EX-99.1 2 dex991.htm PRESS RELEASE Press Release

EXHIBIT 99.1

NEWS MEDIA CONTACT:

Sears Holdings Public Relations

(847) 286-8371

FOR IMMEDIATE RELEASE:

November 16, 2006

SEARS HOLDINGS REPORTS THIRD QUARTER RESULTS

HOFFMAN ESTATES, Ill. – Sears Holdings Corporation (“Holdings” or the “Company”) (NASDAQ: SHLD) today reported net income of $196 million, or $1.27 per diluted share, for the third quarter ended October 28, 2006, compared with net income of $58 million, or $0.35 per diluted share, for the third quarter ended October 29, 2005. Third quarter results for 2006 include $101 million (or $0.42 per diluted share) of income from the Company’s investment of a portion of its surplus cash. Third quarter fiscal 2006 results also include $6 million of net income (or $0.04 per diluted share), in the form of lower tax expense, related to the resolution of certain income tax matters related to Kmart Corporation (a predecessor operating company of Kmart). Additionally, both the current and prior year third quarter periods included restructuring charges: $4 million (or $0.02 per diluted share) in 2006 and $59 million (or $0.13 per diluted share) in 2005. The diluted earnings per share impact of these items is illustrated below:

Diluted earnings per share impact of certain significant items (1):

 

     13 Weeks Ended  
    

October 28,

2006

   

October 29,

2005

 

Earnings per diluted share - as reported

   $ 1.27     $ 0.35  

Less:

    

Total return swap income

     0.42       —    

Income tax settlements

     0.04       —    

Restructuring charges

     (0.02 )     (0.13 )
                

Earnings per diluted share - excluding above items

   $ 0.83     $ 0.48  
                

 

(1) Total return swap income as well as periodic restructuring and other periodic events or activities affect the Company’s results; however, the amounts of these types of items may vary significantly from period to period and may have a disproportionate effect on the periods presented, which affects the comparability of the Company’s financial performance. Management considers the total impact of these items, along with reported results, when it reviews and evaluates the Company’s financial performance.

The Company’s improved quarterly results reflect increased operating income, driven primarily by reduced expenses across all businesses and increased gross margins at both Sears Domestic and Sears Canada. Third quarter operating results at both Sears Domestic and Sears Canada improved relative to the same quarter last year, while operating results at Kmart declined due to lower sales levels and gross margins, partially offset by reduced expenses. Earnings per diluted share for the quarter also benefited from lower average diluted shares outstanding during the current year quarter as compared with the third quarter of fiscal 2005.

“We continue to manage our costs effectively as we make the changes necessary to become a customer-driven organization,” said Aylwin Lewis, Sears Holdings’ chief executive officer and president. He added, “We are excited to enter the holiday sales period with the products we believe our customers want and an approach that focuses our entire organization in support of our stores in delivering superior customer service across all of our businesses and formats.”


Third Quarter Revenues and Comparable Store Sales

For the quarter, domestic comparable store sales declined 3.0% in the aggregate, with Sears Domestic comparable store sales declining 4.8% and Kmart comparable store sales declining 0.7%. The comparable store sales declines at both Kmart and Sears Domestic reflect the impact of increased competition and lower transaction volumes. At Kmart, comparable store sales declined across a number of categories, including home goods, hardlines, food and consumables, and general merchandise, partially offset by increased comparable store sales within apparel and pharmacy. At Sears Domestic, comparable store sales declined across most categories and formats, with more pronounced sales declines within both the home fashion and lawn and garden categories. These declines were partially offset by pronounced sales increases in women’s apparel, reflecting what the Company believes are improved assortments in this business relative to last year. Last year, Sears Domestic modified its apparel assortment to a more “fashion forward” offering, which was not successful and led to significant sales declines within Sears Domestic’s apparel business during the second half of fiscal 2005.

Total revenues declined $0.3 billion to $11.9 billion for the 13 weeks ended October 28, 2006, as compared to total revenues of $12.2 billion for the 13 weeks ended October 29, 2005. Sears revenues declined $0.1 billion as compared to the third quarter last year, primarily reflecting the impact of comparable store sales declines, partially offset by an increase in the total number of Sears Full-line stores in operation, resulting mainly due to conversions from the Kmart format. Total revenues at Kmart declined $0.2 billion as compared to the prior year period, primarily reflecting a reduction in the total number of Kmart stores in operation and, to a lesser degree, the impact of comparable store sales declines.

