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| Sears Canada Reports Third Quarter Earnings |
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| Operating Earnings increase 15% over last year TORONTO, Oct. 20, 2005 (Canada NewsWire via COMTEX News Network) -- Sears Canada Inc. (TSX: SCC) today announced its unaudited third quarter results. Total revenues for the 13-week period ended October 1, 2005 were $1.487 billion compared to $1.497 billion for the 13 weeks ended October 2, 2004, a decrease of 0.7%. Revenues for 2005 include those related to the Company's April 2005 acquisition of Cantrex Group Inc. Net earnings for the quarter, excluding non-comparable items, were $20.8 million or 19 cents per share compared to $18.1 million or 17 cents per share in the quarter last year. As part of the Company's previously announced productivity improvement initiatives, a non-comparable restructuring charge of $62.7 million (pre-tax) related to strategic staffing was accounted for in the third quarter. Also accounted for in the third quarter as a non-comparable item was a charge of $21.1 million (pre-tax) related to stock-based compensation. In order to avoid a dilution of the Company's share base with respect to outstanding options, employees were enabled to take a cash payment in lieu of the issuance of shares. These two charges contributed to a net loss, including non-comparable items, of $37.4 million for the quarter or 35 cents per share compared to earnings of $12.7 million or 12 cents per share in the quarter last year. The Company's merchandising profit increased over the third quarter of 2004. Also, the Company moved some key promotional events from the third quarter of 2004 to the fourth quarter this year for strategic reasons, resulting in some same store sales decreases. Same store sales for the quarter decreased 8.2%. In addition, as part of the Company's strategy to make its mall-based stores more productive and profitable, two new full-line department stores were opened in Brockville and Timmins, Ontario, moving to premises more than double the size of their previous locations. "Updating the current design elements of our mall-based stores together with a broadened selection of national and private brand merchandise, particularly within our destination businesses, is a worthy investment which will lead to improved productivity," said Brent Hollister, President and Chief Executive Officer, Sears Canada. Total revenues for the 39-week period ended October 1, 2005 were $4.329 billion compared to $4.315 billion for the same period last year, an increase of 0.3%. Net earnings for the first nine months, excluding non-comparable items, were $27.9 million or 26 cents per share compared to $35.5 million or 33 cents per share for the same period last year. Net losses for the nine months, including non-comparable items, were $12.6 million or 12 cents per share compared to net earnings of $33.9 million or 32 cents per share for the same period last year. With respect to the remainder of 2005, the Company noted some additional information. Capital expenses, in 2005, are planned to be below $100 million, compared to approximately $150 million in 2004. In addition, the Company confirms that it is progressing as anticipated towards the closing of the sale of its Credit and Financial Services business to JPMorgan Chase & Co. and expects to complete the transaction by year-end, as previously announced. The Board of Directors of Sears Canada Inc. declared a quarterly dividend of 6 cents a share on all Common Shares of the Corporation. The dividend is payable on the 15th day of December, 2005 to shareholders of record on the 15th day of November, 2005. This release contains discussion of forward-looking information and potential future circumstances and developments. The discussion of such matters is qualified by the inherent risks and uncertainties surrounding future expectations generally, and may materially differ from the Company's actual experience. Sears Canada is a multi-channel retailer with a network of 191 corporate stores, 177 dealer stores, 62 home improvement showrooms, over 2,100 catalogue merchandise pick-up locations, 113 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 earnings before non-comparable items to net earnings
(in millions, except per share amounts)
Unaudited
13 Week Period Ended October 1, 2005 and October 2, 2004
-----------------------------------------------------
Earnings (loss)
Before Tax After tax per share
-------------------------------------------------------------------------
2005 2004 2005 2004 2005 2004
-------------------------------------------------------------------------
Earnings before
non-comparable
items $ 33.7 $ 29.9 $ 20.8 $ 18.1 $ 0.19 $ 0.17
-------------------------------------------------------------------------
Effect from sale
of receivables (2.3) (3.7) (1.6) (2.4) (0.01) (0.02)
Sale of real estate
joint venture - - - - - -
Sale of real estate 2.9 - 2.4 - 0.02 -
Stock-based
compensation (21.1) - (18.2) - (0.17) -
Restructuring
activities (62.7) (5.0) (40.8) (3.3) (0.38) (0.03)
Conversion of Eatons
stores - - - - - -
Auto centre
operations - 0.4 - 0.3 - -
Store closures - - - - - -
-------------------------------------------------------------------------
Net earnings (loss) $ (49.5) $ 21.6 $ (37.4) $ 12.7 $ (0.35) $ 0.12
-------------------------------------------------------------------------
-------------------------------------------------------------------------
39 Week Period Ended October 1, 2005 and October 2, 2004
-----------------------------------------------------
Earnings (loss)
Before Tax After tax per share
-------------------------------------------------------------------------
2005 2004 2005 2004 2005 2004
-------------------------------------------------------------------------
Earnings before
non-comparable
items $ 48.4 $ 60.2 $ 27.9 $ 35.5 $ 0.26 $ 0.33
-------------------------------------------------------------------------
Effect from sale
of receivables 4.1 (2.7) 2.6 (1.8) 0.02 (0.02)
Sale of real
estate joint
venture 15.5 16.0 12.3 12.9 0.12 0.12
Sale of real estate 4.8 3.1 4.0 2.0 0.04 0.02
Stock-based
compensation (21.1) - (18.2) - (0.17) -
Restructuring
activities (63.3) (14.6) (41.2) (9.5) (0.39) (0.08)
Conversion of
Eatons stores - 8.0 - 5.2 - 0.05
Auto centre
operations - (13.6) - (8.8) - (0.08)
Store closures - (2.4) - (1.6) - (0.02)
-------------------------------------------------------------------------
Net earnings (loss) $ (11.6) $ 54.0 $ (12.6) $ 33.9 $ (0.12) $ 0.32
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SEARS CANADA INC.
