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| Sears Canada Reports Fourth Quarter Earnings and Full-Year Results |
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| Sale of Credit Operations helps generate record profit! TORONTO, Feb. 2, 2006 (Canada NewsWire via COMTEX News Network) -- Sears Canada Inc. (TSX: SCC) today announced its unaudited fourth quarter and full-year results. Total revenues for the 13-week period ended December 31, 2005 were $1.908 billion compared to $1.915 billion for the 13 weeks ended January 1, 2005, a decrease of 0.4%. Same store sales increased by 1.1% during the same period. Sears Canada reports that net earnings for the quarter, excluding non-comparable items, were $102.0 million or 95 cents per share, an increase of 16.7% compared to $87.3 million or 82 cents per share in the quarter last year. Net earnings for the quarter including non-comparable items totaled $783.4 million or $7.30 per share compared to $94.8 million or 89 cents per share in same the quarter last year. The most significant non-comparable item was the sale of the Company's Credit and Financial Services operations to JPMorgan Chase Bank, N.A., which closed on November 15, 2005 and generated a gain for the year of $677.2 million after-tax, or $6.34 per share. In the fourth quarter of 2005, merchandise net sales increased 2.0% over the prior year's fourth quarter, with the largest improvement being in Major Appliances, due in part to the recharge program announced at the annual Shareholders' meeting last April. Designed to strengthen Kenmore's number one market share position, the recharge focused significant resources and new, innovative product into this business. Plans to initiate recharges in other destination businesses throughout 2006 are already underway. Full-line, Sears Home, and Dealer stores all showed sales increases in the fourth quarter compared to the same period last year. Expenses were down 3.5% for the same period, gross margin was up 89 basis points and inventory levels were slightly lower. By region, sales were strongest in Western Canada and weakest in the Atlantic provinces. Revenues for the full year were $6.238 billion for the year ended December 31, 2005 compared to $6.230 billion for the year ended January 1, 2005, an increase of 0.1%. Comparable store sales were down approximately 2.9%. Net earnings for the full year excluding non-comparable items were $129.9 million or $1.22 per share, an increase of 5.8% compared to $122.8 million or $1.15 per share last year. Net earnings for the full year including non-comparable items were $770.8 million or $7.22 per share compared to $128.7 million or $1.21 per share last year. Capital expenditures were $86 million for the full year, compared to $156 million in 2004. In the third quarter of 2005, the Company commenced implementation of a series of measures designed to reduce expenses without impacting its dedication to providing quality products and exceptional customer service. These included strategic staffing reductions and the consolidation of merchandise buying offices. The Company continues to pursue further operational efficiency improvements throughout the organization, including rationalization of facilities, other operational expense reductions, and a review of sourcing and procurement practices to generate improved merchandise margin. The Company plans to achieve a cost structure that reflects a lean, profitable organization competing with the best of Canadian retailers. 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 March, 2006 to shareholders of record on the 15th day of February, 2006. The Company noted that its Board of Directors has established an independent committee with respect to the proposal by Sears Holdings Corporation, announced on December 5, 2005, to acquire all of the outstanding shares of Sears Canada which Sears Holdings and its affiliates do not already own for $16.86 per common share in cash. The independent committee has engaged financial advisors who are currently preparing a formal valuation of the Company. 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; the outcome of the proposed purchase by Sears Holdings Corporation of the outstanding shares of Sears Canada which it does not already own; 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 188 corporate stores, 180 dealer stores, 67 home improvement showrooms, over 2,100 catalogue merchandise pick-up locations, 112 Sears Travel offices and a nationwide home maintenance, repair, and installation network. The Company also publishes Canada's most extensive general merchandise catalogue and offers shopping online at www.sears.ca.
<<
SEARS CANADA INC.
