Sears Holdings Corporation reported income from continuing operations attributable to Holdings' shareholders for the first quarter of 2012 of $189 million ($1.78 per diluted share from continuing operations) versus a net loss from continuing operations attributable to Holdings' shareholders of $165 million ($1.53 loss per diluted share from continuing operations), for the first quarter of 2011.

Other key developments:

  • Adjusted EBITDA for the quarter of $197 million ($209 million domestic and $(12) million at Sears Canada) in 2012 versus $58 million ($73 million domestic and $(15) million at Sears Canada) in 2011;
  • Adjusted loss per diluted share from continuing operations for the first quarter of $0.31 in 2012 and a loss of $1.34 in 2011;
  • First quarter 2012 included gains on the sale of assets of $233 million, after tax and noncontrolling interest, from the sale of certain U.S. and Canadian stores and leasehold interests.  These transactions generated approximately $440 million of cash proceeds;
  • Gross margin rate in 2012 improved 100 basis points over the prior year quarter;
  • Sears Domestic's comparable store sales declined 1.0% in the first quarter of 2012, Kmart's comparable store sales declined 1.6% and Sears Canada's comparable store sales declined 6.3%;
  • Inventory balances declined $881 million from the prior year comparable quarter;
  • Liquidity of $3.4 billion with cash balances of $784 million and nearly $2.6 billion of capacity on domestic and Canadian revolving credit facilities; and
  • Currently planning a partial spin-off of our interest in Sears Canada to our shareholders, as announced today in a separate release, which would bring the ownership of SCC by Sears Holdings to 51% when complete.

Lou D'Ambrosio, Sears Holdings' chief executive officer and president, said, “We are pleased with the results for the first quarter and our progress towards restoring profit growth and transforming our Company. Our actions were driven by a focus on three core priorities: 1) enhancing financial and operational discipline; 2) improving our core retail operations; and 3) leading customer based innovation through integrated retail and an engaging membership program, Shop Your Way Rewards.  I want to thank all the associates at Sears Holdings for their commitment and hard work in delivering the first quarter results.”

First Quarter Revenues and Comparable Store Sales

Revenues decreased $270 million to $9.3 billion for the quarter ended April 28, 2012.  The decline in revenue was primarily due to the effect of having fewer Kmart and Sears Full-line stores in operation, lower domestic comparable store sales for the quarter and a decline in Sears Canada's comparable stores sales for the quarter.  First quarter 2012 revenues included a decrease of $21 million due to changes in foreign currency exchange.

Domestic comparable store sales declined 1.3%, comprised of declines of 1.0% at Sears Domestic and 1.6% at Kmart.  While Sears Domestic experienced an overall decrease in comparable store sales, Sears did achieve double-digit increases in its apparel and footwear categories.  These increases were offset by declines in the home appliance and consumer electronics categories.

Kmart had sales increases in the apparel and footwear categories offset by declines in consumer electronics.  Sears Canada's comparable store sales decreased 6.3% for the quarter primarily due to sales decreases in electronics, home decor, hardware and apparel, partially offset by increases in major appliances and mattresses.

Operating Income (Loss)

Operating income was $315 million for the quarter ended April 28, 2012, compared to an operating loss of $172 million for the quarter ended April 30, 2011.  The improvement in operating income of $487 million includes gains on sales of assets, which were partially offset by the impact of charges related to store closures and severance and other significant items.  Excluding these items, operating income improved $155 million, primarily due to the improvement in gross margin and the reduction in selling and administrative expenses.

For the quarter, our gross margin increased $23 million to $2.6 billion in 2012.  The increase was driven by improvements in margin rate, partially offset by the decline in overall sales and included a decrease of $6 million related to the impact of foreign currency exchange rates on gross margin at Sears Canada. Gross margin for 2011 included charges of $1 million related to store closures.   

