Sears Canada

Transcription

Sears Canada

The
Many Sides of SEARS
at a
S E A R S
D E PA R T M E N T S T O R E S
DEALER STORES
ÒSears is now the only full-line department
store in Canada.Ó
Sears has 109 full-line department stores across the country,
ÒThe national resources of
Sears and personal service
from your neighbour.Ó
with the 110th store slated to open in Abbotsford, B.C. in
Dealer stores are independently owned and
1999. 29 stores have been retrofitted to reflect Sears
operated, and offer full catalogue services, a
refreshing new look with a vastly expanded apparel and
large selection of appliances, lawn and garden
home fashion selection.
products and electronics. 14 dealer stores were
opened in 1998 to bring the total to 93. Plans
are to open another 17 dealer stores in 1999.
C A N A D A
I N C.
1 9 9 8
FURNITURE &
APPLIANCE STORES
ÒOffering one of the largest selections of
furniture in Canada.Ó
A n n u a l
Sears sells more furniture than any other single retailer in Canada.
Sears has 20 free-standing furniture stores with 10 more planned
for 1999. 12 of these stores offer both furniture and appliances.
These stores present triple the selection of furniture offered in
R e p o r t
Sears traditional department stores, with the added advantage of
specially trained home decor consultants.
C ATA LO G U E
ÒThe only full-line general merchandise
catalogue in Canada.Ó
Sears published 19 different catalogues in 1998, reaching
4.5 million households. Customers can order by calling
1-800-26-SEARS, the most frequently called number in
SEARS
OUTLET STORES
Canada, or by fax or over the Internet. Sears has 1,900
ÒSears quality at
outlet prices.Ó
catalogue order pick up locations across the country. The
Sears has 12 outlet stores. 4 stores were opened
catalogue offers a department store selection of over
in 1998 featuring a new format with 80,000
50,000 products and services.
sq. ft. The outlet stores offer a wide selection of
merchandise, including in-season clearance.
outside
The
Many Sides of SEARS
at a
S E A R S
DEALER STORES
store in Canada.Ó
C A N A D A
I N C.
1 9 9 8
FURNITURE &
APPLIANCE STORES
A n n u a l
R e p o r t
C ATA LO G U E
SEARS
OUTLET STORES
ÒSears quality at
outlet prices.Ó
outside
Glance
INTERNET
ÒOnly Sears has an existing, nationwide
fulfillment infrastructure to service this
electronic channel.Ó
Sears Internet site delivers a unique selection of
information, answers, products and services. Over 500
products are on sale, or you can order from the catalogue
on-line. Customers can buy services such as travel, flowers,
phone plans, register for wedding or baby gifts and even
take a virtual tour of a Sears furniture store.
SEARS
HOMECENTRAL
ÒA houseful of
services from the
Company you trust.Ó
SEARS
BRAND CENTRAL
Sears offers the broadest range of home repair,
ÒThe major appliance brands you want from the
Company you can rely on .Ó
retailer in Canada at 1-800-4-MY-HOME. Sears
Sears sells more major appliances than any other retailer in
Toronto with a second scheduled for 1999. 30
Canada. With the addition of Maytag in 1998, Sears is the
new Sears Floor Covering Centres will be opened
only retailer in the nation to offer all of the top brands in
in 1999 with plans for 150 within 5 years.
maintenance and renovation services of any
opened its first Sears HomeCentral showroom in
major appliances, including Sears Kenmore, CanadaÕs largest
selling brand. Sears selection is backed by the largest parts
and service operation in Canada with 2400 technicians.
and More...
S E A R S S P E C I A LT Y S E R V I C E S
largest single issue credit card in Canada. More than 75% of Canadian
from hair cutting to driver training, Sears has the largest selection of licensed
households have a Sears Card.
partners of any retailer in Canada.
SEARS CLUB
SEARS CONNECT PHONE PROGRAM
SEARS CARD
With more than 8 million cardholders, this is the
With more than 7 million members, this is the most
With everything
broadly based customer rewards program in Canada. More than 65% of
Sears has become the number one reseller of long distance services
Canadian households are Sears Club members.
in Canada.
SEARS TRAVEL
SEARS
This is one of the largest travel agencies in
Canada, a trusted source for Canadian travellers.
offers Sears Card holders various types of life and property
insurance underwritten by well-known insurance companies, as well as
Sears AutoAssist Club. The Sears Card can also be used with select partner
companies such as Shell and Choice Hotels to earn Sears Club points.
CONTENTS
Sears Canada Annual Report 1998
Sears is CanadaÕs largest single full-line retailer of general merchandise and home-related services, with
full-line department and specialty stores nationwide, complemented by the countryÕs only full-line
general merchandise catalogue. The Company emphasizes quality and service in appealing to a broad
cross-section of Canadian consumers.
The CompanyÕs vision is to be CanadaÕs most successful retailer by providing its customers with
total shopping satisfaction, its associates with opportunities to grow and contribute, and its shareholders with
superior returns on their investment.
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20
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Circle of Confidence
Understanding how Sears anticipates and meets the many
needs of its customers
Innovation Drives
the Brand
Unique ways Sears gets closer to the customer
A Houseful of Services
1-800-4-MY-HOME
Home improvements and repairs all with one call
Answering the Call
Increased catalogue sales driven by new innovations
ChairmanÕs Message
Great Things in Store
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FINANCIAL INFORMATION 1998
24
Eleven Year Summary
25
ManagementÕs Discussion and Analysis
35
Quarterly Results and Common Share
Market Information
36
Statement of Management
Responsibility and AuditorsÕ Report
37
Consolidated Statements of
Financial Position
38
Consolidated Statements of Earnings
38
Retained Earnings
39
Changes in Financial Position
40
Notes to Consolidated Financial
Statements
50
CORPORATE INFORMATION
Corporate Governance
SEARSÉFor the Whole Home
51
Directors and Officers
Navigating a New Retail Landscape
52
Corporate Information
A Spirit of Community
Financial Highlights
Results for the year
1997
(in millions)
Total revenues
$
Interest expense
4,967
$
4,584
86
86
Earnings before income taxes
269
215
Income tax expense
123
99
Net earnings
146
116
Year end position
(in millions)
Working capital
$
898
$
971
Total assets
3,198
3,007
Shareholders’ equity
1,164
1,042
Per share of capital stock
(in dollars)
Net earnings
$
1.38
$
1.10
Dividends declared
0.24
0.24
10.98
9.84
Total
Revenues
Earnings (Loss)
ShareholdersÕ
Equity
(Before Unusual items
and Income Taxes)
5000
300
1200
250
200
1000
4000
150
100
800
50
3000
0
600
-50
2000
88 89 90 91 92 93 94 95 96 97 98
($ millions)
-150
88 89 90 91 92 93 94 95 96 97 98
($ millions)
400
88 89 90 91 92 93 94 95 96 97 98
($ millions)
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FINANCIAL HIGHLIGHTS
1998
For the 52 weeks ended January 2, 1999 and the 53 weeks ended January 3, 1998
3
Letter
toour
shareholders
Paul Walters, Chairman and Chief Executive Officer
with Richard Hosein, Donna Wallace-Harmon and Christina Altomare
from Sears Scarborough, Ontario department store
1998
1998 was another outstanding year for our Company in every respect. Despite a general softening in the
Canadian economy in the latter half of the year, Sears Canada produced its second consecutive year of
record revenues and earnings and continued to gain substantial market share from our competitors.
Total revenues in 1998 increased by $383 million. On a comparable week basis, merchandising revenues
increased by 10.4% on top of the 14.7% gain achieved in 1997. Over the past two years, total revenues have
increased by more than $1 billion dollars.
Earnings have also improved dramatically. In 1998, earnings increased by 25% to $1.38 per share. This
also represents the highest earnings ever achieved in our 46 year history in Canada.
Needless to say, we are all very pleased with our progress in transforming Sears Canada into a Great
Place to Shop, a Great Place to Work and a Great Place to Invest.
4
catalogues, positioning Sears as the only retailer in the country
to offer all of the top brands in major appliances.
We made significant progress in growing our apparel
As always, the dedication of our more than 41,000
business in 1998. The “Softer Side of Sears” enjoyed double
associates is at the core of our success and we are extremely
digit revenue growth representing considerable market share
proud and appreciative of their commitment to place cus-
gains, particularly in women’s and children’s apparel.
tomer satisfaction as their top priority in everything they do.
Our associates have truly accomplished a great deal in
And finally, all Sears associates deserve a pat on the back
for their outstanding commitment to supporting children’s
1998. We have continued to implement our aggressive plan
charities in their respective communities through Sears
to create a brand new Sears through extensive renovations of
“Young Futures” Program. Their efforts have contributed to
our full-line store sales channel.
the more than $2 million dollars donated to provide children
In 1998, we completed major renovations to our
department stores in Laval, Brossard and Anjou, Quebec;
Scarborough, Hamilton, (Limeridge Mall) and Barrie,
with essential resources.
As we approach the new millennium, the consumer
market will be increasingly diverse and fragmented in terms
Ontario; Calgary (Chinook Centre) Alberta; Richmond, and of ethnicity, tastes, motivations and needs. Our challenge
Nanaimo, British Columbia. In addition, we refurbished on
continues to be to micro-market to a more educated
a smaller scale 11 other full-line stores across Canada.
consumer who is short on time, is technologically savvy,
We continued to expand our significant share of the
demands quality and value and craves convenience.
furniture and major appliance segment of the market and
Our unique combination of assets and strengths
in 1998 opened 12 new free-standing stores to bring our
positions us extremely well to respond to these consumer
total to 20.
trends. Our many channels of merchandise and service
In rural Canada, we are expanding our dealer store
presence and, in 1998, we added 14 more stores to this
growing channel, bringing our total to 93 stores. In ad-
distribution are key to building and strengthening the
customer relationship.
The influence of technology will mean the rapid
dition, we added 146 new catalogue order pick-up locations
expansion of E-Commerce, with an increasing number
to our network of 1,900 locations throughout Canada.
of goods for sale in an exciting on-line shopping
In a continued effort to accommodate the needs of the
environment. In addition to being a direct link to and
do-it-for-me home maintenance and repair market, we
from customers, the Internet will be a vital vehicle for
launched Sears HomeCentral, “one number for a houseful
communicating our Company’s ethics, standards and
of services” (1-800-4-MY-HOME), and our latest initiative,
community commitment.
Sears Floor Covering Centres, scheduled to begin opening
Technology will also be used in-store to create easy
early this year. We also launched our biggest Wish Book and
access to time savers such as gift registries or specialty
catalogue contest ever; continued to enhance the benefits of
services such as home decor computer programs, which
using the Sears Card; and delivered state-of-the-art gift
produce take-home pictures of furniture in different fabrics
registry kiosks to all our department stores.
or colours. Technology will allow for the ultimate in
We added the Maytag brand of major appliances to our
already impressive selection of brands at all of our department
targeted marketing. It will enable relationship marketing
that provides merchandise offerings that are specific to
stores, furniture and appliance stores, dealer stores and national each unique customer segment and provide a concise
5
Letter
toour
shareholders
continued
measurement of cost, offering and response. Customer
information and our use of technology will, we believe,
represent one of Sears most valuable sources of
competitive advantage in the future.
As we enter this last year of the 20th century we are
confident that our future at Sears Canada looks very
bright indeed. While the past two years represent
substantial progress for our Company on all fronts, we
recognize that the road to success will always be “under
construction”. While we are proud of our achievements,
we realize that we must rededicate ourselves each and
every year to providing you, our shareholder, with the
return on your investment that you expect and deserve.
I would like to express my gratitude and extend my
congratulations to Mr. J. R. (Jim) Clifford, President and
Chief Operating Officer, Sears Canada, who on November
9th was appointed to the position of President and Chief
Operating Officer, Full-Line Stores, Sears, Roebuck and Co.
Jim, during his five year tenure at Sears Canada, made
an important contribution to the success of our business
and we all wish him well in his new assignment at Sears,
Roebuck and Co. Jim will continue to serve on Sears
Canada’s Board of Directors.
All of us at Sears offer our heartiest congratulations to
C. Richard Sharpe, former Chairman of the Board and
Chief Executive Officer of Sears Canada, who was appointed
a member of the Order of Canada in 1998 for his outstanding achievements in public services and other fields.
This is a well-deserved honour.
P. S. Walters
Chairman & Chief Executive Officer
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Progress in
1998
on 5 Key
Imperatives
Key Imperative:
Accomplishments:
Increase Merchandising Revenues at 2x the
Market Growth Rate
¥
Merchandising revenues increased by 10.4% on a
comparable week basis. The market is estimated to
have grown 4.5% in 1998.*
Grow Merchandising Earnings Before Interest and
Income Taxes (EBIT) to 5% of revenues
¥
Merchandising EBIT % increased from 3.4% in 1997 to
4.2% this year, an improvement of 80 basis points.
Increase Shareholder Value
¥
¥
Earnings increased to $146.4 million, a 25.7% increase
Return on shareholdersÕ equity increased to 13.3%
from 11.7% in 1997.
Protect and Grow Credit Business
¥
Total service charge revenues increased by 3.8% on a
comparable week basis.
The number of active customer accounts increased to
3.9 million.
Significant investment was made in new credit systems.
¥
¥
Create Winning Organization
¥
Performance improvement in all key areas tracked:
associate satisfaction, customer loyalty and financial
measures.