Reconciliation of earnings before non-comparable items to net earnings
(in millions, except per share amounts)
Unaudited
13 Week Period Ended December 31, 2005 and January 1, 2005
-----------------------------------------------------
Earnings (loss)
Before tax After tax per share
-------------------------------------------------------------------------
2005 2004 2005 2004 2005 2004
-------------------------------------------------------------------------
Earnings before
non-comparable
items $ 159.5 $ 126.6 $ 102.0 $ 87.3 $ 0.95 $ 0.82
-------------------------------------------------------------------------
Effect from sale
of receivables (2.1) 8.5 (1.3) 5.5 (0.01) 0.05
Sale of Credit and
Financial Services
operations 811.0 - 677.2 - 6.31 -
Sale of real estate
Joint Venture - - - - - -
Sale of real estate - - - - - -
Stock-based
compensation 5.0 - 8.3 - 0.08 -
Restructuring
activities (4.0) (0.2) (2.7) (0.4) (0.03) -
Conversion of
Eatons stores - - - - - -
Auto centre
operations - 0.5 - 0.3 - -
Store closures (0.2) - (0.1) - - -
Tax recovery,
Kenmore - - - 2.1 - 0.02
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Net earnings $ 969.2 $ 135.4 $ 783.4 $ 94.8 $ 7.30 $ 0.89
-------------------------------------------------------------------------
52 Week Period Ended December 31, 2005 and January 1, 2005
-----------------------------------------------------
Earnings (loss)
Before tax After tax per share
-------------------------------------------------------------------------
2005 2004 2005 2004 2005 2004
-------------------------------------------------------------------------
Earnings before
non-comparable
items $ 207.9 $ 186.8 $ 129.9 $ 122.8 $ 1.22 $ 1.15
-------------------------------------------------------------------------
Effect from sale
of receivables 2.0 5.8 1.3 3.6 0.01 0.03
Sale of Credit
and Financial
Services
operations 811.0 - 677.2 - 6.34 -
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 (16.1) - (9.9) - (0.09) -
Restructuring
activities (67.3) (14.8) (43.9) (9.8) (0.42) (0.09)
Conversion of
Eatons stores - 8.0 - 5.2 - 0.05
Auto centre
operations - (13.1) - (8.5) - (0.08)
Store closures (0.2) (2.4) (0.1) (1.6) - (0.02)
Tax recovery,
Kenmore - - - 2.1 - 0.03
-------------------------------------------------------------------------
Net earnings $ 957.6 $ 189.4 $ 770.8 $ 128.7 $ 7.22 $ 1.21
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SEARS CANADA INC.
Consolidated Statements of Financial Position
As at As at
December 31, January 1,
(in millions) 2005 2005
-------------------------------------------------------------------------
(unaudited) (audited)
ASSETS
Current Assets
Cash and short-term investments $ 775.1 $ 78.0
Accounts receivable (Notes 4 and 5) 54.3 1,526.3
Income taxes recoverable 7.9 0.3
Inventories 788.2 789.8
Prepaid expenses and other assets 128.3 132.4
Current portion of future income tax assets 130.3 98.9
-------------------------------------------------------------------------
1,884.1 2,625.7
Investments and other assets (Note 6) - 82.3
Capital assets 980.9 1,065.8
Deferred charges 243.8 270.4
Future income tax assets 54.1 82.4
Other long-term assets 35.7 135.8
-------------------------------------------------------------------------
$ 3,198.6 $ 4,262.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable $ 696.6 $ 735.2
Accrued liabilities 430.1 434.7
Income and other taxes payable 322.5 101.9
Principal payments on long-term obligations due
within one year 216.1 21.3
Future income tax liabilities - 14.4
-------------------------------------------------------------------------
1,665.3 1,307.5
Long-term obligations (Note 7) 533.2 734.6
Accrued benefit liability (Note 16) 188.3 180.5
Other long-term liabilities 166.5 162.4
-------------------------------------------------------------------------
2,553.3 2,385.0
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (Note 12) 13.7 459.5
Retained earnings 631.6 1,417.9
-------------------------------------------------------------------------
645.3 1,877.4
-------------------------------------------------------------------------
$ 3,198.6 $ 4,262.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF EARNINGS
For the 13 and 52 week periods ended December 31, 2005 and
January 1, 2005
13 Week Period 52 Week Period
--------------------- ---------------------
(in millions, 2004
except per (Restated
share amounts) 2005 - Note 18) 2005 2004
