Sears Holding Corporation reported total revenus for the first quarter ended May 2 decreased 10.1% to $10.06 billion as compared to total revenues of $11.07 billion for the 13 weeks ended May 3, 2008. The decrease includes a $208 million decline due to unfavorable foreign currency exchange rates and was primarily due to lower comparable store sales.


Domestic comparable store sales declined 7.4% in the aggregate, with Sears Domestic comparable store sales declining 11.7% and Kmart comparable store sales declining 2.1% for the quarter. The company said the decline at Sears Domestic continues to be driven by categories directly impacted by housing market conditions (including the home appliances, lawn & garden and tools categories) and lower apparel sales. The decline in comparable store sales at Kmart was driven by a decline in apparel and was partially offset by an increase in sales of home electronics and the impact of assuming the operations of its footwear business from a third party effective January 2009.


Net income attributable to Holdings' shareholders for the quarter was $26 million, or 21 cents per diluted share, as compared to a net loss attributable to Holdings' shareholders of $56 million 43 cents per diluted share, in the first quarter of 2008.  Adjusted EBITDA increased 73% to $359 million in the first quarter as compared to $208 million in the first quarter of 2008. Gross margin rate increased by 130 basis points to 28.6% for the first quarter of 2009. Reduced domestic selling and administrative expenses by $168 million (or 6.7%) during the first quarter of fiscal 2009 as compared to the same quarter in 2008. Maintained a strong balance sheet with $1.2 billion in consolidated cash while reducing consolidated debt to $3.0 billion at May 2, 2009 from $3.5 billion at May 3, 2008. The company added that it successfully amended and extended its credit facility to provide $4.1 billion in financing through March 24, 2010 and $2.4 billion from March 25, 2010 through June 2012, with the option to use existing collateral to obtain up to $1.0 billion of additional capacity subsequent to March 2010 through an accordion feature.


“In this challenging economic environment we are pleased with the progress we have made in improving our gross margin rate, controlling inventories and further reducing our cost structure,” said W. Bruce Johnson, Sears Holdings' interim chief executive officer and president.


Operating Income (Loss)


Operating income was $128 million for the first quarter as compared to an operating loss of $8 million for the first quarter of 2008. Operating income for the first quarter of 2009 includes expenses of $59 million related to domestic pension plans and previously announced store closings and severance, as well as a gain on sale of assets at Sears Canada of $44 million.

 

Excluding these items, operating income increased $151 million and was primarily the result of a decline in selling and administrative expenses, partially offset by lower gross margin dollars. Total selling and administrative expenses declined by $242 million due primarily to a $107 million reduction in advertising expense and an $84 million reduction in payroll and benefits expense. The decline in selling and administrative expenses was partially offset by a decline in gross margin dollars of $150 million, which includes a $63 million decline related to the negative impact of foreign currency exchange rates on gross margin at Sears Canada.

 

For the quarter, the company said it generated $2.9 billion in gross margin as compared to $3.0 billion in the first quarter last year. While gross margin dollars declined, our gross margin rate increased 130 basis points to 28.6%. The increase in gross margin rate consisted of increases of 240 basis points at Sears Domestic and 70 basis points at Kmart and was mainly the result of improved inventory management. The increase in domestic gross margin rate was partially offset by a decline in gross margin rate at Sears Canada.

 

Significant Items


Sears said a number of significant items affected its first quarter results. Excluding these items, net income attributable to Holdings' shareholders for the first quarter of fiscal 2009 was $47 million, or $0.38 per diluted share. Significant items affecting Sears' results include:




  • a previously deferred gain on the August 2007 sale of Sears Canada's former headquarters building of $44 million ($19 million after tax and noncontrolling interest or $0.16 per diluted share) was recognized as Sears Canada ceased use of the building under the lease-back agreement signed at the time of the sale;
  • domestic pension plan expense of $42 million ($25 million after tax or $0.20 per diluted share);
  • mark-to-market losses on Sears Canada hedge transactions of $14 million ($6 million after tax and noncontrolling interest or $0.05 per diluted share); and
  • a charge of $17 million ($9 million after tax and noncontrolling interest or $0.08 per diluted share) related to costs associated with store closings and severance.


