Q3 2014 EarningsDeck-Final - Sears Holdings … 2014 9 Third Quarter Year-Over-Year Revenue Change...

Q3 2014Transformation Update & Financial Results

December 2014

2December 2014

Agenda

Introduction Rob SchriesheimExecutive Vice President & CFO

Opening Remarks Eddie LampertChairman & CEO

3rd Quarter Results & Financial Position Rob Schriesheim

Asset Redeployment & Reconfiguration Activities Rob Schriesheim

Progress on Our Transformation Eddie Lampert

3December 2014

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

4December 2014

Non-GAAP Financial MeasuresFor 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 and Domestic Adjusted EBITDA are non-GAAP measurements, management believes that they are an important indicator of ongoing operating performance and useful to investors because:

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

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

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

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

5December 2014

Opening Remarks

We Are Taking Actions To Significantly Enhance Our Financial Flexibility

3

We Are Taking Steps To Restore Profitability To Our Company

2

Our Transformation Continues As We Leverage Shop Yo ur Way & Integrated Retail

1

6December 2014

Third Quarter Results & Financial Position

7December 2014

Sears Holdings Consolidated Results 1

Amounts in millions, except per share amounts 2014 2013 2014 2013

Revenues 7,207$ 8,272$ 23,099$ 25,595$

Gross margin dollars 1,601 1,931 5,171 6,273

Gross margin rate 22.2% 23.3% 22.4% 24.5%

Selling and administrative expense 2,011 2,262 6,218 6,771

Selling and administrative rate 27.9% 27.3% 26.9% 26.5%

Net Loss attributable to Holdings' Shareholders (548)$ (534)$ (1,523)$ (1,007)$

EPS (5.15)$ (5.03)$ (14.33)$ (9.49)$

Adjusted net loss2

(288)$ (314)$ (794)$ (621)$

Adjusted EPS2 (2.71)$ (2.96)$ (7.47)$ (5.85)$

Adjusted EBITDA2 (309)$ (315)$ (843)$ (419)$

Adjusted EBITDA By Segment2

Sears Domestic (199)$ (171)$ (468)$ (229)$

Kmart (97) (139) (304) (169)

Domestic Adjusted EBITDA (296)$ (310)$ (772)$ (398)$

Sears Canada (13) (5) (71) (21)

Consolidated Adjusted EBITDA (309)$ (315)$ (843)$ (419)$

Third Quarter Year-to-date

We Have Substantial Revenue Scale Which Allows For Small Changes In Margin Rates To Have Large Effects On Profitability

(1) See slides 49 and 50 in appendix for a more detailed breakout of adjusted results by segment.

(2) Reconciliations to the most directly comparable GAAP financial measures can be found in the appendix on slides 47, 51 and 52.

For each 100 basis point improvement

in margin rate, we would see a $70 million improvement

in EBITDA

Every 2% reduction in selling and administrative expense, or 55 basis point rate

improvement, would result in a $40

million improvement in EBITDA

8December 2014

Third QuarterDomestic Adjusted EBITDA Results

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

($ in millions) Q1 Q2 Q3

2013 $(15) $(73) $(310)

2014 $(178) $(298) $(296)

YOY Change $(163) $(225) $14

9December 2014

Third QuarterYear-Over-Year Revenue Change

Q3 2013 DomesticClosed Stores

Lands' End Comp Sales Other Sears Canada Q3 2014

$ %

Domestic Closed Stores (340)$ 31.9%

Lands' End (384) 36.1%

Comp Sales (5) 0.5%

Other (10) 0.9%

Sears Canada (326) 30.6%

Total (1,065)$ 100.0%

Summary of Year-Over-Year Revenue Change

Amount in millions

$8,272

($384) ($10)$7,207

($5)

($326)

($340)

See slide 37 in appendix for year-to-date analysis

On a comparable basis, Revenue was essentially flat year-over-year

10December 2014

Third Quarter Updates

72% 72%

Q3 2013 Q3 2014

Shop Your WayMember Sales Penetration 2

2009 2010 2011 2012 2013 2014

Traditional Online Cross Channel

18% Year-Over-Year Growth in Online & Multichannel Sales Q3 Year-to-Date

Year-Over-Year Comparable Store Sales Trends

-4.0%-0.7%

Q3 2013 Q3 2014

Sears Domestic Comp Store Sales

-2.1%

0.5%

Q3 2013 Q3 2014

Kmart Comp Store Sales

(1) 5-Year CAGR is for Q3 year-to-date period

(2) Member sales penetration is defined as the percentage of eligible sales that are made to Shop Your Way members

