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| Sears Canada Reports First Quarter Results |
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| TORONTO, May 20, 2009 (Canada NewsWire via COMTEX) -- Sears Canada Inc. (TSX: SCC) today announced its unaudited first quarter results. Total revenues for the 13 week period ended May 2, 2009 were $1.117 billion compared to $1.254 billion for the 13 week period ended May 3, 2008, a decrease of 10.9%. Same store sales decreased 10.4%.
Operating EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) for the quarter was $62.3 million compared to $94.4 million for the same period last year. Operating EBITDA is a non-GAAP measure; please refer to the table attached for a reconciliation of net earnings to operating EBITDA. Net earnings for the quarter were $10.3 million or 10 cents per share compared to net earnings of $70.8 million or 66 cents per share for the same period last year. Operating net earnings for the first quarter, excluding the charge related to a staff severance which the Company announced in February, were $16.8 million or 16 cents per share, compared to operating net earnings of $42.5 million or 40 cents per share last year, which excludes the gain on the sale of the Company property in Calgary, Alberta. Operating net earnings is a non-GAAP measure; please refer to the table attached for a reconciliation of net earnings to operating net earnings. Commenting on the quarter, Dene Rogers, President and Chief Executive Officer, Sears Canada Inc., said, "The economic recession deepened during the first quarter, unemployment increased to 8.0% and the Consumer Confidence Index averaged 22 percentage points below last year. Considering the economic conditions, Sears delivered solid results and I commend our 33,000 associates for their contribution to these results. Together we continue towards our goal to become Canada's No. 1 retailer. To take more steps to become the No. 1 retailer we focused on long term value building initiatives including rolling out an improved and expanded gift registry program, introducing a no-fee travel loyalty point redemption program, launching Liz and Co., a new brand from Liz Claiborne, and reducing product returns by providing a higher level of service to customers." 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 197 corporate stores, 193 dealer stores, 43 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.
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SEARS CANADA INC.
RECONCILIATION OF NET EARNINGS TO OPERATING EBITDA
Unaudited
First Quarter
(in millions) 2009 2008
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Net earnings(1) $ 10.3 $ 70.8
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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) $ 16.8 $ 42.5
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Depreciation and amortization 30.1 32.2
Interest expense, net 6.1 0.5
Income taxes expense excluding operating
adjustments(1) 9.3 19.2
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Operating EBITDA(2) $ 62.3 $ 94.4
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Net earnings per share $ 0.10 $ 0.66
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Operating net earnings per share $ 0.16 $ 0.40
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(1) Net earnings and income tax expense for the first quarter of 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 first quarter of 2009 and 2008 represents the 13 weeks ended
May 2, 2009 and May 3, 2008, respectively.
SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Unaudited
As at As at
May 3, January 31,
As at 2008 2009
May 2, (Restated (Restated
(in millions) 2009 - Note 2) - Note 2)
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ASSETS
Current Assets
Cash and short-term investments $ 745.0 $ 766.4 $ 819.8
Restricted cash and investments
(Note 14) 128.4 7.0 144.8
Accounts receivable 133.3 142.2 138.7
Income taxes recoverable 48.2 22.3 16.6
Inventories 1,036.1 1,026.0 968.3
Prepaid expenses and other assets 136.7 76.7 147.9
Current portion of future income
tax assets 13.7 36.9 8.7
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2,241.4 2,077.5 2,244.8
Capital assets 673.7 720.4 696.0
Deferred charges 181.6 195.2 185.2
Intangible Assets 14.8 9.4 16.8
Goodwill 11.2 11.2 11.2
Future income tax assets 32.1 23.8 28.4
Other long-term assets 49.6 33.4 54.9
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$ 3,204.4 $ 3,070.9 $ 3,237.3
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LIABILITIES
Current Liabilities
Accounts payable $ 591.1 $ 669.2 $ 640.9
Accrued liabilities 408.2 442.6 383.6
Income and other taxes payable 41.4 56.9 39.4
Principal payments on long-term
obligations due within one year 32.1 15.7 32.1
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1,072.8 1,184.4 1,096.0
Long-term obligations 332.3 355.7 332.5
Accrued benefit liability (Note 13) 160.8 166.5 158.5
Other long-term liabilities 164.1 167.2 167.1
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1,730.0 1,873.8 1,754.1
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SHAREHOLDERS' EQUITY
Capital stock (Note 10) 15.7 15.7 15.7
Retained earnings 1,409.4 1,179.2 1,399.1
Accumulated other
comprehensive income 49.3 2.2 68.4
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1,474.4 1,197.1 1,483.2
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$ 3,204.4 $ 3,070.9 $ 3,237.3
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SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
For the 13-weeks ended May 2, 2009 and May 3, 2008
Unaudited
2008
(Restated
(in millions, except per share amounts) 2009 - Note 2)
