Sears Canada Reports Second Quarter Earnings
TORONTO, Aug. 19 /CNW/ - Sears Canada Inc. (TSX: SCC) today announced its
unaudited second quarter results. Total revenues for the 13-week period ended
August 1, 2009 were $1.250 billion compared to $1.420 billion for the 13 weeks
ended August 2, 2008, a decrease of 12.0%. Same store sales decreased 10.0%.
Cash, restricted cash and investments increased $109.5 million from $785.6
million as at August 2, 2008 compared to $895.1 million as at August 1, 2009,
with total debt of $361.7 million as at August 1, 2009.
Net earnings for the second quarter were $49.1 million or 45 cents per
share compared to $61.5 million or 57 cents per share in the second quarter
last year. There were no unusual items in the quarter this year or last year.
Operating EBITDA (Earnings before interest, taxes, depreciation and
amortization) for the quarter this year was $108.7 million versus $125.0
million in the same 13-week period last year. Gross margins increased 5 basis
points as a percentage to revenue. Total expenses were reduced by 11.2%.
Total revenues for the 26-week period ended August 1, 2009 were $2.367
billion compared to $2.675 billion for the 26-week period last year, which
ended August 2, 2008, a decrease of 11.5%. Same store sales decreased 10.2%.
Net earnings for the 26 weeks ended August 1, 2009 were $59.4 million or
55 cents per share compared to $132.3 million or $1.23 per share for the same
26-week period last year. Operating net earnings for the first 26 weeks of
2009 were $65.9 million or 61 cents per share compared to $104.0 million or 97
cents per share for same 26-week period last year.
Operating EBITDA for the first half of the year was $171.0 versus $219.4
million for the same period last year. Gross margins decreased 39 basis points
as a percentage to revenue. Total expenses were reduced by 9.6%.
Commenting on the second quarter and first half, Dene Rogers, President
and Chief Executive Officer, Sears Canada Inc. said, "Revenues were negatively
impacted by lower consumer discretionary spending as a result of the recession
and the cool summer that affected most of Canada except British Columbia. We
managed both margins and expenses to maintain profitability. As a result,
Sears operating EBITDA performance to last year remains among the best in the
Canadian retail industry."
"Our 33,000 associates across Canada continue to be committed to
improving the lives of our customers by providing products, services and
solutions that earn their trust and build lifetime relationships," added Mr.
Rogers.
This release contains information which is forward-looking and is subject
to important risks and uncertainties. Forward-looking information concerns the
Company's future financial performance, business strategy, plans, goals and
objectives. Factors which could cause actual results to differ materially from
current expectations include, but are not limited to: the ability of the
Company to successfully implement its cost reduction, productivity improvement
and strategic initiatives and whether such initiatives will yield the expected
benefits; the impact of the sale of the Company's Credit and Financial
Services operations and the results achieved pursuant to the Company's
long-term marketing and servicing alliance with JPMorgan Chase Bank, N.A.;
general economic conditions; competitive conditions in the businesses in which
the Company participates; changes in consumer spending; seasonal weather
patterns; customer preference toward product offerings; changes in the
Company's relationship with its suppliers; interest rate fluctuations and
other changes in funding costs; fluctuations in foreign currency exchange
rates; the possibility of negative investment returns in the Company's pension
plan; the outcome of pending legal proceedings; and changes in laws, rules and
regulations applicable to the Company. While the Company believes that its
forecasts and assumptions are reasonable, results or events predicted in this
forward-looking information may differ materially from actual results or
events.
Sears Canada is a multi-channel retailer with a network of 196 corporate
stores, 193 dealer stores, 41 home improvement showrooms, over 1,800 catalogue
merchandise pick-up locations, 108 Sears Travel offices and a nationwide home
maintenance, repair, and installation network. The Company also publishes
Canada's most extensive general merchandise catalogue and offers shopping
online at www.sears.ca.
SEARS CANADA INC.
RECONCILIATION OF NET EARNINGS TO OPERATING EBITDA
Unaudited
Second Quarter(2) Year-to-Date(2)
-------------------------------------------
(in millions) 2009 2008 2009 2008
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Net earnings(1) $ 49.1 $ 61.5 $ 59.4 $ 132.3
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Non-Operating activities,
net of taxes
Restructuring expense - - 6.5 -
Unusual items - Sale of real
estate/joint venture - - - (28.3)
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Operating net earnings(1) $ 49.1 $ 61.5 $ 65.9 $ 104.0
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Depreciation and amortization 28.8 31.8 58.9 64.0
Interest expense, net 5.8 2.1 11.9 2.6
Income taxes expense excluding
operating adjustments(1) 25.0 29.6 34.3 48.8
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Operating EBITDA $ 108.7 $ 125.0 $ 171.0 $ 219.4
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Net earnings per share $ 0.45 $ 0.57 $ 0.55 $ 1.23
Operating net earnings per
share $ 0.45 $ 0.57 $ 0.61 $ 0.97
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(1) Net earnings and income taxes expense for the second quarter and
year-to-date ("YTD") 2008 have been restated as a result of the
retrospective application of the change in accounting policy related
to the adoption of Goodwill and Intangible Assets.
(2) The second quarter and YTD periods of 2009 and 2008 represent the 13
and 26-week periods ended August 1, 2009 and August 2, 2008,
respectively.
SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Unaudited
As at As at
August 2, January 31,
As at 2008 2009
August 1, (Restated (Restated
(in millions) 2009 - Note 2) - Note 2)
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ASSETS
Current Assets
Cash and short-term investments $ 782.0 $ 783.0 $ 819.8
Restricted cash and investments
(Note 14) 113.1 2.6 144.8
Accounts receivable 136.0 154.6 138.7
Income taxes recoverable 51.6 24.3 16.6
Inventories 952.9 999.5 968.3
Prepaid expenses and other assets 94.5 92.0 147.9
Current portion of future income tax
assets 29.7 32.1 8.7
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2,159.8 2,088.1 2,244.8
Capital assets 652.1 707.9 696.0
Deferred charges 177.9 192.5 185.2
Intangible Assets 16.9 9.4 16.8
Goodwill 11.2 11.2 11.2
Future income tax assets 34.7 25.1 28.4
Other long-term assets 46.1 32.2 54.9
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$ 3,098.7 $ 3,066.4 $ 3,237.3
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LIABILITIES
Current Liabilities
Accounts payable $ 522.1 $ 650.9 $ 640.9
Accrued liabilities 366.5 411.3 383.6
Income and other taxes payable 32.6 39.2 39.4
Principal payments on long-term
obligations due within one year
(Note 5) 239.3 15.2 32.1
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1,160.5 1,116.6 1,096.0
Long-term obligations 122.4 354.1 332.5
Accrued benefit liability (Note 13) 163.1 169.0 158.5
Other long-term liabilities 162.5 165.3 167.1
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1,608.5 1,805.0 1,754.1
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SHAREHOLDERS' EQUITY
Capital stock (Note 10) 15.7 15.7 15.7
Retained earnings 1,458.5 1,240.7 1,399.1
Accumulated other comprehensive
income 16.0 5.0 68.4
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1,490.2 1,261.4 1,483.2
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$ 3,098.7 $ 3,066.4 $ 3,237.3
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SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
For the 13 and 26-week periods ended August 1, 2009 and August 2, 2008
Unaudited
13-Week Period 26-Week Period
--------------------- ---------------------
2008 2008
(in millions, except per (Restated (Restated
share amounts) 2009 - Note 2) 2009 - Note 2)
-------------------------------------------------------------------------
Total revenues $ 1,250.0 $ 1,420.3 $ 2,366.5 $ 2,674.7
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Cost of merchandise sold,
operating, administrative and
selling expenses 1,141.3 1,295.3 2,204.8 2,455.3
Depreciation and amortization 28.8 31.8 58.9 64.0
Interest expense, net (Note 5) 5.8 2.1 11.9 2.6
Unusual items - (gain) (Note 6) - - - (37.2)
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Earnings before income taxes 74.1 91.1 90.9 190.0
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Income taxes expense (recovery)
Current 28.2 27.4 34.6 78.8
Future (3.2) 2.2 (3.1) (21.1)
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25.0 29.6 31.5 57.7
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Net earnings $ 49.1 $ 61.5 $ 59.4 $ 132.3
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Net earnings per share
(Note 7) $ 0.45 $ 0.57 $ 0.55 $ 1.23
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Diluted net earnings per share
(Note 7) $ 0.45 $ 0.57 $ 0.55 $ 1.23
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Net earnings $ 49.1 $ 61.5 $ 59.4 $ 132.3
Other comprehensive income
(loss), net of taxes:
Mark-to-market adjustment
related to short-term
investments, net of income
taxes recovery of $0.1 and
Nil (2008: Nil and less than
$0.1) (0.2) - (0.1) (0.1)
Loss on foreign exchange
derivatives designated as
cash flow hedges, net of
income taxes recovery of
$11.0 and $15.6 (2008:
expense of $1.3 and $2.4) (24.0) 2.8 (33.9) 5.0
Reclassification to net
earnings of gain on foreign
exchange derivatives
designated as cash flow
hedges, net of income taxes
expense of $ 4.4 and $8.7
(2008: recovery Nil and
less than $0.1) (9.3) - (18.6) 0.1
Gain on fuel derivatives
designated as cash flow
hedges, net of income taxes
expense of less than $0.1
and $0.1 (2008: Nil and Nil) 0.2 - 0.2 -
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Other comprehensive (loss)
income (Note 16) (33.3) 2.8 (52.4) 5.0
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Comprehensive income $ 15.8 $ 64.3 $ 7.0 $ 137.3
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
AND ACCUMULATED OTHER COMPREHENSIVE INCOME
For the 13 and 26-week periods ended August 1, 2009 and August 2, 2008
Unaudited
13-Week Period 26-Week Period
--------------------- ---------------------
2008 2008
(Restated (Restated
(in millions) 2009 - Note 2) 2009 - Note 2)
-------------------------------------------------------------------------
Retained earnings
Opening balance $ 1,409.4 $ 1,179.2 $ 1,424.0 $ 1,135.4
Adjustment to opening retained
earnings resulting from
adoption of new accounting
standards for goodwill and
intangible assets, net of
income taxes of $12.4 (Note 2) - - (24.9) (27.0)
Net earnings 49.1 61.5 59.4 132.3
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Closing balance $ 1,458.5 $ 1,240.7 $ 1,458.5 $ 1,240.7
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Accumulated other
comprehensive income
Opening balance $ 49.3 $ 2.2 $ 68.4 $ -
Other comprehensive (loss)
income (33.3) 2.8 (52.4) 5.0
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Closing balance $ 16.0 $ 5.0 $ 16.0 $ 5.0
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Retained earnings and
accumulated other
comprehensive income $ 1,474.5 $ 1,245.7 $ 1,474.5 $ 1,245.7
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SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the 13 and 26-weeks ended August 1, 2009 and August 2, 2008
Unaudited
13-Week Period 26-Week Period
--------------------- ---------------------
2008 2008
(Restated (Restated
(in millions) 2009 - Note 2) 2009 - Note 2)
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Cash flow generated from (used
for) operating activities
Net earnings $ 49.1 $ 61.5 $ 59.4 $ 132.3
Non-cash items included in
net earnings, principally
depreciation, pension
expense, future income taxes
and gain on sale of real
estate and real estate joint
ventures 27.1 41.0 63.6 14.3
Changes in non-cash working
capital balances related to
operations (37.7) (72.8) (157.0) (219.0)
Other, principally pension
contributions and changes to
long-term assets and
liabilities (0.9) (2.2) (5.2) (4.5)
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37.6 27.5 (39.2) (76.9)
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Cash flow generated from (used
for) investing activities
Purchases of capital assets (15.5) (12.8) (33.8) (44.2)
Proceeds from sale of capital
assets 0.4 - 0.8 40.1
Deferred charges (0.7) (0.3) (0.7) (0.3)
Changes in restricted cash and
investments (Current and
Long-term) 17.9 4.4 38.0 2.6
Acquisition, net of cash
acquired - - - (7.0)
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2.1 (8.7) 4.3 (8.8)
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Cash flow used for financing
activities
Repayment of long-term
obligations (2.7) (2.2) (2.9) (2.9)
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Increase (decrease) in cash and
short-term investments 37.0 16.6 (37.8) (88.6)
Cash and short-term investments
at beginning of period 745.0 766.4 819.8 871.6
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Cash and short-term investments
at end of period $ 782.0 $ 783.0 $ 782.0 $ 783.0
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Cash at end of period $ 74.3 $ 57.7 $ 74.3 $ 57.7
Short-term investments at end
of period 707.7 725.3 707.7 725.3
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Total cash and short-term
investments at end of
period $ 782.0 $ 783.0 $ 782.0 $ 783.0
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SEARS CANADA INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 1, 2009
Unaudited
1. BASIS OF PRESENTATION
These unaudited interim consolidated financial statements (the "Financial
Statements") of Sears Canada Inc. (the "Company") have been prepared in
accordance with Canadian Generally Accepted Accounting Principles
("GAAP") but do not contain all disclosures required by Canadian GAAP for
annual financial statements. Accordingly, these Financial Statements
should be read in conjunction with the most recently prepared audited
annual consolidated financial statements for the 52-week period ended
January 31, 2009 ("2008 Annual Financial Statements"). These Financial
Statements for the second quarter ended August 1, 2009 follow the same
accounting policies and methods of application as those used in the
preparation of the 2008 Annual Financial Statements, except as described
in Note 2, Accounting Policies and Estimates.
