Q4 & Full Year Transformation Update & Financial Results February 2015

Transcription

1 Q4 & Full Year 2014 Transformation Update & Financial Results February 2015 a

2 Agenda Introduction Opening Remarks Financial Results Rob Schriesheim Chief Financial Officer Eddie Lampert Chairman & Chief Executive Officer Rob Schriesheim Progress on Our Transformation Eddie Lampert 2

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. 3

4 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. 4

5 Opening Remarks 1 Restoring Profitability: $217M Year-Over-Year Improvement in Q4 Domestic Adjusted EBITDA 2 Focusing on the Future: Best Members, Best Stores, Best Categories 3 Enhancing Our Financial Flexibility 5

6 Financial Results 6

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) 7

8 Fourth Quarter Year-Over-Year Revenue Changes $10,593 85% of Revenue Decline was Due to Non-Comp Items Related to Asset Reconfiguration Activity Amount in millions ($1,097) ($530) $8,469 On a comparable basis, revenue declined 4.4% ($497) $8,099 ($313) ($57) Q As Reported Sears Canada Lands' End Closed Stores Q Comp Basis Comp Store Sales Other 1 Q As Reported See slide 27 in appendix for year-to-date analysis (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. 8

9 Fourth Quarter Comparable Store Sales Format Q Drivers Sears Domestic -7.0% Mattresses Home Appliances Apparel Auto Consumer Electronics Excluding the impact of consumer electronics, Sears Domestic comp store sales would have been -4.6% Kmart -2.0% Total Domestic -4.4% Apparel Toys Jewelry Seasonal Grocery & Household Consumer Electronics Excluding the impact of consumer electronics and grocery & household, Kmart comp store sales would have been +2.8% Excluding the impact of consumer electronics and grocery & household, Total SHC Domestic comp store sales would have been -1.1% While comparable sales were down, gross margin on a comparable basis was up See slide 28 in appendix for year-to-date analysis 9

10 Fourth Quarter Year-Over-Year Gross Margin Changes All of the Margin Decline was Due to Non-Comp Items Related to Asset Reconfiguration Activity $2,482 Amount in millions ($292) ($208) ($93) $18 $1,907 On a Comparable Basis, Margin Increased $71M or 3.7% ($83) $154 $1,978 Q As Reported Sears Canada Lands' End Closed Store Impact Other 1 Q Comp Basis Volume Rate Q As Reported (1) Consists of non-cash reserves See slide 29 in appendix for year-to-date analysis 10

11 Fourth Quarter Year-Over-Year Expense Changes $372M of the Expense Reduction was Due to Non-Comp Items Related to Asset Reconfiguration Activity Amount in millions $2,613 $75 ($319) ($128) On a Comparable Basis, We Reduced Expenses by $239M $2,241 ($239) $2,002 Q As Reported Sears Canada Lands' End Non-Operating 1 Q Comp Basis Expense Increase Expense Decrease 2 SG&A Q As Reported See slide 30 in appendix for year-to-date analysis (1) Consists of closed store reserves, domestic pension expense, legal expenses, transaction costs and other expenses. (2) Domestic adjusted selling and administrative expense. 11

12 Financial Position & Liquid Assets We Believe We Have Sufficient Financial Resources And Liquid Assets Amounts in millions FYE 2014 SHC Domestic Credit Facility Cash $ 250 Availability on Credit Facility 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 $3.275B revolving credit facility 2 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 2 nd lien debt, subject to borrowing base requirements 3 SHC Investment in Sears Canada 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 Real Estate Portfolio 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 (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. 12

13 De-risking the Balance Sheet Domestic Adjusted Net Debt Position 1 Excluding Unfunded Pension, Total Net Debt Decreased by $76M Year-Over-Year $5,117 Total Net Debt ($76) $314 ($390) $3,626 $3,550 Note that FY15 pension contribution will decline to $275 million versus $417 million in FY14 $5,041 $768 $5,809 $3,550 Amounts in millions $1,491 $1,491 Increase in Unfunded Pension Obligation Driven By: 90 bps Drop in Interest Rates as Required by GAAP 2 New Society of Actuaries Mortality Tables $2,259 FYE 2013 Adjusted Net Debt Change in Long Term Debt Change in Net Short Term Debt FYE 2014 Adj. Net Debt Excl. Change in Pension Change in Unfunded Pension Obligation Unfunded Pension Obligation Increase Decrease Net Debt FYE 2014 Adjusted Net Debt (1) Defined as total net debt plus unfunded pension obligation. (2) GAAP interest rate required to be used in measuring funding levels. 13

