Q Transformation Update & Financial Results

Transcription

1 Q Transformation Update & Financial Results

2 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 for our interest in Sears Canada and our Sears Auto Centers business and the potential impact of the completion of such transactions also are subject to risks, assumptions and uncertainties, including our ability to enter into or complete either or both of such transactions 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. 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; our ability to successfully implement initiatives to improve our liquidity through inventory management and other actions; our ability to successfully implement initiatives to redeploy and reconfigure our assets; our ability to retain actively engaged members while optimizing our store network; our ability to increase the number of highly active members; our ability to reduce and optimize costs and expenses and implement business initiatives, including those relating to the apparel business; 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 utility costs, and changes in vendor relationships; our ability to successfully achieve our plans to generate liquidity, reduce inventory and reduce fixed costs; conditions and possible limits, including borrowing base limits, on our access to capital markets and other financing sources, including additional second lien financings, with respect to which we do not have commitments from lenders; vendors lack of willingness to provide acceptable payment terms or otherwise restricting financing to purchase inventory or services; 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 extensive reliance on computer systems, including legacy systems, to implement our integrated retail strategy, process transactions, summarize results and manage our business, which may be subject to disruptions or security breaches; 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 of such parties; impairment charges for goodwill and intangible assets or fixed-asset impairments 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 claims and proceedings with respect to which the parties have reached a preliminary settlement; the timing and amount of required pension plan funding which is dependent upon many factors, including returns on invested assets, the discount rates used to determine pension obligations, and/or changes in regulations or other regulatory action; the impact of fluctuations in interest rates on our pension liabilities as well as the amounts required to meet obligations in connection with our borrowings; and other risks, uncertainties and factors discussed in our most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. 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. 2

3 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, interest expense, interest and investment income, other income loss, 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 is a non-gaap measurement, management believes that it is an important indicator of ongoing operating performance and useful to investors because: 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 the results of Lands End that were included in our results of operations prior to the separation. 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. 3

4 Topics Progress on Our Transformation & Second Quarter Updates Second Quarter Results & Financial Position Update on Asset Redeployment and Reconfiguration Activities A Framework For Profit Update 4

5 Progress On Our Transformation 5

6 Our Transformation Traditional Store Network Model Member-Centric Integrated Retail Model Product Centric Transactions with Customers Store Focus Mass Marketing Uniform Pricing High Fixed Cost Infrastructure Asset Intensive Member Centric Relationships with Members Integrated Retail Alternatives Personalization Dynamic Pricing Greater Proportion of Costs Variable Less Asset Intensive 6

7 Executive Summary Our EBITDA Performance Is Not Acceptable & We Are Taking Steps To Address It Profit is highly sensitive to small changes in rates given our large sales base Our Transformation Continues as We Leverage Shop Your Way and Integrated Retail Increasing engagement from SYW members which is now at 73% Adjusting our physical footprint Focusing on better performing stores Integrating stores/online/mobile/services with on-line sales up 18% year-over-year in Q2 and 22% YTD Plan To Take Actions To Enhance Our Financial Flexibility Inventory reductions of $1.7B over past 3 years via store closings and productivity will alter our reliance on inventory as the primary form of collateral in our capital structure In the next 6 12 months, we intend to work with our lenders and others to evaluate our capital structure with a goal of achieving more long-term flexibility and may act sooner if appropriate We have a large, valuable, diverse and unencumbered set of assets and businesses Proven Record Of Funding Our Transformation & Business Model In the 1 st half of 2014, we generated $665 million in proceeds toward our initial goal of $1 billion Enhanced our liquidity by over $4.5B in past 3 years Reduced lease obligations by $1B+ and pension obligations by $600M We Continue To Add To The Talent Pool Of The Company Brought in new leaders and elevated leaders within the Company to achieve more agility and better performance and an ability to execute the Shop Your Way and Integrated Retail platform 7

8 Second Quarter Results & Financial Position 8

9 Sears Holdings Consolidated Results 1 Second Quarter Year-to-date Amounts in millions, except per share amounts Revenues $ 8,013 $ 8,871 $ 15,892 $ 17,323 Gross margin dollars $ 1,742 $ 2,186 $ 3,570 $ 4,342 Gross margin rate 21.7% 24.6% 22.5% 25.1% Selling and administrative expense $ 2,118 $ 2,291 $ 4,207 $ 4,509 Selling and administrative rate 26.4% 25.8% 26.5% 26.0% Net Loss attributable to Holdings' Shareholders $ (573) $ (194) $ (975) $ (473) EPS $ (5.39) $ (1.83) $ (9.17) $ (4.46) Adjusted net loss 2 $ (305) $ (166) $ (541) $ (309) Adjusted EPS 2 $ (2.87) $ (1.56) $ (5.09) $ (2.91) Adjusted EBITDA 2 $ (313) $ (78) $ (534) $ (104) Adjusted EBITDA By Segment 2 Sears Domestic $ (178) $ (43) $ (269) $ (58) Kmart (120) (30) (207) (30) Sears Canada (15) (5) (58) (16) Total $ (313) $ (78) $ (534) $ (104) For each 100 basis point improvement in margin rate, we would see a $80 million improvement in EBITDA Every 2% reduction in selling and administrative expense, or 50 basis point rate improvement, would result in a $40 million improvement in EBITDA We Have Substantial Revenue Scale Which Allows For Small Changes In Margin Rates To Have Large Effects On Profitability (1) See slides 47 and 48 in appendix for a more detailed breakout by segment. (2) Reconciliations to the most directly comparable GAAP financial measures can be found in the appendix on slides 49, 50 and 51. 9

