TORONTO, Oct. 26, 2006 (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 September 30, 2006 were $1.409 billion compared to $1.487 billion for the 13 weeks ended October 1, 2005, a decrease of 5.2%. The decrease in revenues was primarily due to the sale of the Credit and Financial Services operations in the fourth quarter of 2005. Same store sales increased 1.2%. The Company moved some key promotional events from the fourth quarter of 2005 to the third quarter this year for strategic reasons, and believes that the majority of the same store sales increase is due to the change in the timing of these promotional events.
Net earnings for the third quarter, including non-comparable items, were $37.8 million or 35 cents per share compared to a loss of $37.4 million or 35 cents per share in the same quarter last year. Net earnings for the quarter, excluding non-comparable items, were $41.1 million or 38 cents per share compared to $20.8 million or 19 cents per share in the quarter last year.
Gross margins for the quarter increased over the equivalent period in 2005 by 250 basis points, as a result of a higher balance of sale in apparel and improved inventory management. Inventory levels were 1.5% lower than the same period last year. Total expenses were reduced by 13.7%, approximately 60% of which is related to the sale of the Credit and Financial Services operations. During the quarter the Company revised assumptions used to calculate certain of its reserves based on recent experience. The net impact to pre-tax earnings for the third quarter due to these adjustments was a decrease in expenses of $4.0 million.
"We are pleased with the same store sales, productivity improvements and expense reductions in the third quarter. Yet, we realize the annual performance is highly dependent on the fourth quarter in which more than 40% of earnings are generated," said Dene Rogers, Acting President, Sears Canada Inc. "The productivity improvements begun in the fourth quarter of 2005 are now essentially complete. To grow earnings going forward it will be necessary to grow sales in an increasingly competitive Canadian marketplace, with new competitors coming into Canada and existing competitors expanding formats and categories."
Total revenues for the 39-week period ended October 1, 2006 were $4.059 billion compared to $4.329 billion for the same period last year, a decrease of 6.2%. Same store sales decreased 1.4%.
Net earnings for the first nine months, including non-comparable items, were $44.1 million or 41 cents per share compared to a loss of $12.6 million or 12 cents per share for the same period last year. Net earnings for the nine months, excluding non-comparable items, were $60.6 million or 56 cents per share compared to $27.9 million or 26 cents per share for the same period last year.
Gross margins for the first nine months increased by 155 basis points over the same period last year. Total expenses were reduced by 13.5%, approximately 60% of which is related to the sale of the Credit and Financial Services operations.
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 results achieved pursuant to the Company's long-term credit card marketing and servicing alliance with JPMorgan Chase Bank, N.A. (Toronto Branch); 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 and investment income; 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 takeover bid by SHLD Acquisition Corp., a wholly-owned indirect subsidiary of Sears Holdings Corporation, to acquire the outstanding shares of Sears Canada which it and its affiliates do not already own, and proposed subsequent acquisition transaction; 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, 182 dealer stores, 65 home improvement showrooms, over 1,900 catalogue merchandise pick-up locations, 107 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
For the 13-week periods ended September 30, 2006 and October 1, 2005
------------------------------------------------
Earnings (loss)
Before tax After tax per share
-------------------------------------------------------------------------
2006 2005 2006 2005 2006 2005
-------------------------------------------------------------------------
Earnings before
non-comparable items $ 66.8 $ 33.7 $ 41.1 $ 20.8 $ 0.38 $ 0.19
-------------------------------------------------------------------------
Effect from sale of
receivables - (2.3) - (1.6) - (0.01)
Restructuring
activities (4.9) (62.7) (3.3) (40.8) (0.03) (0.38)
Stock-based
compensation - (21.1) - (18.2) - (0.17)
Sale of real estate - 2.9 - 2.4 - 0.02
-------------------------------------------------------------------------
Net earnings (loss) $ 61.9 $(49.5) $ 37.8 $(37.4) $ 0.35 $(0.35)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the 39-week periods ended September 30, 2006 and October 1, 2005
------------------------------------------------
Earnings (loss)
Before tax After tax per share
-------------------------------------------------------------------------
2006 2005 2006 2005 2006 2005
-------------------------------------------------------------------------
Earnings before
non-comparable items $108.3 $ 48.4 $ 60.6 $ 27.9 $ 0.56 $ 0.26
-------------------------------------------------------------------------
Effect from sale of
receivables - 4.1 - 2.6 - 0.02
Restructuring
activities (25.2) (63.3) (16.5) (41.2) (0.15) (0.39)
Stock-based
compensation - (21.1) - (18.2) - (0.17)
Sale of real estate
joint ventures - 15.5 - 12.3 - 0.12
Sale of real estate - 4.8 - 4.0 - 0.04
-------------------------------------------------------------------------
Net earnings (loss) $ 83.1 $(11.6) $ 44.1 $(12.6) $ 0.41 $(0.12)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SEARS CANADA INC.
