Third Quarter 2013 Transformation Update and Financial Results November 21, 2013
Cautionary Statement Regarding Forward Looking Information This presentation contains forward-looking statements about our expectations for the implementation of our integrated retail strategy and various other initiatives. Statements preceded or followed by, or that otherwise include, the words believes, expects, anticipates, intends, estimates, plans, is likely to and similar expressions or future or conditional verbs such as will, may and could are generally forward-looking in nature and not historical facts. Forward-looking statements are subject to risks 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. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. The following 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; 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; our ability to complete possible transactions with respect to Lands' End and/or Sears Auto Centers on terms that are acceptable to us, on intended timetables or at all and the impact of the evaluation and/or completion of those transactions on our other businesses; the potential impact on our business and our relationships from any such transactions; our ability to successfully achieve our plans to generate liquidity, reduce inventory and reduce fixed costs; possible 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 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 claims and proceedings with respect to which the parties have reached a preliminary settlement; and the timing and amount of required pension plan funding; 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. In addition, the descriptions of our credit facilities are qualified in their entirety by reference to the actual terms of the credit facilities. 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
Topics Update on Our Transformation into a Member-Centric Integrated Retailer Redeploying our Capital as we Invest in our Transformation Third Quarter Results and Financial Position 3
Update on Our Transformation into a Member- Centric Integrated Retailer
The Retail Landscape is Changing Stores that don t sell anything Innovative products and exclusive brands becoming a core differentiator 5
and we are proactively transforming our business to benefit from the changing retail landscape Member-centric Integrated Retailer enabled by Shop Your Way We are transitioning from a business that has historically focused on running a store network into a business that provides and delivers value by serving its members in the manner most convenient for them: whether in store, in home or through digital devices How are we driving this transformation? 1. Investing in capabilities to enable our members to interact with us and access the widest possible assortment of products and services 2. Enhancing our membership benefits associated with Shop Your Way (Shop Your Way Max, Injecting Points, Contests & Sweepstakes, Deal Center, VIP Program) 3. Developing digital and social relationships with our members 4. Using data and analytics to make targeted offers and decisions delivered in real-time 5. Expanding our reach through Marketplace and delivery options and we are making investments accordingly 6
we are investing in Integrated Retail Capabilities for our members H Home Enable our members to: Shop anytime With a shopping experience that is: Simple S O Fulfill anywhere Seamless Store Online Pay any way Relevant P Phone Rewarding since technology is driving much of this transformation 7
we are investing in technology to leverage our strengths as the distinction between physical and online retailing blurs Integrated retail combines the best of online, mobile and brickand-mortar. Flexibility, personalization, convenience We are providing our members with a differentiated and convenient shopping experience We are taking advantage of our physical and supply chain assets as well as leveraging our technology investments Building new Services (Purchase & Post Purchase) Supply Chain enabling 2 day delivery 2000 Store Locations fulfilling both Store + Online orders Integrated Retail 100mm items Online available through Marketplace Store experience enabled by technology and our investments have begun to show progress 8