*
The market is defined as total retail sales as measured by Statistics Canada, less
food stores, auto dealers, misc. other stores
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ÒAnticipating and meeting
the many needs of our
customers in more unique
ways than anyone else. ItÕs
the defining difference that
sets Sears apart today,
and tomorrow.Ó
Paul Walters,
Circl
e o
f
C
Chairman and Chief Executive Officer
8
n
o
d
i
f
e
c
en
MAXIMIZING EVERY
C U S T O M E R C O N TA C T
“Service is an ongoing priority,” explains Ethel Taylor, VicePresident, Full-Line Stores, “because as our service improves,
A
A ÔFULL-LINEÕ BRAND
The momentum of record growth continued unabated in
1998 as Sears focused on developing lifetime customer
relationships, making it even easier and more convenient for
customers to shop with Sears. It was also a year in which
Sears extended its relationship with its customers into more
aspects of their lives.
Sears accomplished this by moving full steam ahead to
fulfill its vision to be a Great Place to Shop, Work and
Invest. At the heart of this commitment was the Company’s
strategy to be a ‘full-line’ brand by continuing to grow in
existing and new areas of the business. What does this mean
to the consumer?
our customers’ expectations rise as well. We must
continuously improve and enhance our levels of service at
each point of contact with the customer.”
Great improvements in customer service were achieved
in 1998, as evidenced by Sears consistently scoring above
other major department stores in over 20,000 service
excellence mystery shops. “Service excellence ratings
increased to an impressive average 90%,” explains Taylor.
“We also saw improvements in every area of associate
satisfaction as we focused on supporting the people who face
and talk with our customers every day.”
Sears has achieved, and will continue to achieve,
operational excellence thanks to its thousands of sales
associates who work to ensure Sears earns the confidence and
trust of its customers every day, and in every way. To show
its appreciation, the Company launched a “Customer
Service Pays Off Contest” in 1998, awarding almost
$40,000 in prizes to associates in recognition of outstanding
customer service.
Paul Walters, Chairman and Chief Executive Officer
explains: “Sears moved forward in the development of our
infrastructure to ‘Do it all for our customers’. While others
were refocusing and eliminating whole categories of
products, only Sears remained committed to being a fullline department store.
In 1998, Sears offered the most places to shop: from
department stores to home services, to off-mall stores, to our
catalogue and the Internet. By creating synergy among these
sales channels, we were able to offer more products, more
selection, style, services and value. Our goal is to have more
of our customers shopping from more of our sales channels.
This unique approach in the Canadian retailing industry
Ò service
is
an ongoing
priorityÓ
helped us to continue to expand and grow the relationship
with our customers.”
9
G
GROWTH WAS IN FASHION IN 1998
Sears $550 million, multi-year mall-based department
store revitalization program continued in 1998, with major
capital investment retrofits in 9 major department stores
in Nanaimo and Richmond, British Columbia; Calgary,
Alberta; Barrie, Scarborough and Hamilton, Ontario; and
Laval, Anjou and Brossard, Quebec; with limited retrofits in
11 other stores across Canada. These changes included new
P h o t o g r a p h : To d d E b e r l e
flooring and fixtures, shopping boulevards with more
inviting, wider aisles and more true-to-life lighting. How
effective has this process been?
“The strategy of freeing up space by transferring
furniture into our furniture and appliance stores continues
to be highly successful,” says Ed Matier, Vice-President,
FAMOUS NAMES. FAMOUS BRANDS.
Apparel. “It resulted in an additional 219,000 square feet of
Craftsman maintained its dominant position in the
selling space which we used to further bolster our apparel
marketplace as the number one selling brand in
and soft home selection in virtually every category and
lawnmowers, tractors and snowblowers. “We launched a new
entrench Sears in the minds of customers as a fashion
line of Craftsman compressor and air tools for the serious
apparel retailer. We also positioned national brand offerings
do-it-yourselfer and are in the process of redesigning our
as being complementary to our exclusive private label
Craftsman tools with more ergonomically friendly handles”
collections such as Jessica, Two Roads, R&R and Nevada,
says Ashley Whicher, Vice-President of Craftsman and
which offer designer looks at reasonable prices. Product
Leisure and Automotive. Sears broadened its exclusive line of
development for our private label fashions is a key priority
Diehard batteries in 1998 with the launch of Diehard Silver.
for us and we have designers on staff creating the right look
for our customers.”
Sears continued in 1998 with its award winning “Softer
Martha Stewart Everyday Colors™ paint became
available at Sears in Canada in 1998, featuring 256 colours.
96 unique colour combination cards, developed by Martha
Side of Sears” advertising campaign, designed to highlight
herself, take the stress out of making the right decision about
Sears growing strength in fashion with the Company’s core
which colours work best together. Sears introduced a new
customers – Canadian women aged 25 to 54. The “Softer”
Easy Living One Coat paint line, and now offers 2,000
and “Many Sides” of Sears campaign is part of a fully
colour choices. The Company also announced it would open
integrated marketing strategy to establish Sears as the most
“Nevada Bob’s” upscale golf shops in 8 of its retail stores in
compelling brand in retailing.
1999, with plans to broaden distribution in the future.
These are just a few of the ways that Sears, by offering
more selection and value, became more relevant to its
customers in every aspect of their lives.
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GREAT
THINGS
IN STORE
ÒSears renovations have
improved store layouts and
design and revitalized our
ability to offer a greater
selection of fashions, brand
names and value for our
customers.Ó
Rick Sorby,
Executive Vice-President, Marketing
11
IBrand
nnovation drives the
ÒBuilding on the unique ways we get
closer to the customer to distribute
more products and services has been
a key element in successfully
reinventing Sears brand image.Ó
Bill Turner,
Executive Vice-President, Merchandise & Logistics
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Building
Lifelong
Relationships
APPLIANCE ALLIANCE
Sears was the only department store that saw growth in
the major appliance segment, continuing its number one
position in market share. Sears still dominates with its
exclusive Kenmore brand, Canada’s number one selling
brand of major appliances. In 1998, as part of the
Company’s brand equity focus, Sears added the Maytag
brand to its Sears Brand Central selection and became the
only retailer in the country to offer all of the top brands in
major appliances.
CONNECTING WITH CUSTOMERS
Another sales channel Sears uses to connect with its
A LIFETIME OF CHOICES
customers is its national network of authorized dealer stores,
In 1998 Sears continued the momentum of establishing
operated under independent local ownership and offering
itself as a unique retailer in the marketplace, building on its
hometown service. These stores, 25% of which were
core strengths and expanding the way the Company goes to
enlarged in 1998, provide full catalogue service plus a large
market to make its customers’ lives easier. How did Sears
selection of appliances, electronics and floor-care and lawn
focus on building lifelong relationships with its customers to
and garden power products. A new format, which features
accomplish this?
furniture, was piloted in Penticton, British Columbia in
“Only Sears can evolve a brand strategy that allows us to November, 1998. Sears added 14 new dealer stores in 1998
to bring the total to 93. The target is 110 by the end of
offer customers so much choice and deliver it in so many
ways,” says Paul Walters, Chairman and Chief Executive
1999. “These stores allow us to put our merchandise
Officer. “By taking advantage of the synergistic interaction
closer to where our customers live and give them a new
between our unique sales channels, Sears is taking another
opportunity to buy from us,” says Ajit Khanna, Vice-
step forward in improving lifelong relationships with our
President, Off-Mall Sales.
customers.”
“A perfect example is major appliances,” says Stew
“We also opened a new format of outlet stores with
80,000 square feet, offering a wide selection of merchandise,
MacLeod, Vice-President, Home and Appliances.
including in-season clearance merchandise in a brighter,
“Customers can choose from the Sears Brand Central
more attractive shopping environment focused on value and
selection at our department stores in major centres, at free-
quick service,” explains Khanna. “These new stores are
standing furniture and appliance stores; at dealer stores in
located in Vancouver, Calgary, Brampton and London.”
smaller towns or from the comfort of their home 24 hours a
day through our catalogues or Internet site. And Sears can
have it delivered, installed, financed and serviced. We’re
there for our customers, every way they want us to be.”
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T
THE RIGHT STORE FOR FURNITURE
MORE TO COME HOME FOR
Sears strategy to transfer furniture from its mall-based
Whole Home is the brand umbrella for the home fashion
department stores to massive, free-standing furniture and
side of Sears, and represents the most extensive selection of
appliance stores offering triple the department store selection, co-ordinated furniture and home decor products in Canada
has been a resounding success. Twelve more of these new
today. “The Whole Home program is Sears way of making it
stores were opened in 1998, bringing the total to 20, 12 of
easy for customers to put together a look for their home that
which also feature the exclusive Sears Brand Central selection
they’ll love for years to come,” says Heather Mercer, Whole
of major appliances. While furniture was moved out of
Home Fashion Director. “We expanded the Whole Home
nearby Sears mall-based department stores, the decision to
brand product selection in all our stores and catalogues in
sell Sears incomparable selection of appliances in both its
1998 and introduced “Casual Classics”, the first of our
mall-based department stores as well as the free-standing
seasonal co-ordinated collections. It features over 100
furniture stores has resulted in even greater market share. As
colour-matched products for every room of the home…from
a result, the 10 new stores planned for 1999 will include
dishes to bedding, to towels to candles, curtains and
Sears...
for the whole home
Sears Brand Central appliances. Sears has also announced
furniture…it all co-ordinates so it’s easy for customers
plans to renovate and expand its existing furniture-only
who don’t have a lot of time to shop to achieve a great
stores in Mississauga and Kitchener, Ontario to include
look. Some customers love it so much, they buy the
appliances. How does this strategy improve a customer’s
whole package.”
shopping experience and build lifelong relationships?
“These stores are offering more of what our customers
A major new multi-media advertising campaign for
Whole Home invites customers to ‘get comfortable’.
have told us they want from us…all in one easy-to-shop
furniture and appliance stores. “We have one of the largest
EVEN YOUR OFFICE GETS
C O M F O R TA B L E
selections of furniture and custom upholstery in Canada,
Sears launched a new venture in 1998 intended to increase
displayed in co-ordinated settings where you can actually
its market share of Canada’s growing office furniture
buy all the decor items presented, supported by trained
business. Targeting the “SOHO” market – small office/home
consultants. In our Brand Central area, we are showcasing
office, Sears launched a national Whole Home Office
our ability to provide custom-designed kitchens through
Furniture catalogue. A broad range of home and
Sears HomeCentral renovation service. From cupboards to
commercial-grade office furniture is also offered in select
flooring, counters to lighting, it completes the service circle
furniture stores, with plans to expand in 1999.
location,” explains Bob Rigg, General Sales Manager for
for the customer.”
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ÒSears offers our customers
an easier way to make their
house a homeÉfrom
inspiring, affordable and coordinated product for every
room to our unique furniture
and appliance stores.Ó
Furniture store customers
benefit from specially trained
decor specialists and a new
computer system that can
Brent Hollister,
Executive Vice-President,
Sales and Service
create photos of thousands of
custom upholstery options.
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A Houseful of Services
A
A QUESTION
OF TRUST
Sears has offered the broadest
range of home services of any
retailer in Canada for more than
25 years. In 1998, a new
1-800-
ÒWe know that consumers
trust Sears. If we can offer
more of the products and
services they are looking for,
backed by an unconditional
guarantee, our customers will
shop with us more often and
for more of their needs.Ó
services together, Sears is
confident that it will capture
an increasing share of this $15
billion industry.
solution was introduced for
easing the anxiety homeowners
experience when faced with
fashions. By bringing all these
Larry Moore,
Vice-President, Home Service Sales
The first Sears
HomeCentral showroom was
repairs, maintenance or
opened as part of the Markham,
renovations. The Company
Ontario furniture and appliance
maximized its unique infrastructure to bring together all
store, featuring kitchen and bath vignettes, floor and
of its capabilities and services under one name, Sears
window coverings, custom windows and doors and a gas
HomeCentral, available through one easy number. How
fireplace shop. Following the success of this opening, Sears
does this new HomeCentral service make it easier than ever
has announced a second showroom scheduled to open in
for customers to come home to Sears?
1999 in its newly expanded furniture and appliance store in
“Sears continues to leverage its brand equity into new
Mississauga, Ontario.
areas because of inherent consumer trust in the Sears brand,”
explains Larry Moore, Vice-President, Service Sales. “We
A D D I N G F LO O R S PA C E
now help customers through one easy number and a service
To further extend its leadership role in the home
they trust 24 hours a day, seven days a week: 1-800-4-MY-
improvement service business, Sears HomeCentral will open
HOME or 1-877-LE-FOYER in Quebec. Services include
30 new “Sears Floor Covering Centres” in 1999. “Sears will
the repair of appliances, heating and cooling services,
select independently owned and operated floor covering
exterior and interior home improvements, carpet cleaning,
dealers to work with Sears under this new name,” says
parts and much more. These services are supported by
Moore. “These stores will maintain their independence,
Canada’s largest service and repair fleet, with over 2,400
but will benefit from Sears volume buying power, group
licensed technicians and access to over 3 million parts”.
marketing programs and Sears guarantee of satisfaction.
Sears HomeCentral is also targeting the “do-it-for-me”
16
We plan to have 150 floor covering centres open within the
homeowner, offering everything from roofing to doors and
next 5 years, greatly expanding our offering of hard floor
windows, to custom installed carpeting and window
coverings such as ceramics, laminates, vinyl and hardwood.”
