UNITED STATES Washington, D.C. 20549 |
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 1, 2000 | ||||
Commission file number 1-416
SEARS, ROEBUCK AND CO.
(Exact name of registrant as specified in its charter)
(State of Incorporation) | (I.R.S. Employer Identification No.) | |||||||||||
(Address of principal executive offices) | (Zip Code) | |||||||||||
Registrant [1] has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and [2] has been subject to such filing requirements for the past 90 days. | ||||||||||||
Yes | X | No | ||||||||||
SEARS, ROEBUCK AND CO.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 AND 26 WEEKS ENDED JULY 1, 2000
PART I - FINANCIAL INFORMATION | Page | |
Item 1. | Financial Statements | |
Condensed Consolidated Statements of Income (Unaudited) 13 Weeks and 26 Weeks Ended July 1, 2000 and July 3, 1999 | ||
Condensed Consolidated Balance Sheets July 1, 2000 (Unaudited), July 3, 1999 (Unaudited) and January 1, 2000 | ||
Condensed Consolidated Statements of Cash Flows (Unaudited) 26 Weeks Ended July 1, 2000 and July 3, 1999 | ||
Notes to Condensed Consolidated Financial Statements (Unaudited) | ||
Independent Accountants' Review Report | ||
Item 2. | Management's Discussion and Analysis of Operations, Financial Condition and Liquidity |
PART II - OTHER INFORMATION
Item 1. | Legal Proceedings | |
Item 4. | Submission of Matters to a Vote of Security-Holders | |
Item 6. | Exhibits and Reports on Form 8-K |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEARS, ROEBUCK AND CO.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(millions, except per share data) | |||||||||||||||
1999 | 2000 | 1999 | |||||||||||||
Merchandise sales and services | $ | 8,975 | $ | 8,599 | $ | 16,804 | $ | 16,127 | |||||||
Credit revenues | 1,101 | 1,037 | 2,245 | 2,165 | |||||||||||
Total revenues | 10,076 | 9,636 | 19,049 | 18,292 | |||||||||||
Costs and expenses | |||||||||||||||
Cost of sales, buying and occupancy | 6,606 | 6,271 | 12,475 | 11,929 | |||||||||||
Selling and administrative | 2,112 | 2,058 | 4,066 | 3,977 | |||||||||||
Depreciation and amortization | 210 | 215 | 419 | 424 | |||||||||||
Provision for uncollectible accounts | 215 | 215 | 460 | 506 | |||||||||||
Interest | 310 | 313 | 626 | 647 | |||||||||||
Total costs and expenses | 9,453 | 9,072 | 18,046 | 17,483 | |||||||||||
Operating income | 623 | 564 | 1,003 | 809 | |||||||||||
Other income (expense) | 5 | (12) | 6 | (14) | |||||||||||
Income before income taxes and minority interest | 628 | 552 | 1,009 | 795 | |||||||||||
Income taxes | (232) | (209) | (372) | (301) | |||||||||||
Minority interest | (8) | (12) | (14) | (17) | |||||||||||
Net income | $ | 388 | $ | 331 | $ | 623 | $ | 477 | |||||||
Earnings per share: | |||||||||||||||
Basic | $ | 1.12 | $ | 0.87 | $ | 1.77 | $ | 1.25 | |||||||
Diluted | $ | 1.11 | $ | 0.86 | $ | 1.76 | $ | 1.24 | |||||||
Cash dividends declared per share | $ | 0.23 | $ | 0.23 | $ | 0.46 | $ | 0.46 | |||||||
Average common and common equivalent shares outstanding | 348.4 | 383.6 | 354.2 | 384.4 | |||||||||||
See accompanying notes. |
SEARS, ROEBUCK AND CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(millions) | ||||||||
2000 | 1999 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 345 | $ | 397 | $ | 729 | ||
Retained interest in transferred credit card receivables | 1,985 | 3,600 | 3,144 | |||||
Credit card receivables, net | 17,125 | 16,771 | 18,033 | |||||
Other receivables | 311 | 384 | 404 | |||||
Merchandise inventories | 5,628 | 5,000 | 5,069 | |||||
Prepaid expenses, deferred charges and other assets | 561 | 604 | 579 | |||||
Deferred income taxes | 764 | 729 | 709 | |||||
Total current assets | 26,719 | 27,485 | 28,667 | |||||
Property and equipment, net | 6,345 | 6,332 | 6,450 | |||||
Deferred income taxes | 318 | 531 | 367 | |||||
Other assets | 1,487 | 1,502 | 1,470 | |||||
Total assets | $ | 34,869 | $ | 35,850 | $ | 36,954 | ||
Liabilities | ||||||||
Current liabilities | ||||||||
Short-term borrowings | $ | 2,557 | $ | 3,814 | $ | 2,989 | ||
Current portion of long-term debt and capitalized leases | 2,338 | 612 | 2,165 | |||||
Accounts payable and other liabilities | 6,319 | 5,977 | 6,992 | |||||
Unearned revenues | 1,086 | 950 | 971 | |||||
Other taxes | 462 | 451 | 584 | |||||
