Sears Canada Reports First Quarter Results

TORONTO, May 16, 2012 /CNW/ - Sears Canada Inc. (TSX: SCC) today announced its unaudited first quarter results.  Total revenue for the 13 week period ended April 28, 2012 was $915.1 million compared to $992.5 million for the 13 week period ended April 30, 2011, a decrease of 7.8%.  Same store sales decreased 6.3%.

EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization and Non-Operating Activities) for the quarter this year was a loss of $30.1 million compared to a loss of $22.3 million for the same period last year.   Net earnings for the quarter this year were $93.1 million or 91 cents per share compared to a net loss of $47.0 million or 45 cents per share for the same period last year.  Included in earnings for the quarter this year was a gain of $164.3 million this year representing the pre-tax gain on lease terminations of three stores as announced by the Company on March 2, 2012.

"Although not reflected in our top line sales, there are positive signs of progress in many areas of our business," commented Calvin McDonald, President and Chief Executive Officer, Sears Canada.  "We are making progress on our transformation, having executed two major initiatives during the quarter: the lowering of over 5,000 prices to provide increased value to customers more consistently every day and the launch of our Spring LOOK! Report to demonstrate quality, value and merchandising authority on the season's newest apparel and fashion trends.

"Balancing our value program has had a positive effect on our Monday to Friday sales, with weekday sales increasing and sales of our 'regular-priced' items in our full-line, Sears Home and hometown dealer stores up significantly compared to the first quarter of last year.   In addition, Major Appliances and Mattresses, two hero categories we have aggressively marketed, continue to perform better than last year, achieving sales growth in the quarter. These are all positive signs of some core business indicators getting better.

"In addition, the Company has prudently managed expenses during the quarter resulting in operating expense reductions of 5.9% compared to the first quarter of last year."

As expected, total-week net sales for the quarter were impacted negatively by the price rebalancing initiative, as the Company continues to instill more day-in and day-out value across the enterprise.  Factors adversely impacting revenue for the quarter were:

  • The reduction of merchandise offerings in non-strategic categories
  • Lower sales of clearance merchandise, the result of less clearance inventory and reduced promotional activity on clearance merchandise
  • The reduction in catalogue pages and distribution

"We will continue to roll out our transformation initiatives, focus on improved management of inventory levels in our apparel businesses and adjust our weekend promotional programs for improved customer response to our Saturday-Sunday offerings," added Mr. McDonald.

This release contains information which is forward-looking and is subject to important risks and uncertainties. Forward-looking information concerns the Company's future financial performance, business strategy, plans, goals and objectives.  Factors which could cause actual results to differ materially from current expectations include, but are not limited to: the ability of the Company to successfully implement its cost reduction, productivity improvement and strategic initiatives and whether such initiatives will yield the expected benefits; the results achieved pursuant to the Company's long-term marketing and servicing alliance with JPMorgan Chase Bank, N.A.;  general economic conditions; competitive conditions in the businesses in which the Company participates; changes in consumer spending; seasonal weather patterns; customer preference toward product offerings; changes in the Company's relationship with its suppliers; interest rate fluctuations and other changes in funding costs; fluctuations in foreign currency exchange rates; the possibility of negative investment returns in the Company's pension plan;  the outcome of pending legal proceedings; and changes in laws, rules and regulations applicable to the Company.  While the Company believes that its forecasts and assumptions are reasonable, results or events predicted in this forward-looking information may differ materially from actual results or events.

Sears Canada is a multi-channel retailer with a network that includes 196 corporate stores, 278 hometown dealer stores, 29 home services showrooms, over 1,500 catalogue and online merchandise pick-up locations, 105 Sears Travel offices and a nationwide home maintenance, repair, and installation network. The Company also publishes Canada's most extensive general merchandise catalogue and offers shopping online at www.sears.ca.





SEARS CANADA INC.      
RECONCILIATION OF NET EARNINGS (LOSS) TO OPERATING EBITDA      
For the 13-week periods ended April 28, 2012 and April 30, 2011      
         
Unaudited      
         
(in CAD millions, except per share amounts)   2012 2011
Net earnings (loss)    $ 93.1  $ (47.0)
             
  Gain on lease terminations     (164.3)   -
  Depreciation and amortization expense     28.7   28.6
  Finance costs     4.0   6.8
  Interest income     (0.5)   (0.6)
  Share of income from joint ventures     (3.5)   (1.9)
  Income tax (expense) recovery     12.4   (8.2)
             
Operating EBITDA    $ (30.1)  $ (22.3)
             
             
Basic net earnings (loss) per share    $ 0.91  $ (0.45)
         
   
Operating EBITDA is a measure used by management, the retail industry and investors as an indicator of the Company's performance, ability to incur and service debt, and as a valuation metric.  Operating EBITDA is a non-IFRS measure.

 

TABLE OF CONTENTS
 
Unaudited Condensed Consolidated Financial Statements
      Condensed Consolidated Statements of Financial Position
  Condensed Consolidated Statements of Net Earnings (Loss) and Comprehensive Income (Loss)
  Condensed Consolidated Statements of Changes in Shareholders' Equity
  Condensed Consolidated Statements of Cash Flows
Notes to the Unaudited Condensed Consolidated Financial Statements
  Note 1:    General information
  Note 2:    Significant accounting policies
  Note 3:    Issued standards not yet adopted
  Note 4:    Critical accounting judgments and key sources of estimation uncertainty
  Note 5:    Cash and cash equivalents and interest income
  Note 6:    Inventories
  Note 7:    Long-term obligations and finance costs
  Note 8:    Capital stock
  Note 9:    Revenue
  Note 10:  Retirement benefit plans
  Note 11:  Depreciation and amortization expense
  Note 12:  Gain on lease terminations
  Note 13:  Assets and liabilities held for sale
  Note 14:  Financial instruments
  Note 15:  Contingent liabilities
  Note 16:  Net earnings (loss) per share
  Note 17:  Income taxes
  Note 18:  Events after the reporting period
  Note 19:  Approval of unaudited condensed consolidated financial statements
   

SEARS CANADA INC.          
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION        
           
Unaudited          
           
      As at As at As at
    As at January 28, 2012 April 30, 2011 January 29, 2011
(in CAD millions) Notes April 28, 2012 (Restated - Note 2.4.1) (Restated - Note 2.4.1) (Restated - Note 2.4.1)
           
ASSETS          
Current assets          
Cash and cash equivalents  5,14,15  $ 361.6  $ 397.4  $ 198.4  $ 432.3
Accounts receivable, net  14   96.2   116.2   131.1   144.0
Income taxes recoverable      1.5   4.1   1.2   4.5
Inventories 6   883.7   823.9   981.7   953.2
Prepaid expenses      33.3   27.9   39.4   31.8
                   
Assets classified as held for sale 13   31.9   -   -   -
                   
Total current assets     1,408.2   1,369.5   1,351.8   1,565.8
                   
Non-current assets                  
Property, plant and equipment     853.7   872.0   887.0   900.7
Investment property     21.7   21.7   21.7   21.7
Intangible assets     22.5   23.6   23.6   23.5
Goodwill      8.7   8.7   11.2   11.2
Investment in joint ventures      298.8   301.4   309.9   313.3
Deferred tax assets  2.4.1   75.4   84.6   66.8   33.2
Other long-term assets  7,14,17   55.6   49.2   55.5   38.1
                   
Total assets    $ 2,744.6  $ 2,730.7  $ 2,727.5  $ 2,907.5
                   
LIABILITIES                  
Current liabilities                  
Accounts payable and accrued liabilities 14  $ 577.7  $ 576.8  $ 644.8  $ 665.6
Deferred revenue     213.7   208.0   230.2   224.0
Provisions      54.4   64.8   61.1   65.3
Income taxes payable     10.9   1.0   3.1   1.0
Other taxes payable     31.5   42.8   29.5   65.3
Derivative financial liabilities 14   -   -   17.1   3.0
Principal payments on long-term obligations due within one year  7,14   4.9   5.1   5.7   4.7
                   