Kmart's gross margin rate improved 60 basis points for the first quarter mainly due to the increase in sales in the higher margin apparel business, as well as the margin improvement in the toys and sporting goods categories driven by less markdown activity.  Sears Domestic's gross margin rate increased 140 basis points for the quarter primarily due to improved margins in the apparel, home appliance and footwear categories, which were partially offset by a decline in home services.  Sales generated in the closing stores contributed to the improved margins.  Sears Canada's gross margin rate improved 60 basis points for the first quarter as a result of the actions taken in 2011 to clear inventory and improve inventory productivity.    

Domestic selling and administrative expenses decreased $37 million in the first quarter of 2012 compared to the first quarter of 2011 predominately due to decreases in payroll and advertising expenses.  Selling and administrative expenses included expenses related to domestic pension plans, store closings and severance of $75 million and $20 million for 2012 and 2011, respectively.  Selling and administrative expenses at Sears Canada for the quarter decreased $25 million from last year, and included a decrease of $7 million related to the impact of foreign currency exchange rates.  On a Canadian dollar basis, selling and administrative expenses decreased by $18 million, primarily due to decreases in outsourcing, advertising and payroll expenses.

Operating income for the first quarter of 2012 included expenses related to domestic pension plans, store closings and severance, as well as gains on sales of assets, which aggregated to operating income of $311 million.  Operating loss for the first quarter of 2011 included expenses of $21 million related to domestic pension plans, store closings and severance.

See the attached schedule, “Adjusted Earnings per Share,” for a reconciliation from GAAP to as adjusted amounts, including adjusted earnings per diluted share from continuing operations.

Our effective tax expense rate for the first quarter of 2012 was 25.7% and our effective tax benefit rate for the first quarter of 2011 was 31.0%.  The current year tax rate was impacted by the establishment of a valuation allowance in 2011 against certain deferred income tax assets and the utilization of part of our net operating loss deferred tax asset in 2012.

Financial Position

Rob Schriesheim, Sears Holdings' Chief Financial Officer, said, “We took several actions in the first quarter of 2012 to build the strength of our liquidity position.  First, we completed the previously announced sale of U.S. and Canadian stores and leasehold interests, which generated cash proceeds of $440 million.  In addition, we progressed with our plans to separate Sears Hometown and Outlet businesses through a transfer to electing shareholders by filing a registration statement on Form S-1 with the Securities and Exchange Commission.  The transaction is still expected to close in the third quarter of 2012 and generate in the range of $400 million to $500 million in cash proceeds.  These transactions, together with already announced cost reductions and actions to reduce cash invested in our inventory, are expected to generate between $1.6 billion and $1.7 billion in capital in 2012.  As evidenced by our improvement in operating performance and our other actions, we continue to focus on financial discipline and operational productivity, enhancing our already strong financial flexibility and unlocking value in our portfolio of assets.”

We had cash balances of $784 million at April 28, 2012 ($415 million domestic and $369 million at Sears Canada) as compared to $754 million at January 28, 2012.  The increase in cash during the first quarter of 2012 was primarily due to cash generated from the sale of properties, partially offset by uses of cash during the quarter which included repayments of long-term debt of $211 million, contributions to our pension and post-retirement benefit plans of $86 million, capital expenditures of $80 million and other working capital needs.

Merchandise inventories at April 28, 2012 were $8.8 billion, as compared to $9.7 billion at April 30, 2011.  Domestic inventory decreased approximately $759 million to $8.0 billion at April 28, 2012 from $8.7 billion at April 30, 2011, driven by both improved productivity and store closures.  Sears Domestic inventory decreased in all categories, with the most notable decreases in the home appliance, consumer electronics and footwear categories.  Kmart inventory decreased in virtually all categories with the most notable decreases in consumer electronics and sporting goods and toys.  Sears Canada's inventory levels decreased approximately $122 million to $837 million at April 28, 2012 from $959 million at April 30, 2011, primarily as a result of the actions taken in 2011 to clear inventory and improve inventory productivity.                   

Total debt (consisting of short-term borrowings, long-term debt and capital lease obligations) was $3.2 billion at April 28, 2012, compared to $3.5 billion at January 28, 2012.  Capacity under our credit facilities was $2.6 billion ($1.8 billion domestic and $0.8 billion at Sears Canada).