Sears Canada Reports Second Quarter Earnings
TORONTO, Aug. 17 /CNW/ - Sears Canada Inc. (TSX: SCC) today announced its unaudited second quarter results. Total revenues for the 13-week period ended July 31, 2010 were $1.213 billion compared to $1.250 billion for the 13 weeks ended August 1, 2009, a decrease of 3.0%. Same store sales decreased 2.4%.
Operating EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) for the quarter this year was $74.3 million versus $108.7 million in the same 13-week period last year. Net earnings for the second quarter were $31.9 million or 29 cents per share compared to $49.1 million or 45 cents per share in the second quarter last year. There were no non-operating activities in the quarter this year or last year.
Total revenues for the 26-week period ended July 31, 2010 were $2.280 billion compared to $2.366 billion for the 26-week period last year, which ended August 1, 2009, a decrease of 3.6%. Same store sales decreased 2.2%.
Operating EBITDA for the first half of the year was $120.9 million versus $171.0 million for the same period last year. Net earnings for the 26 weeks ended July 31, 2010 were $39.1 million or 36 cents per share compared to $59.4 million or 55 cents per share for the same 26-week period last year. There were no non-operating activities in the 26-week period ending July 31, 2010, however last year's comparable period included a pre-tax restructuring charge of $9.3 million. Therefore, operating net earnings for the first 26 weeks of 2010 were $39.1 million or 36 cents per share compared to $65.9 million or 61 cents per share for same 26-week period last year.
Commenting on the second quarter and first half, Dene Rogers, President and Chief Executive Officer, Sears Canada Inc. said, "Our results reflect a continuing downward trend in consumer confidence caused by high unemployment and other factors. In response to these economic conditions and the competitive marketplace, we are offering outstanding value with unique programs such as:
- Sears has the best financing terms for cost-conscious customers
including zero interest, payment deferral for up to 36 months along
with Sears Club loyalty points and a host of other benefits
- The new "modern shop", which has new brands including Kensie, Mac &
Jac, and Guess in addition to Sears private brands such as Attitude
and Nevada, is rolling out across the country this fall
- Sears offers custom furniture with thousands of options for customers
to design sofas, tables and other home furnishings according to their
own tastes and preferences, at no additional cost versus stocked
models at other retailers."
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, 241 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.
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
For the 13 and 26-week periods ended July 31, 2010 and August 1, 2009
Unaudited
13-Week Period 26-Week Period
(in millions, except --------------------- ---------------------
per share amounts) 2010 2009 2010 2009
-------------------------------------------------------------------------
Total revenues $ 1,212.8 $ 1,250.0 $ 2,279.8 $ 2,366.5
-------------------------------------------------------------------------
Cost of merchandise sold,
operating, administrative
and selling expenses 1,138.5 1,141.3 2,158.9 2,204.8
Depreciation and amortization 25.1 28.8 50.8 58.9
Interest expense, net (Note 5) 1.8 5.8 7.7 11.9
-------------------------------------------------------------------------
Earnings before income taxes 47.4 74.1 62.4 90.9
-------------------------------------------------------------------------
Income tax expense (recovery)
Current 17.3 28.2 24.2 34.6
Future (1.8) (3.2) (0.9) (3.1)
-------------------------------------------------------------------------
15.5 25.0 23.3 31.5
-------------------------------------------------------------------------
Net earnings $ 31.9 $ 49.1 $ 39.1 $ 59.4
-------------------------------------------------------------------------
Net earnings per share
(Note 6) $ 0.29 $ 0.45 $ 0.36 $ 0.55
-------------------------------------------------------------------------
Diluted net earnings per
share (Note 6) $ 0.29 $ 0.45 $ 0.36 $ 0.55