Liabilities classified as held for sale 13,14   28.4   -   -   -
                   
Total current liabilities     921.5   898.5   991.5   1,028.9
                   
Non-current liabilities                  
Long-term obligations  7,14   23.3   117.6   27.7   124.4
Deferred revenue      88.5   89.2   77.0   77.4
Retirement benefit liability  2.4.1,10   450.0   452.3   333.1   326.2
Deferred tax liabilities 2.4.1   5.4   5.3   5.5   5.5
Other long-term liabilities      73.6   75.8   91.4   84.7
                   
Total liabilities     1,562.3   1,638.7   1,526.2   1,647.1
                   
SHAREHOLDERS' EQUITY                  
Capital stock  8   15.0   15.0   15.4   15.4
Retained earnings 2.4.1,8   1,246.2   1,155.9   1,199.9   1,247.8
Accumulated other comprehensive loss 2.4.1,10   (78.9)   (78.9)   (14.0)   (2.8)
Total shareholders' equity     1,182.3   1,092.0   1,201.3   1,260.4
Total liabilities and shareholders' equity    $ 2,744.6  $ 2,730.7  $ 2,727.5  $ 2,907.5
           
           
The accompanying notes are an integral part of these consolidated financial statements.          
 
 
 
SEARS CANADA INC.      
CONDENSED CONSOLIDATED STATEMENTS OF NET EARNINGS (LOSS)    
  AND COMPREHENSIVE INCOME (LOSS)      
For the 13-week periods ended April 28, 2012 and April 30, 2011      
         
Unaudited      
         
        2011
(in CAD millions, except per share amounts) Notes 2012 (Restated - Note 2.4.1)
         
Revenue 9  $             915.1  $ 992.5
Cost of goods and services sold 6    580.4   625.4
Selling, administrative and other expenses 2.4.1,10,11,14   393.5   418.0
Operating loss     (58.8)   (50.9)
             
Gain on lease terminations 12   164.3   -
Finance costs  7,17   4.0   6.8
Interest income  5   0.5   0.6
Share of income from joint ventures     3.5   1.9
Earnings (loss) before income taxes     105.5   (55.2)
             
Income tax (expense) recovery          
  Current 17   (3.1)   (21.2)
  Deferred 2.4.1,17   (9.3)   29.4
        (12.4)   8.2
Net earnings (loss)      $ 93.1  $ (47.0)
             
Basic net earnings (loss) per share 16  $ 0.91  $ (0.45)
Diluted net earnings (loss) per share 16  $ 0.91  $ (0.45)
             
Net earnings (loss)    $ 93.1  $ (47.0)
             
Other comprehensive income (loss), net of taxes:          
  Mark-to-market adjustment on cash equivalents     0.1   -
  Loss on foreign exchange derivatives     -   (12.2)
  Reclassification to net earnings (loss) of (gain) loss on foreign exchange derivatives     (0.1)   1.0
Other comprehensive loss     -   (11.2)
Comprehensive income (loss)    $ 93.1  $ (58.2)
             
             
The accompanying notes are an integral part of these consolidated financial statements.      
 
 
                         
SEARS CANADA INC.                                    
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN                            
  SHAREHOLDERS' EQUITY                                
For the 13-week periods ended April 28, 2012 and April 30, 2011                            
                                 
Unaudited                              
                                 
(in CAD millions) Notes   Capital stock   Retained
earnings
  Mark-to-market on
short-term
investments within
cash and cash
equivalents
  Foreign exchange
derivatives
designated as cash
flow hedges
  Remeasurement
gains (losses)
  Accumulated other
comprehensive
loss
  Shareholders'
equity
Balance as at January 28, 2012   $ 15.0 $ 1,155.9 $ - $ 0.2 $ (79.1) $ (78.9) $ 1,092.0
                                 
Comprehensive income (loss)                              
  Net earnings         93.1               -   93.1
                                 
Other comprehensive income (loss)                              
  Mark-to-market gain             0.1           0.1   0.1
  Reclassification of gain on foreign exchange derivatives                 (0.1)       (0.1)   (0.1)
Total other comprehensive income (loss)     -   -   0.1   (0.1)   -   -   -
Total comprehensive income (loss)     -   93.1   0.1   (0.1)   -   -   93.1
                                 
  Repurchases of common shares 8   -   (2.8)               -   (2.8)
                                 
Balance as at April 28, 2012   $ 15.0 $ 1,246.2 $ 0.1 $ 0.1 $ (79.1) $ (78.9) $ 1,182.3
                                 
(Restated - Note 2.4.1)                              
Balance as at January 29, 2011   $ 15.4 $ 1,247.8 $ - $ (2.8) $ - $ (2.8) $ 1,260.4
                                 
Comprehensive loss                              
  Net loss         (47.0)               -   (47.0)
                                 
Other comprehensive (loss) income                              
  Loss on foreign exchange derivatives                 (12.2)       (12.2)   (12.2)
  Reclassification of loss on foreign exchange derivatives                 1.0       1.0   1.0
Total other comprehensive loss     -   -   -   (11.2)   -   (11.2)   (11.2)
Total comprehensive loss     -   (47.0)   -   (11.2)   -   (11.2)   (58.2)
                                 
  Repurchases of common shares 8   -   (0.9)               -   (0.9)
                                 
Balance as at April 30, 2011   $ 15.4 $ 1,199.9 $ - $ (14.0) $ - $ (14.0) $ 1,201.3
                                 
                                 
The accompanying notes are an integral part of these consolidated financial statements.                            
                     
                     
 
SEARS CANADA INC.      
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS      
For the 13-week periods ended April 28, 2012 and April 30, 2011      
         
Unaudited      
         
        2011
(in CAD millions) Notes 2012 (Restated - Note 2.4.1)
Cash flow used for operating activities      
  Net earnings (loss)    $                  93.1  $ (47.0)
  Adjustments for:          
    Depreciation and amortization expense 11   28.7   28.6
    Gain on disposal of property, plant and equipment     (0.3)   (0.2)
    Gain on lease terminations 12   (164.3)   -
    Finance costs 7   4.0   6.8
    Interest income 5   (0.5)   (0.6)
    Share of income from joint ventures     (3.5)   (1.9)
    Retirement benefit plans expense 10   7.8   7.7
    Short-term disability expense 10   2.5   2.4
    Income tax (expense) recovery 17   12.4   (8.2)
  Interest received 5   0.5   0.7
  Interest paid 7   (1.5)   -
  Retirement benefit plans contributions 10   (12.4)   (2.7)
  Income tax refunds (payments), net 17   7.8   (19.7)
  Changes in non-cash working capital     (65.6)   (71.1)
  Changes in long-term assets and liabilities     (2.0)   (7.7)
        (93.3)   (112.9)
Cash flow generated from (used for) investing activities        
  Purchases of property, plant and equipment and intangible assets     (13.2)   (16.3)
  Proceeds from sale of property, plant and equipment     0.5   0.3
  Proceeds from lease terminations 12   170.0   -
  Dividends received from joint ventures      6.3   6.7
        163.6   (9.3)
Cash flow used for financing activities          
  Interest paid on finance lease obligations 7   (0.5)   (0.6)
  Repayment of long-term obligations     (134.2)   (110.8)
  Proceeds from long-term obligations     31.7   1.9
  Repurchases of common shares 8   (2.9)   (0.9)
        (105.9)   (110.4)
             
Decrease in cash and cash equivalents    $ (35.6)  $ (232.6)
             
Effect of exchange rate on cash and cash equivalents at end of period     (0.2)   (1.3)
             
Cash and cash equivalents at beginning of period    $ 397.4  $ 432.3
Cash and cash equivalents at end of period    $ 361.6  $ 198.4
         
         
The accompanying notes are an integral part of these consolidated financial statements.      
 