Total current liabilities | 12,762 | 11,804 | 13,701 | |||||
Long-term debt and capitalized leases | 12,245 | 14,042 | 12,884 | |||||
Postretirement benefits | 2,070 | 2,258 | 2,180 | |||||
Minority interest and other liabilities | 1,343 | 1,463 | 1,350 | |||||
Total liabilities | 28,420 | 29,567 | 30,115 | |||||
Commitments and Contingent Liabilities | ||||||||
Shareholders' Equity | ||||||||
Common shares | 323 | 323 | 323 | |||||
Capital in excess of par value | 3,542 | 3,566 | 3,554 | |||||
Retained earnings | 6,414 | 5,149 | 5,952 | |||||
Treasury stock - at cost | (3,418) | (2,233) | (2,569) | |||||
Deferred ESOP expense | (113) | (160) | (134) | |||||
Accumulated other comprehensive loss | (299) | (362) | (287) | |||||
Total shareholders' equity | 6,449 | 6,283 | 6,839 | |||||
Total liabilities and shareholders' equity | $ | 34,869 | $ | 35,850 | $ | 36,954 | ||
Total common shares outstanding | 343.0 | 380.3 | 369.1 | |||||
See accompanying notes. | ||||||||
SEARS, ROEBUCK AND CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(millions) | |||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||
Net income | $ | 623 | $ | 477 | |
Adjustments to reconcile net income to net cash | |||||
provided by (used in) operating activities: | |||||
Depreciation, amortization and other noncash items | 466 | 464 | |||
Provision for uncollectible accounts | 460 | 506 | |||
Loss (Gain) on sales of property and investments | (1) | 2 | |||
Change in (net of acquisitions): | |||||
Deferred income taxes | (2) | 81 | |||
Retained interest in transferred credit card receivables | 1,159 | 694 | |||
Credit card receivables | 437 | 758 | |||
Merchandise inventories | (564) | (234) | |||
Other operating assets | 70 | (14) | |||
Other operating liabilities | (822) | (732) | |||
Net cash provided by operating activities | 1,826 | 2,002 | |||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||
Acquisition of businesses, net of cash acquired | (1) | (16) | |||
Proceeds from sales of property and investments | 19 | 101 | |||
Purchases of property and equipment | (395) | (575) | |||
Purchases of long-term investments | (17) | (21) | |||
Net cash used in investing activities | (394) | (511) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||
Proceeds from long-term debt | 307 | 909 | |||
Repayments of long-term debt | (766) | (1,313) | |||
Decrease in short-term borrowings, primarily 90 days or less | (432) | (830) | |||
Repayments of ESOP note receivable | 100 | 58 | |||
Common shares purchased | (901) | (202) | |||
Common shares issued for employee stock plans | 41 | 42 | |||
Dividends paid to shareholders | (164) | (257) | |||
Net cash used in financing activities | (1,815) | (1,593) | |||
Effect of exchange rate on cash and invested cash | (1) | 4 | |||
Net decrease in cash and cash equivalents | (384) | (98) | |||
Balance at beginning of year | 729 | 495 | |||
Balance at end of period | $ | 345 | $ | 397 | |
See accompanying notes. |
SEARS, ROEBUCK AND CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Financial Statements
The Condensed Consolidated Balance Sheets as of July 1, 2000 and July 3, 1999, the related Condensed Consolidated Statements of Income for the 13 and 26 weeks ended July 1, 2000 and July 3, 1999, and the Condensed Consolidated Statements of Cash Flows for the 26 weeks ended July 1, 2000 and July 3, 1999, are unaudited. The interim financial statements reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Sears, Roebuck and Co. (the "Company" or "Sears") 1999 Annual Report to Shareholders and Annual Report on Form 10-K. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.
Certain reclassifications have been made to the 1999 financial statements to conform with the current year presentation.
On March 10, 1999, the Board of Directors approved a common share repurchase program to acquire up to $1.5 billion of the Company's common shares by December 31, 2001. The shares are purchased on the open market or through privately negotiated transactions. As of July 1, 2000, approximately 41.5 million common shares have been acquired under this repurchase program at a cost of approximately $1.37 billion. During the second quarter of 2000, the Company repurchased 10.3 million shares at a cost of $393 million.