-------------------------------------------------------------------------
Net earnings $ 31.9 $ 49.1 $ 39.1 $ 59.4
Other comprehensive income
(loss), net of taxes:
Mark-to-market adjustment
related to short-term
investments, net of income
tax recovery of Nil and
$0.1 (2009: $0.1 and Nil) - (0.2) (0.2) (0.1)
Gain (Loss) on foreign
exchange derivatives
designated as cash flow
hedges, net of income tax
expense of $3.0 and recovery
of $1.5 (2009: recovery of
$11.0 and $15.6) 5.6 (24.0) (3.2) (33.9)
Reclassification to net
earnings of gain on foreign
exchange derivatives
designated as cash flow
hedges, net of income tax
expense of $0.6 and $0.9
(2009: $4.4 and $8.7) (0.3) (9.3) (1.9) (18.6)
Gain on fuel derivatives
designated as cash flow
hedges, net of income tax
expense of Nil and Nil
(2009: less than $0.1
and $0.1) - 0.2 - 0.2
-------------------------------------------------------------------------
Other comprehensive income
(loss) 5.3 (33.3) (5.3) (52.4)
-------------------------------------------------------------------------
Comprehensive income $ 37.2 $ 15.8 $ 33.8 $ 7.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
AND ACCUMULATED OTHER COMPREHENSIVE INCOME
For the 13 and 26-week periods ended July 31, 2010 and August 1, 2009
Unaudited
13-Week Period 26-Week Period
--------------------- ---------------------
(in millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Retained earnings
Opening balance $ 1,641.0 $ 1,409.4 $ 1,633.8 $ 1,399.1
Dividend declared (376.7) - (376.7) -
Net earnings 31.9 49.1 39.1 59.4
-------------------------------------------------------------------------
Closing balance $ 1,296.2 $ 1,458.5 $ 1,296.2 $ 1,458.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other
comprehensive income
Opening balance $ (2.6) $ 49.3 $ 8.0 $ 68.4
Other comprehensive income
(loss) 5.3 (33.3) (5.3) (52.4)
-------------------------------------------------------------------------
Closing balance $ 2.7 $ 16.0 $ 2.7 $ 16.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings and
accumulated other
comprehensive income $ 1,298.9 $ 1,474.5 $ 1,298.9 $ 1,474.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SEARS CANADA INC.
RECONCILIATION OF NET EARNINGS TO OPERATING EBITDA
Unaudited
Second Quarter(1) Year-to-Date(1)
(in millions, except -------------------------------------------
per share amounts) 2010 2009 2010 2009
-------------------------------------------------------------------------
Net earnings $ 31.9 $ 49.1 $ 39.1 $ 59.4
-------------------------------------------------------------------------
Non-operating activities,
net of taxes
Restructuring expense - - - 6.5
-------------------------------------------------------------------------
Operating net earnings(2) $ 31.9 $ 49.1 $ 39.1 $ 65.9
-------------------------------------------------------------------------
Depreciation and amortization 25.1 28.8 50.8 58.9
Interest expense, net 1.8 5.8 7.7 11.9
Income tax expense excluding
operating adjustments 15.5 25.0 23.3 34.3
-------------------------------------------------------------------------
Operating EBITDA(2) $ 74.3 $ 108.7 $ 120.9 $ 171.0
-------------------------------------------------------------------------
Net earnings per share $ 0.29 $ 0.45 $ 0.36 $ 0.55
Operating net earnings
per share $ 0.29 $ 0.45 $ 0.36 $ 0.61
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The second quarter of 2010 and 2009 represent the 13 and 26-week
periods ended July 31, 2010 and August 1, 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 Unaudited Audited
As at As at As at
July 31, August 1, January 30,
(in millions) 2010 2009 2010
-------------------------------------------------------------------------
ASSETS
Current Assets
Cash and short-term investments
(Note 3) $ 716.3 $ 782.0 $ 1,381.8
Restricted cash and investments
(Note 13) 5.8 113.1 15.8
Accounts receivable 130.0 136.0 131.1
Income taxes recoverable 41.2 51.6 6.0
Inventories (Note 4) 910.9 952.9 852.3
Prepaid expenses and other assets 83.2 94.5 74.7
Current portion of future income
tax assets 29.4 29.7 29.7
-------------------------------------------------------------------------
1,916.8 2,159.8 2,491.4
Capital assets 583.6 652.1 620.2
Deferred charges 177.4 177.9 179.2
Intangible assets 23.2 16.9 22.6