 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. General information

Sears Canada Inc. is incorporated in Canada. The address of its registered office and principal place of business is 290 Yonge Street, Suite 700, Toronto, Ontario, Canada M5B 2C3.  The principal activities of Sears Canada Inc. and its subsidiaries (the "Company") are disclosed in Management's Discussion and Analysis. The immediate parent of the Company is Sears Holdings Corporation ("Sears Holdings"), incorporated in the U.S. in the state of Delaware. The ultimate controlling party of the Company is ESL Investments, Inc. through Sears Holdings, also incorporated in the U.S. in the state of Delaware.

2. Significant accounting policies

2.1 Statement of compliance

The unaudited condensed consolidated financial statements of the Company for the 13-week period ended April 28, 2012 (the "Financial Statements") have been prepared in accordance with IAS 34, Interim Financial Reporting ("IAS 34"), and therefore, do not contain all disclosures required by International Financial Report Standards ("IFRS") for annual financial statements.  Accordingly, these Financial Statements should be read in conjunction with the Company's most recently prepared audited annual consolidated financial statements for the 52-week period ended January 28, 2012 (the "2011 Annual Financial Statements"), prepared in accordance with the standards and interpretations issued by the International Accounting Standards Board ("IASB").  These include IFRS, International Accounting Standards ("IAS") and the interpretations of the International Financial Reporting Interpretations Committee ("IFRIC") and the Standing Interpretations Committee ("SIC"), which were effective and applicable to the Company as at the end of fiscal 2011.

2.2 Basis of preparation and presentation

The principal accounting policies of the Company have been applied consistently in the preparation of these Financial Statements for all periods presented.  These Financial Statements follow the same accounting policies and methods of application as those used in the preparation of the 2011 Annual Financial Statements except for the employee benefits accounting policies and financial instrument disclosures, as discussed in Note 2.4.  The Company's significant accounting policies are described in Note 2 of the 2011 Annual Report.

The Company's Financial Statements incorporate the financial statements of the Company as well as all of its subsidiaries.  Real estate joint venture investments are accounted for using the equity method of accounting (described in Note 2.13 of the 2011 Annual Report).  Subsidiaries include all entities where the Company has the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities.  All intercompany balances and transactions, and any unrealized income and expenses arising from intercompany transactions, are eliminated in the preparation of these Financial Statements.

The fiscal year of the Company consists of a 52 or 53-week period ending on the Saturday closest to January 31. The 13-week periods presented in these Financial Statements reflect the first quarter of fiscal 2012 ending April 28, 2012 and the first quarter of fiscal 2011 ending April 30, 2011.

The Company's Financial Statements are presented in Canadian dollars, which is the Company's functional currency.

2.3 Seasonality

The Company's operations are seasonal in nature. Accordingly, merchandise and service revenues, as well as performance payments received from JPMorgan Chase & Co, N.A. (Toronto Branch) ("JP Morgan Chase") under the long-term credit card marketing and servicing alliance, will vary by quarter based on consumer spending behaviour. Historically, the Company's revenues and earnings are highest in the fourth quarter due to the holiday season. The Company is able to adjust certain variable costs in response to seasonal revenue patterns; however, costs such as occupancy are fixed, causing the Company to report a disproportionate level of earnings in the fourth quarter. This business seasonality results in quarterly performance that is not necessarily indicative of the year's performance.

2.4 Changes in accounting policies

2.4.1 IAS 19 (Revised), Employee Benefits ("IAS 19")

The Company has elected to early adopt IAS 19 (Revised).  On June 16, 2011, the IASB issued amendments to IAS 19 which included the elimination of the "corridor approach," which is the option to defer and amortize the recognition of actuarial gains and losses.  The significant amendments to IAS 19 are as follows:

  • The "corridor approach" is to be replaced with full and immediate recognition of actuarial gain and loss remeasurements in "Other comprehensive (loss) income" ("OCI");
  • Retirement benefit costs are to consist of service costs, net interest and remeasurements, with remeasurements being recorded in OCI;
  • Past service costs are to be recognized immediately in the Consolidated Statements of Net Earnings (Loss);
  • Expected returns on plan assets will no longer be recognized in profit or loss. Instead, interest income on plan assets, calculated using the discount rate used to measure the pension obligation, will be recognized in the Consolidated Statements of Net Earnings (Loss),
  • Plan administration costs are to be expensed as incurred; and
  • Disclosures relating to retirement benefit plans will be enhanced and will include discussions on risk associated with each plan, an explanation of items recognized in the consolidated financial statements and descriptions of the amount, timing and uncertainty on the Company's future cash flows.

The amendments to IAS 19 are effective for annual periods beginning on or after January 1, 2013 with early adoption permitted. The amendments are required to be applied retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. As discussed above, the Company has elected to early adopt the amendments to IAS 19, and as such, the Company has restated the assets and liabilities, and income and expenses, for the 52-week period ended January 28, 2012, including the opening balance of "Retained earnings" and the opening assets and liabilities disclosed in the Consolidated Statement of Financial Position as at January 29, 2011, as though these amendments had always applied.

Restatement of prior year comparatives

A summary of the impact arising from the application of the change in accounting policy is as follows:

   
Consolidated Statements of Financial Position  
(Increase (decrease) in CAD millions) As at
January 28, 2012
As at
April 30, 2011
As at
January 29, 2011
       
  Retirement benefit asset  $ (187.7)  $ (193.1)  $ (197.4)
  Retirement benefit liability   308.2   206.2   205.3
Net change to retirement benefit asset and liability   (495.9)   (399.3)   (402.7)
             
  Deferred tax assets   84.0   66.1   32.7
  Deferred tax liabilities   (43.6)   (36.7)   (71.0)
Net change to deferred tax assets and liabilities   127.6   102.8   103.7
             
Accumulated other comprehensive loss   (79.1)   -   -
Retained earnings   (289.2)   (296.5)   (299.0)
             
             
Consolidated Statements of Net Earnings (Loss) and Comprehensive Income (Loss)    
       
(Increase (decrease) in CAD millions, except per share amounts) 13-Week
Period Ended
April 28, 2012
13-Week
Period Ended
April 30, 2011
52-Week
Period Ended
January 28, 2012
       
Selling, administrative and other expenses  $ (6.1)  $ (3.3)  $ (13.2)
Earnings before income taxes   6.1   3.3   13.2
Deferred income tax expense   1.6   0.8   3.4
             
Net earnings   4.5   2.5   9.8
             
Basic net earnings per share  $ 0.04  $ 0.02  $ 0.09
Diluted net earnings per share  $ 0.04  $ 0.02  $ 0.09
             
Other comprehensive loss   -   -   (79.1)
Comprehensive income (loss)   4.5   2.5   (69.3)
           
           
Consolidated Statemens of Cash Flows          
(Increase (decrease) in CAD millions) 13-Week
Period Ended
April 28, 2012
13-Week
Period Ended
April 30, 2011
52-Week
Period Ended
January 28, 2012
       
Net earnings  $ 4.5  $ 2.5  $ 9.8
Retirement benefit plans expense   (6.1)   (3.3)   (13.2)
Income tax expense   1.6   0.8   3.4
       
       

Please refer to Note 10 for fully restated prior year comparative figures.

2.4.2 IFRS 7, Financial Instruments: Disclosures ("IFRS 7")

The IASB first amended IFRS 7 on October 7, 2010, to require additional disclosures regarding transfers of financial assets.  These amendments are effective for annual periods beginning on or after July 1, 2011.  The Company has adopted these amendments beginning January 29, 2012.  These amendments do not impact the Company's disclosures for the 13-week period ended April 28, 2012.

3. Issued standards not yet adopted

The Company monitors the standard setting process for new standards issued by the IASB that the Company may be required to adopt in the future. Since the impact of a proposed standard may change during the review period, the Company does not comment publicly until the standard has been finalized and the effects have been determined.