14 Fiscal 2014 Asset Reconfiguration & Financing Activity Generated $2.3B of liquidity from asset reconfiguration and financing activities in fiscal 2014 Lands End Spin-Off $500M in proceeds Short-term Loan Secured by Certain Real Properties $400M in proceeds Initial maturity date of Dec 31, Extended to Feb 28, 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 14

15 Fiscal 2015 Asset Reconfiguration & Financing Activity 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 Amended and Extended Secured Short-term Loan SHC will repay $200M of the $400M loan on March 2 nd 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 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 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 (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. 15

16 Progress On Our Transformation 16

17 Our Transformation Is Underway 17

18 Focused on the Future As we transform our business we are focused on three areas: 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 18

19 Focused on Our Best Members Building Relationships Through Personalization Over 25% of our Marketing Communications are Personalized Mass vs. Personalized Interactions Benefits of Personalized Interactions Increased Relevance Increased Engagement Higher Retention Increased Visit Frequency Q Q Personalized Traditional Larger Share of Member s Wallet 19

20 Focused on Our Best Members Connecting Online and Stores 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 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 20

21 Focused on Our Best Stores Optimizing Store Network and Space 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 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 Sears & Whole Foods on Shared Footprint in Clearwater, Florida 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 21

22 Focused on Our Best Stores Integrated Retail Investments Focusing Our Resources on Our Best Stores as We Invest in Integrated Retail Associate Mobility Digital Signs In-Store Pick-Ups & Returns 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 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 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 22

23 Focused on Our Best Categories Leading Categories Focused on Growing Our Best & Most Important Categories Home Appliances Home Services Apparel 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 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 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 23

24 Focused on Our Best Categories Transforming Consumer Electronics Business Model Focused On Building Partnerships To Increase Margin & Mitigate Risk Marketplace New categories and new brands through vendor partners Dedicated in-store presence for expanded Marketplace offerings Store-In-Store Vendor-funded experiences featuring key brands Re-merchandising to maximize exposure and presence of our most relevant brands Scan-Based Trading Building new scan-based trading relationships to expand our assortment while mitigating 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 24

25 Summary 1 Restoring Profitability: $217M Year-Over-Year Improvement in Q4 Domestic Adjusted EBITDA 2 Focusing on the Future: Best Members, Best Stores, Best Categories Focusing on the Future: Best Members, Best Stores, Best Categories 3 Increasing Our Financial Flexibility 25

26 Appendix a

27 Full Year 2014 Year-Over-Year Revenue Changes $36,188 87% of Revenue Decline was Due to Non-Comp Items Related to Asset Reconfiguration Activity Amounts in millions ($1,708) ($1,341) On a comparable basis, revenue declined 2.1% $31,860 ($1,279) ($421) ($241) $31,198 FY 2013 Sears Canada Lands' End Closed Stores FY 2013 Comp Basis Comp Store Sales (1) Other FY 2014 (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. 27

28 Full Year 2014 Domestic Comparable Store Sales Format Full Year 2014 Drivers Sears Domestic -2.1% Home Appliances Mattresses Apparel Auto Consumer Electronics Excluding the impact of consumer electronics, Sears Domestic comp store sales would have been -0.5% Kmart -1.4% Apparel Jewelry Grocery & Household Consumer Electronics Total Domestic -1.8% Excluding the impact of consumer electronics and grocery & household, Kmart comp store sales would have been +0.8% Excluding the impact of consumer electronics and grocery & household, Total SHC Domestic comp store sales would have been +0.1% 28

29 Full Year 2014 Year-Over-Year Margin Changes Amount in millions 81% of Margin Decline was Due to Non-Comp Items Related to Asset Reconfiguration Activity $8,755 ($514) On a comparable basis, Margin declined 4.2% ($529) $7,459 ($242) ($11) ($155) ($155) $7,149 FY 2013 Sears Canada Lands' End Closed Store Impact (1) Consists of non-cash reserves Other 1 FY 2013 Comp Basis Volume Rate FY

30 Full Year 2014 Year-Over-Year Expense Changes $770M of the Expense Reduction was Due to Non-Comp Items Related to Asset Reconfiguration Activity Amount in millions $9,384 ($482) $101 ($389) On a Comparable Basis, We Reduced Expenses by $394M $8,614 ($394) $8,220 FY 2013 Sears Canada Lands' End Non-Operating FY 2013 Comp Basis Expense Increase 1 2 Expense Decrease (1) Consists of closed store reserves, domestic pension expense, legal expenses, transaction costs and other expenses. (2) Domestic adjusted selling and administrative expense SG&A FY

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 Amounts in millions Assets $3,616 $3,490 $3,221 $4,051 $4,054 $3,633 Liability 5,875 4,981 5,311 6,109 5,623 5,435 Unfunded ($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% (1) Year-End Balances Note: A 100 bps increase in the discount rate would reduce the pension liability by approximately $600 million 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. 31

