Sears Canada Reports First Quarter Results and Announces Extraordinary Cash
Dividend and Normal Course Issuer Bid
TORONTO, May 18 /CNW/ - Sears Canada Inc. (TSX: SCC) today announced its unaudited first quarter results. Total revenue for the 13 week period ended May 1, 2010 was $1.067 billion compared to $1.117 billion for the 13 week period ended May 2, 2009, a decrease of 4.4%. Same store sales decreased 2.0%. Gross margin increased 51 basis points compared to the first quarter of 2009.
Operating EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization and Non-Operating Activities) for the quarter this year was $46.6 million compared to $62.3 million for the same period last year. Operating EBITDA is a non-GAAP measure; please refer to the table attached for a reconciliation of net earnings to operating EBITDA. Net earnings for the quarter this year were $7.2 million or 7 cents per share compared to net earnings of $10.3 million or 10 cents per share for the same period last year.
Net earnings, excluding non-operating activities, for the quarter this year were $7.2 million or 7 cents per share versus $16.8 million or 16 cents per share in the quarter last year. Last year's non-operating activities represented a pre-tax restructuring charge of $9.3 million.
Cash, restricted cash and investments were $1.294 billion at the end of the first quarter this year, an increase of $417.4 million compared to the end of the first quarter last year. Total debt was $349.3 million at the end of the quarter this year compared to $364.4 million at the end of the quarter last year.
Commenting on the quarter, Dene Rogers, President and Chief Executive Officer, Sears Canada Inc., said, "Canadians are still feeling the effects of the economic recession. The Consumer Confidence Index in April, 2010 at 84.8% was lower than it was three months earlier in January, 2010 at 96.6%. In addition, a planned reduction in catalogue impressions of 16.6% and the strong Canadian dollar, which prompted cross-border shopping, also impacted sales. In response, we are lowering prices to offer Canadians exceptional value and providing special services like deferred financing and equal billing payments to make it easy for customers to manage their household budgets for appliances, furniture, electronics and home improvement items such as roofing and air conditioners. Along with the new apparel brands launched, including Mac & Jac, and the upgrade in fashionability and quality to existing brands such as Jessica, Attitude and Distinction, we continue our march to become Canada's No. 1 retailer."
Extraordinary Cash Dividend:
The Company also announced today that its Board of Directors declared that an extraordinary cash dividend of $3.50 per share on all Common Shares of the Company, or approximately $376.7 million, will be paid on June 4, 2010 to shareholders of record as at the close of business on May 31, 2010.
Adjusting balances from the end of the first quarter for the extraordinary cash dividend and a $200 million debt payment made on May 10, 2010, Sears Canada will have approximately $717.2 million in cash, restricted cash and investments on a pro forma basis.
Normal Course Issuer Bid:
The Company is also announcing today that it intends to file with the Toronto Stock Exchange ("TSX") a Notice of Intention to make a Normal Course Issuer Bid that permits the Company to purchase for cancellation up to 5% of its issued and outstanding common shares, representing 5,381,049 of the issued and outstanding common shares ("Shares"). There are 107,620,995 Shares issued and outstanding, as at May 18, 2010.
Under the Normal Course Issuer Bid, which is subject to TSX approval, purchases may commence on May 25, 2010 and must terminate by May 24, 2011 or on such earlier date as Sears Canada may complete its purchases pursuant to the Notice of Intention filed with the TSX. The total purchase of Shares by Sears Canada pursuant to its Normal Course Issuer Bid will not exceed, in the aggregate, 5% of all outstanding Shares, and will be subject to the limits under the Toronto Stock Exchange rules, including a daily limit of 25% of the average daily trading volume (which, based on the prior six months trading volumes, can not exceed 6,746 Shares a day), and a limit of one block purchase per week (which is not subject to an average daily trading volume limit).
The Board of Directors believes that, if the Company is able to purchase Shares at attractive prices, such purchases will create value for the Company and its continuing shareholders while providing additional liquidity to shareholders who desire to sell their Shares. The Company may not purchase Shares under the Normal Course Issuer Bid if Shares cannot be purchased at prices that the Company considers attractive and decisions regarding the timing of purchases will be also based on market conditions and other factors. Therefore, there is no assurance that any Shares will be purchased under the Normal Course Issuer Bid and the Company may elect to suspend or discontinue the bid at any time.
Sears Canada will report to its shareholders in its quarterly and annual reports as to the status of the Normal Course Issuer Bid. All purchases of Shares pursuant to its Normal Course Issuer Bid will be made by Sears Canada in accordance with the rules of the TSX and effected through the facilities of the TSX. Moreover, Sears Canada will make no purchases of Shares other than open market purchases. Any Shares purchased will be cancelled.
