Transformation Update & Financial Results Q2 2017 August 24, 2017
Cautionary Statement Regarding ForwardLooking Information This presentation contains forwardlooking statements under the federal securities laws, 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. Forwardlooking 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 forwardlooking 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 following additional factors, among others, could cause actual results to differ from those set forth in the forwardlooking 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 changing 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; our ability to successfully achieve our plans to generate liquidity through potential transactions or otherwise; 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 fixedasset impairment for longlived 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; and the timing and amount of required pension plan funding. Additionally, detailed descriptions of risk, uncertainties and factors relating to Sears Holdings are discussed in our most recent Annual Report on Form 10K and other filings with the Securities and Exchange Commission. While we believe that our forecasts and assumptions are reasonable, we caution that actual results may differ materially. We intend the forwardlooking 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. 2
NonGAAP Financial Measures In addition to our net loss attributable to Sears Holdings' shareholders determined in accordance with Generally Accepted Accounting Principles ("GAAP"), for purposes of evaluating operating performance, we use Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA"), as well as Adjusted Earnings per Share ("Adjusted EPS"). Adjusted EBITDA is computed as net loss attributable to Sears Holdings Corporation appearing on the Condensed Consolidated Statements of Operations excluding income tax (expense) benefit, interest expense, interest and investment loss, other 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 noncash recurring items. While Adjusted EBITDA is a nongaap financial measurement, management believes that it is an important indicator of ongoing operating performance, and useful to investors, because: Adjusted EBITDA excludes the effects of financings 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 comparability of results, including impairment charges related to fixed assets, closed store and severance charges, pension expense, amortization of the deferred Seritage gain, transaction costs associated with strategic initiatives and items associated with legal matters. 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 the appendix for reconciliations of the differences between the nongaap financial measures used in this presentation with the most comparable financial measures calculated in accordance with GAAP. 3
Q2 2017 Highlights Financial Results $ in millions Q2 2017 Q2 2016 Total Revenues $4,365 $5,663 Comp Store Sales (11.5)% (5.2)% Gross Margin $971 $1,260 Gross Margin Rate 22.2% 22.2% SG&A Expenses $1,369 $1,484 Net Income (Loss) $(251) $(395) Adjusted EBITDA (1) $(67) $(191) Operational Highlights Launched Kenmore Products On Amazon.com, Including AlexaEnabled Smart Appliances Announced Shop Your Way Partnership With Time Inc. To Reward Members Expanded Dedicated Store Concept With Sears Appliances & Mattresses In Pharr, Texas (1) Adjusted EBITDA is shown inclusive of additional rent expense of $44 million and $48 million in Q2 2017 and Q2 2016, respectively. From the inception of Seritage to date, we have received recapture notices on 36 properties, and also exercised our right to terminate the lease on 56 properties, which is estimated to reduce rent payments by approximately $52 million on an annual basis. 4
Substantial Value In Kenmore Agreement Innovative Agreement With Amazon Expands The Reach Of The Kenmore Brand Marks the broadest distribution to date of Kenmore outside of Sears branded stores and related online retail platforms Collaboration is the first of its kind for Kenmore and is expected to significantly expand the brand s reach to millions of U.S. customers who shop on Amazon.com Kenmore products are now available on Amazon s first and only dedicated home appliances brand page for distribution in Orange County, California, with a rollout to all of Southern California and the Chicago area planned for September and then regionally until nationwide coverage is reached Expected to drive growth opportunities