As the company noted in our fourth quarter 2008 earnings release, the company has a legacy pension obligation for past service performed by Kmart and Sears, Roebuck and Co. associates. The annual pension expense included in our financial statements related to these legacy domestic pension plans was relatively minimal in recent years. However, due to the severe decline in the capital markets that occurred in the latter part of 2008 our domestic pension expense has increased by an estimated $160 to $175 million in 2009. As a result, Sears present pension expense as a significant item affecting earnings and as a separate line item in our Adjusted EBITDA reconciliation to promote operating performance comparability.


In the second quarter of 2008 the company realized a gain of $62 million ($37 million after tax or 29 cents per diluted share) from the overturning of an adverse jury verdict relating to the redemption of certain Sears, Roebuck and Co. bonds in 2004. The company does not expect a similar event this year; whereas they do expect domestic pension expense to increase in the second quarter of 2009 by an amount comparable to the increase experienced in the first quarter.


Financial Position

 

The company had cash balances of $1.2 billion at May 2, 2009 (of which $515 million was domestic and $734 million was at Sears Canada) as compared to $1.4 billion at May 3, 2008 and $1.3 billion at January 31, 2009. For the quarter, the significant uses of its cash included $40 million for share repurchases, $76 million in capital expenditures, and $52 million of contributions to our pension and post-retirement plans.

 

Merchandise inventories were approximately $9.5 billion at May 2, 2009 as compared to $10.3 billion at May 3, 2008. Domestic inventory levels declined from $9.4 billion at May 3, 2008 to $8.7 billion at May 2, 2009 due to efforts taken to improve inventory management noted previously. Inventory levels at Sears Canada decreased $136 million largely due to the impact of foreign currency exchange rates.

 

Total debt at May 2, 2009 was $3.0 billion, as compared to $3.5 billion at May 3, 2008. The decrease in outstanding debt was mainly the result of a reduction in domestic long-term debt obligations of $386 million. Total short-term borrowings at May 2, 2009 of $839 million were consistent with the company's level of borrowings at May 3, 2008, with amounts borrowed mainly used to build inventory for the spring season and to pay matured term debt. Excluding amounts owed under the revolving credit agreement and borrowed non-recourse to Sears Holdings by Orchard Supply, Holdings has less than $1 billion in domestic borrowings, with no significant required repayments until 2011.

 

Extension and Amendment of Credit Agreement

 

On May 21, 2009 the company successfully extended the maturity date of our revolving credit facility by entering into an amended credit agreement which has an expiration date of June 22, 2012. The original credit agreement, which was set to expire on March 24, 2010, provided $4.0 billion of borrowing capacity, however only approximately $3.8 billion had been available since September 2008 when an affiliate of Lehman Brothers notified Sears it would no longer fund its proportionate share of the Original Agreement.

 

As part of the Amended Agreement, Sears' borrowing capacity under the Original Agreement will be increased over the original amount to $4.1 billion until March 24, 2010.

 

The amended terms and conditions of the asset based credit facility provide for a bifurcation of the existing $4 billion facility into a $2.4 billion tranche maturing on June 22, 2012 and bearing an interest rate of London Interbank Offered Rate plus 4.00% with a LIBOR floor of 1.75%, and a $1.7 billion tranche maturing March 24, 2010, bearing an initial interest rate of LIBOR plus 0.875%.

 

The bifurcation into the Extended Tranche provides Holdings and its subsidiaries more than adequate liquidity for standby letters of credit and working capital needs. The facility also provides an accordion feature that allows the company to use existing collateral in the facility to obtain up to $1.0 billion of additional capacity subsequent to March 24, 2010 should we so choose. The amendment and extension revises certain terms of the credit agreement to reflect current market conditions. Similar to the Original Agreement, the Amended Agreement has a $1.5 billion letter of credit sub-limit, is secured by a first lien on most of our domestic inventory and receivables, and determines availability pursuant to a borrowing base formula.

 

The transaction was led by Banc of America Securities LLC, Wells Fargo Retail Finance, and GE Capital Markets, as Joint Lead Arranger and Joint Book Runners, which collectively committed $1.2 billion, and was supported by many other financial institutions. “

 

Share Repurchase

 

During the first quarter of 2009, the company repurchased approximately 1.0 million common shares under its share repurchase program at a total cost of $40 million, or an average price of $41.04 per share.