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Total revenues $ 1,116.5 $ 1,254.4
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Cost of merchandise sold, operating,
administrative and selling expenses 1,063.5 1,160.0
Depreciation and amortization 30.1 32.2
Interest expense, net (Note 5) 6.1 0.5
Unusual items - (gain) (Note 6) - (37.2)
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Earnings before income taxes 16.8 98.9
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Income taxes expense (recovery)
Current 6.4 51.4
Future 0.1 (23.3)
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6.5 28.1
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Net earnings $ 10.3 $ 70.8
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Net earnings per share $ 0.10 $ 0.66
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Diluted net earnings per share $ 0.10 $ 0.66
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Net earnings $ 10.3 $ 70.8
Other comprehensive income (loss), net of taxes:
Mark-to-market adjustment related to
short-term investments, net of income taxes
expense of less than $0.1 (2008: recovery
of less than $0.1) 0.1 (0.1)
Loss on derivatives designated as cash flow
hedges, net of income taxes recovery of
$4.6 (2008: expense of $1.1) (9.9) 2.2
Reclassification to net earnings of gain on
derivatives designated as cash flow hedges,
net of income taxes expense of $4.3
(2008: recovery less than $0.1) (9.3) 0.1
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Other comprehensive (loss) income (Note 16) (19.1) 2.2
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Comprehensive (loss) income $ (8.8) $ 73.0
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS AND ACCUMULATED OTHER
COMPREHENSIVE INCOME
For the 13-weeks ended May 2, 2009 and May 3, 2008
Unaudited
2008
(Restated
(in millions) 2009 - Note 2)
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Retained earnings
Opening balance $ 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 10.3 70.8
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Closing balance $ 1,409.4 $ 1,179.2
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Accumulated other comprehensive income
Opening balance $ 68.4 $ -
Other comprehensive (loss) income (19.1) 2.2
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Closing balance $ 49.3 $ 2.2
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Retained earnings and accumulated other
comprehensive income $ 1,458.7 $ 1,181.4
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SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the 13-weeks ended May 2, 2009 and May 3, 2008
Unaudited
2008
(Restated
(in millions) 2009 - Note 2)
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Cash flow generated from (used for) operating
activities
Net earnings $ 10.3 $ 70.8
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 36.5 (26.7)
Changes in non-cash working capital balances
related to operations (119.3) (146.2)
Other, principally pension contributions and
changes to long-term assets and liabilities (4.3) (2.3)
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(76.8) (104.4)
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Cash flow generated from (used for) investing
activities
Purchases of capital assets (18.3) (31.4)
Proceeds from sale of capital assets 0.4 40.1
Changes in restricted cash and investments
(Current and Long-term) 20.1 (1.8)
Acquisition, net of cash acquired - (7.0)
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2.2 (0.1)
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Cash flow used for financing activities
Repayment of long-term obligations (0.2) (0.7)
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Increase (decrease) in cash and short-term
investments (74.8) (105.2)
Cash and short-term investments at
beginning of period 819.8 871.6
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Cash and short-term investments at end
of period $ 745.0 $ 766.4
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Cash at end of period $ 105.9 $ 75.5
Short-term investments at end of period 639.1 690.9
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Total cash and short-term investments at
end of period $ 745.0 $ 766.4
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SEARS CANADA INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MAY 2, 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 first quarter ended May 2, 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
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-week period
ended May 3, 2008 and the year ended January 31, 2009 from the figures
previously reported:
As at and As at and
for the for the
13-week 52-week
Period Period
Ended Ended
May 3, January 31,
(increase (decrease) in millions) 2008 2009
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Prepaid expenses and other assets $ (26.1) $ (34.6)
Current portion of future income tax asset 8.8 8.4
Deferred charge (2.0) (1.7)
Future income tax asset - 0.5
Future income tax liability - (2.5)
Net earnings 7.7 2.1
Opening retained earnings (27.0) (27.0)
Closing retained earnings (19.3) (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 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 Balance Sheet. 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
Balance Sheet. 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 result 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.
3. INVENTORIES
The amount of inventories recognized as an expense during the 13-week
period ended May 2, 2009 was $565.3 million (2008: $630.4 million),
including $26.9 million (2008: $21.1 million), related to write-downs. A
negligible amount of write-downs were reversed during this period ended
May 2, 2009.