Operating Income

Operating income was $276 million for the 13 weeks ended October 28, 2006, as compared to $119 million for the 13 weeks ended October 29, 2005. Operating income in the third quarter of last year was negatively impacted by $59 million in restructuring charges at Sears Canada and Kmart as compared with $4 million in such charges at Kmart in the current year quarter. Excluding the impact of these charges, prior year third quarter operating income was $178 million. In addition to the above-noted impact of lower restructuring charges, reduced selling and administrative expenses (which declined $147 million compared to the third quarter of last year) and increased total gross margin dollars also favorably impacted overall operating income in the current year quarter.

Financial Position

The Company had cash and cash equivalents of $2.1 billion at October 28, 2006 (of which $1.8 billion is domestic and $0.3 billion is at Sears Canada) as compared to $1.2 billion at October 29, 2005 and $4.4 billion at January 28, 2006. During the current quarter, cash and cash equivalents declined $1.6 billion from the $3.7 billion balance at the end of the second quarter. Approximately $1.1 billion of that decrease was due to cash being used to build inventories for the holiday selling season (net of merchandise payables). Other cash uses in the quarter included $289 million for share repurchases, $267 million for pension contributions (including a voluntary accelerated contribution of $200 million), debt repayments of $258 million (net of new borrowings) and $153 million of capital expenditures.

Merchandise inventories at October 28, 2006 were approximately $11.5 billion, as compared to $10.8 billion as of October 29, 2005. The increase reflects planned increases due to earlier receipt of product, the expansion of product assortment this year and increases in apparel and other merchandise categories where the Company believes business trends support higher inventory levels. Merchandise payables were $4.2 billion at October 28, 2006, as compared to $4.3 billion as of October 29, 2005.

As the result of resolving certain tax matters during the third quarter of 2006 pertaining to the bankruptcy of Kmart Corporation, a predecessor operating company of Kmart, the Company recorded approximately $104 million of deferred tax assets with an offsetting credit recorded to capital in excess of par value. In accordance with AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code,” resolution of these matters result in a direct credit to capital in excess of par value within shareholders’ equity.

 

2


Share Repurchase

During the third quarter of 2006, the Company repurchased approximately 2 million common shares at a total cost of $289 million, or an average price of $141.89 per share. As of October 28, 2006, the Company had remaining authorization to repurchase $618 million of common shares under its existing share repurchase program approved by the board of directors. The remaining shares may be purchased in the open market, through self-tender offers or through privately negotiated transactions. Timing will depend on prevailing market conditions, alternative uses of capital and other factors.

Interest and Investment Income

The following table sets forth the components of interest and investment income as reported on the Company’s condensed consolidated income statement. Amounts from prior periods have been reclassified to interest and investment income to conform to current period presentation. The Company previously reported interest income on cash and cash equivalents as a component of net interest expense, and reported other investment income as a component of other income.

 

     13 Weeks Ended    39 Weeks Ended
millions    October 28,
2006
   October 29,
2005
   October 28,
2006
   October 29,
2005

Interest and investment income

           

Interest income on cash and cash equivalents

   $ 36    $ 16    $ 112    $ 51

Total return swap income

     101      —        101      —  

Other investment income

     3      24      28      35
                           

Total

   $ 140    $ 40    $ 241    $ 86
                           

The Company, from time to time, invests its surplus cash in various securities and financial instruments, including total return swaps, which are derivative contracts that synthetically replicate the economic return characteristics of one or more underlying marketable equity securities. In exchange for receiving the return tied to the position underlying a total return swap, the Company pays a floating rate of interest tied to LIBOR on the notional amount of the contract. The fair value of a total return swap is based on the quoted market price of the underlying position and changes in fair value of the total return swaps are recognized currently in earnings. During the third quarter of fiscal 2006, the Company entered into total return swaps and recognized $101 million of investment income consisting of realized gains of $66 million and unrealized gains of $38 million less $3 million of interest cost. As of October 28, 2006, the total return swaps had an aggregate notional amount of $387 million and a fair value of $38 million. These investments are highly concentrated and involve substantial risks. Accordingly, the Company’s financial position and quarterly and annual results of operations may be positively or negatively materially affected based on the timing, magnitude and performance of these investments.