Goodwill 11.2 11.2 11.2
Future income tax assets 35.7 34.7 32.0
Other long-term assets 46.9 46.1 48.2
-------------------------------------------------------------------------
$ 2,794.8 $ 3,098.7 $ 3,404.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current Liabilities
Accounts payable $ 632.4 $ 522.1 $ 647.7
Accrued liabilities 324.1 366.5 342.1
Income and other taxes payable 40.7 32.6 72.7
Principal payments on long-term
obligations due within one year
(Note 5 and 15) 105.8 239.3 314.2
-------------------------------------------------------------------------
1,103.0 1,160.5 1,376.7
Long-term obligations (Note 5) 35.8 122.4 36.5
Accrued benefit liability (Note 12) 177.0 163.1 167.7
Future income tax liabilities 4.4 4.2 4.3
Other long-term liabilities 160.0 158.3 162.1
-------------------------------------------------------------------------
1,480.2 1,608.5 1,747.3
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (Note 9) 15.7 15.7 15.7
Retained earnings 1,296.2 1,458.5 1,633.8
Accumulated other comprehensive
income 2.7 16.0 8.0
-------------------------------------------------------------------------
1,314.6 1,490.2 1,657.5
-------------------------------------------------------------------------
$ 2,794.8 $ 3,098.7 $ 3,404.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SEARS CANADA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the 13 and 26-week periods ended July 31, 2010 and August 1, 2009
Unaudited
13-Week Period 26-Week Period
--------------------- ---------------------
(in millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Cash flow generated from
(used for) operating
activities
Net earnings $ 31.9 $ 49.1 $ 39.1 $ 59.4
Non-cash items included in
net earnings, principally
depreciation and pension
expense 32.0 27.1 64.9 63.6
Changes in non-cash working
capital balances related
to operations (40.3) (37.7) (168.5) (157.0)
Other, principally pension
contributions and changes
to long-term assets and
liabilities (3.3) (0.9) (5.7) (5.2)
-------------------------------------------------------------------------
20.3 37.6 (70.2) (39.2)
-------------------------------------------------------------------------
Cash flow generated from
(used for) investing
activities
Purchases of capital assets (7.9) (16.2) (19.8) (34.5)
Proceeds from sale of
capital assets 0.1 0.4 0.3 0.8
Changes in restricted cash
and investments 14.0 17.9 10.0 38.0
-------------------------------------------------------------------------
6.2 2.1 (9.5) 4.3
-------------------------------------------------------------------------
Cash flow used for financing
activities
Repayment of long-term
obligations (207.6) (2.7) (209.1) (2.9)
Dividend payment (376.7) - (376.7) -
-------------------------------------------------------------------------
(584.3) (2.7) (585.8) (2.9)
-------------------------------------------------------------------------
(Decrease) increase in cash
and short-term investments (557.8) 37.0 (665.5) (37.8)
Cash and short-term
investments at beginning
of period 1,274.1 745.0 1,381.8 819.8
-------------------------------------------------------------------------
Cash and short-term
investments at end of
period $ 716.3 $ 782.0 $ 716.3 $ 782.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash at end of period $ 47.4 $ 74.3 $ 47.4 $ 74.3
Short-term investments at
end of period 668.9 707.7 668.9 707.7
-------------------------------------------------------------------------
Total cash and short-term
investments at end of
period $ 716.3 $ 782.0 $ 716.3 $ 782.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SEARS CANADA INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 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 second quarter ended July 31, 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" 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. The new sections 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
During the first quarter ended May 1, 2010 the Company conducted a review
of its capital asset depreciation estimates. As a result of the review, a
revision of the estimates of the useful lives of its roofing assets and
heating, ventilation, and air conditioning assets was made. 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 and $5.0 million for the 13 and 26-week periods ending
