q4 & full year 2014 - sears holdings corporation · 4 non-gaap financial measures for purposes...

a

Q4 & Full Year 2014 Transformation Update & Financial Results

February 2015

2

Agenda

Introduction Rob Schriesheim Chief Financial Officer

Opening Remarks Eddie Lampert Chairman & Chief Executive Officer

Financial Results Rob Schriesheim

Progress on Our Transformation Eddie Lampert

3

Cautionary Statement

Regarding Forward-Looking Information This presentation contains forward-looking statements, including statements about our transformation through our integrated retail strategy, the opportunities, some of which are quantified, presented by a framework for profit, our plans to redeploy and reconfigure our assets, our liquidity and ability to exercise financial flexibility as we meet our obligations and possible strategic transactions. Forward-looking statements, including these, are based on the current beliefs and expectations of our management and are subject to significant risks, assumptions and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. In addition, the framework for profit is not intended to provide guidance or predict results; instead, it is intended to provide dimensional context for the potential opportunities for increasing profitability if we are successful in achieving the potential results outlined, which is subject to significant assumptions, uncertainties and risks, including those identified in the presentation relating to maintaining, reversing or otherwise improving or achieving certain performance metrics, including member penetration, level of member engagement and retention rates. There can be no assurance that any of these efforts will be successful. The statements concerning our evaluation of strategic alternatives, including with respect to the sale-leaseback/real estate investment trust transaction regarding certain owned real estate, also are subject to risks and uncertainties, including our ability to enter into or complete any such transaction on acceptable terms, on intended timetables or at all, the form or terms and conditions of any such transaction, and the impact of the evaluation and/or completion of any such transaction on our other businesses. There can be no assurance that any of these efforts will be successful. The following additional factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: our ability to offer merchandise and services that our customers want, including our proprietary brand products; our ability to successfully implement our integrated retail strategy to transform our business; our ability to successfully manage our inventory levels; initiatives to improve our liquidity through inventory management and other actions; competitive conditions in the retail and related services industries; worldwide economic conditions and business uncertainty, including the availability of consumer and commercial credit, changes in consumer confidence and spending, the impact of rising fuel prices, and changes in vendor relationships; vendors’ lack of willingness to provide acceptable payment terms or otherwise restricting financing to purchase inventory or services; possible limits on our access to our domestic credit facility, which is subject to a borrowing base limitation and a springing fixed charge coverage ratio covenant, capital markets and other financing sources, including additional second lien financings, with respect to which we do not have commitments from lenders; our ability to successfully achieve our plans to generate liquidity through potential transactions or otherwise; potential liabilities in connection with the separation of Lands’ End, Inc. and disposition of a portion of our ownership interest in Sears Canada Inc.; our extensive reliance on computer systems, including legacy systems, to implement our integrated retail strategy, process transactions, summarize results, maintain customer, member, associate and Company data, and otherwise manage our business, which may be subject to disruptions or security breaches; the impact of seasonal buying patterns, including seasonal fluctuations due to weather conditions, which are difficult to forecast with certainty; our dependence on sources outside the United States for significant amounts of our merchandise; our reliance on third parties to provide us with services in connection with the administration of certain aspects of our business and the transfer of significant internal historical knowledge to such parties; impairment charges for goodwill and intangible assets or fixed-asset impairment for long-lived assets; our ability to attract, motivate and retain key executives and other associates; our ability to protect or preserve the image of our brands; the outcome of pending and/or future legal proceedings, including product liability and qui tam claims and proceedings with respect to which the parties have reached a preliminary settlement; and the timing and amount of required pension plan funding. While we believe that our forecasts and assumptions are reasonable, we caution that actual results may differ materially. We intend the forward-looking statements to speak only as of the time made and do not undertake to update or revise them as more information becomes available, except as required by law.