we have had consistent online growth since 2006 as our integrated retail sales have grown significantly Online Revenue 2 2006 2007 2008 2009 2010 2011 2012 YTD Oct 2012 Traditional Online Cross Channel 1 YTD Oct 2013 1 Cross channel consists of order online, pickup in store and order from store, ship to home. 2 Consists of Sears.com and Kmart.com sites. Excludes Lands End and Sears Canada sites. 9
and we continue to grow our Digital Relationships with our members Two concrete examples include: 1. ereceipts establish digital connection with our members 2. Shopping Recap establishes digital connections with members considering making a purchase Digital communication summarizing the items the member considered in store and provides additional product details 10
we will continue to invest in our Member-Centric Integrated Retail Model Online & Stores Traditional Cross channel (order online, pick up in store; order in store, ship to home) Digital interactions Digital receipts Shopping recaps Targeted offers Expanding reach Two-day delivery Mobile capabilities In-store SYW App Member assist Shop Your Way Members always get more Tool to personalize offers Social engagement www.shopyourway.com 11
Redeploying our Capital as we Invest in our Transformation: Business Portfolio Update and Recent Transactions
We are reconfiguring our asset base as we accelerate our transformation We have separated Sears Hometown and Outlet Stores and are evaluating separating both our Lands' End business and Sears Auto Center business to: 1. Become a more focused company that is easier to understand and manage not just from the standpoint of our store portfolio but also from the standpoint of our portfolio of businesses 2. Separate the management of these businesses to allow them to pursue their own strategic opportunities, optimize their capital structures, attract talent and allocate capital in a more focused manner 3. Provide multiple opportunities for our shareholders to participate in the value creation generated by these businesses 4. Potentially enhance SHC s and the separated entities financial flexibility, depending on transaction structure. and we continue to make progress on enhancing our financial flexibility consistent with our previous statements 13
we are on track to generate $2B of liquidity through transactions in 2013 versus our goal of $500M Real estate proceeds: Proceeds generated through third quarter $ 0.3 Billion Sears Canada five store lease transaction 0.4 1 Sears Canada sale of joint venture interest 0.3 2 Term Loan On October 2, 2013 executed $1 billion, 1.0 five-year secured loan using the accordion feature of our domestic ABL facility. $ 2.0 Billion Sears Canada announced an approximately $500 million dividend on Nov. 19 Sears Holdings owns 51% of Sears Canada and will receive approximately $250 million from the distribution The remainder of the dividend will be distributed to other Sears Canada shareholders 1 Proceeds received November 12, 2013 2 Proceeds expected to be received January 8, 2014 as we continue our transformation we are re-allocating our resources 14
and redeploying capital resources to invest in the transformation of the Company 1. Member-centric integrated retail model Shop Your Way technology platform Online Digital Interactions Expanding reach Mobile capabilities Social engagement 2. Maintaining traditional model as we transition to member-centric model Traditional promotional model consisting of promotional markdowns and mass marketing Member focused promotional models consisting of Shop Your Way member discounts and offers, digital targeted offers and differentiated in-store experiences the annual investment associated with these activities is measured in hundreds of millions of dollars we are carrying 2 business/promotion models during our transformational investment. 15
Third Quarter Results and Financial Position
Q3 Financial Results Comments Results consistent with our October 29, 2013 release Highlights of our transformation include: 1. 70% of sales are now made to SYW members, up from 65% last quarter 2. 17% year-to-date growth in our online and multi-channel sales 3. Launched Adam Levine and Nicki Minaj in 500 Kmart Stores and on shopyourway.com/kmart.com Financial position highlights 1. On track to generate $2.0B of liquidity vs. $500M stated objective 2. Cash of $600M as well as $7.7B of combined liquidity and net inventory at quarter end; excluding approximately $450M of net cash proceeds 1 expected from Sears Canada real estate transactions 1 Computed as $700 million in gross proceeds less $250 million dividend paid to Sears Canada minority shareholders. 17