Adjusted EBITDA

For purposes of evaluating operating performance, the Company’s management uses an Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) measurement computed as operating income appearing on the statement of operations less depreciation and amortization and gains/(losses) on sales of assets. In addition, it is adjusted to exclude certain merger-related costs, nonrecurring gains and restructuring charges. Adjusted EBITDA is used by management to evaluate the operating performance of the Company’s businesses for comparable periods. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items. Management compensates for this limitation by using GAAP financial measures as well in managing the Company’s businesses.

 

3


While Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of operating performance because:

 

    EBITDA excludes the effects of financing and investing activities by eliminating the effects of interest and depreciation costs;

 

    Management considers gains/(losses) on the sale of assets to result from investing decisions rather than ongoing operations;

 

    Restructuring activities, while periodically affecting the Company’s results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects the comparability of results; and

 

    Adjusted EBITDA excludes a one-time gain resulting from the settlement of Visa/MasterCard litigation and vice chairman separation expenses, both of which were recorded in the second quarter of fiscal 2006, as well as merger transaction costs which result from extraordinary activities that are not part of normal operations.

Adjusted EBITDA was determined as follows:

 

     13 Weeks Ended     39 Weeks Ended  
     October 28,
2006
    October 29,
2005
    October 28,
2006
    October 29,
2005
 
                       Pro Forma  

Operating income per statement of income

   $ 276     $ 119     $ 1,124     $ 543  

Plus depreciation and amortization

     278       263       843       826  

Less gain on sale of assets

     (8 )     (15 )     (32 )     (26 )
                                

Before excluded items

     546       367       1,935       1,343  

Vice Chairman separation expense

     —         —         8       —    

Visa/MasterCard settlement

     —         —         (36 )     —    

Merger transaction costs

     —         —         —         34  

Restructuring charges

     4       59       27       104  
                                

Adjusted EBITDA as defined

   $ 550     $ 426     $ 1,934     $ 1,481  
                                

% to revenues

     4.6 %     3.5 %     5.3 %     3.9 %

Adjusted EBITDA for the Company’s domestic (United States operations) and Sears Canada operations is as follows:

 

     13 Weeks Ended     39 Weeks Ended  
     Adjusted EBITDA    % To Revenues     Adjusted EBITDA    % To Revenues  
     October 28,
2006
   October 29,
2005
   October 28,
2006
    October 29,
2005
    October 28,
2006
   October 29,
2005
   October 28,
2006
    October 29,
2005
 
                                Pro Forma          Pro Forma  

Domestic operations

   $ 439    $ 367    4.1 %   3.3 %   $ 1,692    $ 1,319    5.1 %   3.8 %

Sears Canada

     111      59    8.9 %   4.8 %     242      162    6.8 %   4.6 %
                                                    

Total Adjusted EBITDA

   $ 550    $ 426    4.6 %   3.5 %   $ 1,934    $ 1,481    5.3 %   3.9 %
                                                    

Quarterly Report on Form 10-Q

The Company plans to file with the SEC its Quarterly Report on Form 10-Q for the third quarter 2006 on or before December 7, 2006.

 

4


Forward-Looking Statements

Results are preliminary and unaudited. This press release contains forward-looking statements about the Company’s goals. Forward-looking statements are subject to risks and uncertainties that may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Such statements include, but are not limited to, statements about the expected benefits of the business combination of Sears and Kmart, the potential benefits of our investments and future financial and operating results. Such statements are based upon the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Risks and uncertainties include the possibility that we fail to offer products and services that satisfy the desires of our customers, whose preferences may change in the future, or other factors outside the control of Holdings. Actual results may differ materially from those set forth in the forward-looking statements. The Company intends the forward-looking statements to speak only as of the time made and does not undertake to update or revise them as more information becomes available.

