UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 28, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-416
SEARS, ROEBUCK AND CO.
(Exact name of registrant as specified in its charter)
New York 36-1750680
(State of Incorporation) (I.R.S. Employer Identification No.)
3333 Beverly Road, Hoffman Estates, Illinois 60179
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 847/286-2500
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
As of June 30, 1997 the Registrant had 391,608,464 common shares, $.75
par value, outstanding.
Sears, Roebuck and Co.
Index to Quarterly Report on Form 10-Q
June 28, 1997
Page
Part I - Financial Information.
Item 1. Financial Statements.
Condensed Consolidated Statements of Income (unaudited) -
Three and Six Months Ended June 28, 1997 and June 29, 1996. 1
Condensed Consolidated Balance Sheets -
June 28, 1997 (unaudited), June 29, 1996 (unaudited)
and December 28, 1996. 2
Condensed Consolidated Statements of Cash Flows (unaudited) -
Six Months Ended June 28, 1997 and June 29, 1996. 3
Notes to Condensed Consolidated Financial Statements
(unaudited). 4
Independent Certified Public Accountants' Review Report. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 8
Part II - Other Information.
Item 1. Legal Proceedings. 15
Item 4. Submission of Matters to a Vote of Security-Holders 16
Item 6. Exhibits and Reports on Form 8-K. 17
-1-
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
SEARS, ROEBUCK AND CO.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 28, June 29, June 28, June 29,
(millions, except per common share data) 1997 1996 1997 1996
Revenues
Merchandise sales and services $ 8,563 $ 8,056 $ 16,122 $ 14,964
Credit revenues 1,168 1,076 2,371 2,163
Total revenues 9,731 9,132 18,493 17,127
Costs and expenses
Cost of sales, buying and occupancy 6,272 5,946 11,977 11,195
Selling and administrative 2,006 1,976 3,890 3,726
Depreciation and amortization 201 171 383 329
Provision for uncollectible accounts 315 270 597 508
Interest 341 333 693 687
Reaffirmation charges (note 7) 475 -- 475 --
Total costs and expenses 9,610 8,696 18,015 16,445
Operating income 121 436 478 682
Other income, net 139 23 129 27
Income before income taxes 260 459 607 709
Income taxes 143 185 308 284
Net income $ 117 $ 274 $ 299 $ 425
Net income (loss) consists of:
Domestic operations $ 113 $ 288 $ 340 $ 453
International operations 4 (14) (41) (28)
Net income $ 117 $ 274 $ 299 $ 425
Earnings per common share, after
allowing for dividends on preferred shares $ 0.29 $ 0.67 $ 0.75 $ 1.03
Cash dividends declared per common share $ 0.23 $ 0.23 $ 0.46 $ 0.46
Average common and common
equivalent shares outstanding 397.7 400.1 398.1 399.8
<FN>
See accompanying notes.
</FN>
-2-
SEARS, ROEBUCK AND CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 28, June 29, Dec. 28,
(millions) 1997 1996 1996
Assets
Current assets
Cash and invested cash $ 247 $ 514 $ 660
Credit card receivables 21,425 19,896 21,563
Other receivables 264 358 335
Merchandise inventories 4,954 4,441 4,646
Prepaid expenses and deferred charges 398 419 348
Deferred income taxes 991 904 895
Total current assets 28,279 26,532 28,447
Property and equipment
Land 456 371 445
Buildings and improvements 5,075 4,616 5,080
Furniture, fixtures and equipment 4,544 4,038 4,279
Capitalized leases 451 335 433
10,526 9,360 10,237
Less accumulated depreciation 4,637 4,081 4,359
Total property and equipment, net 5,889 5,279 5,878
Deferred income taxes 893 840 905
Other assets 955 758 937
Total assets $ 36,016 $ 33,409 $ 36,167
Liabilities
Current liabilities
Short-term borrowings $ 3,334 $ 4,252 $ 3,533
Current portion of long-term debt and
capitalized leases obligations 2,383 2,054 2,737
Accounts payable and other liabilities 7,520 6,220 7,840
Unearned revenues 888 940 840
Total current liabilities 14,125 13,466 14,950
Long-term debt and capitalized leases 12,661 11,212 12,170
Postretirement benefits 2,700 2,808 2,748
Minority interest and other liabilities 1,392 1,287 1,354
Total liabilities 30,878 28,773 31,222
Commitments and Contingent Liabilities (note 7)
Shareholders' Equity
8.88% Preferred Shares, First Series
(note 3) - 325 -
Common shares 323 323 323
Capital in excess of par value 3,600 3,624 3,618
Retained income (note 2) 3,449 2,674 3,330
Treasury stock - at cost (1,657) (1,619) (1,655)
Minimum pension liability (277) (285) (277)
Deferred ESOP expense (220) (239) (230)
Cumulative translation adjustments (80) (167) (164)
Total shareholders' equity 5,138 4,636 4,945
Total liabilities and shareholders'
equity $ 36,016 $ 33,409 $ 36,167
Total common shares outstanding 391.6 392.1 391.4
<FN>
See accompanying notes.
