Operator: Good day, ladies and gentlemen and welcome to the Sears Holdings Fiscal 2012 Third Quarter Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to introduce your host of today's conference Bill Phelan. Sir, you may begin
William K. Phelan - SVP, Finance: Thank you, operator. Good afternoon and welcome to Sears Holdings Earnings Call. I am Bill Phelan, Senior Vice President of Finance for Sears Holdings. Joining me today are Lou D'Ambrosio, our Chief Executive Officer; Rob Schriesheim, our Chief Financial Officer; and Ron Boire, who leads merchandising at our Sears and Kmart Formats; and Imran Jooma, who leads our online business and marketing efforts.
For our call today, you may follow along with the slides that are shown. Slides will be automatically advanced during the discussion and will be posted at our website.
Before we begin, I would like to remind you that today's discussion will contain forward-looking statements related to future events and expectations. These statements are based on current expectations and the current economic environment, and actual results may differ materially from those expressed or implied in the forward-looking statements. You can find factors that could cause the Company's actual results to differ materially listed in today's press release, in the presentation for today's call that is posted at the Investor Information section of searsholdings.com and in our most recent SEC filings.
In addition, our discussion will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measure can be found in today's press release. Any reference in our discussion to EBITDA means adjusted EBITDA as defined in the press release and presentation. Finally, we assume no obligation to update the information presented on this call except as required by law.
I would now like to turn the call over to Lou.
Louis J. D'Ambrosio - CEO and President: Thanks, Bill and let me thank everyone for joining the call today. When we held our annual meeting in May we outlined three priorities for our Company. Financial and operational discipline, core retail excellence and innovation for our customers and members; specifically through Integrated Retail and our SHOP YOUR WAY membership program. We've made progress in each and will touch on them during today's call.
For the third quarter we had modest EBITDA growth year-over-year, led by some of our most important categories, like Appliances, Apparel and Home Services. In fact, we also had comp store growth in Sears Apparel and Appliances. This was partly offset where we have some challenges in areas like consumer electronics and grocery and household which we will discuss. We're on track to generate $1.8 billion of additional liquidity, $1.7 billion is done. These numbers far exceed the target we set during the earnings call we had in February.
So the effect of these actions is that our current position coupled with a significant reduction in near-term obligations gives us substantial financial flexibility and we intend to continue to take actions that create value and retain the flexibility to invest in the strategic priorities of our Company. We have significant assets, some of the best brands in retail, over 200 million square feet of real estate, more than $5 billion of inventory already paid for, and the largest Home Services business to name a few.
We're here to translate those assets into value. Our preference, our focus is to accomplish this operationally. Likewise where it makes sense, we will optimize our assets in other ways. We will do this thoughtfully and deliberately where it creates long-term value. This industry, the retail industry, continues to change dramatically and rapidly. It will never go back to what it was and we've seen the consequences for those that have not changed fast enough. There is no choice which is why we will continue to accelerate our transformation.
We are rapidly moving to a member-based business model. Our investments are focused on our members and their experience. This is why we are investing several hundred million dollars this year alone in Integrated Retail and SHOP YOUR WAY membership program.
More than half of our revenues at Sears and Kmart now come from SHOP YOUR WAY members. The program provides compelling benefits and conveniences from no receipt required on returns or exchanges, guaranteed pickup in 5 minutes, personalized deals, you can engage in it further then when ShopYourWay.com down, which brings together all these capabilities and many more in a very engaging social shopping experience and Imran Jooma will elaborate on this later in the call.
Our members are increasingly traveling between channels and want to do this seamlessly as they gather information and shop. This is why we've been investing in Integrated Retail and we are seeing it pay off. The total online business grew over 20% in the quarter. What's interesting is that the most significant part of this growth came from multi-channel transactions like buy online, pickup-in-store or order and store for a home delivery and about half of the online business now includes interactions with another channel.
Now of course, stores are still very important. They are key part of the shopping system and we are taking actions to enhance the store experience with store redesigns, technology deployment, introducing new merchandise like our Outdoor Life shop at Sears which are going very well. Ron Boire is leading this and accelerating these initiatives and Ron will discuss this later in the call. But stores are now part of a bigger shopping system, which does not necessarily need to be as asset incentive. At the center of the system is the member and that is our focal point of investment and increasingly the center of our business model.
As I conclude my opening comments, I want to note that we continue to look for ways to benefit our associates as we transform our Company. You may have recently seen our changes to healthcare as we move to a private exchange model. We are providing our associates with greater choice and positioning Sears Holdings for compliance with upcoming healthcare regulations.
So in summary, we've made a lot of progress, including sizable EBITDA growth year-to-date demonstrate the financial flexibility and strong traction on our strategic initiatives. We still have a lot of work to get done.
So with that, let me now turn it over to our CFO, Rob Schriesheim and Rob is going to talk about the financial results and actions and also the evolution of our business models with the particular focus on value creation. Rob?
Robert A. Schriesheim - EVP and CFO: Thanks, Lou. On Slide 6 as you can see, I'm going to cover our Q3 results as well as our financial position and liquidity profile. However, the primary focus of my remarks are twofold, first, we view the progress we've made against the specific actions we outlined earlier this year; and second, discuss our business model evolution as we transform to a member centric platform. As part of that evolution, we have implemented specific action to reduce our risk profile, enhance the productivity of our asset base, and unlock value in our asset portfolio. This model leverages our ecosystem of stores, brands, online channels, social media assets, mobile applications, technology investments, and surrounded by our SHOP YOUR WAY membership program.
One of the ancillary benefits of this model is de-risking, a recurring theme which you'll hear from me today. By transforming our Company into a more nimble, less asset intensive business model, we can reduce the level of risk in our operational structure and balance sheet while concurrently improving the returns on our invested capital. Our actions have positively impacted our liquidity by $1.8 billion, while unlocking value in our asset portfolio. These actions have included, first, a reduction in our fixed cost structure of over $500 million for the full year; second, a reduction in our inventory of nearly $1 billion; third, optimizing our asset structure and enhancing our management focus through the separation of Sears Hometown and Outlet Stores, and the recent spinoff of 45% of Sears Canada, with the former transaction generating $446.5 million in proceeds; fourth, a sale of 14 real estate properties generating $440 million in proceeds; fifth, a $1 billion reduction in our lease obligation since 2010; finally, we've capitalized on an opportunity to reduce risk related legacy pension obligation.