July 31, 2010, 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
July 31, August 1, January 30,
(in millions) 2010 2009 2010
-------------------------------------------------------------------------
Cash $ 47.4 $ 74.3 $ 56.5
Short-term investments
Government treasury bills 611.4 689.7 1,265.5
Bank term deposits 57.5 18.0 59.8
-------------------------------------------------------------------------
Total $ 716.3 $ 782.0 $ 1,381.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4. INVENTORIES
The amount of inventories recognized as an expense during the 13 and
26-week periods ended July 31, 2010 was $635.0 million (2009:
$651.8 million) and $1,183.3 million (2009: $1,232.7 million),
respectively, including $26.6 million (2009: $15.7 million) and
$44.8 million (2009: $42.6 million), related to write-downs. A negligible
amount of write-downs to net realizable value were reversed during the
period ended July 31, 2010. These expenses are included in "Cost of
merchandise sold, operating, administrative and selling expenses" in the
Consolidated Statements of Earnings and Comprehensive Income.
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.
On May 10, 2010, the Company repaid upon maturity $200.0 million, 7.45%
unsecured medium-term notes. As at July 31, 2010, $100.0 million, 7.05%
unsecured medium-term notes were outstanding and were included in
"Principal payments on long-term obligations due within one year" in the
Consolidated Statements of Financial Position. This $100.0 million is due
to be repaid on September 20, 2010. The Company is not subject to any
financial covenants and the Company's remaining debt consists of
unsecured medium-term notes with a fixed interest rate and payment terms
and its proportionate share of the long-term debt of its joint venture
interests.
As at July 31, 2010, the Company had outstanding letters of credit of
U.S. $9.3 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.
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 and 26-week periods ended July 31, 2010 totalled
$2.6 million (2009: $6.2 million) and $9.2 million (2009: $13.2 million).
Interest revenue primarily related to cash and short-term investments for
the 13 and 26-week periods ended July 31, 2010 totalled $0.8 million
(2009: $0.4 million) and $1.5 million (2009: $1.3 million).
The Company's cash payments for interest 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 and 26-week periods ended
July 31, 2010 totalled $7.9 million (2009: $8.1 million) and
$12.5 million (2009: $13.1 million). The Company received cash related to
interest revenue for the 13 and 26-week periods totalling $0.8 million
(2009: $0.4 million) and $1.3 million (2009: $1.8 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 26-week 26-week
Period Ended Period Ended Period Ended Period Ended
(Number of July 31, August 1, July 31, August 1,
shares) 2010 2009 2010 2009
-------------------------------------------------------------------------
Average number of
shares per basic
net earnings
per share
calculation 107,620,995 107,620,995 107,620,995 107,620,995
Effect of dilutive
instruments
outstanding 9,285 4,374 9,965 3,815
-------------------------------------------------------------------------
Average number of
shares per diluted
net earnings
per share
calculation 107,630,280 107,625,369 107,630,960 107,624,810
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For both the 13 and 26-week periods ended July 31, 2010, 31,740 options
(2009: 39,980 options) were included in the calculation of diluted net
earnings per share as they were dilutive. For both the 13 and 26-week
periods ended July 31, 2010, Nil options (2009: 126,081 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 26-week 26-week
Period Ended Period Ended Period Ended Period Ended
July 31, August 1, July 31, August 1,
(in millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Total revenues
Merchandising $ 1,201.3 $ 1,237.4 $ 2,255.4 $ 2,342.2
Real Estate
Joint Ventures 11.5 12.6 24.4 24.3
-------------------------------------------------------------------------
Total revenues $ 1,212.8 $ 1,250.0 $ 2,279.8 $ 2,366.5