</FN>
-3-
SEARS, ROEBUCK AND CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 28, June 29,
(millions) 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 299 $ 425
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation, amortization and other noncash items 506 434
Reaffirmation charges 475 -
Provision for uncollectible accounts 597 508
Gain on sales of property and investments (118) (27)
Change in (net of acquisitions):
Deferred income taxes (82) 26
Credit card receivables (711) (347)
Merchandise inventories (371) (406)
Other operating assets (80) (35)
Other operating liabilities (634) (351)
Net cash (used in) provided by operating activities (119) 227
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired (115) -
Net proceeds from sales of businesses 379 -
Proceeds from sales of property and investments 9 45
Purchases of property and equipment, net (461) (550)
Net cash used in investing activities (188) (505)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,544 1,952
Repayments of long-term debt (1,427) (502)
Decrease in short-term borrowings, primarily
90 days or less (40) (1,098)
Repayments of ESOP note receivable 16 21
Common shares purchased for employee stock plans (77) (92)
Common shares issued for employee stock plans 57 100
Dividends paid to shareholders (178) (195)
Net cash (used in) provided by financing activities (105) 186
Effect of exchange rate changes on cash and invested cash (1) -
Net decrease in cash and invested cash (413) (92)
Cash and invested cash at beginning of year 660 606
Cash and invested cash at end of period $ 247 $ 514
<FN>
See accompanying notes.
</FN>
-4-
SEARS, ROEBUCK AND CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Financial Statements
The Condensed Consolidated Balance Sheets as of June 28, 1997 and
June 29, 1996 and the related Condensed Consolidated Statements of
Income for the three and six months then ended and Condensed Consolidated
Statements of Cash Flows for the six months then ended are unaudited.
The interim financial statements reflect all adjustments (consisting of
normal recurring accruals except as described in note 7) 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. 1996
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.
2. Shareholders' Equity and Dividend Restrictions
Under terms of indentures entered into in 1981 and thereafter, Sears
cannot take specified actions, including the declaration of cash dividends,
which would cause its consolidated unencumbered assets, as defined, to fall
below 150% of its consolidated liabilities, as defined. At June 28, 1997
approximately $2.4 billion could be paid in dividends to shareholders under
the most restrictive indentures.
On March 13, 1996, the Board of Directors approved a common share
repurchase program for the purpose of acquiring shares for distribution
under employee stock-based incentive plans. The Company plans on acquiring
up to ten million Sears common shares on the open market. Through June 28,
1997 5.0 million common shares had been acquired under the repurchase
program.
3. Earnings Per Common Share
Earnings per common share is computed based on the weighted average
number of common and common equivalent shares (dilutive stock options)
outstanding. In 1996, earnings per common share included an adjustment
for dividends of $7 million and $15 million for the three- and six-month
periods ended June 29, 1996, on the 8.88% Preferred Shares. The Company
redeemed all the 8.88% Preferred Shares on November 12, 1996 at a
redemption price of $25 per depository share plus accrued dividends.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per
Share." The statement is effective for financial statements for periods
ending after Dec. 15, 1997, and changes the method in which earnings per
share will be determined. Adoption of this statement by the Company will
not have a material impact on earnings per share.
4. Accounting Change
The Company adopted Statement of Financial Accounting Standard (SFAS)
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", effective January 1, 1997. This statement
provides consistent guidance for distinguishing transfers of financial
assets (securitizations) that are sales from transfers that are secured
borrowings. SFAS No. 125 requires the Company to recognize gains on
securitizations which qualify as sales. The statement also indicates that
an allowance for uncollectible accounts should not be maintained for
receivables which are sold (securitized). The effect of this accounting
change was to increase net income by $35 million and $74 million for the
three- and six-month periods ended June 28, 1997, respectively.
-5-
SEARS, ROEBUCK AND CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Acquisition of Businesses
During the first quarter of 1997, the Company acquired all the
outstanding stock of All America Termite and Pest Control, Inc.
("All America") and Florida Builder Appliances. All America is a termite
and pest control business and Florida Builder Appliances is a supplier of
appliances to residential construction and remodeling contractors in the
Florida market. Additionally in the quarter, the Company acquired the
remaining 35% of the outstanding shares it did not already own of MaxServ,
Inc. These acquisitions were recorded using the purchase method of
accounting. The results of operations from these acquired companies are
not material to the Company's consolidated results of operations.
6. Disposition of Businesses
In April 1997, the Company completed the sale of 60 percent of the
outstanding shares of Sears, Roebuck de Mexico, S.A. de C.V.
("Sears Mexico") to Grupo Carso S.A. de C.V. for cash proceeds of $103
million. The sale was recorded in the first quarter resulting in a pretax
loss of $21 million in other income and tax expense of $15 million for an
after-tax loss of $36 million, or $0.09 per share. The transaction reduced
the Company's ownership in Sears Mexico to 15.5 percent.