Consolidated Statements of Financial Position
As at As at As at
September 30, October 1, December 31,
(in millions) 2006 2005 2005
-------------------------------------------------------------------------
(unaudited) (unaudited) (audited)
ASSETS
Current Assets
Cash and short-term investments $ 372.2 $ 94.8 $ 775.1
Accounts receivable (Notes 4 and 5) 142.3 95.2 146.5
Income taxes recoverable 1.1 8.5 7.9
Inventories 906.4 920.5 788.2
Prepaid expenses and other assets 136.2 151.6 128.3
Current portion of future income
tax assets 120.5 84.6 130.3
Assets held for sale (Note 3) - 1,569.7 -
-------------------------------------------------------------------------
1,678.7 2,924.9 1,976.3
Capital assets 896.2 991.8 980.9
Deferred charges 223.9 249.6 243.8
Future income tax assets 49.3 130.7 54.1
Other long-term assets 34.7 34.2 35.7
-------------------------------------------------------------------------
$ 2,882.8 $ 4,331.2 $ 3,290.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable $ 788.6 $ 747.6 $ 696.6
Accrued liabilities 458.5 534.9 522.3
Income and other taxes payable 56.6 58.9 322.5
Principal payments on long-term
obligations due within one year
(Note 6) 16.9 221.4 216.1
Future income tax liabilities - 13.6 -
Liabilities of operations held
for sale (Note 3) - 12.6 -
-------------------------------------------------------------------------
1,320.6 1,589.0 1,757.5
Long-term obligations (Note 6) 530.7 532.8 533.2
Accrued benefit liability (Note 14) 188.0 182.2 188.3
Other long-term liabilities 167.0 160.7 166.5
-------------------------------------------------------------------------
2,206.3 2,464.7 2,645.5
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (Note 11) 15.7 480.4 13.7
Retained earnings 660.8 1,386.1 631.6
-------------------------------------------------------------------------
676.5 1,866.5 645.3
-------------------------------------------------------------------------
$ 2,882.8 $ 4,331.2 $ 3,290.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF EARNINGS
For the 13 and 39-week periods ended September 30, 2006 and
October 1, 2005
Unaudited 13-Week Period 39-Week Period
--------------------- ---------------------
(in millions, except per
share amounts) 2006 2005 2006 2005
-------------------------------------------------------------------------
Total Revenues $ 1,408.8 $ 1,486.7 $ 4,058.8 $ 4,329.5
-------------------------------------------------------------------------
Cost of merchandise sold,
operating, administrative
and selling expenses 1,284.2 1,401.6 3,793.6 4,111.2
Depreciation and amortization 37.9 39.8 114.9 123.7
Interest expense, net 19.9 13.9 42.0 42.1
Unusual items - expense
(Note 7) 4.9 80.9 25.2 64.1
-------------------------------------------------------------------------
Earnings (loss) before income
taxes 61.9 (49.5) 83.1 (11.6)
-------------------------------------------------------------------------
Income tax expense (recovery)
Current 20.5 14.6 24.2 34.6
Future 3.6 (26.7) 14.8 (33.6)
-------------------------------------------------------------------------
24.1 (12.1) 39.0 1.0
-------------------------------------------------------------------------
Net earnings (loss) $ 37.8 $ (37.4) $ 44.1 $ (12.6)
-------------------------------------------------------------------------
Earnings (loss) per share
(Note 8) $ 0.35 $ (0.35) $ 0.41 $ (0.12)
-------------------------------------------------------------------------
Diluted earnings (loss)
per share (Note 8) $ 0.35 $ (0.35) $ 0.41 $ (0.12)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the 13 and 39-week periods ended September 30, 2006 and
October 1, 2005
Unaudited 13-Week Period 39-Week Period
--------------------- ---------------------
(in millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Opening Balance $ 623.0 $ 1,429.9 $ 631.6 $ 1,417.9
Net earnings (loss) 37.8 (37.4) 44.1 (12.6)