Consolidated Statements of Financial Position
As at As at
October 2, January 1,
As at 2004 2005
October 1, (Restated - (Restated -
(in millions) 2005 Note 18) Note 18)
-------------------------------------------------------------------------
(unaudited) (unaudited) (audited)
ASSETS
Current Assets
Cash and short-term investments $ 94.8 $ 76.7 $ 78.0
Accounts receivable (Notes 4 and 5) 6.5 1,283.8 1,526.3
Income taxes recoverable 8.5 1.8 0.3
Inventories 920.5 902.3 789.8
Prepaid expenses and other assets 151.6 141.8 132.4
Current portion of future income
tax assets 84.6 154.6 98.9
Assets held for sale (Note 3) 1,569.7 - -
-------------------------------------------------------------------------
2,836.2 2,561.0 2,625.7
-------------------------------------------------------------------------
Investments and other assets
(Note 6) 0.1 79.4 83.9
Capital assets 991.8 1,049.6 1,065.8
Deferred charges 249.6 272.9 270.4
Future income tax assets 130.7 57.4 82.4
Other long-term assets 34.1 102.8 134.2
-------------------------------------------------------------------------
$ 4,242.5 $ 4,123.1 $ 4,262.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable $ 747.6 $ 767.5 $ 735.2
Accrued liabilities 446.2 399.9 434.7
Income and other taxes payable 58.9 50.8 101.9
Principal payments on long-term
obligations due within one year 221.4 7.0 21.3
Future income tax liabilities 13.6 12.0 14.4
Liabilities of operations held for
sale (Note 3) 12.6 - -
-------------------------------------------------------------------------
1,500.3 1,237.2 1,307.5
Long-term obligations (Note 7) 532.8 750.7 734.6
Accrued benefit liability (Note 16) 182.2 190.4 180.5
Other long-term liabilities 160.7 156.8 162.4
-------------------------------------------------------------------------
2,376.0 2,335.1 2,385.0
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (Note 12) 480.4 458.5 459.5
Retained earnings 1,386.1 1,329.5 1,417.9
-------------------------------------------------------------------------
1,866.5 1,788.0 1,877.4
-------------------------------------------------------------------------
$ 4,242.5 $ 4,123.1 $ 4,262.4
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SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF EARNINGS
For the 13 and 39 week periods ended October 1, 2005 and October 2, 2004
Unaudited
13 Week Period 39 Week Period
---------------------------------------------------
2004 2004
(in millions, except (Restated - (Restated -
per share amounts) 2005 Note 18) 2005 Note 18)
-------------------------------------------------------------------------
Total Revenues $ 1,486.7 $ 1,497.3 $ 4,329.5 $ 4,315.4
-------------------------------------------------------------------------
Cost of merchandise
sold, operating,
administrative and
selling expenses 1,401.6 1,416.0 4,111.2 4,092.3
Depreciation and
amortization 39.8 40.9 123.7 124.6
Interest expense, net 13.9 14.2 42.1 41.0
Unusual items (Note 8) 80.9 4.6 64.1 3.5
-------------------------------------------------------------------------
Earnings (loss) before
income taxes (49.5) 21.6 (11.6) 54.0
-------------------------------------------------------------------------
Income tax expense
(recovery)
Current 14.6 16.9 34.6 34.7
Future (26.7) (8.0) (33.6) (14.6)
-------------------------------------------------------------------------
(12.1) 8.9 1.0 20.1
-------------------------------------------------------------------------
Net earnings (loss) $ (37.4) $ 12.7 $ (12.6) $ 33.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per
share (Note 9) $ (0.35) $ 0.12 $ (0.12) $ 0.32
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings
(loss) per share
(Note 9) $ (0.35) $ 0.12 $ (0.12) $ 0.32
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the 13 and 39 week periods ended October 1, 2005 and October 2, 2004
Unaudited
13 Week Period 39 Week Period
---------------------------------------------------
2004 2004
(Restated - (Restated -
(in millions) 2005 Note 18) 2005 Note 18)
-------------------------------------------------------------------------
Opening Balance $ 1,429.9 $ 1,330.1 $ 1,417.9 $ 1,321.7
Net earnings (loss) (37.4) 12.7 (12.6) 33.9
Dividends declared (6.4) (6.4) (19.2) (19.2)
Repurchase of shares
(Note 12) - (6.9) - (6.9)
-------------------------------------------------------------------------
Closing Balance $ 1,386.1 $ 1,329.5 $ 1,386.1 $ 1,329.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the 13 and 39 week periods ended October 1, 2005 and October 2, 2004
Unaudited
13 Week Period 39 Week Period
---------------------------------------------------
2004 2004
(Restated - (Restated -
(in millions) 2005 Note 18) 2005 Note 18)
-------------------------------------------------------------------------
CASH FLOW GENERATED
FROM (USED FOR)
OPERATIONS
Net earnings (loss) $ (37.4) $ 12.7 $ (12.6) $ 33.9
Non-cash items
included in net
earnings,
principally
depreciation,
pension expense,
future income taxes
and gain on sale of
real estate joint
venture 40.7 48.2 129.2 135.6
Changes in non-cash
working capital
balances related to
operations 29.2 (48.6) (167.4) (167.8)
Other, principally
pension contributions (17.4) (1.9) (20.5) (2.2)
-------------------------------------------------------------------------
