Operator: Good day, ladies and gentlemen and thank you for standing by and welcome to the Sears Holdings Corporation Fiscal 2013 First 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 may be recorded.
Now it's my pleasure to turn the floor over to Bill Phelan. Sir, the floor is yours.
William K. Phelan - SVP, Finance: Thank you, operator. Good afternoon ladies and gentlemen and welcome to Sears Holdings Earnings Call. I am Bill Phelan, Senior Vice President of Finance for Sears Holdings. Joining me today are Eddie Lampert, our Chairman and Chief Executive Officer; and Rob Schriesheim, our Executive Vice President and Chief Financial Officer.
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 to our website after today's call.
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 measures can be found in the presentation and today's press release. Any reference in our discussion today 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 our Chairman and CEO, Eddie Lampert.
Edward S. Lampert - Chairman and CEO: Thank you, Bill, and let me thank everybody for joining the call today. Our first quarter 2013 financial performance is not acceptable. A Company of our size and with our assets should be generating a significant profit. As an investor, I followed our industry very closely and have benchmarked our performance against our competitors.
During the first quarter of 2013, many of our competitors have noted certain macro factors that have impacted our industry, their businesses and our business. Colder weather in parts of the country, delayed tax refunds et cetera. Having said that, I do not subscribe to the view that the macro factors are the sole reason for our poor performance. They have an impact, but even with that impact, we should be doing a lot better than we are. Changing customer buying habits and changing forms of competition are challenging us and retail industry generally, and we must evolve our company and our business models to meet this challenge.
Let me now turn the call over to our Chief Financial Officer Rob Schriesheim, who will discuss our financial results and actions. After his remarks, I will have additional commentary and then we will open the call to Q&A. Rob?
Robert A. Schriesheim - EVP and CFO: Thanks Eddie. I'll briefly cover our first quarter results as well as our financial position and liquidity profile. I'll also provide an update on our intention to generate at least $500 million and additional liquidity in 2013 through selected actions that are consistent with our focus on creating long-term value which we announced in November of last year.
As a reminder before we begin, the Company is different today than it was a year ago. As you recall, last year, we altered our asset configuration, financial de-risked our business model and enhanced our financial flexibility by increasing our liquidity by about $1.8 billion. This is accomplished through a combination of actions, including more efficient management of inventory and expenses, selective store closures, the sale of 14 properties 11 domestic and 3 in Canada, the separation of the Sears Hometown and Outlet store business which I'll refer to as SHO, the spin-off of nearly half of our interest in Sears Canada while retaining the 51% stake and funding our pension to allow us to offer lumpsum settlements thereby reducing our pension risk.
Under Generally Accepted Account Principles, we are required to continue to include SHO in our historical financials through the date of separation, October 2012. As a result, our GAAP financial statement will not present a year-over-year comparison on a consistent basis excluding SHO, until the fourth quarter of this year. Throughout this year, when we report our quarterly results, we will disclose the impact of the SHO separation SHO was providing consistent basis for comparison.
Beginning on Slide 5, let me briefly review our first quarter results. On a GAAP basis we reported a net loss of $279 million as compared to net income of $189 million last year. The change from last year was due to two items, first in last year's first quarter we recognized a substantial gain from two real estate transactions. The amount of the gain was $233 million after tax the second item was lower operating income which I will cover in more detail on the next few pages.
Moving on Slide 6, we cover significant items. Because GAAP income includes many non-operating items like the real estate gains as well as other unusual items which can significantly affect the comparability of reported results. We use adjusted net income and adjusted EBITDA to evaluate out performance. Slide 6 itemizes the adjustments made in that income for better comparison purposes.
As you can see adjusted for these items net loss increased by $83 million from a loss of $54 million last year to a loss of $137 million this year.
Slide 7 provides the adjusted EBITDA and its components which we use to evaluate performance. From an operating perspective it was a challenging quarter for us as our EBITDA declined by $168 million year-over-year. There were some headwinds which challenged us during the quarter, specifically it was unseasonably cool spring this year in contrast to last year which was unusually warm. As such the cooler spring adversely effected many of our seasonal businesses this year where as those businesses benefitted from the weather in the first quarter of last year.
Secondly the 2% increase in the FICA payroll tax which went into effect at the beginning of the calendar year resulted in a notable decline in discretionary income for many of our members and customers, particularly on the Kmart side.
However we are clearly not satisfied with our performance and are working diligently to improve our results so as to earn appropriate return on the assets employed in the business. On the next few slides I'll discuss components of adjusted EBITDA beginning with revenue.
Slide 8, is a waterfall chart which provides the components of the change in revenue from $9.3 billion last year to $8.5 billion this year while also providing associated estimated impact to our EBITDA. The first red bar is the effect from store closures. In 2012, we had closed store activity which reduced 2013 first quarter revenue by $378 million, and we estimate that we earned about $70 million of EBITDA on the closed store sales last year.
Recall that at the end of 2011 we announced about 100 store closings. Most of those stores closed in early 2012. Also, I note that we generate a profit when we closed stores and liquidate the merchandise. As such, the first quarter of last year benefited from the closed store activity as these are profitable events for us.