Dividends declared - (6.4) (12.9) (19.2)
Notional dividends (Note 11) - - (2.0) -
-------------------------------------------------------------------------
Closing Balance $ 660.8 $ 1,386.1 $ 660.8 $ 1,386.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the 13 and 39-week periods ended September 30, 2006 and
October 1, 2005
Unaudited
13 Week 13 Week 39 Week 39 Week
Period Period Period Period
Ended Ended Ended Ended
September October September October
(in millions) 30, 2006 1, 2005 30, 2006 1, 2005
-------------------------------------------------------------------------
CASH FLOWS GENERATED FROM
(USED FOR) OPERATING
ACTIVITIES
Net earnings (loss) $ 37.8 $ (37.4) $ 44.1 $ (12.6)
Non-cash items included in
net earnings, principally
depreciation, pension
expense and future
income taxes 63.1 40.7 181.9 129.2
Changes in non-cash working
capital balances related
to operations 23.0 29.2 (352.5) (167.4)
Other, principally pension
contributions and changes
to long-term assets and
liabilities (2.2) (17.4) (27.8) (20.5)
-------------------------------------------------------------------------
121.7 15.1 (154.3) (71.3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CASH FLOW GENERATED FROM
(USED FOR) INVESTING
ACTIVITIES
Purchases of capital assets (12.8) (20.7) (31.8) (54.8)
Proceeds from sale of
capital assets 0.3 3.0 1.0 26.6
Charge account receivables
(Note 4) - 1.5 - 109.4
Deferred charges - - (0.5) (2.8)
Acquisition, net of cash
acquired - - - (23.2)
Investments and other assets - 3.2 - 37.8
-------------------------------------------------------------------------
(12.5) (13.0) (31.3) 93.0
-------------------------------------------------------------------------
CASH FLOW GENERATED FROM
(USED FOR) FINANCING
ACTIVITIES
Net proceeds from issue of
capital stock (Note 11) - 11.4 - 15.9
Repayment of long-term
obligations (Note 6) (299.8) (0.5) (501.8) (1.6)
Issuance of long-term
obligations (Note 6) - - 300.0 -
Deferred charges (0.8) - (2.6) -
Dividends paid - (6.4) (12.9) (19.2)
-------------------------------------------------------------------------
(300.6) 4.5 (217.3) (4.9)
-------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
AND SHORT-TERM INVESTMENTS (191.4) 6.6 (402.9) 16.8
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD 563.6 88.2 775.1 78.0
-------------------------------------------------------------------------
CASH AND SHORT-TERM
INVESTMENTS AT END OF PERIOD $ 372.2 $ 94.8 $ 372.2 $ 94.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sears Canada Inc.
Notes to the Interim Consolidated Financial Statements
September 30, 2006
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 December 31,
2005. Figures for the 13 and 39-week periods ended September 30, 2006 and
October 1, 2005 and the balances as 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 and earnings are typically
earned in the fourth quarter.
2. ACCOUNTING POLICIES AND ESTIMATES
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 December 31, 2005, except as noted below.
Accounting by a Customer for Certain Consideration Received from a Vendor
As required under the Canadian Institute of Chartered Accountants
("CICA") Emerging Issues Committee ("EIC") Abstract 144 "Accounting by a
Customer for Certain Consideration Received from a Vendor", the Company
has recognized, for the 13 and 39-week periods ended September 30, 2006,
$1.9 million and $5.1 million, respectively, as a reduction to purchases
related to binding agreements for which full entitlement has not yet been
met but is probable (for the 13 and 39-week periods ended October 1, 2005
- a $0.4 million increase to purchases and a $3.2 million reduction to
purchases, respectively). Also in accordance with EIC-144, the Company
recognizes the benefit of discretionary rebates when paid by the vendor
or when the vendor becomes obligated to pay.