In June 1997, the Company sold its 30 percent equity interest in Advantis,
a joint venture between IBM and the Company, to IBM for $450 million.
After contractually required distributions to third parties, the transaction
resulted in cash proceeds of $276 million, a pretax gain of $150 million
reflected in other income and an after-tax gain of $91 million, or $0.23 per
share.
7. Legal Proceedings
On June 3, 1997, the Company entered into a settlement of the consolidated
class action lawsuits filed in the United States Bankruptcy and District
Courts for the District of Massachusetts by certain current and former
credit card holders of the Company who had declared personal bankruptcy
(the "Settlement"). These lawsuits alleged that the Company had violated
the United States Bankruptcy Code and consumer protection laws in various
states through activities related to certain debt reaffirmation agreements.
During the second quarter of 1997, the Company also reached an agreement
in principle with Attorneys General in all fifty states and signed a
consent decree with the Federal Trade Commission relating to these matters.
A civil and criminal investigation of these matters is ongoing.
The terms of the Settlement, which must still be jointly approved by the
United States Bankruptcy and District Courts for the District of
Massachusetts, require, among other things, the Company to pay the debtors
the amounts collected pursuant to reaffirmation agreements that were not
filed with the bankruptcy courts, including finance charges, plus 10%
interest, and to undergo a review of its credit bankruptcy reaffirmation
procedures. In addition, outstanding balances relating to unfiled debt
reaffirmation agreements will be written off. The Company will also
establish a $25 million fund to be distributed to the debtors participating
in the Settlement. A joint fairness hearing on the Settlement has been set
for October 28, 1997. The agreement in principle reached with the States'
Attorneys General requires, among other things, the Company to establish
funds aggregating $40 million to be shared among the states and used in
part for consumer education.
The Company recorded a pretax charge of $475 million ($320 million on an
after-tax basis) in the second quarter for the estimated cost of the matters
referred to above, including other related expenses. This estimate is based
on management's assumptions as to the ultimate outcome of future events and
uncertainties. Actual results could differ from this estimate and there can
be no assurance that additional costs will not be incurred.
-6-
SEARS, ROEBUCK AND CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On May 14, 1997 and June 11, 1997, several stockholders filed actions on
behalf of the Company against its directors and certain of its officers in
the Supreme Court of the State of New York for the Counties of New York and
Westchester, alleging breach of fiduciary duty for failing to prevent the
improper handling of certain of the Company's debt reaffirmation agreements.
The complaints seek unspecified damages and attorneys' fees and expenses.
The plaintiffs have agreed to consolidate their complaints and to file an
amended and consolidated complaint in the Supreme Court of the State of New
York for the County of New York. The Company intends to vigorously defend
these allegations.
On June 23, 1997, several stockholders of the Company, purporting to
represent a class, filed a consolidated and amended complaint against the
Company and one of its officers in the United States District Court for the
Northern District of Illinois, alleging violations of the Securities Exchange
Act of 1934 for failure to disclose the bankruptcy collection practices
described above in periodic filings with the Securities and Exchange
Commission prior to April 10, 1997. The complaint seeks unspecified damages
and attorneys' fees and expenses. The Company has filed a motion to dismiss
this case.
The Company is subject to various other legal and governmental proceedings
pending against the Company, many involving routine litigation incidental to
the businesses. Other matters contain allegations which are nonroutine and
involve compensatory, punitive or antitrust treble damage claims in very
large amounts, as well as other types of relief. The consequences of these
matters are not presently determinable but, in the opinion of management of
the Company after consulting with legal counsel, the ultimate liability in
excess of reserves currently recorded is not expected to have a material
effect on annual results of operations, financial position, liquidity or
capital resources of the Company.
-7-
SEARS, ROEBUCK AND CO.
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 June 28, 1997 and June 29, 1996, and the related
Condensed Consolidated Statements of Income for the three- and six-month
periods ended June 28, 1997 and June 29, 1996, and the Condensed Consolidated
Statements of Cash Flows for the six-month periods ended June 28, 1997 and
June 29, 1996. 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 generally accepted auditing standards, 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the Consolidated Balance Sheet of Sears, Roebuck and Co. as of
December 28, 1996, 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 10, 1997, 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 December 28, 1996, is fairly stated, in all material
respects, in relation to the Consolidated Balance Sheet from which it has been
derived.
/S/Deloitte & Touche LLP
Deloitte & Touche LLP
Chicago, Illinois
July 24, 1997
-8-
ITEM 2. - SEARS, ROEBUCK AND CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE- AND SIX-MONTH PERIODS ENDED JUNE 28, 1997 AND JUNE 29, 1996
Operating Results
Operating results for the Company are reported for two business segments:
domestic operations and international operations. The domestic operations
segment includes the Company's operations in the United States and Puerto Rico.