The next two bars relates the separation of Sears Hometown and Outlet, which occurred in October of last year. The red bar of negative $621 million represents the sale to customers that SHO had in the first quarter of last year. Since SHO was part of Sears Holdings then, those customer sales and the corresponding EBITDA of $37 million were included in our results.
The green bar of $434 million positive, represents the sale of product we made to SHO this year as they procured the bulk of their products through us. Pursuant to the terms of the separation agreement, we sell this product to SHO at our cost, which results in a reduction in our gross margin rates.
The following set of bars labeled business performance, summarizes the revenue change of our ongoing domestic business. The first bar of negative $215 million is the domestic comparable store sales performance for the quarter of negative 3.6%. I'll discuss that on the next slide.
The next part for positive $38 million is for an item that occurs every few years related to the 53-week fiscal year. Let me explain this. Last year was a 53-week fiscal year. As a result, the fiscal weeks of this year do not correspond to last year. The first fiscal week of this year is a week later than last year. For comparable store sales reporting, we compared the weeks to the corresponding week last year, but for fiscal reporting, we have a one-week difference. The effect of that difference is to increase sales reported for fiscal purposes in 2013 by $38 million over comparable sales as the retail calendar shift resulted in us replacing one week of winter with one week of spring.
On a comparable basis, when adjustments are made for the closed store activity and the SHO separation, our domestic EBITDA declined by $99 million. The last red bar represents Sears Canada which experienced a $76 million revenue decline consisting of a comparable store sales decline of 2.6% and a $19 million reduction on reported revenue due to foreign currency fluctuations. Sears Canada's EBITDA improved by $1 million.
On Slide 9, the Sears Domestic comp store sales decline of 2.4% was attributable to the lawn and garden category. Obviously this category was impacted by weather and the cool spring was a factor in its performance. In parts of the country, like our Western region, which had warmer weather, we saw better performance. Excluding the lawn and garden category, our Sears full-line store comps would have been positive. Also, Sears apparel had a comp store sales gain for the seventh consecutive quarter despite the unfavorably cool spring.
Kmart comp store sales were down 4.6%. The decline in Kmart was particularly attributable to the highly competitive transactional business, which made up three-quarters of the decline experience as we were not as promotional in grocery and household this year.
The remaining decline in Kmart was in the weather related lawn and garden, outdoor living and sporting goods categories.
Moving to Slide 10, our gross margin rate was down 220 basis points to 25.6% in the quarter and declines were experienced in all three segments.
See Page 22 in the Appendix for the adjusted margin rates by segment the primary drivers of the decline were first Sear Domestic was adversely affected by the $434 million of products sold to Sears Hometown and Outlet at cost or at a 0% margin rate. The impact of selling products to Sears Hometown and Outlet at costs are at a 0% margin rate resulted in 160 basis points decline in Sears Domestic margin rate for the quarter.
Accounting rules required that we include these sales in our results have (indiscernible) to separation they are at cost.
Also Sears auto experienced margin rate contraction in its tire business as higher product costs were not able to passed along due to the competitive nature of the tire business.
The margin decline at Kmart was due to higher clearance markdowns in apparel and the timing of vendor allowances in grocery and household this year as compared to last year.
Sears Canada margin decline reflects higher valuation reserves for U.S. accounting purposes. As Sears Canada's financial statements are prepared in accordance with IFRS as opposed to U.S. GAAP there are some differences in inventory evaluations.
Moving on to Slide 11 let me speak to expense performance. On a reported basis expenses were down $227 million. However as we have already discussed we use the adjusted basis for evaluation purposes and on an adjusted basis selling and administrative expenses declined $76 million.
$46 million domestically and $30 million at Sears Canada. As we have previously stated, we expect to reduce domestic expenses by $200 million this year.
Moving to Slide 12, we have previously discussed our business model evolution as we transformed to a member-centric platform. This chart contrasts the characteristics of the traditional retail model with where we are heading. As part of that evolution we are implementing specific actions to reduce our risk profile, enhance the productivity of our asset base, and unlock value in our asset portfolio. This new model leverages our stores, brands, online channels, social media assets, mobile applications, technology investments, and is surrounded by our SHOP YOUR WAY membership program.
One important point to highlight is where we are in that transformation process. We are at that phase where we are essentially supporting both the old and new models, which is costly. For example, we have increased our investment in SHOP YOUR WAY offers and promotions while still maintaining comparable levels of traditional advertising and promotional markdown costs. When we are successful in our transformation, we will be able to replace traditional advertising and across the board product discounting with digital advertising and targeted SHOP YOUR WAY pricing to direct the bulk of discounts to our best members. We believe that these changes will increase our revenue by making our promotions more effective and will increase our efficiency by reducing the cost of advertising and promotional markdowns over time leading to higher gross and operating margins.
A company of our size has significant leverage. If using some simple math, for example, we can reduce these costs by only 1%, it can be worth hundreds of millions of dollars in gross and operating margin. Another benefit of this evolution is that it de-risks our business model by converting previously fixed cost to being more variable in nature.
Slide 13 summarizes some of our substantial financial resources. As you can see on Slide 13, at quarter end, we had nearly $0.5 billion of cash. In addition, we also have immediate availability of $1.75 billion on our credit facility. On top of that, we have $5 billion of equity and inventory. Inventory is the current asset which can be converted to cash very quickly, or on average in 90 days in the normal course. Taken together, we have 7 billion of liquidity or assets which can be converted into cash in the near term.
