Sears Holdings Pro Forma Revenue Flat At $13.2B, Income Climbs

Hoffman Estates, Ill. — Total pro forma fiscal second-quarter revenue at Sears Holdings was about flat at $13.2 billion for the period ending July 30, compared with $13.5 billion in the year-ago three months.

An “as reported” statement of operations for Sears Holdings, which merged Sears with the acquiring retailer Kmart late last March, is not representative of the company's ongoing results because it only includes Sears' results since March.

Therefore, by presenting results on a pro forma basis, which includes Sears' results for all periods presented, a better understanding of trends and ongoing performance becomes available. Pro forma results assume that the merger occurred in the beginning of 2004.

Second-quarter pro forma operating income at Sears Holdings climbed to $324 million from a year-earlier $244 million, while pro forma net income rose to $161 million, from $110 million in the same three months the previous year. Gross margin rate moved up to 27.2 percent, from 26 percent, while second-quarter expenses as a percentage of total revenue remained fairly even, at 22.6 percent, up from 22.5 percent the previous year.

In the second quarter, Kmart total sales dropped 3.2 percent, compared with the prior-year period, and comp-store sales dipped 0.3 percent. Total sales were negatively impacted by a reduction in stores, while comps slipped due to lower transaction volumes.

Sears domestic sales in the three months dropped 3 percent, due to a 7.4 percent slide in domestic comp-store sales, partially offset by strong home services sales. The comp-store decline reflects efforts initiated in 2005 to improve gross margin by reducing reliance on certain promotional events and reducing inventory levels to lower merchandise holding costs.

For the purpose of evaluating operating performance, Sears Holdings uses a pro forma adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) measurement.

Domestic operations EBITDA in the second quarter climbed to $588 million from a year-ago $449 million. For the six months, domestic operations EBITDA reached $952 million, compared with $776 million in the first half of the previous year.

Pro forma total revenue for Sears Holdings in the first half dropped slightly to $26 billion, down from $26.2 billion in the same period the prior year.

Operating income on a pro forma basis increased to $424 million in the first half, up from a year-on-year $371 million, while net income dropped to $83 million, from $145 million. Gross margin in the six months rose 1 percentage point, to 26.8 percent, while expenses as a percentage of total revenue increased to 23.2 percent, from 22.8 percent in the first half of last year.

Results as reported for Sears Holdings in the second quarter show $13.2 billion in total revenue, compared with a year-ago $4.8 billion.

As reported, operating income increased to $324 million from a year-earlier $275 million, reflecting the inclusion of Sears, which had $225 million in operating income in the quarter, partially offset by $68 million less in gains on the sale of assets realized this year and $42 million in restructuring charges recognized in the current quarter related to the merger. Net income was $161 million, compared with a year-on-year $154 million.