 

As of May 2, 2009, the company had remaining authorization to repurchase $465 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.

Domestic Pension Plan Funding

 

In the company's Annual Report on Form 10-K for the fiscal year ended Jan. 31, 2009 it disclosed that we expected to make contributions to our domestic pension plans of approximately $170 million in 2009 and $500 million in 2010. The large increase contributions expected between fiscal 2009 and 2010 at that time was due primarily to the severe decline in capital markets that occurred in the latter part of 2008 and U.S. government legislation regarding pension-funding requirements.

 

Based on new guidance issued by the Treasury Department, Sears now estimates that the 2010 contribution will be approximately $325 million, though the ultimate amount of pension contributions could be affected by further changes in the applicable regulation and financial market and investment performance. Sears expect each remaining quarter of 2009 to contain domestic pension plan expense consistent with first quarter levels.

 
Adjusted EBITDA was determined as follows:


                                           Quarters Ended
                                          —————-
                                           May 2,   May 3,
                                           2009     2008
                                          ——   ——
    Operating income (loss) per
     statement of income                   $128      $(8)
    Plus depreciation and amortization      226      248
    Less gain on sales of assets            (54)     (32)
                                            —-     —-
    Before excluded items                   300      208

    Domestic pension expense                 42       —
    Closed store reserve and severance       17       —
                                             —      —
    Adjusted EBITDA as defined             $359     $208
                                           ====     ====
    % to revenues                           3.6%     1.9%




    Adjusted EBITDA for segments are as follows:


                                           13 Weeks Ended

                          —————————————————

                             Adjusted EBITDA             % To Revenues

                          ————————-  ————————

                          May 2, 2009   May 3, 2008  May 2, 2009  May 3, 2008

                          ———–   ———–  ———–  ———–

    Kmart                     $48           $ 11         1.3%         0.3%

    Sears Domestic            266            117         4.8%         1.9%

    Sears Canada (1)           45             80         5.1%         6.5%

                               —             —         —-         —-

    Total Adjusted EBITDA    $359           $208         3.6%         1.9%

                             ====           ====         ====         ====


    (1) First quarter 2009 Adjusted EBITDA in Canadian dollars was $56

        million as compared to $81 million for the prior year, as the

        average exchange rate for the quarter declined from .9943 to .8056.


 
Sears Holdings Corporation

                  Condensed Consolidated Statements of Income

                                  (Unaudited)


      Amounts are Preliminary and Subject to Change

                                                         13 Weeks Ended

                                                         ————–

      millions, except per share data                     May 2,   May 3,

                                                          2009     2008

                                                          —-     —-

    REVENUES

      Merchandise sales and services                    $10,055  $11,068

                                                        ——-  ——-


    COSTS AND EXPENSES

      Cost of sales, buying and occupancy                 7,182    8,045

      Gross margin dollars                                2,873    3,023

      Gross margin rate                                    28.6%    27.3%


      Selling and administrative                          2,573    2,815

      Selling and administrative expense as a

       percentage of total revenues                        25.6%    25.4%


      Depreciation and amortization                         226      248

      Gain on sales of assets                               (54)     (32)

                                                            —      —

          Total costs and expenses                        9,927   11,076

                                                          —–   ——


    Operating income (loss)                                 128       (8)

    Interest expense                                        (59)     (66)

    Interest and investment income                            5       11

    Other loss                                              (16)      (1)

                                                            —       —


    Income (loss) before income taxes                        58      (64)

    Income taxes (expense) benefit                          (24)      28

                                                            —       —


    Net income (loss)                                        34      (36)

    Income attributable to noncontrolling interest           (8)     (20)

                                                             —      —


    NET INCOME (LOSS) ATTRIBUTABLE TO HOLDINGS'

      SHAREHOLDERS                                          $26     $(56)

                                                            ===     ====


    EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE

      TO HOLDINGS' SHAREHOLDERS

      Diluted earnings (loss) per share                   $0.21   $(0.43)


      Diluted weighted average common shares

       outstanding                                        121.0    131.7