On December 16, 2011, the IASB issued amendments to three previously released standards.  They are as follows:

    IAS 32, Financial Instruments: Presentation ("IAS 32")
    The IASB amended IAS 32 to address inconsistencies in current practice in the application of offsetting criteria.  The amendments provide clarification with respect to the meaning of 'currently has a legally enforceable right of set-off' and that some gross settlement systems may be considered equivalent to net settlement.  These amendments are effective for annual periods beginning on or after January 1, 2014.  The Company is currently assessing the impact of these amendments on the Company's consolidated financial statements and related note disclosures.
     
    IFRS 7, Financial Instruments: Disclosures
    On December 16, 2011, the IASB approved additional amendments to IFRS 7, which establishes disclosure requirements to help users better assess the effect or potential effect of offsetting arrangements on a company's financial position.  These amendments are effective for annual periods beginning on or after January 1, 2013.  The Company will apply these amendments beginning the first quarter of its 2013 fiscal year and is currently assessing the impact on the Company's disclosures.
     
    IFRS 9, Financial Instruments ("IFRS 9")
    The IASB issued IFRS 9 on November 12, 2009, which will ultimately replace IAS 39, Financial Instruments: Recognition and Measurement ("IAS 39").  The replacement of IAS 39 is a three-phase project with the objective of improving and simplifying the reporting for financial instruments.
     
    The first phase of the project provides guidance on the classification and measurement of financial assets.  IFRS 9 was subsequently reissued on October 28, 2010, incorporating new requirements on accounting for financial liabilities.  On December 16, 2011, the IASB amended the mandatory effective date of IFRS 9 to fiscal years beginning on or after January 1, 2015.  The amendment also provides relief from the requirement to restate comparative financial statements for the effect of applying IFRS 9.  The Company is monitoring the impact of amendments to this standard and initial application of this IFRS is expected to impact the classification of a number of financial assets which will require disclosure in the financial statement notes.
     

On June 16, 2011, the IASB amended IAS 1 to require additional disclosures for items presented in OCI on a before-tax basis and requires items to be grouped and presented in OCI based on whether they are potentially reclassifiable to earnings or loss subsequently (i.e. items that may be reclassified and those that will not be reclassified to earnings or loss).  These amendments are effective for annual periods beginning on or after July 1, 2012 and require full retrospective application.  The Company will apply these amendments beginning the first quarter of its 2013 fiscal year and is currently assessing the impact to its consolidated financial statements.

On May 12, 2011, the IASB issued four new standards, all of which are applicable to Annual Reporting periods beginning on or after January 1, 2013.  The Company is currently assessing the impact of these standards on its consolidated financial statements and related note disclosures. The following is a list and description of these standards:

    IFRS 10, Consolidated Financial Statements ("IFRS 10")
    IFRS 10 establishes the standards for the presentation and preparation of consolidated financial statements when an entity controls one or more entities;
     
    IFRS 11, Joint Arrangements ("IFRS 11")
    IFRS 11 replaces IAS 31, Interests in Joint Ventures ("IAS 31") and requires that a party in a joint arrangement assess its rights and obligations to determine the type of joint arrangement and account for those rights and obligations accordingly;
     
    IFRS 12, Disclosure of Involvement with Other Entities ("IFRS 12")
    IFRS 12, along with IFRS 11 described above, replaces IAS 31. IFRS 12 requires the disclosure of information that enables users of financial statements to evaluate the nature of and the risks associated with, the entity's interests in joint ventures and the impact of those interests on its financial position, financial performance and cash flows; and
     
    IFRS 13, Fair Value Measurement ("IFRS 13")
    IFRS 13 provides guidance to improve consistency and comparability in fair value measurements and related disclosures through a 'fair value hierarchy'. This standard applies when another IFRS requires or permits fair value measurements or disclosures. IFRS 13 does not apply for share-based payment transactions, leasing transactions and measurements that are similar to, but are not fair value.
   

4. Critical accounting judgments and key sources of estimation uncertainty

In the application of the Company's accounting policies, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and underlying assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods.

Critical judgments that management has made in the process of applying the Company's accounting policies, key assumptions concerning the future and other key sources of estimation uncertainty that have the potential to materially impact the carrying amounts of assets and liabilities within the next financial year are described in Note 4 of the 2011 Annual Report. The critical accounting judgments and key sources of estimation uncertainty used in the preparation of these Financial Statements are consistent with those as described in Note 4 of the 2011 Annual Report.

5. Cash and cash equivalents and interest income

Cash and cash equivalents

The components of cash and cash equivalents were as follows:

                         
(in CAD millions)     As at
April 28, 2012
    As at
January 28, 2012
    As at
April 30, 2011
    As at
January 29, 2011
Cash   $ 70.0   $ 49.0   $ 64.8   $ 46.3
Cash equivalents                        
  Government treasury bills     239.9     199.9     60.0     323.8
  Bank term deposits     25.0     121.0     27.6     26.9
  Investment accounts     20.3     20.3     20.0     20.0
Restricted cash and cash equivalents     6.4     7.2     26.0     15.3
Total cash and cash equivalents    $ 361.6    $ 397.4    $ 198.4    $ 432.3

The components of restricted cash and cash equivalents are further discussed in Note 15.

Interest income

Interest income related primarily to cash and cash equivalents for the 13-week period ended April 28, 2012 totaled $0.5 million (2011: $0.6 million).  For the same 13-week period, the Company received $0.5 million (2011: $0.7 million) in cash related to interest income.

6. Inventories

The amount of inventories recognized as an expense during the 13-week period ended April 28, 2012 was $527.4 million (2011: $566.8 million), including $22.6 million (2011: $27.7 million) related to write-downs. These expenses are included in "Cost of goods and services sold" in the unaudited Condensed Consolidated Statements of Net Earnings (Loss) and Comprehensive Income (Loss).  There were no reversals of prior period inventory write-downs during the 13-week period ended April 28, 2012 (2011: Nil).

Inventory is pledged as collateral under the Company's revolving credit facility.

7. Long-term obligations and finance costs

Long-term obligations

Total outstanding long-term obligations were as follows:

                         
(in CAD millions)     As at
April 28, 2012
    As at
January 28, 2012
    As at
April 30, 2011
    As at
January 29, 2011
                         
Finance lease obligations - Current     4.9     5.1     5.7     4.7
Total principal payments on long-term obligations
  due within one year
  $ 4.9   $ 5.1   $ 5.7   $ 4.7
                         
Secured revolving credit facility, net   $ -   $ 93.1   $ -   $ 97.4
Finance lease obligations - Non-current     23.3     24.5     27.7     27.0
Total long-term obligations   $ 23.3   $ 117.6   $ 27.7   $ 124.4
                         

The Company's debt consists of a secured credit facility and finance lease obligations.  In September 2010, the Company entered into an $800.0 million senior secured revolving credit facility (the "Credit Facility") with a syndicate of lenders with a maturity date of September 10, 2015.  The Credit Facility is secured with a first lien on inventory and credit card receivables.  Availability under the Credit Facility is determined pursuant to a borrowing base formula.  Availability under the Credit Facility was $580.9 million as at April 28, 2012 (January 28, 2012: $415.1 million, April 30, 2011: $741.8 million, January 29, 2011: $510.6 million).  This availability may be reduced by additional reserves in the borrowing base formula which may be applied by the lenders pursuant to the terms of the Credit Facility.  The Credit Facility contains covenants which are customary for facilities of this nature and the Company was in compliance with all covenants as at April 28, 2012.

As at April 28, 2012, the Company had no borrowings on the Credit Facility and had unamortized transaction costs incurred to establish the Credit Facility of $7.7 million included in "Other long-term assets" in the Consolidated Statements of Financial Position (January 28, 2012: borrowings of $93.1 million, net of unamortized transaction costs of $8.0 million, included in "Long-term liabilities", April 30, 2011: no borrowings and unamortized transaction costs of $9.7 million, included in "Other long-term assets", January 29, 2011: borrowings of $97.4 million, net of unamortized transaction costs of $10.1 million, included in "Long-term liabilities").  In addition, the Company had $6.7 million (January 28, 2012: $6.3 million, April 30, 2011: $6.3 million, January 29, 2011: $6.7 million) of standby letters of credit outstanding against the Credit Facility. Interest on drawings under the Credit Facility is determined based on bankers' acceptance rates for one to three month terms or the prime rate plus a spread.  Interest amounts on the Credit Facility are due monthly and are added to principal amounts outstanding.