"While we continue to experience a difficult economic environment which is still characterized by high unemployment, we believe the economy has stabilized and the threat of the disruption in financial markets that was top of mind at the beginning of last year has subsided. As a result, the Board of Directors has determined it appropriate to return approximately $376.7 million, by way of an extraordinary cash dividend to shareholders at this time. In addition, the approval of the Normal Course Issuer Bid could result in purchases by the Company of over $100 million, if the Company were to purchase the full 5% available under the Normal Course Issuer Bid. The Board of Directors will continue to evaluate alternative uses for its cash, including the possibility of additional dividends, depending on market conditions, economic outlook and the business performance of Sears Canada," said Dene Rogers, President and Chief Executive Officer, Sears Canada Inc.
Sears Canada hereby notifies shareholders that it designates the full amount of the dividend to be paid on the common shares, to be an "eligible dividend" as defined in subsection 89(1) of the Income Tax Act (Canada), and in any similar provincial and territorial tax legislation.
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 marketing and servicing alliance with JPMorgan Chase Bank, N.A.; general economic conditions; competitive conditions in the businesses in which the Company participates; changes in consumer spending; seasonal weather patterns; customer preference toward product offerings; changes in the Company's relationship with its suppliers; interest rate fluctuations and other changes in funding costs; fluctuations in foreign currency exchange rates; the possibility of negative investment returns in the Company's pension plan; the outcome of pending legal proceedings; and changes in laws, rules and regulations applicable to the Company. While the Company believes that its forecasts and assumptions are reasonable, results or events predicted in this forward-looking information may differ materially from actual results or events.
Sears Canada is a multi-channel retailer with a network of 197 corporate stores, 219 dealer stores, 31 home improvement showrooms, over 1,800 catalogue merchandise pick-up locations, 108 Sears Travel offices and a nationwide home maintenance, repair, and installation network. The Company also publishes Canada's most extensive general merchandise catalogue and offers shopping online at www.sears.ca.
SEARS CANADA INC.
RECONCILIATION OF NET EARNINGS TO OPERATING EBITDA
Unaudited
First Quarter(1)
(in millions, except per share amounts) 2010 2009
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Net earnings $ 7.2 $ 10.3
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Non-operating activities, net of taxes
Restructuring expense - 6.5
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Operating net earnings(2) $ 7.2 $ 16.8
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Depreciation and amortization 25.7 30.1
Interest expense, net 5.9 6.1
Income tax expense excluding operating adjustments 7.8 9.3
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Operating EBITDA(2) $ 46.6 $ 62.3
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Net earnings per share $ 0.07 $ 0.10
Operating net earnings per share $ 0.07 $ 0.16
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(1) The first quarter of 2010 and 2009 represent the 13-week periods
ended May 1, 2010 and May 2, 2009, respectively.
(2) Operating net earnings and Operating EBITDA are non-GAAP measures
which exclude non-operating gains and losses and are used by
management to better assess the Company's underlying performance.
SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Unaudited
As at As at As at
May 1, May 2, January
(in millions) 2010 2009 30, 2010
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ASSETS
Current Assets
Cash and short-term investments
(Note 3) $ 1,274.1 $ 745.0 $ 1,381.8
Restricted cash and investments
(Note 13) 19.8 128.4 15.8
Accounts receivable 132.4 133.3 131.1
Income taxes recoverable 29.4 48.2 6.0
Inventories (Note 4) 915.8 1,036.1 852.3
Prepaid expenses and other assets 67.8 136.7 74.7
Current portion of future income
tax assets 32.7 13.7 29.7
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2,472.0 2,241.4 2,491.4
Capital assets 600.7 673.7 620.2
Deferred charges 178.4 181.6 179.2
Intangible assets 22.9 14.8 22.6
Goodwill 11.2 11.2 11.2
Future income tax assets 33.0 32.1 32.0
Other long-term assets 47.5 49.6 48.2
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$ 3,365.7 $ 3,204.4 $ 3,404.8
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LIABILITIES
Current Liabilities
Accounts payable $ 613.6 $ 591.1 $ 647.7
Accrued liabilities 369.3 408.2 342.1
Income and other taxes payable 41.3 41.4 72.7
Principal payments on long-term
obligations due within one year
(Note 5 and 15) 312.1 32.1 314.2
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1,336.3 1,072.8 1,376.7
Long-term obligations (Note 5) 37.2 332.3 36.5
Accrued benefit liability (Note 12) 172.4 160.8 167.7
Future income tax liabilities 4.4 4.1 4.3
Other long-term liabilities 161.3 160.0 162.1
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1,711.6 1,730.0 1,747.3
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SHAREHOLDERS' EQUITY
Capital stock (Note 9) 15.7 15.7 15.7
Retained earnings 1,641.0 1,409.4 1,633.8
Accumulated other comprehensive
(loss) income (2.6) 49.3 8.0
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1,654.1 1,474.4 1,657.5
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$ 3,365.7 $ 3,204.4 $ 3,404.8
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SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE LOSS
For the 13-weeks ended May 1, 2010 and May 2, 2009
Unaudited