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Non-GAAP Financial Measures

For purposes of evaluating operating performance, we use an Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") measurement. Adjusted EBITDA is computed as net loss attributable to Sears Holdings Corporation appearing on the statements of operations excluding (income) loss attributable to noncontrolling interests, income tax (expense) benefit, interest expense, interest and investment income (loss), other income, depreciation and amortization and gain on sales of assets. In addition, it is adjusted to exclude certain significant items as set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our businesses, as well as executive compensation metrics, for comparable periods. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items. While Adjusted EBITDA and Domestic Adjusted EBITDA are non-GAAP measurements, management believes that they are an important indicator of ongoing operating performance and useful to investors because:

• Adjusted EBITDA and Domestic Adjusted EBITDA excludes the effects of financing and investing activities by eliminating the effects of interest and depreciation costs;

• Management considers gains/(losses) on the sale of assets to result from investing decisions rather than ongoing operations; and

• Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects the comparability of results, including impairment charges related to fixed assets and intangible assets, closed store and severance charges, domestic pension expense, expenses associated with legal matters, transaction costs associated with strategic initiatives and other expenses, the Lands’ End separation and the Sears Canada deconsolidation. We have adjusted our results for these items to make our statements more comparable and therefore more useful to investors as the items are not representative of our ongoing operations and reflect past investment decisions.

See appendix for reconciliations of the differences between the non-GAAP financial measures used in this presentation with the most comparable financial measures calculated in accordance with GAAP.

5

Opening Remarks

Enhancing Our Financial Flexibility

3

Focusing on the Future: Best Members, Best Stores, Best Categories

2

Restoring Profitability: $217M Year-Over-Year Improvement in Q4 Domestic Adjusted EBITDA

1

6

Financial Results

7

Domestic Adjusted EBITDA Results

Meaningful Improvement in Year-Over-Year Domestic Adjusted EBITDA Trend

($ in millions) Q1 Q2 Q3 Q4 Full Year

2013 $(15) $(73) $(310) $(92) $(490)

2014 $(178) $(298) $(296) $125 $(647)

YoY Change $(163) $(225) $14 $217 $(157)

8

Fourth Quarter

Year-Over-Year Revenue Changes

Q4 2013As Reported

Sears Canada Lands' End ClosedStores

Q4 2013Comp Basis

Comp StoreSales

Other Q4 2014As Reported

Amou

nt in

mill

ions

$10,593

($530)

($57)

$8,099

($313)

($1,097)

($497)

See slide 27 in appendix for year-to-date analysis

On a comparable basis, revenue declined 4.4%

$8,469

85% of Revenue Decline was Due to Non-Comp Items Related to Asset Reconfiguration Activity

(1) Other represents revenue from ongoing business operations not directly associated with a store. This includes items such as Home Services revenue, as well as revenue from our ongoing relationships with Sears Hometown and Outlet Stores, Inc. and Lands’ End.

1

9

Fourth Quarter

Comparable Store Sales

Format Q4 2014 Drivers

Sears Domestic -7.0%

Mattresses

Home Appliances

Apparel

Auto

Consumer Electronics

Kmart -2.0%

Apparel

Toys

Jewelry

Seasonal

Grocery & Household


Total Domestic -4.4%


Excluding the impact of consumer electronics, Sears Domestic comp store sales

would have been -4.6%

While comparable sales were down, gross margin on a comparable basis was up

Excluding the impact of consumer electronics and

grocery & household, Kmart comp store sales would have

been +2.8%


grocery & household, Total SHC Domestic comp store sales


10

Q4 2013As Reported

Sears Canada Lands' End Closed StoreImpact

Other Q4 2013Comp Basis

Volume Rate Q4 2014As Reported

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Fourth Quarter

Year-Over-Year Gross Margin Changes Am

ount

in m

illio

ns

$2,482

($208)

($83)

($292)

$154 $1,978 $18


($93)

(1) Consists of non-cash reserves

$1,907

On a Comparable Basis, Margin Increased $71M or 3.7%

All of the Margin Decline was Due to Non-Comp Items Related to Asset Reconfiguration Activity

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Fourth Quarter

Year-Over-Year Expense Changes A

mou

nt in

mill

ions

Q4 2013As Reported

Sears Canada Lands' End Non-Operating Q4 2013Comp Basis

SG&A Q4 2014As Reported

Expense Increase Expense Decrease

1 2

$2,613

($128)

($319)

($239)

$2,002


$75

(1) Consists of closed store reserves, domestic pension expense, legal expenses, transaction costs and other expenses. (2) Domestic adjusted selling and administrative expense.