(Unaudited)(Unaudited)(Unaudited) (Audited)
-------------------------------------------------------------------------
Total Revenues $ 1,908.1 $ 1,915.1 $ 6,237.6 $ 6,230.5
-------------------------------------------------------------------------
Cost of merchandise sold,
operating, administrative
and selling expenses 1,703.4 1,724.6 5,814.6 5,816.9
Depreciation and amortization 40.5 41.4 164.2 166.0
Interest expense, net 6.8 14.0 48.9 55.0
Unusual items - (gain)
expense (Note 8) (811.8) (0.3) (747.7) 3.2
-------------------------------------------------------------------------
Earnings before income taxes 969.2 135.4 957.6 189.4
-------------------------------------------------------------------------
Income taxes
Current 167.9 6.6 202.5 41.3
Future 17.9 34.0 (15.7) 19.4
-------------------------------------------------------------------------
185.8 40.6 186.8 60.7
-------------------------------------------------------------------------
Net earnings $ 783.4 $ 94.8 $ 770.8 $ 128.7
-------------------------------------------------------------------------
Earnings per share (Note 9) $ 7.30 $ 0.89 $ 7.22 $ 1.21
-------------------------------------------------------------------------
Diluted earnings per
share (Note 9) $ 7.28 $ 0.88 $ 7.19 $ 1.20
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the 13 and 52 week periods ended December 31, 2005 and
January 1, 2005
13 Week Period 52 Week Period
---------------------- ---------------------
2004
(Restated
(in millions) 2005 - Note 18) 2005 2004
(Unaudited)(Unaudited)(Unaudited) (Audited)
-------------------------------------------------------------------------
Opening Balance $ 1,386.1 $ 1,329.5 $ 1,417.9 $ 1,321.7
Net earnings 783.4 94.8 770.8 128.7
Dividends declared (1,537.9) (6.4) (1,557.1) (25.6)
Repurchase of shares (Note 12) - - - (6.9)
-------------------------------------------------------------------------
Closing Balance $ 631.6 $ 1,417.9 $ 631.6 $ 1,417.9
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the 13 and 52 week periods ended December 31, 2005 and
January 1, 2005
13 Week Period 52 Week Period
--------------------- ---------------------
2004
(Restated
(in millions) 2005 - Note 18) 2005 2004
(Unaudited)(Unaudited)(Unaudited) (Audited)
-------------------------------------------------------------------------
CASH FLOW GENERATED FROM
(USED FOR) OPERATIONS
Net earnings $ 783.4 $ 94.8 $ 770.8 $ 128.7
Non-cash items included in
net earnings, principally
depreciation, pension
expense, future income
taxes and gain on sale of
Credit and Financial
Services operations (752.8) 81.8 (623.6) 217.4
Changes in non-cash working
capital balances related
to operations 306.8 179.2 139.5 11.4
Other, principally pension
contributions and changes
to long-term assets and
liabilities 4.6 (16.7) (16.0) (18.9)
-------------------------------------------------------------------------
342.0 339.1 270.7 338.6
-------------------------------------------------------------------------
CASH FLOW GENERATED FROM
(USED FOR) INVESTING ACTIVITIES
Purchases of capital assets (31.2) (58.4) (86.0) (155.7)
Proceeds from sale of
capital assets 0.1 - 26.7 41.9
Charge account receivables (66.2) (258.5) 43.2 (164.7)
Proceeds on sale of Credit
and Financial Services
operations (Note 3) 2,446.4 - 2,446.4 -
Deferred charges - (4.2) (2.8) (4.2)
Acquisition, net of cash
acquired (Note 14) - - (23.2) -
Investments and other
assets (Note 6) 0.6 (4.4) 38.4 (7.0)
-------------------------------------------------------------------------
2,349.7 (325.5) 2,442.7 (289.7)
-------------------------------------------------------------------------
CASH FLOW GENERATED FROM
(USED FOR) FINANCING
ACTIVITIES
Repayment of long-term
obligations (4.9) (5.9) (6.5) (18.6)
Net proceeds from issuance
of capital stock
(share repurchase) 1.8 - 17.7 (9.3)
Return of Capital (Note 12) (470.4) - (470.4) -
Dividends paid (1,537.9) (6.4) (1,557.1) (25.6)
-------------------------------------------------------------------------
(2,011.4) (12.3) (2,016.3) (53.5)
-------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
AND SHORT-TERM INVESTMENTS 680.3 1.3 697.1 (4.6)
CASH AND SHORT-TERM
INVESTMENTS AT BEGINNING
OF PERIOD 94.8 76.7 78.0 82.6
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CASH AND SHORT-TERM
INVESTMENTS AT END OF PERIOD $ 775.1 $ 78.0 $ 775.1 $ 78.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sears Canada Inc.