(in millions, except per share amounts) 2010 2009
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Total revenues $ 1,067.0 $ 1,116.5
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Cost of merchandise sold, operating,
administrative and selling expenses 1,020.4 1,063.5
Depreciation and amortization 25.7 30.1
Interest expense, net (Note 5) 5.9 6.1
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Earnings before income taxes 15.0 16.8
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Income tax expense
Current 6.9 6.4
Future 0.9 0.1
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7.8 6.5
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Net earnings $ 7.2 $ 10.3
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Net earnings per share (Note 6) $ 0.07 $ 0.10
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Diluted net earnings per share (Note 6) $ 0.07 $ 0.10
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Net earnings $ 7.2 $ 10.3
Other comprehensive income (loss), net of taxes:
Mark-to-market adjustment related to short-term
investments, net of income tax recovery of
$0.1 (2009: expense of less than $0.1) (0.2) 0.1
Loss on foreign exchange derivatives designated
as cash flow hedges, net of income tax recovery
of $4.5 (2009: recovery of $4.6) (8.8) (9.9)
Reclassification to net earnings of gain on
foreign exchange derivatives designated as cash
flow hedges, net of income tax expense of
$0.3 (2009: $4.3) (1.6) (9.3)
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Other comprehensive loss (10.6) (19.1)
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Comprehensive loss $ (3.4) $ (8.8)
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
AND ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
For the 13-weeks ended May 1, 2010 and May 2, 2009
Unaudited
(in millions) 2010 2009
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Retained earnings
Opening balance $ 1,633.8 $ 1,399.1
Net earnings 7.2 10.3
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Closing balance $ 1,641.0 $ 1,409.4
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Accumulated other comprehensive income (loss)
Opening balance $ 8.0 $ 68.4
Other comprehensive loss (10.6) (19.1)
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Closing balance $ (2.6) $ 49.3
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Retained earnings and accumulated other
comprehensive (loss) income $ 1,638.4 $ 1,458.7
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SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the 13-weeks ended May 1, 2010 and May 2, 2009
Unaudited
(in millions) 2010 2009
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Cash flow generated from (used for) operating
activities
Net earnings $ 7.2 $ 10.3
Non-cash items included in net earnings,
principally depreciation and pension expense 32.9 36.5
Changes in non-cash working capital balances
related to operations (128.2) (119.3)
Other, principally pension contributions and
changes to long-term assets and liabilities (2.4) (4.3)
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(90.5) (76.8)
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Cash flow generated from (used for) investing
activities
Purchases of capital assets (11.9) (18.3)
Proceeds from sale of capital assets 0.2 0.4
Changes in restricted cash and investments (4.0) 20.1
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(15.7) 2.2
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Cash flow used for financing activities
Repayment of long-term obligations (1.5) (0.2)
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Decrease in cash and short-term investments (107.7) (74.8)
Cash and short-term investments at beginning of
period 1,381.8 819.8
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Cash and short-term investments at end of period $ 1,274.1 $ 745.0
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Cash at end of period $ 59.9 $ 105.9
Short-term investments at end of period 1,214.2 639.1
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Total cash and short-term investments at end
of period $ 1,274.1 $ 745.0
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SEARS CANADA INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MAY 1, 2010
Unaudited
1. BASIS OF PRESENTATION
These unaudited interim consolidated financial statements (the "Financial
Statements") of Sears Canada Inc. (the "Company") have been prepared in
accordance with Canadian Generally Accepted Accounting Principles
("GAAP") but do not contain all disclosures required by Canadian GAAP for
annual financial statements. Accordingly, these Financial Statements
should be read in conjunction with the most recently prepared audited
annual consolidated financial statements for the 52-week period ended
January 30, 2010 ("2009 Annual Financial Statements"). These Financial
Statements for the first quarter ended May 1, 2010 follow the same
accounting policies and methods of application as those used in the
preparation of the 2009 Annual Financial Statements.
The Company's operations are seasonal in nature. Accordingly, merchandise
and service revenues, as well as performance payments received from
JPMorgan Chase & Co, N.A. (Toronto Branch) ("JPMorgan Chase") under the
long-term credit card marketing and servicing alliance, will vary by
quarter based upon consumer spending behaviour. Historically, the
Company's revenues and earnings are higher in the fourth quarter than in
any of the other three quarters due to the holiday season. The Company is
able to adjust certain variable costs in response to seasonal revenue
patterns; however, costs such as occupancy are fixed, causing the Company
to report a disproportionate level of earnings in the fourth quarter.
This business seasonality results in quarterly performance that is not
necessarily indicative of the year's performance.