New Policies:
(a) Accounting for Conditional Asset Retirement Obligations
Effective April 2, 2006, the Company adopted EIC-159 "Conditional
Asset Retirement Obligations". This guidance should be applied
retroactively, with restatement of prior periods, to all financial
statements for interim and annual reporting periods ending after
March 31, 2006. A conditional Asset Retirement Obligation
("conditional ARO") refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement
are conditional on a future event that may or may not be within the
control of the entity. EIC-159 requires an entity to recognize a
liability for a conditional ARO if the fair value of the obligation
can be reasonably estimated. If sufficient information is not
available at the time the liability is incurred, a liability should
be recognized in the period in which sufficient information becomes
available to estimate its fair value. In those situations where the
fair value of a conditional ARO cannot be reasonably estimated, that
fact and the reasons should be disclosed.
The legal obligation to remove asbestos is a conditional ARO under
EIC-159. If the Company commits to renovating a leased or owned
building that contains or may contain asbestos, or if asbestos is
inadvertently disturbed, for example, through normal wear and tear,
the Company will be legally obligated to comply with asbestos removal
standards. The Company has not recorded a liability related to the
removal of asbestos because neither the timing nor the cost of such
removal can be reasonably estimated at this time. The cost to remove
any asbestos would vary significantly depending on the extent of
renovation and the location of the asbestos, among other factors. The
timing of asbestos removal is indeterminable as it is dependant on
plans for the nature of future renovations, which are revised
regularly, or on the inadvertent disturbance of asbestos, which
cannot be foreseen.
The Company has determined that it has no other conditional AROs and
therefore EIC-159 has had no material impact on the Company's
financial statements for the 13 and 39-week periods ended
September 30, 2006 and October 1, 2005.
(b) Accounting by a Vendor for Consideration given to a Customer
In September 2005, the EIC of the CICA issued EIC-156 "Accounting by
a Vendor for Consideration given to a Customer (including a Reseller
of the Vendor's Products)". This guidance is to be applied
retroactively, with restatement of prior periods, to all interim and
annual financial statements for fiscal periods beginning on or after
January 1, 2006. EIC-156 provides guidance to manufacturers,
distributors and resellers on the income statement classification,
recognition and measurement of sales incentives or other
consideration given by a vendor to a direct or indirect customer.
This guidance has had no material impact on the Company's financial
statements for the 13 and 39-week periods ended September 30, 2006
and October 1, 2005.
>>
Estimates
During the quarter, the Company revised certain assumptions used to
calculate the loyalty program and insurance reserves based on redemption
and claims experience, respectively. The net impact to pre-tax earnings
for the quarter, due to a decrease in the loyalty reserve of $8.8 million
and an increase to the insurance reserve of $4.8 million is $4.0 million.
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 operations, including its Sears Card and Sears
MasterCard credit portfolio, to JPMorgan Chase Bank, N.A. (Toronto
Branch), ("JPMorgan Chase"). The transaction was complete by the end of
fiscal 2005.
4. ACCOUNTS RECEIVABLE
<<
Details of accounts receivable are as follows:
As at As at As at
September 30, October 1, December 31,
(in millions) 2006 2005 2005
-------------------------------------------------------------------------
Customer accounts receivable
- current $ - $ 1,791.9 $ -
Customer accounts receivable
- deferred - 707.2 -
-------------------------------------------------------------------------
Managed accounts - 2,499.1 -
Less: Co-ownership held by
third parties - (1,013.3) -
-------------------------------------------------------------------------
Co-ownership retained by the Company - 1,485.8 -
Less: long-term portion of deferred
customer accounts receivable - (56.0) -
Interest-only strip receivable - 32.6 -
Miscellaneous receivables 142.3 91.6 146.5
-------------------------------------------------------------------------
142.3 1,554.0 146.5
-------------------------------------------------------------------------
Amounts transferred to assets
held for sale - (1,458.8) -
-------------------------------------------------------------------------
Total $ 142.3 $ 95.2 $ 146.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
As discussed in Note 2 to the Company's financial statements for the
52-week period ended December 31, 2005, during the fourth quarter of 2005
the Company sold substantially all of the assets and liabilities of its
Credit and Financial Services operations to JPMorgan Chase, including its
accounts receivable, interest-only strip and certain miscellaneous
receivables.
The total credit losses on managed accounts, net of recoveries, for the
13 and 39-week periods ended September 30, 2006 were nil (2005 -
$23.4 million) and nil (2005 - $68.8 million), respectively.