We intend to continue to be proactive in generating at least $500 million in additional liquidity over the next 12 months through selective actions that are consistent with our focus on creating long-term value. The exact form and amount will depend on circumstances and opportunities including market conditions. I'll speak in more detail to our business model de-risking initiatives; but first let me speak briefly to our third quarter performance.
Beginning on Slide 7 let's take a look at the third quarter results. On a GAAP basis, we reported a net loss of $498 million as compared to a net loss of $410 million last year. The higher loss is primarily due to reported income tax expense. Last year, we reported a tax benefit of $91 million. This this year we have tax expense of $11 million for a swing of $102 million. Accounting rules currently preclude us from recognizing a tax benefit on operating losses. However, it's important to note that this is not an economic loss as these NOLs and other tax benefits remain available to reduce future taxable income. Because GAAP income includes many non-operating items, we use adjusted EBITDA to evaluate our performance.
We improved our EBITDA by $34 million in the quarter, $18 million domestically and $16 million in Sears Canada. Regarding revenue, Sears Domestic comp store sales decline of 1.6% is attributable to consumer electronics. Excluding this category our Sears full line store comps would have been positive.
Kmart comp store sales were down 4.8% and were affected by consumer electronics and the shift from brand-name drugs to generic equivalents.
On a consolidated basis, margin rate declined 10 basis points driven by consumer electronics, grocery and household and Lands' End, partially offset by improvement at Sears Canada and Apparel. Sears' domestic margin rate was up 10 basis points, Canada was up 220 basis points and Kmart was down 110 basis points. Our expense performance remain strong as we continue to de-risk our cost structure by reducing our fixed expenses consistent with our strategic objective of converting fixed expenses to variable expenses and I'll speak to this further a little later.
Moving on to Slide 8, while EBITDA was up only modestly, we did generate profit improvements in many important businesses in the quarter, including home appliances and Sears apparel which both had positive sales comps and margin rate improvements and our Kmart Apparel, Home Services and Pharmacy businesses generated profit improvement. Improvement from those businesses were partially offset by consumer electronics, which experienced comp sales declines as the overall industry continues to be impacted by price compression. The Kmart grocery and household categories experienced revenue and margin rate declines due to the competitive nature of that industry.
Another aspect of our business which performed well in the quarter is Integrated Retail at both Sears and Kmart as online sales, including web to store and store to web increased by more than 20% at both Sears and Kmart.com as Lou noted.
On Slide 9 you will note that our third quarter was affected by several significant items, which reduced net income by $287 million.
Slide 10 summarizes our year-to-date results. We have generated $271 million in EBITDA improvement over last year. While on the topic of the financial performance, let me speak to our financial position and liquidity. As you can see on Slide 12, at quarter end we have $633 million of cash, in addition to these liquid assets, we also have immediate availability of $1 billion on our $3.3 billion domestic credit facility and $400 million on our Canadian facility. On top of that, we have over $5.7 billion of equity we have in inventory. Inventory is a current asset which could get converted to cash very quickly on average of 90 days in the normal course. Taken together, we have nearly $8 billion of liquid assets and this is at our peak borrowing period. Lastly, let me point out that we also have $1 billion accordion feature, as well as $760 million of second-lien capacity on our domestic revolver, providing further available capital resources that can be quickly accessed.
On Slide 13 is a summary of our revolver usage. Revolver borrowings are $179 million lower than last year. Letters of credit issued by the facility have increased by $157 million. As you can see, we have $22 million more availability this year than last year.
Slide 14 itemizes on debt balances as of the end of the quarter. The main points are short-term borrowings consisting with commercial paper and revolver borrowings are $112 million lower than last year and total debt declined by more than $0.5 billion since last year as we; one, reduced the level of debt required to fund operations; and two, executed a spinoff of Orchard Supply Hardware, which was a deleveraging transaction since their debt transferred with the business. It's important to note that debt declined by $548 million despite the fact that we voluntarily chose to contribute an additional $203 million into our pension plan last month, as I'll discuss in further detail a little later.
As shown on Slide 15, our debt structure is firmly in place for the next few years as our domestic revolver extends into 2016 and we have minimal term debt maturities over the next few years.
Let me close out this section with Slide 16 by summarizing our fixed payment obligations, including share repurchases which I recognized obviously and made it our discretion. As you can see in 2013, we only have $400 million and required cash outflows for debt and capital lease maturities and pension contributions which is much lower than recent years. As a matter fact, it's about half 2012 and half of 2011.
Let me move to the discussion of the actions we took to unlock value, enhance our financial flexibility and financially de-risk our Company. On slide 18 we're apprised of the slide I showed at our shareholder meeting in May of the actions we said we would take to capitalize on our financial flexibility while unlocking value. The estimate at that time was to generate approximately $1.7 billion of cash. As you can see by the total on the lower right side of this slide we expect to successfully generate $1.8 billion even after consideration of the $203 million pension contribution we chose to make in September.
To-date we have already generated 1.7 billion. Not only were these successful in demonstrating financial flexibility they also serve to de-risk our operations and balance sheet as we transform to a less asset-intensive business model. An important component of this model is the migration from a predominately fixed cost base to a more variable cost base. There are four key areas where we have financially de-risked our profile, specifically our lease obligations, our investment in inventory, our fixed cost base, and settling a portion of our legacy pension obligation.
Looking at Slide 19, given the amount of real-estate we control, we are one of the country's largest real estate companies. We have over 200 million square feet of real-estate space and this represents a valuable asset for us as evidenced by recent real estate sales. While we own many of our locations over 700 large stores, we do lease about twice as many locations. As such rent is a significant annual fixed cost and commitment.
An important aspect of our portion of real estate lease is its maturity. This is important for two reasons. First, most of these leases were entered into many years ago and as such we enjoy the lower market rents for a significant number of locations; and second, we're in the option periods for most leases which provides us with the opportunity to decide wither to stay or leave that location every few years. A typical large store lease would have a 20 or 25 year initial term and then a series of five year renewals. We're in the renewal period for most leases so we have the opportunity to cost effectively exit marginally performing stores every few years. So as you can see from the chart on Slide 19, our operating lease obligation has declined by more than $3 billion over the past several years and by almost $1 billion since just 2010, thus reducing our rental obligation.