The Company's operations are seasonal in nature. Accordingly, merchandise
and service revenues, as well as performance payments received from
JPMorgan Chase & Co, N.A. (Toronto Branch) ("JPMorgan Chase") under the
long-term credit card marketing and servicing alliance, will vary by
quarter based upon consumer spending behaviour. Historically, the
Company's revenues and earnings are higher in the fourth quarter than in
any of the other three quarters due to the holiday season. The Company is
able to adjust certain variable costs in response to seasonal revenue
patterns; however, costs such as occupancy are fixed, causing the Company
to report a disproportionate level of earnings in the fourth quarter.
This business seasonality results in quarterly performance that is not
necessarily indicative of the year's performance.
2. ACCOUNTING POLICIES AND ESTIMATES
New Policies:
These Financial Statements follow the same accounting policies and
methods of application as the 2008 Annual Financial Statements, with the
following exceptions:
Goodwill and Intangible Assets
In February 2008, the Canadian Institute of Chartered Accountants
("CICA") issued Handbook Section 3064, "Goodwill and Intangible Assets"
("Section 3064"), which replaced Section 3062, "Goodwill and Other
Intangible Assets" and Section 3450, "Research and Development Costs".
The new standard is effective for interim and annual financial statements
issued for fiscal years beginning on or after October 1, 2008. The new
standard provides further guidance on the recognition and treatment of
internally developed intangibles and requires elimination of the practice
of deferring costs that do not meet the definition and recognition
criteria of assets. Section 3064 reinforces a principle-based approach to
the recognition of costs as assets in accordance with the definition of
an asset and criteria for the recognition of an asset in CICA Handbook
Section 1000, "Financial Statement Concepts".
The Company has adopted the new accounting standard issued by the CICA
Section 3064, effective fiscal 2009. The primary impact of implementing
this standard was with respect to the accounting policy for Catalogue
Production Costs ("CPC"). On adoption of the standard, CPC will be
expensed once the catalogue has been mailed to the customer. Prior to the
adoption of the standard CPC costs were capitalized and amortized over
the life of the catalogue. As a result, certain figures from the prior
year have been restated due to the retrospective application of a change
in accounting policy, as required under CICA Handbook Section 1506,
"Accounting Changes". As a result of this retrospective restatement the
following table summarizes the increase (decrease) to the 2008
comparative figures contained herein as at and for the 13 and 26-week
periods ended August 2, 2008 and the year ended January 31, 2009 from the
figures previously reported:
As at and for
As at and for As at and for the 52-week
the 13-week the 26-week Period Ended
(increase (decrease) Period Ended Period Ended January 31,
in millions) August 2, 2008 August 2, 2008 2009
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Prepaid expenses and
other assets $(25.5) $(25.5) $(34.6)
Current portion of
future income tax asset 8.5 8.5 8.4
Deferred charge (1.9) (1.9) (1.7)
Future income tax asset - - 0.5
Future income tax liability - - (2.5)
Net earnings 0.4 8.1 2.1
Opening retained earnings (19.3) (27.0) (27.0)
Closing retained earnings (18.9) (18.9) (24.9)
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The Company's intangible assets are comprised of software costs. These
costs were previously recorded as a Capital Asset prior to the adoption
of Section 3064. Intangible assets are amortized on a straight-line basis
over their estimated useful lives, and are reported separately as
"Intangible Assets" in the interim Consolidated Statements of Financial
Position. Intangible Assets are tested for impairment annually or more
frequently if changes in circumstances indicate a potential impairment.
Impairment is recognized in net earnings and is measured as the amount by
which the carrying amount exceeds its fair value.
Goodwill represents the excess of the cost of acquisition over the fair
value of the identifiable assets acquired, resulting from the acquisition
of a duct cleaning business in 2008, Cantrex Group Inc. ("Cantrex") in
2005 and a home services operation in 2001. Goodwill is not amortized,
and is reported separately as "Goodwill" in the interim Consolidated
Statements of Financial Position. Goodwill is tested for impairment
annually or more frequently if changes in circumstances indicate a
potential impairment. Impairment is recognized in net earnings and is
measured as the amount by which the carrying amount of the goodwill
exceeds its fair value. No impairment has been recognized on the
Company's goodwill since acquisition.
Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities
The Company adopted Emerging Issues Committee "EIC"-173, "Credit Risk and
the Fair Value of Financial Assets and Financial Liabilities". The EIC
reached a consensus that the Company's credit risk and the credit risk of
the counterparty should be taken into account in determining the fair
value of financial assets and financial liabilities. The abstract is to
be applied retrospectively without restatement of prior periods to
interim and annual financial statements for periods ending on or after
January 20, 2009. The implementation of the new abstract has had no
material impact on the Company's results of operations, financial
position or disclosures.