Notes to the Interim Consolidated Financial Statements
December 31, 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 as at December 31, 2005 and for each of the 13 and 52-week
periods then ended and for the 13 weeks ended January 1, 2005, 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 application as the most recent annual financial statements for
the 52-week period ended January 1, 2005, with the following exceptions:
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-week
period ended December 31, 2005 is a decrease of approximately
$3.2 million (2004 - $2.4 million).
b) Consolidation of Variable Interest Entities and Implicit Variable
Interests
Effective January 2, 2005 and October 17, 2005, the Company adopted
CICA Accounting Guideline 15 ("AcG-15") "Variable Interest Entities"
("VIE") and EIC-157 "Implicit Variable Interests", respectively. A
VIE 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. AcG-15 requires consolidation of a
VIE by the party that will absorb the majority of expected losses or
expected residual returns, or both. An implicit variable interest is
an implied financial interest in an entity that changes with changes
in the fair value of that entity's net assets. An implicit variable
interest is the same as an explicit variable interest except that it
involves the absorbing and/or receiving of variability indirectly
rather than directly from the entity. EIC-157 requires a reporting
enterprise to consider whether it holds an implicit variable
interest in a VIE or potential VIE in order to determine if it is
the party that will absorb the majority of expected losses or
expected residual returns, or both.
Prior to the sale of the Company's Credit and Financial Services
operations, certain financing and related transactions undertaken by
the Company were with securitized trusts which may have met the
definition of a VIE. Upon adoption of AcG-15, the Company evaluated
its involvement with the trusts and determined that the trusts met
the requirements for Qualifying Special-Purpose Entities ("QSPEs")
and are therefore exempt from consolidation. During the 52-week
period ended December 31, 2005, the Company either wound up or
transferred to JPMorgan Chase & Co. all of the trusts utilized for
securitization (Note 3).
The Company has also evaluated the impact of AcG-15 on other legal
structures and economic interests and determined that the adoption
of AcG-15 and EIC-157 has 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 ICA 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. SALE OF CREDIT AND FINANCIAL SERVICES OPERATIONS
On November 15, 2005, the Company completed the sale of substantially all
of the assets and liabilities of its Credit and Financial Services
operations, including its Sears Card and Sears MasterCard credit
portfolio, to JPMorgan Chase & Co. The Company received proceeds of
$2,446.4 million, net of cash transferred, totalling $15.7 million and
transaction costs in the amount of $27.3 million. The Company's pre-tax
gain on sale of $811.0 million is included in unusual items for the
13-week period ended December 31, 2005 (Note 8). Included in income taxes
for the quarter is a charge of $133.8 million related to this
transaction. The calculation of proceeds and allocation of net assets are
preliminary pending resolution of closing adjustments which are expected
to be finalized by the end of the first quarter of 2006.
The table below summarizes the assets and liabilities of the operations
sold. The majority of those assets and liabilities were previously
included in the Company's Credit segment (Note 10). The Company's
consolidated financial statements include the results of the Credit and
Financial Services operations up to November 14, 2005.
(in millions)
-------------------------------------------------------------------------
Cash $ 15.7
Accounts receivable, net of $982.1 million co-ownership held
by third parties 1,542.2
Investments 44.2
Other long-term assets 49.8
Other assets 6.9
Accounts payable and accrued liabilities (7.7)
-------------------------------------------------------------------------
Net assets sold $ 1,651.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4. ACCOUNTS RECEIVABLE
Details of accounts receivable are as follows:
(in millions)
As at As at
December 31, January 1,
2005 2005
-------------------------------------------------------------------------
Customer accounts receivable
- current $ - $ 2,050.3
Customer accounts receivable - deferred - 791.7
-------------------------------------------------------------------------
Managed accounts - 2,842.0
Less: Co-ownership held by third parties - (1,248.5)
-------------------------------------------------------------------------
Co-ownership retained by the Company - 1,593.5
Less: long-term portion of deferred
customer accounts receivable - (98.6)
Interest-only strip receivable (Note 5) - 30.2
Miscellaneous receivables 54.3 1.2
-------------------------------------------------------------------------
Total $ 54.3 $ 1,526.3
-------------------------------------------------------------------------
As discussed in Note 3, during the fourth quarter of 2005, the Company
sold substantially all of the assets and liabilities of its Credit and
Financial Services operations, including its accounts receivable,
interest only strip and certain miscellaneous receivables.