With the exception of $35.6 million (2008: $28.9 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.
4. VENDOR REBATES
The Company has recognized $0.4 million, as a reduction in the cost of
purchases for the 13-week period ending May 2, 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 May 2, 2009 the Company had
outstanding letters of credit of U.S. $62.8 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-week period ended May 2,
2009 amounted to $7.0 million (2008: $7.3 million). The Company's cash
payments for interest on long-term debt in the 13-week period ended
May 2, 2009 totalled $5.0 million (2008: $5.2 million).
In the 13-week period ended May 2, 2009, the Company recorded
$0.9 million (2008: $6.8 million) 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 $1.4 million (2008:
$9.1 million) in respect of short-term interest revenue, net of short-
term interest expense.
6. UNUSUAL ITEMS
There were no unusual items for the first quarter of 2009.
Sale of real estate
In the first quarter of 2008, the Company completed the sale of property
in Calgary, Alberta where it operated a full-line store, receiving
proceeds of approximately $40.0 million. A pre-tax gain of $37.2 million,
net of transaction costs, was recorded in the quarter.
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
Period Period
Ended Ended
May 2, May 3,
(Number of shares) 2009 2008
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Average number of shares per basic net
earnings per share calculation 107,620,995 107,620,995
Effect of dilutive instruments outstanding 3,302 10,514
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Average number of shares per diluted net
earnings per share calculation 107,624,297 107,631,509
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For the 13-week period ended May 2, 2009, 129,951 options (2008: 173,231
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
Period
13-Week Ended
Period May 3,
Ended 2008
May 2, (Restated
(in millions) 2009 - Note 2)
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Total revenues
Merchandising $ 1,104.8 $ 1,242.3
Real Estate Joint Ventures 11.7 12.1
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Total revenues $ 1,116.5 $ 1,254.4
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Segmented operating profit
Merchandising $ 17.9 $ 56.5
Real Estate Joint Ventures 5.0 5.7
Interest expense, net 6.1 0.5
Unusual items - (gain) - (37.2)
Income taxes 6.5 28.1
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Net earnings $ 10.3 $ 70.8
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Segmented Statements of Capital Employed(1)
As at As at
May 3, January 31,
As at 2008 2009
May 2, (Restated (Restated
(in millions) 2009 - Note 2) - Note 2)
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Merchandising $ 1,736.3 $ 1,467.8 $ 1,743.5
Real Estate Joint Ventures 102.5 100.7 104.3
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Total $ 1,838.8 $ 1,568.5 $ 1,847.8
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(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
May 3, January 31,
As at 2008 2009
May 2, (Restated (Restated
(in millions) 2009 - Note 2) - Note 2)
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Merchandising $ 3,090.0 $ 2,961.1 $ 3,120.9
Real Estate Joint Ventures 114.4 109.8 116.4
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Total $ 3,204.4 $ 3,070.9 $ 3,237.3
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9. INCOME TAXES
The Company's total net cash payments of income taxes in the 13-week
period ended May 2, 2009 were $38.9 million (2008: $109.4 million).
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 in respect of payment on a
disputed tax assessment.
10. CAPITAL STOCK
As at May 2, 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 May 2, 2009. The number of outstanding common shares
and stated value 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 by February 2014. As at May 2, 2009 there were 170,531 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-week period ended May 2, 2009 was less than
$0.1 million (2008: $0.1 million).
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 $18.4 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 May 2, 2009 were less than
$0.1 million (2008: $2.8 million), $4.8 million (2008: Nil) and
$2.8 million (2008: $3.0 million), respectively. The Company introduced
the defined contribution plan on July 1, 2008.
14. COMMITMENTS AND CONTINGENCIES
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 litigation 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 May 2, 2009, the Company recorded $128.4 million (2008:
$144.8 million) of restricted cash and investments recorded as current
assets and $3.1 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
$92.5 million (2008: $110.4 million), current and long-term cash deposits
pledged as collateral with counterparties related to outstanding
derivative contracts of $32.0 million (2008: $28.3 million) and
$3.1 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 $3.9 million (2008: $6.1 million).
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
May 3, January 31,
As at 2008 2009
May 2, (Restated (Restated
(in millions) 2009 - Note 2) - Note 2)
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Long-term obligations $ 364.4 $ 371.4 $ 364.6
Shareholders' equity 1,474.4 1,197.1 1,483.2
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$ 1,838.8 $ 1,568.5 $ 1,847.8
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As at May 2, 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 May 2, 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 $64.7 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 $768.3 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 May 2, 2009, approximately 51% of the Company's
accounts receivable are due from two customers and both are in good
standing.