Year-Over-Year Change: Revenue Amounts in millions 9000 8800 $8,857 Total SHO Effect ($112) Domestic Business Performance ($160) 8600 ($198) $351 8400 8200 ($463) ($170) ($5) $15 ($115) $8,272 8000 7800 7600 Sold to SHO at cost 7400 7200 7000 Q3 2012 2012 Closed Stores SHO Sales Sale of Product to SHO Comp Sales Week Comparison Adjustment Other Sears Canada Q3 2013 (1) As originally reported last year. 18
Revenue: Domestic Business Performance Q3 Comp Store Sales Kmart -2.1% Transactional businesses (Grocery & Drug) accounted for virtually all of the decline Declines also in consumer electronics and toys, partially offset by increases in the apparel and seasonal & outdoor living categories. Sears -4.0% Decreases in most categories including the consumer electronics, lawn & garden, tools, home appliances and apparel categories, as well as declines at Sears Auto Centers, partially offset by an increase in the home category. Total -3.1% Drivers 19
Online 1 Continuing to Deliver Consistent Growth Two-year CAGR in excess of 15% 20.8% 19.9% 21.1% 8.4% 11.3% 10.0% 2 2012 2013 2012 2013 2012 2013 Q1 Q2 Q3 Two Year CAGR 14.4% 15.5% 15.4% 1 Consists of Sears.com and Kmart.com sites. Excludes Lands End and Sears Canada sites. 2 Third quarter online revenues increased 10%; lower increase than first and second quarter due to tougher prior year comparison. 20
Year-Over-Year Changes: Margin Amounts in millions 2400 2300 $2,253 Total SHO Effect ($98) Improved member engagement resulted in higher points cost Summary of Year over Year Margin Change $ % SHO effect 98 30.4 Volume 85 26.4 SYW points 75 23.3 Canada 56 17.4 Other 8 2.5 Total 322 100.0 2200 2100 ($113) $15 ($85) However, as we move through business model transition, we are testing various programs while educating members resulting in some duplicative promotional costs 2000 1900 As model evolves, we expect to substitute points for PMDs with the points multiplier effect stimulating member volume and increasing margin ($75) ($8) ($56) $1,931 1800 Q3 2012 P rio r Year SH O M argin R o yalty and Other Vo lume SYW P o ints Other Sears C anada Q3 2013 21
Financial Position and Liquid Assets Amounts in millions as of November 2, 2013 Cash $ 607 Domestic $ 384 Canada 223 Availability on Facilities $ 1,729 Domestic $ 1,000 Canada 729 (2) Equity in Inventory (1) $ 5,395 Inventory A/P Net Domestic $8,009 $3,078 $4,931 Canada 903 439 $464 $8,912 $3,517 $5,395 Excludes $450 million of net cash proceeds from Sears Canada real estate transactions (3) Total $ 7,731 (1) Available as cash or convertible into cash within 90 days (2) Prior to taking into consideration possible reserves (3) $400 million received November 12, 2013; $300 million expected to be received January 8, 2014; less $250 million dividend paid to Sears Canada minority shareholders. 22
Net Inventory: Third Quarter Through business model changes, we have reduced the net inventory investment required Amounts in millions $402 MM of reduction due to SHO separation $10,941 $9,567 $8,912 Reduced net inventory investment by nearly $1.1 billion $4,471 $3,851 $3,517 $6,470 $5,716 $5,395 2011 2012 2013 2011 2012 2013 2011 2012 2013 Inventory Payables Net Inventory 23
Debt Summary Q3 November 2, 2013 October 27, 2012 Unsecured Commercial Paper $ 160 $ 417 Secured Borrowings 1,591 1,473 Total Short-Term Borrowings 1,751 1,890 Senior Secured Notes $ 1,238 $ 1,237 SRAC Notes 327 407 Term Loan 990 - Other Notes/Mortgages 16 24 SHC Borrowings 2,571 1,668 Capital Lease Obligations 316 341 Short-term borrowings down $139 million Total Domestic Long-Term Debt $ 2,887 $ 2,009 Sears Canada $ 57 $ 105 Total Sears Holdings Long-Term Debt $ 2,944 $ 2,114 Total Sears Holdings Debt $ 4,695 $ 4,004 24