SEARS, ROEBUCK AND CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Earnings Per Share
The following table sets forth the computations of basic and diluted earnings per share:
(millions, except per share data) | 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||
July 1, | July 3, | July 1, | July 3, | |||||||||||||||
2000 | 1999 | 2000 | 1999 | |||||||||||||||
Basic: | ||||||||||||||||||
Net income | $ | 388 | $ | 331 | $ | 623 | $ | 477 | ||||||||||
Average shares outstanding | 346.6 | 381.1 | 352.9 | 382.0 | ||||||||||||||
Earnings per share - basic | $ | 1.12 | $ | 0.87 | $ | 1.77 | $ | 1.25 | ||||||||||
Diluted: | ||||||||||||||||||
Net income | $ | 388 | $ | 331 | $ | 623 | $ | 477 | ||||||||||
Average shares outstanding | 346.6 | 381.1 | 352.9 | 382.0 | ||||||||||||||
Dilutive effect of stock options | 1.8 | 2.5 | 1.3 | 2.4 | ||||||||||||||
Average shares and equivalent shares outstanding | 348.4 | 383.6 | 354.2 | 384.4 | ||||||||||||||
Earnings per share - diluted | $ | 1.11 | $ | 0.86 | $ | 1.76 | $ | 1.24 |
The following table sets forth the computation of comprehensive income:
(millions) | 13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||||||||||||||||||||||||
July 1, | July 3, | July 1, | July 3, | |||||||||||||||||||||||||||||||||||||
2000 | 1999 | 2000 | 1999 | |||||||||||||||||||||||||||||||||||||
Net income | $ | 388 | $ | 331 | $ | 623 | $ | 477 | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||
Unrealized gain (loss) on investments | (5) | (41) | (9) | 42 | ||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (10) | 14 | (3) | 20 | ||||||||||||||||||||||||||||||||||||
Total other comprehensive income | (15) | (27) | (12) | 62 | ||||||||||||||||||||||||||||||||||||
Total comprehensive income | $ | 373 | $ | 304 | $ | 611 | $ | 539 | ||||||||||||||||||||||||||||||||
SEARS, ROEBUCK AND CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables set forth revenue, operating income (expense) and total assets by segment:
For the 13 weeks ended July 1, 2000
millions | Retail | Services | Credit | Corporate | International | Consolidated |
Revenue | $ 7,290 | $ 732 | $ 1,033 | $ -- | $ 1,021 | $ 10,076 |
Operating income (expense) | 190 | 99 | 398 | (94) | 30 | 623 |
Total assets | 10,444 | 1,123 | 18,312 | 1,760 | 3,230 | 34,869 |
For the 13 weeks ended July 3, 1999
millions | Retail | Services | Credit | Corporate | International | Consolidated |
Revenue | $ 6,997 | $ 736 | $ 973 | $ -- | $ 930 | $ 9,636 |
Operating income (expense) | 173 | 94 | 315 | (63) | 45 | 564 |
Total assets | 10,109 | 1,028 | 19,731 | 2,210 | 2,772 | 35,850 |
For the 26 weeks ended July 1, 2000
millions | Retail | Services | Credit | Corporate | International | Consolidated |
Revenue | $ 13,603 | $ 1,355 | $ 2,104 | $ -- | $ 1,987 | $ 19,049 |
Operating income (expense) | 193 | 164 | 780 | (182) | 48 | 1,003 |
Total assets | 10,444 | 1,123 | 18,312 | 1,760 | 3,230 | 34,869 |
millions | Retail | Services | Credit | Corporate | International | Consolidated |
Revenue | $ 13,131 | $ 1,383 | $ 2,036 | $ -- | $ 1,742 | $ 18,292 |
Operating income (expense) | 104 | 169 | 610 | (136) | 62 | 809 |
Total assets | 10,109 | 1,028 | 19,731 | 2,210 | 2,772 | 35,850 |
SEARS, ROEBUCK AND CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Effect of New SEC Staff Guidance
8. Restructuring Charge
The Company implemented certain cost-reduction strategies during the third quarter of 1999 resulting in a $46 million pre-tax restructuring charge. Of the $46 million charge, $25 million related to the closing of 33 automotive stores in three geographic markets and $21 million related to severance costs for headquarters staff reductions of approximately 450 employees. The staff reductions and the closing of the 33 stores both occurred during the third quarter of 1999. Of the $25 million charge for the 33 closed stores, approximately $3 million related to severance costs, $21 million was to reduce the carrying value of the closed store assets to their estimated fair value, less costs to sell and $1 million was for other related costs. The Company paid $3 million and $11 million of restructuring costs during the 13 and 26 week periods ended July 1, 2000. Future cash payments are expected to be insignificant.