15.1 10.4 (71.3) (0.5)
-------------------------------------------------------------------------
CASH FLOW GENERATED FROM
(USED FOR) INVESTING
ACTIVITIES
Purchases of capital
assets (20.7) (52.3) (54.8) (97.3)
Proceeds from sale of
capital assets 3.0 3.3 26.6 41.9
Charge account
receivables 1.5 (101.5) 109.4 93.8
Deferred charges - - (2.8) -
Acquisition, net of
cash acquired
(Note 14) - - (23.2) -
Investments and other
assets (Note 6) 3.2 4.6 37.8 (2.6)
-------------------------------------------------------------------------
(13.0) (145.9) 93.0 35.8
-------------------------------------------------------------------------
CASH FLOW GENERATED FROM
(USED FOR) FINANCING
ACTIVITIES
Repayment of long-term
obligations (0.5) (0.3) (1.6) (12.7)
Net proceeds from issue
of capital stock
(Note 12) 11.4 - 15.9 -
Dividends paid (6.4) (6.4) (19.2) (19.2)
Share repurchase
(Note 12) - (9.3) - (9.3)
-------------------------------------------------------------------------
4.5 (16.0) (4.9) (41.2)
-------------------------------------------------------------------------
INCREASE (DECREASE) IN
CASH AND SHORT-TERM
INVESTMENTS 6.6 (151.5) 16.8 (5.9)
CASH AND SHORT-TERM
INVESTMENTS AT
BEGINNING OF PERIOD 88.2 228.2 78.0 82.6
-------------------------------------------------------------------------
CASH AND SHORT-TERM
INVESTMENTS AT END
OF PERIOD $ 94.8 $ 76.7 $ 94.8 $ 76.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sears Canada Inc.
Notes to the Interim Consolidated Financial Statements
October 1, 2005
Unaudited
1. DISCLOSURE
These interim consolidated financial statements (the "financial
statements") of Sears Canada Inc. (the "Company") do not contain all
disclosures required by Canadian generally accepted accounting principles
for annual financial statements and, accordingly, the financial
statements should be read in conjunction with the most recently prepared
annual financial statements for the 52 week period ended January 1, 2005.
Figures for the 13 and 39 week periods ended October 1, 2005 and
October 2, 2004 and the balances at those dates are unaudited.
The Company's business follows a seasonal pattern, with merchandise sales
traditionally being higher in the fourth quarter than in other quarterly
periods due to consumer holiday buying patterns. As a result, a
disproportionate amount of total revenues are typically earned in the
fourth quarter.
2. ACCOUNTING POLICIES
These financial statements follow the same accounting policies and
methods of their application as the most recent annual financial
statements for the 52 week period ended January 1, 2005, except as
follows:
a) Accounting for Consideration From a Vendor
In January 2005, the Emerging Issues Committee ("EIC") of the
Canadian Institute of Chartered Accountants ("CICA") amended
EIC-144 "Accounting by a Customer for Certain Consideration
Received from a Vendor". The Company adopted this new guidance
retroactively as at January 2, 2005. The guidance distinguishes
between discretionary rebates and binding agreements. EIC-144
requires companies to recognize discretionary rebates when paid by
the vendor or when the vendor becomes obligated to pay. For
binding agreements, the rebates should be recognized as a
reduction of purchases for the period, provided the rebate is
probable and reasonably estimable.
This new guidance impacts the timing of recognition of the rebates
between the quarters, but does not impact the annual financial
statements. The impact on the Company's net earnings for the 13
and 39 week periods ended October 1, 2005 is a decrease of
approximately $0.4 million (2004 - $1.1 million increase) and an
increase of $3.2 million (2004 - $2.4 million), respectively.
b) Consolidation of Variable Interest Entities
Effective January 2, 2005, the Company adopted CICA Accounting
Guideline 15 ("AcG-15") "Variable Interest Entities". A variable
interest entity is defined as any type of legal entity that is not
economically controlled by traditional voting equity, but rather
by contractual or other financial arrangements. The guideline
requires consolidation of a variable interest entity by the party
with the majority of expected losses or expected residual returns,
or both.
Certain financing and related transactions undertaken by the
Company are with entities which may meet the definition of
variable interest entities. The Company evaluated its involvement
with the trusts utilized for securitizations, more specifically
SCRT-1992, which was subsequently wound-up during the 13 week
period ended July 2, 2005, and SCORE Trust. The Company determined
that since January 2, 2005, these entities, which are considered
variable interest entities, meet the requirements for Qualifying
Special-Purpose Entities ("QSPEs") and are therefore exempt from
consolidation under AcG-15. The Company has also evaluated the
impact of this guideline on other legal structures and economic
interests. The adoption of this new guideline had no material
impact on the Company's financial statements.
c) Determining Whether an Arrangement Contains a Lease
Effective January 2, 2005, the Company adopted the new guidance of
the CICA regarding whether an arrangement contains a lease.