I'd ask you to take note that the $7.3 billion of liquidity is more than 2.5 times the size of the payable balance. Lastly, let me point out that we also have a $1 billion accordion feature, as well as $760 million of second-lien capacity on your domestic revolver providing further capital resources.
Slide 14, itemizes our debt balance as of the end of the quarter. The main call out on this page is that our short-term borrowings increased by $650 million over last year, with the bulk of the increase in revolver borrowings.
Let me speak to that on the next slide, Slide 15. This year, our revolver borrowings increased by ($620 million) from year end as opposed to last year, when our revolver borrowings decreased by $37 million in the first quarter. However, let me explain the reasons for the variance. Frist, similar to what I explained related out sales, we must consider the 53-week year effect again.
Since 2012 was a 53-week year, this year's quarter ends a week later than last year. Last year's quarter ended April 28, whereas this year's quarter ends May 4. This is important as many disbursements like rent and payroll are made at the end or beginning of the calendar month. The last year comp date for the end of the quarter will be May 5, 2012, one week later and revolver borrowings on that date were $983 million. As such through the comparable period last year Q1 revolves borrowings would have increased by $145 million.
The $145 million increase last year is still much less than the $629 million increase realized this year. The bottom half of the slide summarizes the differences between this year and last. The first is the seasonal build. Year end is our low point of inventory and other working capital items.
The working capital requirements builds in the first quarter as inventory balances increased and various prior year obligations are settled. The working capital requirement typically drops in the second quarter and increases again in the third quarter for the holiday season. The seasonal build this year is $651 million as compared to $495 million last year an increase of about $150 million.
I'd note that roughly half of the increases due to associates benefit cost such as one, higher bonus paid in the quarter this year than last year's due to the improved profitability in the prior year and two the timing of medical benefit payments due to transition from a self-insured medical benefit plan to an exchange program.
Last year benefitted from the $270 million of proceeds from the domestic real estate sales which closed in April of 2012. Another larger variance was domestic EBITDA performance.
As you know EBITDA is a rough proxy for cash generated. Last year we generated $209 million of domestic EBITDA in the first quarter as we benefited from the warm spring, store closing activity and the inclusion of SHO earnings in our results. This year domestic EBITDA was $3 million there were also differences in financing activity the changed commercial paper balances and term debt repayment.
As shown on Slide 16 our debt structure is in place for the next few years as our domestic revolver extends into 2016, and we have negligible term debt maturities over the next several years. Recall, we have liquidity of in excess of $7 billion, plus another $1 billion accordion and $760 million second lien capacity. We have a great deal of financial flexibility when you consider our substantial liquidity, our asset-rich portfolio and minimal term debt maturities.
On Slide 17, we summarized our fixed payment obligations. As you can see in 2013, we only have $400 million of required cash outflows for debt and capital lease maturities and pension contributions, which is much lower than recent years.
On Slide 18, we review our actions already underway that we have previously announced. We intent to reduce our expenses by $200 million, and did so by $46 million in the first quarter. We plan to reduce our inventory at peak by $500 million, which should generate about $300 million in 2013.
Last November, we announced that we would be considering actions to raise at least $500 million of additional liquidity in 2013. As one of a number of options available to us, we are currently in the process of evaluating strategic alternatives for our protection agreement business, including a possible sale, joint venture, a recapitalization of the business or some combination of these alternatives.
These alternatives could, if successful, create additional liquidity in excess of our minimum target of $500 million, but there's, of course, no assurance that we will complete any transaction related to the protection agreement business in 2013. Of course, any actions we might pursue must be value creating since this is our primary objective as we seek to generate acceptable levels of returns on our invested capital. Regardless of the outcome of this process, protection agreements are and will continue to be an integral part of a value proposition for our members, particularly in our home appliance business and Sears will continue to sell and service these agreements going forward.
For those unfamiliar with it, the protection agreement business provides customers with the ability to purchase a service contract related to merchandise. The service contract protects against product failures cause by workmanship, materials, mechanical or electrical breakdown and not caused by usage and normal wear and tear.
Service contracts can be purchased at the point of sale or in the aftermarket. Products eligible for service contract include appliances, consumer electronics, mobile electronic, fitness equipment and some other items.
With that, let me turn the call back over to Eddie.
Edward S. Lampert - Chairman and CEO: Thank you, Rob. As I said, our performance is not acceptable. And here is what we plan to do about it. We have a clear vision and strategy, and in order to execute on it, we have to generate acceptable profit. As I explained at our annual shareholder meeting, we made significant strides in articulating our plan and future business model encapsulated by our focus on integrated retail and our SHOP YOUR WAY reward membership program. We've made significant investments in digital capabilities and have built a very large group of engaged members on the SHOP YOUR WAY platform.
In my first 100 days as CEO, I spent a lot of time meeting with members of our executive leadership team, asking questions and listening to their opinions, ideas and concerns.
I have found many engaged, determined and excited leaders. For those who may be inclined to accept current performance levels for incremental progress, I have made clear that I have much higher expectations. In meetings with our leaders, I have continued to lay out my expectations and my visions, so as to generate alignment around our strategy.