10 Second Quarter Year-Over-Year Revenue Change See slide 40 in appendix for year-to-date analysis Amounts in millions $8,871 ($256) Summary of Year-Over-Year Revenue Change $ % Domestic Closed Stores $ (256) 29.8% Lands' End (330) 38.5% Comp Sales (47) 5.5% Other (85) 9.9% Sears Canada (140) 16.3% Total $ (858) 100.0% ($330) ($47) ($85) $8,013 ($140) Q Domestic Closed Stores Lands' End Comp Sales Other Sears Canada Q (1) (1) Consists primarily of the impact of declines in home services revenue and the impact of free delivery promotions in home appliances. 10

11 Second Quarter Updates Comparable Store Sales Trends Sears Domestic Comp Store Sales Kmart Comp Store Sales 0.1% -0.8% Q Q % -1.7% Q Q % Year-Over-Year Growth in Online & Multichannel Sales Continued Growth of Shop Your Way Member Sales Penetration 1 73% 71% Q Q Q Q Q Q Traditional Online Cross Channel Q Q (1) Member sales penetration is defined as the percentage of eligible sales that are made to Shop Your Way members 11

12 Second Quarter Domestic Comparable Store Sales See slide 41 in appendix for year-to-date analysis Comp Store Sales Performance Format Q Drivers Sears Domestic 0.1% Kmart -1.7% Total Domestic -0.8% Appliances Mattresses Electronics Lawn & Garden Auto Grocery & Household Appliances Apparel Excluding the impact of consumer electronics, Sears Domestic comp store sales would have been +1.6% Excluding the impact of grocery & household and consumer electronics, Kmart comp store sales would have been -1.0% Excluding the impact of consumer electronics and grocery & household, Total SHC Domestic comp store sales would have been +0.4% 12

13 Second Quarter Year-Over-Year Margin Changes See slide 42 in appendix for year-to-date analysis Amounts in millions $2,186 ($54) Domestic Operating Performance ($167) Summary of Year over Year Margin Change $ % Domestic Closed Stores $ (54) 12.1% Lands' End (126) 28.4% Comp Sales (1) 0.2% Rate (166) 37.4% SYW Points (43) 9.7% Sears Canada (54) 12.2% Total $ (444) 100% ($126) ($1) SYW Investment ($166) ($43) ($54) $1,742 Currently carrying costs of two promotional programs: Points and Promotional Markdowns ( PMDs ) As model evolves, expect points to be substitute for PMDs, resulting in improved margin rate Higher points cost is result of higher member engagement Points expense recognized when points are issued Expect to see margin benefit from points issued in Q2 throughout 2014 as these points are redeemed Q Domestic Closed Stores Lands' End Comp Sales Rate SYW Points Sears Canada Q

14 Financial Position & Liquid Assets Amounts in USD millions as of Aug 2, 2014 SHC has a $3.275B domestic revolving credit facility 3 through April 2016 secured by domestic inventory and credit card and pharmacy receivables Sears Canada has a CAD$300M revolving credit facility similar to SHC revolver 2 In May 2014, Sears Canada reduced facility size from CAD$800M to CAD$300M and extended term through 2019 On Aug 2, 2014, Sears Canada had USD$246M of availability based on borrowing base 2 Currently no borrowings, USD$34M in letters of credit issued under facility SHC has uncommitted $500M commercial paper capacity, $7M outstanding on Aug 2, 2014 * * SHC Domestic Sears Canada SHC Consolidated Cash $ 596 $ 243 $ 839 Availability on Facilities 240 (1) 246 (2) 486 Equity in Inventory $ 3,544 $ 333 $ 3,877 Total $ 4,380 $ 822 $ 5,202 We are permitted to raise up to a maximum of $760M in additional 2 nd lien debt subject to borrowing base requirements 4 We have substantial unencumbered real estate portfolio and there are numerous forms of transactions that we believe we could take advantage of to provide additional liquidity SHC s 51% interest in Sears Canada has a current market price of approximately USD$765M and as previously announced we have hired BofA Merrill Lynch to assist us in exploring strategic alternatives, including a potential sale of our interest or of Sears Canada as a whole 5 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) Prior to taking into consideration possible reserves. (3) Availability to borrow subject to the springing fixed charge coverage ratio covenant and borrowing base requirement. (4) The amount of permitted second lien debt will vary throughout the year depending on our inventory and associated borrowing base. (5) Market price as of August 19, There can be no assurance that a sale of this interest is feasible on these terms or at all. 14

15 De-risking the Business Model Second Quarter Consolidated Net Inventory We Are Running Our Business With Less Inventory On An Absolute And Seasonal Basis Amounts in USD millions ~$800M of ~$2.3B Inventory Reduction Due to 2012 SHO & 2014 LE Separations $8,653 $7,708 $6,383 Payable Reduction of $582M Further De-Risks Our Business Model $3,088 $2,903 $2,506 Reduced Net Inventory Investment By ~$1.7B $5,565 $4,805 $3, Inventory Payables Net Inventory (1) By Reducing Our Net Inventory Investment And Our Payables We Have Decreased The Level Of Vendor Support Needed To Run Our Business, Potentially De-risking Our Business Model In A Way That Benefits Us And Our Vendor-partners (1) Net Inventory at Sears Canada was $392M, $438M, and $333M at the end of the second quarter in fiscal 2012, 2013, and 2014, respectively. 15