Excluding the impact of consumer electronics and

grocery & household, Kmart comp store sales would have been +2.8%

Increased Member Engagement In Following Metrics:

• # of Emailable Members• # of Active Redeemers

• Redemption Sales $• Redemption Sales %

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

been +1.0%

11December 2014

Third QuarterDomestic Comparable Store Sales

Format Q3 2014 Drivers

Sears Domestic -0.7%

Home Appliances

Mattresses

Consumer Electronics

Apparel

Auto

Kmart 0.5%

Apparel

Outdoor living

Toys

Grocery & Household


Total Domestic -0.1%


Excluding the impact of consumer electronics, Sears Domestic 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 +1.8%

Excluding the impact of consumer electronics and

grocery & household, Kmartcomp store sales would have

been +2.8%

Same Store Sales Flat Compared to Last Year’s Third Quarter

12December 2014

Q3 2013 Other Lands' End Closed StoreImpact

Rate SYW Points Sears Canada Q3 20141

Third QuarterYear-Over-Year Margin Changes

Amount in millions

$ %

Other (28)$ 8.5%

Lands' End (150) 45.5%

Closed store impact (58) 17.6%

Rate (6) 1.8%

SYW Points 7 -2.2%


Total (330)$ 100%

Summary of Year-Over-Year Margin Change

$1,931

($150)

($6)

($95)

$7

$1,601

($28)


Favorable impact driven by improvements in member analytics and personalization resulting in more efficient use of SYW

Points as promotional vehicle

($58)

(1) Consists of non-cash reserves

Adjusted Domestic Margin Impact($57)

Comparable Store Margin Impact

$1

13December 2014

Third QuarterYear-Over-Year Expense Changes

Amount in millions$ %

Lands' End (121) 48.2%

Non-operating 42 -16.7%

SG&A (71) 28.3%


Total (251)$ 100%

Summary of Year-Over-Year Expense Change

Q3 2013 Lands' End Non-operating SG&A Sears Canada Q3 20 14

Expense Increase Expense Decrease

1 2

$2,262

($121)

($101)

($71) $2,011


$42

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

14December 2014

Cash 326$

Availability on Credit Facility2 234

Equity in Inventory 4,033

Total 4,593$

Amounts in millions

Financial Position & Liquid Assets

We Believe We Have Sufficient Financial Resources And Liquid Assets

(1) As of October 16, 2014, we no longer consolidate Sears Canada.(2) Reflects effect of springing fixed charge coverage ratio covenant and borrowing base requirement.(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.

Rights Offering for Senior Unsecured Notes with Warrants• Received $625M in proceeds on 11/19

Rights Offering for Common Shares in Sears Canada• Received $211M in proceeds by 11/13

� $3.275B revolving credit facility3 through April 2016 secured by domestic inventory and credit card receivables� Permitted to raise up to $500M of short-term debt maturing before April 2016, $491M outstanding at the end of Q3� Permitted to raise up to a maximum of $760M in additional 2nd lien debt, subject to borrowing base requirements4

SHC Domestic Credit Facility

� Substantial portfolio of unencumbered real estate including approximately 700 owned and 1,100 leased locations� There are numerous transactions that we believe we could take advantage of to provide additional liquidity

SHC Real Estate Portfolio

Q3 2014Financial Position & Liquid Assets1

� After the completion of the rights offering on November 7, 2014, we continue to retain ownership of approximately 12M common shares of Sears Canada, with a market value of approximately $112M as of December 1, 2014

SHC Investment in Sears Canada

$836M of Proceeds From Transactions Completed After the Third Quarter Ended

Had both rights offerings been completed as of November 1, 2014, Availability on the Credit

Facility would have been approximately $1.1B

15December 2014

$8,124 $7,545

$6,464

$3,272 $2,978 $2,431

$4,852 $4,567 $4,033

2012 2013 2014 2012 2013 2014 2012 2013 2014

De-risking the Business ModelThird Quarter Domestic Net Inventory

Inventory1 Payables1 Net Inventory1

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

Amounts in millions

We Are Running Our Business With Less Inventory On An Absolute And Seasonal Basis