On a Comparable Basis, We Reduced Expenses by $239M

$372M of the Expense Reduction was Due to Non-Comp Items Related to Asset Reconfiguration Activity

$2,241

12

FYE 2014

Cash 250$

Availability on Credit Facility1 808

Committed Liquid Availability 1,058$

Uncommitted Incremental Short-term Borrowing Capacity 97

Total Liquid Availability 1,155$

Equity in Inventory 3,322

Total 4,477$

Amounts in millions

Financial Position & Liquid Assets

We Believe We Have Sufficient Financial Resources And Liquid Assets

(1) Reflects effect of springing fixed charge coverage ratio covenant and borrowing base requirement. (2) Availability to borrow subject to the springing fixed charge coverage ratio covenant and borrowing base requirement. (3) The amount of permitted second lien debt will vary throughout the year depending on our inventory and associated borrowing base.

$3.275B revolving credit facility2 through April 2016 secured by domestic inventory and credit card receivables Permitted to raise up to $500M of short-term debt maturing before April 2016, $403M outstanding at the end of Q4 Permitted to raise up to a maximum of $760M in additional 2nd lien debt, subject to borrowing base requirements3

SHC Domestic Credit Facility

Substantial portfolio of unencumbered real estate including approximately 685 owned and 1,050 leased locations There are numerous transactions that we believe we could take advantage of to provide additional liquidity

SHC Real Estate Portfolio

After the completion of the rights offering on November 7, 2014, we continue to retain ownership of approximately 12M common shares of Sears Canada, with a market value of approximately $120M as of February 24, 2015

SHC Investment in Sears Canada

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$1,491 $1,491 $2,259

$3,626 $3,550

$3,550

FYE 2013Adjusted Net Debt

Change inLong Term

Debt

Change inNet Short Term

Debt

FYE 2014Adj. Net Debt Excl.Change in Pension

Change inUnfunded Pension

Obligation

FYE 2014Adjusted Net Debt

Unfunded Pension Obligation Increase Decrease Net Debt

Increase in Unfunded Pension Obligation Driven By:

• 90 bps Drop in Interest Rates as Required by GAAP2

• New Society of Actuaries Mortality Tables

De-risking the Balance Sheet

Domestic Adjusted Net Debt Position1

$5,117

$5,809

Amou

nts

in m

illio

ns

(1) Defined as total net debt plus unfunded pension obligation. (2) GAAP interest rate required to be used in measuring funding levels.

$314 $768

($390)

Total Net Debt ($76)

$5,041

Excluding Unfunded Pension, Total Net Debt Decreased by $76M Year-Over-Year

Note that FY15 pension contribution will decline to $275 million versus $417 million in FY14

14

Lands’ End Spin-Off $500M in proceeds

Fiscal 2014

Asset Reconfiguration & Financing Activity

Generated $2.3B of liquidity from asset reconfiguration and financing activities in fiscal 2014

Short-term Loan Secured by Certain Real Properties $400M in proceeds Initial maturity date of Dec 31, 2014. Extended to Feb 28, 2015.

Rights Offering for 40M Common Shares in Sears Canada $380M in proceeds from oversubscribed offering

Rights Offering for Senior Unsecured Notes with Warrants $625M in proceeds from oversubscribed offering

Domestic Real Estate Transactions $358M in proceeds

15

Actively Exploring Sale-Leaseback to Newly Formed REIT 1,2

Actively exploring monetization of a portion of our owned real estate portfolio through a sale-leaseback transaction, with the selected stores to be sold to a newly-formed REIT

SHC would continue to operate in the store locations sold to the REIT under one or more master leases

Targeting between 200 and 300 Sears and Kmart stores to be sold to the REIT

Projected to close in the first half of calendar year 20153

Expected to result in an excess of $2 billion in cash proceeds, substantially enhancing SHC’s financial flexibility

The REIT itself would be funded by equity and debt: Equity would be raised through a rights offering with subscription rights distributed pro rata to all stockholders of

record, providing every stockholder the right to participate proportionate to their ownership interest

Debt would be raised from mortgage or other debt financing

Amended and Extended Secured Short-term Loan SHC will repay $200M of the $400M loan on March 2nd

Lenders have agreed to release 50% of the value of the collateral in connection with repayment

Extended remaining $200M until the earlier of June 1, 2015 or the potential REIT closing

Lenders have committed to re-lend up to $200M, at SHC’s election, on or prior to June 1, 2015

If we re-borrow, we must re-pledge the released collateral

Fiscal 2015

Asset Reconfiguration & Financing Activity

(1) There can be no assurance that any transactions will be entered into or completed on acceptable terms, or at all. (2) There can be no assurance that we will pursue such a transaction, and any transaction would require review and approval by our board of directors. (3) Subject to, among other things, board approvals and market conditions.