16 Domestic Pension Contributions Reducing the Obligation See slide 43 in appendix for historical pension obligation history Amounts in millions Historically, Pension Contributions Have Been A Significant Use of Our Cash $2.9 Billion We Expect Contributions To Decline After 2014, Providing Relief From Funding Pressure Created By Artificially Low Interest Rates $1.1 Billion $318 $181 $259 $173 $277 $352 $516 2 $485 $360 * * $310 $270 * $250 * $215 $ Actual Contributions Estimated Contributions *On August 8 th, new legislation was enacted that amends existing pension funding requirements, which we expect will: Increase the discount rates we use to determine our pension liability, resulting in lower liabilities and lower funding obligations. Decrease contributions from those shown above in 2014 by $65M, and contributions in 2015, 2016 and 2017 by $60M, $70M, and $60M The ultimate amount of pension contributions and timing could be affected by changes in the applicable regulations or other regulatory actions, as well as financial market and investment performance. (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. (2) 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. 16

17 De-risking the Balance Sheet Domestic Net Debt Position Amounts in millions Q2 End August 2, 2014 August 3, 2013 Unsecured Commercial Paper $ 7 $ 247 Secured Borrowings 1,397 1,509 Total Short-Term Borrowings 1,404 1,756 Senior Secured Notes $ 1,238 $ 1,237 SRAC Notes Term Loan Other Notes/Mortgages SHC Borrowings 2,566 1,582 Domestic Capital Lease Obligations Total Domestic Long-Term Debt $ 2,857 $ 1,913 Total Domestic Debt $ 4,261 $ 3,669 Adjustments Less: Cash - Domestic $ 596 $ 383 Add: Unfunded Pension - Domestic (1) $ 1,491 $ 2,090 "Adjusted" Domestic Net Debt Position (2) $ 5,156 $ 5,376 Q2 Pension Contributions - Domestic $ 84 $ 74 SHC is using one form of debt, i.e. the Revolver, to fund another form of debt, the legacy pension obligation. Of the Q Revolver balance of $1,397M, $393M was driven over the past twelve months by pension contributions, as distinguished from funding operating results Year-Over-Year Decline in Net Short-Term Borrowings Revolver Borrowings Decline $ (112) Commercial Paper Decline (240) Change in Short-Term Borrowings (352) Cash Increase - Domestic (213) Change in Net Short-Term Borrowings $ (565) SHC s 51% interest in Sears Canada has a current market prices of approximately USD$765M 3. If we are successful in monetizing this stake, and any of the proceeds are applied to the domestic revolver, the Q domestic revolver and Adjusted Domestic Net Debt would decline accordingly. Impact of Pension Contributions on Revolver Usage Q Revolver Borrowings $ 1,509 Less: Pension Contributions (Prior 6 Qtrs.) (665) Pro Forma Q Revolver Borrowings $ 844 Less: Decrease in Revolver Q to Q (112) Less: LTM Pension Contributions (393) Pro Forma Q Revolver Borrowings $ 339 Reduced Net Short-Term Borrowings And Continued To De-Risk Pension Liability (1) As of fiscal year end. (2) Adjusted Consolidated Net Debt Position is $5,027M for Q and $5,327M for Q (3) Market price as of August 19, There can be no assurance that a sale of this interest is feasible on these terms or at all. 17

18 De-risking the Balance Sheet Domestic Revolver Borrowing Flexibility SHC Domestic Net Short Term Debt Position Amounts in millions Net Short Term Borrowings Aug 2, 2014 Aug 3, 2013 ABL Borrowings $1,397 $1,509 Commercial Paper Less Cash (596) (383) Net ST Debt $808 $1,373 SHC Domestic Availability on our Credit Facility Amounts in millions Aug 2, 2014 Aug 3, 2013 Revolver Commitments $ 3,275 $ 3,275 Borrowing Base & FCCR Impact (1) (992) (327) Capacity 2,283 2,948 Borrowings (1,397) (1,509) Letters of Credit (646) (680) Total Usage (2,043) (2,189) Available to Borrow Cash Availability + Cash 836 1,142 Incremental CP Capacity (2) Availability + Cash + CP (3) $ 1,329 $ 1,395 Reduced Net Short-Term Debt by $565M During the 2014 holiday season we currently anticipate that our domestic inventory will be at a level that the borrowing base will not limit the amount we can draw under the credit facility Borrowing capacity remains adequate, with $628M of the year-over-year decline due to more efficient inventory management, which reduced our borrowing base at a time of year when we do not need access to the full $3.275B of commitments SHC s 51% interest in Sears Canada has a current market value of approximately USD$765M 4. If we are successful in monetizing this stake, and apply any of the proceeds to the domestic revolver, the Q domestic availability to borrow, as well as the sum of availability + cash + CP would increase accordingly. The sum of our borrowing availability plus cash and our $500M uncommitted commercial paper program provides ample liquidity and does not consider our real estate assets. (1) Combined effect of springing fixed charge coverage ratio covenant and borrowing base on capacity. (2) We have an uncommitted commercial paper program of up to $500 million. (3) Availability with commercial paper funded to capacity. (4) Market price as of August 19, There can be no assurance that a sale of this interest is feasible on these terms or at all. 18