2. ACCOUNTING POLICIES AND ESTIMATES
Future Accounting Policies:
International Financial Reporting Standards ("IFRS")
The Canadian Accounting Standards Board confirmed, in February 2008, that
it will require all public companies to adopt IFRS for interim and annual
financial statements relating to fiscal years beginning on or after
January 1, 2011. In the year of adoption, companies will be required to
provide comparative information as if IFRS had been used in the preceding
fiscal year. The transition from Canadian GAAP to IFRS will be applicable
to the Company's first quarter of operations for fiscal 2011, at which
time the Company will prepare both its fiscal 2011 and fiscal 2010
comparative financial information using IFRS. The Company expects the
transition to IFRS to impact financial reporting, business processes,
internal controls and information systems. The Company is currently
assessing the impact of the transition to IFRS on these areas and will
continue to invest in training and resources throughout the transition
period to facilitate a timely conversion.
Multiple Deliverable Revenue Arrangements
In December 2009, the EIC issued EIC-175, "Multiple Deliverable Revenue
Arrangements" to amend EIC-142, "Revenue Arrangements with Multiple
Deliverables". This requires consideration at inception to be allocated
using the relative selling price method and prohibiting the residual
method. This abstract is to be applied prospectively to revenue
arrangements with multiple deliverables entered into or materially
modified in the first annual fiscal period beginning on or after January
1, 2011. Early adoption is permitted and should be applied retroactively
from the beginning of the entity's fiscal period of adoption. EIC-142 is
effective until adoption of EIC-175. The Company is continuing to
evaluate whether or not to early adopt this EIC in 2010.
Business Combinations
In January 2009, the CICA issued Handbook Sections; 1582, "Business
Combinations"; 1601, "Consolidated Financial Statements"; and 1602, "Non-
controlling Interests" ("Section 1602") which are based on the IASB, IFRS
3, "Business Combinations". The new standards replace the existing
guidance on Business Combinations ("Section 1581") and Consolidated
Financial Statements ("Section 1600"). The new standards were issued to
harmonize Canadian accounting for business combinations with the
international and U.S. accounting standards. The new standards are to be
applied prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period
beginning on or after January 1, 2011, with earlier adoption permitted.
Assets and liabilities that arose from business combinations whose
acquisition dates preceded the application of the new standards shall not
be adjusted upon application of these new standards. Section 1602, should
be applied retrospectively except for certain items. The Company is
evaluating the future impact of these sections on its operations,
financial position and disclosures and continues to assess whether it
will early adopt the new sections.
Estimates:
Capital Assets
As a result of the annual review of capital asset depreciation estimates
conducted in Q1 2010, the Company revised the estimates of the useful
lives of its roofing assets and heating, ventilation, and air
conditioning assets. The impact was a decrease in the depreciation
expense resulting in a net increase to the carrying value of the capital
assets and pre-tax earnings of $2.5 million due to the increase in useful
lives of the assets.
3. CASH AND SHORT-TERM INVESTMENTS
The components of cash and short-term investments were as follows:
As at As at As at
May 1, May 2, January
(in millions) 2010 2009 30, 2010
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Cash $ 59.9 $ 105.9 $ 56.5
Short-term investments
Government treasury bills 1,158.2 624.1 1,265.5
Bank term deposits 56.0 15.0 59.8
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Total $ 1,274.1 $ 745.0 $ 1,381.8
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4. INVENTORIES
The amount of inventories recognized as an expense during the 13-week
period ended May 1, 2010 was $548.3 million (2009: $580.9 million),
including $21.7 million (2009: $26.9 million), related to write-downs. A
negligible amount of write-downs were reversed during the period ended
May 1, 2010. These expenses are included in "Cost of merchandise sold,
operating, administrative and selling expenses" in the Consolidated
Statements of Earnings and Comprehensive Loss.
5. LONG-TERM OBLIGATIONS
The Company has a corporate credit rating of BB and BB- from Dominion
Bond Ratings Service and Standard and Poor's, respectively, and a
corporate family rating of Ba1 from Moody's Investors Service, Inc.
The Company is not subject to any financial covenants and the Company's
debt consists of unsecured medium-term notes with fixed interest rates
and payment terms and its proportionate share of the long-term debt of
its joint venture interest. As at May 1, 2010, the Company had
outstanding letters of credit of U.S. $8.5 million (2009: U.S. $13.1
million) used to support the Company's offshore merchandise purchasing
program with restricted cash and investments pledged as collateral.
(Comparative figures for 2009 represent balances as at January 30, 2010)
Interest expense on long-term debt including the current portion and the
Company's proportionate share of interest on long- term debt of joint
ventures for the 13-week period ended May 1, 2010 totalled $6.6 million
(2009: $7.0 million). Interest revenue primarily related to cash and
short-term investments for the 13-week period ended May 1, 2010 totalled
$0.7 million (2009: $0.9 million).