EIC-150 "Determining Whether an Arrangement Contains a Lease"
requires companies to analyze arrangements that do not take the
legal form of a lease but convey a right to use a tangible asset.
Such arrangements may include, but are not limited to, outsourcing
arrangements and contracts in which a company must make a payment
regardless of whether it takes delivery of a contracted product or
service. An assessment as to whether an arrangement contains a
lease is made at the inception of the arrangement. Reassessments
are also undertaken when there is a change in the contractual
terms, a renewal or extension is exercised, or there are other
specified changes. The adoption of this guidance has had no
material impact on the Company's financial statements.
3. ASSETS HELD FOR SALE
On August 31, 2005, the Company entered into a definitive agreement to
sell substantially all of the assets and liabilities of its Credit and
Financial services business (the "Business"), including its Sears Card
and Sears MasterCard credit portfolio, to JPMorgan Chase & Co. The
transaction has been approved by both companies and is expected to close
by the end of the fiscal year, subject to regulatory approvals and
closing conditions.
The assets and liabilities of the Business are reported separately on the
Consolidated Statement of Financial Position as at October 1, 2005. The
majority of the assets and liabilities of the Business are included in
the Credit segment (Note 10). The major classes of assets and liabilities
of the Business, held for sale include:
As at
(in millions) October 1, 2005
-------------------------------------------------------------------------
Accounts receivable $ 1,458.8
Investments and other assets 46.0
Other long-term assets 56.0
Other assets 8.9
-------------------------------------------------------------------------
Total assets held for sale $ 1,569.7
-------------------------------------------------------------------------
Accounts payable and accrued liabilities $ 12.6
-------------------------------------------------------------------------
Total liabilities of operations held for sale $ 12.6
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4. ACCOUNTS RECEIVABLE
Details of accounts receivable are as follows:
As at As at As at
October 1, October 2, January 1,
(in millions) 2005 2004 2005
-------------------------------------------------------------------------
Customer accounts receivable -
current $ 1,791.9 $ 1,742.7 $ 2,050.3
Customer accounts receivable -
deferred 707.2 872.3 791.7
-------------------------------------------------------------------------
Managed accounts 2,499.1 2,615.0 2,842.0
Less: Co-ownership held by third
parties (1,013.3) (1,280.9) (1,248.5)
-------------------------------------------------------------------------
Co-ownership retained by the Company 1,485.8 1,334.1 1,593.5
Less: long-term portion of deferred
customer accounts receivable (56.0) (72.8) (98.6)
Interest-only strip receivable (Note 5) 32.6 21.6 30.2
Miscellaneous receivables 2.9 0.9 1.2
-------------------------------------------------------------------------
1,465.3 1,283.8 1,526.3
-------------------------------------------------------------------------
Amounts transferred to assets held
for sale (Note 3) (1,458.8) - -
-------------------------------------------------------------------------
Total $ 6.5 $ 1,283.8 $ 1,526.3
-------------------------------------------------------------------------
The total credit losses on managed accounts, net of recoveries, for the
13 and 39 week periods ended October 1, 2005 were $23.4 million (2004 -
$22.3 million) and $68.8 million (2004 - $66.4 million), respectively.
Miscellaneous receivables includes the reduction to Customer accounts
receivable, related to sales transacted for which the merchandise has yet
to be delivered.
5. TRANSFERS OF RECEIVABLES
Securitization is an important financial vehicle which provides the
Company with access to funds at a relatively low cost. The Company sells
undivided co-ownership interests in its portfolio of current and deferred
charge accounts receivable to two separate trusts and retains the right
to receive the income generated by the undivided co-ownership interests
sold to the trusts in excess of the trusts' stipulated share of service
charge revenues. These trusts are QSPEs and, therefore, these financial
statements do not include the assets, liabilities, and results of
operations of these trusts. The trusts have financed the purchase of the
co-ownership interests primarily through the issuance of debt to
independent third party investors totalling $1,013.3 million (2004 -
$1,280.9 million).
The undivided co-ownership interest is sold on a fully serviced basis and
the Company receives no fee for ongoing servicing responsibilities. The
Company receives proceeds equal to the fair value of the assets sold and
retains the rights to future cash flows arising after the investors in
the securitization trusts have received the return for which they
contracted. The co-owners have no recourse to the Company's retained
interest in the receivables sold other than in respect of amounts in the
cash reserve account (Note 6) and the interest-only strip receivable
(Note 4). The co-owners have no recourse to the Company's other assets.
The Company recognized a pre-tax reduction in revenue of $2.3 million and
pre-tax gain in revenue of $4.1 million for the 13 and 39 week periods
ended October 1, 2005, respectively (2004 - pre-tax reduction in revenue
of $3.7 million and $2.7 million, respectively), related to the timing of
recognition of income on the sale of charge accounts receivable. As at
October 1, 2005, the interest-only strip receivable was recorded at
$32.6 million (2004 - $21.6 million).