-------------------------------------------------------------------------
Segmented operating
profit
Merchandising $ 45.2 $ 74.7 $ 60.5 $ 92.6
Real Estate
Joint Ventures 4.0 5.2 9.6 10.2
Interest
expense, net 1.8 5.8 7.7 11.9
Income taxes 15.5 25.0 23.3 31.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings $ 31.9 $ 49.1 $ 39.1 $ 59.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segmented Statements of Capital Employed(1)
As at As at As at
July 31, August 1, January 30,
(in millions) 2010 2009 2010
-------------------------------------------------------------------------
Merchandising $ 1,360.3 $ 1,750.3 $ 1,916.9
Real Estate Joint Ventures 95.9 101.6 91.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total $ 1,456.2 $ 1,851.9 $ 2,008.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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
July 31, August 1, January 30,
(in millions) 2010 2009 2010
-------------------------------------------------------------------------
Merchandising $ 2,694.4 $ 2,986.9 $ 3,302.9
Real Estate Joint Ventures 100.4 111.8 101.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total $ 2,794.8 $ 3,098.7 $ 3,404.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. INCOME TAXES
The Company's total net cash payments of income taxes in the 13 and
26-week periods ended July 31, 2010 were $28.9 million (2009:
$30.8 million) and $67.3 million (2009: $69.7 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.
9. CAPITAL STOCK
On June 4, 2010, the Company paid an extraordinary cash dividend
totalling $376.7 million to shareholders of record as at May 31, 2010.
The Company has filed a Normal Course Issuer Bid to permit the Company to
purchase for cancellation up to 5% of its issued and outstanding common
shares equivalent to 5,381,049 common shares. Purchases were allowed to
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
Normal Course Issuer Bid filed with the TSX.
The Company may not purchase common shares under the Normal Course Issuer
Bid if such shares cannot be purchased at prices that the Company
considers attractive and decisions regarding the timing of purchases will
also be based on market conditions and other factors. Therefore, there is
no assurance that any common shares will be purchased under the Normal
Course Issuer Bid and the Company may elect to suspend or discontinue the
bid at any time.
As at July 31, 2010, no shares have been purchased under the Normal
Course Issuer Bid.
As at July 31, 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 July 31, 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 July 31, 2010, there were 31,740 stock
options outstanding under the Employees Stock Plan.
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 $15.0 million
(2009: $18.3 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 $3.2 million (2009: $5.6 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.
12. ASSOCIATE FUTURE BENEFITS
The expense for the defined benefit, defined contribution and other
benefit plans for the 13-week period ended July 31, 2010 was $2.2 million
(2009: $0.4 million), $2.9 million (2009: $4.0 million) and $2.9 million
(2009: $2.5 million), respectively. The expense for the defined benefit,
defined contribution and other benefit plans for the 26-week period ended
July 31, 2010 was $4.3 million (2009: $0.8 million), $5.3 million (2009:
$8.7 million) and $5.9 million (2009: $5.1 million), respectively.
13. COMMITMENTS AND CONTINGENCIES
In addition to the class action suits described in the 2009 Annual
Financial Statements, the Company is involved in various legal
proceedings incidental to the normal course of business. The Company
believes that, while 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 July 31, 2010, the Company recorded $5.8 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
$1.3 million (2009: $5.2 million) the Canadian equivalent of U.S.
$1.2 million (2009: U.S. $4.8 million), current cash deposits pledged as
collateral with counterparties related to outstanding derivative
contracts of $1.3 million (2009: $6.4 million) and funds held in trust in
accordance with regulatory requirements governing advance ticket sales
related to Sears Travel of $3.2 million (2009: $4.2 million).