The Company's cash payments for interest on long-term debt for the 13-
week period ended May 1, 2010 totalled $4.6 million (2009: $5.0 million).
The Company received cash related to interest revenue for the 13-week
period totalling $0.5 million (2009: $1.4 million).
6. NET EARNINGS PER SHARE
A reconciliation of the number of shares used in the net earnings per
share calculation is as follows:
13-Week 13-Week
Period Ended Period Ended
(Number of shares) May 1, 2010 May 2, 2009
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Average number of shares per basic net
earnings per share calculation 107,620,995 107,620,995
Effect of dilutive instruments outstanding 11,690 3,302
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Average number of shares per diluted net
earnings per share calculation 107,632,685 107,624,297
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For the 13-week period ended May 1, 2010, 35,060 options were included in
the calculation of diluted net earnings per share as they were dilutive.
For the 13-week period ended May 2, 2009, 129,951 options were excluded
from the calculation of diluted net earnings per share as they were anti-
dilutive.
7. SEGMENTED INFORMATION
Segmented Statements of Earnings
13-Week 13-Week
Period Ended Period Ended
(in millions) May 1, 2010 May 2, 2009
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Total revenues
Merchandising $ 1,054.1 $ 1,104.8
Real Estate Joint Ventures 12.9 11.7
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Total revenues $ 1,067.0 $ 1,116.5
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Segmented operating profit
Merchandising $ 15.3 $ 17.9
Real Estate Joint Ventures 5.6 5.0
Interest expense, net 5.9 6.1
Income taxes 7.8 6.5
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Net earnings $ 7.2 $ 10.3
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Segmented Statements of Capital Employed(1)
As at As at As at
May 1, May 2, January
(in millions) 2010 2009 30, 2010
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Merchandising $ 1,911.7 $ 1,736.3 $ 1,916.9
Real Estate Joint Ventures 91.7 102.5 91.3
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Total $ 2,003.4 $ 1,838.8 $ 2,008.2
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(1) Capital Employed represents the total of long-term obligations,
including principal payments on long-term obligations due within one
year, and shareholders' equity, which includes capital stock,
retained earnings and accumulated other comprehensive income
("AOCI").
Segmented Statements of Total Assets
As at As at As at
May 1, May 2, January
(in millions) 2010 2009 30, 2010
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Merchandising $ 3,267.3 $ 3,090.0 $ 3,302.9
Real Estate Joint Ventures 98.4 114.4 101.9
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Total $ 3,365.7 $ 3,204.4 $ 3,404.8
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8. INCOME TAXES
The Company's total net cash payments of income taxes in the 13-week
period ended May 1, 2010 were $38.4 million (2009: $38.9 million).
In the ordinary course of business, the Company is subject to ongoing
audits by tax authorities. While the Company believes that its tax filing
positions are appropriate and supportable, periodically, certain matters
are challenged by tax authorities. As the Company routinely evaluates and
provides for potentially unfavourable outcomes with respect to any tax
audits, the Company believes that the final disposition of tax audits
will not have a material adverse effect on its liquidity, consolidated
financial position or results of operations. If the result of a tax audit
materially differs from the existing provisions, the Company's effective
tax rate and its net earnings may be affected positively or negatively in
the period in which the tax audits are completed. Included in other long
term assets are receivables of $20.9 million (2009: $20.9 million)
related to payments made by the Company for tax assessments that are
being disputed. (Comparative figures for 2009 represent balances as at
January 30, 2010)
9. CAPITAL STOCK
As at May 1, 2010, 107,620,995 common shares were issued and outstanding.
Sears Holdings Corporation, the controlling shareholder of the Company,
is the beneficial holder of 97,341,670, or 90.4% (2009: 73.1%), of the
common shares of the Company as at May 1, 2010. The number of outstanding
common shares and stated value did not change from the end of fiscal
2009.
10. STOCK-BASED COMPENSATION
The Employees Stock Plan expired on April 19, 2008; however, the
expiration of the plan does not affect the rights of current option
holders. Options were last granted in 2004 which are exercisable within
10 years from the grant date. All options currently outstanding will
expire by February 2014. As at May 1, 2010, there were 35,060 stock
options outstanding under the Employees Stock Plan.
At the end of each fiscal period, the Company records a liability for
previously issued tandem awards equal to the amount by which the market
price of its shares at the end of the period exceeds the exercise price
of the vested tandem awards. Stock compensation expense is recorded to
adjust the liability for changes in the market price of the Company's
shares and for awards exercised in the period. Total stock-based
compensation expense related to tandem awards issued from the Employees
Stock Plan during the 13-week period ended May 1, 2010 was $0.2 million
(2009: less than $0.1 million).