5. TRANSFERS OF RECEIVABLES
Prior to the sale of the Company's Credit and Financial Services
operations, securitization was a financial vehicle that 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 $2.3 million and
pre-tax gain in revenue of $4.1 million for the 13 and 39-week periods
ended October 1, 2005, respectively, related to the timing of recognition
of income on the sale of charge accounts receivable.
6. LONG-TERM OBLIGATIONS
The Company's cash interest payments, including the cost to settle the
cross-currency interest rate swap discussed below, in the 13 and 39-week
periods ended September 30, 2006 were $20.5 million (2005 -
$13.3 million) and $53.4 million (2005 - $41.5 million), respectively.
Interest expense, including the cost to settle the cross-currency
interest rate swap, on long-term debt for the 13 and 39-week periods
ended September 30, 2006 amounted to $25.5 million (2005 - $14.5 million)
and $55.3 million (2005 - $43.8 million), respectively.
On March 15, 2006, the Company repaid the maturing $200.0 million 6.75%
secured medium-term notes and drew the equivalent of Canadian
$300.0 million on its secured U.S. $260.0 million term loan with a
floating interest rate based on LIBOR plus 150 to 175 basis points. The
U.S. term loan requires quarterly principal payments of 0.25%, with the
remaining principal due December 22, 2012. In addition, to mitigate the
risk of fluctuations in the Canadian/U.S. exchange rate and the floating
interest rate, the Company concurrently entered into cross-currency
interest rate swaps (Note 16), and applied hedge accounting on these
instruments. The effective fixed interest rate on the U.S. term loan is
4.75% plus 150 to 175 basis points.
On September 29, 2006, the Company repaid the outstanding balance of the
term loan of U.S. $259.3 million and concurrently settled the cross-
currency interest rate swaps and discontinued hedge accounting. The cost
of settlement of the swaps of $8.9 million and the write-off of
previously capitalized debt issue costs of $0.9 million is included in
interest expense.
7. UNUSUAL ITEMS
The Company recorded a pre-tax expense of $4.9 million (2005 -
$80.9 million) and $25.2 million (2005 - $64.1 million) in the 13 and
39-week periods ended September 30, 2006, respectively. The unusual items
are as follows:
<<
13 Week 13 Week 39 Week 39 Week
Period Period Period Period
Ended Ended Ended Ended
September October September October
(in millions) 30, 2006 1, 2005 30, 2006 1, 2005
-------------------------------------------------------------------------
Restructuring activities $ (4.9) $ (62.7) $ (25.2) $ (63.3)
Stock-based compensation - (21.1) - (21.1)
Sale of real estate joint
venture - - - 15.5
Sale of real estate - 2.9 - 4.8
-------------------------------------------------------------------------
Total unusual items -
expense $ (4.9) $ (80.9) $ (25.2) $ (64.1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Restructuring Activities
Pre-tax restructuring charges for the 13 and 39-week periods ended
September 30, 2006 were $4.9 million (2005 - $62.7 million) and
$25.2 million (2005 - $63.3 million), respectively. The charges relate to
the implementation of various productivity improvement initiatives,
previously announced in 2005, which included strategic staffing
decisions, rationalization of facilities, a review of sourcing and
procurement practices and various other operational efficiency
improvements. The third quarter and year-to-date expenses relate
primarily to severance and related charges resulting from a workforce
reduction in certain departments and positions, including the logistics
and transportation divisions, the product repair services organization
and executive positions. As part of the above initiatives, and included
in the above figures, the Company recorded a $0.5 million non-cash charge
during the 39-week period ended September 30, 2006 related to the write-
down of fixed assets from the product repair services organization. In
addition, during the 13-week period ended September 30, 2006, the Company
recorded charges of $4.9 million related to pension enhancements as part
of the above noted severance. This amount has been included in Accrued
benefit liability on the Consolidated Statements of Financial Position.