(1) Adjusted for Lands’ End

~$1.7B Inventory Reduction Due to Inventory Productivity

Improvements & Closed Stores

Payable Reduction of $841M Further De-Risks Our

Business Model

Reduced Domestic Net Inventory Investment By

$819M

16December 2014

Domestic Pension ContributionsReducing the Obligation

$352

$516

$360 $417

$243 $243 $247 $228 $169

2011 2012 2013 2014 2015 2016 2017 2018 2019

Actual Contributions Estimated Contributions

$ in

mill

ions

$1.6 Billion

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

(2) The Company offered a voluntary lump sum to certain plan participants and paid $1.5 billion in settlements thereby reducing pension risk.

(3) Projected contributions include provision for future strengthening of the mortality tables by the IRS.

1

2

$1.1 Billion3

Historically, Pension Contributions Have BeenA Significant Use of Our Cash

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

17December 2014

$2,042 $1,347 $1,347

$2,887

$2,844 $3,469

$1,367 $1,770 $934

Q3 2013Reported

Q3 2014Reported

Q3 2014As Adjusted

Unfunded Pension & Retirement Obligations Long-Term Debt Net Short-Term Debt

2,322

De-risking the Balance SheetDomestic Adjusted Net Debt Position 1

Reduced Adjusted Domestic Net Debt & Continued To De-Risk Pension Liability

$6,296$5,961 $5,750

Amounts in millions

(1) Defined as total net debt plus unfunded pension obligation.(2) For additional detail see slide 42 in appendix.(3) Adjusted to show what Adjusted Domestic Net Debt would have been had both rights offerings been completed as of November 1, 2014. Assumes

the $836M in proceeds received from these transactions after the third quarter ended were used to reduce secured borrowings.

$546 Million Reduction

18December 2014

Total Domestic Short-Term Liquid Availability 1

$572

$234

$1,070

$340

$9

$9 $384

$326

$326

Q3 2013Reported

Q3 2014Reported

Q3 2014As Adjusted

Availability to Borrow Incremental Short-Term Debt Capacity Cash

2,322

We Have Substantial Short-Term Liquid Availability at Time of Year Where Inventory Needs are at Peak

$1,296

$569

$1,405Amounts in millions

(1) Defined as Availability to Borrow under credit agreement plus available short-term debt capacity permitted under credit agreement plus cash.(2) For additional detail, see slides 43 in appendix.(3) Adjusted to show what Availability to Borrow would have been had both rights offerings been completed as of November 1, 2014. Assumes the

$836M in proceeds received from these transactions after the third quarter ended were used to reduce secured borrowings.

19December 2014

Term Debt Maturities

$3 $13 $13 $60

$2,191

2014 2015 2016 2017 2018

As of November 1, 2014Amounts in millions

Minimal Long-Term Debt Maturities Until 2018

20December 2014

Asset Redeployment & Reconfiguration

21December 2014

Asset Reconfiguration Framework

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

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:

22December 2014

Fiscal 2014 Asset Reconfiguration & Financing Activity

Through December 2 nd, we have generated $2.2B of liquidity from financing and asset reconfiguration activities in fiscal 2014

Lands’ End

Sears Canada

Sears Auto Centers

Real Estate Portfolio

� Completed separation of Lands’ End business from SHC on April 4, 2014

� Received $500M exit dividend from Lands’ End on April 4, 2014

� Rights offering of 40M common shares of Sears Canada was oversubscribed, generating $380M of proceeds with $169M in Q3 and $211M in Q4 of 2014

� Continue to retain 12 million shares in Sears Canada with a market value of approximately $112M as of December 1, 2014

� Considering strategic alternatives1

� Through the third quarter, we have announced the closure of approximately 235 stores in 2014

� Received proceeds of $316M from real estate transactions in the first three quarters of 2014

� On October 20, 2014, announced lease agreements with Primark, a leading fashion retailer in Europe

� Announced on November 7, 2014 that we are actively exploring means to monetize a portion of our owned real estate portfolio, through a sale-leaseback transaction, with the selected stores to be sold to a newly-formed real estate investment trust (“REIT”). In the event such sale-leaseback transaction were to occur, we would realize substantial proceeds from such sale which would further enhance our liquidity2.