-4-MY-H ME
Products and Services
¥ appliance repair
service on most
major brands
¥ awnings
¥ custom broadloom
¥ carpet cleaning
¥ central air
conditioning
¥ chain link fencing
¥ custom drapery
and blinds
¥ duct cleaning
¥ entry doors
¥ electronic air
cleaners
¥ flooring
¥ furnaces
¥ garage
doors/openers
¥ gas fireplaces/stoves
¥ interior/exterior
shutters
¥ kitchen
cabinets/refacing
¥ lawn care
¥ shingle roofing
¥ siding
¥ soffit/fascia/
eavestrough
¥ upholstery cleaning
¥ windows
¥ parts
17
C
Answering
the
all
ÒSears catalogue allows us to be a full-line department
store wherever and however a customer wants to shop
with us, by phone; in our department, dealer and furniture
stores; and even on-line.Ó
Scott Marshall, Vice-President, Catalogue Sales
C A N A D AÕ S C ATA LO G U E
Sears catalogue business enjoyed a record year, increasing the number of active
customers to almost 4 million, a growth of over 300,000 customers from the previous
year. Sears produced 19 different catalogues in 1998, bringing its department store
selection and more to over 4.5 million households in communities across Canada.
A key Sears strategy that continued to evolve in 1998 was to leverage the added
depth and breadth of selection in the catalogue to propel sales in the Company’s
retail environment. How has this improved the ease with which customers can shop
At a record 1000 pages,
with Sears?
Scott Marshall, Vice-President, Catalogue Sales, explains: “Sears catalogue is the
Sears 45th anniversary
Christmas Wish Book was its
only full-line general merchandise catalogue in Canada. Our continued strong growth
biggest Wish Book ever, with
is the result of the transformation of our catalogue marketing offers and the improved
over 50% more gift ideas.
convenience and service of our field agency network. As our marketing offers have
Sears biggest customer
created more demand, our field organization has responded with service innovations
contest ever also awarded
such as Shop by Phone in our retail flyers, which gives customers an alternative to
over 9,200 prizes totaling
shopping in person. We also forged greater synergy between our retail operations and
more than $1.5 million.
catalogue shopping network with expanded service catalogue “stores” in our renovated
18
Sears state of the art
1.4 million square foot
department stores and new catalogue desks in our furniture and appliance stores.
catalogue distribution
Extensive training and new technology now allows us to input customers’ catalogue
Centre is one of the
orders at any register in our retail stores. As a result of these innovations, we can use
largest in Canada.
catalogue inventory to connect with our retail customers in two ways: we can offer
them a vastly expanded selection of sizes and styles; and we have the opportunity to
introduce them to the advantages of catalogue shopping.”
As a new service, kiosks for easy access to Sears Request, our computerized gift
registry service, were installed in all department stores, linking catalogue and retail
inventories and information.
WE WROTE THE BOOK ON SERVICE
Technological advancement continues to help Sears provide better service while reducing costs. In fact, customer satisfaction levels are higher than ever. A record 22 million
catalogue order calls came through 1-800-26-SEARS, Canada’s most frequently called
number. Cost of order processing was reduced and cycle time decreased.
127 new catalogue agents were added in 1998, exceeding expansion plans. This
brings the network of catalogue selling locations to 1,900. New fixturing and signing
programs are providing a consistent image for Sears in these locations.
19
www.sears.ca www.sears.ca www.sears.ca www.sears.ca www.sears.ca www.sears.ca www.sears.ca www.sears.ca www.s
Navigating a Convenience
New Retail Landscape
shoppingon-lineshoppingon-lineshoppingon-lineshoppingon-lineshoppingon-lineshoppingon-lineshoppingon-lineshoppingon
TRANSFORMING
I N F O R M AT I O N I N T O S A L E S
Sears continued to develop its presence on
the Internet, the new retail landscape that
provides an unprecedented opportunity for the
Company. It is here on the Internet where Sears, with
Canada’s only fully established national catalogue order
Save time.
Save money
ÒWe want to give customers what
they want, when they want it and
be there for them 24 hours a day.
The Internet is the opportunity to
bring all Sears can offer together
like never before.Ó
fulfillment and billing system, has the unique advantage of
Rick Brown, Vice-President Strategic Planning
being able to offer its customers access to its entire depth
and breadth of merchandise and services. How will the
Internet better link Sears with its customers?
“Sears strategy for growth is to provide for as many
aspects of the consumer’s life as possible and to make each
¥ visits to Sears website
increased 539% to 500,000+
visitors in 1998
interaction uncomplicated, effortless and satisfying,” says
Bruce Clarkson, General Manager, Relationship Marketing.
“The Internet is the ultimate synergistic opportunity, the
one place where the entire Company can come together for
¥ sales increased
446% in 1998
our customers.”
Sears launched its website in 1996, and offers its
customers a unique information and service source, e-mail
¥ similar
growth is
projected
for 1999
communication and merchandise. It presently offers more
than 500 products for purchase through electronic
commerce, as well as on-line catalogue ordering of its
thousands of catalogue offerings. Customers can buy travel,
flowers, phone plans, take a virtual tour of a Sears furniture
store, and the list is expanding every day.
20
ears.ca www.sears.ca www.sears.ca www.sears.ca www.sears.ca www.sears.ca www.sears.ca www.sears.ca www.sears.ca
www.sears.ca
open 24 hours
shoppingon-line
lineshoppingo
LINK TO THE FUTURE
“It is becoming clearer to Sears how
powerful the Internet can be for providing
information that in turn can generate sales,” explains
John Pullam, National Manager, Electronic Commerce. “We
believe the Internet is an important source of sales for Sears
and an unprecedented interface that will link us with our
customers and their lives like never before.”
T H E R E L AT I O N S H I P C A R D
In 1998, 62% of the Company’s transactions
were completed on the Sears Card, and Sears
Club membership reached 7 million.
Enhancements to the Sears Card made in 1998 provide
even more advantages to our cardholders. SearsConnect
customers can now make long distance calls anywhere in
Canada, 24 hours a day, for only 10 cents a minute, and
earn Sears Club points as an added benefit.
Initiatives to add new alliances resulted in announcements that Beaver, Penny, Payless and Turbo service stations
would now join Shell Canada in accepting the Sears Card
for transactions. And Canada’s largest lodging chain,
Choice Hotels, became the newest partner to accept the
Sears Card.
“The Sears Card has been a big hit at these new venues,”
says Ray Bird, Senior Vice-President, Credit. “We continue
to offer our customers more choices and locations to use
their Sears Card and more opportunities to collect Sears
Club points.”
21
A
A
SPIRIT
OF
COMMUNITY
ÒIn appreciation of our valued
relationship with our customers, Sears is
dedicated to supporting relevant
initiatives in the communities we serve.Ó
John Menchella, National Director, Strategic Marketing
YOUNG FUTURES
“Sears Canada recognizes the need to support caring
booklets to take home to be read with their parents. Our
programs which focus on the well-being of our children,”
focus on computer literacy for children was moved ahead by
says Paul Walters, Chairman and Chief Executive Officer.
our ongoing commitment to Computers for Schools, a
“Sears “Young Futures” Program, is dedicated to helping
program through which Sears helped place over 100,000
selected groups within the communities where our
recycled computers in schools across the country. Once
customers and associates live. Importantly, we also
again, Sears donated the latest volume of the Dictionary of
encourage others to contribute their funds and time to
Canadian Biography to over 3200 schools. The Company
this worthy cause.”
also sponsored the Sears Ontario Drama Festival, the largest
Sears contributed over $2 million in cash and in-kind
merchandise to hundreds of community charities and major
national charitable campaigns focusing on programs that
student drama festival in North America, now in its
53rd season.
We are very proud of the donations made by our
provide the basics to children. Additionally, Sears helped
associates. Last year, our Employee Charitable Fund
raise funds for local charities through a number of national
Campaign raised close to $1 million for employee-
programs such as “Help Us Help Kids,” a program where
designated charities. Many associates volunteered a
customers were asked to round up their purchase totals and
considerable amount of their time to various causes, like
Sears would match the donation; and over $100,000 was
Margie Schuett, who capped several years of volunteer
raised through the sale of Ho Ho Beans, an adorable bean
activity being selected Chef de Mission Team Canada 1998,
bag snowman sold across Canada.
competing at the XVI Commonwealth Games in Malaysia.
Sears also sponsors major national events, selected
READING THE FUTURE
because they represent what is relevant to our customers.
Sears believes its focused charitable
Sears sponsored the first open skating event in Canada, the
giving strategy can have a significant Sears Figure Skating Open ‘98. In Quebec, “Les Spectacles
22
impact. For the fourth year in a
Sears” sponsored concerts by Brian Adams and a musical
row, Sears presented the Ben
production, Stomp. Our support of the Raptors and
Wicks’ Born to Read program to
Grizzlies, with their NBA “Stay in School” message, focuses
children in grades 1 to 3 across
on what children can aspire to. The Sears Model’s Club is
Canada. Teachers gave 2 million
another national program which encourages youth to present
kids “Born to Read and Cook”
themselves with confidence and develops their self-esteem.
1998
Financial Information
Sears
MD&A and
Financial Highlights
In 1998 Sears continued to create value for our shareholders.
Investment in strategic growth initiatives contributed to increases
in revenues, earnings, and the return on shareholdersÕ equity.
Sears believes these investments, as well as the effective
management of expenses, will continue to contribute to the
achievement of our key imperatives, and generate value for
our shareholders.
John T. Butcher
Senior Vice-President and Chief Financial Officer
23
Eleven Year Summary 1
Fiscal Year
Results for the Year (in millions)
Total revenues
Depreciation
Earnings (loss) before unusual
items and income taxes
Unusual items gain (loss)
Earnings (loss) before
income taxes
Income taxes (recovery)
Net earnings (loss)
Dividends declared
Capital expenditures
Year End Position (in millions)
Accounts receivable
Inventories
Net capital assets
Total assets
Working capital
Long-term obligations
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
$ 4,967 $ 4,584 $ 3,956 $ 3,918 $ 4,066 $4,032 $4,042 $ 4,169 $4,642 $ 4,621 $4,377
96
78
78
74
67
69
70
56
55
48
47
269
0
215
0
70
(45)
43
(21)
88
(5)
15
(5)
(101)
(46)
(31)
(8)
70
(31)
186
0
175
0
269
123
146
25
142
215
99
116
25
160
25
16
9
23
63
22
10
12
23
76
83
38
45
23
60
10
6
4
23
37
(147)
(56)
(91)
21
55
(39)
(10)
(29)
20
235
39
19
21
20
204
186
83
106
21
116
175
82
96
21
118
$ 1,100 $ 1,225 $ 1,033 $ 926 $1,324 $1,101 $ 909 $1,090 $1,877 $1,784 $1,496
739
640
491
507
559
563
628
693
665
807
747
868
825
744
763
800
813
941
997
803
665
572
2,746 2,796 3,069 3,581 3,512 3,103
3,198 3,007 2,734
2,554 2,949
888
885 1,112 1,486 1,451 1,177
898
971
741
661 1,016
947
1,063 1,245 1,362 1,185
964
681
836
634
662 1,032
867
845
863
900
948
970
883
1,164 1,042
949
856
Per Share of Capital Stock (in dollars)
Net earnings (loss)
$ 1.38 $ 1.10 $ 0.09 $ 0.13 $ 0.47
0.24
Dividends declared
0.24
0.24
0.24
0.24
9.13
10.98
9.84
8.98
9.02
$ 0.05 $ (1.04) $ (0.34) $ 0.25 $ 1.23 $ 1.11
0.24
0.24
0.24
0.24
0.24
0.24
8.90
9.10 10.67 11.25 11.26 10.27
Financial Ratios
Return on average
shareholders’ equity (%)
Current ratio
Return on total revenues (%)
Debt/Equity ratio
Pre-tax margin (%)
13.3
1.7
2.9
42/58
5.4
11.7
1.9
2.5
45/55
4.7
1.0
1.7
0.2
46/54
0.6
1.4
1.7
0.3
48/52
0.6
5.2
2.0
1.1
59/41
2.0
0.5
2.0
0.1
58/42
0.3
(10.3)
2.1
(2.2)
59/41
(3.6)
(3.1)
2.4
(0.7)
61/39
(0.9)
2.2
2.3
0.5
67/33
0.8
11.4
2.1
2.3
66/34
4.0
11.2
2.0
2.2
65/35
4.0
Number of Selling Units
Full-line department stores
Furniture stores
Outlet stores
Dealer stores
Catalogue selling locations
109
20
12
93
1,898
110
8
8
79
1,752
110
4
9
60
1,746
110
1
10
19
1,623
110
0
11
4
1,542
110
0
12
0
1,483
109
0
13
0
1,579
106
0
15
0
1,701
97
0
18
0
1,701
92
0
17
0
1,708
84
0
16
0
1,726
1 Certain amounts have been restated to reflect accounting changes related to the consolidation of the Company’s proportionate share of the assets, liabilities, revenues and expenses of real estate
joint ventures as recommended by the Canadian Institute of Chartered Accountants. The change in policy, effective in 1995, has been applied retroactively.
24
ManagementÕs Discussion & Analysis
Sears is Canada’s largest single full-line retailer of general
merchandise and home-related services, with full-line department
and specialty stores, as well as catalogue selling locations across
Canada. The Company emphasizes quality, value, and service in
appealing to a broad cross-section of Canadian consumers.
The Company’s vision is to be Canada’s most successful
retailer by providing customers with total shopping satisfaction,
associates with opportunities for career advancement and personal
growth, and shareholders with superior returns on their
investment.
O V E R V I E W O F C O N S O L I DAT E D R E S U LT S
For purposes of this discussion, “Sears” or “the Company” refers
to Sears Canada Inc. and its subsidiaries together with the
Company’s proportionate share of the assets, liabilities, revenues
and expenses of joint venture interests in shopping centres.
The 1998 fiscal year refers to the 52 week period ended
January 2, 1999 and comparatively, the 1997 fiscal year refers to
the 53 week period ended January 3, 1998.
The following table summarizes the Company’s operating
results for 1998 and 1997.