11. GUARANTEES
The Company has provided the following significant guarantees to third
parties:
Sub-Lease Agreements
The Company has a number of sub-lease agreements with third parties. The
Company retains ultimate responsibility to the landlord for payment of
amounts under the lease agreements should the sub-lessee fail to pay. The
total future lease payments under such agreements are $15.2 million
(2009: $18.4 million).
Royalty License Agreements
The Company pays royalties under various merchandise license agreements,
which are generally based on sales of products under these agreements.
The Company currently has license agreements for which it pays royalties
regardless of sales, as guarantee royalties under these license
agreements. Total future minimum royalty payments under such agreements
are $4.2 million (2009: $5.9 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.
12. ASSOCIATE FUTURE BENEFITS
The expense for the defined benefit, defined contribution and other
benefit plans for the 13-week period ended May 1, 2010 was $1.6 million
(2009: $0.1 million), $2.4 million (2009: $4.8 million) and $3.5 million
(2009: $2.9 million), respectively.
13. COMMITMENTS AND CONTINGENCIES
In addition to the class action suits described in the annual financial
statements, the Company is involved in various legal proceedings
incidental to the normal course of business. The Company is of the view
that although the outcome of such legal proceedings cannot be predicted
with certainty, the final disposition is not expected to have a material
adverse effect on the Company's consolidated financial position or
results of operations.
Restricted Cash and Investments
Cash and investments are considered to be restricted when they are
subject to contingent rights of a third party customer, vendor, or
government agency. As at May 1, 2010, the Company recorded $19.8 million
(2009: $15.8 million) of restricted cash and investments as current
assets. The restricted cash and investments represent cash and
investments pledged as collateral for letter of credit obligations issued
under the Company's offshore merchandise purchasing program of $1.9
million (2009: $5.2 million) the Canadian equivalent of U.S. $1.8 million
(2009: U.S. $4.8 million), current cash deposits pledged as collateral
with counterparties related to outstanding derivative contracts of $14.2
million (2009: $6.4 million) and funds held in trust in accordance with
regulatory requirements governing advance ticket sales related to Sears
Travel of $3.7 million (2009: $4.2 million). (Comparative figures for
2009 represent balances as at January 30, 2010)
14. CAPITAL DISCLOSURES
The Company's objectives when managing capital are:
- Maintain financial flexibility thus allowing the Company to
preserve its ability to meet financial objectives and continue as
a going concern;
- Provide an appropriate return to shareholders; and
- Maintain a capital structure that allows the Company to obtain
financing should the need arise.
The Company manages and makes adjustments to its capital structure, when
necessary, in light of changes in economic conditions, the objectives of
its shareholders, the cash requirements of the business and the condition
of capital markets. In order to maintain or adjust the capital structure
the Company may pay a dividend or return capital to shareholders,
increase/decrease debt or sell assets.
The Company defines capital as follows:
- Long-term obligations, including the current portion ("Long-term
obligations"); and
- Shareholders' equity.
The following table presents summary quantitative data with respect to
the Company's capital:
As at As at As at
May 1, May 2, January
(in millions) 2010 2009 30, 2010
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Long-term obligations $ 349.3 $ 364.4 $ 350.7
Shareholders' equity 1,654.1 1,474.4 1,657.5
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$ 2,003.4 $ 1,838.8 $ 2,008.2
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As at May 1, 2010, the Company is not subject to any financial covenants
or ratios and the outstanding notes are unsecured. The Company has a U.S.
$20.0 million letter of credit facility with restricted cash and
investments pledged as collateral against a portion of the outstanding
credit facility.
15. FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company enters into financial
agreements with banks and other financial institutions to reduce
underlying risks associated with interest rates and foreign currency. The
Company does not hold or issue derivative financial instruments for
trading or speculative purposes.
Financial Instrument Risk Management
The Company is exposed to credit, liquidity and market risk as a result
of holding financial instruments. Market risk consists of foreign
exchange and interest rate risk.
Credit Risk
Credit risk refers to the possibility that the Company can suffer
financial losses due to the failure of the Company's counterparties to
meet their payment obligations. Exposure to credit risk exists for
derivative instruments, cash and short-term investments, restricted cash
and investments, other long-term assets and accounts receivable.
As at May 1, 2010, the Company's only exposure to counterparty risk as it
relates to derivative instruments is represented by the fair value of the
derivative asset of Nil (2009: $64.7 million). These contracts are placed
with financial institutions with secure credit ratings.
Cash and short-term investments, restricted cash and investments and
other long-term assets of $1,295.2 million (2009: $874.9 million) also
expose the Company to credit risk should the borrower default on maturity
of the investment. The Company manages this exposure through policies
that require borrowers to have a minimum credit rating of A, and limiting
investments with individual borrowers at maximum levels based on credit
rating.
The Company is exposed to minimal credit risk from customers as a result
of ongoing credit evaluations and review of accounts receivable
collectability. As at May 1, 2010, approximately 52% of the Company's
accounts receivable are due from two customers who are both in good
standing.