9. Legal Proceedings
There have been no material developments in any material legal proceedings since the Company's disclosure in its Annual Report on Form 10-K for the fiscal year ended January 1, 2000.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Shareholders and Board of Directors
of Sears, Roebuck and Co.
We have reviewed the accompanying Condensed Consolidated Balance Sheets of Sears, Roebuck and Co. as of July 1, 2000 and July 3, 1999, and the related Condensed Consolidated Statements of Income for the 13-week and 26-week periods ended July 1, 2000 and July 3, 1999 and the Condensed Consolidated Statements of Cash Flows for the 26-week periods ended July 1, 2000 and July 3, 1999. These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the Consolidated Balance Sheet of Sears, Roebuck and Co. as of January 1, 2000, and the related Consolidated Statements of Income, Shareholders' Equity, and Cash Flows for the year then ended (not presented herein); and in our report dated February 7, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying Condensed Consolidated Balance Sheet as of January 1, 2000, is fairly stated, in all material respects, in relation to the Consolidated Balance Sheet from which it has been derived.
Deloitte & Touche LLP
Chicago, Illinois
August 2, 2000
SEARS, ROEBUCK AND CO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY FOR THE
13 AND 26 WEEKS ENDED JULY 1, 2000 AND JULY 3, 1999
Analysis of Operations
Operating results for the Company are reported for four domestic segments and one international segment. The domestic segments include the Company's operations in the United States and Puerto Rico. The Company's segments are defined as follows:
Retail consisting of:
| Corporate consisting of administrative activities of a holding company nature, the costs of which are not allocated to the Company's businesses (includes the Company's On-line investments) | |||
Services consisting of:
| International consisting of retail, services, credit, corporate and On-line operations conducted in Canada through Sears Canada, Inc. ("Sears Canada"), a 54.5% owned consolidated subsidiary | |||
Credit which manages domestic Credit Card operations |
For the 13 weeks ended July 1, 2000, net income was $388 million, or $1.11 per share, compared to $331 million, or $0.86 per share for the comparable 1999 period. For the 26 weeks ended July 1, 2000, net income was $623 million, or $1.76 per share compared to $477 million, or $1.24 per share for the comparable 1999 period. The increases in net income and earnings per share were primarily due to increased operating income in the Retail and Credit segments coupled with a reduction in outstanding shares due to the Company's share repurchase program.
Operating income (expense) by segment was as follows:
(millions) | |||||||||||
July 1, | July 3, | July 1, | July 3, | ||||||||
Retail | $ | 190 | $ | 173 | $ | 193 | $ | 104 | |||
Services | 99 | 94 | 164 | 169 | |||||||
Credit | 398 | 315 | 780 | 610 | |||||||
Corporate | (94) | (63) | (182) | (136) | |||||||
International | 30 | 45 | 48 | 62 | |||||||
Total operating income | $ | 623 | $ | 564 | $ | 1,003 | $ | 809 | |||
The Company's consolidated effective tax rate for the 13 weeks ended July 1, 2000 was 36.9% compared to 37.9% in the prior year period. The decrease in the effective tax rate is primarily due to the favorable resolution of certain domestic tax audit issues.
SEARS, ROEBUCK AND CO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY FOR THE
13 AND 26 WEEKS ENDED JULY 1, 2000 AND JULY 3, 1999
Due to holiday buying patterns, merchandise sales are traditionally higher in the fourth quarter than other quarterly periods and a disproportionate share of operating income is typically earned in the fourth quarter. This business seasonality results in performance for the 13 and 26 weeks ended July 1, 2000 which is not necessarily indicative of performance for the balance of the year. The Company makes available by phone a recorded message on the sales performance of its domestic stores. The message is updated weekly and can be heard by calling (847) 286-6111.