It will take a bit of time, but I'm committed to having a leadership team which is team which aligned, accountable and then understands what we need to do to transform this Company. And we intend to transform while producing results not using transformation as an excuse for why results are not satisfactory. We are (standing) still. Last year we took several actions to stabilize the company and to generate significant liquidity to meet maturing debt obligations and to provide our vendors with additional comfort with regard to ordinary obligations.
The actions we took also helped to address legacy pension obligations made worst by the actions of the federal reserve to artificially hold down long term interest rates. As Rob indicated we are currently evaluating a range of actions one of which revolves around our protection agreement business which if successful could generate in excess of $500 million of targeted additional liquidity. Actions such as these are among the alternatives we have to create liquidity and drive long term shareholder value.
There are other possibilities that we are considering and depending on valuation and alternative investment opportunities we may choose to execute on one or more of these in the near future.
We are doing a better job of articulating the SHOP YOUR WAY member value proposition. For example we now offer targeted personalized rewards through in-store and online offers. We are adding points to member accounts as a targeted promotional tool. And we are driving excitement through conscious and sweepstakes.
We constantly strive to tailor and customize the information that we communicate to our members based upon what we know about them. We want more than an occasional transactional relationship with our members. We want to be trusted advisor and have the capability to meet many of our members needs in the most convenient manner for them.
We are also letting everybody who visits our stores or websites know that membership is free and that through a significant benefits to being a member. Our members will always get more.
We are working hard to build value trust relationships with our members by providing differentiated products and services that will be difficult for other retailers to replicate. We have strengthened our product assortment with a number of recent actions.
The launch of our relationship with Adam Levine and Nicki Minaj in the Kmart apparel business broadens our appeal to a younger demographic and further enhances our social media reach. Outdoor Life in the Sears apparel business to appeal to the outdoors in the mall. Alphaline and the electronics accessories business initially focused on headphones, stands and mounts and gaming categories. RoadHandler tires in our automotive business, offering a best in class 100,000 mile guarantee. At the same time we are maintaining our strong position in home appliances with Kenmore and other leading brands and in tools and Craftsman. And when you combine exclusive products with innovative services and experiences, you have a compelling proposition.
Let me offer a few examples. Our newly launched Member Assist application empowers our associates to seamlessly interact and to offer advice to our members no matter where they are. We are able to nimbly respond to our member's needs with information on demand using various mobile devices, such as the iPad, iTouch and Android platform.
Shopper Recap allow us to send members an e-mail with the information on the specific items they looked at in store, providing them with information they needed to make an informed decision even after they leave the store. These functions are supported by our investment in technology platforms as well as our investment in our wireless networks and devices in our stores.
Buy online pickup and store leverage is the power of our national store footprint as an added convenience to our members by giving them additional choices in when and how they want to purchase products.
Return in 5 Exchange in 5 provides a more streamline of returning and exchange process regardless of whether the product was purchased online or in store. And most importantly, all of these capabilities are powered by our engaged and empowered associates. We are placing our bet on the evolution of retail becoming a more social and collaborative process and we have results to prove that these capabilities are helping. We are seeing continued strong online sales performance. Sears.com and Kmart.com grew 20% over the prior year in Q1. 60% of Kmart and Sears sales in 2012 were associated with SHOP YOUR WAY members. This has continued in 2013. Annual sales per member have increased by over 8%. Members spend 18% more than non-members. And our supply chain enhancement now allows us to ship the most in-demand products to 99% of the country in two days or less.
We added 15 million items to our online marketplace assortment as we increased the assortment to over 75 million items currently. We are bringing the online capabilities that we built into our stores and bring our store capability to our online business to help with inventory management and fulfillment. In terms of growth, we have a new area of focus that I'd like to share with you today around health and wellness.
The health and wellness market place is currently one of the largest and fastest growing segments in the U.S. economy. As a result of an aging population, innovative new technologies and the implementation of the health care reform law, our members have a greater need for comprehensive and coordinated health care solution. Because of this, we think there is any opportunity to leverage our company's assets and focus our efforts on this growing market, re-serving and enhancing our relationship with a member by addressing their needs.
To move this strategy forward, we've established a health and wellness solutions business unit led by Doug Klinger. Doug will focus on developing and delivering member-based health and wellness solutions in addition to developing innovative products and services for our members.
The health and wellness solutions business will work to expand the impact of health and wellness service we currently offer, such as our optical license business or hearing aid business, chronic care management, home health, health clinic and pharmacy. We will work to leverage the SHOP YOUR WAY platform to enable improved access in selection of healthcare coverage by our member.
The focus will be on making health and wellness customize, convenient and comprehensive. In addition to the work we are doing to position ourselves for the future. We are taking steps to improve operationally and return to profitability. Expense management has been an area of focus from a labor, marketing and cost of goods perspective. We are taking deliberate action to reduce our fixed expenses while ensuring that we are enhancing our member experience.
Last year we reduced our expenses by approximately $600 million and as rob indicated we intend to reduce our expenses by an additional $200 million this year.