(1) There can be no assurance that any transactions will be entered into or completed on acceptable terms, or at all.

(2) There can be no assurance that we will pursue such a transaction, and any transaction would require review and approval by our board of directors.

Financing Activity� Executed a $400M short-term loan secured by certain

real properties. Loan matures on Dec. 31, 2014 and is extendable at our option through Feb. 28, 2015

� Rights offering for $625M of senior unsecured notes with warrants was oversubscribed, with proceeds received on November 19, 2014

23December 2014

Actively Exploring a REIT Transaction involving 200 -300 Owned Properties Through a Rights Offering to Holdings’ S hareholders

� We continue to evaluate our capital structure with the objective of enhancing our financial flexibility and liquidity

� As we continue the transformation of our business, we intend to proactively right-size, redeploy and highlight the value of our assets, including our substantial real estate portfolio

� We are actively exploring means to monetize a portion of our owned real estate portfolio (potentially in the range of 200 to 300 stores), through a sale-leaseback transaction, with the selected stores to be sold to a newly-formed REIT

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

� In the event such sale-leaseback transaction were to occur, we would realize substantial proceeds from such sale which would further enhance our liquidity.

� If we determine to pursue such a sale-leaseback transaction, we expect to distribute to our shareholders rights to purchase shares of common stock or other equity interests of the REIT, funding a portion of the purchase price for the stores from the subscription proceeds of such shares or interests, with the balance from mortgage or other debt financing

� There can be no assurance that we will pursue such a transaction, and any transaction would require review and approval by our board of directors

24December 2014

Dec-12

Jan-13

Feb-13

Oct-13

Nov-13

Jan-14

Mar-14

Sep-14

Nov-14

$1B Term Loan

$500M Lands’ End Exit Dividend

$243M Sears Canada Dividend Proceeds

$447M SHO Exit Dividend

$52M Sears Canada Dividend

$400M Secured Short Term Loan2

$380M Sears Canada Rights Offering

$625M Unsecured Notes with Warrants

$354M Real EstateTransactions in 2012

$155M Real Estate Transactions in 2013

$250M Real EstateTransactions in 2014

SHC Domestic Has Demonstrated the Value in its Port folio of Assets and its Ability to Rapidly Monetize with Grea t Flexibility

Fiscal 2012 Fiscal 2013 Fiscal 2014

$4.4B1 of Capital Raised From Asset Monetization & Financi ngs Since 2012 with $2.2B in Fiscal 2014

(1) Excludes $900M in cash from inventory productivity actions after adjusting for Sears Hometown & Outlet Stores and Lands’ End Separation.(2) Secured by certain real properties representing 2% of our total properties.

Real Estate Transactions: $0.8B Sears Canada Dividends: $0.3B Spin-Offs & Rights Offerings: $1.3B Financings: $2.0B

25December 2014

Progress On Our Transformation

26December 2014

Our Transformation Is Underway

Other retailers are starting to make investments in areas that are at the core of our transformation

Wal-Mart Warns of Rough Patch for Sales, ProfitsRetailer Scales Back Plans for Superstores, Shifts More Spending to E-Commerce Operations- WSJ Article 10/16/14

Amazon to Open First Brick-and-Mortar SiteThe New York City Location to Handle Same-Day-Delivery Inventory, Product Returns- WSJ Article 10/9/14

“Same-day delivery, ordering online and picking up i n store are ideas that are really catching on.”

– Wells Fargo Analyst

“Wal-Mart Stores Inc. appealed to investors for pati ence Wednesday, as it tries to retool its operations for shoppers who are

buying more online and in smaller stores closer to home.”

27December 2014

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 Stra tegic PlatformsShop Your Way & Integrated Retail

28December 2014

Store OptimizationImpact of Annual Member Retention for 2014 Store Cl osings

Potential Impact If Successful In Optimizing Store N etwork While Retaining Portion Of Actively Engaged Members Is $300-$400 Million An nual 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 announced closings through the third quarter of 2014.(5) Assumes our ability to retain members will improve as we continue to invest in Shop Your Way and Integrated Retail capabilities.