Domestic operations include Retail Stores (comprised of Full-line Stores, Home
Stores and Auto Stores), Home Services, Direct Response Marketing and Credit.
Credit includes the results of the Company's portfolio of receivables which
arise from extending domestic customers credit to pay for purchases of
merchandise and services. International operations consist of similar
merchandising and service operations conducted in Canada through Sears Canada
Inc., a consolidated, 55.0% owned subsidiary ("Sears Canada") and Sears,
Roebuck de Mexico, S.A. de C.V. ("Sears Mexico"), a 75.5% owned subsidiary
until March 29, 1997. As of March 29, 1997 Sears Mexico is no longer
included in the consolidated balance sheet as the Company completed the sale
of its controlling interest in Sears Mexico to Grupo Carso, S.A. de C.V.
For the three-months ended June 28, 1997 net income was $117 million, or
$0.29 per common share. Results for the quarter were affected by three
significant items which together reduced net income by $194 million, or $0.49
per common share. These items include reaffirmation charges, the gain on the
sale of Advantis and the positive impact of the accounting change for SFAS No.
125. Excluding these items, net income would have been $311 million, or $0.78
per common share as compared to $274 million, or $0.67 per common share in the
second quarter of 1996. For the six-months ended June 28, 1997 net income was
$299 million, or $0.75 per common share. Excluding the impact of significant
noncomparable items, net income would have been $490 million, or $1.23 per
common share as compared to $425 million, or $1.03 per common share in the
first half of 1996.
Impact of noncomparable items is summarized as follows:
2nd Quarter Six Months
(millions, except per common share) $ EPS $ EPS
1997 Reported Net Income $ 117 $ 0.29 $ 299 $ 0.75
Less Noncomparable Items:
Reaffirmation Charges (320) (0.80) (320) (0.80)
Sale of Advantis 91 0.23 91 0.23
SFAS No. 125 Acctng. Change 35 0.08 74 0.18
Sale of Sears Mexico -- -- (36) (0.09)
(194) (0.49) (191) (0.48)
1997 Net Income Before
Noncomparable Items $ 311 $ 0.78 $ 490 $ 1.23
1996 Net Income $ 274 $ 0.67 $ 425 $ 1.03
The Company's consolidated effective tax rate in the second quarter of 1997
was 55.0% as compared to 40.2% in the prior year period. The increase was
primarily related to certain components of the reaffirmation charges which
provide no tax benefit. Excluding the impact of the reaffirmation charges,
the Company's consolidated effective tax rate would have been 40.5% in the
second quarter of 1997. For the six-months ended June 28, 1997 the
consolidated effective tax rate was 50.7% versus 40.0% in the first half of
1996. The increase was due to the previously mentioned impact of the
reaffirmation charges and the tax expense from the first quarter sale of Sears
Mexico. Excluding these significant items, the consolidated effective tax rate
would have been 40.7% for the first half of 1997.
-9-
ITEM 2. - SEARS, ROEBUCK AND CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE- AND SIX-MONTH PERIODS ENDED JUNE 28, 1997 AND JUNE 29, 1996
Revenues increased 6.6% to $9.7 billion and 8.0% to $18.5 billion for the
three- and six-month periods ended June 28, 1997, respectively, from the
comparable 1996 period.
Revenues Three Months Ended Six Months Ended
June 28, June 29, June 28, June 29,
(millions, except number of stores) 1997 1996 Change 1997 1996 Change
Domestic operations:
Full-line Stores $ 5,227 $ 5,082 2.9% $ 9,811 $ 9,380 4.6%
Off-the-mall stores 1,823 1,539 18.5 3,461 2,905 19.1
Service and other revenues 789 738 6.8 1,445 1,362 6.0
Merchandise sales and services 7,839 7,359 6.5 14,717 13,647 7.8
Credit revenues 1,106 996 11.0 2,227 1,995 11.6
Total domestic operations 8,945 8,355 7.1 16,944 15,642 8.3
International operations 786 777 1.3 1,549 1,485 4.3
Total revenues $ 9,731 $ 9,132 6.6% $ 18,493 $ 17,127 8.0%
Domestic comparable store sales increase 2.3% 9.4% 2.5% 7.1%
Number of domestic Full-line Stores 824 808
Number of domestic off-the-mall stores 2,607 2,308
Total 3,431 3,116
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 second quarter and the
first half of 1997 which is not necessarily indicative of performance for the
balance of the year.
-10-
ITEM 2. - SEARS, ROEBUCK AND CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE- AND SIX-MONTH PERIODS ENDED JUNE 28, 1997 AND JUNE 29, 1996
Domestic Operations
For the second quarter, the Company posted a 2.3% comparable store sales
increase which came on top of a 9.4% comparable store sales increase in 1996.
Full-line Stores revenues increased 2.9% over second quarter 1996.