As at April 28, 2012, the Company had outstanding merchandise letters of credit of U.S. $6.2 million (January 28, 2012: U.S. $5.5 million, April 30, 2011: U.S. $6.1 million, January 29, 2011: U.S. $6.6 million) used to support the Company's offshore merchandise purchasing program with restricted cash and cash equivalents pledged as collateral.

Finance costs

Interest expense on long-term obligations, including finance lease obligations, the current portion of long-term obligations, amortization of transaction costs and commitment fees on the unused portion of the Credit Facility for the 13-week period ended April 28, 2012 totaled $2.4 million (2011: $2.8 million).  Interest expense is included in "Finance costs" in the unaudited Condensed Consolidated Statements of Net Earnings (Loss) and Comprehensive Income (Loss).  Also included in "Finance costs" for the 13-weeks ended April 28, 2012 was $1.6 million (2011: $4.0 million) of interest on accruals for uncertain tax positions.

The Company's cash payments for interest on long-term obligations, including finance lease obligations, the current portion of long-term obligations and commitment fees on the unused portion of the Credit Facility for 13-week period ended April 28, 2012 totaled $2.0 million (2011: $0.6 million).

8. Capital stock

On May 18, 2010, the Company filed a Normal Course Issuer Bid with the Toronto Stock Exchange ("TSX") that permitted the Company to purchase for cancellation up to 5% of its issued and outstanding common shares ("2010 NCIB").  Under the 2010 NCIB, purchases were allowed to commence on May 25, 2010 and terminated on May 24, 2011.  On May 24, 2011, the Company renewed the Normal Course Issuer Bid with the TSX for the period of May 25, 2011 to May 24, 2012 ("2011 NCIB"). Pursuant to the 2011 NCIB, the Company is permitted to purchase for cancellation up to 5% of its issued and outstanding common shares, equivalent to 5,268,599 common shares based on the common shares issued and outstanding as at May 9, 2011. The Company may not purchase common shares under the 2011 NCIB if such shares cannot be purchased at prices that the Company considers attractive.  Decisions regarding the timing of purchases are based on market conditions and other factors.

During the 13-week period ended April 28, 2012, 235,763 shares were purchased for $2.9 million (2011: 45,100 shares were purchased for $0.9 million) and cancelled. The impact of the share repurchases for the 13-week period was a decrease to "Capital stock" of less than $0.1 million (2011: less than $0.1 million) and a decrease to "Retained earnings" of $2.8 million (2011: $0.9 million). As at April 28, 2012, a total of 5,109,063 shares had been purchased for $87.9 million and cancelled under the 2010 and 2011 NCIB resulting in a total decrease to date of $0.7 million in "Capital stock" and $87.2 million in "Retained earnings."

As at the end of April 28, 2012, 102,512,532 common shares (January 28, 2012: 102,748,295, April 30, 2011: 105,371,995, January 29, 2011: 105,417,095) were issued and outstanding.  Sears Holdings, the controlling shareholder of the Company, is the beneficial holder of 97,341,670, or 95.0%, of the common shares of the Company as at April 28, 2012 (January 28, 2012: 97,341,670, or 94.7%, April 30, 2011: 97,341,670, or 92.4%, January 29, 2011: 97,341,670, or 92.3%). The issued and outstanding shares are fully paid and have no par value.

9. Revenue

The components of the Company's revenue were as follows:

                 
(in CAD millions)       13-Week
Period Ended
April 28, 2012
      13-Week
Period Ended
April 30, 2011
Sale of goods      $ 797.9      $ 873.7
Service revenue       80.5       79.4
Commission revenue       25.7       27.9
Licensee fee revenue       7.3       7.6
Other       3.7       3.8
Total revenue      $ 915.1      $ 992.4

10. Retirement benefit plans

The Company currently maintains a defined benefit registered pension plan and a defined contribution registered pension plan ("Registered Retirement Plans") which covers eligible, regular full-time employees as well as some of its part-time employees.  The defined benefit plan provides pensions based on length of service and final average earnings.  In addition to a registered retirement savings plan, the pension plan includes a non-registered supplemental arrangement in respect to the defined benefit plan ("Non-registered Pension Plan"). The non-registered portion of the plan is maintained to enable certain employees to continue saving for retirement in addition to the registered limit as prescribed by the Canada Revenue Agency.  The Company also maintains a defined benefit non-pension post retirement plan which provides life insurance, medical and dental benefits to eligible retired employees through a health and welfare trust (''Other Benefits Plan'').

Risks associated with retirement benefit plans

There is no assurance that the Company's retirement benefit plans will be able to earn the assumed rate of return.  New regulations and market driven changes may result in changes in the discount rates and other variables which would result in the Company being required to make contributions in the future that differ significantly from the estimates. Management is required to use assumptions to account for the plans in conformity with IFRS. However, actual future experience will differ from these assumptions giving rise to actuarial gains or losses. In any year, actual experience differing from the assumptions may be material.

Plan assets consist primarily of cash, alternative investments and marketable equity and fixed income securities.  The value of the marketable equity and fixed income investments will fluctuate due to changes in market prices.  Plan obligations and annual pension expense are determined by independent actuaries and through the use of a number of assumptions.  Although the Company believes that the assumptions used in the actuarial valuation process are reasonable, there remains a degree of risk and uncertainty which may cause results to differ from expectations.  Significant assumptions in measuring the benefit obligations and pension plan costs include the discount rate and the rate of compensation increase.

Asset-liability matching strategies

The Company has adopted an asset-liability matching strategy in the Other Benefits Plan wherein assets are invested in accordance with a short-term fixed income mandate, primarily bonds with maturities not exceeding four years.  This investment strategy is aligned with the expected use of the assets, which is to fund the Company's retiree health benefits and short-term disability payments within the next four to five years.

Plan amendments, curtailments and settlements

There were no significant plan amendments, curtailments or settlements during the 52-week period ended January 28, 2012 and the 13-week period ended April 28, 2012.

Sensitivity of significant actuarial assumptions

The following table summarizes the sensitivity of significant actuarial assumptions on the Company's defined benefit obligation:

       
      52-Week
Period Ended
January 28, 2012
(Restated - Note 2.4.1) 
            Non-      
      Registered      Registered     Other 
      Retirement      Pension     Benefits
(in CAD millions)     Plans      Plan     Plan
1% increase in discount rate    $ (150.2)    $ (5.0)    $ (31.0)
1% decrease in discount rate     187.7     6.0     37.0
0.5% decrease in compensation increase rate     (19.4)     (0.6)      n/a 
                   

The discount rate used in the above sensitivity analysis has been established based on market yields on high quality corporate bonds in Canada and was 4.70% for fiscal 2011.

Salaries for active employees are based upon historical experience and anticipated future management decisions.  It is assumed to increase at a flat rate plus an age-related merit increase.  The compensation increase rate increase assumption for fiscal 2011 was 3.50%.

The methods and assumptions used in determining the above sensitivity are consistent with the methods and assumptions used in the 2011 Annual Report.

Maturity profile of retirement benefit plan obligations

The weighted average duration of the Registered Retirement Plans, Non-registered Pension Plan and Other Benefit Plan is approximately 11, 10 and 11.5 years, respectively.

The Company's contractual cash flow maturity relating to retirement benefit plan obligation payments is included under "Liquidity Risk" in Note 14.