By closing negative EBITDA stores and retaining a r elationship with our members we expect toimprove profitability and reduce working capital wh ile optimizing our store network

Stage 1Optimize Store Network Size

Stage 2Migrate Members to Other Channels

$1,890

$(50)

Sales EBITDA

FY 2013 Performance of Stores Announced for Closure in 2014

$380 $95

Sales EBITDA

Potential Annualized Impact of Retaining Members Who Shopped These Stores

• Should generate $50M of incremental annualized EBITDA by avoiding losses from these underperforming locations

• Expected to reduce working capital requirements by $300M

• Shop Your Way & Integrated Retail enables us to maintain relationships and retain sales with members after store closures

$145M Annualized Profit Improvement 1,2,3,4

29December 2014

Transforming Our Real Estate PortfolioMaximizing Asset Value While Serving Our Members

� We are transforming our asset base to better serve our members

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

� Partnering with other retailers allows us to improve productivity and profitability by rationalizing our physical footprint while generating substantial leasing income

� By partnering with other retailers in this manner, we are able to retain a considerable amount of space to serve our members, as can be seen in the Forever 21 and Whole Foods examples to the left

� On October 20, 2014, we announced lease agreements with Primark, a leading fashion retailer in Europe

� Primark will lease 7 locations from SHC in conjunction with their entry into the Northeastern United States

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

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

Sears & Whole Foods on Shared Footprint in Clearwater, Florida

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

30December 2014

Shop Your Way & Integrated Retail

72% 72%

Q3 2013 Q3 2014

Shop Your Way Member Engagement

2009 2010 2011 2012 2013 2014Traditional Online Cross Channel

Integrated Retail Initiatives Driving Results

(1) Member sales penetration is defined as the percentage of eligible sales that are made to Shop Your Way members.

� 18% Year-Over-Year Growth in Online & Multichannel Sales Q3 Year-to-Date

� Launched “Reserve It” in Q3 which allows members to shop for clothing and footwear online and reserve merchandise in store to try on

� Active emailable members increased significantly

� 12-month active redeemers increased significantly

� Improved member analytics driving increased efficiency of SYW Points as promotional vehicle

Shop Your Way Member Sales Penetration 1Online & Multichannel Sales

Accelerating Our Transformation With Shop Your Way & Integrated Retail

31December 2014

Reserve It. Shop Your Way Member Exclusive Benefi t

� Launched “Reserve It” service at Sears

� Allows members to shop for clothing and footwear online and reserve merchandise in store to try on

� Members can virtually browse racks of merchandise and have their specific size or color waiting for them in a designated “Reserve It” area in their local store

� Designed to save members time and make shopping far more convenient

� Members can reserve up to 6 items for 48 hours

Integrated RetailIn-Store Initiatives Underway

� Here is how it works: http://youtu.be/sXzFu137KKg

� Member Testimonials: http://youtu.be/mmvP4EgvGaQ

32December 2014

Reducing Selling & Administrative ExpenseImproved Efficiency of Marketing Spend

Benefits of Shifting from Fixed to Variable Cost Marketing

� More efficient and more effective

� Personalized versus Mass

� Higher ROI

� Real Time

� Flexible

� Improved member experience and engagement

77%

63%

23%

37%

Q3 YTD 2013 Q3 YTD 2014

Marketing Expense Reductions

Fixed Variable

Reduced Marketing Expense by $100M+ Year-Over-YearThrough Third Quarter of 2014 While Maintaining Mar keting Effectiveness

33December 2014

Transforming Our Apparel Business

• Leveraging New York design resources to create a point of difference and uniqueness as opposed to market vendors

• Improved fabric quality and garment construction

• Balanced assortment with core basics, fashion essentials and on trend fashion

• More frequent deliveries to have newness on the floor

• Reduce SKU’s for a cleaner, more impactful floor presentation

• Significant changes to Metaphor & Structure for Holiday 2014

Increasing Emphasis On Product Quality To Better Se rve Our Members

34December 2014

Framework for Profit Initiatives 1

CategorySHC Domestic Potential

Incremental Annual EBITDA Impact

Optimize Store Network $300M - $400M

In-Store Integrated Retail InitiativesUnderway

$150M - $200M

Shop Your Way Member EngagementPer 1M Members Per 10M Members

$50M $500M

Optimize Cost Of Goods SoldEach 1% Reduction Each 2% Reduction

$230M $460M

Selling & Administrative ExpensesEach 2% Reduction Each 4% Reduction

$150M $300M

Apparel Sales Productivity$10 Improvement Per Sq. Ft. $50 Improvement Per Sq. Ft.