As we transform our business in 2015, we intend to proactively right-size, redeploy and highlight the value of our assets, including our substantial real estate portfolio

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Progress On Our Transformation

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Our Transformation Is Underway

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Our Best Members

• Increasing Engagement

• Strengthening Relationships

• Growth Through Retention

Our Best Stores

• Optimizing Store Network

• Integrated Retail Investments

• Continues Productivity Improvement

Our Best Categories

• Focus on Leading Categories

• Transforming Important But Underperforming Categories

Focused on the Future

As we transform our business we are focused on three areas:

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Focused on Our Best Members

Building Relationships Through Personalization

Over 25% of our Marketing Communications are Personalized

Q4 2013 Q4 2014

Mass vs. Personalized Interactions

Personalized Traditional

Benefits of Personalized Interactions

Increased Relevance

Increased Engagement

Higher Retention

Increased Visit Frequency

Larger Share of Member’s Wallet

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Focused on Our Best Members

Connecting Online and Stores

Store to Home In store Kiosks in all of our Sears and Kmart stores allow

associates to fulfill members’ needs Access to over 120 million products when a member can’t find

what they are looking for

60% of Online Transactions are now Multi Channel

Ship From Store Leverages our inventory assets across the country Enables us to ship to 99% of U.S. zip codes in 2 days or less by

having our stores ship product when closer to a member’s home than a warehouse During Holiday 2014, we saw close to one third of all online

shipments fulfilled by our stores

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Focused on Our Best Stores

Optimizing Store Network and Space

We are transforming our asset base to better serve our members

In many cases, our stores are larger than needed for today’s technology equipped consumer

Partnering with other retailers allows us to improve productivity and profitability by: Rationalizing our retail store footprint Generating substantial leasing income

On October 20, 2014, we announced lease agreements with Primark, a leading fashion retailer in Europe Primark will lease 7 locations from SHC

in conjunction with their entry into the Northeastern United States

Sears will continue have a significant presence in 6 locations with a streamlined store format of up to 100,000 selling square feet

Sears & Whole Foods on Shared Footprint in Clearwater, Florida

As we leverage Shop Your Way and Integrated Retail, we will continue to right-size, redeploy and highlight the value of our assets, including our substantial real estate portfolio

Sears & Forever 21 on Shared Footprint in Costa Mesa, California

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• Launched in-vehicle pick-up in 2014 • Expanded offering to include in-vehicle returns & exchanges • Enabled cross format free store pick-up expanding our reach

In-Store Pick-Ups & Returns

Focused on Our Best Stores

Integrated Retail Investments

Focusing Our Resources on Our Best Stores as We Invest in Integrated Retail

• Replaced more than 100,000 paper signs in 300 Sears stores • Strategically rolling out to more of our best stores in 2015 • Signs display pricing, product information, and consumer reviews

Digital Signs

• Currently in over 500 Sears stores • Provides instant access to information on millions of products • Associates can complete checkout or send shopper recap from device

Associate Mobility

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• Bringing product design in-house to elevate style and quality • Reducing lead times to improve in-season responsiveness • Improving processes geared towards better SKU rationalization

Apparel

Focused on Our Best Categories

Leading Categories

Focused on Growing Our Best & Most Important Categories

• Reinforcing our position as #1 national service provider • Focused on improving service levels and response times • Investing in people, processes and technology to grow the business

Home Services

• Reinforcing our position as #1 appliance retailer in the U.S. • Launching innovative products with exclusive features under Kenmore • Expanding assortment both in-store and online

Home Appliances

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Focused on Our Best Categories

Transforming Consumer Electronics Business Model

• Building new scan-based trading relationships to expand our assortment while mitigating risk

Scan-Based Trading

• Vendor-funded experiences featuring key brands

• Re-merchandising to maximize exposure and presence of our most relevant brands

Store-In-Store

• New categories and new brands through vendor partners

• Dedicated in-store presence for expanded Marketplace offerings

Marketplace

Focused On Building Partnerships To Increase Margin & Mitigate Risk

New model may impact revenue performance; however, we believe it will improve profitability, reduce working capital and provide our members more of the products they are looking for