We are changing our marketing practices to increase the emphasis on providing timely targeted offers to our members. In this process we are reducing our reliance on fixed long lead time traditional marketing vehicles in favor of variable real time marketing vehicles. We are looking harder at our markdown process based upon store specific inventory levels and other factors.
In sum while our first quarter performance was unacceptable I have tried to provide some clarity around our strategic vision. More specifically I have offered an outline of the initiatives that we are pursuing that are intended to restore the company to an acceptable level of profitability. Beyond that to position us to realize profitable growth. The pace of change in our industry is accelerating as the individuals are altering their shopping behaviors as they adopt new technologies.
We plan to be well positioned to serve our members as these changes occur.
I'll now hand the call back to Bill Phelan.
William K. Phelan - SVP, Finance: Thank you Eddie. That concludes our prepared remarks. So now operator can you open it up for questions.
Operator: (William Reuter, Bank of America Merrill Lynch).
Spencer - Bank of America Merrill Lynch: This is actually Spencer in for Bill. I was wondering if you guys could talk a little bit about the mobile investments you've made and what exactly those entail, and then whether you think that there is substantial need or desire for investments in the future?
Edward S. Lampert - Chairman and CEO: Yeah, I mean, I think what we've tried to do is a combination of bringing new talent into the Company, engineering talent, that has the ability to work directly on building applications that we are using. In the past, a lot of the technology development would have been outsourced, or would have simply been purchased based upon industry solutions. The time involved, the explanation involved in attracting these talents to our Company has been expensive and the investments that we've made include the SHOP YOUR WAY app, the Sears mobile app, the Kmart mobile app and desire to bring that predominantly in-house really relates to the new development cycles around that type of technology as opposed to multi-year projects. A lot of releases are made on a fairly continuous basis. So, we believe that mobile is essential to get right. We believe that we will leverage industry solutions, but we want to make sure that we have the talent and the focus around developing our own applications including patenting applications that we can use with our members.
Spencer - Bank of America Merrill Lynch: Then can you remind us what percent of sales are online, and is it very different either in Kmart or Sears?
Edward S. Lampert - Chairman and CEO: Well, we don't really break those out directly, but directionally they've been growing and the Sears online business is a much larger business than the Kmart online business.
Spencer - Bank of America Merrill Lynch: Then one more. Can you remind us or tell us how many stores you guys closed in the quarter, and then how many you guys are thinking about closing this year?
Robert A. Schriesheim - EVP and CFO: Just to clarify, you are talking about last year's quarter, about 100 stores.
Spencer - Bank of America Merrill Lynch: Then you guys plan on closing any stores this year?
Robert A. Schriesheim - EVP and CFO: We don't have a specific plan as ordinary course as we continue to review our geographic physical footprint, particularly in line with our migration to a more member centric driver organization. We're continually reviewing the physical footprint and we made decisions as the business proceeds, so nothing specific at this point.
Operator: Paul Swinand, Morningstar Investments.
Paul Swinand - Morningstar Investment: Just wanted to Clarify on the last question with store closings. It's a 100, year-over-year quarter comparable quarter store closings with main line stores?
Edward S. Lampert - Chairman and CEO: No, I think what Rob was referring to really was 2012. In terms of Q1, 2013, it's substantially less than that. So, I think, we can get you the numbers off line, but I think Rob was referring mostly to the stores that were closed in 2012.
Paul Swinand - Morningstar Investment: So that's the total for the year?
Edward S. Lampert - Chairman and CEO: Correct.
Paul Swinand - Morningstar Investment: Then, I'm just trying to – you made some comments about the inventory and I'm trying to break out how much of that is due to store closing and how much is, is it focused in any other one area or is it pretty much shared equally across the departments.
Edward S. Lampert - Chairman and CEO: I'll let Rob answer that as well. I think it's a combination of store closings, changing the business model to integrated fulfillment, where we carry the inventory and how we fulfill the inventory, whether it's from store or online and it's also taking a much harder look at inventory turns, return on inventory investment the ageing of inventory where we are taking much a harder look and more disciplined look at that and we think we have some good opportunities to reduce inventory without impacting the business. I think Rob has referenced in the past and in this call that we have $4 billion to $5 billion of inventory with no payables against them, that’s fairly unusual for a large retailer. Most retailers have higher inventory turnover and high return on inventories. So as we get more granular in looking at that, we think we have some opportunities to reduce inventory without impacting the business.
Paul Swinand - Morningstar Investment: Would you say that none of the same store sales decline was due to tight inventory?
Edward S. Lampert - Chairman and CEO: I think it’s hard to break that down specifically. But I'm not sure we have any evidence that for example stocks have had any material impact on our sales.
Paul Swinand - Morningstar Investment: I guess, we are all interested and view the online and technology investments positively I guess we are trying to bridge the gap of how we get to a profitably company from where we are today, could you maybe comment on the gross margins generated by the online side of the business, are they above the stores or is there some way that you could see as this grows the profitability will increase?