About Sears Holdings Corporation

Sears Holdings Corporation is the nation’s third largest broadline retailer, with approximately $55 billion in annual revenues, and with approximately 3,800 full-line and specialty retail stores in the United States and Canada. Sears Holdings is the leading home appliance retailer as well as a leader in tools, lawn and garden, home electronics and automotive repair and maintenance. Key proprietary brands include Kenmore, Craftsman and DieHard, and a broad apparel offering, including such well-known labels as Lands’ End, Jaclyn Smith and Joe Boxer, as well as the Apostrophe and Covington brands. It also has Martha Stewart Everyday products, which are offered exclusively in the U.S. by Kmart and in Canada by Sears Canada. The company is the nation’s largest provider of home services, with more than 13 million service calls made annually. For more information, visit Sears Holdings’ website at http://www.searsholdings.com.

 

5


Sears Holdings Corporation

Statements of Income

(Unaudited)

Amounts are Preliminary and Subject to Change

 

      13 Weeks Ended     39 Weeks Ended  
     Reported     Reported     Pro forma  
millions, except per common share data    October 28,
2006
    October 29,
2005
    October 28,
2006
    October 29,
2005
    October 29,
2005
 

REVENUES

          

Merchandise sales and services

   $ 11,941     $ 12,118     $ 36,724     $ 32,867     $ 37,918  

Credit and financial products revenues

     —         84       —         171       257  
                                        

Total revenues

     11,941       12,202       36,724       33,038       38,175  
                                        

COSTS AND EXPENSES

          

Cost of sales, buying and occupancy

     8,557       8,795       26,380       23,997       27,669  

Gross margin dollars

     3,384       3,323       10,344       8,870       10,249  

Gross margin rate

     28.3 %     27.4 %     28.2 %     27.0 %     27.0 %

Selling and administrative

     2,834       2,981       8,382       7,718       9,059  

Selling and administrative expense as a percentage of total revenues

     23.7 %     24.4 %     22.8 %     23.4 %     23.7 %

Depreciation and amortization

     278       263       843       650       826  

Gain on sales of assets

     (8 )     (15 )     (32 )     (25 )     (26 )

Restructuring charges

     4       59       27       104       104  
                                        

Total costs and expenses

     11,665       12,083       35,600       32,444       37,632  
                                        

Operating income

     276       119       1,124       594       543  

Interest and investment income

     (140 )     (40 )     (241 )     (86 )     (118 )

Interest expense

     89       87       255       235       290  

Other income

     —         —         (15 )     (31 )     (31 )
                                        

Income before income taxes, minority interest and cumulative effect of change in accounting principle

     327       72       1,125       476       402  

Income taxes

     119       28       438       183       172  

Minority interest

     12       (14 )     17       (7 )     (1 )
                                        

Income before cumulative effect of change in accounting principle

     196       58       670       300       231  

Cumulative effect of change in accounting principle (net of income tax benefit of $58)

     —         —         —         (90 )     (90 )
                                        

NET INCOME

   $ 196     $ 58     $ 670     $ 210     $ 141  
                                        

EARNINGS PER COMMON SHARE

          

Diluted earnings per share before cumulative effect of change in accounting principle

   $ 1.27     $ 0.35     $ 4.29     $ 1.98     $ 1.42  

Diluted earnings per share

   $ 1.27     $ 0.35     $ 4.29     $ 1.39     $ 0.87  

Diluted weighted average common shares outstanding

     154.4       163.6       156.3       151.4       162.2  


Sears Holdings Corporation

Condensed Balance Sheets

Amounts are Preliminary and Subject to Change

 

     (Unaudited)   

January 28,

2006

millions   

October 28,

2006

  

October 29,

2005

  

ASSETS

        

Current assets

        

Cash and cash equivalents

   $ 2,096    $ 1,202    $ 4,440

Receivables

     909      698      811

Merchandise inventories

     11,508      10,750      9,068

Assets held for sale

     —        1,724      —  

Other current assets

     902      901      888
                    

Total current assets

     15,415      15,275      15,207

Property and equipment, net

     9,247      9,944      9,823

Goodwill

     1,880      1,731      1,684

Tradenames and other intangible assets

     3,467      3,648      3,448

Other assets

     460      396      411
                    

TOTAL ASSETS

   $ 30,469    $ 30,994    $ 30,573
                    

LIABILITIES

        

Current liabilities

        