19 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 $3,460 Annual Rent Expense Est. $883 $864 $864 $813 $826 $794 $721 Reducing Net Minimum Lease Payments Decreases Corporate Obligations And Further De-Risks Our Business Model (1) Estimated as of the end of the second quarter

20 Term Debt Maturities As of August 2, 2014 Amounts in millions $2,190 $284 $6 $13 $13 $ Thereafter Minimal Long-Term Debt Maturities Until

21 Asset Redeployment & Reconfiguration 21

22 Asset Reconfiguration Framework We Are Reconfiguring Our Asset Base To Accelerate & Fund Our Transformation Through Strategic Transactions That We Expect Will Allow SHC Or The Separated Entity To: 1. Become a more focused company that is more efficient to manage and easier to understand 2. Pursue its own strategic opportunities and attract talent 3. Optimize capital structures and allocate capital in a more focused manner 4. Enhance financial flexibility 5. Provide opportunities for shareholders to continue to participate in value creation generated by these businesses after the separation Leveraging Our Rich Portfolio Of Assets To Enhance Financial Flexibility While Creating Value For Our Shareholders 22

23 Update on Previously Announced Asset Reconfiguration Activities Lands End Completed separation of Lands End business from SHC on April 4, 2014 Received $500M exit dividend from Lands End on April 4, 2014 Sears Canada SHC has a 51% equity stake in Sears Canada with a current market value of about $765M as of August 19, 2014 Hired BofA Merrill Lynch to assist us in exploring strategic alternatives for our 51% interest in Sears Canada, including potential sale of SHC s interest or Sears Canada as a whole 1 Sears Auto Centers Considering strategic alternatives 1 Real Estate Portfolio Flexible lease portfolio Reduce unprofitable stores as leases expire and accelerate closings when appropriate Received proceeds of $164 million from real estate transactions in the first half of 2014 Through the first half of the year, we announced the closure of approximately 130 stores in 2014 # of Locations on List Continue to Maintain Substantially the Same Presence in Top Malls in Country Despite Store Closures Top 100 Malls in America Top 100 Fashion Malls in America Combined Lists In The First Half of 2014, We Generated $664 Million Of Liquidity From Asset Reconfiguration Activities (1) There can be no assurance that any transactions will be entered into or completed on acceptable terms, or at all. (2) Goldman Sachs list of Top 100 Malls in America published in (3) Morgan Stanley list of Top 100 Fashion Malls in America published in

24 A Framework For Profit 24

25 Commitment to Our Shareholders Throughout our transformation, we will remain committed to: Serving Our Members Better Driving Sustainable and Profitable Growth Maintaining Disciplined Stewardship of Capital Creating Value For Our Shareholders 25

26 Framework Summary Components of the plan intend to leverage our scale, and include: Optimizing store network and square footage Accelerating Shop Your Way & Integrated Retail as the foundation of our business model Transforming select business models Reducing expenses A Framework For Profit Centered Around Our Two Strategic Platforms Shop Your Way & Integrated Retail 26

27 Store Optimization Impact of Annual Member Retention for 2014 Store Closings By closing negative EBITDA stores and retaining a relationship with our members we expect to improve profitability and reduce working capital while optimizing our store network Stage 1 Optimize Store Network Size FY 2013 Performance of Stores Announced for Closure in 2014 $983 Stage 2 Migrate Members to Other Channels Potential Annualized Impact of Retaining Members Who Shopped These Stores $73M Annualized Profit Improvement 1,2,3,4 $184 $47 Sales $(26) EBITDA Should generate $26M of incremental annualized EBITDA by avoiding losses from these underperforming locations Expected to reduce working capital requirements by $(156)M Sales EBITDA Shop Your Way & Integrated Retail enables us to maintain relationships and retain sales with members after store closures Potential Impact If Successful In Optimizing Store Network While Retaining Portion Of Actively Engaged Members Is $300-$400 Million Annual Incremental EBITDA 1,3,5 (1) Note that potential impact of initiatives are for SHC Domestic. (2) Assumes historical experience associated with engaged member penetration rates as well as active engagement member retention rates (the latter of which are based on stores closed from June of 2013 until the present) continues in future store closings, for which no assurance can be given. (3) EBITDA assumes gross margin rates that are currently realized at the Sears and Kmart format levels. (4) Based on 128 announced closings through first half of (5) Assumes our ability to retain members will improve as we continue to invest in Shop Your Way and Integrated Retail capabilities 27

28 Integrated Retail In-Store Initiatives Underway We are on track with the roll-out of Integrated Retail initiatives Continue to see financial benefit from Integrated Retail Initiatives such as Digital Signs and RFID Investments in ShopSears application provide the foundation for integrated retail capabilities Benefits for Members: Access product information and in-store availability 10.2% 11.1% 3.7% Access product reviews Side-by-side product comparison ipad Digital Signs (HA) 2 9:24 PM Mobile checkout Revenue Shopper Recap Currently Implemented 2014 Approved / Plan Potential Future State 2.1% RFID (Apparel)3 Gross Margin Shop Sears # Stores Digital Signs # Stores RFIDs # Stores / / / 221 Format Wide Potential Impact If Successful With Integrated Retail Initiatives Underway Is $500 million Annual Incremental Revenue and $150-$200 million of Annual Incremental EBITDA1,4 (1) (2) (3) (4) Note that potential impact of initiatives are for SHC Domestic. Digital signs impact is actuals based on testing in home appliances category in select stores. RFIDs impact is actuals based on testing in apparel category in select stores. Assumes results achieved in the currently implemented store population for revenue and margin improvement, as shown in the table above, are achieved format wide, including potential impacts from store optimization actions, for which no assurance can be given. 28