Financial Instruments - Recognition and Measurement
In April 2009, the CICA amended Handbook Section 3855, "Financial
Instruments - Recognition and Measurement", ("Section 3855") to converge
with International Accounting Standards 39, "Financial Instruments:
Recognition and Measurement" ("IAS 39"). The amendment was made to
clarify the calculation of interest on an interest-bearing asset after
recognition of an impairment loss. The amendment is effective on
issuance. The Company adopted the section with no impact on the Company's
results of operations, financial position or disclosures.
In June 2009 the CICA amended Handbook Section 3855 to converge with IAS
39 and International Financial Reporting Interpretations Committee 9,
"Reassessment of Embedded Derivatives" ("IFRIC 9"). The amendment was
made to provide guidance concerning the assessment of embedded
derivatives upon reclassification of a financial asset out of the held-
for-trading category. The amendment is effective for reclassifications
made on or after July 1, 2009. The Company adopted the section with no
impact on the Company's results of operations, financial position or
disclosures.
Future Accounting Policies:
International Financial Reporting Standards ("IFRS")
The Canadian Accounting Standards Board confirmed, in February 2008, that
it will require all public companies to adopt IFRS for interim and annual
financial statements relating to fiscal years beginning on or after
January 1, 2011. In the year of adoption, companies will be required to
provide comparative information as if IFRS had been used in the preceding
fiscal year. The transition from Canadian GAAP to IFRS will be applicable
to the Company's first quarter of operations for fiscal 2011, at which
time the Company will prepare both its fiscal 2011 and fiscal 2010
comparative financial information using IFRS. The Company expects the
transition to IFRS to impact financial reporting, business processes,
internal controls and information systems. The Company is currently
assessing the impact of the transition to IFRS on these areas and will
continue to invest in training and resources throughout the transition
period to facilitate a timely conversion.
Financial Instruments - Recognition and Measurement
In April 2009, the CICA amended Handbook Section 3855 to converge with
IAS 39 to provide guidance on when a put, call, surrender or prepayment
option embedded in a host debt instrument is closely related to the host
instrument. The amendment is effective for interim and annual financial
statements relating to fiscal years beginning on or after January 1, 2011
with earlier adoption permitted. The Company is currently evaluating the
future impact of this amendment on its consolidated financial statements.
In July 2009, the CICA amended Handbook Section 3855 to converge with
IFRS for impairment of debt instruments by changing the categories into
which debt instruments are required and permitted to be classified. The
amendments are effective for annual financial statements relating to
fiscal years beginning on or after November 1, 2008. An entity is
permitted, but not required, to apply these amendments to interim
financial statements relating to periods within the fiscal year of
adoption only if those interim financial statements are issued on or
after August 20, 2009. The Company is currently evaluating the future
impact of this amendment on its 2009 consolidated financial statements.
Financial Instruments - Disclosures
In June 2009, the CICA amended Handbook Section 3862, "Financial
Instruments - Disclosures" ("Section 3862"), to adopt the amendments
recently proposed by the International Accounting Standards Board
("IASB") to IFRS 7, "Financial Instruments: Disclosures". The amendments
were made to enhance disclosures about fair value measurements, including
the relative reliability of the inputs used in those measurements, and
about the liquidity risk of financial instruments. The amendments are
effective for annual financial statements relating to fiscal years ending
after September 30, 2009 for publicly accountable enterprises, private
enterprises, co-operative business enterprises, rate-regulated
enterprises and not-for-profit organizations that choose to apply Section
3862. Comparative information for the disclosures required by the
amendments is not required in the first year of application. The Company
is currently evaluating the future impact of this amendment on its 2009
consolidated financial statements.
Estimates:
Loyalty Program Reserves
During the second quarter, the Company revised certain assumptions used
to calculate the loyalty program reserves based on new information
regarding redemption rates and the associated cost of the program. The
net impact was an increase to pre-tax earning of $7.0 million due to a
decrease in the loyalty reserve.
3. INVENTORIES
The amount of inventories recognized as an expense during the 13 and 26-
week periods ended August 1, 2009 was $636.3 million (2008:
$726.2 million) and $1,201.6 million (2008: $1,356.5 million),
respectively, including $16.1 million (2008: $21.3 million) and
$43.0 million (2008: $42.4 million), related to write-downs. A negligible
amount of write-downs were reversed during each of the 13 and 26-week
periods ended August 1, 2009.
With the exception of $32.5 million (2008: $32.1 million) of inventories
from the Company's parts and service and home improvement businesses, the
Company's entire inventories balance consists of merchandise finished
goods. (Comparative figures for 2008 represent balances as at January 31,
2009.)
4. VENDOR REBATES
The Company has recognized $0.6 million and $1.0 million, as a reduction
in the cost of purchases for the 13 and 26-week periods ended August 1,
2009 related to binding agreements for which full entitlement has not yet
been met but is probable.
5. LONG-TERM OBLIGATIONS
The Company has a corporate credit rating of BB and BB- from Dominion
Bond Ratings Service and Standard and Poor's respectively and a corporate
family rating of Ba1 from Moody's Investors Service, Inc.
The Company is no longer subject to any financial covenants and the
Company's long-term debt consists of unsecured medium-term notes with
fixed interest rates and payment terms. As at August 1, 2009 the Company
had outstanding letters of credit of U.S. $54.0 million used to support
the Company's offshore merchandise purchasing program with restricted
cash and investments pledged as collateral.
Interest expense on long-term debt for the 13 and 26-week periods ended
August 1, 2009 amounted to $6.2 million (2008: $7.2 million) and
$13.2 million (2008: $14.5 million), respectively. The Company's cash
payments for interest on long-term debt in the 13 and 26-week periods
ended August 1, 2009 totalled $8.1 million (2008: $9.0 million) and
$13.1 million (2008: $14.2 million), respectively.