Liquidity Risk
Liquidity risk is the risk that the Company may not have cash available
to satisfy financial liabilities as they come due. The Company actively
maintains access to adequate funding sources to ensure it has sufficient
available funds to meet current and foreseeable financial requirements at
a reasonable cost.
The following table summarizes the carrying amount and the contractual
maturities of both the interest and principal portion of significant
financial liabilities as at May 1, 2010:
Contractual Cash Flow Maturities
-------------------------------------------------
1 year 3 years
Carrying Within to to Beyond
(in millions) Amount Total 1 year 3 years 5 years 5 years
-------------------------------------------------------------------------
Accounts
payable $ 613.6 $ 613.6 $ 613.6 - - -
Accrued
liabilities 369.3 369.3 369.3 - - -
Long-term
obligations
and payments
due within
1 year 349.3 369.7 325.8 17.8 20.8 5.3
Operating
lease
obligations(2) - 658.5 111.1 188.0 126.7 232.7
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$1,332.2 $2,011.1 $1,419.8 $ 205.8 $ 147.5 $ 238.0
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(2) Operating lease obligations are not reported on the consolidated
statement of financial position.
Of the $658.5 million of operating lease commitments disclosed in the
table above, $10.5 million relates to the Company's proportionate share
of the commitments of its Real Estate Joint Ventures.
Management believes that cash on hand, future cash flows generated from
operations and availability of current and future funding will be
adequate to support these financial liabilities.
Market Risk
Market risk exists as a result of the potential for losses caused by
changes in market factors such as interest rates, foreign currency
exchange rates and commodity prices.
Foreign Exchange Risk
The Company enters into foreign exchange contracts to reduce the foreign
exchange risk with respect to U.S. dollar denominated assets,
liabilities, goods or services.
- As at May 1, 2010, there were option contracts with a notional
value of U.S $563.0 million (2009: U.S. $385.4 million) and a
carrying value of $4.0 million included in accrued liabilities
(2009: $60.4 million included in prepaid expenses and other
assets) which have been designated as cash flow hedges for hedge
accounting treatment under CICA Handbook Section 3865, "Hedges"
("Section 3865"). These option contracts have settlement dates
extending to August 2011. These contracts are intended to reduce
the foreign exchange risk with respect to anticipated purchases of
U.S. dollar denominated goods and services, including goods
purchased for resale ("hedged item"). As at May 1, 2010 all hedges
were considered effective with no ineffectiveness recognized in
income.
- As at May 1, 2010, there were swap contracts outstanding with a
notional value of U.S. $1.6 million (2009: U.S. $90.0 million) and
a carrying value of Nil (2009: $4.1 million included in prepaid
expenses and other assets). These contracts are intended to reduce
the foreign exchange risk on U.S. dollar denominated short-term
investments pledged as collateral for letter of credit obligations
issued under the Company's offshore merchandise purchasing
program.
While the notional principal amounts of these outstanding financial
instruments are not recorded on the consolidated statements of financial
position, the fair value of the contracts is included on the consolidated
statements of financial position in one of the following categories,
depending on the derivative's maturity and value: prepaid expenses and
other assets, other long-term assets, accrued liabilities or other long-
term liabilities. Changes in fair value of those contracts designated as
hedges are included in other comprehensive income ("OCI") for cash flow
hedges to the extent the hedges continue to be effective. Amounts
previously included in OCI are reclassified to net earnings in the same
period in which the hedged item impacts net earnings.
For the 13-week period ended May 1, 2010, the Company recorded a loss of
$0.1 million (2009: $0.3 million), relating to the translation or
settlement of U.S. dollar denominated monetary items consisting of cash,
accounts receivable, accounts payable, excluding the reclassification
from other comprehensive income of the gain on foreign exchange
derivatives designated as cash flow hedges.
Based on historic movements, volatilities in foreign exchange and
management's current assessment of the financial markets, the Company
believes a variation of +10% (appreciation of the Canadian dollar) and -
10% (depreciation of the Canadian dollar) in foreign exchange rate
against the U.S. dollar is reasonably possible over a 12 month period.
The period end rate was 0.9844 U.S. dollar to Canadian dollar. A 10%
appreciation or depreciation of the U.S./Canadian dollar exchange rate
was determined to have an immaterial impact on net earnings for U.S.
dollar denominated balances included in cash and short-term investments,
accounts receivable and the unhedged portion of accounts payable.
Interest Rate Risk
From time to time the Company enters into interest rate swap contracts
with Canadian domestic financial institutions to manage exposure to
interest rate risks. As at May 1, 2010, the Company had no interest rate
swap contracts in place.
