Sears Holdings Corporation Reports First Quarter 2005 Results
Sears Holdings Corporation (NASDAQ: SHLD), issued its financial statements for the quarter ended April 30, 2005. Sears Holdings ("Holdings") was created in connection with the merger of Kmart Holding Corporation ("Kmart") and Sears, Roebuck and Co. ("Sears"), which was completed on March 24, 2005. Sears Holdings is the nation's third largest broadline retailer with approximately 2,300 full-line and 1,200 specialty retail stores in the United States operating through Kmart and Sears and 340 full-line and specialty stores in Canada operating through Sears Canada Inc. ("Sears Canada"), a 54%-owned subsidiary.
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The Statement of Operations included below for the 13 weeks ended April 30, 2005 includes all 13 weeks of Kmart's results of operations but only Sears results of operations for the approximately five-week long period of March 25, 2005 forward. The Company therefore believes the results of operations are not representative of the on-going results for Holdings. As a result, the Company has included pro forma results that include Sears for the full 13 weeks. The Company has also provided its calculation of Pro Forma Adjusted EBITDA for Holdings, including a breakdown of Pro Forma Adjusted EBITDA between its domestic and Canadian operations. Reconciliation of the pro forma results of operations to the GAAP results of operations has also been included.
Financial Position
As of April 30, 2005, Holdings had approximately $30 billion of assets and $11 billion of equity, as follows:
(in billions) April 30, April 28, Jan. 26,
2005 2004 (1) 2005 (1)
Total assets $30.6 $6.3 $8.7
Total liabilities 19.4 4.0 4.2
Shareholders' equity $11.2 $2.3 $4.5
(1) For accounting purposes, the business combination was treated as a
purchase of Sears by Kmart. As such, the historical financial
statements of Kmart become the historical financial statements for
Holdings.
Holdings ended the first quarter with $1.6 billion of cash and cash equivalents. Prior to the consummation of the merger, Kmart and Sears had approximately $7.4 billion of cash and cash equivalents in aggregate. The decrease in cash reflects the $5.4 billion paid to former Sears shareholders and option holders in connection with the merger and the repayment of $346 million of commercial paper borrowings. In addition to the $1.6 billion of cash on hand, Holdings has access to a $4 billion credit facility that is secured by domestic inventory and credit card accounts receivable.
Holdings' inventory level at April 30, 2005 was approximately $9.5 billion, an increase of $6.1 billion over the prior year as a result of the merger. The current year inventory balance includes a purchase accounting step up adjustment of $48 million on Sears inventory above its FIFO value. As of the prior year period, the combined inventory on a FIFO basis of Sears and Kmart was approximately $9.7 billion. The merchandise payable balance is $3.7 billion at April 30, 2005 as compared to $3.9 billion for Sears and Kmart combined as of April 28, 2004.
During the first quarter of 2005, Holdings spent $66 million on capital expenditures as compared to $55 million and $88 million spent by Kmart and Sears, respectively, during the same 13-week period in the prior year. The current year spending of $66 million excludes approximately $40 million of capital expenditures made by Sears during the period January 30, 2005 through March 24, 2005 (pre-merger period).
Same Store Sales Performance
Comparable store sales and total sales at Kmart decreased 3.7% and 2.3%, respectively, for the 13 weeks ended April 30, 2005 as compared to the 13 weeks ended April 28, 2004. The decline in same-store and total sales is due to lower transaction volumes, the impact of poor weather conditions on the Company's seasonal product lines, and the impact of ongoing construction activity in stores which are converting to the Sears Essentials format. Total sales benefited from an additional $153 million of sales as a result of three additional days in the current quarter due to the Company's change in fiscal year end from the last Wednesday in January to the Saturday closest to January 31st. However, total sales were negatively impacted by a reduction in the total number of operating Kmart stores, which more than offset the additional three days of revenue.
Merchandise sales and services revenues at Sears Domestic increased 0.5% for the 13-week period ended April 30, 2005 versus the 13 week-period ended May 1, 2004. The slight increase was due to strong home services sales partially offset by a 3.1% decrease in domestic comparable store sales. Within domestic sales, cooler than anticipated weather conditions caused declines in certain seasonal businesses, including lawn and garden and seasonal apparel categories. These declines were partially offset by modest gains within the footwear and automotive categories. Lower sales have also resulted from efforts initiated in 2005 to reduce reliance on certain promotional events and strategies historically executed to drive transactional volumes at the expense of lower margin rates.