Prior to the sale of the Credit and Financial Services operations on
November 15, 2005, the total credit losses on managed accounts, net of
recoveries, for the 13 and 52-week periods ended December 31, 2005, were
$12.5 million (2004 - $23.9 million) and $81.3 million
(2004 - $90.3 million), respectively.
Miscellaneous receivables include the credit related to the reduction in
revenue for sales transacted for which the merchandise has yet to be
delivered, and receivables from JPMorgan Chase & Co. related to the sale
of the Company's Credit and Financial Services operations (Note 3).
5. TRANSFERS OF RECEIVABLES
Prior to the sale of the Company's Credit and Financial Services
operations, securitization was a financial vehicle which provided the
Company with access to funds at a relatively low cost. The Company sold
undivided co-ownership interests in its portfolio of current and deferred
charge accounts receivable to two separate trusts and retained 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.
The Company recognized a pre-tax reduction in revenue of $2.1 million and
a pre-tax gain in revenue of $2.0 million for the 13 and 52-week periods
ended December 31, 2005, respectively (2004 - pre-tax gain in revenue of
$8.5 million and $5.8 million, respectively), related to the timing of
recognition of income on the sale of charge accounts receivable.
The table below summarizes certain cash flows related to the transfer of
receivables prior to the sale of the Credit and Financial Services
operations:
13-Week 13-Week 52-Week 52-Week
Period Period Period Period
Ended Ended Ended Ended
December 31, January 1, December 31, January 1,
(in millions) 2005 2005 2005 2005
-------------------------------------------------------------------------
Proceeds from new
securitizations $ 40.8 $ 224.7 $ 226.1 $ 663.5
Proceeds from
collections reinvested 153.8 364.0 1,430.3 1,133.3
Other cash flows
relating to
retained interests (0.2) 9.1 0.5 9.8
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6. INVESTMENTS AND OTHER ASSETS
As at As at
December 31, January 1,
(in millions) 2005 2005
-------------------------------------------------------------------------
Unsecured debentures $ - $ 37.8
Subordinated loans - 3.0
Other investments - 2.8
Retained interest in transferred receivables
- cash reserve account - 38.7
-------------------------------------------------------------------------
Total $ - $ 82.3
-------------------------------------------------------------------------
During 2005, the Company's investments were either redeemed as a result
of the winding up of securitization trust SCRT - 1992 or sold to JPMorgan
Chase & Co. (Note 3).
7. LONG-TERM OBLIGATIONS
The Company's net cash interest payments in the 13 and 52-week periods
ended December 31, 2005 were $7.1 million (2004 - $13.8 million) and
$46.9 million (2004 - $52.2 million), respectively.
Interest expense on long-term debt for the 13 and 52-week periods ended
December 31, 2005 amounted to $14.6 million (2004 - $14.7 million) and
$58.4 million (2004 - $59.3 million), respectively.