In the 13 and 26-week periods ended August 1, 2009, the Company recorded
$0.4 million (2008: $5.1 million) and $1.3 million (2008: $11.9 million),
respectively, of interest revenue, net of short-term interest expense,
primarily related to cash and short-term investments. The Company
received cash in the amount of $0.4 million (2008: $3.8 million) and
$1.8 million (2008: $12.9 million) in respect of short-term interest
revenue, net of short-term interest expense, during the 13 and 26-week
periods ended August 1, 2009, respectively.
During the quarter $200.0 million of medium term notes due May 10, 2010
were reclassified from long-term obligations to current liabilities.
6. UNUSUAL ITEMS
There were no unusual items for the 13 and 26-week periods ended August
1, 2009.
In the first quarter of 2008, the Company completed the sale of property
in Calgary, Alberta where it operated a full-line store. The Company
received proceeds of approximately $40.0 million recording a pre-tax gain
of $37.2 million, net of transaction costs.
7. NET EARNINGS PER SHARE
A reconciliation of the number of shares used in the net earnings per
share calculation is as follows:
13-week 13-week 26-week 26-week
Period Ended Period Ended Period Ended Period Ended
August 1, August 2, August 1, August 2,
(Number of shares) 2009 2008 2009 2008
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Average number of
shares per basic
net earnings per
share
calculation 107,620,995 107,620,995 107,620,995 107,620,995
Effect of dilutive
instruments
outstanding 4,374 9,428 3,815 11,481
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Average number of
shares per
diluted net
earnings per
share
calculation 107,625,369 107,630,423 107,624,810 107,632,476
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For the 13 and 26-week periods ended August 1, 2009, 126,081 options
(2008: 166,481 options) were excluded from the calculation of diluted net
earnings per share as they were anti-dilutive.
8. SEGMENTED INFORMATION
Segmented Statements of Earnings
13-Week 26-Week
Period Ended Period Ended
13-Week August 2, 26-Week August 2,
Period Ended 2008 Period Ended 2008
August 1, (Restated - August 1, (Restated -
(in millions) 2009 Note 2) 2009 Note 2)
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Total revenues
Merchandising $ 1,237.4 $ 1,408.4 $ 2,342.2 $ 2,650.7
Real Estate
Joint Ventures 12.6 11.9 24.3 24.0
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Total revenues $ 1,250.0 $ 1,420.3 $ 2,366.5 $ 2,674.7
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Segmented
operating profit
Merchandising $ 74.7 $ 88.0 $ 92.6 $ 144.5
Real Estate
Joint Ventures 5.2 5.2 10.2 10.9
Interest expense, net 5.8 2.1 11.9 2.6
Unusual items - (gain) - - - (37.2)
Income taxes 25.0 29.6 31.5 57.7
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Net earnings $ 49.1 $ 61.5 $ 59.4 $ 132.3
-------------------------------------------------------------------------
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Segmented Statements of Capital Employed(1)
As at As at
August 2, January 31,
As at 2008 2009
August 1, (Restated - (Restated -
(in millions) 2009 Note 2) Note 2)
-------------------------------------------------------------------------
Merchandising $ 1,750.3 $ 1,530.4 $ 1,743.5
Real Estate Joint Ventures 101.6 100.3 104.3
-------------------------------------------------------------------------
Total $ 1,851.9 $ 1,630.7 $ 1,847.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Capital Employed represents the total of long-term obligations,
including principal payments on long-term obligations due within one
year, and shareholders' equity, which includes capital stock,
retained earnings and accumulated other comprehensive income
("AOCI").
Segmented Statements of Total Assets
As at As at
August 2, January 31,
As at 2008 2009
August 1, (Restated - (Restated -
(in millions) 2009 Note 2) Note 2)
-------------------------------------------------------------------------
Merchandising $ 2,986.9 $ 2,957.0 $ 3,120.9
Real Estate Joint Ventures 111.8 109.4 116.4
-------------------------------------------------------------------------
Total $ 3,098.7 $ 3,066.4 $ 3,237.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. INCOME TAXES
The Company's total net cash payments of income taxes in the 13 and 26-
week periods ended August 1, 2009 were $30.8 million (2008:
$24.6 million) and $69.7 million (2008: $134.0 million), respectively.
In the ordinary course of business, the Company is subject to ongoing
audits by tax authorities. While the Company believes that its tax filing
positions are appropriate and supportable, periodically, certain matters
are challenged by tax authorities. As the Company routinely evaluates and
provides for potentially unfavourable outcomes with respect to any tax
audits, the Company believes that the final disposition of tax audits
will not have a material adverse effect on its liquidity, consolidated
financial position or results of operations. If the result of a tax audit
materially differs from the existing provisions, the Company's effective
tax rate and its net earnings may be affected positively or negatively in
the period in which the tax audits are completed. Included in other long
term assets is a receivable of $17.1 million related to a payment made by
the Company for a tax assessment that is being disputed.
10. CAPITAL STOCK
As at August 1, 2009, 107,620,995 common shares were issued and
outstanding. Sears Holdings Corporation, the controlling shareholder of
the Company, is the beneficial holder of 78,680,790, or 73.1%, of the
common shares of the Company as at August 1, 2009. The number of
outstanding common shares did not change from the end of fiscal 2008.
11. STOCK-BASED COMPENSATION
The Employees Stock Plan expired on April 19, 2008 however; the
expiration of the plan does not affect the rights of current option
holders. Options were last granted in 2004 which are exercisable within
10 years from the grant date. All options currently outstanding will
expire before or in February 2014. As at August 1, 2009 there were
166,061 stock options outstanding under the Employees Stock Plan.
At the end of each fiscal period, the Company records a liability for
previously issued tandem awards equal to the amount by which the market
price of its shares at the end of the period exceeds the exercise price
of the vested tandem awards. Stock compensation expense is recorded to
adjust the liability for changes in the market price of the Company's
shares and for awards exercised in the period. Total stock-based
compensation expense related to tandem awards issued from the Employees
Stock Plan during the 13 and 26-week periods ended August 1, 2009 was
expense of less than $0.1 million (2008: credit of $0.2 million) and
expense of $0.1 million (2008: credit of $0.1 million), respectively.
12. GUARANTEES
The Company has provided the following significant guarantees to third
parties:
Sub-lease agreements
The Company has a number of sub-lease agreements with third parties. The
Company retains ultimate responsibility to the landlord for payment of
amounts under the lease agreements should the sub-lessee fail to pay. The
total future lease payments under such agreements are $18.3 million.