29 Integrated Retail In-Store Initiatives Underway In Vehicle Pick-up. Shop Your Way Member Exclusive Benefit Launched In Vehicle Pickup at Sears making buy-online pick-up in-store more convenient for our members Due to strong positive member feedback, we are expanding this capability to Kmart in a 115 store pilot in Q3 Benefits for Members: Members can park in a special spot, notify the store they are there from their mobile phone and we will deliver the product to their vehicle in 5 minutes or less, guaranteed. Perfect for families, members in a hurry and in inclement weather Here is how it works: Benefits for Members: Launched Cross-Format Buy-Online Pick-Up In-Store Members can shop for their favorite brands on sears.com, kmart.com and shopyourway.com and pick them up at the Sears or Kmart location that is most convenient for them at no additional cost Ability to pick up product at approximately 1,900 locations Here is how it works: 29

30 Shop Your Way Member Engagement Actively Engaged Members Continue To Spend 75% More Than The Average Active Member Annual Average Spend Per Member 75% Total Active Member Population 3 4 Most Highly Active Member We continue to see signs of increased member engagement: Number of members redeeming points in the last 12 months has increased Number of active able members has increased Potential Impact If Successful In Shifting 1 Million Active Members To Most Active Status is $50 Million in Annual Incremental EBITDA 1,2 (1) Note that potential impact of initiatives are for SHC Domestic. (2) Assumes we are able to effectively use member data to provide more relevant personalized marketing content that will drive higher member engagement. (3) An Active Member is defined as a member that has transacted at least one time in the last 12 months. (4) Assumes the average annual spend for a highly active member, defined as an active member that transacts across both Sears and Kmart formats, does not decline, for which no assurances can be given. 30

31 Enhance Margins Optimize Cost of Goods Sold $23.6 Cost of Goods Sold FY 2013 Actuals 1 ($ in billions) $7.9 Selling & Administrative Expense $31.5 Total Expense Opportunities To Optimize Cost Of Goods Sold Strategic Sourcing Increase Private Label Penetration Surgical Pricing Move from PMDs to Points for more efficient promotional model Improved flow of merchandise Aged Inventory Reduction Supply chain optimization In-store leasing (rental income) Strategic Sourcing Update: Second Quarter Initiatives Expected to Create Savings Year-to-Date, we have executed a number of strategic sourcing initiatives that we believe may improve improve profitability by up to $80M on an annualized basis We are continuing to utilize the strategic sourcing framework to identify additional savings across both merchandise and non-merchandise sourcing Potential Impact If Successful In A 1% Reduction In Cost Of Goods Sold Is $230 Million Of Annual Incremental EBITDA1, 2, 3 (1) Note that FY 2013 actuals shown and the potential impact of initiatives are for SHC Domestic and exclude Lands End. (2) Assumes we are able to execute, or continue to execute, in additional product categories, the cost reduction initiatives that we have already implemented in certain product categories. (3) Assumes we are able to execute on the cost reduction initiatives that we have identified but not yet implemented. 31

32 Reduce Selling & Administrative Expenses $23.6 FY 2013 Actuals 1 ($ in billions) $7.9 $31.5 Opportunities To Optimize Selling & Administrative Expense Fixed to digital marketing Lean/Process re-engineering Leveraging technology to improve existing business process Cost of Goods Sold Selling & Administrative Expense Total Expense We have reduced fixed expenses by $30M in the first half of the year Fixed to Digital Marketing Shifted 12% of our marketing dollar spend from fixed-cost traditional marketing to variable-cost digital assets, which reducing expenses by $42M in first half of 2014 while increasing productivity Potential Impact If Successful In A 2% Reduction In Selling And Administrative Expense Is $150 Million Of Annual Incremental EBITDA1, 2, 3 (1) Note that the FY 2013 actuals shown and the potential impact of initiatives are for SHC Domestic and excludes Lands End. (2) Assumes we are able to execute, or continue to execute, in additional product categories, the cost reduction initiatives that we have already implemented in certain product categories. (3) Assumes we are able to execute on the cost reduction initiatives that we have identified but not yet implemented. 32

33 Business Initiatives Apparel Productivity Opportunities SHC Apparel productivity is 1/3 the industry average Increase inventory turn by improving current assortments and brand propositions Introduce innovations in fabrics and unique styles and designs Reduce current lead times to react faster to member needs and trends, and reduce risks by smaller and more seasonal buys Improve member experience by having refreshed brands and merchandise presentations We have taken actions that we believe will improve Apparel Productivity in the back half of the year Upgraded Product & Brands Added Attention, Everlast, Impact by Jillian Michaels (new brand launch this fall), Metaphor, Northwest Territory, Structure, Toughskins Upgraded Visual Merchandising Shifted to a more Life-Styled merchandising presentation Elevate Fabric & Technology Elevating essential fabrics with textures, upgrading contemporary fabrics by capturing trends, and incorporating new fabric technologies Reduced Lead Times Over 30% reduction in over 25 brands enabling faster reactions to changing trends Reduced SKU s Shrunk SKU base by about 30% creating a more curated assortment Potential Impact If Successful With A $10 Improvement In Revenue Per Square Foot For Apparel Is About $100 Million Annual Incremental EBITDA 2 (1) Revenue Per Sq. Ft. is defined as total revenue (including online revenue) divided by total selling square footage. (2) Note that potential impact of initiatives are for SHC Domestic business. The impact to EBITDA includes an adjustment to reflect the potential impact of store optimization actions and assumes we are able to maintain current margin rates, which have been subject to significant fluctuation historically. 33