across Sears Home Services and Innovel Solutions as more customers experience their quality services as part of Kenmore product purchases on Amazon.com Sears Home Services and Innovel Solutions will supply whiteglove service for delivery, installation, and extended product protection for Kenmore products sold on Amazon.com Kenmore Smart appliances are now integrated with Amazon Alexa Committed To Unlocking Value From Our Various Assets Participating in expanded reach of iconic Kenmore and Craftsman brands through innovative agreements Continue to evaluate more ways to create additional value from our brands and businesses through broader partnerships, new technology or other means 5
Progress On Our Transformation Increasingly Confident In Our Future With Positive Momentum On Our Transformation Enhancing Financial Performance Increasing Financial Flexibility Creating Value From Our Assets Driving Our Transformation Over $1.0 billion in annualized cost savings actioned to date; on path to achieve $1.25 billion target Created $500 million Line of Credit Loan Facility and extended maturity of existing LC Facility, while paying down real estate loans (1) Over $460 million proceeds generated from real estate transactions during the second quarter (1) Shop Your Way partnership with Time Inc & Synapse Group Additional Levers To Drive Profitability We will drive further improvements in our organization focused on Best Members, Best Categories, Best Stores We continue to pursue innovative store concepts, as well as instore partnership and subdivision opportunities We are evaluating strategic options across our portfolio to unlock value from our assets and businesses (1) $276 million repayment of real estate loans in Q2 and, subsequent to second quarter end, the company executed asset sales, which generated cash proceeds of nearly $160 million, with approximately $25 million to repay real estate loans and the remainder used to repay the balance on the Company s revolving credit facility. 6
Increased Financial Flexibility Enhanced Liquidity Amended Second Lien Credit Facility providing additional financial flexibility in the form of a $500 million Line of Credit Loan Facility, which had an outstanding balance of $330 million at quarter end Extended maturity of $271 million Letter of Credit Facility from original date of December 28, 2017 through December 28, 2018 and eliminated unused portion of the facility Both vehicles generated interest from certain unaffiliated thirdparty investors, including syndication of $140 million of the LC Facility as of August 2017 Debt Repayment Repaid $276 million of real estate loans during the second quarter Completed additional $160 million in asset sales subsequent to quarter end, with $25 million to be used for repayment of real estate loans and the remainder to repay a portion of our revolving credit facility balance Entered into a second agreement to purchase a group annuity contract from Metropolitan Life Insurance Company ( MLIC ), a MetLife, Inc. company Derisked Pension Plans Additional $512 million of pension liability annuitized, for a total of $1.0 billion yeartodate MLIC will pay future pension benefit payments to an additional approximately 20,000 pension plan participants for a total of 71,000 plan participants annuitized yeartodate, preserving all benefits while reducing cost volatility and administrative expenses for SHC 7
Q2 Financial Position And Liquid Assets Substantial Liquidity And Financial Flexibility Approximately $810 million in cash, availability on credit facility, and availability under the shortterm borrowing basket as of the end of Q2 2017 Amounts in millions Q2 2017 Q2 2016 Q4 2016 Cash and cash equivalents $212 $276 $286 Availability on Credit Facility (1) 191 191 165 Availability under ShortTerm Borrowing Basket (1) 407 149 250 Total Liquid Availability $810 $616 $701 Total debt (including shortterm borrowings and current portion of longterm debt) of $4.0 billion at July 29, 2017 compared to $4.2 billion at January 28, 2017 Additionally, the Company has up to $500 million of FILO loan capacity depending on inventory levels at the time of issuance (1) The shortterm borrowing basket provides the ability to borrow with maturities inside of the ABL Maturity of July 2020. The shortterm borrowing basket can be paid down and reborrowed as desired. Availability on the shortterm borrowing basket for Q2 2017 is stated less $263 million real estate loan outstanding and $330 million of Line of Credit loans outstanding under the Second Lien Credit Agreement. 8