The following table shows the key economic assumptions used in measuring
the interest-only strip receivable. The table also displays the
sensitivity of the current fair value of residual cash flows to immediate
10% and 20% adverse changes in yield, payment rate, net charge-off rate
and discount rate assumptions:
Effects of Adverse Changes
(in millions) Assumptions 10% 20%
-------------------------------------------------------------------------
Yield (annual rate) 24.43% $ 3.1 $ 8.7
Principal payment rate (monthly
rate) 24.29% 2.2 6.2
Net charge-off rate (annual rate) 4.41% 0.9 1.8
Discount rate (annual rate) 12.00% - -
-------------------------------------------------------------------------
The table below summarizes certain cash flows related to the transfer of
receivables:
13 Week 13 Week 39 Week 39 Week
Period Period Period Period
Ended Ended Ended Ended
October 1, October 2, October 1, October 2,
(in millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
Proceeds from new
securitizations $ 7.3 $ 51.8 $ 185.3 $ 438.8
Proceeds from
collections
reinvested 381.4 230.4 1,276.5 769.3
Other cash flows
relating to retained
interests (3.1) (3.9) 0.7 0.7
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6. INVESTMENTS AND OTHER ASSETS
As at As at As at
October 1, October 2, January 1,
(in millions) 2005 2004 2005
-------------------------------------------------------------------------
Unsecured debentures $ - $ 41.8 $ 37.8
Subordinated loans 2.3 3.4 3.0
Other term investments 4.4 4.5 4.4
Retained interest in transferred
receivables - cash reserve
account 39.4 29.7 38.7
-------------------------------------------------------------------------
46.1 79.4 83.9
-------------------------------------------------------------------------
Amounts transferred to assets
held for sale (Note 3) (46.0) - -
-------------------------------------------------------------------------
Total $ 0.1 $ 79.4 $ 83.9
-------------------------------------------------------------------------
During the 13 week period ended July 2, 2005, the unsecured debentures
were redeemed as a result of the winding up of securitization trust SCRT -
1992.
The cash reserve account, which is invested in short-term investments
with a maturity date of less than 90 days, is a structural requirement of
the securitization trusts and thus the Company's access to the funds is
restricted.
7. LONG-TERM OBLIGATIONS
The Company's net cash interest payments in the 13 and 39 week periods
ended October 1, 2005 were $12.7 million (2004 - $12.4 million) and
$39.8 million (2004 - $38.4 million), respectively.
Interest expense on long-term debt for the 13 and 39 week periods ended
October 1, 2005 amounted to $14.5 million (2004 - $14.9 million) and
$43.8 million (2004 - $44.6 million), respectively.
8. UNUSUAL ITEMS
The Company recorded a pre-tax expense in the 13 and 39 week periods
ended October 1, 2005 of $80.9 million (2004 - $4.6 million) and
$64.1 million (2004 - $3.5 million), respectively. The expense was
comprised of the following items:
13 Week 13 Week 39 Week 39 Week
Period Period Period Period
Ended Ended Ended Ended
October 1, October 2, October 1, October 2,
(in millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
Sale of real estate
joint venture $ - $ - $ 15.5 $ 16.0
Sale of real estate 2.9 - 4.8 3.1
Stock-based
compensation (21.1) - (21.1) -
Restructuring
activities (62.7) (5.0) (63.3) (14.6)
Conversion of Eatons
stores - - - 8.0
Auto centre
operations - 0.4 - (13.6)
Store closures - - - (2.4)
-------------------------------------------------------------------------
Total unusual items $ ( 80.9) $ (4.6) $ (64.1) $ (3.5)
-------------------------------------------------------------------------
Sale of Real Estate Joint Ventures
During the 26 week period ended July 2, 2005, a $15.5 million pre-tax
gain was recognized on the sale of the Company's proportional interest in
a real estate joint venture.
During the 26 week period ended July 3, 2004, a $16.0 million pre-tax
gain was recognized on the sale of the Company's proportional interest in
another real estate joint venture. This gain consisted of $14.6 million
realized during the 13 weeks ended April 3, 2004 and a $1.4 million
revision, recorded during the 13 weeks ended July 3, 2004.
Sale of Real Estate
During the 13 and 39 week periods ended October 1, 2005, the Company
realized a pre-tax gain of $2.9 million (2004 - Nil) and $4.8 million
(2004 - $3.1 million), respectively, on the sale of real estate.
Stock-Based Compensation
A pre-tax charge of $21.1 million was recorded during the 13 and 39 week
periods ended October 1, 2005 (2004 - Nil). The charge relates to stock
based compensation expenses directly attributable to resolutions approved
as described in Note 13 and the announcement that the Company had reached
a definitive agreement to sell substantially all of the assets and
liabilities of its Credit and Financial services business (Note 3).
Of the $21.1 million charge, $8.3 million represented cash payments for
stock appreciation rights made during the 13 weeks ended October 1, 2005.
Restructuring Activities
Pre-tax charges of $62.7 million and $63.3 million were recorded during
the 13 and 39 week periods ended October 1, 2005, respectively. The
charges relate to severance costs as a result of restructuring certain
departments and positions, primarily in the merchandising segment, to
better align the corporate structure to the Company's strategic and
productivity initiatives.
Similar charges of $5.0 million and $14.6 million were recorded during
the 13 and 39 week periods ended October 2, 2004, respectively.