25

Summary

Increasing Our Financial Flexibility

3

Restoring Profitability: $217M Year-Over-Year Improvement in Q4 Domestic Adjusted EBITDA

1

Focusing on the Future: Best Members, Best Stores, Best Categories Focusing on the Future: Best Members, Best Stores, Best Categories

2

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Appendix

27

Full Year 2014

Year-Over-Year Revenue Changes

FY 2013 Sears Canada Lands' End Closed Stores FY 2013 CompBasis

Comp StoreSales

Other FY 2014

Amou

nts

in m

illio

ns

$36,188

($1,341)

($241) $31,198

($421)

($1,708)

($1,279)

(1)

On a comparable basis, revenue declined 2.1%

87% of Revenue Decline was Due to Non-Comp Items Related to Asset Reconfiguration Activity

$31,860

(1) Other represents revenue from ongoing business operations not directly associated with a store. This includes items such as Home Services revenue, as well as revenue from our ongoing relationships with Sears Hometown and Outlet Stores, Inc. and Lands’ End.

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Full Year 2014

Domestic Comparable Store Sales

Format Full Year 2014 Drivers

Sears Domestic -2.1%

Home Appliances

Mattresses

Apparel

Auto


Kmart -1.4%

Apparel

Jewelry

Grocery & Household


Total Domestic -1.8%

Excluding the impact of consumer electronics, Sears Domestic comp store sales



grocery & household, Total SHC Domestic comp store sales

would have been +0.1%


grocery & household, Kmart comp store sales would have

been +0.8%

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FY 2013 Sears Canada Lands' End Closed StoreImpact

Other FY 2013 CompBasis

Volume Rate FY 20141

Full Year 2014

Year-Over-Year Margin Changes

Amount in millions

$8,755

($529)

($155)

($514)

($155) $7,149 ($11) ($242)

(1) Consists of non-cash reserves

$7,459

On a comparable basis, Margin declined 4.2%

81% of Margin Decline was Due to Non-Comp Items Related to Asset Reconfiguration Activity

30

Full Year 2014

Year-Over-Year Expense Changes Am

ount

in m

illio

ns

FY 2013 Sears Canada Lands' End Non-Operating FY 2013 CompBasis

SG&A FY 2014

Expense Increase Expense Decrease

1 2

$9,384

($389)

($482)

($394)

$8,220

$101

(1) Consists of closed store reserves, domestic pension expense, legal expenses, transaction costs and other expenses. (2) Domestic adjusted selling and administrative expense

$8,614

On a Comparable Basis, We Reduced Expenses by $394M

$770M of the Expense Reduction was Due to Non-Comp Items Related to Asset Reconfiguration Activity

31

Legacy Pension Obligation History

Sears Holdings has a frozen pension plan which provides benefits for past services

The pension obligation increased in 2014 due to a decrease in the discount rate and new mortality rates used to compute the liability

Note: A 100 bps increase in the discount rate would reduce the pension liability by approximately $600 million

2014 2013 2012 2011 2010 2009

Assets $3,616 $3,490 $3,221 $4,051 $4,054 $3,633 Liability 5,875 4,981 5,311 6,109 5,623 5,435Unfunded ($2,259) ($1,491) ($2,090) ($2,058) ($1,569) ($1,802)

Discount Rate 3.70% 4.60% 4.25% 4.90% 5.75% 6.00%

Amounts in millions Year-End Balances(1)

Continue To Honor Our Legacy Pension Obligations While De-Risking This Liability

(1) In 2012, the Company offered a voluntary lump sum to certain plan participants and paid $1.5 billion in settlements thereby reducing pension risk.

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Domestic Pension Contributions

$352

$516

$360 $417

$275 $284 $282 $267 $208

2011 2012 2013 2014 2015 2016 2017 2018 2019

Actual Contributions Estimated Contributions

$ in

mill

ions

$1.6 Billion

(1) In order to reduce the risks of gross pension obligations, the Company elected to contribute an additional $203M to the domestic pension plan in fiscal 2012, which is included in the amount shown.

(2) The Company offered a voluntary lump sum to certain plan participants and paid $1.5 billion in settlements thereby reducing pension risk. (3) Projected contributions include provision for future strengthening of the mortality tables by the IRS.