Short-term borrowings and current portion of long-term debt

   $ 577    $ 796    $ 748

Merchandise payables

     4,195      4,314      3,458

Unearned revenues

     1,078      1,073      1,047

Liabilities held for sale

     —        133      —  

Other current liabilities

     5,271      4,939      5,097
                    

Total current liabilities

     11,121      11,255      10,350

Long-term debt and capitalized lease obligations

     2,955      3,264      3,268

Pension and postretirement benefits

     2,092      2,161      2,421

Minority interest and other liabilities

     2,677      3,369      2,923
                    

Total Liabilities

     18,845      20,049      18,962
                    

Total Shareholders’ Equity

     11,624      10,945      11,611
                    

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 30,469    $ 30,994    $ 30,573
                    

Total common shares outstanding

     153.9      161.2      159.8


Sears Holdings Corporation

Segment Results

(Unaudited)

Amounts are Preliminary and Subject to Change

2006 - Reported

 

     13 Weeks Ended October 28, 2006  
     Kmart     Sears     Sears Holdings  
millions      Domestic     Canada    

Merchandise sales and services revenue

   $ 4,042     $ 6,655     $ 1,244     $ 11,941  

Cost of sales, buying and occupancy

     3,096       4,611       850       8,557  

Gross margin dollars

     946       2,044       394       3,384  

Gross margin rate

     23.4 %     30.7 %     31.7 %     28.3 %

Selling and administrative

     889       1,662       283       2,834  

Selling and administrative expense as a percentage of total revenues

     22.0 %     25.0 %     22.7 %     23.7 %

Depreciation and amortization

     22       223       33       278  

Gain on sales of assets

     (9 )     1       —         (8 )

Restructuring charges

     4       —         —         4  
                                

Total costs and expenses

     4,002       6,497       1,166       11,665  
                                

Operating income

   $ 40     $ 158     $ 78     $ 276  
                                

Number of:

        

Kmart Stores

     1,394       —         —         1,394  

Full-Line Stores

     —         933       123       1,056  

Specialty Stores

     —         1,083       252       1,335  
                                

Total Stores

     1,394       2,016       375       3,785  
                                
2005 - Reported         
     13 Weeks Ended October 29, 2005  
     Kmart     Sears     Sears Holdings  
millions      Domestic     Canada    

Merchandise sales and services

   $ 4,172     $ 6,803     $ 1,143     $ 12,118  

Credit and financial products revenues

     —         —         84       84  
                                

Total revenues

     4,172       6,803       1,227       12,202  

Cost of sales, buying and occupancy

     3,157       4,805       833       8,795  

Gross margin dollars

     1,015       1,998       310       3,323  

Gross margin rate

     24.3 %     29.4 %     27.1 %     27.4 %

Selling and administrative

     930       1,716       335       2,981  

Selling and administrative expense as a percentage of total revenues

     22.3 %     25.2 %     27.3 %     24.4 %

Depreciation and amortization

     13       214       36       263  

Gain on sales of assets

     (17 )     —         2       (15 )

Restructuring charges

     6       —         53       59  
                                

Total costs and expenses

     4,089       6,735       1,259       12,083  
                                

Operating income

   $ 83     $ 68     $ (32 )   $ 119  
                                

Number of:

        

Kmart Stores

     1,426       —         —         1,426  

Full-Line Stores

     —         926       122       1,048  

Specialty Stores

     —         1,146       248       1,394  
                                

Total Stores

     1,426       2,072       370       3,868  
                                


Sears Holdings Corporation

Segment Results

(Unaudited)

2006 - Reported

      39 Weeks Ended October 28, 2006  
     Kmart     Sears     Sears Holdings  
millions      Domestic     Canada    

Merchandise sales and services revenue

   $ 12,768     $ 20,403     $ 3,553     $ 36,724  

Cost of sales, buying and occupancy

     9,726       14,156       2,498       26,380  

Gross margin dollars

     3,042       6,247       1,055       10,344  

Gross margin rate

     23.8 %     30.6 %     29.7 %     28.2 %

Selling and administrative

     2,618       4,951       813       8,382  

Selling and administrative expense as a percentage of total revenues

     20.5 %     24.3 %     22.9 %     22.8 %

Depreciation and amortization

     55       687       101       843  

Gain on sales of assets

     (26 )     (6 )     —         (32 )