A summary of the changes in the accrued liability related to these and
other restructuring activities is outlined below:
<<
Restructuring
(in millions) Liability
-------------------------------------------------------------------------
Accrued liability January 4, 2004 $ -
Cash expense 14.1
Cash payments (10.6)
-------------------------------------------------------------------------
Accrued liability January 1, 2005 $ 3.5
Cash expense 65.4
Cash payments (51.7)
-------------------------------------------------------------------------
Accrued liability December 31, 2005 $ 17.2
Cash expense 5.5
Cash payments (8.3)
-------------------------------------------------------------------------
Accrued liability April 1, 2006 $ 14.4
Cash expense 14.3
Cash payments (15.6)
-------------------------------------------------------------------------
Accrued liability July 1, 2006 $ 13.1
Cash payments (4.6)
-------------------------------------------------------------------------
Accrued liability September 30, 2006 $ 8.5
-------------------------------------------------------------------------
>>
Sale of Real Estate Joint Venture
During the 39-week period ended October 1, 2005, a $15.5 million pre-tax
gain was recognized on the sale of the Company's proportionate interest
in a real estate joint venture.
Sale of Real Estate
During the 39-week period ended October 1, 2005, the Company realized a
pre-tax gain of $4.8 million 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. The charge relates to stock-based
compensation expenses directly attributable to resolutions approved as
described in Note 12 of the Company's financial statements for the
52-week period ended December 31, 2005 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.
Of the $21.1 million charge, $8.3 million represented cash payments for
stock appreciation rights made during the 13 and 39-week periods ended
October 1, 2005.
<<
8. 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 Ended Period Ended Period Ended Period Ended
(number of September October September October
shares) 30, 2006 1, 2005 30, 2006 1, 2005
-------------------------------------------------------------------------
Average number of
shares per basic
earnings per share
calculation 107,620,995 106,816,427 107,563,118 106,555,533
Effect of dilutive
instruments
outstanding 9,662 958,601 140,891 1,174,741
-------------------------------------------------------------------------
Average number of
shares per diluted
earnings per share
calculation 107,630,657 107,775,028 107,704,009 107,730,274
-------------------------------------------------------------------------
9. SEGMENTED INFORMATION
Segmented Statement of Earnings
13 Week 13 Week 39 Week 39 Week
Period Period Period Period
Ended Ended Ended Ended
September October September October
(in millions) 30, 2006 1, 2005 30, 2006 1, 2005
-------------------------------------------------------------------------
Total revenues
Credit
Operating $ - $ 108.6 $ - $ 336.8
Effect from sale of
receivables - (2.3) - 4.1
Securitization funding
cost - (11.4) - (41.4)
-------------------------------------------------------------------------
- 94.9 - 299.5
Merchandising* 1,395.7 1,379.0 4,019.4 3,991.1
Real Estate Joint Ventures 13.1 12.8 39.4 38.9
-------------------------------------------------------------------------
Total revenues $ 1,408.8 $ 1,486.7 $ 4,058.8 $ 4,329.5
-------------------------------------------------------------------------
Earnings (loss) before
interest, unusual items
and income taxes
Credit
Operating $ - $ 36.8 $ - $ 130.6
Effect from sale of
receivables - (2.3) - 4.1
Securitization funding
cost - (11.4) - (41.4)
-------------------------------------------------------------------------
- 23.1 - 93.3
Merchandising* 80.8 16.3 132.8 (14.5)
Real Estate Joint Ventures 5.9 5.9 17.5 15.8
-------------------------------------------------------------------------
Earnings before interest,
unusual items and
income taxes 86.7 45.3 150.3 94.6
Interest expense, net 19.9 13.9 42.0 42.1
Unusual items - expense 4.9 80.9 25.2 64.1
Income tax expense
(recovery) 24.1 (12.1) 39.0 1.0
-------------------------------------------------------------------------
Net earnings (loss) $ 37.8 $ (37.4) $ 44.1 $ (12.6)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
* In 2006, merchandising includes revenue and earnings from the
alliance with JPMorgan Chase as follows: for the 13-week period ended
September 30, 2006 - $19.4 million and $20.8 million; for the 39-week
period ended September 30, 2006 - $55.6 million and $44.8 million,
respectively. (See Note 2)
Segmented Statement of Capital Employed(*)
As at As at As at
September 30, October 1, December 31,
(in millions) 2006 2005 2005
-------------------------------------------------------------------------
Merchandising $ 1,088.3 $ 956.0 $ 1,255.4
Credit - 1,520.2 -
Real Estate Joint Ventures 135.8 144.5 139.2
-------------------------------------------------------------------------
Total $ 1,224.1 $ 2,620.7 $ 1,394.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
* 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 As at As at
September 30, October 1, December 31,
(in millions) 2006 2005 2005
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Merchandising $ 2,733.7 $ 2,599.1 $ 3,138.2
Credit - 1,573.2 -
Real Estate Joint Ventures 149.1 158.9 152.6
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Total $ 2,882.8 $ 4,331.2 $ 3,290.8
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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. Beginning
November 15, 2005, revenue and earnings from the alliance with JPMorgan
Chase, including costs associated with the Company's loyalty program and
certain overhead expenses, as well as the remaining net assets of the
former Credit segment, are recorded in the Merchandising segment.