Moving to Slide 20; since last year we are focused on enhancing our efficiency and improving our return on capital employed by reducing our inventory investment by $1.4 billion. $400 million incurred to the Sears Hometown and Outlet Stores transaction. $1 billion was generated through store closers and productivity improvements as planned. While we have reduced our inventory investment we have not reduced our customers' choices. On contrary, the capability of the marketplace at sears.com demonstrates the power of leveraging technologies and is one of the reasons we have been heavily investing in these capabilities for several years. We can exponentially increase our customer's choice while simultaneously lowering our capital base and de-risking our business model by reducing our investment in traditional real estate and inventory assets.
Looking at Slide 21, another method to reduce the level of risk for an enterprise is to reduce its fixed costs. We consider fixed cost to include rent, utilities, management payroll, and traditional forms of marketing like circulars and television. Note that some of these costs are presented in the cost of sales, buying and occupancy line on our income statement. This year we have successfully reduced these fixed costs by $430 million through the third quarter and expect to realize more than $500 million for the full year, this compares to our initial objective outlined at our Annual Meeting of $200 million.
As shown on Slide 22. We also took the opportunity that was presented to us to reduce our pension risk. We voluntarily elected to contribute an additional $203 million of pension plan in order to get to 80% funded status, which allowed us to offer lump sum settlement to a portion of our pension plan participants.
As shown on Slide 23. We believe that the lump sum settlement is beneficial as it reduces pension plan risks as outlined. Accounting rules requires to recognize a non-cash special charge to earnings for pension expense due to settlement. Also note the lump sum amounts will be paid from the pension plan assets not by the Company.
As shown on Slide 24, we completed a number of strategic transactions in 2012 which explicitly demonstrate the inherent value in our portfolio of assets. First, we sold 14 stores in two separate transactions for $440 million in proceeds which demonstrates the underlying value in our real estate portfolio. Second, the Sears Hometown and Outlet Store rights offering was a very successful transaction. It closed on October 11 and generated $446.5 million proceeds for Sears Holdings. Was structured to allow all shareholders participate on the same basis and to maintain their ownership level in the new Company. It provides our shareholders with greater flexibility and providing a choice of securities they may own and it maintains the Sears Hometown volume and our ecosystem as we continue to procure product for them and as such we experienced no loss of volume of purchasing power or reduction in operating scale efficiencies.
Third, most recent transaction with the spin-off of a 45% interest of Sears Canada to our shareholders which is two days ago leaving us with a 51% controlling stake. Again, the benefits of this transaction include greater focus by Sears Canada and Holdings on the respective businesses, greater choice for investors and increased capital markets and trading liquidity for Sears Canada common shares.
There are two reporting items related to Hometown stores that I should make you aware of. The first one relates to the reporting of historical results because we continue to provide many services to Sears Hometown. We are deemed by the accounting rules to 'continuing cash flows with Sears Hometown.' As such, we are precluded from presenting Sear Hometown a discontinued operation. The results through 11, 2012 will still be included in historic financials.
The second reporting item relates to reporting ongoing activity with Hometown stores. Our financial statements from October 11, 2012 forward will include all of our transactions with Home Town store. We'll continue to procure products for them. We'll also provide various administrative services for them. Accordingly, we'll report sales for all products sold to Hometown and for services performed for them. However, as the products and services are generally provided to them at a cost, there will be minimal if any profit on these sales with one notable exception as we will earn royalties on all Kenmore, Craftsman and DieHard sales in Sears Hometown and Outlet Stores. This will result in a lower overall reported margin rate for Sears Holdings and we'll disclose the amounts in the future for transparency.
Moving to Slide 25, the Sears Canada and Orchard Supply transactions were technically dividends and resulted in an adjustment of Sears Holdings share price because they distributed ownership of Sears Holdings businesses to shareholders. While no specific price adjustments was made in connection with the Sears Hometown and Outlet Store transaction, it was the distribution of rights to all shareholders which provided value.
Our primary objective is to create value through improved operating performance as we execute on our strategic vision on a proactive basis. However, as we have stated in the past, we are also committed to unlocking value in our asset portfolio as we consider the optimal structure consistent with our evolving business model. On Slide 25 we illustrate the adjustments to Sears Holdings share price to take into consideration the recent trading values of the businesses which were separated consisting of Sears Hometown and Outlet Stores, Sears Canada and Orchard Supply Hardware stores. As you can see the combined adjustment value is about $10 per share at current trading prices. This process has been consistent with our commitment to transform the Company and unlock value.
With that, let me turn it over to Ron Boire.
Ronald D. Boire - EVP, Chief Merchandising Officer and President, Sears Full Line Stores and Kmart Formats: Thanks Rob. Good afternoon. I've been now been at Sears Holdings for about 10 months and I'm continually impressed by the products and capabilities our Company provides. Today I am going to discuss three areas in which we are driving action. First, improving the merchandise assortment; second, enhancing the customer experience; third, winning the 2012 holiday season. We continue to focus on the cornerstone brands within our portfolio, such as Kenmore, Craftsman and DieHard, the pillars on which our brand strategies are built. In addition to these strategic brands, we are sharpening our assortment and have launched important product lines and brands, many exclusively available at Sears and Kmart.
A few highlights include, together with Outdoor Life magazine we've created an exclusive brand that is housed in nearly 800 Outdoor Life shops and Sears stores nationwide. These shops feature a compelling assortment of casual and performance apparel geared towards men in the outdoor lifestyle, while offering function and comfort at a value. Outdoor Life is off to a great start, exceeding our plans by double-digits with categories like Flannel up over 40%. Merchandise improvements like Outdoor Life have resulted in five consecutive quarters of comp store sales growth for Sears apparel.