Edward S. Lampert - Chairman and CEO: I don't think we break that out specifically, but I will tell you category-by-category, it varies. There are some categories where online margins can be higher than store margins and vice versa when you consider markdowns – clearance markdowns, promotional markdowns, etcetera. I think that one of the things that we've been very focused on is the sensitivity of our gross margins to small changes in price. A 2% price change, plus or minus, on $8 billion a quarter is $160 million. So, when you are selling product at 40% and 50% off, the opportunity to do better than 40% or 50% off to get 38% off or 48% off is a big variable. And I think that the broad-based 'everybody gets the same deal' marketing that Sears and Kmart and many others have engaged in for a long time will be changing. I'm not predicting that the retail industry will become like the airline industry where 10 people across the row in plane all pay different prices for their seat or five people on the floor of a hotel room all pay different prices for their hotel room. But I do think there's going to be a lot more variability and it tips both ways. Better price realization doesn't mean raising prices. It can mean being more accurate in where you place your inventory, being less general and less long lead time in terms of the promotions. The ability that we have now to target our promotions to specific geographies to specific members, groups of members gives us an opportunity to realize a much better answer. Having said that, and what Rob referenced is, as we run both systems simultaneously, there have been instances, more than – it's instances where we're running, not sure it's promotions, but we're also giving away significant SHOP YOUR WAY point which is real money that has the impact of hurting our margins. And I think that that, bringing a much more heightened awareness to our merchants and to our marketing people about how these things can work together rather than – not being additive, but being substitutional, if that's the word. I think we have an opportunity to do much, much better in terms of price realization. And the leverage there if you run the math, it can be very substantial.
Operator: Gary Balter, Credit Suisse.
Gary Balter - Credit Suisse: Could you talk about the protection agreement division in your Company. Could you give us some parameters around that? And when can you maybe – you'll get $500 million or more, what is the volume of EBITDA from that business? Has it been growing, et cetera?
Edward S. Lampert - Chairman and CEO: Gary, I don't think that we break that information out, but what I would say is that similar to the way many retailers have partnered with others with the credit card business, I think we're one of the few that actually issues our own protection agreement. We think there is an opportunity here to partner with somebody else or to recapitalize the business. Because it’s a more asset intensive business than probably deserving of a different capitalization and different structure than what we had historically. Having said that as we said in our remarks, whether we have a transaction here or not will depend on things like valuation. Things like access to funding. I think we have one of the larger protection agreement businesses in the country and we are looking very, very hard at our entire corporate structure to figure out what the right capital structure is against each business, what the right level of investment is in each business. But in terms of broad parameters, we haven’t really broken that out in the past.
Gary Balter - Credit Suisse: Basically on cash do your shareholders (indiscernible) could you talk about the Q2, Q3 impacts that we are going to see similar to what you are sure this is for Q1, so we can model that?
Robert A. Schriesheim - EVP and CFO: Gary, what we said in the past I appreciate the questions. Two things one we don’t want to get into giving forward guidance not only for us but for another publicly traded company in this case Shop as you refer to it. We will each quarter give you visibility into the year-over-year. So that you can do your modeling on a quarter-by-quarter basis. But I don’t want to go down the path of giving forward-looking guidance, not only for us but for another public company.
Edward S. Lampert - Chairman and CEO: I think the important point is that and Rob correct me if I am wrong. We will include the revenue that comes from us selling product to the Hometown and Outlet business at our cost. So that’s really – it's a loss for us, but that's just from accounting convention standpoint what gets included in our revenues and in our margins, it's essentially a zero margin business.
Robert A. Schriesheim - EVP and CFO: That's right. As we indicated they had about 160 basis point negative impact year-over-year.
Gary Balter - Credit Suisse: Right. Why would you – is that because you are making money of the franchise fees or like why would you accelerate your cost?
Robert A. Schriesheim - EVP and CFO: Well, as part of the arrangement. Remember, what we were interested in doing was setting up a management structure and an asset structure where both management teams of the respective companies gets focused on driving the respective businesses. And we felt that shops could be capitalized somewhat differently and pursue a task better on its own. In addition, by keeping them as part of our ecosystem if you will, by continuing to procure inventory for them, we maintain economies of scale. So, it's a benefit for us as we continue to retain the economies of scale. It's a benefit for our shareholders in the sense that we got what we feel is a more appropriate capital structure for shop and it's better for them as they can be singularly focused on their business.
Edward S. Lampert - Chairman and CEO: Yeah, another way of saying that is, that instead of them directly sourcing product, we basically source product for them and transfer it to them at cost. I guess, theoretically it could have done differently where they were sourcing their own product and we were out of the middle, but we're in the middle right now.
Gary Balter - Credit Suisse: Then just in your question, because I think some people are now (indiscernible) kind of the EBITDA for the quarter. How does that turn? Like what – it sounds like it was obviously weather in your comments as you discussed it little bit better. But what are the factors that drive the margin back up, because that seems to be the big miss?
Edward S. Lampert - Chairman and CEO: I think on the Cambridge side the transactional business has hurt us. On the Sears side it was more weather-related. So I think the key thing in my mind really is the sensitivity of our profitability to pricing actions and promotional actions. And so, if you were to think about what a 100 or 200 basis point price change might mean and that goes from the equivalent of a 50% discount to a 48% discount, it changes the entire quarter, it changes the entire set of possibilities and I would tell you that we're very, very focused on looking at what our promotions are driven by a combination of moving products and selling products, but also what we make on the product and that may sound like the A, B, Cs of the business. It is the A, B, Cs of the business, but the difference between 50% discount and a 45% discount, which we routinely do, has a magnified impact on profitability. And I think that's something that we're focused on every day in terms of making sure that we have adequate gross profit dollars and margin on what we sell. So I think that that's – we could talk about expenses all we want, but the big lever is really around sales and margin, and I think the margin piece is highly leveragable but the proof is going to be in the pudding.