10. INCOME TAXES
The Company's total net cash payments of income taxes in the 13 and
39-week periods ended September 30, 2006 were $1.6 million (2005 -
$5.9 million) and $207.1 million (2005 - $36.7 million), respectively.
11. CAPITAL STOCK
As at September 30, 2006, 107,620,995 common shares were issued and
outstanding. Sears Holdings Corporation ("Sears Holdings") is the
beneficial holder of 75,563,719, or 70.2%, of the common shares of the
Company as at September 30, 2006.
During the 13 and 39-week periods ended September 30, 2006, a total of
nil and 217,951 shares, respectively, were issued on the redemption of
Deferred Share Units ("DSUs") held by officers and other employees of the
Company. A total of nil shares and 237 shares were issued on the exercise
of options in the 13 and 39-week periods ended September 30, 2006,
respectively. Cash received from the issuance of capital stock upon the
exercise of options amounted to nil (2005 - $11.4 million) and less than
$0.1 million (2005 - $15.9 million) in the 13 and 39-week periods ended
September 30, 2006, respectively.
Under the Employee Stock Plan and the Directors' Share Purchase Plan,
DSUs are credited with notional dividend equivalents when dividends are
paid on common shares by the Company. During the 13 and 39-week periods
ended September 30, 2006, the Company credited nil and $2.0 million,
respectively, to capital stock for notional dividend equivalents related
to the quarterly dividend declared in February 2006 and the combined
extraordinary cash dividend and return of capital declared in December
2005 (see Note 11 "Capital Stock" to the Company's financial statements
for the 52-week period ended December 31, 2005).
On March 4, 2005, the Company renewed its Normal Course Issuer Bid to
permit the purchase for cancellation of up to 5% of its issued and
outstanding common shares, representing up to 5.3 million common shares,
from March 4, 2005 to March 3, 2006. The Normal Course Issuer Bid expired
on March 3, 2006 and was not renewed. During the 13 and 39-week periods
ended September 30, 2006 and October 1, 2005, the Company did not
purchase any shares for cancellation.
12. STOCK-BASED COMPENSATION
Details of the Company's stock-based compensation plans are contained in
Note 12 "Stock-Based Compensation" to the Company's financial statements
for the 52-week period ended December 31, 2005.
At the end of each fiscal period, the Company records a liability for
tandem awards equal to the amount by which the market price of its shares
at the end of the period exceeds the exercise price of the vested tandem
awards. 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 awards exercised in the
period. During the 13 and 39-week periods ended September 30, 2006, an
expense of $0.2 million (2005 - $21.1 million expense) and a credit of
$0.1 million (2005 - $28.3 million expense), respectively, were recorded
related to tandem awards.
Cash payments for stock appreciation rights made during the 13 and
39-week periods ended September 30, 2006 were nil million (2005 -
$8.3 million) and $0.1 million (2005 - $8.3 million), respectively.
Awards of Special Incentive Shares to officers and other employees of the
Company are measured at the fair value on the grant date and expensed
over the vesting period. As of November 15, 2005, all Special Incentive
Shares were fully vested. Compensation cost related to Special Incentive
Shares of nil (2005 - $0.4 million) and nil (2005 - $1.1 million) has
been recognized as an expense and credited to capital stock for the
13 and 39-week periods ended September 30, 2006, respectively.
On February 19, 2006, the Board of Directors waived the restrictions on
the disposition of all common shares that were issued upon the vesting of
Special Incentive Shares granted in 2003 and 2004 to officers and other
employees of the Company, and approved the redemption of all Special
Incentive Shares, which were taken as DSUs, for common shares of the
Company. The purpose of the foregoing waiver and approval was to enable
such officers and employees to sell their common shares on the market or
tender to the offer made by SHLD Acquisition Corp., a wholly-owned
indirect subsidiary of Sears Holdings, to purchase any and all of the
outstanding common shares of the Company, other than common shares
already held by SHLD Acquisition Corp. or its affiliates.