Last month, our Consumer Electronics team launched Alphaline, our exclusive Sears Holding brand of high-quality consumer electronics, headphones and accessories, sold at both Sears and Kmart Alphaline was crafted to offer incredible styles and performance at a great value. We are experiencing double-digit increases in the Alphaline categories since their launch. Last quarter we also launched Tempur-Pedic mattresses in select stores nationwide. With the addition of one of the biggest names in mattresses, we've built on our holiday strong business and added a product line that our members are responding to. We have also expanded our mattress space in 150 of our Sears locations which is producing comp sales increases of over 10% for the category. As the nation's number fitness retailer we have exclusively offered NordicTrack equipment to our customers and members. This year we became the exclusive national retailer of (soul) equipment in full-line Sears stores. We are also proud Sears fitness flagships which offer customers and members a complete fitness destination.
These new launches are in addition to our strong celebrity brands such as Sandra Lee, Sofia Vergara, the Kardashian Kollection, Jaclyn Smith and Selena Gomez just to name a few.
Having the products our customers want is crucial. We are also improving the in-store presentation in key categories as we previewed at our Annual Meeting. For example, we are refreshing our apparel departments nationwide and creating feature shops in areas such as Laura Scott, men's denim, and men's workwear. We have improved the layout of many stores and refloated stores to promote relevant product adjacencies. We're rolling out a major refresh this fall that will continue into next year. It's also important that this is not a major remodel of the store. We can make these changes in a very cost-effective way at roughly $250,000 per store. This illustrates our ability to efficiently transform the in-store experience at Sears.
Our Integrated Retail strategy leverages capabilities of our online store and store base in ways that our competition simply cannot. For example, our customers can buy online and pick up in the store including curbside pickup. Additionally, nearly half of our Sears stores utilize iPads with mobile checkout to provide rich content shopping experiences in appliances, consumer electronics, fitness and other consultative areas. We also offer e-receipts for purchase. We are consistently focused on offerings that – responsive to how our customers want to shop, which integrate the physical and digital worlds.
Our products in our Integrated Retail experience are coming together this holiday season. We have great exclusive products available such as Barbie Holiday 2012 Brunette Doll and the Hot Wheels Dune Racer in our toy departments at Kmart. Also in Kmart customers can find the stylist collection from Sofia Vergara, it was recently expanded into the Activeware category. In tools, Craftsman launched new innovation in the bolt-on platform, a powerful modular tool platform that saves money and space while having all of your tools in one place.
In Consumer Electronics, our members and customers can find great gifts under $20 like our new headphone line from $5 to $20 and $5 iPod and iPhone cases. We continue to expand our seasonal and holiday business at Sears and Kmart. We're thrilled with the launch of Sandra, by Sandra Lee holiday collection at Kmart.
We know our members value convenience so we've extended our holiday hours this year to better serve our customers and members. Both Sears and Kmart will now welcome members and customers' in-store on Thanksgiving Day this year. Our Kmart stores are better prepared to take care of the customers layaway needs with enhancements like checkout express and free layaway.
Within the Sears format we started our hiring for holiday earlier this year to ensure access to the best associates, to serve our customers and member better. We have improved our holiday visual presentation, improved store navigation and we have a stronger merchandise statement to show our customers cross merchandising opportunities that bring to life our tagline this is how to gift, this is Sears.
Now let me close by giving you a timely example the way our products and capabilities come together to offer our members value. Many people were impacted by super storm Sandy, we felt we needed to help and help with speed. We were able to leverage the diversity of our products as well as our strong logistics network to quickly deliver over 125 truckloads of supplies to the impacted areas. We also indemnified our SHOP YOUR WAY members that lived in the path of Hurricane Sandy and provided them with up to $20 worth of point, these points were available immediately to purchase whatever members needed from Sears and Kmart. Millions of dollars were redeemed by our members to assist in their short-term needs.
Now Imran Jooma will continue the discussion of how we're focused on our members are at the core of everything we do.
Imran Jooma - SVP and President, Online, Marketing, Pricing & Financial Services, Sears Holdings: Thank you Ron, and good afternoon. As you heard from Lou and Ron today, we are very committed to serving, delighting and rewarding our members and customers with experiences that best serve their needs. By investing in technology earlier on and developing key capabilities, we are now able to offer both targeted and unadvertised offers to our members. New this holiday season, our members will receive both targeted and advertised offers like; 5% back in points for all purchases made under Sears credit card; early access to black Friday special almost five days in advance; free gift with purchase such as a tote bag with offers such as double and triple points on a future purchase; free check cashing at Kmart, free and two-day shipping by signing up for our SHOP YOUR WAY MAX program. For added convenience and to save time members and customers can take advantage of the seamless online and offline connections that Lou referenced as part our Integrated Retail strategy, such as buy online, pick up at store that is backed by a guarantee of being ready in five minutes or less. In approximately 700 sales locations we also offer a curbside pickup option for added convenience. And new this holiday season, members can return and exchange an item without a receipt that is also backed by a guarantee of five minutes or less.
By listening and acting on our customers and member feedback, we have also improved our layaway offering this year by making it free. For the first time we have removed layaway service fee for holiday shopping. We are also offering layaway on day after Thanksgiving items including doorbusters as well as online and mobile purchases.
Customers can also have layaway contracts initiated in stores ship to their home. By offering these great values and by creating these extraordinary conveniences for customers and members we expect to increase the demand for our products and services and drive profitable sales.
We are also focused on providing a very large assortment of products through our endless isles online. We have expanded our offerings to now provide over 50 million products from thousands of marketplace sellers. These items can also be ordered from inside our stores through our in-store terminals and iPad devices that are used by our store associates.
Throughout the holiday season and beyond, you will see how our marketing and advertising will create awareness of the breadth and depth of product offerings, one example being our (beach and connecting slide) TV commercial that highlights that we are the only retailer that carries the top 10 brands in appliances. These TV commercials have received over 5 million views on YouTube and continue to garner positive customer feedback.
We continue to build member relationship on ShopYourWay.com. This enables us to understand member preferences at a granular level and provide a more personalized and relevant shopping experience. On this exclusive site members can access all our products including the marketplace items that I referenced earlier; promotions, coupons, sweepstakes and other offerings such as points lookup in a single place.
