 million due to changes in the Canadian foreign exchange rate.  Operating income for the second quarter of 2010 and 2009, includes expenses of $37 million and $103 million, respectively, related to domestic pension plans, store closings and severance.  The impact these items had on our operating income and earnings is summarized in the attached schedule, "Adjusted Earnings per Share," which provides a reconciliation from GAAP results to our adjusted earnings amounts, including adjusted earnings per diluted share.

For the quarter, we generated gross margin of $2.8 billion, which is $28 million more than last year.  Gross margin dollars this year include an increase of $31 million related to the impact of foreign currency exchange rates on gross margin at Sears Canada and last year included a $17 million charge for markdowns recorded in connection with store closings.  Gross margin remained relatively flat with last year, primarily due to an increase in gross margin rate at Kmart, which offset the slight decline in sales.  Kmart's gross margin rate increased 230 basis points mainly due to reduced markdowns on apparel.  The increase in Kmart's gross margin rate was partially offset by a decrease in gross margin rate of 40 basis points at Sears Domestic, primarily due to reduced margins in home services, and a decrease in gross margin rate of 150 basis points at Sears Canada.

Financial Position

We had cash balances of $1.2 billion at July 31, 2010 (approximately $500 million domestic and $700 million at Sears Canada), $1.3 billion at August 1, 2009 and $1.7 billion at January 30, 2010.  Significant uses of our cash during the first half of 2010 include $560 million for the purchase of additional interest in Sears Canada, $273 million for share repurchases, repayments of long-term debt of $228 million, capital expenditures of $168 million, and contributions to our pension and post-retirement benefit plans of $122 million. These uses of cash were funded in part by an increase in short-term borrowings of $893 million.

Total debt (consisting of short-term borrowings, long-term debt and capital lease obligations) was $3.2 billion at July 31, 2010 and August 1, 2009.  Total debt remained flat between years due to payments of $200 million made on long-term debt at Sears Canada, primarily offset by an increase in domestic short-term borrowing due to our first quarter 2010 acquisition of an additional interest in Sears Canada.  

Share Repurchase

During the 13- and 26- week periods ended July 31, 2010, we repurchased common shares at a total cost of $272 million and $273 million, respectively, under our share repurchase program.  Our repurchases for the 13- and 26- week periods ended July 31, 2010 were made at average prices of $75.57 and $75.61 per share, respectively.  During the first half of fiscal 2010, we repurchased a total of 3.6 million shares.  As of July 31, 2010, we had remaining authorization to repurchase $309 million of common shares under the share repurchase program.  The share repurchases may be implemented using a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, the purchase of call options, the sale of put options or otherwise, or by any combination of such methods.  Timing will be dependent on prevailing market conditions, alternative uses of capital and other factors.    

Adjusted EBITDA

For purposes of evaluating operating performance, we use an Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") measurement computed as net loss attributable to Sears Holdings Corporation appearing on the statements of operations excluding income attributable to noncontrolling interest, income tax benefit, interest expense, interest and investment income, other income (loss), depreciation and amortization and gains/losses on sales of assets.  In addition, it is adjusted to exclude certain significant gains/losses.  Our management uses Adjusted EBITDA to evaluate the operating performance of our businesses, as well as executive compensation metrics, for comparable periods.  Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items.  

While Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of operating performance because:

• EBITDA excludes the effects of financing and investing activities by eliminating the effects of interest and depreciation costs;
• Management considers gains/losses on the sale of assets to result from investing decisions rather than ongoing operations; and
• Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects the comparability of results.

Adjusted EBITDA was determined as follows:

Adjusted EBITDA for our segments are as follows:

Quarterly Report on Form 10-Q

For a detailed discussion of the Company's financial results, please see the Company's Quarterly Report on Form 10-Q, which will be filed with the Securities and Exchange Commission and posted to the Company's website at http://www.searsholdings.com.

Forward-Looking Statements

Results are preliminary and unaudited. This press release contains forward-looking statements about our expectations for the second quarter of fiscal 2010. Forward-looking statements are subject to risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: our ability to offer merchandise and services that our customers want, including our proprietary brand products; our ability to successfully implement initiatives to improve inventory management and other capabilities; competitive conditions in the retail and related services industries; worldwide economic conditions and business uncertainty, the availability of consumer and commercial credit, changes in consumer confidence, tastes, preferences and spending, and changes in vendor relationships; the impact of seasonal buying patterns, including seasonal fluctuations due to weather conditions, which are difficult to forecast with certainty; our dependence on sources outside the United States for significant amounts of our merchandise; our extensive reliance on computer systems to process transactions, summarize results and manage our business; our reliance on third parties to provide us with services in connection with the administration of certain aspects of our business; impairment charges for goodwill and intangible assets or fixed-asset impairment for long-lived assets; our ability to attract, motivate and retain key executives and other associates; the outcome of pending and/or future legal proceedings, including product liability claims, including proceedings with respect to which the parties have reached a preliminary settlement; and the timing and amount of required pension plan funding. We intend the forward-looking statements to speak only as of the time made and do not undertake to update or revise them as more information becomes available.

About Sears Holdings Corporation

Sears Holdings Corporation is the nation's fourth largest broadline retailer with approximately 3,900 full-line and specialty retail stores in the United States and Canada.  Sears Holdings is the leading home appliance retailer as well as a leader in tools, lawn and garden, consumer electronics and automotive repair and maintenance.  Sears Holdings is the 2010 ENERGY STAR® Retail Partner of the Year.  Key proprietary brands include Kenmore, Craftsman and DieHard, and a broad apparel offering, including such well-known labels as Lands' End, Jaclyn Smith and Joe Boxer, as well as the Apostrophe and Covington brands.  It also has the Country Living collection, which is offered by Sears and Kmart.  We are the nation's largest provider of home services, with more than 12 million service calls made annually.  Sears Holdings Corporation operates through its subsidiaries, including Sears, Roebuck and Co. and Kmart Corporation.  For more information, visit Sears Holdings' website at www.searsholdings.com.

SOURCE Sears Holdings Corporation