Other indemnification agreements
In the ordinary course of business the Company has provided
indemnification commitments to counterparties in transactions such as
leasing transactions, royalty agreements, service arrangements,
investment banking agreements, director and officer indemnification
agreements and indemnification of trustees under indentures for
outstanding public debt. The Company has also provided certain
indemnification agreements in connection with the sale of the Credit and
Financial Services operations in November 2005. The foregoing
indemnification agreements require the Company to compensate the
counterparties for costs incurred as a result of changes in laws and
regulations or as a result of litigation claims or statutory claims or
statutory sanctions that may be suffered by a counterparty as a
consequence of the transaction. The terms of these indemnification
agreements will vary based on the contract and typically do not provide
for any limit on the maximum potential liability. Historically, the
Company has not made any significant payments under such indemnifications
and no amount has been accrued in the Financial Statements with respect
to these indemnification commitments.
13. ASSOCIATE FUTURE BENEFITS
The net expense for the defined benefit, defined contribution and other
benefit plans for the 13-week period ended August 1, 2009 were
$0.4 million (2008: $1.4 million), $3.9 million (2008: $1.8 million) and
$2.4 million (2008: $2.7 million), respectively. The net expense for the
defined benefit, defined contribution and other benefit plans for the 26-
week period ended August 1, 2009 were $0.8 million (2008: $4.7 million),
$8.7 million (2008: $1.8 million) and $4.9 million (2008: $5.2 million),
respectively. The Company introduced the defined contribution plan on
July 1, 2008.
14. COMMITMENTS AND CONTINGENCIES
In addition to the class action suit described in the annual financial
statements, the Company is involved in various legal proceedings
incidental to the normal course of business. The Company is of the view
that although the outcome of such legal proceedings cannot be predicted
with certainty, the final disposition is not expected to have a material
adverse effect on the Company's consolidated financial position or
results of operations.
Restricted Cash and Investments
Cash and investments are considered to be restricted when it is subject
to contingent rights of a third party customer, vendor, or government
agency. As at August 1, 2009, the Company recorded $113.1 million (2008:
$144.8 million) of restricted cash and investments recorded as current
assets and $0.7 million (2008: $6.9 million) of restricted cash deposits
recorded in other long-term assets. These balances represent cash and
investments pledged as collateral for letter of credit obligations issued
under the Company's offshore merchandise purchasing program of
$75.5 million (2008: $110.4 million), current and long-term cash deposits
pledged as collateral with counterparties related to outstanding
derivative contracts of $34.4 million (2008: $28.3 million) and
$0.7 million (2008: $6.9 million), respectively, and funds held in trust
in accordance with regulatory requirements governing advance ticket sales
related to Sears Travel of $3.2 million (2008: $6.1 million).
(Comparative figures for 2008 represent balances as at January 31, 2009.)
15. CAPITAL DISCLOSURES
The Company's objectives when managing capital are:
- Maintain financial flexibility thus allowing the Company to preserve
its ability to meet financial objectives and continue as a going
concern;
- Provide an appropriate return to shareholders; and
- Maintain a capital structure that allows the Company to obtain
financing should the need arise.
The Company manages and makes adjustments to its capital structure, when
necessary, in light of changes in economic conditions, the objectives of
its shareholders, the cash requirements of the business and the condition
of capital markets. In order to maintain or adjust the capital structure
the Company may pay a dividend or return capital to shareholders,
increase/decrease debt or sell assets.
The Company defines capital as follows:
- Long-term obligations, including the current portion ("Long-term
obligations"); and
- Shareholders' equity.
The following table presents summary quantitative data with respect to
the Company's capital:
As at As at
August 2, January 31,
As at 2008 2009
August 1, (Restated - (Restated -
(in millions) 2009 Note 2) Note 2)
-------------------------------------------------------------------------
Long-term
obligations $ 361.7 $ 369.3 $ 364.6
Shareholders' equity 1,490.2 1,261.4 1,483.2
-------------------------------------------------------------------------
$ 1,851.9 $ 1,630.7 $ 1,847.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at August 1, 2009, the Company is not subject to any financial
covenants or ratios and the outstanding notes are unsecured. The Company
has a U.S. $120.0 million letter of credit facility with restricted cash
and investments pledged as collateral against outstanding amounts.
16. FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company enters into financial
agreements with banks and other financial institutions to reduce
underlying risks associated with interest rates and foreign currency. The
Company does not hold or issue derivative financial instruments for
trading or speculative purposes.
Financial instrument risk management
The Company's adoption of Section 3862, "Financial Instruments-
Disclosure" and Section 3863, "Financial Instruments-Presentation" on
February 3, 2008, has resulted in additional disclosure relating to the
Company's exposure to risks arising from financial instruments. The
Company is exposed to credit, liquidity and market risk as a result of
holding financial instruments. Market risk consists of foreign exchange,
interest rate and commodity price risk.
Credit risk
Credit risk refers to the possibility that the Company can suffer
financial losses due to the failure of the Company's counterparties to
meet their payment obligations. Exposure to credit risk exists for
derivative instruments, cash and short-term investments, restricted cash
and investments and accounts receivable.
As at August 1, 2009, the Company's only exposure to counterparty risk as
it relates to derivative instruments is represented by the fair value of
the derivative contracts of $21.7 million. These contracts are placed
with financial institutions with secure credit ratings.
Cash and short-term investments, restricted cash and investments and
other long-term assets of $819.8 million also expose the Company to
credit risk should the borrower default on maturity of the investment.
The Company manages this exposure through policies that require borrowers
to have a minimum credit rating of A, and limiting investments with
individual borrowers at maximum levels based on credit rating.
The Company is exposed to minimal credit risk from customers as a result
of ongoing credit evaluations and review of accounts receivable
collectability. As at August 1, 2009, approximately 51% of the Company's
accounts receivable are due from two customers who are both current on
their account.
Liquidity risk
Liquidity risk is the risk that the Company may not have cash available
to satisfy financial liabilities as they come due. The Company actively
maintains access to adequate funding sources to ensure it has sufficient
available funds to meet current and foreseeable financial requirements at
a reasonable cost.