$100M $500M

Total Potential Incremental Annual EBITDA If Initia tives Are Successful Is~$1.0 Billion To ~$2.4 Billion 2

(1) This slide was included in our Q2 2014 earnings call presentation on August 21, 2014.(2) 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.

35December 2014

Closing Remarks

Focused on the Future: Best Members, Best Stores, B est Categories

3

Demonstrated Our Financial Flexibility Resulting in Strong Liquidity

2

Improving EBITDA Trend in Q3 Expected to Continue t o Q4

1

36December 2014

Appendix

37December 2014

Third Quarter Year-to-Date 2014Year-Over-Year Revenue Change

Q3 YTD 2013 DomesticClosed Stores

Lands' End Comp Sales Other Sears Canada Q3 YTD 2014

(1) Consists primarily of the impact of declines in home services revenue and the impact of free delivery promotions in home appliances.

$ %

Domestic Closed Stores (784)$ 31.4%

Lands' End (811) 32.5%

Comp Sales (108) 4.3%

Other (182) 7.3%


Total (2,496)$ 100.0%

Summary of Year-Over-Year Revenue Change

Amounts in millions

$25,595

($811)

($182)

$23,099

($108)

($611)

($784)

(1)

38December 2014

Third Quarter Year-to-Date 2014Domestic Comparable Store Sales

Comp Store Sales Performance

Format Q3 YTD 2014 Drivers

Sears Domestic -0.1%

Home Appliances

Mattress


Lawn & Garden

Auto

Apparel

Kmart -1.2%Grocery & Household

Electronics

Total Domestic -0.6%

39December 2014

Q3 2013 Other Lands' End Closed StoreImpact

Comp Sales Rate SYW Points Sears Canada Q3 20141

Third Quarter Year-to-Date 2014Year-Over-Year Margin Changes

Amount in millions

$6,273

($321)

($18)

($222)

($74)

$5,171

($30)

($149)

(1) Consists of non-cash reserves

Adjusted Domestic Margin Impact($529)

Comparable Store Margin Impact

($380)

($288)

$ %

Other (30)$ 2.7%

Lands' End (321) 29.1%

Closed store impact (149) 13.5%

Comp Sales (18) 1.6%

Rate (288) 26.2%

SYW Points (74) 6.7%


Total (1,102)$ 100%

Summary of Year-Over-Year Margin Change

40December 2014

Third Quarter Year-to-Date 2014Year-Over-Year Expense Changes

Amount in millions$ %

Lands' End (261) 47.2%

Non-operating 26 -4.7%

SG&A (155) 28.0%


Total (553)$ 100%

Summary of Year-Over-Year Expense Change

Q3 2013 Lands' End Non-operating SG&A Sears Canada Q3 20 14

Expense Increase Expense Decrease

1 2

$6,771

($261)

($163)

($155) $6,218

$26

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

41December 2014

De-risking Our Domestic PensionLegacy 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

� Note that a 100 basis point increase in the discount rate would reduce the pension liability by approximately $460 million

2013 2012 2011 2010 2009

Assets $3,490 $3,221 $4,051 $4,054 $3,633

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%

Amounts in millions Year-End Balances

(1)

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

� 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%

(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.

(1)

42December 2014

Amounts in USD millions

November 2, 2013 November 1, 2014Unsecured Commercial Paper 160$ 91$ Secured Borrowings 1,591 1,605 Secured Short-term Loan - 400 Total Short-Term Borrowings 1,751$ 2,096$ Less: Cash (384) (326) Net Short-Term Borrowings 1,367$ 1,770$

Senior Secured Notes 1,238$ 1,238$ SRAC Notes 327 327 Term Loan 990 985 Other Notes/Mortgages 16 14 SHC Borrowings 2,571$ 2,564$ Domestic Capital Lease Obligations 316 280

Total Domestic Long-Term Debt 2,887$ 2,844$

Total Domestic Net Debt 4,254$ 4,614$

AdjustmentsAdd: Unfunded Pension - Domestic (1) 2,042$ 1,347$

Adjusted Domestic Net Debt Position (2) 6,296$ 5,961$

Q3 Pension Contributions - Domestic 137$ 156$

Q3 End

De-risking the Balance SheetAdjusted Domestic Net Debt Position

SHC is using one form of debt, i.e. the Revolver, to fund another form of debt, the legacy pension obligation. Of the Q3 2014 secured borrowings balance of $1,605M, $412M was driven over the past twelve months by pension contributions, as distinguished from funding operating results.