34 Business Initiatives Connected Solutions 15M+ ANNUAL HOME VISITS SYW MEMBERS ONE OF THE LARGEST MEMBERSHIP PROGRAMS IN RETAIL Home Environment Fitness SHC s capabilities and breadth can provide Shop Your Way members seamless experiences across connected Home, Car & Fitness Laundry Home Entertainment 8M+ ANNUAL VEHICLE INTERACTIONS 2 BILLION+ WEEKLY IN HOME SHC BRAND EXPERIENCES Garage Kitchen 1.4 BILLION+ CHANNEL EXPERIENCES AT STORES AND 25+ ONLINE STORE BRANDS 70M+ ANNUAL SUPPORT & SALES CALLS 34

35 Connected Life Expansion of Connected Solutions Centers Complete Flagship Experience Diversified Product Offerings with Hands on Displays Complete Remodel w/ New Fixtures 1,800 to 2,200 sq. ft. Opened May Chicago Stores CURRENT ASSORTMENT: AT&T Verizon Craftsman Garage Door Fitbit Consumer Cellular igrill mini Sphero Samsung Gear watches Optimized Experience Diversified Product Offerings with Hands on Displays Complete Remodel w/ New Fixtures September/October 4 Chicago Stores Phase 2 1,000 sq. ft. Rationalized assortment Small Format Floorplan and fixtures cost optimized to support model and leverage existing assets October 3 Chicago Stores 500 sq. ft. Phase 3 Evaluating overall store portfolio to identify stores for future roll out 35

36 SHC Domestic Working Capital Improvement Improvement Net Working Capital Impact 1,2 Inventory Turns 1 Turn $400M Key Initiatives Unproductive Inventory Reduced Total Aggregate Aged inventory by $106M or 7% Y/Y Reduced Total Inventory by over 10% via assortment rationalization, seasonal inventory buys, aged inventory, merchandise flow, consignment inventory, etc. Assortment Rationalization Removing poor performing items from assortments in many different merchandise categories including Apparel, Jewelry, Electronics, Beauty Care, and Tools, for example. Currently achieving between 10% and 30% reductions in various apparel categories, for example. Merchandise Flow Flowing merchandise closer to sales in various businesses (e.g. Toys and Camping) Carrying lower weeks of supply in various businesses (e.g. Household, Auto Batteries and Lawn & Garden) Continuing to meet demand by maintaining in-stock rates Apparel Fast Fashion Holding back seasonal Open-To-Buy in order to accommodate fast-turning apparel items with the ability to respond quickly to changing trends or poor selling items reducing markdowns In & Out Programs Special one-time buys to drive additional margin with no long-term inventory investment based on a selling window of 30 days after which items marked out of stock (1) Note that potential impact of initiatives are for SHC Domestic and excludes Lands End. (2) Amount of reduction in net working capital if successful in improving inventory by one turn. 36

37 Potential Incremental EBITDA Impact Category SHC Domestic Potential Incremental Annual EBITDA Impact Optimize Store Network $300M - $400M In-Store Integrated Retail Initiatives Underway Shop Your Way Member Engagement Optimize Cost Of Goods Sold Selling & Administrative Expenses Apparel Sales Productivity $150M - $200M Per 1M Members Per 10M Members $50M $500M Each 1% Reduction Each 2% Reduction $230M $460M Each 2% Reduction Each 4% Reduction $150M $300M $10 Improvement Per Sq. Ft. $50 Improvement Per Sq. Ft. $100M $500M Total Potential Incremental Annual EBITDA If Initiatives Are Successful Is ~$1.0 Billion To ~$2.4 Billion 1 (1) Note that potential impact of initiatives are for SHC Domestic and excludes Lands End. Indication of possible EBITDA impact assuming achievement of various assumptions underlying each initiative for which no assurances can be given. 37

38 Positioning Ourselves For Success 1. Transforming Our Business Model Through Shop Your Way & Integrated Retail 2. Reducing Our Legacy Pension Obligation 3. Managing Our Expenses 4. De-risking Our Balance Sheet & Enhancing Financial Flexibility 5. Implementing the Framework For Profit We Are Playing Offense In Creating A Platform Positioned To Succeed In The Changing Retail Landscape 38

39 Appendix 39

40 First Half 2014 Year-Over-Year Revenue Change Amounts in millions $17,323 Summary of Year-Over-Year Revenue Change $ % Domestic Closed Stores $ (444) 31.0% Lands' End (427) 29.8% Comp Sales (103) 7.2% Other (172) 12.1% Sears Canada (285) 19.9% Total $ (1,431) 100.0% ($444) ($427) ($103) ($172) $15,892 ($285) Q2 YTD 2013 Domestic Closed Stores Lands' End Comp Sales Other Sears Canada Q2 YTD 2014 (1) (1) Consists primarily of the impact of declines in home services revenue and the impact of free delivery promotions in home appliances. 40