Apparel revenues gained 5.1% during the second quarter reflecting the
positive response to Full-line Store renovations, broader assortments
and quality brands. Women's ready to wear, especially sportswear, as
well as footwear and fine jewelry posted strong sales increases and
achieved comparable store sales gains in the low teen range.
Hardlines revenues, comprised of Home Electronics, Home Appliances, and
Home Improvement merchandise sales, increased 2.2% for the second quarter
with strong gains in Home Electronics partially offset by decreased Home
Improvement sales. Hardlines comparable store sales were flat with second
quarter 1996.
For the six-month period, Full-line store sales grew 4.6% over 1996 as
Apparel achieved a 10.3% increase and Hardlines gained 1.9%.
Off-the-mall store revenues made up of Home Stores and Auto Stores,
increased 18.5% for the second quarter, which came on top of a 17.2% gain in
1996.
Home Stores revenues significantly increased over 1996 primarily
resulting from sales by the newly acquired Orchard Supply Hardware
Stores. Hardware and Sears Dealer stores had substantial revenue
increases from a year ago benefiting from 246 net new store openings and
also achieved comparable store sales increases in the mid-single digits.
HomeLife furniture stores revenues increased by mid-single digits, but
comparable stores sales fell slightly from 1996.
.Auto Stores, consisting of the Sears Tire Group and Parts Group,
experienced revenue declines in the low single digits from the same
period a year ago as comparable store sales were down from prior year.
During the first quarter Sears Tire Group announced plans to convert its
Tire America and NTW stores into a single format, "National Tire and
Battery" (NTB) as part of the continued expansion of automotive off-the-
mall concepts.
Off-the-mall store revenues increased 19.1% for the six-month period as
compared to 1996 and benefited largely from the expansion of the Home Stores.
Service and other revenues, which are generated primarily by the Home
Services and Direct Response Marketing businesses, were up 6.8% in the second
quarter and 6.0% in the first six months of 1997 versus the 1996 comparable
period. The increase was primarily due to strong revenue gains by Home
Services on improved service contract revenue for product repair and
installed home improvement sales.
The domestic credit card receivables portfolio contributes significantly
to domestic operations' profitability. The key components that determine
profitability of the portfolio (before administrative expenses and income
taxes) are credit revenues (gross revenues less the funding cost on
securitized receivables), interest expense and the provision for
uncollectible accounts.
On January 1, 1997 the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which changed the accounting for securitized receivables.
Implementation of SFAS No. 125 increased 1997 net income by $35 million and
$74 million for the three- and six-month periods ended June 28, 1997,
respectively.
-11-
ITEM 2. - SEARS, ROEBUCK AND CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE- AND SIX-MONTH PERIODS ENDED JUNE 28, 1997 AND JUNE 29, 1996
Key Domestic Credit Information
Balances At
June 28, June 29, Dec. 28,
(millions) 1997 1996 1996
Gross credit card receivables $ 26,494 $ 23,994 $ 26,731
Receivable balances sold (6,123) (4,970) (6,330)
Owned credit card receivables $ 20,371 $ 19,024 $ 20,401
Gross credit card receivables delinquent
sixty days or more 5.93% 4.61% 5.43%
Allowance for uncollectible accounts as a
percentage of owned credit card receivables 3.83% 3.96% 3.63%
Three Months Ended Six Months Ended
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
Gross credit revenues $ 1,211 $ 1,080 $ 2,441 $ 2,157
Funding costs on securitized receivables (105) (84) (214) (162)
Net credit revenues $ 1,106 $ 996 $ 2,227 $ 1,995
Net credit charge-offs to average gross
credit card receivables 5.81% 4.08% 5.48% 3.87%
The 11.0% and 11.6% growth in gross domestic credit revenues for the three-
and six-month periods, respectively, reflected higher owned receivable
balances resulting from strong merchandise sales partially offset by the
effects of SFAS No. 125. The Sears Card continues to have the dominant
market share of credit retail sales generated in both the Full-line Stores and
off-the-mall stores. Adoption of SFAS No. 125 reduced 1997 gross credit
revenues by $61 million and $111 million for the three- and six-month periods
ended June 28, 1997, respectively, as the servicing costs and provision for
uncollectible accounts related to securitized receivables are now presented
as a reduction of credit revenues.
Gross margin as a percentage of domestic merchandise sales and services for
the second quarter was 26.7% versus 26.4% in the comparable prior year period.
The domestic gross margin rate benefited from the continued shift in sales to
higher margin apparel merchandise, improved logistics costs and savings from
merchandise sourcing initiatives offset by competitive pricing pressure. In
addition, Home Services and Direct Response Marketing experienced improved
gross margin rates. For the six-month period, 1997 domestic gross margin
rose 30 basis points to 25.8%.