(in millions, except per share amounts)
Total revenues
Earnings before interest
and income taxes
Interest expense
Income taxes
Net earnings
Earnings per share
1998
$ 4,966.6
1997
$ 4,583.5
354.3
85.6
268.7
122.3
146.4
1.38
301.3
86.1
215.2
98.7
116.5
1.10
$
$
$
$
SEARS
CANADA
In 1998, Sears continued to implement its strategic growth
initiatives which contributed to increased revenues. The
Company’s strategy for growth is directed at meeting the needs of
its target customer, and involves increased investment in
inventories, fixed assets and marketing. In 1998, Sears continued
to expand and enhance the range of products and services it offers
to its customers. During the year, the Company completed
renovations to 20 full-line department stores, and opened 12 new
Sears Furniture Stores (ten of which feature major appliances),
four outlet stores, and 14 dealer stores.
The Company’s earnings before income taxes were $268.7
million in 1998, a 24.9% increase over 1997 earnings of $215.2
million. Operational expenses and investments in inventory and
capital assets were all effectively managed, contributing to a
substantial increase in net earnings.
Number of Associates
1998
10,073
31,508
41,581
Full-time associates
Part-time associates
Total associates
1997
9,221
29,324
38,545
The total number of associates increased by 7.9% in 1998, due
primarily to growth in the Company’s merchandising operations.
S E G M E N T E D B U S I N E S S A N A LY S I S
The Company’s operations can be grouped into three major
businesses: merchandising, credit, and real estate joint venture
operations.
MERCHANDISING OPERATIONS
Total revenues increased in 1998 by $383.1 million or 8.4% over
1997 due primarily to strong growth in merchandising revenues.
Fiscal 1997 contained 53 weeks. On a comparable 52 week basis,
total revenues increased by 9.7% in 1998.
The merchandising business segment includes Sears full-line
department store and catalogue operations, in addition to Sears
Furniture Stores, dealer stores, outlet stores, and Sears
HomeCentral.
25
ManagementÕs Discussion & Analysis continued
Merchandising Operations
(in millions)
Revenues
Earnings before interest and
income taxes
Capital employed
1998
$ 4,595.1
1997
$ 4,210.6
$
$
$
$
193.7
735.4
141.7
553.6
Furniture Stores Ð stores ranging in size from 35,000 square feet
to 58,000 square feet, featuring an expanded selection of
furniture, decorator rugs and, in 12 stores, major appliances.
Outlet Stores Ð selling returned and surplus merchandise in
stores ranging in size from 24,000 square feet to 109,000
square feet.
Merchandising Operating Analysis
Merchandising revenues were $4.6 billion in 1998, an increase of
9.1% over 1997. On a comparable week basis, merchandising
revenues increased 10.4%. All regions experienced increases in
revenues in 1998.
Dealer Stores Ð independent, locally operated stores serving
smaller population centres, selling home appliances and
electronics, as well as lawn and garden furniture, and garden and
snow removal equipment.
Merchandising Revenues by Region
Catalogue Selling Locations Ð consist of 1,678 independent
catalogue agent locations, plus catalogue pick-up locations within
Sears full-line stores, outlet stores, dealer stores, and selected Sears
Furniture Stores.
1998
$ 447.6
943.1
1,858.0
820.3
526.1
$ 4,595.1
(in millions)
Atlantic
Quebec
Ontario
Prairies
BC/Yukon/NWT
Total
% of
% of Total
Total Households1
9.7
7.8
20.5
26.1
40.4
36.3
17.9
16.4
11.5
13.4
100.0
100.0
In 1998, the Company closed its full-line department store
in Markham, Ontario, and converted the store into a Sears
Furniture Store and a fashion outlet store. In addition, the
Company opened 11 new Sears Furniture Stores (nine of which
offer major appliances), three outlet stores, and 14 dealer stores.
1 Total Households is based on Statistics Canada, 1996 Census.
Merchandising Gross Floor Area
Number of Selling Units
As at January 2, 1999
Atlantic
Full-Line
11
Furniture
0
Outlet
1
Dealer
18
Catalogue
326
Que.
25
4
1
9
470
(square feet – in millions)
Ont. Prairies
42
19
13
1
7
2
24
17
518
423
BC
Yukon
NWT
12
2
1
25
161
Full-Line
Furniture
Total
109
20
12
93
1,898
Full-Line Department Stores Ð 109 department stores ranging in
size from 24,500 square feet to 162,000 square feet.
26
Outlet
Total
Merchandise service centres:
Active
Subleased or dormant
Total merchandise service centres
1998
13.4
0.8
1997
13.6
0.3
0.9
15.1
0.6
14.5
7.1
1.4
8.5
6.8
1.9
8.7
Merchandise service centres include two catalogue order
fulfillment facilities and five service centres supporting national
merchandising operations.
SEARS
Recent Merchandising Initiatives
• During the year, 20 full-line department stores were renovated.
Major renovations were made to nine stores: Laval, Anjou and
Brossard, Quebec; Scarborough Town Centre, Hamilton
Limeridge, and Barrie, Ontario; Richmond and Nanaimo,
British Columbia; and Calgary Chinook, Alberta. The
renovations to these stores, featuring major upgrades to store
presentation such as fixtures and lighting, were modeled after
the nine full-line department stores renovated in the Greater
Toronto Area in 1997. During the renovations this year, Sears
was able to reclaim more than 118,000 square feet of selling
space by eliminating surplus stockroom and office space. This
additional selling space was used to present an expanded
assortment of fashion apparel, cosmetics, accessories, and
home fashions.
• In December, 1998, Sears announced that it plans to open a
new full-line department store in Abbotsford, British Columbia
in the Fall of 1999.
• In November, 1998, Sears announced the launch of Nevada
Bob’s golf shops in eight full-line stores in 1999 on a test basis.
The golf shops, which will be staffed by Nevada Bob’s sales
professionals and feature a broad-range of national brands in
golf equipment, accessories, and apparel, will be opened in
stores with one location in each of Toronto, Hamilton, and
St. Catharines, Ontario; two locations in Quebec City,
Quebec; and three locations in Edmonton, Alberta. This
strategic alliance demonstrates Sears commitment to expand
and enhance the shopping experience for Sears customers.
• Sears Request, a new state-of-the-art gift registry kiosk
designed to enhance the existing Special Occasions Gift
Registry which was launched in 1996, was rolled-out to all
full-line stores during 1998. Conveniently located in the
housewares department, these kiosks allow customers to scan
CANADA
• To maximize synergies between the catalogue and full-line sales
channels, and to allow department store customers access to
the catalogue’s expanded selection of styles and specialty sizes,
Sears installed a software program called COMET on all fullline point-of-sale terminals in 1998. This software allows
associates in a full-line store to order catalogue items for a
customer directly at any cash register in the store. The associate
can also offer the customer the option of home delivery, or
arrange for the item to be picked up at the catalogue agent or
full-line store location most convenient to the customer.
• During the year, the Company continued to enhance its
assortment of national brands. Sears added a broad selection of
Maytag appliances in October, including Maytag’s full line of
washers, dryers, and dishwashers, to Sears Brand Central
selection in all Sears full-line stores, Sears Furniture Stores
featuring major appliances, its national catalogues, and to more
than 85 dealer stores. Sears also introduced Martha Stewart
Everyday Colors™, a colour coordinated line of interior latex
paint. Sears has combined these brands with its strong private
label offerings, such as Kenmore appliances, and Easy Living
Paint, in order to provide customers with a broad range of
products from which to choose when furnishing and
decorating their homes.
• This year, Sears consolidated the repair and home improvement
services it offers under the banner Sears HomeCentral,
1-800-4-MY-HOME, or 1-877-LE-FOYER in Quebec.
“Do-it-for-me” homeowners nationwide can now call this tollfree number 24 hours a day, seven days a week for a wide
variety of services including appliance repairs, parts, heating
and cooling services, carpet cleaning, and exterior and interior
home improvements. By bringing all of these services together
under the Sears HomeCentral banner, Sears is able to offer
customers a more convenient way to shop for home repairs
and improvements.
personalized announcement cards mailed to them on behalf
of a registrant in order to receive an up-to-date list of the gift
items registered. Any purchase made using this system will
be instantly removed from the list of gifts requested to
eliminate duplication.
27
• In October, 1998, Sears announced the launch of Sears Floor
Covering Centres, with plans to introduce 30 stores in 1999.
Sears will license existing independent floor coverings dealers to
operate Sears Floor Covering Centres, allowing dealers to
benefit from Sears volume buying and group marketing
programs. These stores, which will continue to be
independently owned and operated, will feature wall-to-wall
carpeting, in addition to a large selection of hard floor
coverings such as hardwood, laminates, ceramics, and vinyl.
The introduction of Sears Floor Covering Centres is part of
Sears plan to expand the products and services offered under its
Sears HomeCentral banner.
• During the year, Sears opened 12 new Sears Furniture Stores
(ten of which offer major appliances), with four new locations
in Quebec, two in British Columbia, one in Alberta, and five
in Ontario. The Sears Furniture Stores which feature
appliances, carry the Sears Brand Central selection of major
appliances, in addition to a broad selection of furniture,
decorator rugs and accent decor items. The new Sears furniture
and appliance store located in Markham, Ontario also features
the first Sears HomeCentral showroom, offering a wide range
of home products and services such as floor and window
coverings, model kitchens, gas fireplaces, and bathroom
renovations. The Company plans to open ten new combination
furniture and appliance stores in 1999. In addition, the
Company plans to relocate the Sears Furniture Stores in
Kitchener and Mississauga, Ontario, to larger premises in
1999. Sears Brand Central appliances will be added to both
locations, and a Sears HomeCentral showroom will be featured
in the Mississauga location.
• Sears continued to expand its dealer store program in 1998
adding 14 new locations, bringing the total number of dealer
stores to 93. The Company plans to open an additional 17
dealer stores in 1999. In November, 1998, Sears announced
that its dealer store in Penticton, British Columbia, would be
the first dealer store to offer furniture. This initiative will allow
Sears to measure the responsiveness of consumers in smaller
28
communities to an expanded selection of merchandise which
includes furniture. Sears plans to test the addition of furniture
to several dealer store locations in 1999.
• In 1998, Sears opened four new format outlet stores in London
and Brampton, Ontario; Calgary, Alberta; and Vancouver,
British Columbia. The new outlet stores are designed to feature
brighter lighting, wider aisles, and expanded display space.
Sears outlet stores feature a wide assortment of value-priced
catalogue and full-line store surplus, as well as in-season
clearance merchandise.
• Sears continued to develop its presence on the Internet during
the year. Sears launched its bilingual website, www.sears.ca in
1998 which offers customers more than 500 products for
purchase through the website, as well as on-line catalogue
ordering. Customers can also purchase services such as travel
and floral delivery at the site. In 1998 Sears website received
over 500,000 visitors. The Company views electronic
commerce as an important new retailing medium, and plans
to continue to enhance its Internet offerings in 1999.
CREDIT OPERATIONS
Sears credit operations finance and manage customer charge
account receivables generated from the sale of goods and services
charged on the Sears Card.
(in millions)
Total service charge revenues
Less: SCRT2 share of revenues
Net service charge revenues
income taxes
Capital employed
$
1998
371.3 $
(65.4)
305.9
$ 126.7
$ 1,020.3
1997
364.8
(54.2)
310.6
$ 127.5
$ 1,090.8
2 Refer to the section entitled “Securitization of Charge Account Receivables” on page 31.
Credit operations contributed $126.7 million to the Company’s
1998 consolidated earnings before interest and income taxes,
compared to $127.5 million in fiscal 1997.
SEARS
Total service charge revenues earned on customer charge
account receivables increased by $6.5 million or 1.8% in 1998.
Fiscal 1997 contained 53 weeks. On a comparable 52 week basis,
total service charge revenues increased by 3.8%. Through its
securitization program, the Company securitizes customer charge
account receivables in order to obtain a more favourable cost of
funding. The cost of this funding is deducted from the total
service charge revenues earned on the portfolio. (Refer to the
section entitled “Securitization of Charge Account Receivables”
on page 31.)
Charge Account Receivables Analysis
(in millions – except average outstanding
account balance per customer)
Active customer accounts
Average outstanding balance per
customer account at year end
Charge account receivables written-off
during the year (net of recoveries)
1998
3.9
1997
3.8
$
441
$
439
$
44.4
$
46.4
Net write-offs as a percentage of the monthly average amounts
outstanding were 2.9% in 1998 compared to 3.2% in 1997
and 3.4% in 1996. This write-off rate continues to be at the
low end of industry norms. The Company maintains a low
write-off rate through continued innovation of its portfolio
management strategies.
Since October, 1993, Sears has been accepting third party
credit cards in addition to the Sears Card. 1998 was the first full
year debit cards were accepted in all of the Company’s full-line
stores, Sears Furniture Stores, and outlet stores. The chart below
details the trend in method of payment.
Sears Card
Third Party Credit Cards
Cash & Debit Cards
Total
1998
62%
13
25
100%
1997
64%
13
23
100%
1996
66 %
11
23
100 %
CANADA
Recent Credit Initiatives
The following initiatives have been directed at increasing usage of
the Sears Card.
• In May, 1998, Sears formed an alliance with Choice Hotels
Canada Inc. to offer Sears Card holders the option of using
their Sears Card to pay for accommodation at more than 200
Clarion, Quality, Comfort, Sleep, Econo Lodge, MainStay
Suites, and Rodeway locations across Canada. Sears Card
holders can also guarantee reservations through Choice Hotels’
toll-free reservations hotline. Sears will continue to seek out
opportunities to form strategic alliances with companies that
will be chosen based on their fit with Sears objectives and the
potential benefits to Sears Card holders.