Details of the accrued liability related to these activities are outlined
below:
Restructuring
(in millions) Liability
-------------------------------------------------------------------------
Accrued liability January 3, 2004 $ -
Cash expense 14.1
Cash payments (10.6)
-------------------------------------------------------------------------
Accrued liability January 1, 2005 $ 3.5
Cash payments (1.7)
-------------------------------------------------------------------------
Accrued liability April 2, 2005 $ 1.8
Cash expense 0.6
Cash payments (0.7)
-------------------------------------------------------------------------
Accrued liability July 2, 2005 $ 1.7
Cash expense 62.7
Cash payments (0.3)
-------------------------------------------------------------------------
Accrued liability October 1, 2005 $ 64.1
-------------------------------------------------------------------------
Conversion of Eatons Store
A recovery of $8.0 million was recorded during the 39 week period ended
October 2, 2004 relating to the reversal of the remaining accrued costs
associated with the conversion of the Eatons stores to the Sears banner.
Conversion expenses of $180.0 million were originally recorded in fiscal
2002.
Auto Centre Operations
In 2004, the Company entered into three separate licensing and asset sale
agreements with third parties to assume the operation of 39 of the
Company's 52 auto centres. Pursuant to these agreements, the licensees
purchased the inventory and certain equipment related to the auto centre
operations, and now occupy and operate the premises. The Company has
converted three of the other centres into Hardware stores and has closed
or converted for use in its other merchandise operations the remaining 10
locations.
Total expenses for the 39 week period ended October 2, 2004 were
$13.6 million. The charges include severance expenses, a non-cash
impairment loss on long-lived assets, and other closure-related costs,
net of liabilities assumed by licensees. During the 13 week period ended
October 2, 2004 an adjustment of $0.4 million was made to the severance
accrual to reflect the impact of re-deploying employees previously
identified to be severed.
Details of the accrued liability related to this transaction are outlined
below:
Facility
Severance Closure & Accrued
(in millions) Expense Other Costs Liability
-------------------------------------------------------------------------
Accrued liability January 3, 2004 $ - $ - $ -
Cash expense 9.0 3.6 12.6
Cash payments (8.4) (1.7) (10.1)
-------------------------------------------------------------------------
Accrued liability January 1, 2005 0.6 1.9 2.5
Cash payments (0.6) (0.4) (1.0)
-------------------------------------------------------------------------
Accrued liability April 2, 2005 - 1.5 1.5
-------------------------------------------------------------------------
Cash payments - - -
-------------------------------------------------------------------------
Accrued liability July 2, 2005 - 1.5 1.5
-------------------------------------------------------------------------
Cash payments - (0.2) (0.2)
-------------------------------------------------------------------------
Accrued liability October 1, 2005 $ - $ 1.3 $ 1.3
-------------------------------------------------------------------------
The Company anticipates that it will complete the majority of the
remaining facility closures activities by the end of this fiscal year.
Store Closures
During the 39 week period ended October 2, 2004, the Company incurred
$2.4 million in lease exit costs and non-cash fixed asset impairment
charges relating to the closure of a value centre and an outlet store
located in Ontario.
9. EARNINGS PER SHARE
A reconciliation of the number of shares used in the earnings per share
calculation is as follows:
13 Week 13 Week 39 Week 39 Week
Period Period Period Period
Ended Ended Ended Ended
October 1, October 2, October 1, October 2,
2005 2004 2005 2004
---------------------------------------------------
Number Number Number Number
of shares of shares of shares of shares
-------------------------------------------------------------------------
Average number of
shares per basic
earnings per share
calculation 106,816,427 106,683,358 106,555,533 106,772,084
Effect of dilutive
instruments
outstanding 958,601 422,637 1,174,741 412,344
-------------------------------------------------------------------------
Average number of
shares per diluted
earnings per share
calculation 107,775,028 107,105,995 107,730,274 107,184,428
-------------------------------------------------------------------------
10. SEGMENTED INFORMATION
Segmented Statement of Earnings
13 Week 39 Week
Period Period
13 Week Ended 39 Week Ended
Period October 2, Period October 2,
Ended 2004 Ended 2004
October 1, (Restated- October 1, (Restated-
(in millions) 2005 Note 18) 2005 Note 18)
-------------------------------------------------------------------------
Total revenues
Credit
Operating $ 108.6 $ 105.8 $ 336.8 $ 323.9
Securitization
(loss)/gain (2.3) (3.7) 4.1 (2.7)
Securitization
funding cost (11.4) (17.5) (41.4) (57.5)
-------------------------------------------------------------------------
94.9 84.6 299.5 263.7
Merchandising 1,379.0 1,399.5 3,991.1 4,012.1
Real Estate Joint
Ventures 12.8 13.2 38.9 39.6
-------------------------------------------------------------------------
Total revenues $ 1,486.7 $ 1,497.3 $ 4,329.5 $ 4,315.4
-------------------------------------------------------------------------
Earnings (loss) before
interest, unusual
items and taxes
Credit
Operating $ 36.8 $ 42.9 $ 130.6 $ 138.6
Securitization
(loss)/gain (2.3) (3.7) 4.1 (2.7)
Securitization
funding cost (11.4) (17.5) (41.4) (57.5)
-------------------------------------------------------------------------
23.1 21.7 93.3 78.4
Merchandising 16.3 11.9 (14.5) (0.5)
Real Estate Joint
Ventures 5.9 6.8 15.8 20.6
-------------------------------------------------------------------------
Earnings before
interest, unusual
items and taxes 45.3 40.4 94.6 98.5
Interest expense,
net 13.9 14.2 42.1 41.0
Unusual items
- expense 80.9 4.6 64.1 3.5
Income tax expense
(recovery) (12.1) 8.9 1.0 20.1
-------------------------------------------------------------------------
Net earnings (loss) $ (37.4) $ 12.7 $ (12.6) $ 33.9
-------------------------------------------------------------------------
Segmented Statement of Capital Employed (x)
-------------------------------------------------------------------------
As at
October 2,
As at 2004 As at
October 1, (Restated - January 1,
(in millions) 2005 Note 18) 2005
-------------------------------------------------------------------------
Merchandising $ 956.0 $ 970.5 $ 822.7
Credit 1,520.2 1,419.7 1,660.0
Real Estate Joint Ventures 144.5 155.5 150.6
-------------------------------------------------------------------------
Total $ 2,620.7 $ 2,545.7 $ 2,633.3
-------------------------------------------------------------------------
(x) Capital Employed represents the total of long-term obligations,
including principal payments on long-term obligations due within one
year, and shareholders' equity.