Selling and administrative expense as a percentage of revenues for
domestic operations improved to 20.4% in the second quarter of 1997 from 21.3%
in the comparable prior year period. Second quarter 1997 selling and
administrative expense was reduced by $30 million as servicing costs for
securitized receivables are no longer included in selling and administrative
expense but instead are charged against credit revenues in accordance with
SFAS No. 125. An additional 70 basis point decrease resulted from solid
revenue performance coupled with continued emphasis on controlling expenses
and leveraging the fixed cost base. For the six-month period, the selling
and administrative rate for domestic operations improved 80 basis points to
20.8%. SFAS No. 125 reduced selling and administrative expense by $61
million for the 1997 six-month period.
Domestic operations depreciation and amortization expense was $187 million
in the second quarter and $352 million for the six-month period, an increase
of $33 million and $56 million, respectively, from the comparable 1996
periods. The increase reflects the continuation of the Company's store
remodeling program and the off-the-mall store expansion.
-12-
ITEM 2. - SEARS, ROEBUCK AND CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE- AND SIX-MONTH PERIODS ENDED JUNE 28, 1997 AND JUNE 29, 1996
The allowance for uncollectible accounts for owned domestic credit card
receivables was $781 million and $753 million at June 28, 1997 and June 29,
1996, respectively. The domestic provision for uncollectible accounts was
$308 million in the second quarter and $577 million for the six-month period
as compared to $254 million and $481 million in the prior year periods. The
1997 provision for uncollectible accounts was reduced by $89 million and $171
million for the three- and six-month periods ended June 28, 1997,
respectively, due to the implementation of SFAS No. 125 which requires that
estimated charge-offs on sold receivables be included in the determination of
the gain or loss on the sale of receivables. Excluding the impact of SFAS No.
125, the provision would have increased 55.8% and 55.4% for the three- and
six-month periods, respectively. The increase is primarily attributable to
the 56.8% rise in net charge-offs for the first half of 1997 as compared to
1996 due to the continuing industry-wide trend of increased delinquencies and
bankruptcies and the growth in domestic credit card receivables.
Since the Company uses securitizations of credit card receivables as a
significant funding source, total domestic funding costs include interest
expense and the funding cost of securitized receivables. Total domestic
funding costs were as follows:
Three Months Ended Six Months Ended
June 28, June 29, June 28, June 29,
(millions) 1997 1996 1997 1996
Interest expense $ 316 $ 288 $ 627 $ 595
Funding costs on securitized receivables (1) 105 84 214 162
Total funding costs $ 421 $ 372 $ 841 $ 757
<FN>
(1) Funding costs on securitized receivables represent the interest paid on
securitized receivables and are presented as a reduction of credit
revenues in the statements of income.
</FN>
Total domestic funding costs as a percentage of revenues increased from
4.5% in 1996 to 4.7% in the second quarter of 1997 and also increased for
the six-month period from 4.8% in 1996 to 5.0% in 1997. The increase in
total domestic funding costs reflects higher funding requirements due to a
larger receivable portfolio and the redemption of the Preferred Shares in
the fourth quarter of 1996.
During the second quarter, the Company reached comprehensive agreements
with debtor class action plaintiffs and Attorneys General in all fifty
states relating to certain reaffirmation agreements with the Company's
bankrupt credit-card holders that were not filed during the period January 1,
1979 through April 1, 1997. Under these agreements, the Company will use its
best efforts to identify all debtors with unfiled reaffirmation agreements
during the period and remit to them all amounts paid pursuant to such
agreements plus interest at 10% and write-off any remaining balances related
to unfiled reaffirmation agreements. In addition, the Company will provide a
fund of $25 million to be distributed to the debtors participating in the
settlement.
In the second quarter, the Company recorded a pretax charge of $475 million
($320 million after-tax) for the estimated cost of the settlement of this
matter, including related other expenses. Such an estimate is based on
assumptions as to the ultimate outcome of future events and uncertainties.
Actual results could differ from the estimate. See Note 7 for further
discussion. Management expects that this matter will have an adverse impact
on credit card charge-offs and the provision for uncollectible accounts in
subsequent periods.
Other income increased $116 million in the second quarter of 1997 from the
prior year period primarily due to the sale of the Company's interest in
Advantis to IBM for a pretax gain of $150 million.
-13-
ITEM 2. - SEARS, ROEBUCK AND CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE- AND SIX-MONTH PERIODS ENDED JUNE 28, 1997 AND JUNE 29, 1996
International Operations
International operations in the second quarter of 1997 only included the
results of the Company's interest in Sears Canada as a result of the first
quarter sale of the Company's controlling interest in Sears Mexico.
International operations posted second quarter income of $4 million compared
with a loss of $14 million in 1996. For the first half of 1997, international
operations had a loss of $41 million compared with a loss of $28 million in
the first half of 1996. Excluding the loss on the sale of the Company's
controlling interest in Sears Mexico, international operations would have
posted a loss of $5 million in the first half of 1997.