• Sears launched SearsConnect in 1998, which combines the
existing Sears PhonePlan with a new flat rate long distance
calling plan, Sears EasyTalk. Sears EasyTalk allows members to
call anywhere in Canada at any time of day for a flat rate of 10
cents a minute. All long distance calls made by SearsConnect
members earn Sears Club points.
• During the year, Sears initiated projects to install new software
applications which reduce the approval time for new Sears
Card applications, facilitate the management of lines of credit
and credit risk, and allow Sears the opportunity to expand
strategic alliance initiatives.
REAL ESTATE JOINT VENTURE OPERATIONS
As at January 2, 1999, the Company held joint venture interests
in 19 shopping centres, 17 of which contain a Sears store. The
Company has 15% to 50% interests in these joint ventures.
Accordingly, the Company carries its proportionate share of the
assets, liabilities, revenues and expenses of these joint ventures on
its books.
The percentage charged to third party cards remained constant at
13%. The share of non-credit sales increased to 25% from 23%
last year, with debit card usage accounting for 5% of total sales.
29
Accounts Receivable
Real Estate Joint Venture Operations
$
1998
65.6
$
1997
62.3
$
$
33.9
252.5
$
$
32.1
245.7
(in millions)
Revenues
income taxes
Capital employed
3
3 Excluded from revenues is the Company’s proportionate share of rental revenues
earned from full-line stores of Sears Canada Inc. of $3.7 million
($3.7 million – 1997).
The market value of Sears interest in these properties is estimated
to be approximately $417 million ($400 million – 1997). It is
the Company’s policy to have one-third of the properties
independently appraised each year, while the appraisals of the
remaining two-thirds are reviewed and updated by management.
Sears portion of the debt of these properties is $227.1 million
($229.8 million – 1997).
O V E R V I E W O F T H E C O N S O L I DAT E D
S TAT E M E N T S O F F I N A N C I A L P O S I T I O N
Assets
(in millions)
Cash
Accounts receivable
Inventories
Net capital assets
Other assets
Total assets
1998
$ 190.4
1,100.4
738.7
867.6
300.9
$ 3,198.0
1997
$
68.3
1,224.6
640.3
825.1
249.0
$ 3,007.3
Total assets increased by $190.7 million or 6.3% in 1998.
In 1998, cash increased by $122.1 million primarily due to
proceeds of $156.6 million received from the securitization of
charge account receivables on December 16, 1998.
Accounts receivable decreased by $124.2 million or 10.1%
in 1998 as a result of an increase in the amount of receivables
securitized.
30
(in millions)
Charge account receivables
Less amount securitized
Net charge account receivables
Deferred receivables
Less amount securitized
Net deferred receivables
Other receivables
Total accounts receivable
1998
1997
$ 1,682.5 $ 1,655.7
(1,087.5)
(965.6)
595.0
690.1
544.5
497.4
(83.2)
(24.4)
461.3
473.0
44.1
61.5
$ 1,100.4 $ 1,224.6
Deferred receivables represent credit sales not yet billed to
customers’ accounts. These credit sales are billed to the customers’
accounts at the end of an interest-free deferral period.
Inventories increased by $98.4 million in support of the
Company’s revenue growth initiatives.
Net capital assets increased by $42.5 million. Capital
expenditures totaled $142.2 million in 1998, of which
approximately $79.2 million was spent on full-line department
store renovations and the opening of 12 new Sears Furniture
Stores. Depreciation expense for the year was $95.5 million.
Liabilities
1998
(in millions)
Accounts payable and
accrued liabilities
Long-term obligations due within
one year
Long-term obligations
Other liabilities
Total liabilities
$
995.8
1997
$
878.6
163.4
680.5
11.6
836.1
194.0
$ 2,033.7
238.6
$ 1,964.9
Total liabilities increased by $68.8 million or 3.5% in 1998.
Accounts payable increased by $123.2 million in 1998
primarily to finance the growth in inventories.
Including amounts due within one year, long-term
obligations decreased by $3.8 million from $847.7 million to
$843.9 million. In 1999, $150.0 million of 11.0% unsecured
debentures will mature.
SEARS
Liquidity
As at January 2, 1999, the ratio of current assets to current
liabilities was 1.7:1 compared to 1.9:1 at the end of 1997.
Working capital was $898.5 million as at January 2, 1999,
compared to $971.1 million as at January 3, 1998. The decrease
in working capital is primarily attributable to increases in the
amount of charge account receivables securitized and long-term
obligations due within one year. The increase in inventories is
offset by an increase in accounts payable.
FINANCING ACTIVITIES
The Company has the flexibility to raise funds through bank
borrowings, by issuing equity and corporate debt securities, and
through the securitization of charge account receivables.
In 1998, the Company carried out the following significant
financing activities:
• On December 23, 1998, Sears filed a shelf prospectus with
securities commissions in Canada that qualifies the issuance of
up to $500 million in medium-term notes (debt with a term to
maturity in excess of one year) over the next two years.
• During 1998, long-term financing for new capital projects
of real estate joint ventures was obtained in the amount of
$3.4 million. In addition, $15.5 million of joint venture debt
matured in 1998, of which $9.4 million was refinanced.
Securitization of Charge Account Receivables
Sears Acceptance Company Inc. (“Acceptance”), a wholly owned
subsidiary of Sears, purchases all Sears Card charge account
receivables (including deferred receivables) generated by
merchandise and service sales. Through the Company’s
securitization program, Acceptance sells undivided co-ownership
interests in the charge account receivables (excluding deferred
receivables) to Sears Canada Receivables Trust (Trust 1) and Sears
Canada Receivables Trust – 1992 (Trust 2). In addition,
Acceptance sells undivided co-ownership interests in its portfolio
of charge account receivables (including deferred receivables) to
Sears Canada Receivables Trust – 1996 (Trust 3). Trust 1, Trust 2
and Trust 3 are collectively referred to as SCRT.
CANADA
As the equity units of these trusts are held by independent
parties, the assets and liabilities of SCRT are not reflected in the
Company’s consolidated financial statements. The cost to the
Company of the securitization program is reflected as a reduction
in the Company’s share of Sears Card service charge revenues.
SCRT is an important financing vehicle which is able to
obtain favourable interest rates because of its structure and the
high quality of the portfolio of charge account receivables backing
its debt. Securitization provides the Company with a diversified
source of funds for the operation of its business.
Trust 1 Ð Trust 1, which was established in 1991, issues shortterm commercial paper to finance the purchase of undivided coownership interests in charge account receivables (excluding
deferred receivables).
Trust 2 Ð Trust 2, which was established in 1993, issues longterm senior and subordinated debentures to finance the purchase
of undivided co-ownership interests in charge account receivables
(excluding deferred receivables).
Trust 3 Ð Trust 3, which was established in 1996, finances the
purchase of undivided co-ownership interests in Acceptance’s
portfolio of charge account receivables (including deferred
receivables) through drawdowns under revolving senior and
subordinated note facilities.
Summary of Debt Ratings
CBRS
Sears Canada Inc.
Unsecured debentures
SCRT
Commercial paper (Trust 1)4
Senior debentures (Trust 2)4
Subordinated debentures (Trust 2)
Senior notes (Trust 3)4
Subordinated notes (Trust 3)
B++ (High)
DBRS
BBB
A-1+ R-1 (High)
A++
AAA
A
A (High)
A++
AAA
A+
A
4 Highest rating assigned by CBRS Inc. (CBRS) and Dominion Bond Rating
Service Limited (DBRS) for this debt category.
31
Summary of SCRT Obligations
(in millions)
Commercial paper
Senior debt:
6.50%, due December 16, 1998
5.34%, due December 16, 2003
8.95%, due June 1, 2004
Floating rate, due April 1, 2001
Floating rate, due June 30, 2006
$
$
1997
374.8
150.0
175.0
150.0
122.7
597.7
150.0
175.0
150.0
43.1
518.1
3.9
31.0
1.3
36.2
5.2
7.2
13.7
0.4
21.3
3.5
44.3
$ 1,170.7
72.3
990.0
Subordinated debt:
7.67% to 9.18%, due 1998 to 2004
Floating rate, due 1998 to 2004
Floating rate, due June 30, 2006
Accrued liabilities
Trust units (floating rate, due
1998 to 2006)
Total SCRT obligations
1998
487.3
$
Capital Structure
The chart below highlights the improving trend in the debt to
equity ratio, due primarily to the contribution of net earnings
in 1998.
1998
% of
Total
Long-term debt due
within one year $ 163.4
8.1
Long-term debt
680.5
Total debt
843.9
Shareholders’ equity 1,164.3
Total capital
$2,008.2
33.9
42.0
58.0
100.0
(in millions)
32
(in millions)
Interest Costs
Total debt at end of year
Average debt for year
Interest on long-term debt
Other interest (net)5
Interest expense
Average rate of debt6
Securitization Costs
Amount securitized at end of year
Average amount securitized for year
Cost of funding
Average rate of securitized funding6
Total Funding
Total funding at the end of year
Total average funding for year
Total funding costs for year
Average rate of total funding6
$
$
$
1998
1997
843.9 $
845.5
78.6 $
7.0
85.6 $
10.2%
847.7
758.4
74.5
11.6
86.1
11.2 %
$ 1,170.7 $ 990.0
1,056.9
1,019.6
65.4
54.2
6.2%
5.2 %
$ 2,014.6 $ 1,837.7
1,902.4
1,778.0
151.0
140.3
8.0%
7.8 %
5 Other interest includes $8.9 million in 1998 ($13.2 million – 1997) for payment of
the interest rate differential on floating-to-fixed interest rate swaps.
6 1997 calculation based on 365 day year rather than fiscal period of 53 weeks.
1997
% of
Total
11.6
0.6
836.1
847.7
1,042.4
$1,890.1
44.2
44.8
55.2
100.0
$
Analysis of Funding Costs
The following table summarizes the Company’s total funding
costs including the cost of the securitization program:
Total funding costs for 1998 increased by $10.7 million due
primarily to higher average funding levels and higher interest
rates applicable to floating rate funding outstanding in SCRT.
C A P I TA L E X P E N D I T U R E S
The Company expects to commit approximately $235 million for
capital expenditures in 1999, compared to capital expenditures of
$142.2 million in 1998. Planned expenditures for 1999 include
$103.0 million for full-line store enhancements and new
combination Sears furniture and appliance stores. The balance of
the capital expenditures will be spent primarily on information
technology, logistics and real estate operations.
SEARS
A N A LY S I S O F TOTA L TA X E S
Total taxes increased by $34.0 million in 1998. Income taxes
increased $23.6 million, commensurate with the increase in
earnings before income taxes.
(in millions)
Provincial capital tax
Property tax
Payroll taxes7
Total taxes expensed in cost of
merchandise sold, operating,
administrative and selling expense
Corporate income tax
Large corporations tax
Income taxes
Total taxes
$
$
1998
7.1
52.3
72.0
131.4
116.9
5.4
122.3
253.7
$
$
CANADA
1999 is approximately U.S. $300 million. From time to time the
Company uses forward contracts to fix the exchange rate on a
portion of its expected requirement for U.S. dollars. As at January
2, 1999, there were no foreign exchange contracts outstanding.
1997
6.7
45.7
68.6
Concentration of Credit Risk
The Company’s exposure to credit risk relates mainly to customer
account receivables. Sears Card customers are a large and diverse
group. The average balance per customer at year end was $441.
121.0
93.9
4.8
98.7
219.7
Leases
Twenty-two of Sears 109 full-line stores are Company-owned and
two of the 20 Sears Furniture Stores are Company-owned, with
the balance held under long-term leases which include favourable
renewal options. As a result, the Company’s full-line store rental
expense is expected to remain stable.
7 Represents contributions to the Canada and Quebec Pension Plans, Employment
Insurance, health care levies and WCB premiums.
R I S K S A N D U N C E R TA I N T I E S
The key elements of the Company’s strategy for minimizing risk
are as follows:
Interest Rates
SCRT has financed purchases of undivided co-ownership
interests in the portfolio of charge account receivables with the
issuance of short-term commercial paper, as well as debt and trust
units, some of which are subject to floating interest rates. To
reduce the risk associated with fluctuating interest rates, floatingto-fixed interest rate swap transactions in the notional amount of
$350 million ($200 million - 1997) have been utilized. This
brings the Company’s fixed-to-floating funding ratio, including
securitized funding, to 66/34, which is within its target ratios.
Merchandise Sources
A major aim of the merchandise procurement process is to ensure
that Sears, together with its merchandise sources, fulfills its
promises and obligations to its customers. Sears will continue to
work with its merchandise sources to ensure that they share this
commitment.
Sears shops the world market to provide its customers with
the best value for their dollar. The Company purchases consumer
goods from approximately 2,700 sources, most of which are
Canadian. As a result, Sears is confident in its ability to continue
providing consumers with high quality merchandise at
competitive prices.
Year 2000
The Year 2000 poses a significant global challenge. Date
dependent systems and processes that use two digits to represent
the year must be adapted in order to avoid risk of error with the
turn of the century.
Foreign Exchange
The Company’s foreign exchange risk is limited to currency
fluctuations between the Canadian and U.S. dollar. The
Company’s forecast for its total requirement of foreign funds in
33
Sears has been preparing to meet the Year 2000 challenge for
the past four years, as the Company is a significant user of
current technologies. The Company makes extensive use of
technology to interact with third parties, primarily suppliers and
customers, for increased efficiency and productivity. In January,
1997, the Company established a cross-functional team to oversee
and manage the Sears Year 2000 Project.
The first phase of the project, which included identifying
and evaluating the Company’s systems and applications for Year
2000 capability, determining necessary modifications and
replacements, and initiating communication with third parties,
including merchandise and non-merchandise suppliers, was
completed in the second quarter of 1997.