41 First Half 2014 Domestic Comparable Store Sales Comp Store Sales Performance Format Q2 YTD 2014 Drivers Sears Domestic 0.2% Appliances Mattress Electronics Lawn & Garden Auto Kmart -1.9% Electronics Grocery & Household Total Domestic -0.9% 41

42 First Half 2014 Year-Over-Year Margin Changes Amounts in millions $4,342 ($91) ($171) Domestic Operating Performance ($18) ($302) Summary of Year over Year Margin Change $ % Domestic Closed Stores $ (91) 11.8% Lands' End (171) 22.2% Comp Sales (18) 2.3% Rate (284) 36.8% SYW Points (81) 10.5% Sears Canada (127) 22.2% Total $ (772) 105.8% ($284) ($81) ($127) $3,570 SYW Investment Currently carrying costs of two promotional programs: Points and Promotional Markdowns ( PMDs ) As model evolves, expect points to be substitute for PMDs, resulting in improved margin rate Higher points cost is result of higher member engagement Points expense recognized when points are issued Expect to see margin benefit from points issued in first half throughout 2014 as these points are redeemed Q2 YTD 2013 Domestic Closed Stores Lands' End Comp Sales Rate SYW Points Sears Canada Q2 YTD

43 De-risking Our Domestic Pension Legacy Obligation History Sears Holdings has a frozen pension plan which provides benefits for past services The pension obligation declined in 2013 due to an increase in the discount rate, contributions and improved investment performance Amounts in millions Year End Balances (1) Assets $3,490 $3,221 $4,051 $4,054 $3,633 (1) Liability 4,981 5,311 6,109 5,623 5,435 Unfunded ($1,491) ($2,090) ($2,058) ($1,569) ($1,802) Discount Rate 4.60% 4.25% 4.90% 5.75% 6.00% We currently estimate the 2014 unfunded pension obligation to be $980 million, assuming contributions of about $485 million at a discount rate of 4.60% Note that a 100 basis point increase in the discount rate would reduce the pension liability by approximately $460 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. (2) The ultimate amount of pension contributions and timing could be affected by changes in the applicable regulations as well as financial market and investment performance. 43

44 Sears Holdings Consolidated Results Amounts in millions, except per share amounts Second Quarter Q2 YTD Revenues $ 8,013 $ 8,871 $15,892 $ 17,323 Net loss attributable to Holdings' shareholders $ (573) $ (194) $ (975) $ (473) EPS $ (5.39) $ (1.83) $ (9.17) $ (4.46) Adjusted net loss (1) $ (305) $ (166) $ (541) $ (309) Adjusted EPS (1) $ (2.87) $ (1.56) $ (5.09) $ (2.91) (1) Adjusted to reflect the results of the Lands' End business that were included in our results prior to the separation. 44

45 Significant Items Amounts in millions Second Quarter Q2 YTD Net loss as reported $ (573) $ (194) $ (975) $ (473) Domestic pension expense Closed store/store impairments/severance Gain on sales of assets (6) (58) (14) (58) Gain on sale of Canadian joint venture (9) (9) Tax matters Lands' End separation (11) (4) (18) Adjusted net loss (1) $ (305) $ (166) $ (541) $ (309) (1) Adjusted to reflect the results of the Lands' End business that were included in our results prior to the separation. 45

46 Adjusted EBITDA Amounts in millions Second Quarter Q2 YTD Revenues $ 8,013 $ 8,541 $ 15,670 $ 16,674 Margin 1,753 2,067 3,501 4,099 Margin rate 21.9% 24.2% 22.3% 24.6% Expenses 2,066 2,145 4,035 4,203 Adjusted EBITDA (1) $ (313) $ (78) $ (534) $ (104) By Segment: Sears $ (178) $ (43) $ (269) $ (58) Kmart (120) (30) (207) (30) Sears Canada (15) (5) (58) (16) $ (313) $ (78) $ (534) $ (104) (1) Adjusted to reflect the results of the Lands' End business that were included in our results prior to the separation. 46

47 Second Quarter Adjusted Segment Results Quarter Ended millions Kmart Sears Domestic Sears Canada Sears Holdings Revenue $ 2,923 $ 3,168 $ 4,310 $ 4,453 $ 780 $ 920 $ 8,013 $ 8,541 Gross margin dollars , ,753 2,067 Gross margin rate 20.3% 22.5% 22.6% 25.1% 23.7% 25.9% 21.9% 24.2% Selling and administrative ,154 1, ,066 2,145 Selling and administrative expense as a percentage of total revenues 24.4% 23.5% 26.8% 26.0% 25.6% 26.4% 25.8% 25.1% Adjusted EBITDA (1) (120) (30) (178) (43) (15) (5) (313) (78) Depreciation and amortization (24) (33) (110) (129) (18) (25) (152) (187) Gain on sales of assets Special items: Domestic pension expense - - (23) (40) - - (23) (40) Closed store reserve and severance (27) (8) (7) (2) (6) - (40) (10) Impairment charges (2) - (3) - (15) - (20) - Lands' End separation Operating income (loss) $ (142) $ (56) $ (318) $ (146) $ (54) $ 151 $ (514) $ (51) (1) Adjusted to reflect the results of the Lands' End business that were included in our results prior to the separation. 47