International revenues for the second quarter of 1997 increased 1.3% from
the same period a year ago despite the fact that the segment no longer
includes revenues from Sears Mexico due to the aforementioned sale. Sears
Canada revenues in the second quarter were up 15.2% on strong retail store
and catalog sales performance. For the six-month period, international
revenues were $1.5 billion, up 4.3% from prior year.
Gross margins as a percentage of merchandise sales and services increased
to 26.8% in the second quarter from 23.7% in 1996. Sears Canada gross margin
rates improved substantially in 1997 reflecting reduced logistics costs and
lower markdown rates. For the six-month period, gross margins from
international operations increased 320 basis points to 25.2%.
Selling and administrative expense as a percentage of total revenues
decreased to 23.1% in 1997 from 24.9% in the second quarter of 1996. Sears
Canada selling and administrative rate improved 260 basis points in
the second quarter of 1997 to 23.1% versus 1996 due to cost containment
initiatives coupled with revenue growth and a favorable comparison to
prior year which included a restructuring charge of $10 million (before
minority interest). For the six-month period, the selling and administrative
expense as a percentage of revenues from international operations decreased
80 basis points to 23.1%.
Financial Condition
As of June 28, 1997, domestic merchandise inventories on the first-in,
first-out (FIFO) basis were $5.30 billion, compared with $4.74 billion at
June 29, 1996 and $4.96 billion at December 28, 1996. The increase in the
inventory levels reflects the additional inventory to support higher volume
sales and the growth in new stores, both Full-line and off-the-mall.
Cash flows from operating activities consist primarily of net income
adjusted for certain noncash expense items including depreciation,
reaffirmation charges, and the provision for uncollectible accounts, as well
as changes in receivables, inventories and deferred taxes.
Net cash used in the Company's operating activities totaled $119 million
for the first six months of 1997 compared to net cash provided of $227 million
for the same period in 1996. The change in operating net cash was primarily
due to a higher increase in owned retail customer receivables in 1997 as
compared to 1996 and a smaller decrease in operating liabilities.
-14-
ITEM 2. - SEARS, ROEBUCK AND CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE-AND SIX-MONTH PERIODS ENDED JUNE 28, 1997 AND JUNE 29, 1996
Net cash used in investing activities totaled $188 million for the first
six months of 1997 compared to $505 million in 1996. The decrease in net
cash used resulted from cash provided by the dispositions of the Company's
interest in Advantis and the sale of the Company's controlling interest in
Sears Mexico partially offset by cash used for the acquisition of All
America, MaxServ and Florida Builders Appliances in the first quarter. As
part of its growth strategy, the Company may continue to pursue selective
strategic acquisitions. Cash used for property and equipment related to
the Company's Full-line stores remodeling programs and expansion of its
store base was $461 million in the first six months of 1997 as compared to
$550 million in 1996.
Net cash used in financing activities totaled $105 million for the first
six months of 1997 as compared to cash provided of $186 million in 1996.
The decrease in net cash provided by financing activities resulted from a
reduction in net borrowings partially attributable to the net proceeds
received from the sales of businesses.
-15-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 3, 1997, the Company entered into a settlement of the
consolidated class action lawsuits filed in the United States
Bankruptcy and District Courts for the District of Massachusetts
by certain current and former credit card holders of the Company
who had declared personal bankruptcy (the "Settlement"). These
lawsuits alleged that the Company had violated the United States
Bankruptcy Code and consumer protection laws in various states
through activities related to certain debt reaffirmation agreements.
During the second quarter of 1997, the Company also reached an
agreement in principle with Attorneys General in all fifty states
and signed a consent decree with the Federal Trade Commission
relating to these matters. A civil and criminal investigation of
these matters is ongoing.
The terms of the Settlement, which must still be jointly approved by
the United States Bankruptcy and District Courts for the District of
Massachusetts, require, among other things, the Company to pay the
debtors the amounts collected pursuant to reaffirmation agreements
that were not filed with the bankruptcy courts, including finance
charges, plus 10% interest, and to undergo a review of its credit
bankruptcy reaffirmation procedures. In addition, outstanding
balances relating to unfiled debt reaffirmation agreements will be
written off. The Company will also establish a $25 million fund to
be distributed to the debtors participating in the Settlement. A
joint fairness hearing on the Settlement has been set for October 28,
1997. The agreement in principle reached with the States' Attorneys
General requires, among other things, the Company to establish funds
aggregating $40 million to be shared among the states and used in
part for consumer education.
The Company recorded a pretax charge of $475 million ($320 million on
an after-tax basis) in the second quarter for the estimated cost of
the matters referred to above, including other related expenses. This
estimate is based on management's assumptions as to the ultimate
outcome of future events and uncertainties. Actual results could
differ from this estimate and there can be no assurance that
additional costs will not be incurred.