The project is continuing to progress in accordance with the
project schedule. As of December 31, 1998, remedial action and
Year 2000 testing have been completed for 96% of all application
programs. The schedule for 1999 includes completion of the Year
2000 testing for the remaining applications and programs as well
as continued testing to maintain a Year 2000 ready application
portfolio and environment.
In September 1998, a cross-functional sub-committee was
formed to review Sears Business Continuity Plans and to address
any Year 2000 specific issues or situations, including alternative
sourcing and identifying actions to be taken if a critical system or
service provider were not yet Year 2000 ready. This process is
scheduled for completion by the end of the third quarter of 1999.
Sears continues to conduct an aggressive communication
campaign with third parties with whom it has a business
relationship, including both merchandise and non-merchandise
suppliers. This includes having met with over 300 key suppliers
in 1998 to specifically address the Year 2000 issue. This program
of meeting with key suppliers to communicate and assess risk will
continue through 1999. There can be no guarantee that the
systems, services, or supplies provided by other companies on
which Sears relies will be Year 2000 ready on a timely basis, or
that another company’s failure to be Year 2000 ready may not
have an adverse effect on Sears. The impact will depend on the
Year 2000 readiness of other parties, including financial
institutions, government agencies, transportation entities,
telephone communication companies, utilities, and vendors.
34
However, based on Sears program of assessment and actions taken
to mitigate the risk to Sears, management believes that the Year
2000 issue will not have a material adverse impact on Sears future
results of operation or financial condition, although there can be
no absolute assurance that this will be the case.
To date, approximately $20 million has been spent on
personnel and contractors. These costs are expensed as incurred.
The total estimated cost for the Year 2000 Project is
approximately $28 million.
Sears continues to participate with the Retail Council of
Canada and other retailers to increase awareness of the Year 2000
issue. In addition, Sears was an active member of the Industry
Canada Year 2000 Task Force, providing input and guidance on
common issues and opportunities facing the industry as a whole.
Competitive and Economic Environment
Sears believes that the general economic environment will remain
positive in 1999, although growth may occur at a slower pace
than in 1998. The retail market remains highly competitive. Sears
is well positioned to take advantage of emerging trends in
retailing, including those in the areas of specialty stores and
services, as well as electronic commerce.
Sears is optimistic that consumer confidence will remain
stable in 1999 due to expected increases in employment levels
and personal disposable income, as well as continued low
inflation and interest rates.
Outlook
Sears continues to position itself to capture a larger share of
consumer spending through its aggressive program of store
renovations and enhanced merchandise assortment and
presentation.
The Company also continues to evaluate new and innovative
methods of retailing. By meeting customers’ needs in terms of
merchandise selection, pricing, and the total shopping experience,
Sears anticipates growth in revenues and profits into the future.
SEARS
Quarterly Results
Unaudited
First Quarter
1998
Total revenues
Earnings (loss) before
income taxes
Net earnings (loss)
Earnings (loss) per share
CANADA
Second Quarter
Third Quarter
Fourth Quarter*
1997
1998
1997
1998
1997
1998
1997
$ 1,008.8
$
875.1
$ 1,154.4
$ 1,054.3
$ 1,170.5
$ 1,065.5
$ 1,632.9
$ 1,588.6
$
$
$
$
$
$
(2.6) $
(2.8) $
(0.03) $
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
15.6
7.5
0.07
55.4
29.9
0.28
42.3
22.8
0.22
45.0
24.1
0.23
37.1
19.4
0.18
152.7
84.9
0.80
138.4
77.1
0.73
* The Fourth Quarter contained 13 weeks in 1998 and 14 weeks in 1997.
Common Share Market Information*
First Quarter
1998
High
Low
Close
Avg. daily trading volume
$
$
$
25.75
19.00
24.40
122,559
Second Quarter
1997
$
$
$
13.95
10.00
13.35
229,870
1998
$
$
$
27.75
24.40
27.70
63,010
Third Quarter
1997
$
$
$
20.00
12.50
18.40
295,137
1998
$
$
$
29.00
16.90
16.90
174,352
Fourth Quarter
1997
$
$
$
25.20
18.25
25.00
127,992
1998
$
$
$
22.05
16.00
18.00
73,591
1997
$
$
$
25.75
19.00
19.80
189,641
* The Toronto Stock Exchange
35
Statement of Management Responsibility
Management is responsible for the accuracy, integrity and objectivity of the financial information contained in this Annual Report. The
consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada and include
certain amounts that are based on estimates and judgements. Financial information used elsewhere in the Annual Report is consistent
with that in the financial statements.
Management has developed, maintains and supports an extensive program of internal audits that provides reasonable assurance that
financial records are reliable and that assets are safeguarded.
The Board of Directors, through the activities of its Audit and Corporate Governance Committee, ensures that management fulfills its
responsibilities for financial reporting and internal control. The Audit and Corporate Governance Committee, the majority of whom are
outside directors, meets periodically with the financial officers of the Company, the internal auditors and external auditors to discuss
audit activities, internal accounting controls and financial reporting matters. The Board of Directors, on the recommendation of the
Audit and Corporate Governance Committee, has approved all of the information contained in the Annual Report.
The Company’s external auditors, Deloitte & Touche LLP, have conducted audits of the financial records of the Company in accordance
with generally accepted auditing standards. Their report is as follows.
Senior Vice-President and
Chief Financial Officer
Chairman of the Board and
Chief Executive Officer
AuditorsÕ Report to the Shareholders of Sears Canada Inc.
We have audited the consolidated statements of financial position of Sears Canada Inc. as at January 2, 1999 and January 3, 1998 and
the consolidated statements of earnings, retained earnings and changes in financial position for the 52 weeks and 53 weeks then ended.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform
an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at
January 2, 1999 and January 3, 1998 and the results of its operations and the changes in its financial position for the 52 weeks and 53
weeks then ended in accordance with generally accepted accounting principles.
Deloitte & Touche LLP
Chartered Accountants
36
Toronto, Ontario
February 8, 1999
Consolidated Statements of Financial Position
SEARS
1998
As at January 2, 1999 and January 3, 1998 (in millions)
Assets
Current Assets
Cash and short-term investments
Charge account receivables (Note 2)
Other receivables (Note 3)
Inventories
Prepaid expenses and other assets
Future income tax assets (Note 4)
$
Investments and Other Assets (Note 5)
Net Capital Assets (Note 6)
Deferred Charges (Note 7)
$
Liabilities
Current Liabilities
Accounts payable
Accrued liabilities
Income and other taxes payable
Principal payments on long-term obligations
due within one year (Note 9)
$
Long-term Obligations (Note 9)
Future Income Tax Liabilities (Note 4)
ShareholdersÕ Equity
Capital Stock (Note 10)
Retained Earnings
$
190.4
595.0
505.4
738.7
57.4
61.6
2,148.5
50.9
867.6
131.0
3,198.0
683.4
312.4
90.8
CANADA
1997
$
$
$
68.3
690.1
534.5
640.3
48.9
41.9
2,024.0
22.8
825.1
135.4
3,007.3
560.2
318.4
162.7
163.4
1,250.0
11.6
1,052.9
680.5
103.2
2,033.7
836.1
75.9
1,964.9
451.8
712.5
1,164.3
3,198.0
450.9
591.5
1,042.4
3,007.3
$
Approved by the Board:
P.S. Walters
Director
J.M. Tory
Director
37
Consolidated Statements of Earnings
For the 52 weeks ended
January 2, 1999
Total revenues
Deduct:
Cost of merchandise sold, operating,
administrative and selling expenses
Depreciation
Interest
$
$
4,516.8
95.5
85.6
4,697.9
268.7
Income taxes (Note 4)
Current
Future
Net earnings
Earnings per share
4,966.6
January 3, 1998
$
$
114.7
7.6
122.3
146.4
1.38
4,583.5
4,204.1
78.1
86.1
4,368.3
215.2
$
$
105.0
(6.3)
98.7
116.5
1.10
Consolidated Statements of Retained Earnings
(in millions)
Opening balance
Net earnings
Dividends declared
Closing balance
38
January 2, 1999
January 3, 1998
$
$
591.5
146.4
737.9
25.4
712.5
$
$
500.4
116.5
616.9
25.4
591.5
Consolidated Statements of Changes in Financial Position
(in millions)
Cash Generated From (Used For) Operations
Net earnings
Non-cash items included in net earnings, principally depreciation
Funds from operations
Changes in working capital (Note 11)
January 2, 1999
$
Cash Generated From (Used For) Investment Activities
Purchases of capital assets
Proceeds from sale of capital assets
Deferred charges
146.4
111.7
258.1
(34.0)
224.1
SEARS
CANADA
January 3, 1998
$
116.5
88.9
205.4
(106.5)
98.9
(142.2)
6.9
95.1
(5.4)
(160.4)
1.1
(82.8)
(1.9)
(28.1)
(73.7)
6.8
(237.2)
Cash (Used For) Dividends
7.8
(11.6)
0.9
(2.9)
(25.4)
134.9
(104.6)
2.6
32.9
(25.4)
Increase (decrease) in cash and short-term investments at end of year
122.1
(130.8)
68.3
199.1
Investments and other assets
Cash Generated From (Used For) Financing Activities
Issue of long-term obligations
Repayment of long-term obligations
Net proceeds from issue of capital stock
Cash and short-term investments at beginning of year
Cash and short-term investments at end of year
$
190.4
$
68.3
39
Notes to Consolidated Financial Statements
1 . S U M M A RY O F A C C O U N T I N G P O L I C I E S
Principles of Consolidation
The consolidated financial statements include the accounts of
Sears Canada Inc. and its subsidiaries together with its proportionate share of the assets, liabilities, revenues and expenses of real
estate joint ventures (“the Company”).
Fiscal Year
The fiscal year of the Company consists of a 52 or 53 week
period ending on the Saturday closest to December 31. The 1998
fiscal year for the consolidated statements presented is the 52
weeks ended January 2, 1999 and the comparable period is the
53 weeks ended January 3, 1998.
Inventories
Inventories are valued at the lower of cost or net
realizable value. Cost is determined for retail store inventories by
the retail inventory method and for catalogue order and
miscellaneous inventories by the average cost method, based on
individual items.
Prepaid Advertising Expense
Catalogue production costs are deferred and amortized over the
life of each catalogue on the basis of the estimated sales from
that catalogue.
Deferred Receivables
Deferred receivables are charge account receivables that have not
yet been billed to the customers’ accounts. Service charges are not
accrued on these accounts over the deferral period which
generally ranges from six to 13 months.
Capital Assets
Capital assets are stated at cost. Depreciation and amortization
provisions are generally computed by the straight-line method
based on estimated useful lives of two to ten years for equipment
and fixtures, and of ten to 40 years for buildings and
improvements.
40
The Company’s proportionate share of buildings held in
joint ventures is generally depreciated by the sinking fund
method over 20 to 40 years.
The Company capitalizes interest charges for major
construction projects and depreciates these charges over the life of
the related assets.
Deferred Charges
The cumulative excess of contributions to the Company’s pension
plan over the amounts expensed is included in deferred charges.
Debt issuance costs are deferred and amortized by the
straight-line method to the due dates of the respective debt issues.
Securitization set up costs are amortized on a straight-line basis
over a maximum of five years.
Consulting fees for major projects are amortized by the
straight-line method over the period of future benefit ranging
from three to five years.
Certain other costs are deferred and amortized by the
straight-line method over the remaining life of the related asset.
Adoption of New Accounting Standard for Income Taxes
During the year, the Company elected early adoption of the new
Recommendations of the Canadian Institute of Chartered
Accountants relating to the accounting for income taxes. Under
this new accounting policy, applied retroactively, future income
taxes reflect the tax effect of differences between the book and tax
basis of assets and liabilities. Previously, deferred income taxes
reflected the tax effect of revenue and expense items reported for
accounting purposes in periods different than for tax purposes.
The Company elected not to restate prior years’ financial
statements as it determined that the adoption of this standard
does not have a material impact on the Company’s financial
position or results of operations in the current or preceding years.
Foreign Currency Translation
Obligations payable in U.S. dollars are translated at the exchange
rate in effect at the balance sheet date or at the rates fixed by
forward exchange contracts.
SEARS
SEARS
Transactions in foreign currencies are translated into
Canadian dollars at the rate in effect on the date of the
transaction.
Pensions
The Company maintains a defined benefit, final average
pension plan which covers substantially all of its regular fulltime associates as well as some of its part-time associates. The
plan provides pensions based on length of service and final
average earnings.
Current service costs under the Company’s pension plan are
charged to operations as they accrue. The excess of the market
value of pension fund assets over the actuarial present value of
the accrued pension obligations as at January 1, 1986 and any
surpluses or deficits arising since that date, are amortized over the
expected average remaining service life of the associate group
covered by the plan. Actuarial valuations are calculated using the
projected benefit method pro-rated on services, based on
management’s best estimate of the effect of future events
(Refer to Note 8).
The Company provides life insurance, medical and dental
benefits to eligible retired associates. These benefits are accrued in
the year that an associate retires. The accumulated obligation as at
January 1, 1989, for previously retired associates, was amortized
over 10 years beginning January 1, 1989.
Estimates
The preparation of the Company’s financial statements, in
accordance with generally accepted accounting principles,
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from
those estimates.