The following table summarizes the carrying amount and the contractual
maturities of both the interest and principal portion of significant
financial liabilities as at August 1, 2009:
Contractual Cash Flow Maturities
-------------------------------------------------
1 year 3 years
Carrying Within to to Beyond
(in millions) Amount Total 1 year 3 years 5 years 5 years
-------------------------------------------------------------------------
Accounts
payable $ 522.1 $ 522.1 $ 522.1 $ - $ - $ -
Accrued
liabilities 366.5 366.5 366.5 - - -
Long-term
obligations
and payments
due within
1 year 361.7 399.0 266.3 114.1 8.6 10.0
Operating lease
obligations(2) - 672.9 107.4 178.8 134.1 252.6
-------------------------------------------------------------------------
$1,250.3 $1,960.5 $1,262.3 $ 292.9 $ 142.7 $ 262.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(2) Operating lease obligations are not reported on the consolidated
statement of financial position.
Management believes that cash on hand, future cash flows generated from
operations and availability of current and future funding will be
adequate to support these financial liabilities.
Market risk
Market risk exists as a result of the potential for losses caused by
changes in market factors such as interest rates, foreign currency
exchange rates and commodity prices.
Foreign exchange risk
The Company enters into foreign exchange contracts to reduce the foreign
exchange risk with respect to U.S. dollar denominated assets,
liabilities, goods or services. As at August 1, 2009, there were
derivative contracts outstanding with a notional value of U.S.
$314.8 million and a combined carrying value of $16.3 million, included
in prepaid expenses and other assets. These derivative contracts have
settlement dates extending to August 2010. Option contracts with a
notional value of U.S $304.9 million and a carrying value of
$16.4 million have been designated as a cash flow hedge for hedge
accounting treatment under CICA Handbook Section 3865, "Hedges" ("Section
3865"). These contracts are intended to reduce the foreign exchange risk
with respect to anticipated purchases of U.S. dollar denominated goods
and services, including goods purchased for resale ("hedged item"). As at
August 1, 2009 all hedges were considered effective with no
ineffectiveness recognized in income.
The Company is also subject to foreign exchange risk on U.S. dollar
denominated short-term investments pledged as collateral for letter of
credit obligations issued under the Company's offshore merchandise
purchasing program. As at August 1, 2009, there were swap contracts
outstanding with a notional value of U.S. $70.0 million and a carrying
value of $4.2 million, included in prepaid expenses and other assets.
These contracts are short-term to match the duration of the outstanding
obligations.
While the notional principal amounts of these outstanding financial
instruments are not recorded on the consolidated statements of financial
position, the fair value of the contracts is included on the consolidated
statements of financial position in one of the following categories,
depending on the derivative's maturity and value: prepaid expenses and
other assets, other long-term assets, accrued liabilities or other long-
term liabilities. Changes in fair value of those contracts designated as
hedges are included in other comprehensive income ("OCI") for cash flow
hedges to the extent the hedges continue to be effective. Amounts
previously included in OCI are reclassified to net earnings in the same
period in which the hedged item impacts net earnings.
For the 13 and 26-week periods ended August 1, 2009, the Company recorded
a gain of $2.9 million and $7.3 million, respectively relating to the
translation or settlement of U.S. dollar denominated monetary items.
Based on historic movements, volatilities in foreign exchange and
management's current assessment of the financial markets, the Company
believes a variation of +10% (appreciation of the Canadian dollar) and
-10% (depreciation of the Canadian dollar) in foreign exchange rate
against the U.S. dollar is reasonably possible over a 12 month period.
The period end rate was 0.9281 U.S. dollar to Canadian dollar. Cash and
short-term investments (other than those discussed above), derivative
contracts that have not been designated as cash flow hedges, accounts
receivable and accounts payable include U.S. dollar denominated balances
which net to an insignificant balance, therefore, any changes in the
U.S./Canadian dollar exchange rates would have an immaterial impact on
net earnings.
Interest rate risk
From time to time the Company enters into interest rate swap contracts
with Schedule I banks, to manage exposure to interest rate risks. As at
August 1, 2009, the Company had no interest rate swap contracts in place.
Interest rate risk reflects the sensitivity of the Company's financial
condition to movements in interest rates. Financial assets and
liabilities which do not bear interest or bear interest at fixed rates
are classified as non-interest rate sensitive. Based on historic
movements, volatilities in interest rates and management's current
assessment of the financial markets, the Company believes a variation of
+1%/-1% in the interest rates applicable to the Company's cash and short-
term investments and restricted cash and investments are reasonably
possible over a 12 month period.
Cash and short-term investments and restricted cash and investments are
subject to interest rate risk. The total subject to interest rate risk as
at August 1, 2009 was $894.1 million. A movement in interest rate of
+/- 1% would cause a variance in net earnings in the amount of
$6.2 million.
Fuel price risk
The Company entered into a fuel derivative contract to manage the
exposure to diesel fuel prices to help mitigate volatility in cash flow
for the transportation service business. As at August 1, 2009 there was a
fixed to floating rate swap contract outstanding for a notional volume of
5.8 million litres and a carrying value of $0.5 million. This derivative
contract has settlement dates extending to February 2010 and a portion
has been designated as a cash flow hedge for hedge accounting treatment
under Section 3865. Changes in the fair value of the effective portion of
the designated component of the derivative contract that qualifies as a
cash flow hedge is recognized in accumulated other comprehensive income.
Upon maturity of the designated component of the swap contract, the
effective gains and losses are recorded in net earnings. Any gain or loss
in fair value relating to the ineffective portion is recognized
immediately in net earnings.
Classification and fair value of financial instruments
The estimated fair values of financial instruments as at August 1, 2009,
August 2, 2008 and January 31, 2009, are based on relevant market prices
and information available at those dates. The following tables summarize
the classification and fair value ("FV") of certain financial instruments
as at August 1, 2009, August 2, 2008 and January 31, 2009 and the pre-tax
change in fair value of those instruments during the 13 and 26-week
periods of 2009 and 2008 with the offset included in either OCI or net
earnings. The Company determines the classification of a financial
instrument when it is originally recorded, based on the underlying
purpose of the instrument. As a significant number of the Company's
assets and liabilities, including inventories and capital assets, do not
meet the definition of financial instruments, values in the tables below
do not reflect the fair value of the Company as a whole.