On May 14, 1997 and June 11, 1997, several stockholders filed actions
on behalf of the Company against its directors and certain of its
officers in the Supreme Court of the State of New York for the
Counties of New York and Westchester, alleging breach of fiduciary
duty for failing to prevent the improper handling of certain of the
Company's debt reaffirmation agreements. The complaints seek
unspecified damages and attorneys' fees and expenses. The various
plaintiffs have agreed to consolidate their complaints and to file an
amended and consolidated complaint in the Supreme Court of the State
of New York for the County of New York. The Company intends to
vigorously defend these allegations.
On June 23, 1997, several stockholders of the Company, purporting to
represent a class, filed a consolidated and amended complaint against
the Company and one of its officers in the United States District
Court for the Northern District of Illinois, alleging violations of
the Securities Exchange Act of 1934 for failure to disclose the
bankruptcy collection practices described above in periodic filings
with the Securities and Exchange Commission prior to April 10, 1997.
The complaint seeks unspecified damages and attorneys' fees and
expenses. The Company has filed a motion to dismiss this case.
The Company is subject to various other legal and governmental
proceedings pending against the Company, many involving routine
litigation incidental to the businesses. Other matters contain
allegations which are nonroutine and involve compensatory, punitive
or antitrust treble damage claims in very large amounts, as well as
other types of relief. The consequences of these matters are not
presently determinable but, in the opinion of management of the
Company after consulting with legal counsel, the ultimate liability
in excess of reserves currently recorded is not expected to have a
material effect on annual results of operations, financial position,
liquidity or capital resources of the Company.
-16-
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders.
On May 8, 1997, the Company held its annual meeting of shareholders
at The Art Institute of Chicago in Chicago, Illinois.
1) Hall Adams, Jr., Alston D. Correll, Jr., Richard C. Notebaert and
Patrick G. Ryan were elected to Class C of the Board for three
year terms expiring at the 2000 annual meting of shareholders.
Hugh B. Price was elected to Class A of the Board for a term
expiring at the 1998 annual meeting of shareholders. The
shareholders approved the recommendation of the Audit Committee
that Deloitte & Touche LLP be appointed auditors for 1997 and
adopted and approved a Sears Employee Stock Purchase Plan. One
shareholder proposal was voted on and defeated. The vote on
these matters was as follows:
Directors
Name For Withheld
Hall Adams, Jr. 336,617,282 4,840,605
Alston D. Correll, Jr. 336,617,282 4,834,642
Richard C. Notebaert 336,617,282 7,136,869
Patrick G. Ryan 336,617,282 4,911,501
Hugh B. Price 336,617,282 5,377,043
2) Approval of appointment of Deloitte & Touche LLP as auditors
for 1997.
For Against Abstain
338,574,781 987,342 1,725,519
3) Sears Employee Stock Purchase Plan.
For Against Abstain Broker Non-Votes
325,165,751 14,023,098 2,097,449 1,344
Shareholder Proposals
4) De-classifying the Board of Directors.
For Against Abstain Broker Non-Votes
144,172,259 152,532,992 5,489,749 39,092,642
-17-
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
An Exhibit Index has been filed as part of this Report on Page E-1.
(b) Reports on Form 8-K.
Current Reports on Form 8-K dated April 10, June 3, June 5 and June
11, 1997.
-18-
SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Sears, Roebuck and Co.
(Registrant)
July 24, 1997 By /s/ James A. Blanda
James A. Blanda
Vice President and Controller
(Principal Accounting
Officer and duly authorized
Officer of Registrant)
E-1
EXHIBIT INDEX
SEARS, ROEBUCK AND CO.
THREE MONTH PERIOD ENDED JUNE 28, 1997
Exhibit No.
3.1 Restated Certificate of Incorporation as in effect on May 13, 1996
(incorporated by reference to Exhibit 3(a) to Registrant's
Registration Statement No. 33-8141).
3.2 By-laws, as amended and restated on May 8, 1997.
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.
10.1 Amendment No. Two, effective April 1, 1997, to The Savings and
Profit Sharing Fund of Sears Employees.
10.2 Sears Executive Retirement Plan Arrangements (SERPA), as amended,
effective March 24, 1997.
10.3 Supplemental Retirement Income Plan (SRIP), as amended, effective
March 24, 1997.
10.4 Consent Order with Federal Trade Commission (incorporated by
reference to Registrant's Form 8-K dated June 5, 1997, File
No. 1-416).
10.5 Stipulation and Agreement of Settlement, dated June 12, 1997,
as amended.
12(a) Computation of ratio of income to fixed charges for Sears,
Roebuck and Co. and consolidated subsidiaries for each of the
five years ended December 28, 1996, and for the six- and twelve-
month periods ended June 28, 1997.
12(b) Computation of ratio of income to combined fixed charges and
preferred share dividends for Sears, Roebuck and Co. and
consolidated subsidiaries for each of the five years ended
December 28, 1996, and for the six- and twelve-month periods ended
June 28, 1997.
15 Acknowledgment of awareness from Deloitte & Touche LLP, dated
July 24, 1997, concerning unaudited interim financial information.
27 Financial Data Schedule.