Retail
Retail revenues increased 4.2% to $7.3 billion and 3.6% to $13.6 billion for the 13 and 26 weeks ended July 1, 2000, respectively, from the comparable 1999 period. Excluding the effect of the HomeLife divestiture in the first quarter of 1999, retail revenues increased $521 million or 4.0% for the 26 week period. Retail revenues and related information are as follows:
(millions, except number of stores) | |||||||||||||||||||||||||
July 1, | |||||||||||||||||||||||||
2000 | |||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||
Full-line stores | $ | 5,652 | $ | 5,437 | 4.0% | $ | 10,595 | $ | 10,232 | 3.5% | |||||||||||||||
Specialty stores | 1,638 | 1,560 | 5.0% | 3,008 | 2,899 | 3.8% | |||||||||||||||||||
Total Retail revenues | $ | 7,290 | $ | 6,997 | 4.2% | $ | 13,603 | $ | 13,131 | 3.6% | |||||||||||||||
Number of Full-line stores | 858 | 848 | |||||||||||||||||||||||
Number of Specialty stores | 2,174 | 2,127 | |||||||||||||||||||||||
Total Retail stores | 3,032 | 2,975 | |||||||||||||||||||||||
Comparable store sales percentage increase | 2.7% | 0.9% | 2.7% | 1.3% |
For the 13 week period, Full-line stores revenues increased 4.0% over the second quarter of 1999.
- Hardlines revenues increased 5.6% in the second quarter of 2000. Strong gains in electronics and home appliances, and an increase in home improvement were partially offset by a decrease in home office sales.
SEARS, ROEBUCK AND CO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY FOR THE
13 AND 26 WEEKS ENDED JULY 1, 2000 AND JULY 3, 1999
For the 13 week period ended July 1, 2000, Specialty stores revenues increased 5.0% from the comparable 1999 period primarily due to strong comparable store sales increases in Sears Dealer stores. Sears Dealer store revenues also benefited from 73 net new store openings. The Great Indoors also produced strong revenue gains over the comparable 1999 period. Auto stores revenues decreased 1.9% from the comparable 1999 period due to the closure of 33 NTB stores in the third quarter of 1999 and comparable store sales decreases.
Specialty stores revenues increased 3.8% for the 26 week period ended July 1, 2000 compared to 1999. The prior year includes revenues from HomeLife which was sold on January 30, 1999. Excluding HomeLife revenues in the prior year, Specialty stores revenues increased 5.5% primarily due to new store growth and strong comparable store sales increases in the Sears Dealer and The Great Indoors stores, and comparable store increases in the Hardware stores, partially offset by Auto store comparable store sales decreases.
Retail gross margin as a percentage of Retail revenues for the second quarter of 2000 declined 50 basis points from the second quarter of 1999. The decline is primarily due to increased markdown activity in the Full-line stores particularly across the softlines businesses. For the 26 week period, retail gross margin was flat.
Retail selling and administrative expense as a percentage of Retail revenues for the second quarter of 2000 improved 40 basis points from the second quarter of 1999. The improvement was primarily due to increased marketing efficiency. For the 26 week period, the retail selling and administration expense rate improved 40 basis points.
Retail depreciation and amortization expense for the second quarter of 2000 decreased $4 million or 2.4% from the comparable 1999 period. For the 26 week period, retail depreciation and amortization expense decreased $4 million.
Services
Services revenues, which are generated by the Home Services and Direct Response businesses, decreased 0.5% in the second quarter of 2000 versus the comparable 1999 period. Both Home Services and Direct Response businesses showed slight revenue decreases. In Home Services, lower repair service revenues and significantly lower revenues from Sears Termite and Pest Control offset improvements in Cooling and Heating. For the 26 week period, Services revenues decreased 2.0%.
Services gross margin as a percentage of Services revenues for the second quarter of 2000 improved 50 basis points. The increase in gross margin rate is primarily due to margin rate improvements in the Sears Repair Services business partially offset by a lower margin rate in the Sears Home Improvement business.
Services selling and administrative expense as a percentage of Services revenues improved 20 basis points in the second quarter of 2000 from the comparable 1999 period. The decreased selling and administrative expense ratio was primarily due to productivity initiatives in Home Services that reduced payroll, benefits and marketing costs.
For the 26 week period, Services gross margin rate decreased 60 basis points and selling and administrative expense improved 50 basis points.
Services depreciation and amortization increased 2.0% in the second quarter of 2000 from the comparable 1999 period and increased 2.4% for the comparable 26 week period.