8. UNUSUAL ITEMS
The Company recorded pre-tax income in the 13 and 52-week periods ended
December 31, 2005 of $811.8 million (2004 - $0.3 million) and
$747.7 million (2004 - $3.2 million expense), respectively. The unusual
items are as follows:
13-Week 13-Week 52-Week 52-Week
Period Period Period Period
Ended Ended Ended Ended
December 31, January 1, December 31, January 1,
(in millions) 2005 2005 2005 2005
-------------------------------------------------------------------------
Sale of Credit and
Financial Services
operations $ 811.0 $ - $ 811.0 $ -
Sale of real estate
Joint Venture - - 15.5 16.0
Sale of real estate - - 4.8 3.1
Stock-based compensation 5.0 - (16.1) -
Restructuring activities (4.0) (0.2) (67.3) (14.8)
Conversion of
Eatons stores - - - 8.0
Auto centre operations - 0.5 - (13.1)
Store closures (0.2) - (0.2) (2.4)
-------------------------------------------------------------------------
Total unusual items
- gain (expense) $ 811.8 $ 0.3 $ 747.7 $ (3.2)
-------------------------------------------------------------------------
Sale of Credit and Financial Services Operations
On November 15, 2005, the Company completed the sale of substantially all
of the assets and liabilities of its Credit and Financial Services
operations, including its Sears Card and Sears MasterCard credit
portfolio, to JPMorgan Chase & Co. The Company has recognized a pre-tax
gain of $811.0 million on this transaction (Note 3).
Sale of Real Estate Joint Venture
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 39-week period ended October 1, 2005, the Company realized a
pre-tax gain of $4.8 million (second quarter 2004 - $3.1 million), on the
sale of real estate.
Stock-Based Compensation
A pre-tax charge of $16.1 million was recorded during the 52-week period
ended December 31, 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 operations (Note 3), and
the corresponding increase in the Company's share price.
A pre-tax credit of $5.0 million was recorded in the 13-week period ended
December 31, 2005 (2004 - Nil) due to the reduction in the liability
required at year end. The liability decreased in the fourth quarter of
2005 as a result of a decrease in the market price of the Company's
stock, as well as the number of options outstanding at December 31, 2005.
Restructuring Activities
Pre-tax restructuring charges for the 13 and 52-week periods ended
December 31, 2005 were $4.0 million and $67.3 million, respectively. The
total restructuring charge for the year includes a cash charge of
$65.4 million and a non-cash charge of $1.9 million (2004 - $14.1 million
and $0.7 million, respectively). The charges relate to severance payments
and other costs resulting from the restructure of certain departments and
positions, including executive positions, to better align the corporate
structure to the Company's strategic and productivity initiatives.
Specifically, in 2005, the Company announced a workforce reduction of
approximately 1,200 individuals. Included in the announcement were those
associates affected by the consolidation of the buying, marketing and
procurement activities of the Montreal buying office and various
corporate and store administrative positions. Other restructuring
expenses include the costs of outplacement services and the costs to
relocate employees due to the strategic staffing initiative. The non-cash
charge in 2005 includes the write-down of parts supplies and fixed assets
following the decision to re-design the Company's Parts and Service
business, offset by a reduction in the Company's provision for
in-warranty services.
Restructuring charges of $0.2 million and $14.8 million were recorded
during the 13 and 52-week periods ended January 1, 2005, respectively.
The charges related to severance payments as a result of restructuring
certain departments and positions to better align the corporate structure
to the Company's strategic and productivity initiatives.
13-Week 13-Week 52-Week 52-Week
Period Period Period Period
Ended Ended Ended Ended
December 31, January 1, December 31, January 1,
(in millions) 2005 2005 2005 2005
-------------------------------------------------------------------------
Severance expense $ (0.3) $ 0.4 $ 63.0 $ 14.1
Other expense 2.4 - 2.4 -
-------------------------------------------------------------------------
Sub-total $ 2.1 $ 0.4 $ 65.4 $ 14.1
-------------------------------------------------------------------------
Non-cash expense 1.9 (0.2) 1.9 0.7
-------------------------------------------------------------------------
Total expense $ 4.0 $ 0.2 $ 67.3 $ 14.8
-------------------------------------------------------------------------
A summary of the changes in the accrued liability related to these
activities is outlined below:
Restructuring
(in millions) Liability
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Accrued liability January 3, 2004 $ -
Cash expense 14.1
Cash payments (10.6)
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Accrued liability January 1, 2005 $ 3.5
Cash payments (1.7)
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Accrued liability April 2, 2005 $ 1.8
Cash expense 0.6
Cash payments (0.7)
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Accrued liability July 2, 2005 $ 1.7
Cash expense 62.7
Cash payments (0.3)
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Accrued liability October 1, 2005 $ 64.1
Cash expense 2.1
Cash payments (49.0)
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Accrued liability December 31, 2005 $ 17.2
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Conversion of Eatons Store
A recovery of $8.0 million was recorded during the 52-week period ended
January 1, 2005 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 52-week period ended January 1, 2005 were
$13.1 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
January 1, 2005, an adjustment of $0.5 million was made to the severance
accrual to reflect the impact of re-deploying employees previously
identified to be severed.
