During the three and nine months ended October 29, 2011, we incurred $265 million and $297 million, respectively, of restructuring and management transition charges. Restructuring and management transition charges include costs related to activities to streamline our supply chain and custom decorating operations, the previously announced exit of our catalog and outlet businesses, cost savings initiatives to reduce home office expenses, the VERP and transition costs related to selected executive management. These programs are expected to be substantially completed by the end of 2012.

 

Supply chain

As a result of streamlining our supply chain organization, during the three and nine months ended October 29, 2011, we recorded $16 million and $31 million, respectively, of increased depreciation and employee severance.   Increased depreciation resulted from shortening the useful lives of assets related to the closing and consolidating of selected facilities.

 

Exit catalog outlet stores

On October 16, 2011, we completed an asset purchase agreement to sell the assets related to the operations of our catalog outlet stores. We sold fixed assets and inventory with combined net book values of approximately $31 million, for a total purchase price of $7 million, which resulted in a loss of $24 million. During the three and nine months ended October 29, 2011, we recorded $6 million and $10 million, respectively, of severance costs related to the sale of our outlet stores.

Termination benefits

We recorded $12 million and $17 million of employee termination benefits for actions planned to reduce our home office expenses for the three and nine months ended October 29, 2011, respectively.

 

VERP

As a part of several restructuring and cost-savings initiatives designed to reduce salary and related costs across the Company, in the third quarter of 2011 we incurred a total charge of $179 million related to the VERP. Charges included $176 million related to enhanced retirement benefits for the approximately 4,000 associates who accepted the VERP, $1 million related to curtailment charges for our SRP and BRP as a result of the reduction in the expected years of future service related to these plans (see Note 9), and we incurred an additional $2 million of costs associated with administering the VERP.

 

Management transition

During the three and nine months ended October 29, 2011, we recorded $27 million and $29 million, respectively, of management transition charges. In June 2011, we announced that Ronald B. Johnson would become our Chief Executive Officer on November 1, 2011, succeeding Myron E. Ullman, III. Mr. Ullman will remain Executive Chairman of the Board of Directors until January 27, 2012, at which time he will step down from the Company and our Board of Directors. During the third quarter of 2011, we incurred charges of $10 million related to Mr. Ullman's transition services compensation. In October 2011, we announced that Michael Francis was appointed our President and as part of his employment package, he was awarded a one-time sign-on bonus of $12 million. During the three and nine months ended October 29, 2011, we recorded $5 million and $7 million, respectively, of other management transition charges.

 

The following table reconciles the activity for the restructuring and management transition liability during the nine months ended October 29, 2011:

($ in millions)		Supply Chain			Exit Catalog Outlet Stores			Termination Benefits			VERP			Management Transition			Other			Total
January 29, 2011	$	-		$	4		$	4		$	-		$	-		$	-		$	8
Charges		31			34			17			179			29			7			297
Cash payments		(8	)		(8	)		(9	)		-			(15	)		-			(40	)
Non-cash		(21	)(1)		(24	)(2)		-			(177	)(3)		(6	)(4)		(2	)(1)		(230	)
October 29, 2011	$	2		$	6		$	12		$	2		$	8		$	5		$	35

 

(1)     Amounts represent increased depreciation as a result of shortening the useful lives of assets associated with our supply chain and custom decorating operations.

(2)     Amount represents the loss on the sale of the catalog outlet stores.

(3)     Amount includes $133 million that reduced the prepaid status of our Primary Plan and $44 million that increased the unfunded status of our SRP and BRP.

(4)     Amount represents stock-based compensation expense related to management transitions.