Key Takeaways 1 Significant improvement in net loss and Adjusted EBITDA in the second quarter of 2017 driven by progress on the strategic actions to return to profitability 2 Unlocking further value from our assets and businesses through innovative experiences, unique partnerships and strategic options 3 Increased financial flexibility while reducing debt and derisking pension obligations 4 We will continue to drive improvements in our organization by focusing on our Best Categories, Best Stores and Best Members 9
Appendix
Q2 2017 Revenue Changes $5,663 Revenue declined 10.8% on a comparable basis, including the impact of both store and nonstore sales (1) $(527) $4,892 $(771) $(422) $(105) $4,365 Amount in millions Q2 Comp Store Sales Kmart (9.4)% Sears Domestic: (13.2)% Total Domestic (1) : (11.5)% Q2 2016 Closed Stores Q2 2016 Comp Basis Comp Store (1) Sales Comp NonStore Sales (2) Q2 2017 (1) Comparable store sales amounts include sales for all stores operating for a period of at least 12 full months (including remodeled and expanded stores, but excluding store relocations and stores that have undergone format changes), as well as sales from sears.com and kmart.com shipped directly to customers and have been adjusted for the change in the unshipped sales reserves recorded at the end of each reporting period. (2) Comp NonStore Sales represents revenue from ongoing business operations not directly associated with a store, as well as revenue from our ongoing relationships with Sears Hometown and Outlet Stores, Inc. and Lands End. Note, the majority of the Comp NonStore Sales decline is attributed to reduced revenue from Sears Hometown and Outlet Stores, Inc. 11
Q2 2017 Gross Margin Changes $1,260 Gross margin declined 5.8% on a comparable basis and gross margin rate improved by 110 bps $(60) $(145) $1,031 Amount in millions $(84) $(111) Rate Impact Attributed to a decline in overall markdowns, most notably clearance markdowns. $51 $971 Q2 2016 Closed Store Impact (1) Other Q2 2016 Comp Basis Volume Rate Q2 2017 (1) Primarily consists of noncash reserves, additional Seritage/JV rent expense of $44 million and $48 million, respectively, in Q2 2017 and Q2 2016, and amortization of deferred Seritage gain. 12
Q2 2017 Expense Changes $210 SG&A expenses declined 19.2% on a comparable basis $1,694 Amount in millions $1,484 $(325) Broader Reduction $2.9B since 2012 $1,369 Q2 2016 NonOperating (1) Q2 2016 Comp Basis SG&A Q2 2017 Expense Increase Expense Decrease (1) Consists of closed store reserves, pension expense, transaction costs, and legal expenses. 13
First Half 2017 Revenue Changes Revenue declined 10.9% on a comparable basis, including the impact of both store and nonstore sales (1) $11,057 $(1,328) $(1,063) $9,729 $8,666 $(839) $(224) Amount in millions July YTD Comp Store Sales Kmart (10.3)% Sears Domestic: (12.8)% Total Domestic (1) : (11.7)% First Half 2016 Closed Stores First Half 2016 Comp Basis Comp Store (1) Sales Comp NonStore Sales (2) First Half 2017 (1) Comparable store sales amounts include sales for all stores operating for a period of at least 12 full months (including remodeled and expanded stores, but excluding store relocations and stores that have undergone format changes), as well as sales from sears.com and kmart.com shipped directly to customers and have been adjusted for the change in the unshipped sales reserves recorded at the end of each reporting period. (2) Comp NonStore Sales represents revenue from ongoing business operations not directly associated with a store, as well as revenue from our ongoing relationships with Sears Hometown and Outlet Stores, Inc. and Lands End. Note, the majority of the Comp NonStore Sales decline is attributed to reduced revenue from Sears Hometown and Outlet Stores, Inc. 14
First Half 2017 Gross Margin Changes Gross margin declined 13.2% on a comparable basis and gross margin rate declined by 60 bps $2,437 $(288) $2,189 $(217) $(31) $(239) $(49) $1,901 Amount in millions Rate Impact Attributed to an increase in promotional markdowns, including Shop Your Way points expense. First Half 2016 Closed Store Impact (1) Other First Half 2016 Comp Basis Volume Rate First Half 2017 (1) Primarily consists of noncash reserves, additional Seritage/JV rent expense of $89 million and $102 million, respectively, in the first half of 2017 and the first half of 2016, and amortization of deferred Seritage gain. 15