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
July 31, August 1, January 30,
(in millions) 2010 2009 2010
-------------------------------------------------------------------------
Long-term obligations $ 141.6 $ 361.7 $ 350.7
Shareholders' equity 1,314.6 1,490.2 1,657.5
-------------------------------------------------------------------------
Total $ 1,456.2 $ 1,851.9 $ 2,008.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at July 31, 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. As at July 31, 2010, the Company had
outstanding letters of credit of U.S. $9.3 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.
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 July 31, 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 $3.0 million (2009: $9.9 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 $723.4 million (2009: $1,398.9 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 July 31, 2010, approximately 47% 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 July 31, 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 $ 632.4 $ 632.4 $ 632.4 - - -
Accrued
liabilities 324.1 324.1 324.1 - - -
Long-term
obligations
and payments
due within
1 year 141.6 156.8 111.9 13.7 12.1 19.1
Operating lease
obligations(2) - 625.3 103.9 180.2 121.0 220.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$1,098.1 $1,738.6 $1,172.3 $ 193.9 $ 133.1 $ 239.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(2) Operating lease obligations are not reported on the consolidated
statement of financial position.
Of the $625.3 million of operating lease commitments disclosed in the
table above, $10.4 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 July 31, 2010, there were option contracts with a notional
value of U.S $429.0 million (2009: U.S. $303.6 million) and a
carrying value of $3.0 million (2009: $9.9 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 July 31, 2010, all hedges were considered effective
with no ineffectiveness recognized in income.
- As at July 31, 2010, there were swap contracts outstanding with a
notional value of U.S. $1.0 million (2009: U.S. $4.8 million) and
a carrying value of Nil (2009: less than $0.1 million included in
accrued liabilities). 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 and 26-week periods ended July 31, 2010, the Company recorded
a loss of $0.9 million (2009: gain of $0.8 million) and a loss of
$1.0 million (2009: gain of $0.5 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 0.9725 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 July 31, 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
+/-0.25% 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 July 31, 2010 was $720.2 million (2009: $1,394.7 million). A movement
in interest rate of +/-0.25% would cause a variance in net earnings in
the amount of $0.3 million.
Classification and Fair Value of Financial Instruments
The estimated fair values of financial instruments as at July 31, 2010,
January 30, 2010 and August 1, 2009 are based on relevant market prices
and information available at those dates. The following table summarizes
the classification and fair value of certain financial instruments as at
July 31, 2010, January 30, 2010 and August 1, 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. 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)
-------------------------------------------------------------------------
Fair As at As at As at
Balance Sheet Value July 31, August January
Classification Category Hierarchy 2010 1, 2009 30, 2010
-------------------------------------------------------------------------
Available
for sale
Short-term Cash and
investments short-term
investments(3) Level 1 $ 668.9 $ 707.7 $1,325.3
Held for
trading
Cash Cash and
short-term
investments Level 1 47.4 74.3 56.5
Cash and Restricted
investments cash and
investments(3) Level 1 5.8 113.1 15.8
U.S. $ Prepaid
derivative expenses
contracts & other
assets Level 2 3.0 20.5 9.9
Cash Other long-
term assets Level 1 - 0.7 -
Commodity Prepaid
derivative expenses
contracts & other
assets Level 2 - 1.2 0.1
Long-term Other long-
investments term assets Level 3 1.3 1.5 1.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 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 $139.9 million (2009:
$348.5 million), including the portion due within one year, but excluding
all capital lease obligations, have a fair value as at July 31, 2010 of
$143.0 million (2009: $352.2 million). The fair value of the Company's
proportionate share of long-term debt of joint ventures, with a carrying
value of $39.9 million (2009: $48.5 million) as at July 31, 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 $42.4 million (2009: $47.6 million). The fair value of the
Company's medium term notes, with a carrying value of $100.0 million
(2009: $300.0 million) at July 31, 2010, is $100.6 million (2009:
$304.6 million) and was determined with reference to observable market
prices and rates.
For further information: Contact for Media: Vincent Power, Sears Canada, Corporate Communications, 416-941-4422, [email protected]
Share this article