SEARS, ROEBUCK AND CO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY FOR THE
13 AND 26 WEEKS ENDED JULY 1, 2000 AND JULY 3, 1999
Credit
Domestic Credit revenues increased 6.2% to $1.0 billion and 3.3% to $2.1 billion, respectively for the 13 and 26 weeks ended July 1, 2000 from the comparable prior year periods. The increase in Credit revenues in the second quarter was primarily attributable to yield improvement and higher securitization income. The yield improvement reflects performance pricing and higher late fees. Securitization of $910 million of credit card receivables in June 2000 added $22 million of securitization income to credit revenues and income. A lower average level of owned credit card receivables and retained interest assets partially offset the above revenue increases. A summary of Credit information (for the managed portfolio) is as follows:
Sears credit cards as a % of sales(1) | 46.5% | 48.2% | 46.8% | 48.6% | ||||||||
Average account balance (as of July 1, 2000 and July 3, 1999) | $ | 1,163 | $ | 1,182 | ||||||||
Average managed credit card receivables (millions) | $ | 25,244 | $ | 26,469 | $ | 25,698 | $ | 27,039 |
(1) 1999 Sears credit cards share has been restated to conform with the current year calculation which excludes HomeLife sales and now includes The Great Indoors sales and Sears On-line sales. Sears credit cards include Sears Card, Premier, Sears Charge Plus, Sears Gold Mastercard, Sears Mastercard, Starter Card, Easy Pay, and Commercial One Card. |
The percentage of merchandise sales and services transacted with Sears credit cards in the second quarter of 2000 declined to 46.5% compared to 48.2% a year ago due to greater consumer preference for the use of cash, checks and third party credit cards. The payment rate during the second quarter of 2000 was also higher than in the comparable prior year quarter, contributing to the decrease in average managed receivables.
Credit selling and administrative expense as a percentage of Credit revenues improved 310 basis points in the second quarter of 2000 and 280 basis points for the 26 week period from the comparable 1999 periods. The second quarter improvement was primarily due to lower account servicing and collection costs. The year to date expense reduction also reflects lower legal expenses.
SEARS, ROEBUCK AND CO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY FOR THE
13 AND 26 WEEKS ENDED JULY 1, 2000 AND JULY 3, 1999
The domestic provision for uncollectible accounts and related information is as follows:
(millions) | July 1, | July 3, | July 1, | July 3, | ||||||||
2000 | 1999 | 2000 | 1999 | |||||||||
Provision for uncollectible accounts | $ | 206 | $ | 206 | $ | 441 | $ | 490 | ||||
Net credit charge-offs as a percentage of average managed credit card receivables (1) (2) | 5.09% | 7.11% | 5.39% | 7.08% |
Domestic managed credit card receivables - delinquency rate (1) | 7.15% | 7.20% | 7.58% | 7.57% | 7.29% | ||||||||||
Allowance for uncollectible accounts | $ | 725 | $ | 725 | $ | 725 | $ | 773 | $ | 850 | |||||
Allowance % of domestic owned credit card receivables | 4.46% | 4.48% | 4.26% | 4.78% | 5.27% | ||||||||||
(2) The net charge-off rate is affected by seasonality, periodic sales of uncollectible accounts to third parties, bankruptcy trends and other general economic trends.
The domestic provision for uncollectible accounts was flat at $206 million for the 13 weeks ended July 1, 2000 and decreased 10.0% to $441 million for the 26 weeks ended July 1, 2000 from the comparable prior year periods. The decrease was attributable to lower average owned credit card receivable balances and improvement in portfolio quality as net charge-offs declined from the comparable prior year period and delinquencies continued to show favorable trends.
SEARS, ROEBUCK AND CO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY FOR THE
13 AND 26 WEEKS ENDED JULY 1, 2000 AND JULY 3, 1999
Interest expense is discussed within the Credit segment since the majority of the Company's interest expense is allocated to the Credit segment. Interest expense is combined with the funding costs on receivables sold through securitizations to represent total funding costs as follows:
(millions) | ||||||||||||
Consolidated interest expense(1) | $ | 310 | $ | 313 | $ | 626 | $ | 647 | ||||
Funding cost on securitized receivables | 102 | 106 | 205 | 212 | ||||||||
Total funding costs | $ | 412 | $ | 419 | $ | 831 | $ | 859 | ||||
Consolidated interest expense decreased in the first and second quarters of 2000 compared to 1999 due to lower on-book debt levels caused primarily by a decrease in domestic owned credit card receivables and retained interest assets. This decrease in debt levels was partially offset by a higher average funding rate in the first and second quarter of 2000 versus 1999. The funding cost on securitized receivables was slightly lower in both the first and second quarters of 2000 due to lower levels of average securitized balances.
Corporate
Corporate expenses increased $31 million in the second quarter of 2000 and $46 million for the first 26 weeks of 2000 compared to similar periods in 1999. The increases were primarily due to a higher level of investment in the Sears On-line initiatives.
International
International revenues for the second quarter of 2000 increased 9.8% from the same period a year ago. Sears Canada enjoyed strong increases in retail and credit revenues. For the 26 week period, International revenues increased 14.1%.