First Half 2017 Expense Changes SG&A expenses declined 17.9% on a comparable basis $2,987 $224 $3,211 $2,636 $(575) Amount in millions Broader Reduction $2.9B since 2012 First Half 2016 NonOperating (1) First Half 2016 Comp Basis SG&A First Half 2017 Expense Increase Expense Decrease (1) Consists of closed store reserves, pension expense, transaction costs, and legal expenses. 16
Consolidated Results Q2 2017 17
Significant Items Q2 2017 18
Reconciliation of Adjusted EBITDA to GAAP Q2 2017 19
Adjusted Segment Results Q2 2017 20
Reconciliation of Adjusted EPS to GAAP Q2 2017 Quarter Ended July 31, 2017 Adjustments millions, except per share data GAAP Pension Expense Closed Store Reserve, Store Impairments and Severance Gain on Sales of Assets MarktoMarket Adjustments Amortization of Deferred Seritage Gain Other (1) Tax Matters As Adjusted Gross margin impact $ 971 $ $ 89 $ $ $ (19) $ $ $ 1,041 Selling and administrative impact Depreciation and amortization impact 1,369 83 (246) (39) (8) Impairment charges impact 5 (5) Gain on sales of assets impact (380) 315 Operating income impact (106) 246 141 (315) (19) Interest and investment loss impact (12) 12 24 1,108 75 (65) (24) (77) Income tax expense impact (10) (92) (53) 118 (5) 7 9 101 75 After tax and noncontrolling interests impact (251) 154 88 (197) 7 (12) (15) 101 (125) Diluted loss per share impact $ (2.34) $ 1.44 $ 0.82 $ (1.84) $ 0.07 $ (0.11) $ (0.14) $ 0.94 $ (1.16) millions, except per share data GAAP Pension Expense Gross margin impact $ 1,260 $ $ 4 $ $ $ (22) $ $ $ 1,242 Selling and administrative impact 1,484 (72) Closed Store Reserve, Store Impairments and Severance Gain on Sales of Assets Quarter Ended July 30, 2016 MarktoMarket Adjustments Amortization of Deferred Seritage Gain 22 Other (2) Tax Matters As Adjusted Depreciation and amortization impact 92 (1) 91 Impairment charges impact 7 (7) Gain on sales of assets impact (54) 21 (33) Adjustments (1) 1,433 Operating loss impact (269) (72) Interest and investment loss impact (13) (10) (21) (22) 14 1 (393) 1 Income tax expense impact (13) (27) 4 8 (5) 8 156 131 After tax and noncontrolling interests impact (395) 45 (6) (13) 9 (14) 1 156 (217) Diluted loss per share impact $ (3.70) $ 0.42 $ (0.05) $ (0.12) $ 0.08 $ (0.13) $ 0.01 $ 1.46 $ (2.03) (1) Consisted of items associated with legal matters. (2) Consisted of transaction costs associated with strategic initiatives and other expenses. 21
Reconciliation of Adjusted EPS to GAAP YTD 2017 Closed Store Reserve, Gain on sale of Trade Gain on Sales of MarktoMarket Amortization of As millions, except per share data GAAP Pension Expense Store Impairments Other (1) Tax Matters Adjusted name Assets Adjustments Deferred Seritage Gain and Severance Gross margin impact $ 1,901 $ $ 104 $ $ $ $ (40) $ $ $ 1,965 Selling and administrative impact Depreciation and amortization impact 170 (14) 156 Impairment charges impact 20 (20) Gain on sales of assets impact (1,121) 492 504 (125) Operating income impact Interest and investment loss impact (14) Income tax benefit impact After tax and noncontrolling interests impact 62 (109) (89) 185 189 26 Weeks Ended July 31, 2017 (7) 182 149 (307) (315) 11 3 (6) 15 3 (37) 213 (25) (6) (37) (355) Diluted loss per share impact $ (0.07) $ 1.70 $ 1.39 $ (2.86) $ (2.94) $ 0.10 $ (0.23) $ (0.06) $ (0.34) $ (3.31) Adjustments 2,636 (291) (100) 9 196 291 238 (492) (504) (40) 17 2,254 (9) (320) 26 Weeks Ended July 30, 2016 Adjustments millions, except per share data GAAP Pension Expense Closed Store Reserve, Gain on Sales of MarktoMarket Amortization of Store Impairments Assets Adjustments Deferred Seritage Gain and Severance Other (2) Tax Matters As Adjusted Gross margin impact $ 2,437 $ $ 64 $ $ $ (44) $ $ $ 2,457 Selling and administrative impact Depreciation and amortization impact 187 (5) 182 Impairment charges impact 15 (15) Gain on sales of assets impact (115) 47 (68) Operating loss impact Interest and investment loss impact (17) 20 Income tax expense impact After tax and noncontrolling interests impact 2,987 (144) (5) (9) 2,829 (637) 144 89 (47) (28) (54) (33) 18 (8) 16 (866) 90 56 (29) 12 9 (486) 3 (3) 342 250 (28) 6 342 (417) Diluted loss per share impact $ (8.11) $ 0.85 $ 0.52 $ (0.27) $ 0.11 $ (0.26) $ 0.06 $ 3.20 $ (3.90) (44) (1) Consisted of expenses associated with legal matters and transaction costs associated with strategic initiatives. (2) Consisted of expenses associated with legal matters,, transaction costs associated with strategic initiatives and other expenses. 22