Members can not only aggregate products, services and content into catalogues and wish list, but also share them with their friends and engage with brands and celebrities that are creating content as well. I encourage you all, if you have not visited ShopYourWay.com recently to take a few minutes, to engage with it so that you can see for yourself all of the fun and benefit it has to offer. The result is not just a more personalized shopping experience, but in fact a more social shopping experience. We believe this represents the evolution of SHOP YOUR WAY from a loyalty program into a true membership program that is centered around, rewarding, delighting, and serving our members.
This concludes our formal remarks. Let me now turn this over to Bill Phelan.
William K. Phelan - SVP, Finance: Thanks Imran. Operator I think we are ready to take questions now.
Operator: Bill Reuter, Bank Of America Merrill Lynch.
William Reuter - BOA Merrill Lynch: You guys really focused on the value of your assets here, I was wondering if you could provide a little more color on some of the assets that you guys are going to plan on trying to monetize last year and generate the $500 million?
Robert A. Schriesheim - EVP and CFO: Bill, consistent with our prior comments, we are obviously focused on creating long-term sustainable value through operating performance. As we continue with our evolution we're moving to a more, as we describe, nimble, less asset intensive business model and as we move through this process we are continuously evaluating on asset structure and whether specific assets and/or businesses are better managed within the current Sears Holding asset configuration or outside of it. In my prepared remarks I didn't indicate that there would necessarily be asset. Cash can be generated through multiple means, but in any case the primary objective is how we can best create economic value. During the past year, we obviously took advantage of our underlying asset base and financial flexibility as well as actions focused on improving productivity to create through actions that also generated cash proceeds. In summary, though, the objective is creation of value. It's not to generate cash for the sake of cash since we don't believe we have the need for additional cash. I guess I'd point out that look our asset book value is $22 billion. So, $500 million is only about 2%. It's not as if it's anything significant. Beyond that I won't offer any specifics other to say we demonstrated this past year we'll be very disciplined about how we use our assets and allocate our capital to invest in our transformation and also we consider all of our obligations and commitments as well as we manage our business transformation. Companies moving to transformations make decisions all the time about how to allocate and reallocate capital as they execute on their strategic vision and certainly history in business is replete with examples on the retail world and outside of the retail world of companies going through transformations who choose to remove capital from older business models and reinvested to promote their strategic vision, which is basically what we're doing.
William Reuter - BOA Merrill Lynch: One more on that. I guess, your inventory levels are so far down from where they were last year. I'm curious how you feel that where they are at this point whether you guys still think that you can reduce your inventories and generate capital there or alternatively, maybe what you (feel want to) invest more and it feels like we're missing out on some sales?
Robert A. Schriesheim - EVP and CFO: Yeah, so, you're right. We're down about $1 billion year-over-year excluding show in inventory. I point out about third of that is associated with store closings, the other two-thirds is associated with more effective inventory buys, more efficient management of our supply chain, more efficient management of our assortment. Ron, Imran, Lou myself are all very focused on return on capital employed and obviously as we move towards a more member-centric model as an integrated retailer our investments and traditional retail real-estate inventory assets will likely decline. I guess I'd also point out that with the marketplace where we carry $50 million items, those items are carried by third-party. So going forward that's another reason how – another way we manage our inventory. Let me let Ron comment.
Ronald D. Boire - EVP, Chief Merchandising Officer and President, Sears Full Line Stores and Kmart Formats: Yeah, from a standpoint being ready for holiday we're comfortable. I think if you still look at our inventory turnover versus what we – I think we'd likely to be and what some best in class competitors maybe, we have opportunity. So, when we look at whether it's key categories like appliances, apparel, tools for jewelry we feel we are in stock. We have made big bets on the items and categories that we think will drive profitability for Q4 and frankly I am looking for even greater inventory productivity through a more focused assortment to assortment optimization and much more localized assortments as we get better and better with understanding our SHOP YOUR WAY members buying patterns and use that data to be more effective in delivering what they want and where they want at a store and customer level. So, I'm confident with where we are right now.
William Reuter - BOA Merrill Lynch: Then just lastly, it sounds like asset sales are not really the focus here, but do you feel that you have additional real-estate that there would be value in and you guys could monetize if you made that decision that you wanted to do that?
Robert A. Schriesheim - EVP and CFO: Obviously we've demonstrated we got a lot of value on our real-estate, we only sold 14 properties, we continuously evaluate a footprint of our ecosystem and we always continue to evaluate our stores, we are approached all the time we listen most of the times things don't make sense, sometimes some is worth more to somebody else than it is to us we'll obviously opportunistically take advantage of that.
Operator: Gary Balter, Credit Suisse.
Gary Balter - Credit Suisse: I have a question on the results and the something on the liquidity or cash flow? Given, you talked about how you would have been positive with consumer electronics, which is an admirable job on the apparel aide and on the appliance side, why were the results – like they looked weak relative to that, because you would have expected better EBITDA at least from the Sears division and then or that will be what's happening at Kmart and have you turned that around from an operating point of view?
Ronald D. Boire - EVP, Chief Merchandising Officer and President, Sears Full Line Stores and Kmart Formats: First on Kmart, I think Kmart was definitely impacted by consumer electronics and there is I think two factors in consumer electronics one is currently the industry is in a cycle where, A, innovation has slowed with the exception of frankly mobile and what's going on in the mobile and wireless space and be there is price compression in the balance of the industry, namely, television sets and I think we also have not – we weren't well positioned coming into this year. You may know we have a new leader of that business (Shane Pierce) who we brought in in the spring who is both making operational improvements in consumer electronics as well as looking at the strategic position of the category for the brand. Secondly, in the grocery and household business, but grocery in particular, we feel that we are not as well positioned as we'd like to be in that category. We're thinking about that position conveniences versus traffic and how that category should be repositioned within the Kmart format and we actually just this month hired a new leader for that business Ryan Vero who we're working with diligently to understand the grocery component of the grocery household, drug and pharmacy sectors whereas getting particular created new operating strategy for us around grocery.
Louis J. D'Ambrosio - CEO and President: (indiscernible), Rob, why don't you just give a perspective on kind of the relative profit contribution between here is Kmart even with the situation with consumer electronics.