Revolver Borrowings SHC has a $3.275 billion revolving credit facility through 2016 secured by domestic inventory and credit card and pharmacy receivables Amounts in millions Nov. 2, Oct. 27, 2013 2012 Capacity $3,275 $3,275 Borrowings 1,591 1,473 Letters of Credit 684 779 2,275 2,252 Availability $1,000 $1,023 SCC has a CAD$800 million revolving credit facility similar to our domestic revolver At the end of Q3, SCC had $729 (1) million of availability according to their borrowing base Currently no borrowings, $24 million in letters of credit issued under facility Combined capacity under SHC revolving credit facilities is $1.7 billion in addition to $0.6 billion of cash on hand (1) Additional capital resources potentially available through $760 million of second lien capacity on our domestic revolving credit facility (1) Prior to taking into consideration possible reserves and excludes $450 million of net cash proceeds from Sears Canada real estate transactions (after dividend to Sears Canada minority shareholders). 25
Summary of 2013 Planned Actions to Date $200 million year-over-year fixed expense reductions On track to achieve reductions $500 million reduction in inventory at peak Completed. As of November 2, 2013, domestic inventory reduced by approximately $600 million $2.0 billion of additional liquidity generated Through third quarter have generated $302 million in real estate proceeds Sears Canada to receive $700 million in proceeds from real estate transactions in Q4 Sears Canada announced an approximately $500 million dividend on Nov. 19 Sears Holdings owns 51% of Sears Canada and will receive approximately $250 million from the distribution The remainder of the dividend will be distributed to other Sears Canada shareholders On October 2, 2013, we successfully executed a $1 billion, five-year secured loan using the accordion feature with our ABL facility 26
Appendix
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, 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 is a non-gaap measurement, management believes that it is an important indicator of ongoing operating performance and useful to the 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 SHO 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. 28
Sears Holdings Consolidated Results Amounts in millions, except per share amounts Third Quarter Year to Date (a) 2013 (b) 2012 2013 (a) 2012 (b) Revenues $8,272 $8,857 $25,595 $27,594 Net loss ($534) ($498) ($1,007) ($441) Loss per share ($5.03) ($4.70) ($9.49) ($4.16) Adjusted net loss ($306) ($219) ($598) ($386) Adjusted loss per share ($2.88) ($2.07) ($5.64) ($3.64) (a) Period ending November 2, 2013 (b) Period ending October 27, 2012 29
Significant Items Amounts in millions Third Quarter Year to Date 2013 2012 2013 2012 Net loss as reported ($534) ($498) ($1,007) ($441) Gain on asset sales -- (7) (58) (241) Domestic pension expense 26 26 77 77 Closed store/store impairments/severance (2) 29 17 66 Tax matters and other 204 235 373 198 Transaction costs -- 4 -- 6 SHO ceparation -- (8) -- (51) Adjusted Net loss ($306) ($219) ($598) ($386) 30
Adjusted EBITDA Amounts in millions Third Quarter Year to Date 2013 2012 2013 2012 Revenues $8,272 $8,857 $25,595 $27,594 Margin 1,944 2,172 6,301 6,951 Margin rate 23.5% 24.5% 24.6% 25.2% Expenses 2,230 2,344 6,650 6,844 Adjusted EBITDA ($286) ($172) ($349) $107 By Segment: Sears Domestic ($142) ($79) ($159) $69 Kmart (139) (101) (169) 33 Sears Canada (5) 8 (21) 5 ($286) ($172) ($349) $107 31
SHC Adjusted Segment Results Third Quarter 13 Weeks Ended millions Kmart Sears Domestic Sears Canada Sears Holdings 2013 2012 2013 2012 2013 2012 2013 2012 Revenue $ 2,916 $ 3,081 $ 4,419 $ 4,724 $ 937 $ 1,052 $ 8,272 $ 8,857 Gross margin dollars 601 690 1,094 1,177 249 305 1,944 2,172 Gross margin rate 20.6% 22.4% 24.8% 24.9% 26.6% 29.0% 23.5% 24.5% Selling and administrative 740 791 1,236 1,256 254 297 2,230 2,344 Selling and administrative expense as a percentage of total revenues 25.4% 25.7% 28.0% 26.6% 27.1% 28.2% 27.0% 26.5% Adjusted EBITDA (139) (101) (142) (79) (5) 8 (286) (172) Depreciation and amortization (31) (39) (128) (143) (22) (27) (181) (209) Gain on sales of assets 19 3 2 17-6 21 26 Special items: Domestic pension expense - - (41) (42) - - (41) (42) Closed store reserve and severance (17) (27) 32 (8) (19) (3) (4) (38) Impairment charges (3) - (2) - (1) - (6) - Transaction costs - - - (4) - (3) - (7) Operating loss $ (171) $ (164) $ (279) $ (259) $ (47) $ (19) $ (497) $ (442) 32