1

2

$1.3 Billion3

Historically, Pension Contributions Have Been A Significant Use of Our Cash

We Expect Contributions To Decline After 2014, Providing Relief From Funding Pressure Created By Artificially Low Interest Rates

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De-risking Our Obligations

Consistently Reduced Lessee Obligation

$6,617 $6,259

$5,514 $5,060

$4,729 $4,343

$3,646

$2,885

2007 2008 2009 2010 2011 2012 2013 2014

$883 $864 $864 $813 $826 $794 $721 Annual Rent

Expense

Amounts in millions

Reducing Net Minimum Lease Payments Decreases Corporate Obligations And Further De-Risks Our Business Model

As We Continue To Adjust Our Store Footprint We Expect To Further Reduce Lease Obligations

$677

34

Sears Holdings Consolidated Results

Amounts in millions, except per share amounts

2014 2013 2014 2013Revenues $ 8,099 $ 10,593 $ 31,198 $ 36,188

Net loss attributable to Holdings' shareholders $ (159) $ (358) $ (1,682) $ (1,365)

EPS $ (1.50) $ (3.37) $ (15.82) $ (12.87)

Adjusted net loss (1) $ (36) $ (171) $ (830) $ (792)

Adjusted EPS (1) $ (0.34) $ (1.61) $ (7.81) $ (7.46)

Fourth Quarter Full Year

(1) Adjusted for the results of the Lands' End business and Sears Canada which were included in our results prior to the separation/disposition.

35

Significant Items

Amounts in millions

2014 2013 2014 2013Net loss as reported $ (159) $ (358) $ (1,682) $ (1,365)

Domestic pension expense 14 25 56 102

Domestic closed store/store impairments/ severance 78 166 158 180

Domestic gain on sales of assets (14) (7) (54) (41)

Other(1) 26 — 29 —

Gain on Sears Canada disposition — — (44) —

Domestic tax matters 19 249 574 655

Sears Canada segment — (200) 137 (244)

Lands' End separation — (46) (4) (79)

Adjusted net loss (2) (36)$ (171)$ (830)$ (792)$

(1) Includes expenses associated with legal matters, transaction costs related to strategic initiatives and other expenses.(2) Adjusted for the results of the Lands' End and Sears Canada businesses which were included in our results prior to the separation/disposition.


36

Consolidated Adjusted EBITDA

Amounts in millions

2014 2013 2014 2013Net loss attributable to SHC per statement of operations $ (159) $ (358) $ (1,682) $ (1,365)Income (loss) attributable to noncontrolling interests — 208 (128) 249 Income tax expense (benefit) (63) 125 125 144 Interest expense 92 73 313 254 Interest and investment (income) loss 1 (178) (132) (207)Other income — (2) (4) (2) Operating loss (129) (132) (1,508) (927)Depreciation and amortization 126 173 581 732 Gain on sales of assets (59) (391) (207) (667)Before excluded items (62) (350) (1,134) (862)

Closed store reserve and severance 86 103 224 130 Domestic pension expense 22 40 89 162

Other(1) 41 — 50 —Impairment charges 38 219 63 233 Adjusted EBITDA 125 12 (708) (337)

Lands' End separation — (80) (10) (150)Adjusted EBITDA as defined(2) $ 125 $ (68) $ (718) $ (487)

Sears Canada segment — (24) 71 (3)Domestic Adjusted EBITDA as defined (2) $ 125 $ (92) $ (647) $ (490)

(1) Includes expenses associated with legal matters, transaction costs related to strategic initiatives and other expenses.(2) Adjusted for the results of the Lands' End and Sears Canada businesses which were included in our results prior to the separation/disposition.


37

Adjusted EBITDA

Amounts in millions

2014 2013 2014 2013Revenues $ 8,099 $ 10,062 $ 30,976 $ 34,625

Margin 1,988 2,303 7,131 8,196

Margin rate 24.5% 22.9% 23.0% 23.7%

Expenses 1,863 2,371 7,849 8,683

Adjusted EBITDA (1) 125$ (68)$ (718)$ (487)$

By Segment:Kmart 88$ $ 40 (216)$ $ (129)Sears Domestic 37 (132) (431) (361) Sears Canada — 24 (71) 3

125$ (68)$ (718)$ (487)$

(1) Adjusted for the results of the Lands' End business which were included in our results prior to the separation.


