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Sears Holdings lost more than half a billion in Q2

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Staff Writer | August 25, 2016
Sears Holdings Corporation announced financial results for its second quarter ended July 30, 2016.
Sears Holdings
Sears Holdings    Revenues decreased to $5.7 billion
Revenues decreased approximately $548 million to $5.7 billion for the quarter ended July 30, 2016, compared to revenues of $6.2 billion for the quarter ended August 1, 2015.

The decrease in revenue was primarily driven by a 5.2% decline in comparable store sales during the quarter, which accounted for $240 million of the revenue decline, and by having fewer Kmart and Sears Full-line stores in operation, which accounted for $199 million of the decline.

In addition, Sears Holdings also experienced a decline in revenues from Sears Hometown and Outlet Stores, Inc. of approximately $75 million during the second quarter of 2016.

At Kmart, comparable store sales decreased 3.3%. We experienced comparable store sales increases in several categories this quarter, including toys, jewelry, mattresses and apparel, which were more than offset by declines in the pharmacy, grocery & household and consumer electronics categories.

Sears Domestic comparable store sales decreased 7.0%, primarily driven by decreases in home appliances, apparel, consumer electronics, footwear, lawn & garden and tools.

During the quarter, gross margin decreased $175 million due to the above noted decline in sales, as well as a decline in company's gross margin rate.

As a result of the Seritage and JV transactions, the second quarter of 2016 included additional rent expense of approximately $48 million and the second quarter of 2015 included additional rent expense and assigned sub-tenant rental income of approximately $26 million.

Kmart's gross margin rate for the second quarter improved 10 basis points compared to the prior year second quarter, while Sears Domestic's gross margin rate declined 150 basis points.

Excluding the impact of significant items noted in company's Adjusted Earnings Per Share tables, Kmart's gross margin rate would have declined 10 basis points, while Sears Domestic's gross margin rate would have declined 100 basis points compared to the prior year second quarter.

While Sears Holdings experienced improvement in several categories in company's Kmart format, the overall decline in Kmart's gross margin rate was primarily due to declines in the grocery & household and apparel categories.

The decline in Sears Domestic's gross margin rate was primarily driven by a decline in the apparel category. The margin rate in both segments was negatively impacted by increased promotional markdowns, including an increase in Shop Your Way expense.

Selling and administrative expenses decreased $210 million in the second quarter of 2016 compared to the prior year quarter. Excluding significant items noted in company's Adjusted Earnings Per Share tables, selling and administrative expenses declined $193 million primarily due to a decrease in payroll expense.

In addition, advertising expense declined as Sears Holdings shifted away from traditional advertising to the use of Shop Your Way points expense, which is included within gross margin.

Sears Holdings' effective tax rate for the second quarter of 2016 was an expense of 3.4%.

The application of the requirements for accounting for income taxes in interim periods, after consideration of company's valuation allowance, causes a significant variation in the typical relationship between income tax expense and pretax income.

During the prior year quarter, the company realized a significant tax benefit on the deferred taxes related to indefinite-life assets associated with the properties sold in the transaction with Seritage. As such, company's effective tax rate for the second quarter of 2015 was a benefit of 1,700.0%.

The company reported a net loss attributable to Sears Holdings' shareholders of $395 million for the second quarter of 2016 compared to net income attributable to Holdings' shareholders of $208 million for the prior year period.

Net loss attributable to Sears Holdings' shareholders for the second quarter of 2016 and net income attributable to Holdings' shareholders for the second quarter of 2015 included significant items noted in company's Adjusted Earnings Per Share tables, which aggregated to expense of $178 million and income of $464 million, respectively.

Adjusting for these significant items, Sears Holdings would have reported a net loss attributable to Holdings' shareholders of $217 million and $256 million in the second quarter of 2016 and 2015, respectively.

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