Robert A. Schriesheim - EVP and CFO: Gary, if you look at the press release on Page 5 which is probably what you're doing, you can see that year-over-year for third quarter Sears Domestic EBITDA improved by about $50 million from negative $114 million to negative $63 million. Kmart obviously declined by about $30 million and a large part of that decline was actually driven by consumer electronics.
Louis J. D'Ambrosio - CEO and President: In both businesses in '12 I guess that they had declined. Mostly in Kmart, but consumer electronic was down in both. Also, gaming is a big part of Kmart in consumer electronics.
Gary Balter - Credit Suisse: In that since we're on this and before I get to liquidity question, how do we figure out the (indiscernible) impact, like what are those numbers as you said they're still included in here?
Louis J. D'Ambrosio - CEO and President: I'm sorry, the impact of (SHOW)?
Gary Balter - Credit Suisse: Yeah, we call it (indiscernible).
Louis J. D'Ambrosio - CEO and President: At this point, what we can say is they are in the financials through October 11th of 2012 and they are technically not going to be a discontinued operation, so the results will remain in our financials through October 11, 2012. Going forward, what we'll do for transparency, as I said, is show the results as a segment.
Gary Balter - Credit Suisse: As a segment or completely discontinued if you don't own it?
Louis J. D'Ambrosio - CEO and President: No, it's technically cannot be – as I said in my comments, it technically cannot be characterized as a discontinued operation because of the degree of continuing cash flows we have ongoing between ourselves and (SHOW). So, it's not going to be characterized as a discontinued operation. So that's why we remain in the historical financials.
Gary Balter - Credit Suisse: Then just on a liquidity follow-up and then (indiscernible). Could you give us some guidance for 2013 in terms of CapEx, pension costs and interest expense as we build them in our model?
Louis J. D'Ambrosio - CEO and President: Sure, as you know, in general, our policy is we don't provide guidance. I'm not going to alter from that except on as it relates to pension, as a result of a voluntary contribution that we made, it will reduce our pension cash contribution by about $70 million from $420 million, which was initially anticipated to about $350 million. In addition, obviously as ancillary benefit of that, while we don't know yet, there'll be some degree of reduction in cash costs and expenses associated with active participants who might choose to avail themselves of the program. That's what I'm willing to give as guidance.
Gary Balter - Credit Suisse: And is that $350 million something we should be thinking about for future years to '14, '15, '16 because before you did this there was going to be a step up?
Louis J. D'Ambrosio - CEO and President: Yeah, the problem we have obviously in answering that question is, it's highly dependent upon the regulatory environment and on interest rates as well, it's very sensitive (indiscernible).
Gary Balter - Credit Suisse: Then part B of that and then I'm off. You generated, as you said, $1.8 billion in cash through inventory, some of the asset sale et cetera spinning off your (indiscernible) and spinning off shops. Yet when you look at the balance sheet, the debt is pretty the same, the cash is pretty much sustained, not exactly obviously, but the words and you could see (like tables) obviously played a role, you paid some of that down and pension cost played a role, but essentially you are saying that even with you are not generating a lot of free cash, so how do you think about that?
Louis J. D'Ambrosio - CEO and President: Well, the way I look at it is pretty simply I look at the balance sheet and when I look at the balance sheet on a reported basis, debt is down by $550 million and the debt is down by $550 million despite the fact that we made a $203 million contribution to the pension – $203 million additional contribution to the pension on top of the $300 million normal. So, it's $500 million total pension contribution. So, that's down by $548 million despite the fact that we made a total pension contribution of $500 million. We reduced expenses by what will be $500 million and the total cash generated will be about $1.8 billion. So, I think that's how the numbers hold together. It's pretty factual.
Operator: Paul Swinand, Morningstar.
Paul Swinand - Morningstar: Just to follow up on Gary's last comment, maybe if the cash flow statement was available on the 8-K that might be helpful. I mean, we can all look at the balance sheet, but it's quicker to do the cash flow. Would you consider doing that in the future?
Robert A. Schriesheim - EVP and CFO: Yeah, we'll consider doing it in the future. We've been very, very transparent in our SEC filings. I think we are as transparent or more transparent than most companies I know in most industries. So, I don't think we have any aversion to doing that. Certainly you'll be seeing the cash flow statement in our Q that's going to be filed. So, it's all going to be out there. There is nothing to hide.
Paul Swinand - Morningstar: Just making a little quicker for us. Just again a little – following up on what Gary was saying, I realized your comments that the grocery business got a little tougher. I've heard that. But in other hand, that business hasn't really changed much. Can you drill down a little more what changed in the quarter? I mean, Target and Walmart have had groceries for a long time. I don't know that the footprint of them has really changed much. It's not like it has never been a competitive category and it's not like you haven't competed there effectively before. What changed in the quarter that made it actually be a negative?
Ronald D. Boire - EVP, Chief Merchandising Officer and President, Sears Full Line Stores and Kmart Formats: This is Ron. I think there's couple of things. First, we were in the previous four quarters had been investing significant incremental – it's accidentally muted here. I think couple of things. First, in the previous four quarters we were investing incremental advertising primarily in the form of wrap on our flyer in grocery as we determined strategies between traffic and convenience for the category. As we comp that also the competitive set changed a little bit as one of our largest competitors and maybe the biggest guy in the country started to significantly increase the advertising exposure they gave to the grocery and household category. I also think we probably made some bets in the category around grocery versus household that in retrospect as we look at the numbers didn't pan out and so we need to think about our mix there. The third thing is, there were some COGS increases that began to flow through the income statement in that business for the past six to eight months that have become material over the last quarter, so a variety of things. As I said earlier, we have also Ryan Vero has just joined us. In fact his first full day in the building was yesterday. As we look to revitalize that business and reestablish the appropriate strategic direction for the grocery portion of our grocery, drug, pharma businesses. So, I think we understand what's going on there and I think we have some strategic decisions to make about the positioning of grocery in particular in that business unit.