Restructuring charges

     8       —         19       27  
                                

Total costs and expenses

     12,381       19,788       3,431       35,600  
                                

Operating income

   $ 387     $ 615     $ 122     $ 1,124  
                                

Number of:

        

Kmart Stores

     1,394       —         —         1,394  

Full-Line Stores

     —         933       123       1,056  

Specialty Stores

     —         1,083       252       1,335  
                                

Total Stores

     1,394       2,016       375       3,785  
                                
2005 - Reported         
     39 Weeks Ended October 29, 2005  
     Kmart     Sears     Sears Holdings  
millions      Domestic     Canada    

Merchandise sales and services

   $ 13,354     $ 17,141     $ 2,372     $ 32,867  

Credit and financial products revenues

     —         —         171       171  
                                

Total revenues

     13,354       17,141       2,543       33,038  

Cost of sales, buying and occupancy

     10,154       12,109       1,734       23,997  

Gross margin dollars

     3,200       5,032       638       8,870  

Gross margin rate

     24.0 %     29.4 %     26.9 %     27.0 %

Selling and administrative

     2,850       4,178       690       7,718  

Selling and administrative expense as a percentage of total revenues

     21.3 %     24.4 %     27.1 %     23.4 %

Depreciation and amortization

     33       541       76       650  

Gain on sales of assets

     (25 )     —         —         (25 )

Restructuring charges

     51       —         53       104  
                                

Total costs and expenses

     13,063       16,828       2,553       32,444  
                                

Operating income

   $ 291     $ 313     $ (10 )   $ 594  
                                

Number of:

        

Kmart Stores

     1,426       —         —         1,426  

Full-Line Stores

     —         926       122       1,048  

Specialty Stores

     —         1,146       248       1,394  
                                

Total Stores

     1,426       2,072       370       3,868  
                                

2005 - Pro Forma

        
     39 Weeks Ended October 29, 2005  
     Kmart     Sears     Sears Holdings  
millions      Domestic     Canada    

Merchandise sales and services

   $ 13,354     $ 21,311     $ 3,253     $ 37,918  

Credit and financial products revenues

       —         257       257  
                                

Total revenues

     13,354       21,311       3,510       38,175  

Cost of sales, buying and occupancy

     10,154       15,127       2,388       27,669  

Gross margin dollars

     3,200       6,184       865       10,249  

Gross margin rate

     24.0 %     29.0 %     26.6 %     27.0 %

Selling and administrative

     2,850       5,249       960       9,059  

Selling and administrative expense as a percentage of total revenues

     21.3 %     24.6 %     27.4 %     23.7 %

Depreciation and amortization

     33       683       110       826  

Gain on sales of assets

     (25 )     (1 )     —         (26 )

Restructuring charges

     51       —         53       104  
                                

Total costs and expenses

     13,063       21,058       3,511       37,632  
                                

Operating income

   $ 291     $ 253     $ (1 )   $ 543  
                                


Sears Holdings Corporation

Adjusted EBITDA

Amounts are Preliminary and Subject to Change

 

     13 Weeks Ended  
     October 28, 2006     October 29, 2005  
     Domestic
Operations
    Sears
Canada
    Sears
Holdings
    Domestic
Operations
    Sears
Canada
    Sears
Holdings
 

Operating income per statement of income

   $ 198     $ 78     $ 276     $ 151     $ (32 )   $ 119  

Plus depreciation and amortization

     245       33       278       227       36       263  

Less gain on sale of assets/businesses

     (8 )     —         (8 )     (17 )     2       (15 )
                                                

Before excluded items

     435       111       546       361       6       367  

Vice Chairman separation expense

     —         —         —         —         —         —    

Visa/MasterCard settlement

     —         —         —         —         —         —    

Restructuring charges

     4       —         4       6       53       59  
                                                

Adjusted EBITDA as defined

   $ 439     $ 111     $ 550     $ 367     $ 59     $ 426  
                                                

% to revenues

     4.1 %     8.9 %     4.6 %     3.3 %     4.8 %     3.5 %
     39 Weeks Ended  
     October 28, 2006     October 29, 2005  
     Domestic
Operations
    Sears
Canada
    Sears
Holdings
    Domestic
Operations
    Sears
Canada
    Sears
Holdings
 