A summary of the changes in the accrued liability related to this
transaction is outlined below:
Facility
Closure
Severance & Other Accrued
(in millions) Expense Costs Liability
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Accrued liability January 3, 2004 $ - $ - $ -
Cash expense 9.0 3.6 12.6
Cash payments (8.4) (1.7) (10.1)
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Accrued liability January 1, 2005 0.6 1.9 2.5
Cash payments (0.6) (0.4) (1.0)
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Accrued liability April 2, 2005 - 1.5 1.5
Cash payments - - -
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Accrued liability July 2, 2005 - 1.5 1.5
Cash payments - (0.2) (0.2)
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Accrued liability October 1, 2005 - 1.3 1.3
Cash payments - (1.3) (1.3)
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Accrued liability December 31, 2005 $ - $ - $ -
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Store Closures
During the 13 and 52-week periods ended December 31, 2005, the Company
incurred a $0.2 million charge primarily related to the closure of a
Coverings store located in Ontario.
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,
both 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 52-Week 52-Week
Period Period Period Period
Ended Ended Ended Ended
December January December January
31, 2005 1, 2005 31, 2005 1, 2005
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Number Number Number Number
of shares of shares of shares of shares
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Average number of
shares per basic
earnings per share
calculation 107,288,335 106,256,270 106,738,733 106,643,131
Effect of dilutive
instruments
outstanding 258,799 322,691 456,827 389,931
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Average number of
shares per diluted
earnings per share
calculation 107,547,134 106,578,961 107,195,560 107,033,062
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10. SEGMENTED INFORMATION
Segmented Statement of Earnings
13-Week
Period
13-Week Ended 52-Week 52-Week
Period January Period Period
Ended 1, 2005 Ended Ended
December (Restated December January
(in millions) 31, 2005 Note 18) 31, 2005 1, 2005
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Total revenues
Credit
Operating $ 51.4 $ 108.1 $ 388.2 $ 432.0
Securitization
(loss) gain (2.1) 8.5 2.0 5.8
Securitization funding
cost (5.6) (17.2) (47.0) (74.7)
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43.7 99.4 343.2 363.1
Merchandising 1,850.5 1,802.6 5,841.6 5,814.7
Real Estate Joint
Ventures 13.9 13.1 52.8 52.7
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Total revenues $ 1,908.1 $ 1,915.1 $ 6,237.6 $ 6,230.5
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Earnings (loss) before
interest, unusual items
and income taxes
Credit
Operating $ 12.1 $ 31.6 $ 142.7 $ 170.2
Securitization
(loss) gain (2.1) 8.5 2.0 5.8
Securitization
funding cost (5.6) (17.2) (47.0) (74.7)
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4.4 22.9 97.7 101.3
Merchandising 155.2 120.4 140.7 119.9
Real Estate Joint
Ventures 4.6 5.8 20.4 26.4
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Earnings before interest,
unusual items and
income taxes 164.2 149.1 258.8 247.6
Interest expense, net 6.8 14.0 48.9 55.0
Unusual items
- (gain) expense (811.8) (0.3) (747.7) 3.2
Income taxes 185.8 40.6 186.8 60.7
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Net earnings $ 783.4 $ 94.8 $ 770.8 $ 128.7
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Segmented Statement of Capital Employed (x)
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As at As at
December 31, January 1,
(in millions) 2005 2005
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Merchandising $ 1,255.4 $ 822.7
Credit - 1,660.0
Real Estate Joint Ventures 139.2 150.6
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Total $ 1,394.6 $ 2,633.3
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(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
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As at As at
December 31, January 1,
(in millions) 2005 2005
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Merchandising $ 3,046.0 $ 2,376.6
Credit - 1,720.1
Real Estate Joint Ventures 152.6 165.7
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Total $ 3,198.6 $ 4,262.4
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During the fourth quarter of 2005, the majority of the assets and
liabilities of the Credit segment were sold to JPMorgan Chase & Co.