48 Year-To-Date Adjusted Segment Results Q2 YTD millions Kmart Sears Domestic Sears Canada Sears Holdings Revenue $5,820 $ 6,271 $ 8,373 $ 8,641 $ 1,477 $ 1,762 $ 15,670 $ 16,674 Gross margin dollars 1,192 1,423 1,960 2, ,501 4,099 Gross margin rate 20.5% 22.7% 23.4% 25.5% 23.6% 27.0% 22.3% 24.6% Selling and administrative 1,399 1,453 2,229 2, ,035 4,203 Selling and administrative expense as a percentage of total revenues 24.0% 23.2% 26.6% 26.1% 27.6% 27.9% 25.7% 25.2% Adjusted EBITDA (1) (207) (30) (269) (58) (58) (16) (534) (104) Depreciation and amortization (47) (66) (224) (262) (36) (50) (307) (378) Gain (loss) on sales of assets (1) Special items: Domestic pension expense - - (45) (81) - - (45) (81) Closed store reserve and severance (36) (16) (7) (5) (25) (2) (68) (23) Impairment charges (2) - (8) (8) (15) - (25) (8) Lands' End separation Operating income (loss) $ (240) $ (84) $ (514) $ (327) $ (135) $ 113 $ (889) $ (298) (1) Adjusted to reflect the results of the Lands' End business that were included in our results prior to the separation. 48

49 Reconciliation to GAAP 13 Weeks Ended August 2, 2014 Adjustments Closed Store Reserve, millions, except per share data GAAP Domestic Pension Expense Store Impairments and Severance Gain on Sales of Assets Gain on Sale of Canadian Joint Venture Tax Matters As Adjusted Gross margin impact $ 1,742 $ $ 11 $ $ $ $ 1,753 Selling and administrative impact 2,118 (23) (29) 2,066 Depreciation and amortization impact 152 (1) 151 Impairment charges impact 20 (20) Gain on sales of assets impact (34) 10 (24) Operating loss impact (514) (10) (440) Interest and investment income impact 32 (23) 9 Income tax expense impact (32) (9) (22) Loss attributable to noncontrolling interest impact 8 (7) After tax and noncontrolling interest impact (573) (6) (9) 237 (305) Diluted loss per share impact $ (5.39) $ 0.13 $ 0.30 $ (0.06) $ (0.08) $ 2.23 $ (2.87) 13 Weeks Ended August 3, 2013 Adjustments Closed Store Reserve, Store millions, except per share data GAAP Domestic Pension Expense Impairments and Severance Gain on Sales of Assets Tax Matters As Adjusted- Reported Lands' End Separation As Adjusted (1) Gross margin impact $ 2,186 $ $ 7 $ $ $ 2,193 $ (126) $ 2,067 Selling and administrative impact 2,291 (40) (3) 2,248 (103) 2,145 Depreciation and amortization impact 187 (1) 186 (5) 181 Gain on sales of assets impact (241) 235 (6) (6) Operating loss impact (51) (235) (235) (18) (253) Income tax expense impact (30) (15) (4) Income attributable to noncontrolling interest impa (67) After tax and noncontrolling interest impact (194) 25 7 (58) 65 (155) (11) (166) Diluted loss per share impact $ (1.83) $ 0.24 $ 0.07 $ (0.55) $ 0.61 $ (1.46) $ (0.10) $ (1.56) (1) Adjusted to reflect the results of the Lands' End business that were included in our results prior to the separation. 49

50 Reconciliation to GAAP 26 Weeks Ended August 2, 2014 Adjustments Closed Store Reserve, millions, except per share data GAAP Domestic Pension Expense Store Impairments and Severance Gain on Sales of Assets Gain on Sale of Canadian Joint Venture Tax Matters Lands' End Separation As Adjusted Gross margin impact $ 3,570 $ $ 18 $ $ $ $ (87) $ 3,501 Selling and administrative impact 4,207 (45) (50) (77) 4,035 Depreciation and amortization impact 307 (1) (3) 303 Impairment charges impact 25 (25) Gain on sales of assets impact (80) 23 (57) Operating loss impact (889) (23) (7) (780) Interest and investment income impact 36 (23) 13 Income tax expense impact (29) (17) (32) Loss attributable to noncontrolling interest impact 48 (14) 8 (9) 33 After tax and noncontrolling interest impact (975) (14) (9) 385 (4) (541) Diluted loss per share impact $ (9.17) $ 0.26 $ 0.45 $ (0.13) $ (0.08) $ 3.62 $ (0.04) $ (5.09) 26 Weeks Ended August 3, 2013 Adjustments Closed Store Reserve, Store millions, except per share data GAAP Domestic Pension Expense Impairments and Severance Gain on Sales of Assets Tax Matters As Adjusted- Reported Lands' End Separation As Adjusted(1) Gross margin impact $ 4,342 $ $ 15 $ $ $ 4,357 $ (258) $ 4,099 Selling and administrative impact 4,509 (81) (8) 4,420 (217) 4,203 Depreciation and amortization impact 378 (2) 376 (11) 365 Impairment charges impact 8 (8) Gain on sales of assets impact (255) 235 (20) (20) Operating loss impact (298) (235) (419) (30) (449) Income tax expense impact (21) (30) (13) Income attributable to noncontrolling interest impa (54) (1) After tax and noncontrolling interest impact (473) (58) 170 (291) (18) (309) Diluted loss per share impact $ (4.46) $ 0.49 $ 0.18 $ (0.55) $ 1.60 $ (2.74) $ (0.17) $ (2.91) (1) Adjusted to reflect the results of the Lands' End business that were included in our results prior to the separation. 50