Interest rate risk reflects the sensitivity of the Company's financial
condition to movements in interest rates. Financial assets and
liabilities which do not bear interest or bear interest at fixed rates
are classified as non-interest rate sensitive. Based on historic
movements, volatilities in interest rates and management's current
assessment of the financial markets, the Company believes a variation of
+1%/-1% in the interest rates applicable to the Company's cash and short-
term investments and restricted cash and investments are reasonably
possible over a 12 month period.
Cash and short-term investments and restricted cash and investments are
subject to interest rate risk. The total subject to interest rate risk as
at May 1, 2010 was $1,291.5 million (2009: $874.1 million). A movement in
interest rate of +/-1% would cause a variance in net earnings in the
amount of $9.1 million (2009: $6.1 million).
Classification and Fair Value of Financial Instruments
The estimated fair values of financial instruments as at May 1, 2010,
January 30, 2010 and May 2, 2009 are based on relevant market prices and
information available at those dates. The following tables summarize the
classification and fair value of certain financial instruments as at May
1, 2010 and January 30, 2010 and May 2, 2009. The Company determines the
classification of a financial instrument when it is originally recorded,
based on the underlying purpose of the instrument. As a significant
number of the Company's assets and liabilities, including inventories and
capital assets, do not meet the definition of financial instruments,
values in the tables below do not reflect the fair value of the Company
as a whole.
The fair value of financial instruments are classified and measured
according to the following three levels based on the following fair value
hierarchy.
- Level 1: Quoted prices in active markets for identical assets or
liabilities
- Level 2: Inputs other than quoted prices in active markets that
are observable for the asset or liability either directly
(i.e. as prices) or indirectly (i.e. derived from prices)
- Level 3: Inputs for the asset or liability that are not based on
observable market data
(in millions)
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Fair As at As at As at
Balance Sheet Value May 1, May 2, January
Classification Category Hierarchy 2010 2009 30, 2010
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Available
for sale
Short-term Cash and
investments short-term
investments(3) Level 1 $1,214.2 $639.1 $1,325.3
Held for
trading
Cash Cash and
short-term
investments Level 1 59.9 105.9 56.5
Cash and Restricted
investments cash and
investments(3) Level 1 19.8 128.4 15.8
U.S. $
derivative Prepaid
contracts expenses
& other
assets Level 2 - 64.5 9.9
U.S. $
derivative Accrued
contracts liabilities Level 2 4.0 - -
Cash Other long-
term assets Level 1 - 3.1 -
Commodity Accrued
derivative liabilities
contracts Level 2 - 0.1 0.1
Long-term Other long-
investments term assets Level 3 1.3 1.5 1.3
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(3) Interest revenue related to cash and short-term investments is
disclosed in Long-term Obligations (Note 5)
All other assets that are financial instruments, excluding long-term
notes discussed below, have been classified as "loans and receivables"
and all other financial instrument liabilities have been classified as
"other liabilities" and are measured at amortized cost in the
Consolidated Statements of Financial Position. The carrying value of
these financial instruments, with the exception of long-term obligations,
approximates fair value as they are short-term in nature. Long-term
obligations with a carrying value of $347.3 million (2009: $361.6
million), including the portion due within one year, but excluding all
capital lease obligations, have a fair value as at May 1, 2010 of $351.9
million (2009: $359.9 million). The fair value of the Company's
proportionate share of long-term debt of joint ventures, with a carrying
value of $47.3 million (2009: $61.6 million) as at May 1, 2010, was
calculated using a valuation technique based on assumptions that are not
supported by observable market prices or rates. The term and interest
rate applicable to each joint venture's debt together with management's
estimate of a risk-adjusted discount rate were used to determine the fair
value of $50.0 million (2009: $62.0 million). The fair value of the
Company's medium term notes, with a carrying value of $300.0 million
(2009: $300.0 million) at May 1, 2010, is $301.9 million (2009: $297.9
million) and was determined with reference to observable market prices
and rates.
16. SUBSEQUENT EVENTS
On May 10, 2010, the Company repaid, upon maturity, $200.0 million of its
unsecured medium-term notes.
The Board of Directors have declared an extraordinary cash dividend of
approximately $376.7 million to be paid on June 4, 2010 to shareholders
of record as at the close of business on May 31, 2010.
The Company has filed with the Toronto Stock Exchange ("TSX") a Notice of
Intention to make a Normal Course Issuer Bid that would permit the
Company to purchase for cancellation up to 5% of its issued and
outstanding common shares equivalent to 5,381,049 common shares. Subject
to TSX approval purchases may commence on May 25, 2010 and must terminate
by May 24, 2011 or on such earlier date as the Company may complete its
purchases pursuant to the Notice of Intention filed with the TSX or give
notice of suspension of the Normal Course Issuer Bid.
For further information: Media Relations Contact: Vincent Power, Sears Canada Inc., (416) 941-4422, [email protected]
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