Statements of Operations
Holdings' Statements of Operations for the first quarter are as follows:
13 Weeks Ended
(in millions, except per share amounts) April 30, April 28,
2005 2004
Total revenues $7,626 $4,627
Cost of sales, buying and occupancy 5,655 3,545
Selling and administrative 1,719 945
Depreciation and amortization 107 4
Gain on sales of assets (6) (32)
Total costs and expenses 7,475 4,462
Operating income 151 165
Interest expense, net (42) (28)
Bankruptcy-related recoveries 17 7
Other income 9 3
Income before income taxes, minority interest and
cumulative effect of change in accounting
principle 135 147
Income taxes 52 56
Minority interest 2 --
Income before change in accounting principle $81 $91
Cumulative effect of change in accounting principle (90) --
Net (loss) income $(9) $91
Per share (diluted basis)
Earnings per share before change in accounting
principle $0.65 $ 0.94
Cumulative effect of change in accounting
principle (0.72) --
(Loss) earnings per share $(0.07) $ 0.94
Diluted weighted average shares outstanding 124.8 100.3
A $90 million after-tax charge was recorded as a cumulative effect of change in accounting in the first quarter of 2005 resulting from the Company's decision to change its method of accounting for certain indirect overhead costs included in inventory.
Pro Forma Results
The statement of operations for the 13 weeks ended April 30, 2005 is not representative of the on-going results for Holdings as it only includes Sears results of operations from March 25, 2005 forward. Had the Sears results for the full quarter been included, Holdings' revenues would have been approximately $5 billion higher. Therefore, the Company believes that an understanding of trends and on-going performance is not complete without presenting results on a pro forma basis that include Sears results for a full 13-week period.
The following pro forma statements of operations summarize the results of Holdings assuming that the merger occurred at the beginning of 2004:
13 Weeks Ended
(in millions) April 30, 2005 April 28, 2004
Pro Forma (1) Pro Forma
Total revenues $12,763 $12,769
Cost of sales, buying and occupancy 9,327 9,422
Gross margin rate 26.4% 25.7%
Selling and administrative 3,060 2,968
Selling and administrative expense as a
percentage of total revenues 24.0% 23.2%
Depreciation and amortization 283 283
Gain on sales of assets (7) (36)
Total costs and expenses 12,663 12,637
Operating income 100 132
Interest expense (75) (95)
Bankruptcy-related recoveries 17 7
Other income 19 25
Income before income taxes, minority interest 61 69
Percent to revenues 0.5% 0.5%
Income taxes (benefit) 41 28
Minority interest and extraordinary item 8 3
Income before cumulative effect of change in
accounting principle 12 38
Cumulative effect of change in accounting principle (90) --
NET INCOME $(78) $38
(1) Includes $34 million of transaction costs and $3 million of
integration costs related to the merger.
The pro forma information is not indicative of the results of operations that would have been achieved if the merger had taken place at the beginning of 2004 or that may result in the future. The pro forma information has not been adjusted to reflect any operating efficiencies that may be realized as a result of the merger.
Pro Forma Adjusted EBITDA
For purposes of evaluating operating performance, Holdings' management uses a Pro Forma Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Pro Forma Adjusted EBITDA") measurement computed as operating income on the statement of operations less depreciation and amortization and gains/(losses) on sale of assets. In addition, it is adjusted to exclude certain merger-related costs. Pro Forma Adjusted EBITDA is used by management to evaluate the relative operating performance of its businesses for comparable periods. Pro Forma Adjusted EBITDA should not be used by investors as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items. Management compensates for this limitation by using GAAP financial measures as well in managing the Company's business.
While Pro Forma Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of operating performance because:
1. EBITDA excludes the effect of financing and investing activities by
eliminating the effect of interest and depreciation costs.
2. Management considers gains (losses) on the sale of assets to result
from investing decisions rather than ongoing operations.
For the quarter, Pro Forma Adjusted EBITDA is determined as follows:
2005 2004
Operating income per pro forma statement of
operations $100 $132
Plus depreciation and amortization 283 283
Less gain on sale of assets (7) (36)
Before excluded items 376 379
Merger-related items:
Merger transaction costs 34 --
Merger integration costs 3 --
Pro Forma Adjusted EBITDA as defined $413 $379
% to pro forma revenues 3.2% 3.0%
Pro Forma Adjusted EBITDA for the Company's domestic (United States operations) and Sears Canada operations is as follows:
Pro Forma Adjusted EBITDA % to Pro Forma Revenues
2005 2004 2005 2004
Domestic operations $364 $327 3.1% 2.8%
Sears Canada 49 52 4.6% 5.2%
Total Adjusted
Pro Forma EBITDA $413 $379 3.2% 3.0%
For a detailed discussion of Holdings' financial results, please see Holdings' Form 10-Q which has been filed with the Securities and Exchange Commission and posted to the Company's website at http://www.searsholdings.com/ .
About Sears Holdings Corporation
Sears Holdings Corporation is the nation's third largest broadline retailer, with approximately $55 billion in annual revenues, and with approximately 3,800 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, home electronics and automotive repair and maintenance. 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 Martha Stewart Everyday products, which are offered exclusively in the U.S. by Kmart and in Canada by Sears Canada. The company is the nation's largest provider of home services, with more than 14 million service calls made annually. For more information, visit Sears Holdings' website at http://www.searsholdings.com/ .
PRO FORMA RECONCILIATIONS
The following tables provide a reconciliation from the as reported results to the pro forma results presented above for Sears Holdings for the 13-week periods ended April 30, 2005 and May 1, 2004, respectively.