Retirement benefit plans expense and contributions

The expense for the defined benefit, defined contribution and other benefit plans for the 13-week period ended April 28, 2012 was $2.5 million (2011: $2.0 million), $2.3 million (2011: $2.6 million) and $3.0 million (2011: $3.1 million), respectively.  Not included in total retirement benefit plans expense for the 13-week period are short-term disability payments of $2.5 million (2011: $2.4 million) that were paid from the other benefit plan.  These expenses are included in "Selling, administrative and other expenses" in the Condensed Consolidated Statements of Net Earnings (Loss) and Comprehensive Income (Loss).

Total payments relating to cash contributed by the Company to its defined benefit, defined contribution and other benefit plans for the 13-week period ended April 28, 2012 were $12.4 million (2011: $2.7 million).

Restatement due to adoption of IAS 19

The Company has elected to early adopt the amendments to IAS 19 beginning January 29, 2012, with retrospective application to prior reporting periods.  A description of the nature of the change in accounting policy and a summary of its impact to the Company's consolidated financial statements are included in Note 2.4.1.

The following annual disclosures have been restated to comply with the amendments to IAS 19.

i) Retirement benefit asset and liability

                  52-Week
Period Ended
January 28, 2012
                  (Restated - Note 2.4.1)
            Non-            
      Registered      Registered     Other       
      Retirement      Pension     Benefits      
(in CAD millions)     Plans      Plan     Plan     Total
                         
Defined benefit plan assets                        
  Fair value, beginning balance    $ 1,241.7    $ 47.4    $ 89.9    $ 1,379.0
  Actual return on plan assets     50.0     1.0     3.1     54.1
  Employer contributions     0.9     6.4     -     7.3
  Administrative expenses     (0.5)     -     (0.1)     (0.6)
  Benefits paid1     (113.2)     (5.5)     (24.2)     (142.9)
Fair value of plan assets, ending balance    $ 1,178.9     49.3     68.7     1,296.9
                         
Defined benefit plan obligations                        
  Accrued obligations, beginning balance2    $ 1,354.7   $ 47.8   $ 302.7   $ 1,705.2
  Total current service cost     0.9     -     -     0.9
  Interest cost     70.9     2.5     15.8     89.2
  Benefits paid     (113.2)     (5.5)     (16.4)     (135.1)
  Actuarial losses      64.4     5.3     19.3     89.0
Accrued plan obligations, ending balance    $ 1,377.7     50.1     321.4     1,749.2
Retirement benefit plan asset (liability) at end of fiscal year, net    $ (198.8)    $ (0.8)    $ (252.7)    $ (452.3)
                         
The retirement benefit asset (liability) is included in the
Company's Consolidated Statements of Financial
Position as follows:    
                       
                         
Retirement benefit asset    $ -    $ -    $ -    $ -
Retirement benefit liability    $ (198.8)   $ (0.8)    $ (252.7)    $ (452.3)
Retirement benefit plan liability at end of fiscal year   $ (198.8)   $ (0.8)    $ (252.7)    $ (452.3)

1  Benefits paid from the funded assets include retiree benefits and short-term disability of active associates. Other benefits, consisting of health and dental claims for active employees, are paid directly by the Company.    
Accrued benefit obligation represents the actuarial present value of benefits attributed to associate service rendered to a particular date.      
 

 

ii) Retirement benefit plans expense

             
            52-Week
Period Ended
January 28, 2012
(Restated - Note 2.4.1)
                      Non-                
              Registered      Registered     Other      
              Retirement      Pension     Benefits      
(in CAD millions)             Plans     Plan     Plan     Total
Current service cost            $ 0.9   $ -    $ -   $ 0.9
Interest cost           70.9     2.5     15.8     89.2
Interest income on plan assets         (64.8)     (2.6)     (4.1)     (71.5)
Administrative expenses             0.5     -     0.1     0.6
Net defined benefit plans expense (income)             7.5     (0.1)     11.8     19.2
Net defined contribution plan expense             10.7     -     0.3     11.0
Total retirement benefit plans expense (income)1            $ 18.2   $ (0.1)   $ 12.1    $ 30.2

1 Not included in total expense recognized, are short-term disability payments of $8.4 million that were paid
from the health and welfare trust.    
  Both short-term disability and the retirement benefit plans expense are included in "Selling, administrative and other
expenses" in the Company's Consolidated Statements of Net Earnings (Loss) and Comprehensive Income (Loss). 
   

 

iii) Remeasurements of the net defined retirement benefit liability are as follows:

52-Week
Period Ended
January 28, 2012
(Restated - Note 2.4.1)
            Non-            
              Registered     Registered     Other       
              Retirement     Pension     Benefits      
(in CAD millions)             Plans     Plan     Plan     Total
Actuarial loss on difference between interest income and actual return on plan assets       $ (14.8)    $ (1.6)   $ (1.0)    $ (17.4)
Actuarial gain (loss) due to change in demographic assumptions             19.0     0.3     (0.6)     18.7
Actuarial loss due to change in economic assumptions             (108.6)     (3.6)     (27.0)     (139.2)
Actuarial gain (loss) due to all other experiences             25.2     (2.0)     8.2     31.4
Total pre-tax remeasurement losses           $ (79.2)   $ (6.9)   $ (20.4)   $ (106.5)
                 
Income tax recovery on remeasurement losses               27.4
Total remeasurement losses, net of income taxes1                $ (79.1)

1 Total remeasurement losses, net of income taxes, are included in "Other comprehensive loss" in the Company's Consolidated Statements of Net Earnings (Loss) and Comprehensive Income (Loss).
 

 

The actuarial loss associated with changes in economic assumptions is due to changes in the discount rate.  The discount rate as at January 28, 2012 decreased 0.7% for the Registered Retirement Plans and the Non-registered Pension Plan, and 0.8% for the Other Benefits Plan.  This loss is in approximate proportion to the impact of a 1.0% decrease in discount rates, as shown in the sensitivity analysis above.

iv) Actuarial assumptions

The adoption of the amendments to IAS 19 resulted in a change in the following significant actuarial assumption:

     
    52-Week
Period Ended
January 28, 2012
(Restated - Note 2.4.1) 
        Non-    
    Registered    Registered   Other 
    Retirement    Pension   Benefits
    Plans    Plan   Plan
             
Expected long-term rate of return on plan assets
used in calculation of benefit plans expense
  4.7%   4.7%   4.6%
         

11. Depreciation and amortization expense

The components of the Company's depreciation and amortization expense, included in "Selling, administrative and other expenses", were as follows:

       
(in CAD millions)     13-Week
Period Ended
April 28, 2012
    13-Week
Period Ended
April 30, 2011
Property, plant and equipment    $ 26.3    $ 26.7
Intangible assets     2.4     1.9
Total depreciation and amortization expense    $ 28.7    $ 28.6
 

12. Gain on lease terminations

On March 2, 2012, the Company entered an agreement to surrender and terminate early the operating leases on three properties.  On the closing date, April 20, 2012, the Company received cash proceeds of $170.0 million for the surrender of the three leases, resulting in a pre-tax gain of $164.3 million for the 13-week period ended April 28, 2012, net of transaction costs of $5.7 million, including the derecognition of leasehold improvements.  The Company plans to exit all three properties by October 31, 2012.   The Company may incur additional expenses relating to these sales in future periods.

13. Assets and liabilities held for sale

Assets and liabilities held for sale

On April 24, 2012, the Company entered an agreement to sell the operations of its subsidiary, Cantrex Group Inc. ("Cantrex") to Nationwide Marketing Group, LLC (the "purchaser") for $3.5 million, equal to the net carrying amount of specified Cantrex assets and liabilities to be sold. The closing date of the transaction was April 29, 2012. As at the end of April 28, 2012, the assets and liabilities of Cantrex held for sale have been separately reclassified on the Company's unaudited Condensed Consolidated Statements of Financial Position. The major classes of assets and liabilities classified as held for sale were as follows:

       
(in CAD millions)     As at
April 28, 2012
       
  Accounts receivable, net    $ 30.8
  Inventories     0.2
  Prepaid expenses     0.3
Current assets classified as held for sale     31.3
       
  Property, plant and equipment     0.6
Non-current assets classified as held for sale     0.6
Assets classified as held for sale    $ 31.9
       
  Accounts payable    $ 25.1
  Accrued liabilities     3.3
Current liabilities classified as held for sale     28.4
       
Non-current liabilities classified as held for sale     -
Liabilities classified as held for sale   $ 28.4
     

14. Financial instruments

In the ordinary course of business, the Company enters into financial agreements with banks and other financial institutions to reduce underlying risks associated with interest rates and foreign currency.  The Company does not hold or issue derivative financial instruments for trading or speculative purposes.