During the 13 and 39-week periods ended September 30, 2006, all Special
Incentive Shares which were taken as DSUs were redeemed for common shares
of the Company.
Following the termination of their service to the Board of Directors on
May 9, 2006, the former independent Directors redeemed all of their DSUs
for either common shares of the Company, purchased by the Company on the
Toronto Stock Exchange, or the cash equivalent, all in accordance with
the Directors Share Purchase Plan. As the Company accounts for Directors'
compensation over the term of their service, no compensation expense was
incurred as a result of these redemptions.
13. GUARANTEES
The Company has provided the following significant guarantees:
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 $22.6 million.
Other indemnification agreements
In the ordinary course of business, the Company has provided
indemnification commitments to counterparties in transactions such as
leasing transactions, royalty agreements, service arrangements,
investment banking agreements, director and officer indemnification
agreements and indemnification of trustees under indentures for
outstanding public debt. The Company has also provided certain
indemnification agreements in connection with the sale of the Credit and
Financial Services operations in November 2005. The foregoing
indemnification agreements require the Company to compensate the
counterparties for costs incurred as a result of changes in laws and
regulations or as a result of litigation claims or statutory claims or
statutory sanctions that may be suffered by a counterparty as a
consequence of the transaction. The terms of these indemnification
agreements will vary based on the contract and typically do not provide
for any limit on the maximum potential liability. Historically, the
Company has not made any significant payments under such indemnifications
and no amount has been accrued in the financial statements with respect
to these indemnification commitments.
14. ASSOCIATE FUTURE BENEFITS
Information about the Company's defined benefit plans is contained in
Note 9 of the Company's financial statements for the 52-week period ended
December 31, 2005. The net benefit plan expense for the 13 and 39-week
periods ended September 30, 2006 was $19.2 million (2005 - $12.4 million)
and $48.4 million (2005 - $37.9 million), respectively. The Company
contributed a total of $2.6 million (2005 - $17.5 million) and
$29.0 million (2005 - $19.0 million) to its associate future benefit
plans during the 13 and 39-week periods ended September 30, 2006,
respectively.
15. COMMITMENTS AND CONTINGENCIES
As discussed in Note 15 of the Company's financial statements for the
52-week period ended December 31, 2005, the Company was named in three
class actions in the provinces of Quebec, Saskatchewan and Ontario in
2005 arising out of Sears' pricing of tires. The Company believes these
allegations are without merit. The outcome of these actions is
indeterminable, and the monetary damages, if any, cannot be reliably
estimated. Therefore, the Company has not made a provision for any
potential liability.
A class action with respect to the Sears Card was filed against the
Company pursuant to Quebec law in 2000. The Company believes these
allegations are without merit. The outcome of this action is
indeterminable, and the monetary damages, if any, cannot be reliably
estimated. Therefore, the Company has not made a provision for any
potential liability.
In addition, the Company is involved in various legal proceedings
incidental to the normal course of business. Sears is of the view that
although the outcome of such litigation cannot be predicted with
certainty, the final disposition is not expected to have a material
adverse effect on the Company's consolidated financial position or
results of operations.
16. FINANCIAL INSTRUMENTS
On March 15, 2006, the Company entered into cross-currency interest rate
swaps converting an aggregate notional principal amount of U.S.
$260.0 million floating rate term loan into Canadian dollar fixed rate
term debt. The fixed interest rate payable by the Company under these
agreements is 4.75%. These swaps mature on December 22, 2012, and provide
for quarterly payments which match the principal and interest payments
required under the Company's U.S. $260.0 million term loan. In addition,
the interest rate on the swaps resets quarterly to match the term loan
interest rate reset dates.
On September 29, 2006, the Company settled the swaps in conjunction with
the repayment of the term loan (Note 6). The cost of settlement of the
swaps of $8.9 million and the write-off of previously capitalized debt
issue costs of $0.9 million is included in interest expense.
17. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the
current period's presentation.
SOURCE: Sears Canada Inc.
Contact for Media: Vincent Power, Sears Canada, Corporate Communications, (416)
941-4422, vpower@sears.ca