CANADA
CANADA
2 . C H A R G E A C C O U N T R E C E I VA B L E S
Details of charge account receivables are as follows:
(in millions)
1998
1997
$ 1,682.5 $ 1,655.7
Less: amounts securitized
(1,087.5)
(965.6)
Net charge account receivables
$ 595.0 $ 690.1
3 . OT H E R R E C E I VA B L E S
Other receivables consist of the following:
(in millions)
Deferred receivables
Less: amounts securitized
Net deferred receivables
Miscellaneous receivables
Total
$
$
1998
544.5 $
(83.2)
461.3
44.1
505.4 $
1997
497.4
(24.4)
473.0
61.5
534.5
4 . F U T U R E I N C O M E TA X E S
The tax effects of the significant components of temporary
differences giving rise to the Company’s net income tax assets and
liabilities are as follows:
1998
1997
LongLong(in millions)
Current
Term Current
Term
Future income tax assets:
Non-deductible
accruals
$ 61.6 $
$ 41.9
$
Total
$ 61.6 $
$ 41.9
$
Future income tax liabilities:
Depreciable capital
assets
$
- $ 49.8
$
$ 47.4
Deductible prepaid
expenses
45.2
27.4
Other
8.2
1.1
Total
$
- $ 103.2
$
$ 75.9
Earnings per Share
Earnings per share is calculated based on the weighted average
number of shares outstanding during the fiscal year.
41
The average combined federal and provincial statutory income
tax rate, excluding Large Corporations Tax, applicable to the
Company was 43.4% for 1998 and 43.5% for 1997.
A reconciliation of income taxes at the average statutory tax
rate to the actual income taxes is as follows:
(in millions)
$
Income taxes at average
statutory tax rate
Increase (decrease) in
income taxes resulting from:
Non-taxable portion of capital gains
Non-deductible items
Large Corporations Tax
Income taxes
Effective tax rate
$
1998
268.7
$
116.6
1997
215.2
93.6
(0.3)
0.6
(0.1)
0.4
5.4
122.3 $
45.5%
4.8
98.7
45.9 %
5 . I N V E S T M E N T S A N D OT H E R A S S E T S
(in millions)
Unsecured debentures
Subordinated loans
Other
Total
$
$
1998
44.1
6.8
50.9
$
$
1997
20.1
2.2
0.5
22.8
continued
6 . N E T C A P I TA L A S S E T S
Capital assets are summarized as follows:
(in millions)
Land
Buildings and improvements
– held by joint ventures
Equipment and fixtures
Gross capital assets
Accumulated depreciation
Buildings and improvements
– held by joint ventures
Equipment and fixtures
Total accumulated depreciation
Net capital assets
1998
$
64.3
592.7
274.9
788.5
1,720.4
1997
$
68.1
561.3
266.6
694.7
1,590.7
301.7
47.9
503.2
852.8
867.6
276.6
41.5
447.5
765.6
825.1
$
$
The carrying values of land and buildings are evaluated by
management on an on-going basis as to their net recoverable
amounts. This is a function of their average remaining useful
lives, market valuations, cash flows, and capitalization rate
models. Situations giving rise to a shortfall in the net recoverable
amounts are assessed as either temporary or permanent declines
in the carrying values; permanent declines are adjusted.
Management does not foresee adjustments in the near term.
7. DEFERRED CHARGES
Unsecured debentures, which represent investments made by the
Company in the independent trusts referred to in Note 15, in the
amount of $14.1 million, $6.0 million and $24.0 million are due
in 2010, 2011 and 2013 respectively. Subordinated loans, which
represent loans to one of the independent trusts, are due in 2006.
All bear interest at floating rates.
42
1998
(in millions)
Excess of pension contributions over
amounts expensed, including
contributions for post-retirement
benefits of $2.1 million
($3.1 million – 1997)
Deferred consulting fees
Tenant allowances for proportionate
interests in joint ventures
Debt issuance and securitization
set up costs
Other deferred charges
Total deferred charges
$
$
99.1
4.4
1997
$
107.5
0.7
10.6
9.4
5.1
11.8
131.0
6.2
11.6
135.4
$
SEARS
SEARS
8. PENSION PLAN
Selected financial information relating to the Company’s pension
plan is summarized as follows:
(in millions)
1998
1997
Pension plan assets at market value
$ 1,200.7 $ 1,137.8
Present value of accrued
pension obligations
$ 734.1 $ 697.1
9 . LO N G -T E R M O B L I G AT I O N S
(in millions)
Unsecured debentures:
11.00% due May 18, 1999
$
11.70% due July 10, 2000
8.25% due December 11, 2000
7.80% due March 1, 2001
6.55% due November 5, 2007
Proportionate share of long-term debt
of joint ventures with a weighted average
interest rate of 9.1% due 1999 to 2013
Capital lease obligations:
interest rates from 8.0 % to 17.0%
Less principal payments due within one
year included in current liabilities
Total long-term obligations
$
1998
150.0
100.0
125.0
100.0
125.0
1997
$
150.0
100.0
125.0
100.0
125.0
227.1
229.8
16.8
843.9
17.9
847.7
163.4
680.5
11.6
836.1
$
The Company’s proportionate share of the long-term debt of
joint ventures is secured by the shopping malls owned by the
joint ventures and, in some cases, guaranteed by the Company.
The Company’s total principal payments due within one
year include $12.4 million ($10.5 million – 1997) of the
proportionate share of the current debt obligations of
joint ventures.
Interest on long-term debt amounted to $78.6 million
($74.5 million – 1997).
CANADA
CANADA
Principal Payments
For fiscal years subsequent to the fiscal year ended January 2,
1999, principal payments required on the Company’s total longterm obligations are as follows:
(in millions)
1999
2000
2001
2002
2003
Subsequent years
Total debt outstanding
$
$
163.4
253.1
134.2
33.3
6.8
253.1
843.9
Significant Financing Transactions
On February 26, 1997, the outstanding 9.25% unsecured
debentures of Sears Canada Inc. in the amount of $100.0 million
matured.
On November 5, 1997, Sears Canada Inc. issued $125.0
million of 6.55% unsecured debentures, due November 5, 2007.
During 1997, long-term financing for new capital projects of
real estate joint ventures was obtained in the amount of $9.9
million. In addition, $81.8 million of joint venture debt matured
in 1997, of which $78.5 million was refinanced.
On December 23, 1998, Sears filed a shelf prospectus with
securities commissions in Canada that qualifies the issuance of up
to $500 million in medium-term notes (debt with a term to
maturity in excess of one year) over the next two years.
During 1998, long-term financing for new capital projects of
real estate joint ventures was obtained in the amount of $3.4
million. In addition, $15.5 million of joint venture debt matured
in 1998, of which $9.4 million was refinanced.
43
10. C A P I TA L S TO C K
An unlimited number of common shares are authorized. Changes
in the number of outstanding common shares and their stated
values since December 29, 1996 are as follows:
1998
1997
Stated
Stated
Number
value
Number
value
of shares (millions)
of shares
(millions)
Beginning
Balance
105,959,504 $ 450.9 105,610,910
$ 448.3
Issued
pursuant
to stock
options
124,460
0.9
348,594
2.6
Ending
Balance
106,083,964 $ 451.8 105,959,504
$ 450.9
Details of stock option transactions under the Employees Stock
Plan, including Special Incentive Awards, as at January 2, 1999,
are set out below. Special Incentive Awards of options and shares
are awarded to Senior Officers of the Company on a conditional
basis, subject to achievement of specified performance criteria,
within specified vesting periods. In 1998, 140,000 shares were
awarded as Special Incentive Awards, 40,000 of which are subject
to Plan amendment and obtaining requisite approvals. No shares
were issued during the year under Special Incentive Awards.
44
continued
Options granted Option
and accepted
price
175,975
$ 5.69
142,150
$ 7.53
195,200
$ 7.49
232,301
$ 5.58
275,730
$ 5.58
60,000
$ 9.72
286,750
$ 10.65
30,000
$ 10.82
306,870
$ 19.63
26,000
$ 24.73
Expiry
date
Feb. 1998
Feb. 1999
Feb. 2000
Feb. 2001
Feb. 2006
Nov. 2006
Jan. 2007
Feb. 2007
Jan. 2008
Apr. 2008
Special Incentive Award Options
170,000
$ 22.75
Feb. 2008
825,000
$ 28.75
Jul. 2008
Options Options
exercised outstanding
170,325
110,575
31,575
144,542
50,658
182,483
49,818
70,605
205,125
60,000
23,006
263,744
10,000
20,000
306,870
26,000
-
170,000
825,000
Options to purchase up to 342,870 common shares have
been authorized to be granted under the Employees Stock Plan
in 1999.
In April, 1998, the Company established the Directors’
Stock Option Plan to grant stock options to Directors who are
not Executive Officers of the Company or Sears, Roebuck and
Co. In 1998, 9,000 stock options were granted to six Directors at
an option price of $25.98. The options expire in April, 2008. No
options were exercised during the year.
The Company is authorized to issue an unlimited number of
non-voting, redeemable and retractable Class 1 Preferred Shares
in one or more series. As at January 2, 1999, the only shares
outstanding were the common shares of the Company.
SEARS
SEARS
CANADA
CANADA
11. C H A N G E S I N W O R K I N G C A P I TA L
13. S E G M E N T E D I N F O R M AT I O N
The cash generated from (used for) working capital is made up of
changes in the following accounts:
(in millions)
1998
1997
Other receivables
$
29.1 $ (108.8)
Future income tax assets
(1.9)
Inventories
(98.4)
(149.2)
Prepaid expenses and other assets
(10.0)
(2.4)
Accounts payable
123.2
87.3
Accrued liabilities
(6.0)
(6.5)
Income and other taxes payable
(71.9)
75.0
Cash generated from
(used for) working capital
$ (34.0) $ (106.5)
The Company has three reportable operating segments:
merchandising, credit, and real estate joint venture operations.
12. C O M M I T M E N T S
The reportable segments have been determined on the basis on
which management measures performance and makes decisions
on allocations of resources. The accounting policies of the
segments are the same as those described in the Summary of
Accounting Policies. During the preparation of the internal
financial statements the revenues and expenses between segments
are eliminated. The Company evaluates the performance of each
segment based on earnings before interest expense and income
taxes. The Company does not allocate interest expense or income
taxes to segments.
Minimum capital and operating lease payments, exclusive of
property taxes, insurance and other expenses payable directly by
the Company having an initial term of more than one year as at
January 2, 1999 are as follows:
Capital Operating
(in millions)
leases
leases
1999
$
2.7 $
69.9
2000
2.7
66.3
2001
2.7
61.1
2002
2.7
56.9
2003
2.7
53.0
Subsequent years
14.3
453.9
Minimum lease payments
$
27.8 $ 761.1
Less imputed interest
11.0
Total capital lease obligations
$
16.8
• The merchandising segment includes the Company’s full-line
department stores, specialty stores, catalogue operations, and
home services.
• The credit segment finances and manages customer charge
account receivables generated from the sale of goods and
services charged on the Sears credit card.
• The real estate joint venture segment consists of the Company’s
joint venture interests in shopping centres, most of which
contain a Sears store.
Total rentals charged to earnings under all operating leases for the
year ended January 2, 1999 amounted to $80.8 million ($79.4
million – 1997).
45
continued
Segmented Statements of Earnings for the 52 weeks ended January 2, 1999 and the 53 weeks ended January 3, 1998
(in millions)
Total revenues
Segment operating profit
Interest expense
Income taxes
1
Mdse.
$ 4,595.1 $
193.7
1998
Real Estate
Joint
Credit Ventures2
Total
Mdse.
305.9 $
65.6 $ 4,966.6 $ 4,210.6 $
126.7
33.9
354.3
141.7
85.6
122.3
Net earnings
$
1997
Real Estate
Joint
Credit
Ventures
Total
310.6 $
62.3 $ 4,583.5
127.5
32.1
301.3
86.1
98.7
146.4
$
116.5
Segmented Statements of Financial Position as at January 2, 1999 and January 3, 1998
1998
Real Estate
Joint
Credit
Ventures
(in millions)
Mdse.
Assets
Cash
Total receivables
Inventories
Net capital assets
Other
Total assets
Liabilities
Accounts payable
Accrued liabilities
Other
Total liabilities excluding debt
Capital employed
Capital expenditures
Depreciation and amortization
$
Total
1997
Real Estate
Joint
Credit
Ventures
Mdse.
Total
186.7 $
- $
68.9
1,024.3
738.7
609.2
283.2
9.8
$ 1,886.7 $ 1,034.1 $
3.7 $ 190.4 $
64.9 $
- $
7.2
1,100.4
90.9
1,130.3
738.7
640.3
258.4
867.6
568.4
7.9
300.9
230.5
14.0
277.2 $ 3,198.0 $ 1,595.0 $ 1,144.3 $
3.4 $
68.3
3.4
1,224.6
640.3
256.7
825.1
4.5
249.0
268.0 $ 3,007.3
$
6.1
3.4
15.2
24.7
252.5
8.7
6.0
5.0
2.1
15.2
22.3
245.7
13.1
5.5
$
$
$
$
677.2
287.7
186.4
1,151.3
735.4
133.5
89.5
$
$
$
$
$
0.1
21.3
(7.6)
13.8
1,020.3
-
$
$
$
$
$
$
$
$
$
$
683.4
312.4
194.0
1,189.8
2,008.2
142.2
95.5
$
$
$
$
$
555.2
294.5
191.7
1,041.4
553.6
147.3
72.6
$
$
$
$
$
21.8
31.7
53.5
1,090.8
-
$
$
$
$
$
$
$
$
$
$
560.2
318.4
238.6
1,117.2
1,890.1
160.4
78.1
1 The real estate joint venture revenues are net of $3.7 million ($3.7 million – 1997) representing the elimination of rental revenues earned from Sears full-line stores. Rental expense of the real
estate joint venture segment has been decreased by the same amount having no effect on segment operating profit.
2 The real estate joint ventures had cash generated from operations of $12.3 million ($8.7 million – 1997), cash used for investment activities of $9.5 million ($13.9 million – 1997), and cash
used for financing activities of $2.5 million (cash generated from financing activities of $6.8 million – 1997).
