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Revenue Falls at Eddie Lampert's Sears Holdings in the Second Quarter

August 16, 2012 | About:
Holly LaFon

Holly LaFon

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HOFFMAN ESTATES, Ill., Aug. 16, 2012 /PRNewswire/ -- Sears Holdings Corporation ("Holdings," "we," "us," "our" or the "Company") (SHLD) today reported its second quarter 2012 results. In summary, we reported:

  • Adjusted EBITDA increased $95 million for the quarter to $153 million in 2012 versus $58 million in 2011. Domestic EBITDA increased $114 million ($144 million in 2012 versus $30 million in 2011). Sears Canada's EBITDA declined $19 million ($9 million in 2012 versus $28 million in 2011);
  • For the quarter, margin rate increased 100 basis points and selling and administrative expenses declined;
  • Net loss from continuing operations attributable to Holdings' shareholders for the second quarter of $132 million ($1.25 loss per diluted share) and $152 million ($1.42 loss per diluted share), in 2012 and 2011, respectively. The second quarter included an effective tax benefit rate of 39.3% in 2011 versus a benefit rate of 15.8% in 2012;
  • Adjusted loss per diluted share from continuing operations for the second quarter of $0.86 in 2012 and $1.18 in 2011;
  • Sears Domestic's comparable store sales declined 2.9% in the second quarter of 2012, Kmart's comparable store sales declined 4.7%, and Sears Canada's comparable store sales declined 7.1%;
  • Continued discipline of our inventory with domestic inventory declining $512 million from the prior year balance;
  • Liquidity of $3.1 billion with cash balances of $738 million and nearly $2.4 billion of capacity on domestic and Canadian revolving credit facilities, as well as Sears Hometown and Outlet Store transaction on track to raise $446.5 million of gross proceeds; and
  • Partial spin-off of our interest in Sears Canada expected to close in the second half of 2012 with distribution to our shareholders.
Lou D'Ambrosio, Sears Holdings' Chief Executive Officer and President, said, "We continue to make progress against the priorities we outlined in our fourth quarter earnings release and call. In particular, we have improved our profit position, as we reduced expenses and expanded margin rate through more effective promotional design. We have also successfully lowered inventory, reduced debt from year end, and enhanced our liquidity. In addition, the Sears Hometown transaction remains on track to close in the third quarter. While we drive operational discipline, we are also investing in our customer experience, particularly through our ShopYourWay membership program and Integrated Retail. Our focus is on providing clear benefits to our members and customers, and delivering an excellent and seamless experience across the store, online, mobile and in the home."

Second Quarter Revenues and Comparable Store Sales

Revenues decreased $671 million to $9.5 billion for the quarter ended July 28, 2012. The decline in revenue was primarily due to lower domestic comparable store sales for the quarter and the effect of having fewer Kmart and Sears Full-line stores in operation. Sears Canada's comparable store sales also decreased and included a decline of $55 million due to changes in foreign currency exchange rates.

Domestic comparable store sales declined 3.7%, comprised of declines of 2.9% at Sears Domestic and 4.7% at Kmart, and were driven by four primary factors. The largest impact was in consumer electronics, which continues to be negatively impacted by price compression. Lawn and garden also declined due to drought conditions experienced throughout the country. Part of the decline was due to lower clearance sales activity primarily in the apparel categories due to improved inventory positions in seasonal merchandise. Lastly, pharmacy sales declined due to a conversion of brand name drugs to equivalent generic drugs. The aforementioned items accounted for over half of the decline at Kmart and adjusted for these items, Sears Domestic comparable store sales were up over the prior year. Sears Canada's comparable store sales decreased 7.1% for the quarter primarily due to sales decreases in women's apparel, tools and lawn and garden, home decor and men's apparel partially offset by improved performance in home appliances and mattresses.

Operating Loss

Operating loss was $103 million and $191 million for the quarters ended July 28, 2012 and July 30, 2011, respectively. The improvement in operating loss of $88 million was due to the reduction in selling and administrative expenses and an improvement in gross margin rate, which was partially offset by a decline in gross margin dollars driven by lower overall sales.

For the quarter, our gross margin decreased $70 million to $2.5 billion in 2012. The decrease was primarily driven by declines at Sears Canada. Sears Canada's gross margin decreased due to the decline in overall sales, as well as margin rate and included a decrease of $16 million related to the impact of foreign currency exchange rates. Gross margin at Kmart declined despite an increase in margin rate. Sears Domestic's gross margin improved as margin rate increases more than offset the decline in overall sales. Gross margin for 2011 included charges of $22 million related to store closures.

Sears Canada's gross margin rate declined 180 basis points for the second quarter as a result of rate declines in electronics, jewelry, accessories and luggage, fitness and recreation. Kmart and Sears Domestic's gross margin rates improved 60 basis points and 210 basis points, respectively, during the second quarter mainly due to lower clearance activity in the apparel business. Kmart and Sears also benefited from improved margins in the toys and home appliance categories, respectively.

Domestic selling and administrative expenses decreased $123 million in the second quarter of 2012 compared to the second quarter of 2011 predominately due to decreases in payroll and advertising expenses, which were partially offset by higher pension expense. Selling and administrative expenses included expenses related to domestic pension plans, store closings and severance of $59 million and $36 million for 2012 and 2011, respectively. Selling and administrative expenses at Sears Canada for the quarter decreased $41 million compared to the prior year quarter, and included a decrease of $15 million related to the impact of foreign currency exchange rates. On a Canadian dollar basis, selling and administrative expenses decreased by $26 million, primarily driven by decreases in advertising and payroll expenses.

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