32 Domestic Pension Contributions Historically, Pension Contributions Have Been A Significant Use of Our Cash $1.6 Billion We Expect Contributions To Decline After 2014, Providing Relief From Funding Pressure Created By Artificially Low Interest Rates $1.3 Billion 3 $ in millions $352 $516 1 $360 $417 $275 $284 $282 $267 $ Actual Contributions Estimated Contributions (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. 32

33 De-risking Our Obligations Consistently Reduced Lessee Obligation As We Continue To Adjust Our Store Footprint We Expect To Further Reduce Lease Obligations Amounts in millions $6,617 $6,259 $5,514 $5,060 $4,729 $4,343 $3,646 $2,885 Annual Rent Expense $883 $864 $864 $813 $826 $794 $721 $677 Reducing Net Minimum Lease Payments Decreases Corporate Obligations And Further De-Risks Our Business Model 33

34 Sears Holdings Consolidated Results Amounts in millions, except per share amounts Fourth Quarter Full Year Revenues $ 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) (1) Adjusted for the results of the Lands' End business and Sears Canada which were included in our results prior to the separation/disposition. 34

35 Significant Items Amounts in millions Fourth Quarter Full Year Net loss as reported $ (159) $ (358) $ (1,682) $ (1,365) Domestic pension expense Domestic closed store/store impairments/ severance Domestic gain on sales of assets (14) (7) (54) (41) Other (1) Gain on Sears Canada disposition (44) Domestic tax matters 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. 35

36 Consolidated Adjusted EBITDA Amounts in millions Fourth Quarter Full Year Net 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) Interest expense Interest and investment (income) loss 1 (178) (132) (207) Other income (2) (4) (2) Operating loss (129) (132) (1,508) (927) Depreciation and amortization Gain on sales of assets (59) (391) (207) (667) Before excluded items (62) (350) (1,134) (862) Closed store reserve and severance Domestic pension expense Other (1) Impairment charges Adjusted EBITDA (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. 36

37 Adjusted EBITDA Amounts in millions Fourth Quarter Full Year Revenues $ 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. 37

38 Fourth Quarter Adjusted Segment Results millions Kmart Sears Domestic Sears Canada Sears Holdings Revenue $ 3,547 $ 4,007 $ 4,552 $ 4,958 $ - $ 1,097 $ 8,099 $ 10,062 Gross margin dollars ,156 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 ,119 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) (132) (68) Depreciation and amortization (23) (32) (103) (121) - (20) (126) (173) Gain on sales of assets 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 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. 38

39 Full Year Adjusted Segment Results millions Kmart Sears Domestic Sears Canada Sears Holdings 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, ,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, ,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 (1) 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 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. 39

40 Fourth Quarter Reconciliation to GAAP Amounts are Preliminary and Subject to Change millions, except per share data GAAP Domestic Pension Expense Quarter Ended January 31, 2015 Domestic Closed Store Reserve, Store Impairments and Severance Adjustments 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) Income tax benefit impact 63 (8) (47) 8 (15) After tax and noncontrolling interest impact (159) (14) (36) Diluted loss per share impact $ (1.50) $ 0.13 $ 0.73 $ (0.13) $ 0.25 $ 0.18 $ (0.34) millions, except per share data GAAP Domestic Pension Expense Domestic Closed Store Reserve, Store Impairments and Severance Quarter Ended February 1, 2014 Adjustments Domestic Gain on Sales of Assets Domestic Tax Matters Sears Canada Segment Lands' 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) (22) Operating loss impact (132) (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) Income attributable to noncontrolling interest impact (208) 208 After tax and noncontrolling interest impact (358) (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. 40

41 Full Year Reconciliation to GAAP Amounts are Preliminary and Subject to Change millions, except per share data GAAP Domestic Pension Expense Domestic Closed Store Reserve, Store Impairments and Severance Domestic Gain on Sales of Assets Year Ended January 31, 2015 Other Expenses Adjustments Gain on Sears Canada Disposition Domestic Tax Matters Sears Canada Segment Lands' End Separation 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) (87) (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) Loss attributable to noncontrolling interest impact 128 (128) After tax and noncontrolling interest impact (1,682) (54) 29 (44) (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) millions, except per share data GAAP Domestic Pension Expense Domestic Closed Store Reserve, Store Impairments and Severance Year Ended February 1, 2014 Adjustments Domestic Gain on Sales of Assets Domestic Tax Matters Sears Canada Segment Lands' End Separation 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) (62) Operating loss impact (927) (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) Income attributable to noncontrolling interest impac (249) 249 After tax and noncontrolling interest impact (1,365) (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. 41

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