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 May 2, 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 $ 591.1 $ 591.1 $ 591.1 $ - $ - $ -
Accrued
liabilities 408.2 408.2 408.2 - - -
Long-term
obligations
and payments
due within
1 year 364.4 413.4 59.4 330.0 8.9 15.1
Operating
lease
obligations(2) - 688.4 108.6 179.1 136.9 263.8
-------------------------------------------------------------------------
$1,363.7 $2,101.1 $1,167.3 $ 509.1 $ 145.8 $ 278.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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
When advantageous to do so, 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 May 2, 2009,
there were option contracts outstanding with a notional value of U.S.
$385.4 million and a combined carrying value of $60.4 million, included
in prepaid expenses and other assets. These option contracts have
settlement dates extending to August 2010 and 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 May 2, 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 May 2, 2009, there were swap contracts
outstanding with a notional value of U.S. $90.0 million and a carrying
value of $4.1 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 quarter ended May 2, 2009, the Company recorded a gain of
$4.4 million, 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 0.8432 U.S. dollar to Canadian dollar.
Cash and short-term investments (other than those discussed above),
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
May 2, 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 at
quarter end was $874.1 million. A movement in interest rate of +/-1%
would cause a variance in net earnings in the amount of $6.1 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 May 2, 2009 there was a
fixed to floating rate swap contract outstanding for a notional volume of
8.2 million litres and a carrying value of less than $0.1 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 May 2, 2009 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 May 2, 2009 and January 31, 2009 and the pre-tax change in fair value
of those instruments during the first quarter 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.
First quarter 2009
Pre-tax change in
(in millions) FV included in
-------------------------------------------------------------------------
As at As at
Balance Sheet May 2, January Net
Classification Category 2009 31, 2009 OCI earnings
-------------------------------------------------------------------------
Available
for sale
Short-term Cash and
investments short-term
investments(3) $ 639.1 $ 753.4 $ (0.1) $ -
Long-term Other long-
investments term assets 1.5 1.6 - 0.1
-------------------------------------------------------------------------
Held for
trading
Cash Cash and short-
term investments 105.9 66.4 - -
Cash and Restricted
investments cash and
investments(3) 128.4 144.8 - -
U.S. $
derivative Prepaid expenses
contracts & other assets 64.5 91.1 28.1 (1.5)
Cash Other long-term
assets 3.1 6.9 - -
Fixed price
energy Accrued
contracts liabilities - - - -
Commodity
derivative Accrued
contracts liabilities 0.1 (0.1) - (0.2)
-------------------------------------------------------------------------
$ 28.0 $ (1.6)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
First quarter 2008
Pre-tax change in
(in millions) FV included in
-------------------------------------------------------------------------
As at As at
Balance Sheet May 3, February Net
Classification Category 2008 2, 2008 OCI earnings
-------------------------------------------------------------------------
Available
for sale
Short-term Cash and
investments short-term
investments(3) $ 690.9 $ 806.9 $ 0.1 $ -
Long-term Other long-
investments term assets 2.2 2.6 - 0.4
-------------------------------------------------------------------------
Held for
trading
Cash Cash and short-
term investments 75.5 64.7 - -
Cash and Restricted
investments cash and
investments(3) 7.0 5.2 - -
U.S. $ Prepaid expenses
derivative & other assets
contracts (Accrued
liabilities) 3.9 (0.2) (3.4) (0.7)
Cash Other long-term
assets - - - -
Fixed price
energy Accrued
contracts liabilities - (0.1) - (0.1)
Commodity
derivative Accrued
contracts liabilities - - - -
-------------------------------------------------------------------------
$ (3.3) $ (0.4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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
$361.6 million, including the portion due within one year, but excluding
all capital lease obligations, have a fair value as at May 2, 2009 of
$359.9 million. The fair value of the Company's proportionate share of
long-term debt of joint ventures, with a carrying value of $61.6 million
as at May 2, 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 $62.0 million. The fair value of the
Company's medium term notes, with a carrying value of $300.0 million as
at May 2, 2009, is $297.9 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 May 2, 2009 of $1.5 million,
which has been classified as available for sale. The fair value as at
May 2, 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 $0.1 million
reduction in the investment's fair value during the first quarter of
2009. The Company does not intend to dispose of the investment within the
year.
>>
SOURCE: Sears Canada Inc. Media Relations Contact: Vincent Power, Sears Canada Inc., (416) 941-4422, vpower@sears.ca |
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