MD & A
MD & A
MD & A Four
Management's Analysis of Consolidated Financial Condition
Analysis of Consolidated Financial Condition
The Company's significant financial capacity and flexibility are exemplified by the quality and liquidity of its assets and by its ability to access multiple sources of capital.
The owned credit card receivables balance of $18.79 billion excludes credit card receivables transferred to a securitization Master Trust ("Trust"). Through its subsidiary, SRFG, Inc., the Company sells securities backed by a portion of the receivables in the Trust to provide funding. In addition to the receivables in the Trust which back securities sold to third parties, the Company transfers additional receivables to the Trust in accordance with the terms of the securitization transactions and to have receivables readily available for future securitizations.
A summary of these balances at year-end is as follows:
The credit card receivable balances are geographically diversified within the United States and Canada. The Company grants retail consumer credit based on the use of proprietary and commercially available credit histories and scoring models. The Company promptly recognizes uncollectible accounts and maintains an adequate allowance for uncollectible accounts to reflect losses inherent in the owned portfolio as of the balance sheet date.
Inventories are primarily valued on the last-in, first-out or LIFO method. Inventories would have been $595 million higher if valued on the first-in, first-out or FIFO method at January 1, 2000. Inventories on a FIFO basis totaled $5.66 billion at January 1, 2000, compared to $5.50 billion at January 2, 1999. The increase in inventory levels is primarily due to additional inventory needed to support new Full-line stores, new Specialty Stores, and the growth of Sears Canada. The sale of Homelife partially offset some of the general increase in inventory levels.
In 1999, the Company reduced the percentage of short-term borrowings and increased fixed-rate, longer-term debt and securitization funding in its funding mix as interest rate conditions were favorable in the term debt markets. The Company accesses a variety of capital markets to preserve flexibility and diversify its funding sources. The broad access to capital markets also allows the Company to effectively manage liquidity and repricing risk. Liquidity risk is the measure of the Company's ability to fund maturities and provide for the operating needs of its businesses. Repricing risk is the effect on net income from changes in interest rates. The Company's cost of funds is affected by a variety of general economic conditions, including the level and volatility of interest rates. To aid in the management of repricing risk, the Company uses off-balance sheet financial instruments, such as interest rate swaps. The Company has policies that centrally govern the use of such off-balance sheet financial instruments.
The ratings of the Company's debt securities as of January 1, 2000, appear in the table below:
On February 24, 2000, the Duff & Phelps Credit Rating Co. changed its ratings on the Company's debt securities from A, D-1 and AAA, to A-, D-1- and AAA, respectively.
The Company utilizes Sears Roebuck Acceptance Corp. ("SRAC"), a wholly owned subsidiary, to issue commercial paper, to maintain a medium-term note program, and to issue intermediate and long-term underwritten debt. SRAC issued term debt securities totaling $1.1 billion in 1999. SRAC commercial paper outstanding was $2.68 billion and $4.24 billion at January 1, 2000, and January 2, 1999, respectively. SRAC commercial paper is supported by $5.06 billion of syndicated credit agreements, $875 million of which expires in 2002 and $4.185 billion of which expires in 2003. The weighted average interest rate on SRAC fixed rate term debt issued in 1999 was 6.44% compared to 6.43% in 1998. The following securities were issued during 1999:
> $750 million of
6.25%, 10-year underwritten notes, at a yield of 6.43%
The Company, through its subsidiary SRFG, Inc., securitizes domestic credit card receivables to access intermediate-term funding in a cost-effective manner. In 1999, the Company issued $1.4 billion of fixed-rate term certificates through securitizations, compared to $985 million in 1998. As of January 1, 2000, there were $6.58 billion of investor certificates outstanding that were backed by sold domestic credit card receivables.
The Company plans capital expenditures of $1.2 billion for 2000, which includes the opening of approximately 10 Full-line Stores, and more than 175 Specialty Stores. The Company may also pursue selective strategic acquisitions.
The Company used both internal and external resources to complete its Year 2000 compliance initiatives. The Year 2000 efforts of the Company's credit and bank operations were also subject to regulatory review.
The Company did not experience any significant Y2K problems. All Sears facilities opened as planned, systems were available on time and data centers, networks and infrastructure were operational continuously.
As of January 1, 2000, the Company's total costs (including external costs and the costs of internal personnel) related to its Year 2000 effort are approximately $62 million, all of which the Company (including Sears Canada) has incurred. In addition, the Company has accelerated the planned development of new systems with improved business functionality to replace systems that were not Year 2000 compliant, including the Company's new payroll processing system. These systems cost approximately $80 million, all of which the Company has incurred as of January 1, 2000. The Company funded Year 2000 costs with cash flows from operations.
Annual Report 1999