46
SEARS
SEARS
14. R E L AT E D PA R T Y T R A N S A C T I O N S
Sears, Roebuck and Co. is the beneficial holder of the majority of
the outstanding common shares of Sears Canada Inc., holding
approximately 55% of the common shares of the Company.
During the year, Sears, Roebuck and Co. charged the
Company $5.4 million ($5.5 million – 1997) in the ordinary
course of business for shared merchandise purchasing services.
These amounts are included in the cost of merchandise sold,
operating, administrative, and selling expenses.
Sears, Roebuck and Co. charged the Company $12.5 million
($18.4 million – 1997) and the Company charged Sears,
Roebuck and Co. $5.4 million ($4.6 million – 1997) for other
reimbursements. These reimbursements were primarily in respect
of customer cross-border purchases made on the Sears Card, and
the Sears, Roebuck and Co. charge card, as well as software and
support services.
There were no significant commitments, receivables or
payables between the companies at the end of 1998 or 1997.
15. F I N A N C I A L I N S T R U M E N T S
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 and
controls are in place to prevent and detect these activities. The
financial instruments do not require the payment of premiums or
cash margins prior to settlement. These financial instruments can
be summarized as follows:
CANADA
CANADA
Securitization of Charge Account Receivables
Securitization is an important financial vehicle which provides the
Company with access to funds at a low cost. Sears Acceptance
Company Inc. (“Acceptance”), a wholly owned subsidiary of the
Company, purchases all Sears Card charge account receivables
(including deferred receivables) generated by merchandise and
service sales. Acceptance sells undivided co-ownership interests in
its portfolio of charge account receivables and deferred receivables
to independent trusts. Acceptance retains the income generated
by the undivided co-ownership interests sold to the trusts in
excess of the trusts’ stipulated share of service charge revenues
(Refer to Notes 2 and 3).
Interest Rate Risk
To manage the Company’s exposure to interest rate risks, the
Company has entered into interest rate swap contracts with
Schedule “A” Banks. Neither the notional principal amounts nor
the current replacement value of these financial instruments are
carried on the consolidated balance sheet.
As at January 2, 1999, the Company had three interest rate
swap contracts in place to reduce the risk associated with variable
interest rates associated with the floating rate debt issued by the
trusts. For the year ended January 2, 1999, a net interest
differential of $8.9 million ($13.2 million – 1997) was paid on
the floating-to-fixed interest rate swap contracts and was recorded
as an increase of interest expense of the Company.
Credit Risk
The Company’s exposure to concentration of credit risk is
limited. Accounts receivable are primarily from Sears Card
customers, a large and diverse group.
Foreign Exchange Risk
From time to time the Company enters into foreign exchange
contracts to reduce the foreign exchange risk with respect to U.S.
dollar denominated goods purchased for resale. There were no
such contracts outstanding at the end of 1998 or 1997.
47
Interest Rate Sensitivity Position
Interest rate risk reflects the sensitivity of the Company’s financial
condition to movements in interest rates.
The table below identifies the Company’s financial assets and
liabilities which are sensitive to interest rate movements and those
which are non-interest rate sensitive. Financial assets and
liabilities which do not bear interest or bear interest at fixed rates
are classified as non-interest rate sensitive.
1998
(in millions)
Interest
Sensitive
NonInterest
Sensitive
1997
Interest
Sensitive
Cash net of
bank advances
and shortterm notes
$ 190.4 $
- $
Investments
and other assets
50.9
Total
receivables
1,100.4
Long-term
obligations
(including current
portion)3
(182.5)
(661.4)
Net balance
sheet interest
rate sensitivity
position
$
58.8
$ 439.0 $
68.3
NonInterest
Sensitive
$
-
22.8
-
-
1,224.6
(33.7)
57.4
(814.0)
$ 410.6
3 Interest sensitive portion includes long-term prime-rate based debt and current portion
of long-term debt due to be renegotiated.
48
continued
In addition to the net balance sheet interest rate sensitivity
position, the Company is also affected by interest rate sensitive
debt outstanding in the trusts. Any change in short-term interest
rates will impact floating rate debt and debt with maturities of
less than one year held by the trusts, which totaled $841.7
million at January 2, 1999 ($811.1 million at January 3, 1998).
An increase in the cost of this off-balance sheet debt will result
in a decrease in the Company’s share of service charge revenues.
This interest rate exposure is offset, in part, by interest rate swap
contracts held by the Company in the notional amount of $350
million ($200 million – 1997).
Fair Value of Financial Instruments
The estimated fair values of financial instruments as at January 2,
1999 and January 3, 1998 are based on relevant market prices
and information available at that time. As a significant number of
the Company’s assets and liabilities, including inventory and
capital assets, do not meet the definition of financial instruments,
the fair value estimates below do not reflect the fair value of the
Company as a whole.
Carrying value approximates fair value for financial
instruments which are short-term in nature. These include cash
and short-term investments, charge account receivables, other
receivables, prepaid expenses and other assets, bank advances and
short-term notes, accounts payable, income and other taxes
payable, and principal payments on long-term obligations due
within one year. For financial instruments which are long-term in
nature, fair value estimates are as follows:
SEARS
(in millions)
1998
Carrying or
Notional
Fair
Notional
Fair
Amount
Value
Amount
Value
Financial Assets and Liabilities
Investments and
other assets
$
50.9 $ 50.9 $
Long-term
obligations
$ 680.5 $ 713.6 $
(in millions)
16. U N C E R TA I N T Y D U E TO T H E
YEAR 2000 ISSUE
1997
Carrying or
1998
22.8
836.1
$
22.8
$ 895.7
1997
Carrying
Fair
Carrying
Fair
or
Value
or
Value
Notional
Premium/
Notional
Premium/
Amount
(Discount)
Amount
(Discount)
Off-Balance Sheet Interest Rate Swaps
9.40%, expiring
April 1999
$ 100.0 $ (2.1) $
4.95%, expiring
April 2001
150.0
9.54%, expiring
April 2002
100.0
(14.4)
$ 350.0 $ (16.5) $
100.0
$
100.0
200.0
CANADA
(6.4)
The Year 2000 Issue arises because many computerized systems
use two digits rather than four to identify a year. Date sensitive
systems may recognize the year 2000 as 1900 or some other date,
resulting in errors when information using year 2000 dates is
processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something
other than a date. The effects of the Year 2000 Issue may be
experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may
range from minor errors to significant systems failure which
could affect an entity’s ability to conduct normal business
operations. While the Company is addressing the Year 2000
Issue, it is not possible to be certain that all aspects of the Year
2000 Issue affecting the entity, including those related to the
efforts of customers, suppliers, or other third parties, will be
fully resolved.
-
$
(16.5)
(22.9)
The fair value of investments and other assets and long-term
obligations was estimated based on quoted market prices, when
available, or discounted cash flows using discount rates based on
market interest rates and the Company’s credit rating. As longterm debt coupon rates are higher than current market interest
rates, the fair value of the Company’s long-term debt exceeds its
carrying value.
The fair value of the interest rate swap contracts was
estimated by referring to the appropriate yield curves with
matching terms of maturity. A fair value discount reflects the
estimated amount that the Company would pay to terminate the
contracts at the reporting date.
49
Corporate Governance
The Corporation, the Board of Directors and management are
committed to maintain high standards of corporate governance.
The Board believes that effective corporate governance practices
are essential to the well-being of the Corporation, to improve
corporate performance and to the best interests of shareholders.
The Board of Directors is responsible to oversee the business and
affairs of the Corporation and to act with a view to the best
interests of the Corporation, providing guidance and direction to
the management of the Corporation in order to attain corporate
objectives and maximize shareholder value. The Board carries out
its stewardship functions directly and through its Committees.
The Board of Directors and the Audit and Corporate
Governance, Compensation and Nominating Committees of the
Board are each responsible for certain corporate governance
functions in accordance with their respective mandates. The
Audit and Corporate Governance Committee is responsible
for monitoring and guiding the corporate governance approach
and practices of the Corporation. This Committee is satisfied
that the Corporation is in substantial conformance with the
recommended practices of The Toronto Stock Exchange and
the Montreal Exchange.
The Directors are elected annually by the shareholders.
The Board is currently composed of ten Directors. The
Corporation’s significant shareholder, Sears, Roebuck and Co.,
beneficially holds approximately 55% of the common shares of
the Corporation. Two of the Directors are executive officers of
Sears, Roebuck and Co. and seven Directors (or approximately
70% of the total number of Directors) are independent of the
Corporation and its affiliates. The Board’s composition fairly
reflects the investment in the Corporation by minority
shareholders and the independence of the Board from
management.
50
The Board has five regularly scheduled meetings each year with
additional meetings held as required. The Board has the
opportunity to meet in camera (without management present) at
each meeting. In 1998, there were five meetings of the Board,
three meetings of the Audit and Corporate Governance
Committee, three meetings of the Compensation Committee and
four meetings of the Nominating Committee. Attendance of the
Directors at these meetings has regularly exceeded 90%.
The Corporation has designed the Directors’ compensation to
align the Directors’ interests with corporate performance and the
return to shareholders. Independent Directors receive an annual
equity grant of common shares and stock options under plans
established by the Corporation. In addition to equity
compensation, independent Directors receive a $18,000 annual
cash retainer for serving on the Board. The Chairs of the Board
Committees receive an additional annual retainer of $3,000. No
fees are paid for attendance at Board or Committee meetings.
A more detailed Statement of Corporate Governance Practices is
contained in the Management Proxy Circular of the Corporation,
dated March 4, 1999, a copy of which may be obtained from the
Secretary. The Directors of the Corporation, their principal
occupation and their Committee appointments are listed on page
51 of this Report.
Directors and Officers
SEARS
(as at January 2, 1999)
CANADA
Board of Directors
Honorary Directors
Jalynn H. Bennett ◆
President, Jalynn H. Bennett and Associates Ltd.
James W. Button
Former Senior Executive Vice President of Merchandising,
Sears, Roebuck and Co.
Micheline Bouchard
Chairman of the Board, President and Chief Executive
Officer, Motorola Canada Limited
James R. Clifford
President and Chief Operating Officer, Full-Line Stores,
Officers
Paul S. Walters
Chairman of the Board and Chief Executive Officer
William A. Dimma ◆ ●
Corporate Director
Jeanne E. Lougheed
Corporate Director
C. Richard Sharpe
Former Chairman of the Board and Chief Executive Officer,
Sears Canada Inc.
H. Ray Bird
Senior Vice-President, Credit
■
Arthur C. Martinez ■
Chairman of the Board, President and Chief Executive Officer,
James W. Moir, Jr. ●
Corporate Director
John T. Butcher
Senior Vice-President and Chief Financial Officer
Barbara L. Duffy
Senior Vice-President, Human Resources
Brent V. Hollister
Executive Vice-President, Sales and Service
Alfred Powis ■ ◆ ●
Corporate Director
John D. Smith
Senior Vice-President and Chief Information Officer
James M. Tory ■ ◆
Partner, Tory Tory DesLauriers & Binnington,
Barristers & Solicitors
Richard W. Sorby
Executive Vice-President, Marketing
Paul S. Walters ■ ●
Chairman of the Board and Chief Executive Officer,
Sears Canada Inc.
William R. Turner
Executive Vice-President, Merchandising and Logistics
Rudolph R. Vezér
Senior Vice-President, Secretary and General Counsel
Committees
■
Compensation
◆
Audit and Corporate Governance
●
Nominating
Paul S. Walters is an ex officio member of the Nominating Committee.
51
Corporate Information
Head Office
Sears Canada Inc.
222 Jarvis Street
Toronto, Ontario
Canada M5B 2B8
Transfer Agent and Registrar
CIBC Mellon Trust Company
Toronto, Ontario
Montreal, Quebec
Answerline: (416) 643-5500 or 1-800-387-0825
Internet Address: www.cibcmellon.ca (website) or
[email protected] (e-mail)
Listings
The Montreal Exchange
The Toronto Stock Exchange
Trading Symbol
SCC
Annual and Special Meeting
The Annual and Special Meeting of Shareholders of
Sears Canada Inc. will be held on Monday, April 19, 1999
at 10:00 a.m. in the Burton-Wood Auditorium
Main Floor
222 Jarvis Street
Toronto, Ontario, Canada
ƒdition fran•aise du Rapport annuel
On peut se procurer lÕŽdition fran•aise de ce
rapport en Žcrivant au:
S/703, Relations publiques
Sears Canada Inc.
222 Jarvis Street
Toronto, Ontario
Canada M5B 2B8
Pour de plus amples renseignements au sujet de la
SociŽtŽ, veuillez Žcrire au Service des relations
publiques, ou composer le (416) 941-4425
For More Information
Additional copies of the Annual Report can be obtained
through the Public Affairs Department at the Head Office of
Sears Canada Inc.
For more information about the Company, write to
Public Affairs, or call (416) 941-4425
Internet Address: www.sears.ca (website) or enquiries:
[email protected]
Produced by Sears Canada Inc.
Public Affairs
Design by Compendium Design International Inc.
Printed in Canada by Kempenfelt Graphics Group Inc.
Certain brands mentioned in this report are the trademarks of
Sears Canada Inc., Sears, Roebuck and Co., or used under license.
Others are the property of their owner.
52
get comfortable.™
inside
The
Many Sides of SEARS
at a
S E A R S
DEALER STORES
store in Canada.Ó
C A N A D A
I N C.
1 9 9 8
FURNITURE &
APPLIANCE STORES
A n n u a l
R e p o r t
C ATA LO G U E
SEARS
OUTLET STORES
ÒSears quality at
outlet prices.Ó
outside

Sears Canada

Transcription

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