38

Fourth Quarter

Adjusted Segment Results

millions 2014 2013 2014 2013 2014 2013 2014 2013

Revenue $ 3,547 $ 4,007 $ 4,552 $ 4,958 $ - $ 1,097 $ 8,099 $ 10,062 Gross margin dollars 832 886 1,156 1,124 - 293 1,988 2,303

Gross margin rate 23.5% 22.1% 25.4% 22.7% 0.0% 26.7% 24.5% 22.9%

Selling and administrative 744 846 1,119 1,256 - 269 1,863 2,371

Selling and administrative expense as a percentage of total revenues 21.0% 21.1% 24.6% 25.3% 0.0% 24.5% 23.0% 23.6%

Adjusted EBITDA(1) 88 40 37 (132) - 24 125 (68)

Depreciation and amortization (23) (32) (103) (121) - (20) (126) (173)

Gain on sales of assets 27 19 32 15 - 357 59 391

Special items:Closed store reserve and severance (58) (56) (28) 4 - (51) (86) (103)Domestic pension expense - - (22) (40) - - (22) (40)Other(2) (40) - (1) - - - (41) - Impairment charges (27) (67) (11) (140) - (12) (38) (219)Lands' End separation - - - 80 - - - 80

Operating income (loss) $ (33) $ (96) $ (96) $ (334) $ - $ 298 $ (129) $ (132)

(1) Adjusted for the results of the Lands' End business which were included in our results prior to the separation.(2) Includes expenses associated with legal matters, transaction costs associated with strategic initiatives and other expenses.

Kmart Sears Domestic Sears Canada Sears Holdings

39

Full Year

Adjusted Segment Results

millions

2014 2013 2014 2013 2014 2013 2014 2013 Revenue $ 12,074 $ 13,194 $ 16,814 $ 17,635 $ 2,088 $ 3,796 $ 30,976 $ 34,625 Gross margin dollars 2,615 2,910 4,013 4,269 503 1,017 7,131 8,196

Gross margin rate 21.7% 22.1% 23.9% 24.2% 24.1% 26.8% 23.0% 23.7%

Selling and administrative 2,831 3,039 4,444 4,630 574 1,014 7,849 8,683

Selling and administrative expense as a percentage of total revenues 23.4% 23.0% 26.4% 26.3% 27.5% 26.7% 25.3% 25.1%

Adjusted EBITDA(1) (216) (129) (431) (361) (71) 3 (718) (487)

Depreciation and amortization (95) (129) (437) (511) (49) (92) (581) (732)

Gain on sales of assets 103 66 105 63 (1) 538 207 667

Special items:Closed store reserve and severance (142) (89) (55) 31 (27) (72) (224) (130)Domestic pension expense - - (89) (162) - - (89) (162)Other(2) (43) - (4) - (3) - (50) - Impairment charges (29) (70) (19) (150) (15) (13) (63) (233)Lands' End separation - - 10 150 - - 10 150

Operating income (loss) $ (422) $ (351) $ (920) $ (940) $ (166) $ 364 $ (1,508) $ (927)

(1) Adjusted for the results of the Lands' End business which were included in our results prior to the separation.(2) Includes expenses associated with legal matters, transaction costs associated with strategic initiatives and other expenses.

Kmart Sears Domestic Sears Canada Sears Holdings

40

Fourth Quarter

Reconciliation to GAAP Amounts are Preliminary and Subject to Change

millions, except per share data GAAP

DomesticPensionExpense

Domestic Closed Store

Reserve, Store Impairments

and Severance

Domestic Gain on Sales of Assets

Other Expenses

Domestic Tax Matters

As Adjusted

Gross margin impact 1,978$ —$ 10$ —$ —$ —$ 1,988$

Selling and administrative impact 2,002 (22) (76) — (41) — 1,863

Depreciation and amortization impact 126 — (1) — — — 125

Impairment charges impact 38 — (38) — — — —

Gain on sales of assets impact (59) — — 22 — — (37)

Operating loss impact (129) 22 125 (22) 41 — 37

Income tax benefit impact 63 (8) (47) 8 (15) 19 20

After tax and noncontrolling interest impact (159) 14 78 (14) 26 19 (36)