Operator: Greg Melich, ISI Group.
Greg Melich - ISI Group: Two questions one on the asset sales another one on the SHOP YOUR WAY. The $500 million target for raising money from asset sales, if something doesn’t make sense with selling the protection agreement business is the goal to get the $500 million and consider other assets or brands to sell or basically that’s the business you are looking at this year?
Edward S. Lampert - Chairman and CEO: I think we have multiple options, doing something with protection agreement business doesn’t preclude us doing other things and not doing something with the protection agreement business, doesn’t preclude us from doing other things. I think the commitment that we've made is that we want to continue to strengthen our liquidity profile. That the level of asset intensity that we have in our company is not necessary going forward. It doesn’t mean that we won't have substantial assets, but we want to evaluate the profitability of our business and the profitability of our assets against what the asset value is. So you should expect some transaction relating to real estate are they going to be as substantial as they were last year, hard to predict, it depends on the inquiries that come in. Could there be other assets that get monetized, there could. I think the bottom line is that we are committed to raising and I think the phraseology is in excess of $500 million. The protection agreement on its own would cover more than that but even if we do something with that business it doesn’t preclude us from doing other, taking other actions.
Greg Melich - ISI Group: And on the SHOP YOUR WAY, in the prepared remarks I heard that 60% of sales are with members and (sales per member) were up 8%, so if that's half your sales or more than half your sales and it's up 8%, are memberships down or how do the comps actually be down? Or did I guess the numbers wrong there?
Edward S. Lampert - Chairman and CEO: No, what's happening is that we're actually seeing an increase in members shopping more and we're seeing a decrease of members shopping less. So a group of members last year that shopped one time that number year-over-year is down. So directionally if 1 million members shopped one time last year, that number, and this is just hypothetical, could be down to 700,000. And if 1 million members shopped four or more times last year, that number is up. So really what we're seeing is attrition in members who shop less frequently and an increase in members shopping more frequently, okay, which is a good trend for us. Then the issue of a member who shopped – group of members who shopped four times last year who are now shopping five or more times or members shopping two or three times were now shopping three or four or more times, that's the type of trend that we're looking for. For sure we don't want to lose any of our members, and when I talk about members, these are active members. So members don't lapse unless they, if you will, withdraw their membership. They register it; they could in effect withdraw their membership. But the good part of the trend is that people shop – the members who are shopping with us more frequently that number is growing. It's the population who are shopping – once, really the one-time a year population has been shrinking. Some of that relates to closing stores, because members who are shopping at stores, they get closed, the opportunity we have there is to continue having them to continue to shop with us online or to shop in an adjacent Kmart or Sears store. There are some members who are predominantly Kmart shoppers, some members who are predominantly Sears shoppers, and when we've closed stores in those communities, you see a significant drop off of members who are predominantly store shoppers in terms of being active members.
Greg Melich - ISI Group: So, I guess, there might be another way to think about it. What percentage of the members would shop say four or more times are year, if that's another way to think about it?
Edward S. Lampert - Chairman and CEO: Again, we haven't broken those numbers out, but it's not an insignificant number. Let's put it that way.
Greg Melich - ISI Group: And last if I could, the cost reductions this year, the $200 million. I know last year, you had advertising spend drop, I guess $1.9 billion to $1.6 billion, is that where a lot of the money that went into SHOP YOUR WAY came from if we were sort of looking at it as a reallocation of assets?
Edward S. Lampert - Chairman and CEO: Let me just answer quickly, and I'll have Rob answer. The reduction in expenses, so there we look at things at a granular level. We look at things in aggregate levels. There is substantial investment, substantial expenditures we are making and that we are increasing. Against that, there are expenses that we are decreasing. What we're trying to do is, to be more real-time in what we're doing and more targeted in what we're doing. So, the big buckets of costs for us really relate to labor, marketing, real estate costs, those are the three – the non-product costs. And so when you look at those three variables, something like marketing spend can decrease on a fixed basis, but can increase on a variable basis, so that the more points that get redeemed, the more points that get issued, to the extent that those are variable and performance oriented, you may actually see a significant increase in that expense, where against that – and you talked about sort of the television media or you talked about things like circulars, in aggregate those numbers have been coming down for us. And it's not just because of the type of spending that it is, it's the fact that we need to make decisions weeks and weeks in advance and it's very, very hard to target those offers to specific geographies or to specific members or groups of members, and that's really been a focus for us is we want our members to get more and we want to get more value to our more valuable members. Rob, do you have…?