Louis J. D'Ambrosio - CEO and President: Paul, it's Lou. What I would add to is, exactly as you said, I mean we had very good progress in some of the most important businesses of appliances, of Apparel, Home Services, there are two business which we are doing a lot of work in right now, the consumer electronics and grocery and household. We are looking at everything from the market to our execution to the fundamental business model. When I say the fundamental business model, I mean for us what should that business be. Given the space we have, how we execute, what our go to market is, leveraging our SHOP YOUR WAY membership, what type of alliances or partnerships do make sense et cetera, it's an open discussion, I think we're having the right discussion. We have two very good new leaders now leading each of those businesses, so we could get those businesses not only in a kind of a one, two quarter fix, but sustainably both of those businesses in the right business model, so we could have kind of the longer term value creation based on how we (reach around) those businesses. Not that where our competitors are, not necessarily different from all of our competitors are, but for our set of assets what should those two businesses look like. I have traction on some, but these two we're going into very deeply right now and I believe that the thoughtfulness and the actions will translate into better results.
Paul Swinand - Morningstar: Then I want to drill down on the appliances, I know you comment said that that category was up, I know if you have been watching the industry numbers or some of the manufacturers results, most of the increase has been pricing and mix, we've been talking about when is this going to turn, will it be like autos, there is some pent up demand, but I guess from my standpoint I still haven't seen that it's really turning, is there anything you can add that this business is actually getting better and it's not just a bump along the bottom here or…?
Ronald D. Boire - EVP, Chief Merchandising Officer and President, Sears Full Line Stores and Kmart Formats: Yeah, Paul, this is Ron. I think we have been focused on fixing the fundamentals in our business; that is, improving the customer experience both from the selling environment, the integrated selling environment. As I spoke about in my comments, appliances is one of the tips of the sphere on our Integrated Retail strategy as we have – in about half our stores we use iPads in the selling experience which is we think a material improvement in the selling experience as well as the transparency for customers. So, I think where we're seeing our results is in optimizing our business model and improving how we engage with our customers and how we leverage some of the strategic assets that we've developed over the last couple of years around the Integrated Retail and around how we talk to our SHOP YOUR WAY rewards members. From a market share standpoint, our market share has been up in a couple of the quarters recently and flat in a couple of quarters. So, we are pleased with how we are optimizing the model. But if your question is, do we think that this thing suddenly turns, I don't think we have a strong point of view that that's going to happen. We are prepared as the industry improves and as housing hopefully improves in the coming months and years to leverage our leadership position and we think the work that we are doing around how we communicate with customers, how we handle the customer experience, both online and in an integrated way in the store puts us in a material competitive advantage.
Louis J. D'Ambrosio - CEO and President: It's Lou. I would add to that – to Ron's point. We're not waiting for the housing market to turn to continue to improve what we are doing in appliances. As you said, Paul, through a combination of pricing, through a combination of pricing, through combination of go-to-market execution, importantly to getting the value prop right we've seen in each of the quarters this year improvement in profitability in that business. So, if we execute that business well and we continue to have a value prop from a pricing, from a marketing, from a merchandizing perspective that works well with our members we will be all that much better when the housing market accelerate, but surely we're not waiting for that to look for continued progress in that business.
Paul Swinand - Morningstar: One quick question – I'm not sure if you can disclose it and then I'll get off, but on the plant service side you did mentioned that and it sounds like maybe you've got some new offers, some new ways of going to market, but can you just say that's a very profitable business, right?
Louis J. D'Ambrosio - CEO and President: You're talking about the Home Services?
Paul Swinand - Morningstar: Yeah.
Louis J. D'Ambrosio - CEO and President: Yeah, the Home Services is a profitable business for us and I think…
Paul Swinand - Morningstar: And you're growing it – sorry to interrupt, but you're growing – you said it was up, so is that contributing to the comp that you are growing sales in that?
Louis J. D'Ambrosio - CEO and President: We talked about improved profitability in that business and the improved profitability there is coming from a couple of different areas. One is, we continue to enhance the efficiency and the logistics. So as we bring trucks out to fix customer calls to make sure that through the information we have through our SHOP YOUR WAY membership and so forth we have the right information such that the truck went out the first time has the right part on the truck. Secondly, we continue to enhance the algorithms within our call centers so that when calls come in, we're more effectively able to prioritize them based on those calls that are most important to customers and those calls as it relates to our business model. So, it's the combination of the efficiencies we're driving as well the more – the greater effectiveness we're having in terms being able to deliver the right solution the first time out, which is driving the profitability growth in that business.
Paul Swinand - Morningstar: Is there any way to leverage that further, like to partner with another clients group or another retailer or…?
Louis J. D'Ambrosio - CEO and President: Look what I'll say is, whether it's the Home Services business, or whether it's the brands business et cetera, we have enormous assets. Our focus is creating value with those assets. In most situations that focus is within our portfolio, where there are opportunities to leverage those asset outside of the portfolio, we will do that, but we will do it very thoughtfully, we will do very deliberately, whether it's something with the brands and we've been approached by several people in terms of wanting to do brands deals with us in some of those situations where it made sense for our members and where it made sense for our business model, we did it. Same thing for services, there will be opportunity to leverage – we do have the largest in-Home Services business in the world. We do have the opportunity to leverage that across other environments and we have to make sure that the puts and takes of doing that makes sense for our shareholders in creating long-term value. So there is a wide openness poll to those types of things, but there is also a – I would say an appropriate discipline in doing those things and that's the way we are running the play.
Operator: Greg Melich, ISI Group.
Greg Melich - ISI Group: Two questions, one of the merchandizing strategy and other on the financials, the SHOP MY WAY reward program, could you give us some insight given that's such a key driver to improving EBITDA as to how many member you have, what their frequency is, what their percentage of your sales or profitability, anything that you could give to help us understand how that is such a key part of driving the EBITDA?
Louis J. D'Ambrosio - CEO and President: I'm not going give the specifics about number of members. In the past we've said tens of millions and it's definitely into the tens of millions. What I will say is that over half of the business that we do at Sears and Kmart now come from our SHOP YOUR WAY membership program. So, it's an extremely important part of the business and we do find that members shop more frequently. We find that they do more cross-shopping. So, if we look at the average number of categories that our members engage in versus non-members, it's larger. We believe a big benefit we have is the breadth of our portfolio in that the SHOP YOUR WAY program, it's not just a Sears program or a Kmart program or Lands' End program as your SHOP YOUR WAY program which takes advantage of this massive portfolio we have. So, if you go to Sears and you buy a refrigerator and then you want to use the points and particularly if you're able to get five bags or 10x points to then use those points to buy a T-shirt at Kmart, you could do it. If you want to do something then at Lands' End. So, it's the breadth of this portfolio which we believe is one of the compelling benefits in addition to everything that Imran spoke about in terms of the conveniences, the value, the shipping, the ShopYourWay.com engaging capabilities, et cetera. So, we said more than half of the business now from – we said well into the tens of millions and we're seeing greater engagement from our members. I think those are the key data points that we've been – or that we're ready to discuss at this point.