(Note 3). Following the transaction, income from JPMorgan Chase & Co.,
and costs associated with the Company's loyalty program, as well as the
remaining net assets were recorded in the Merchandising segment.
11. INCOME TAXES
The Company had a net cash refund of income taxes in the fourth quarter
of 2005 totalling $6.2 million (2004 - net cash payments of $8.9
million). The total net cash payment of income taxes in the 52-week
period ended December 31, 2005 was $30.5 million (2004 - $17.5 million).
12. CAPITAL STOCK
107,402,807 common shares were issued and outstanding as at December 31,
2005. A total of 170,814 shares and 1,132,813 shares were issued during
the 13 and 52-week periods ended December 31, 2005, respectively. During
the 13 and 52-week periods ended December 31, 2005, 89,911 and 201,475
shares were issued on the vesting of Special Incentive Shares and
Deferred Share Units combined, and 80,903 and 931,338 shares were issued
on the exercise of options. Cash received from the issuance of capital
stock upon the exercise of options amounted to $1.8 million and $17.7
million in the 13 and 52-week periods ended December 31, 2005,
respectively. A total of 16,331 shares and 44,831 shares were issued
during the 13 and 52-week periods ended January 1, 2005, respectively.
Following the sale of the Credit and Financial Services operations, on
December 16, 2005 the Company made payments of $470.4 million and
$1,531.5 million to the shareholders on record as at December 13, 2005,
by way of a reduction of the stated capital maintained in respect of
common shares, and an extraordinary cash dividend, 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 5.3 million 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.
By purchasing common shares under its 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 has 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
Roebucks' 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.
During 2005, the Company did not purchase any shares for cancellation
under its Normal Course Issuer Bid. In 2004, the Company purchased
573,301 (311,501 from Sears Roebuck) common shares at a weighted average
price of $16.22.
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 ("HRCC") 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-week period ended December 31, 2005, the Company's HRCC to the
Board of Directors approved a resolution to accelerate the vesting of
unvested stock options and Special Incentive Shares.
During the 13 and 52-week periods ended December 31, 2005, no tandem
award options were granted under the Company's stock-based compensation
plans. During the 13 and 52-week periods ended January 1, 2005, Nil and
622,050 tandem award options were granted, respectively.
Cash payments for stock appreciation rights made during the 13 and 52-
week periods ended December 31, 2005, were $9.6 million and $17.9 million
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. Total compensation expense related to tandem
awards was a credit of $5.4 million and an expense of $22.9 million in
the 13 and 52-week periods ended December 31, 2005, respectively.
Compensation expense of less than $0.1 million was recorded in operating
income in the 13 and 52-week periods ended January 1, 2005.
During the 13 and 52-week periods ended December 31, 2005, no Special
Incentive Shares were awarded under the Employees' Stock Plan (the
"Plan"). During the 13 and 52-week periods ended January 1, 2005, Nil 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 $1.0 million
and $2.1 million has been recognized as an expense and credited to
capital stock for the 13 and 52-week periods ended December 31, 2005,
(2004 - $1.0 million and $3.1 million), respectively.
Of the total stock-based compensation charge, a credit of $5.0 million
and an expense $16.1 million were recorded as unusual items (Note 8) for
the 13 and 52-week periods ended December 31, 2005, respectively (2004 -
Nil).
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, to be completed by the end of the first quarter of
2006.
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 $23.3 million.
Other indemnification agreements
In the ordinary course of business and in connection with the sale of the
Credit and Financial Services operations (Note 3), the Company has
provided 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
52-week periods ended December 31, 2005 was $12.5 million (2004 - $11.1
million) and $50.4 million (2004 - $44.9 million), respectively.
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 to the financial statements.
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 "Accounting by a
customer for Certain Consideration Received From a Vendor". The impact on
net earnings and earnings per share for the 13-week period ended January
1, 2005 as a result of the lease restatement is a reduction of
approximately $2.6 million and 2 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 January 1, 2005 is a reduction of $35.6 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. Vincent Power, Sears Canada Inc., (416) 941-4422, vpower@sears.ca |
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