Financial instrument risk management

The Company is exposed to credit, liquidity and market risk as a result of holding financial instruments.  Market risk consists of foreign exchange and interest rate risk.

Credit risk

Credit risk refers to the possibility that the Company can suffer financial losses due to the failure of the Company's counterparties to meet their payment obligations.  Exposure to credit risk exists for derivative instruments, cash and cash equivalents, accounts receivable and investments included in other long-term assets.

Cash and cash equivalents, accounts receivable, derivative financial assets and investments included in other long-term assets of $489.9 million as at April 28, 2012 (January 28, 2012: $514.9 million, April 30, 2011: $330.9 million, January 29, 2011: $577.6 million) expose the Company to credit risk should the borrower default on maturity of the cash and cash equivalents, accounts receivable, derivative financial asset or investment. The Company manages its exposure to credit risk from cash and cash equivalents, derivative financial assets and investments included in other long-term assets through policies that require borrowers to have a minimum credit rating of A, and limiting investments with individual borrowers at maximum levels based on credit rating.

The Company is exposed to minimal credit risk from customers as a result of ongoing credit evaluations and review of accounts receivable collectability.  As at April 28, 2012, approximately 40.0% (January 28, 2012: 26.5%, April 30, 2011: 31.9%, January 29, 2011: 38.7%) of the Company's accounts receivable was due from two customers who were current on their accounts (January 28, 2012 and April 30, 2011: one customer who was current on their account, January 29, 2011: two customers who were current on their accounts).

Liquidity risk

Liquidity risk is the risk that the Company may not have cash available to satisfy financial liabilities as they come due.  The Company actively maintains access to adequate funding sources to ensure it has sufficient available funds to meet current and foreseeable financial requirements at a reasonable cost.

The following table summarizes the carrying amount and the contractual maturities of both the interest and principal portion of significant financial liabilities as at April 28, 2012:

   
            Contractual Cash Flow Maturities
(in CAD millions)     Carrying
Amount
    Total     Within
1 year
    1 year to
3 years
    3 years to
5 years
    Beyond
5 years
Accounts payable and accrued liabilities    $ 577.7    $ 577.7   $ 577.7    $ -    $ -    $ -
Liabilities classified as held for sale     28.4     28.4     28.4     -     -     -
Long-term obligations including payments due within one year1     28.2     36.5     6.6     10.1     6.3     13.5
Operating lease obligations2      n/a      507.4     103.2     156.7     94.5     153.0
Royalties2      n/a      2.8     1.3     1.5     -     -
Retirement benefit plan obligations3     450.0     136.7     29.3     58.6     48.8     -
    $ 1,084.3   $ 1,289.5    $ 746.5   $ 226.9   $ 149.6   $ 166.5

1 Cash flow maturities relating to long-term obligations, including payments due within one year, include annual interest on finance lease obligations at an average rate of 6.7%.  The Company had no borrowings on the
Credit Facility as at April 28, 2012.
2 Operating lease obligations and royalties are not reported on the Consolidated Statements of Financial Position.
3 Retirement benefit plan obligation payments are based on the Company's most recent valuation, completed as at December 31, 2010.

 

Management believes that cash on hand, future cash flows generated from operations and availability of current and future funding will be adequate to support these financial liabilities.

Market risk

Market risk exists as a result of the potential for losses caused by changes in market factors such as foreign currency exchange rates, interest rates and commodity prices.

Foreign exchange risk

The Company may enter into foreign exchange contracts to reduce the foreign exchange risk with respect to U.S. dollar denominated assets and liabilities and purchases of goods or services.

  • As at April 28, 2012, there were no option contracts outstanding (January 28, 2012: no option contracts outstanding, April 30, 2011: notional value of option contracts outstanding was U.S. $279.0 million, January 29, 2011: notional value of option contracts outstanding was U.S. $372.0 million) and therefore, no derivative financial assets nor derivative financial liabilities were recognized in the unaudited Condensed Consolidated Statements of Financial Position (January 28, 2012: Nil, April 30, 2011: $17.1 million included in "Derivative financial liabilities", January 29, 2011: $3.0 million included in "Derivative financial liabilities").  The intrinsic value portion of derivatives is designated as a cash flow hedge for hedge accounting treatment under IAS 39.  Option contracts are intended to reduce the foreign exchange risk with respect to anticipated purchases of U.S. dollar denominated goods and services, including goods purchased for resale ("hedged item").

  • As at April 28, 2012, there were also no swap contracts outstanding (January 28, 2012: no swap contracts outstanding, April 30, 2011: notional value of swap contracts outstanding was U.S. $6.2 million, January 29, 2011: notional value of swap contracts outstanding was U.S. $6.8 million) and therefore, no derivative financial assets nor derivative financial liabilities were recognized in the unaudited Condensed Consolidated Statements of Financial Position (January 28, 2012: Nil, April 30, 2011: less than $0.1 million included in "Derivative financial assets", January 29, 2011: less than $0.1 million included in "Derivative financial liabilities").  Swap contracts are intended to reduce the foreign exchange risk on U.S. dollar denominated short-term investments pledged as collateral for letter of credit obligations issued under the Company's offshore merchandise purchasing program.

While the notional principal of outstanding financial instruments is not recorded on the unaudited Condensed Consolidated Statements of Financial Position, the fair value of any outstanding contracts is included in "Derivative financial assets" or "Derivative financial liabilities", depending on the fair value, and classified as current or long-term, depending on the maturities of the outstanding contracts. Changes in the fair value of the designated portion of contracts are included in OCI for cash flow hedges, to the extent the designated portion of the hedges continue to be effective, with the ineffective portion included in "Selling, administrative and other expenses" in the unaudited Condensed Consolidated Statements of Net Earnings (Loss) and Comprehensive Income (Loss).  Amounts previously included in OCI are reclassified to "Cost of goods and services sold" in the same period in which the hedged item impacts net earnings (loss).

For the 13-week period ended April 28, 2012, the Company recorded a gain of $1.8 million (2011: gain of $2.6 million) relating to the translation or settlement of U.S. dollar denominated monetary items consisting of cash and cash equivalents, accounts receivable and accounts payable, excluding the reclassification from OCI of the gain (loss) on foreign exchange derivatives designated as cash flow hedges.

The period end exchange rate was 1.0194 U.S. dollar to Canadian dollar.  A 10% appreciation or depreciation of the U.S. and/or the Canadian dollar exchange rate was determined to have an after tax impact on net earnings (loss) of $7.3 million for U.S. dollar denominated balances included in cash and cash equivalents, accounts receivable and accounts payable.

Interest rate risk

From time to time, the Company enters into interest rate swap contracts with approved financial institutions to manage exposure to interest rate risks.  As at April 28, 2012, the Company had no interest rate swap contracts in place.

Interest rate risk reflects the sensitivity of the Company's financial condition to movements in interest rates.  Financial assets and liabilities which do not bear interest or bear interest at fixed rates are classified as non-interest rate sensitive.

Cash and cash equivalents and borrowings under the secured revolving credit facility are subject to interest rate risk.  The total subject to interest rate risk as at April 28, 2012 was a net asset of $362.9 million (January 28, 2012: net asset of $297.7 million, April 30, 2011: net asset of $197.2 million, January 29, 2011: net asset of $322.9 million).  An increase or decrease in interest rates of 0.25% would cause an immaterial after-tax impact on quarterly net earnings (loss).