                       Pro Forma     Pro Forma     Pro Forma  

Operating income per statement of income

   $ 1,002     $ 122     $ 1,124     $ 544     $ (1 )   $ 543  

Plus depreciation and amortization

     742       101       843       716       110       826  

Less gain on sale of assets/businesses

     (32 )     —         (32 )     (26 )     —         (26 )
                                                

Before excluded items

     1,712       223       1,935       1,234       109       1,343  

Vice Chairman separation expense

     8       —         8       —         —         —    

Visa/MasterCard settlement

     (36 )     —         (36 )     —         —         —    

Merger transaction costs

     —         —         —         34       —         34  

Restructuring charges

     8       19       27       51       53       104  
                                                

Adjusted EBITDA as defined

   $ 1,692     $ 242     $ 1,934     $ 1,319     $ 162     $ 1,481  
                                                

% to revenues

     5.1 %     6.8 %     5.3 %     3.8 %     4.6 %     3.9 %


Sears Holdings Corporation

Pro Forma Reconciliation

The following tables provide a reconciliation from the as reported results to the pro forma results presented for Sears Holdings, Sears Domestic and Sears Canada for the 39-week period ended October 29, 2005.

Sears Holdings

 

     39-week period ended October 29, 2005  
millions    As reported    

Pre-merger

Activity

    Purchase
Accounting
    Pro Forma  

Merchandise sales and services

   $ 32,867     $ 5,051     $ —       $ 37,918  

Credit and financial products revenues

     171       86       —         257  
                                

Total revenue

     33,038       5,137       —         38,175  
                                

Cost of sales, buying and occupancy

     23,997       3,672       —         27,669  

Selling and administrative

     7,718       1,330       11       9,059  

Depreciation and amortization

     650       147       29       826  

Gain on sales of assets

     (25 )     (1 )     —         (26 )

Restructuring charges

     104       —         —         104  
                                

Total costs and expenses

     32,444       5,148       40       37,632  
                                

Operating income (loss)

     594       (11 )     (40 )     543  

Interest and investment income

     (86 )     (32 )     —         (118 )

Interest expense

     235       57       (2 )     290  

Other income

     (31 )     —         —         (31 )
                                

Income before income taxes, minority interest and cumulative effect of change in accounting principle

     476       (36 )     (38 )     402  

Income tax expense (benefit)

     183       4       (15 )     172  

Minority interest

     (7 )     6       —         (1 )
                                

Income before cumulative effect of change in accounting principle

     300       (46 )     (23 )     231  

Cumulative effect of change in accounting principle, net of tax

     (90 )     —         —         (90 )
                                

NET INCOME (LOSS)

   $ 210     $ (46 )   $ (23 )   $ 141  
                                
Sears Domestic         
     39-week period ended October 29, 2005  
millions    As reported     Pre-merger
Activity
    Purchase
Accounting
    Pro Forma  

Merchandise sales and services revenue

   $ 17,141     $ 4,170     $ —       $ 21,311  

Cost of sales, buying and occupancy

     12,109       3,018       —         15,127  

Selling and administrative

     4,178       1,060       11       5,249  

Depreciation and amortization

     541       116       26       683  

Gain on sales of assets

     —         (1 )     —         (1 )
                                

Total costs and expenses

     16,828       4,193       37       21,058  
                                

Operating income (loss)

   $ 313     $ (23 )   $ (37 )   $ 253  
                                
Sears Canada         
     39-week period ended October 29, 2005  
millions    As reported     Pre-merger
Activity
    Purchase
Accounting
    Pro Forma  

Merchandise sales and services

   $ 2,372     $ 881     $ —       $ 3,253  

Credit and financial product revenues

     171       86       —         257  
                                

Total revenues

     2,543       967       —         3,510  
                                

Cost of sales, buying and occupancy

     1,734       654       —         2,388  

Selling and administrative

     690       270       —         960  

Depreciation and amortization

     76       31       3       110  

Gain on sales of assets

     —         —         —         —    

Restructuring charges

     53       —         —         53  
                                

Total costs and expenses

     2,553       955       3       3,511  
                                

Operating income (loss)

   $ (10 )   $ 12     $ (3 )   $ (1 )