Greg Melich - ISI Group: Then on a financial side, really two parts, you mentioned that with the show spend that you'll still get some profit, I guess the royalty is from Kenmore and some of the other brands could you help us understand how much of the $120 million of EBITDA show is actually from those royalty? Then a last one would be how much does your working capital need go up intra-quarter, in other words, between the end of the quarter and peak during holiday, how much cash do you need?
Louis J. D'Ambrosio - CEO and President: So, the first question, no, we're not going to, we don't disclose what we earn as far as royalties on those brands from show, they are separate publicly traded Company now. So I'd encourage you to look at their financial statements. Can you repeat the second question please?
Greg Melich - ISI Group: So working capital, we can see where you are now with the balance sheet at the end of the quarter, but obviously during the quarter there can be changes in working capital needs like buying inventory ahead of holiday. So I'm just curious if there's a working capital need between when the quarter ended and before Christmas and how much that is, $500 million $1 billion?
Louis J. D'Ambrosio - CEO and President: Well, I would never comment on the specifics, but our Peak borrowing needs, working capital investment et cetera is behind us.
Greg Melich - ISI Group: It was before the end of the quarter or it's before where we are today?
Louis J. D'Ambrosio - CEO and President: Well, without getting into specificity our peak borrowing needs happens around the end of the third quarter.
Operator: Kirk Ludtke, CRT Capital Group.
Kirk Ludtke - CRT Capital Group: I was wondering if you could help us quantify how the asset intensity of the business will change as you do business model changes and if you could put some time frame on that that would be very helpful.
Louis J. D'Ambrosio - CEO and President: let me start with that and I'll turn over to Rob. We are not going to give specifics, but what I won't tell you is that the focus of our investments, the focus of our business model is the member. The member travels across different channels, the store, mobile, online et cetera. So surely, we will have investments in these different areas, but you are no longer required to have to have as large of the asset intensity to have a relationship with a member, so you go from, let's say, a transaction at a store to a relationship with a member and when we look at the asset that we have in our portfolio, many of those assets will continue as is and we'll continue and some of them frankly were going to be doubling down on and investing in further. But when you look through the lens of the member first, it does kind of allow you to move away from some traditional paradigms of what you what again in this business, here's how many stores you need and therefore how many square feet you need and so forth. So that's the lens and the thoughtfulness with which we're evaluating the various elements of our business model and assets and you'll see that continuing to play out. Rob?
Robert A. Schriesheim - EVP and CFO: I don't really have – I think that's a pretty – well, you've taken together with the answer that I think it was Bill Reuter who asked off the bat. We are certainly not going to give any timeframe other than the fact that I did indicate that we would generate at least about $500 million over the next 12 months and we do think as a part of our business model evolution to a more member-centric model, we'll become less asset-intensive. But beyond that I think everything we've given you today gives you a pretty good visibility of where we're heading.
Robert A. Schriesheim - EVP and CFO: Yeah, and the other thing – exactly (indiscernible) and the last thing I'd add to that is we're not going to do anything with the assets to raise cash, let's say, if we're not generating value. I mean, we are here to take these assets and to create value and as we said the focus is to do that operationally. Likewise, if there is an opportunity for long-term value creation through other uses of that asset which still is consistent with this strategy we have in running our company then that's exactly what we'll do.
Operator: David Gober, Morgan Stanley.
David Gober - Morgan Stanley: Just had a couple of questions on the physical footprint and Rob, you really highlighted the optionality that exists in the lease portfolio. I was just wondering if you could give us any color on may be the percentage of stores that are underperforming in your view? Or maybe a different way of asking the question of how do you see the physical footprint over time, have you found that as the SHOP YOUR WAY rewards program has gained traction that sales transfer better when you do close a store and does that make you think about the footprint differently over time?
Louis J. D'Ambrosio - CEO and President: Well, what does make think differently about the footprint is, it's always a difficult consideration when you close a store if it involves exiting a community, because we don't like to do that. As a result of all of our online assets and the SHOP YOUR WAY rewards membership program and driving to a more member-centric strategy, if we do make the decision to exit a marginally performing store, we're not literally exiting a community because we still can provide those customers that we served choices through online means. As far as what our footprint is going to look like with any degree of specificity that's not something we're prepared to talk to as far as how the stores are performing, we've done I think a good job this year in terms of evaluating the store performance and we'll continue to do that going forward. I don't know if Ron has anything he wants to add on that.
Ronald D. Boire - EVP, Chief Merchandising Officer and President, Sears Full Line Stores and Kmart Formats: I think you covered it well Rob and I think the point on community is important and the more we A, become an integrated retailer with kind of the strength that we're building on being able to touch our customer in multiple ways very effectively and B, understand where our members are, it also helps us look differently at the store economics and Rob's point on the not wanting to exit a community is an important one. There's parts of our strategy in particular especially in both boxes but more in particular in the Sears box that really depends on having a local presence. So, how we think about that definitely changes as we know more about our customers and customers' needs and get better at delivering a truly outstanding Integrated Retail experience.
Louis J. D'Ambrosio - CEO and President: It's Lou. I think we've shown over time that we've been extremely patient in staying in communities. We certainly have some stores which are performing better than others. As Ron described earlier, we are making significant investments in stores through technology, through enhancements to the way we're laying out the merchandise et cetera. We will continue to look at the combination of assets we have, stores, online, mobile, home services, as we allocate capital to find the best answer both in serving our members, as well as delivering returns to the shareholders.
William K. Phelan - SVP, Finance: I think that's it. Thank you very much for joining us on our earnings call today. Again, I wish everyone a very happy Thanksgiving.
Operator: Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.