Robert A. Schriesheim - EVP and CFO: The only thing I'd say is last year the reduction in the advertising expenses you are talking about were for the most part not a reduction in what we've referred to as revenue generating assets. They were things like agency fees and the likes were very granular when we look at, a reallocation of our investments or expenses, if you'd like. And so that's the direct answer to your question. The $200 million this year, as Eddie indicated, we have three large buckets; labor, marketing, real estate. We have a number of programs underway continually from last year or we have executed on the Lean program throughout the Company. We have made many of our processes more operationally efficient even separate and apart from Lean, and we have taken some – and that has resulted in some labor actions and the likes. But as far as marketing, we're very careful when we look at reducing marketing the assets. And to your point, over time what we want to do is transition from a more fixed based model in marketing. For example, you have to send a circular 13 weeks in advance, just as an example, to utilizing points, which is more variable based and allows you to do more targeted pricing, a differentiated pricing for example.
Operator: Mary Gilbert, Imperial Capital.
Mary Gilbert - Imperial Capital: Can you give us what's the pension funding costs were in the quarter and how you would look at that sort of rolling out?
Robert A. Schriesheim - EVP and CFO: Yeah. Well, we're filing our Q tomorrow. Our annual pension expense is about $160 million a year. In the quarter, it was roughly $40 million. Our cash funding is about $350 million and while it's not been released you can actually figure out what our cash contribution was. If you look at the line item on the balance sheet and the release, the pension line item, you can see that the pension benefit declined about $90 million or so, that's about what the cash contribution was in the quarter.
Mary Gilbert - Imperial Capital: Then getting back to the potential monetization of protection agreement unit, it sounds like and I wanted to get a clarification on this that you would basically sell it to a financial firm and please cut me if I'm wrong. And you would sort of realize proceeds, but at the same time would you have a structured agreement whereby you would participate in the performance of that agreement on a go-forward basis, so that it would also be generating income to Sears going forward?
Edward S. Lampert - Chairman and CEO: I think the – without commenting on the specific structure, whatever we do we're going to be continuing to offer protection agreements to our members. We have a very, very capable sales force who have been trained and educated on the benefits and the appropriateness of selling protection agreements on a variety of our products beyond appliances. Its electronics, its lawn and garden equipment, fitness equipment, et cetera. So, it's in no way shape or form, are we talking about not offering protection agreements to our members. And I'd like – I think you should think about it a lot similar to the way credit cards that were previously sort of owned and managed by retailers are now predominantly, the receivables are owned and managed by financial institutions, but the retailers continue to have their own credit card programs.
Mary Gilbert - Imperial Capital: Exactly, and so that's why I was thinking, with some of the companies I follow, some of the arrangements that they enter into, they still participate or generate income on those portfolio. So, I guess that this is going to continue, because it is a very – as far as I understand, that obviously there is no financial results, but I think it's a probably a very attractive unit and it's very profitable. But I wondered if Sears in sort of monetizing this as part of the agreement and say selling it for a financial firm would still generate income going forward, so that it would be like an annuity sort to speak going forward.
Edward S. Lampert - Chairman and CEO: I guess, what I'd say is, we can't really comment on what a potential structure may look like, but your description is certainly one of the possibilities that could occur.
Mary Gilbert - Imperial Capital: Then I had a question on the inventory management process that you are going through now. So one of the questions that I have is, as you are looking to be more efficient on a working capital basis, let's say, particularly with inventories, and it makes a lot of sense. But I wondered, to the extent that you might be moving some inventory that you previously kept in the store, when the customer comes in to buy it but it's not in the store and they have to wait a day or two to get it, and I know it's not that much time, but I just wondered about potential loss of revenues in the sense that they actually came in the store and they have the opportunity to walk out with the merchandise, and now they have to wait a day or two. I just wondered about how you're kind of weighing that and if you are considering some of those?
Edward S. Lampert - Chairman and CEO: I think there are two dimensions to that. Number one, if we don't have the inventory in the store, is that a lost sales and in the past with that customer who would leave and go buy the product elsewhere, now we have the ability - you may have seen some of our commercials, but we now have the ability where if you come to the store and we have the product you want, it's not in your size, it's not in the color you want, that we will ship it to you, and so the ability for us to use store inventory to fulfill online orders as well as to use non-store inventory to fulfill what effectively are store orders. That's what we're talking about when we talked about integrated retail. It's not that you buy online or you buy in store. To use an example, if we have 1,000 units of a product in one of our DCs, we might have 100 units of that product or 50 units of that product in 1,000 stores. So the idea of having 50,000 units in the stores and 1,000 units in a DC and if the DC was out of stock to basically not be able to fulfill that doesn’t make sense. When it comes to businesses like apparel and home furnishings, for example, where the sizing and the colors can vary significantly, figuring out how to use the totality of our inventory better so we don't lose sales, even when something may have sold out in a particular store, and we also have the ability now, because of a much expanded inventory assortment, that if you're in a store and you don't find what you want in a store, there's a much greater likelihood that we actually have the product online, and as a SHOP YOUR WAY member we expect to be doing things to make it easier for you to buy those items. Yes, there may be a delay is you talk about a couple of days. There are certain items where if you need them in the next couple of days, you certainly would consider buying it elsewhere. But for many items as long as it's convenient, as long as it's not costly, simply knowing that you are going to get the item a couple days later and that part of your shopping trip was fulfilled is something I think can really raise our level of satisfaction with our members.
Operator: And at this time, ladies and gentlemen, this does conclude our time for questions. And this also does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees you may now disconnect.