Segmented Statement of Total Assets
-------------------------------------------------------------------------
As at
October 2,
As at 2004 As at
October 1, (Restated - January 1,
(in millions) 2005 Note 18) 2005
-------------------------------------------------------------------------
Merchandising $ 2,510.4 $ 2,493.8 $ 2,383.6
Credit 1,573.2 1,463.2 1,713.1
Real Estate Joint Ventures 158.9 166.1 165.7
-------------------------------------------------------------------------
Total $ 4,242.5 $ 4,123.1 $ 4,262.4
-------------------------------------------------------------------------
The majority of the assets of the Credit segment are included in assets
held for sale in the Consolidated Statement of Financial Position as at
October 1, 2005 (Note 3).
11. INCOME TAXES
The Company's total net cash payments of income taxes in the 13 and 39
week periods ended October 1, 2005 were $5.9 million (2004 -
$4.7 million) and $36.7 million (2004 - $8.6 million), respectively.
12. CAPITAL STOCK
107,231,993 common shares were issued and outstanding as at October 1,
2005. A total of 598,048 shares and 961,999 shares were issued during the
13 and 39 week periods ended October 1, 2005, respectively. During the 13
and 39 week periods ended October 1, 2005, 589,715 shares and 850,435
shares were issued on the exercise of options. During the 13 and 39 week
periods ended October 1, 2005, 8,333 and 111,564 shares were issued on
the vesting of special incentive shares, respectively. Cash received from
the issuance of capital stock upon the exercise of options amounted to
$11.4 million and $15.9 million in the 13 and 39 week periods ended
October 1, 2005, respectively. A total of 2,539 shares and 28,500 shares
were issued during the 13 and 39 week periods ended October 2, 2004,
respectively.
On March 4, 2005, the Company renewed its Normal Course Issuer Bid. Under
the renewed Normal Course Issuer Bid, the Company may purchase for
cancellation up to 5% of its issued and outstanding common shares,
representing up to 5,316,081 of the issued and outstanding common shares.
The purchases were eligible to commence on March 4, 2005 and must
terminate by March 3, 2006, pursuant to the Notice of Intention filed
with the Toronto Stock Exchange. The price that the Company will pay for
any such common shares will be the open market price at the time of
acquisition.
In March 2005, the Company renewed its agreement with Sears, Roebuck and
Co. ("Sears Roebuck") pursuant to which Sears Roebuck may elect to sell
to the Company up to the number of common shares sufficient to ensure
that Sears Roebuck's percentage interest in the Company does not increase
as a result of the Company's purchases pursuant to the Normal Course
Issuer Bid. The price for such common share purchases from Sears Roebuck
will be the weighted average price at which the Company bought back
shares during the relevant quarter.
By purchasing common shares under the Normal Course Issuer Bid, the
Company intends to offset the dilutive effect of common shares issued as
equity-based compensation to associates and directors. The Company may
purchase additional common shares up to the maximum stated if, in the
opinion of management, the additional purchases can be made on terms that
enhance the value of the remaining common shares.
The Company did not purchase any shares for cancellation during the 13
and 39 week periods ended October 1, 2005. During the 13 weeks ended
October 2, 2004, the Company purchased 573,301 common shares for
cancellation (311,501 of which were from Sears Roebuck), at a weighted
average price of $16.22 per share. The Company did not purchase any
common shares for cancellation during the first half of fiscal 2004.
13. STOCK-BASED COMPENSATION
Details of the Company's stock-based compensation plans are contained in
Note 11 "Stock-Based Compensation" to the Company's financial statements
for the 52 week period ended January 1, 2005. During the 13 week period
ended October 1, 2005, the Company's Human Resources and Compensation
Committee to the Board of Directors approved a resolution permitting all
outstanding options to be treated as tandem awards. Tandem awards provide
optionees with stock appreciation rights ("SARs") which allow optionees
to choose to exercise SARs instead of the corresponding options. In such
cases, the optionees receive cash payments equal to the amount by which
the market price of the shares on the date of exercise of the SARs
exceeds the exercise price of the corresponding options.