International gross margin as a percentage of International merchandise and services revenues decreased 190 basis points in the second quarter of 2000 from the comparable prior year quarter. The decrease in gross margin rate was primarily due to increased promotional markdowns and increased costs related to the Eaton's acquisition. For the 26 week period, International gross margin decreased 110 basis points largely due to promotional markdowns and integration costs related to the Eaton's acquisition.
International selling and administrative expense as a percentage of total International revenues decreased 10 basis points in the second quarter of 2000 from the second quarter of 1999. For the 26 week period, the International selling and administrative rate increased 30 basis points primarily due to costs associated with remodeling and relaunching stores acquired as part of the Eaton's acquisition.
SEARS, ROEBUCK AND CO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY FOR THE
13 AND 26 WEEKS ENDED JULY 1, 2000 AND JULY 3, 1999
Financial Condition
The consolidated owned net credit card receivables balances of $17.13 billion, $16.77 billion and $18.03 billion as of July 1, 2000, July 3, 1999 and January 1, 2000, respectively, exclude credit card receivables transferred to a securitization Master Trust as follows:
(millions) | July 1, | July 3, | January 1, | |||||||||||||||||
2000 | 1999 | 2000 | ||||||||||||||||||
Domestic | ||||||||||||||||||||
Managed credit card receivables | $ | 25,144 | $ | 26,103 | $ | 26,754 | ||||||||||||||
Securitized balances sold | (6,893) | (6,381) | (6,579) | |||||||||||||||||
Retained interest in transferred credit card receivables | (1,985) | (3,600) | (3,144) | |||||||||||||||||
Other customer receivables | 58 | 104 | 37 | |||||||||||||||||
Domestic owned credit card receivables | 16,324 | 16,226 | 17,068 | |||||||||||||||||
International credit card receivables | 1,557 | 1,430 | 1,725 | |||||||||||||||||
Consolidated credit card receivables | 17,881 | 17,656 | 18,793 | |||||||||||||||||
Less: Allowance for uncollectible accounts | 756 | 885 | 760 | |||||||||||||||||
Credit card receivables, net | $ | 17,125 | $ | 16,771 | $ | 18,033 | ||||||||||||||
Consolidated credit card receivables in the second quarter of 2000 (before allowance for uncollectible accounts) increased $225 million over the second quarter of 1999. Domestic managed credit card receivables decreased from the second quarter of 1999 primarily due to declining market share of sales on the Sears Card and faster payment rates. Domestic owned credit card receivables are slightly higher than last year as a net reduction in securitized and transferred receivables more than offset the decline in managed receivables. Compared to 1999 year-end, consolidated credit card receivables (before allowance for uncollectible accounts) decreased $912 million due to the normal seasonal nature of the retail industry as well as the aforementioned declining market share.
As of July 1, 2000, consolidated merchandise inventories on the first-in, first-out (FIFO) basis were $6.25 billion, compared with $5.69 billion at July 3, 1999 and $5.66 billion at January 1, 2000. The increase in inventory levels from the second quarter of 1999 and January 1, 2000 is primarily due to increased hardlines and softlines inventories in the Full-line stores and increased Specialty store inventories to support revenue growth and additional new store openings. International inventory increases are due to the acquisition of Eaton stores and continued revenue growth.
SEARS, ROEBUCK AND CO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY FOR THE
13 AND 26 WEEKS ENDED JULY 1, 2000 AND JULY 3, 1999
Total funding for the Company at July 1, 2000 was $24.0 billion compared with $24.8 billion a year earlier primarily resulting from a decline in the domestic managed credit card receivables portfolio. Total funding includes debt recorded on the balance sheet and investor certificates related to credit card receivables sold through securitizations as follows:
July 1, | July 3, | January 1, | ||||||
(millions) | 2000 | 1999 | 2000 | |||||
Short-term borrowings | $ | 2,557 | $ | 3,814 | $ | 2,989 | ||
Long-term debt and capitalized lease obligations | 14,583 | 14,654 | 15,049 | |||||
Securitized balances sold | 6,893 | 6,381 | 6,579 | |||||
Total funding | $ | 24,033 | $ | 24,849 | $ | 24,617 | ||
The Company accesses a variety of capital markets to preserve flexibility and diversify its funding sources. The primary funding sources utilized include unsecured commercial paper, medium term notes, senior debt and securitization.
Liquidity
Based upon the cash flow expected to be generated from future operations and the Company's ability to cost-effectively access multiple sources of funding, the Company believes sufficient resources will be available to maintain its planned level of operations, capital expenditures, dividends and share repurchases in the foreseeable future.