SHC Adjusted Segment Results YTD 39 Weeks Ended millions Kmart Sears Domestic Sears Canada Sears Holdings 2013 2012 2013 2012 2013 2012 2013 2012 Revenue $ 9,187 $ 9,870 $ 13,709 $ 14,724 $ 2,699 $ 3,000 $ 25,595 $ 27,594 Gross margin dollars 2,024 2,328 3,553 3,760 724 863 6,301 6,951 Gross margin rate 22.0% 23.6% 25.9% 25.5% 26.8% 28.8% 24.6% 25.2% Selling and administrative 2,193 2,295 3,712 3,691 745 858 6,650 6,844 Selling and administrative expense as a percentage of total revenues 23.9% 23.3% 27.1% 25.1% 27.6% 28.6% 26.0% 24.8% Adjusted EBITDA (169) 33 (159) 69 (21) 5 (349) 107 Depreciation and amortization (97) (110) (390) (430) (72) (78) (559) (618) Gain on sales of assets 47 17 48 250 181 169 276 436 Special items: Domestic pension expense - - (122) (124) - - (122) (124) Closed store reserve and severance (33) (38) 27 (47) (21) (5) (27) (90) Impairment charges (3) - (10) - (1) - (14) - Transaction costs - - - (7) - (3) - (10) Operating income (loss) $ (255) $ (98) $ (606) $ (289) $ 66 $ 88 $ (795) $ (299) 33
Reconciliation to GAAP Net Income Third Quarter Amounts are Preliminary and Subject to Change 13 Weeks Ended November 2, 2013 Adjustments millions, except per share data GAAP Domestic Pension Expense Closed Store Reserve, Store Impairments and Severance Tax Matters As Adjusted Gross margin impact $ 1,931 $ $ 13 $ $ 1,944 Selling and administrative impact 2,262 (41) 9 2,230 Depreciation and amortization impact 181 (3) 178 Impairment charges impact 6 (6) Operating loss impact (497) 41 13 (443) Income tax benefit impact 2 (15) (5) 204 186 Loss attributable to noncontrolling interest impact 13 (10) 3 After tax and noncontrolling interest impact (534) 26 (2) 204 (306) Diluted loss per share impact $ (5.03) $ 0.25 $ (0.02) $ 1.92 $ (2.88) millions, except per share data GAAP Domestic Pension Expense Closed Store Reserve and Severance 13 Weeks Ended October 27, 2012 Adjustments Gain on Sales of Assets Transaction Costs Tax Matters As Adjusted - Reported SHO Separation As Adjusted (1) Gross margin impact $ 2,253 $ $ 32 $ $ $ $ 2,285 $ (113) $ 2,172 Selling and administrative impact 2,496 (42) (6) (7) 2,441 (97) 2,344 Depreciation and amortization impact 211 (9) 202 (2) 200 Gain on sales of assets impact (26) 12 (14) (14) Operating loss impact (428) 42 47 (12) 7 (344) (14) (358) Income tax expense impact (11) (16) (18) 5 (3) 235 192 6 198 After tax and noncontrolling interest impact (498) 26 29 (7) 4 235 (211) (8) (219) Diluted loss per share impact $ (4.70) $ 0.25 $ 0.27 $ (0.07) $ 0.04 $ 2.22 $ (1.99) $ (0.08) $ (2.07) 34
Reconciliation to GAAP Net Income - YTD Amounts are Preliminary and Subject to Change millions, except per share data GAAP Domestic Pension Expense 39 Weeks Ended November 2, 2013 Closed Store Reserve, Store Impairments and Severance Adjustments Gain on Sales of Assets Tax Matters As Adjusted Gross margin impact $ 6,273 $ $ 28 $ $ $ 6,301 Selling and administrative impact 6,771 (122) 1 6,650 Depreciation and amortization impact 559 (5) 554 Impairment charges impact 14 (14) Gain on sales of assets impact (276) 235 (41) Operating loss impact (795) 122 46 (235) (862) Income tax expense impact (19) (45) (18) 89 373 380 Income attributable to noncontrolling interest impact (41) (11) 88 36 After tax and noncontrolling interest impact (1,007) 77 17 (58) 373 (598) Diluted loss per share impact $ (9.49) $ 0.73 $ 0.16 $ (0.55) $ 3.51 $ (5.64) 39 Weeks Ended October 27, 2012 Adjustments millions, except per share data GAAP Domestic Pension Expense Closed Store Reserve and Severance Gain on Sales of Assets Transaction Costs Tax Matters As Adjusted - Reported SHO Separation As Adjusted (1) Gross margin impact $ 7,351 $ $ 32 $ $ $ $ 7,383 $ (432) $ 6,951 Selling and administrative impact 7,378 (124) (58) (10) 7,186 (343) 6,843 Depreciation and amortization impact 625 (16) 609 (6) 603 Gain on sales of assets impact (436) 398 (38) (38) Operating loss impact (216) 124 106 (398) 10 (374) (83) (457) Income tax expense impact (53) (47) (40) 149 (4) 198 203 33 236 Income attributable to noncontrolling interest impact (4) 8 4 4 After tax and noncontrolling interest impact (441) 77 66 (241) 6 198 (335) (51) (386) Diluted earnings per share impact $ (4.16) $ 0.73 $ 0.62 $ (2.28) $ 0.06 $ 1.87 $ (3.16) $ (0.48) $ (3.64) 35