During the 13 and 39 week periods ended October 1, 2005, no tandem award
options were granted under the Company's stock-based compensation plans.
During the 13 and 39 week periods ended October 2, 2004, 50,000 and
622,050 tandem award options were granted, respectively.
The Company records a liability 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. Compensation expense is recorded to adjust
the liability for changes in the number of vested tandem award options,
changes in the market price of the Company's shares and for options
exercised in the period. Prior to the resolutions made in the third
quarter of 2005 and because certain of the Company's options were granted
prior to the effective date of CICA Section 3870 - "Stock-Based
Compensation and Other Stock-Based Payments", for the 39 week period
ended October 1, 2005 the Company continued to apply settlement
accounting upon the exercise of certain options and no compensation
expense was recognized. Total compensation expense related to tandem
awards was $21.1 million and $28.3 million in the 13 and 39 week periods
ended October 1, 2005, respectively, and of the total compensation
expense, $21.1 million was recorded as an unusual item (Note 8) for the
13 and 39 week periods ended October 1, 2005 (2004 - Nil). Compensation
expense of less than $0.1 million was recorded in the 13 and 39 week
periods ended October 2, 2004.
During the 13 and 39 week periods ended October 1, 2005, no Special
Incentive shares were awarded under the Employees Stock Plan. During the
13 and 39 week periods ended October 2, 2004, 25,000 and 215,000 Special
Incentive shares were issued, respectively. Awards of shares under the
Plan are measured at the fair value on the grant date and expensed over
the vesting period. Compensation cost of $0.4 million and $1.1 million
has been recognized as an expense and credited to capital stock for the
13 and 39 week periods ended October 1, 2005, (2004 - $1.2 million and
$2.1 million), respectively.
14. ACQUISITION
On April 29, 2005, the Company acquired all the issued and outstanding
shares of Cantrex Group Inc. ("Cantrex"), a Canadian buying group
representing independent retailers of furniture, appliances, electronics,
photography, equipment and floor coverings. The purchase price financed
by cash, was $23.2 million, net of cash acquired of $7.2 million and was
allocated to the net assets acquired, principally inventory. Goodwill of
$2.5 million was recorded on the transaction. The results of Cantrex's
operations, including its wholly-owned subsidiary Corbeil Electrique
Inc., a Montreal based retailer of major appliances with locations
primarily in Quebec, have been included in the consolidated financial
statements of the Company since the date of acquisition.
The acquisition was accounted for using the purchase method and included
in the Company's Merchandising segment (Note 10).
The purchase price and net asset allocations are preliminary, pending
resolution of final closing adjustments. It is anticipated that these
adjustments will be finalized by the end of the fiscal year.
15. GUARANTEES
The Company has provided the following significant guarantees to third
parties:
Sub-lease agreements
The Company has entered into a number of agreements to sub-lease premises
to 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 $17.1 million.
Other indemnification agreements
In the ordinary course of business, the Company provides indemnification
commitments to counterparties in transactions such as leasing
transactions, royalty agreements, service arrangements, investment
banking agreements, securitization agreements and indemnification of
trustees under indentures for outstanding public debt. These
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.
16. ASSOCIATE FUTURE BENEFITS
Information about the Company's defined benefit plans is contained in
Note 8 of the Company's financial statements for the 52 week period ended
January 1, 2005. The net benefit plan expense for the 13 and 39 week
periods ended October 1, 2005 was $12.4 million (2004 - $11.2 million)
and $37.9 million (2004 - $33.8 million), respectively.
The Company is currently assessing the impact of the recent restructuring
announcement (Note 8) and the pending sale of its Credit and Financial
services business (Note 3) on the accrued benefit obligations of the
Sears Registered Retirement Plan, the Non-Registered Retirement Plan and
the Non-Pension post retirement benefit plan.
17. COMMITMENTS AND CONTINGENCIES
As discussed in Note 14 of the Company's financial statements for the 52
week period ended January 1, 2005, the Company was previously named in a
Quebec class action relating to the required 21-day grace period for
credit cardholders to pay their obligations without attracting credit
charges. The parties have reached a settlement which was approved by the
Court in early April 2005 without admission of any kind by the
defendants. This settlement required Sears to repay interest and lost
opportunity costs to cardholders in Quebec in a total amount which was
not material.
18. COMPARATIVE FIGURES
Certain comparative figures have been restated as a result of correcting
the Company's prior accounting for lease incentives and other allowances
and for the adoption of the amendment to EIC-144. The impact on net
earnings and earnings per share for the 13 and 39 week periods ended
October 2, 2004, as a result of the lease restatement is a reduction of
approximately $2.5 million and 2 cents and $7.7 million and 7 cents,
respectively. The impact from the adoption of the amendment to EIC-144 is
discussed in Note 2, Accounting Policies. The cumulative impact to
opening retained earnings for the 13 week period ended October 2, 2004 is
a reduction of $34.3 million. Additional information on the lease
restatement is contained in Note 1 of the Company's financial statements
for the 52 week period ended January 1, 2005. Certain comparative figures
have also been reclassified to conform to the current period's
presentation.
>>
SOURCE: Sears Canada Inc. Media Relations Contact: Vincent Power, Sears Canada Inc., (416) 941-4422, vpower@sears.ca |
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