(in millions)
-------------------------------------------------------------------------
As at As at As at
Balance Sheet August 1, May 2, January
Classification Category 2009 2009 31, 2009
-------------------------------------------------------------------------
Available
for sale
Short-term Cash and short-term
investments investments(3) $ 707.7 $ 639.1 $ 753.4
Long-term Other long-term
investments assets 1.5 1.5 1.6
-------------------------------------------------------------------------
Held for trading
Cash Cash and short-term
investments 74.3 105.9 66.4
Cash and Restricted cash and
investments investments(3) 113.1 128.4 144.8
U.S. $ derivative Prepaid expenses &
contracts other assets 20.5 64.5 91.1
Cash Other long-term assets 0.7 3.1 6.9
Fixed price Accrued
energy contracts liabilities - - -
Commodity Accrued
derivative liabilities 1.2 0.1 (0.1)
contracts
-------------------------------------------------------------------------
13-week Period 26-week Period
Ended August 1, Ended August 1,
2009 2009
--------------------------------------
(in millions) Pre-tax change in FV included in
-------------------------------------------------------------------------
Balance Sheet Net Net
Classification Category OCI earnings OCI earnings
-------------------------------------------------------------------------
Available
for sale
Short-term Cash and
investments short-term
investments(3) $ 0.2 $ - $ 0.1 $ -
Long-term Other long-term
investments assets - - - 0.1
-------------------------------------------------------------------------
Held for trading
Cash Cash and short-term
investments - - - -
Cash and Restricted cash and
investments investments(3) - - - -
U.S. $ derivative Prepaid expenses &
contracts other assets 48.7 (4.7) 76.8 (6.2)
Cash Other long-term
assets - - - -
Fixed price Accrued
energy contracts liabilities - - - -
Commodity Accrued
derivative liabilities (0.2) (0.9) (0.2) (1.1)
contracts
-------------------------------------------------------------------------
$ 48.7 $ (5.6) $ 76.7 $ (7.2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions)
-------------------------------------------------------------------------
As at As at As at
Balance Sheet August 2, May 3, February
Classification Category 2008 2008 2, 2008
-------------------------------------------------------------------------
Available
for sale
Short-term Cash and
investments short-term
investments(3) $ 725.3 $ 690.9 $ 806.9
Long-term Other long-term
investments assets 2.2 2.2 2.6
-------------------------------------------------------------------------
Held for trading
Cash Cash and
short-term
investments 57.7 75.5 64.7
Cash and Restricted
investments cash and
investments(3) 2.6 7.0 5.2
U.S. $ derivative Prepaid expenses
contracts & other assets
(Accrued
liabilities) 7.9 3.9 (0.2)
Cash Other long-term
assets - - -
Fixed price Accrued
energy contracts liabilities - - (0.1)
Commodity Accrued
derivative liabilities - - -
contracts
-------------------------------------------------------------------------
13-week Period 26-week Period
Ended August 2, Ended August 2,
2008 2008
--------------------------------------
(in millions) Pre-tax change in FV included in
-------------------------------------------------------------------------
Balance Sheet Net Net
Classification Category OCI earnings OCI earnings
-------------------------------------------------------------------------
Available
for sale
Short-term Cash and
investments short-term
investments(3) $ - $ - $ 0.1 $ -
Long-term Other long-term
investments assets - - - 0.4
-------------------------------------------------------------------------
Held for trading
Cash Cash and
short-term
investments - - - -
Cash and Restricted
investments cash and
investments(3) - - - -
U.S. $ derivative Prepaid expenses
contracts & other assets
(Accrued
liabilities) (4.1) 0.1 (7.5) (0.6)
Cash Other long-term
assets - - - -
Fixed price Accrued
energy contracts liabilities - - - (0.1)
Commodity Accrued
derivative liabilities - - - -
contracts
-------------------------------------------------------------------------
$ (4.1) $ 0.1 $ (7.4) $ (0.3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(3) Interest revenue related to short-term investments is disclosed in
Note 5 Long-term Obligations.
All other assets that are financial instruments, excluding long-term
notes discussed below, have been classified as "loans and receivables"
and all other financial instrument liabilities have been classified as
"other liabilities" and are measured at amortized cost on the
consolidated statements of financial position. The carrying value of
these financial instruments, with the exception of long-term obligations,
approximates fair value. Long-term obligations with a carrying value of
$359.1 million, including the portion due within one year, but excluding
all capital lease obligations, have a fair value as at August 1, 2009 of
$359.0 million. The fair value of the Company's proportionate share of
long-term debt of joint ventures, with a carrying value of $59.1 million
as at August 1, 2009, was calculated using a valuation technique based on
assumptions that are not supported by observable market prices or rates.
The term and interest rate applicable to each joint venture's debt
together with management's estimate of a risk-adjusted discount rate were
used to determine the fair value of $58.9 million. The fair value of the
Company's medium term notes, with a carrying value of $300.0 million as
at August 1, 2009, is $300.1 million and was determined with reference to
observable market prices and rates.
Included in other long-term assets on the consolidated statement of
financial position is an investment in long-term notes, with an original
cost of $3.0 million and a fair value as at August 1, 2009 of
$1.5 million, which has been classified as available for sale. The fair
value as at August 1, 2009, has been calculated using a valuation
technique based on assumptions that are not supported by observable
market prices or rates. Information disclosed in the Master Asset Vehicle
2 (MAV2) trust indenture together with management's estimates based
thereon regarding interest rate, risk-adjusted discount rate and expected
term of the various classes of restructured notes, resulted in a Nil and
$0.1 million reduction for the 13 and 26-week periods ended August 1,
2009 respectively, in the investment's fair value. The Company does not
intend to dispose of the investment within a year.
For further information: Contact for Media: Vincent Power, Sears Canada,
Corporate Communications, (416) 941-4422, vpower@sears.ca
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