Sears Holdings
2005
Pre-
merger
As Activity Purchase Pro
reported (1) Acctng forma
Merchandise sales
and services $7,617 $5,051 $-- $12,668
Credit and financial
products revenues 9 86 -- 95
Total revenue 7,626 5,137 -- 12,763
Cost of sales, buying
and occupancy 5,655 3,672 9,327
Gross margin rate 25.8% 27.3% 26.4%
Selling and
administrative 1,719 1,330 11(2) 3,060
Selling and
administrative as % of
total revenues 22.5% 25.9% 24.0%
Depreciation and
amortization 107 147 29(3) 283
Gain on sales of assets (6) (1) -- (7)
Total costs and
expenses 7,475 5,148 40 12,663
Operating income (loss) 151 (11) (40) 100
Interest (expense)
income, net (42) (35) 2(4) (75)
Bankruptcy-related
recoveries 17 -- -- 17
Other income 9 10 -- 19
Income before income
taxes, minority interest
and cumulative effect
of change in
accounting principle 135 (36) (38) 61
Income tax
expense (benefit) 52 4 (15)(5) 41
Minority interest 2 6 -- 8
Income before
cumulative effect of
change in
accounting principle 81 (46) (23) 12
Cumulative effect of
change in accounting
principle, net of tax (90) -- -- (90)
NET (LOSS) INCOME $(9) $(46) $(23) $(78)
(Loss) earnings per
share - diluted $(0.07) $(0.48)
Earnings per share
before cumulative
effect of change in
accounting
principle - diluted $0.65 $0.07
2004
Pre-
merger
As Activity Purchase Pro
reported (1) Acctng forma
Merchandise sales
and services $4,627 $8,055 $-- $12,682
Credit and financial
products revenues -- 87 -- 87
Total revenue 4,627 8,142 -- 12,769
Cost of sales, buying
and occupancy 3,545 5,877 -- 9,422
Gross margin rate 23.4% 27.0% 25.7%
Selling and
administrative 945 2,005 18(2) 2,968
Selling and
administrative as % of
total revenues 20.4% 24.6% 23.2%
Depreciation and
amortization 4 232 47(3) 283
Gain on sales of assets (32) (4) -- (36)
Total costs and
expenses 4,462 8,110 65 12,638
Operating income (loss) 165 32 (65) 132
Interest (expense)
income, net (28) (70) 3(4) (95)
Bankruptcy-related
recoveries 7 -- -- 7
Other income 3 22 -- 25
Income before income
taxes, minority interest
and cumulative effect
of change in
accounting principle 147 (16) (62) 69
Income tax expense
(benefit) 56 (6) (22)(5) 28
Minority interest -- 3 -- 3
Income before
cumulative effect of
change in
accounting principle 91 (13) (40) 38
Cumulative effect of
change in accounting
principle, net of tax -- -- -- --
NET (LOSS) INCOME $91 $(13) $(40) $38
(Loss) earnings per
share - diluted $0.94 $0.23
Earnings per share
before cumulative
effect of change in
accounting
principle - diluted $0.94 $0.23
(1) Represents the 2005 results of operations for the period January 30,
2005 through March 24, 2005 for Sears Domestic and the period
January 2, 2005 through March 24, 2005 for Sears Canada and the 2004
results of operations for the period February 1, 2004 through May 1,
2004 for Sears Domestic and the period January 4, 2004 through
April 3, 2004 for Sears Canada.
(2) Represents an increase to selling and administrative expense resulting
from the adjustment to Sears' pension and postretirement plans based
on the adjustment of such liabilities to fair value.
(3) Represents an increase in depreciation and amortization expense
resulting from the adjustment to Sears' property and equipment and
identifiable intangible assets based on the adjustment of such assets
to fair value.
(4) Represents a decrease to interest expense resulting from the
adjustment to Sears debt based on the adjustments of such liabilities
to fair value.
(5) Represents the aggregate pro forma statutory income tax effect (38%)
of notes (2) through (4) above.
The following table reconciles Pro Forma Adjusted EBITDA to net income as
reported.
2005 2004
Pro Forma Adjusted EBITDA $413 $379
Merger-related items:
Merger transaction costs (34) --
Merger integration costs (3) --
Pro Forma Adjusted EBITDA after
merger-related items 376 379
Depreciation and amortization (283) (283)
Less gain on sale of assets 7 36
Pro Forma operating income 100 132
Interest expense, net (75) (95)
Bankruptcy-related recoveries 17 7
Other income 19 25
Income tax expense (41) (28)
Minority interest expense (8) (3)
Change in accounting principle (90) --
Pro Forma net income (78) 38
Less pre-merger activity 46 13
Less effect of purchase accounting adjustments 23 40
Net income as reported $(9) $91
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SOURCE: Sears Holdings Corporation
CONTACT: Sears Holdings Public Relations, +1-847-286-8371
Web site: http://www.searsholdings.com/