Cautionary Statement Regarding Forward-Looking Information
Certain statements made in this Report are forward-looking statements made in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. As such, they involve risks and uncertainties that could cause actual results to differ materially. The Company's forward-looking statements are based on assumptions about many important factors, including ongoing competitive pressures in the retail industry, changes in consumer spending, delinquency and charge-off trends in the credit card receivables portfolio, general North American economic conditions (such as interest rates and consumer confidence), anticipated cash flow, the Company's ability to cost-effectively access multiple sources of funding, the ability of the Company to implement its marketing plans and cost reduction efforts and normal business uncertainty. In addition, the Company typically earns a disproportionate share of its operating income in the fourth quarter due to holiday buying patterns, which are difficult to forecast with certainty. While the Company believes that its assumptions are reasonable, it cautions that it is impossible to predict the impact of certain factors which could cause actual results to differ materially from expected results. The Company intends its forward looking statements to speak only as of the time of such statements, and does not undertake to update or revise them as more information becomes available.
SEARS, ROEBUCK AND CO.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
PART II. OTHER INFORMATION
Item 4. | Submission of Matters to a Vote of Security-Holders. | ||||||||||||||||||||||||
On May 11, 2000, the Company held its annual meeting of shareholders at the Merchandise Review Center - Sears Store Support in Hoffman Estates, Illinois. | |||||||||||||||||||||||||
Hall Adams, Jr., James R. Cantalupo, W. James Farrell, and Richard C. Notebaert were elected to Class C of the Board of Directors for three year terms expiring at the 2003 annual meeting of shareholders. The shareholders approved the recommendation of the Audit Committee that Deloitte & Touche LLP be appointed auditors for 2000. The shareholders also approved the Sears, Roebuck and Co. 2000 Employees Stock Plan. A shareholder proposal regarding the classified Board of Directors was approved by a majority of votes casts. The votes on these matters were as follows: | |||||||||||||||||||||||||
1. | Election of Directors | ||||||||||||||||||||||||
Withheld | |||||||||||||||||||||||||
Hall Adams, Jr. | 299,637,192 | 6,719,755 | |||||||||||||||||||||||
James R. Cantalupo | 298,004,157 | 8,352,790 | |||||||||||||||||||||||
W. James Farrell | 299,630,075 | 6,726,872 | |||||||||||||||||||||||
Richard C. Notebaert | 299,670,886 | 6,686,061 | |||||||||||||||||||||||
2. | Appointment of Deloitte & Touche LLP as auditors for 2000. | ||||||||||||||||||||||||
3. | Approval of the Sears, Roebuck and Co. 2000 Employees Stock Plan | ||||||||||||||||||||||||
4. | Shareholder proposal regarding the classified Board of Directors. | ||||||||||||||||||||||||
SEARS, ROEBUCK AND CO.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
The Registrant filed a Current Report on Form 8-K dated April 18, 2000 to report, under Item 5, on the Registrant's analyst meeting and, under Item 7, to furnish excerpts from the presentation given at the meeting.
SIGNATURE
Sears, Roebuck and Co. (Registrant) | ||
August 15, 2000 | By | /s/ Glenn R. Richter Glenn R. Richter Vice President and Controller (Principal Accounting Officer and duly authorized officer of Registrant) |
E-1
EXHIBIT INDEX
SEARS, ROEBUCK AND CO.
13 AND 26 WEEKS ENDED JULY 1, 2000 AND JULY 3, 1999
Exhibit No. | |
3(a). | Restated Certificate of Incorporation as in effect on May 13, 1996 (incorporated by reference to Exhibit 3(a) to Registrant's Statement No. 333-8141). |
3(b). | By-laws, as amended to February 1, 2000 (incorporated by reference to Exhibit 3.(ii) to Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 2000). |
4. | Registrant hereby agrees to furnish the Commission, upon request, with the instruments defining the rights of holders of each issue of long-term debt of the Registrant and its consolidated subsidiaries. |
*10. | Retirement Agreement between Sears, Roebuck and Co. and Arthur C. Martinez. |
*12(a). | Computation of ratio of income to fixed charges for Sears and consolidated subsidiaries for each of the five years ended January 1, 2000 and for the six- and twelve-month periods ended July 3, 2000. |
12(b). | Computation of ratio of income to combined fixed charges and preferred share dividends for Sears and consolidated subsidiaries (incorporated by reference to Exhibit 12.(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 2000). |
*15. | Acknowledgement of awareness from Deloitte & Touche LLP, dated August 2, 2000, concerning unaudited interim financial information. |
*27. | Financial Data Schedule. |
* Filed herewith.