Classification and fair value of financial instruments

The estimated fair values of financial instruments presented are based on relevant market prices and information available at those dates.  The following table summarizes the classification and fair value of certain financial instruments as at the specified dates. The Company determines the classification of a financial instrument when it is initially recorded, based on the underlying purpose of the instrument. As a significant number of the Company's assets and liabilities, including inventories and capital assets, do not meet the definition of financial instruments, values in the table below do not reflect the fair value of the Company as a whole.

The fair value of financial instruments are classified and measured according to the following three levels, based on the fair value hierarchy.

  • Level 1:  Quoted prices in active markets for identical assets or liabilities
  • Level 2:  Inputs other than quoted prices in active markets that are observable for the asset or liability either directly (i.e. as prices) or indirectly (i.e. derived from prices)
  • Level 3:  Inputs for the asset or liability that are not based on observable market data
                               
(in CAD millions)                            
Classification     Balance Sheet Category     Fair Value
Hierarchy1
  As at
April 28, 2012
  As at
January 28, 2012
  As at
April 30, 2011
  As at
January 29, 2011
                             
Loans and receivables                            
  Cash and cash equivalents and restricted
cash and cash equivalents
    Cash and cash equivalents2     Level 1  $ 101.4  $ 177.2  $ 118.4  $ 88.5
                             
Available for sale                            
  Cash equivalents     Cash and cash equivalents2     Level 2   260.2   220.2   80.0   343.8
  Short-term investments     Short-term investments2     Level 2   -   -   -   -
                               
Fair value through profit or loss                            
  U.S. $ derivative contracts     Derivative financial assets      Level 2   -   -   -   -
  U.S. $ derivative contracts     Derivative financial liabilities     Level 2   -   -   17.1   3.0
  Long-term investments     Other long-term assets     Level 3   1.3   1.3   1.3   1.3

1 Classification of fair values relates to 2012.            
2 Interest income related to cash and cash equivalents and short-term investments is disclosed in Note 5.      
 

 

All other assets that are financial instruments not listed in the chart above have been classified as "Loans and receivables".  All other financial instrument liabilities have been classified as "Other liabilities" and are measured at amortized cost in the unaudited Condensed Consolidated Statements of Financial Position.  The carrying value of these financial instruments approximate fair value given that they are short-term in nature.

During the 13-week period ended April 28, 2012, there were no transfers of financial instruments between fair value levels nor were there any changes in the classification of financial assets.

15. Contingent liabilities

Legal proceedings

In addition to the class action lawsuits described in the 2011 Annual Report, the Company is involved in various legal proceedings incidental to the normal course of business.  The Company is of the view that, although the outcome of such legal proceedings cannot be predicted with certainty, the final disposition is not expected to have a material adverse effect on the Company's unaudited Condensed Consolidated Statements of Financial Position or unaudited Condensed Consolidated Statements of Net Earnings (Loss) and Comprehensive Income (Loss).

Commitments

As at April 28, 2012, cash and cash equivalents that are restricted represent cash and investments pledged as collateral for letter of credit obligations issued under the Company's offshore merchandise purchasing program of $6.4 million (January 28, 2012: $7.2 million, April 30, 2011: $6.1 million, January 29, 2011: $7.1 million), which is the Canadian equivalent of U.S. $6.5 million (January 28, 2012: U.S. $7.2 million, April 30, 2011: U.S. $6.4 million, January 29, 2011: U.S. $7.0 million).   As at April 30, 2011, restricted cash and cash equivalents also included cash deposits pledged as collateral with counterparties relating to outstanding derivative contracts of $17.4 million (January 29, 2011: $5.1 million) and funds held in trust in accordance with regulatory requirements governing advance ticket sales related to Sears Travel of $2.5 million (January 29, 2011: $3.1 million).

Guarantees

The Company has provided the following significant guarantees to third parties:

Royalty License Agreements

The Company pays royalties under various merchandise license agreements, which are generally based on the sale of products.  Certain license agreements require a minimum guaranteed payment of royalties over the term of the contract, regardless of sales. Total future minimum royalty payments under such agreements as at April 28, 2012, are $2.8 million (January 28, 2012: $3.1 million, April 30, 2011: $4.5 million, January 29, 2011: $2.4 million).

Other Indemnification Agreements

In the ordinary course of business, the Company has provided indemnification commitments to counterparties in transactions such as leasing transactions, royalty agreements, service arrangements, investment banking agreements and director and officer indemnification agreements.  The Company has also provided certain indemnification agreements in connection with the sale of the credit and financial services operations in November 2005.  The foregoing indemnification agreements require the Company to compensate the counterparties for costs incurred as a result of changes in laws and regulations, or as a result of litigation or statutory claims, or statutory sanctions that may be suffered by a counterparty as a consequence of the transaction.  The terms of these indemnification agreements will vary based on the contract and typically do not provide for any limit on the maximum potential liability.  Historically, the Company has not made any significant payments under such indemnifications and no amount has been accrued in the unaudited Condensed Consolidated Financial Statements with respect to these indemnification commitments.

16. Net earnings (loss) per share

A reconciliation of the number of shares used in the net (loss) earnings per share calculation is as follows:

             
(Number of shares)     13-Week
Period Ended
April 28, 2012
    13-Week
Period Ended
April 30, 2011
Weighted average number of shares per basic net
(loss) earnings per share calculation
    102,558,643     105,392,253
Effect of dilutive instruments outstanding     -     -
Weighted average number of shares per diluted net
(loss) earnings per share calculation
    102,558,643     105,392,253
             

"Net earnings (loss)" as disclosed in the unaudited Condensed Consolidated Statements of Net Earnings (Loss) and Comprehensive Income (Loss) was used as the numerator in calculating the basic and diluted net earnings (loss) per share. For the 13-week period ended April 28, 2012, 9,920 options were excluded from the calculation of diluted net earnings per share as they were anti-dilutive.  For the 13-week period ended April 30, 2011, the Company incurred a net loss and therefore, all potential common shares were anti-dilutive.

17. Income taxes

The Company's total net cash refunds or payments of income taxes for the 13-week period ended April 28, 2012 were a net refund of $7.8 million (2011: net payment of $19.7 million).

In the ordinary course of business, the Company is subject to ongoing audits by tax authorities.  While the Company believes that its tax filing positions are appropriate and supportable, periodically, certain matters are challenged by tax authorities.  During the 13-week period ended April 28, 2012, the Company recorded a charge of $2.8 million (2011: $9.1 million) for estimated exposure to uncertain tax provisions, comprised of $1.6 million (2011: $4.0 million) of interest in "Finance costs" and $1.2 million (2011: $5.1 million) related to income tax exposure, consisting of a charge of $1.6 million (2011: $17.9 million) to "Income tax (expense) recovery - Current" and a recovery of $0.4 million (2011: $12.8 million) to "Income tax (expense) recovery - Deferred," all included in the unaudited Condensed Consolidated Statements of Net Earnings (Loss) and Comprehensive Income (Loss).  As the Company routinely evaluates and provides for potentially unfavourable outcomes with respect to any tax audits, the Company believes that, other than as noted above, the final disposition of tax audits will not have a material adverse effect on its liquidity, the unaudited Condensed Consolidated Statements of Financial Position or results of operations.

Included in "Other long-term assets" in the unaudited Condensed Consolidated Statements of Financial Position as at April 28, 2012, were receivables of $30.3 million (January 28, 2012: $30.3 million, April 30, 2011: $20.8 million, January 29, 2011: $20.9 million) related to payments made by the Company for tax assessments that are being disputed.

18. Events after the reporting period

On April 29, 2012, the Company received proceeds of $3.5 million for the sale of specified Cantrex assets and liabilities.  As the net carrying amount of assets and liabilities sold equaled the proceeds received, no gain or loss was recognized on the transaction (see Note 13).

19. Approval of unaudited condensed consolidated financial statements

The unaudited Condensed Consolidated Financial Statements were approved by the Board of Directors and authorized for issue on May 15, 2012.

 

SOURCE Sears Canada Inc.



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