Diluted loss per share impact (1.50)$ 0.13$ 0.73$ (0.13)$ 0.25$ 0.18$ (0.34)$





and Severance



Sears Canada

SegmentLands' End Separation

As Adjusted(1)

Gross margin impact 2,482$ —$ 28$ —$ —$ (292)$ (208)$ 2,010$

Selling and administrative impact 2,613 (40) (24) — — (319) (128) 2,102

Depreciation and amortization impact 173 — (6) — — (20) (6) 141

Impairment charges impact 219 — (207) — — (12) — —

Gain on sales of assets impact (391) — — 12 — 357 — (22)

Operating loss impact (132) 40 265 (12) — (298) (74) (211)

Interest expense impact (73) — — — — 3 — (70)

Interest and investment income impact 178 — — — — (170) — 8

Other income impact 2 — — — — (3) — (1)

Income tax expense impact (125) (15) (99) 5 249 60 28 103

Income attributable to noncontrolling interest impact (208) — — — — 208 — —

After tax and noncontrolling interest impact (358) 25 166 (7) 249 (200) (46) (171)

Diluted loss per share impact (3.37)$ 0.24$ 1.56$ (0.07)$ 2.34$ (1.88)$ (0.43)$ (1.61)$

(1) Adjusted for the results of the Lands' End and Sears Canada businesses w hich w ere included in our results prior to the separation/disposition.

AdjustmentsQuarter Ended February 1, 2014

Quarter Ended January 31, 2015Adjustments

41

Full Year Reconciliation to GAAP Amounts are Preliminary and Subject to Change





and Severance


Other Expenses

Gain on Sears

Canada Disposition


Sears Canada


As Adjusted(1)

Gross margin impact 7,149$ —$ 68$ —$ —$ —$ —$ (502)$ (87)$ 6,628$

Selling and administrative impact 8,220 (89) (129) — (47) — — (603) (77) 7,275

Depreciation and amortization impact 581 — (8) — — — — (49) (3) 521

Impairment charges impact 63 — (48) — — — — (15) — —

Gain on sales of assets impact (207) — — 87 — — — (1) — (121)

Operating loss impact (1,508) 89 253 (87) 47 — — 166 (7) (1,047)

Interest expense (313) — — — — — — 5 — (308)

Interest and investment income impact 132 — — — — (70) — (38) — 24

Other income 4 — — — — — — (4) — —

Income tax expense impact (125) (33) (95) 33 (18) 26 574 136 3 501

Loss attributable to noncontrolling interest impact 128 — — — — — — (128) — —

After tax and noncontrolling interest impact (1,682) 56 158 (54) 29 (44) 574 137 (4) (830)

Diluted loss per share impact (15.82)$ 0.53$ 1.48$ (0.51)$ 0.27$ (0.41)$ 5.40$ 1.29$ (0.04)$ (7.81)$





and Severance


Domestic Tax

Matters

Sears Canada


As Adjusted(1)

Gross margin impact 8,755$ —$ 56$ —$ —$ (1,016)$ (616)$ 7,179$

Selling and administrative impact 9,384 (162) (2) — — (1,085) (466) 7,669

Depreciation and amortization impact 732 — (11) — — (92) (22) 607

Impairment charges impact 233 — (220) — — (13) — —

Gain on sales of assets impact (667) — — 67 — 538 — (62)

Operating loss impact (927) 162 289 (67) — (364) (128) (1,035)

Interest expense impact (254) — — — — 1 — (253)

Interest and investment income impact 207 — — — — (187) — 20

Other income impact 2 — — — — (2) — —

Income tax expense impact (144) (60) (109) 26 655 59 49 476

Income attributable to noncontrolling interest impac (249) — — — — 249 — —

After tax and noncontrolling interest impact (1,365) 102 180 (41) 655 (244) (79) (792)

Diluted loss per share impact (12.87)$ 0.96$ 1.70$ (0.39)$ 6.17$ (2.30)$ (0.73)$ (7.46)$

(1) Adjusted for the results of the Lands' End and Sears Canada businesses w hich w ere included in our results prior to the separation/disposition.

Year Ended February 1, 2014Adjustments

Year Ended January 31, 2015Adjustments

q4 & full year 2014 - sears holdings corporation · 4 non-gaap financial measures for purposes...

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