Reduced Adjusted Domestic Net Debt And Continued To De-Risk Pension Liability

Q3 2013 Secured Borrowings 1,591$

Less: Pension Contributions (Prior 7 Qtrs.) (801)

Pro Forma Q3 2013 Revolver Borrowings 790$

Less: Increase in Revolver Q3 2013 to Q3 2014 14

(412)

Pro Forma Q3 2014 Revolver Borrowings 392$

Impact of Pension Contributions on Revolver Usage

Less: LTM Pension Contributions

(1) As of end of third quarter.(2) “Adjusted” Consolidated Net Debt Position is $6,105M for Q3 2014 (since we no longer consolidate Sears Canada) and $6,352M for Q3 2013.

Assuming both the Sears Canada and Senior Unsecured Notes with Warrants rights offerings had been completed as of November 1, 2014, Secured Borrowings would have been $769M and Adjusted Domestic Net Debt would have been $5,750M

Secured Borrowings Increase 14$

Commercial Paper Decline (69)

Secured Short-Term Loan Increase 400

Change in Short-Term Borrowings 345

58

Change in Net Short-Term Borrowings 403$

Year-Over-Year Increase in Net Short-Term Borrowings

Cash Decrease - Domestic

43December 2014

Third QuarterYear-Over-Year Change in Availability to Borrow

Q3 2013Reported

Borrowing Base& FCCR

SecuredBorrowings

Letters of Credit Q3 2014Reported

Rights OfferingProceeds

Q3 2014As Adjusted 1

(1) Adjusted to show what Availability to Borrow would have been had both rights offerings been completed as of November 1, 2014. Assumes the $836M in proceeds received from these transactions after the third quarter ended were used to reduce secured borrowings.

Amounts in millions

$572

($14)

$234

$1,070

$13

$836

($337)

Total Usage($1)

Year-Over-Year change in availability due primarily to reductions in borrowing base driven by inventory

productivity improvements

Received $836M of proceeds after Q3 from Rights Offering Transactions

Availability on Facility of $1.1B as of December 2, 2014 at Time of Year Where Inventory Needs are at Peak

44December 2014

De-risking Our ObligationsConsistently Reduced Lessee Obligation

$6,617 $6,259

$5,514 $5,060

$4,729 $4,343

$3,646 $2,990

2007 2008 2009 2010 2011 2012 2013 2014Est.

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

Expense

Amounts in millions

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

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

1

(1) Estimated as of the end of the third quarter 2014. Decline from the second quarter includes a decrease of $370M for Sears Canada, which is no longer included.

45December 2014

Sears Holdings Consolidated Results

Amounts in millions, except per share amounts

2014 2013 2014 2013

Revenues $ 7,207 $ 8,272 $23,099 $ 25,595

Net loss attributable to Holdings' shareholders $ (548) $ (534) $ (1,523) $ (1,007)

EPS $ (5.15) $ (5.03) $ (14.33) $ (9.49)

Adjusted net loss (1) $ (288) $ (314) $ (794) $ (621)

Adjusted EPS (1) $ (2.71) $ (2.96) $ (7.47) $ (5.85)

Third Quarter Q3 YTD

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

46December 2014

Significant ItemsAmounts in millions

2014 2013 2014 2013

Net loss as reported $ (548) $ (534) $(1,523) $(1,007)

Domestic pension expense 14 26 42 77

Domestic closed store/store impairments/ severance 46 (4) 80 14

Domestic gain on sales of assets (26) — (40) (34)

Other expenses (1) 4 — 4 —

Gain on Sears Canada disposition (44) — (44) —

Domestic tax matters 180 200 554 406

Sears Canada segment 86 13 137 (44)

Lands' End separation — (15) (4) (33)

Adjusted net loss (2) (288)$ (314)$ (794)$ (621)$

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


47December 2014

Consolidated Adjusted EBITDAAmounts in millions

2014 2013 2014 2013

Net loss attributable to SHC per statement of operations $ (548) $ (534) $ (1,523) $ (1,007)

Income (loss) attributable to noncontrolling interests (80) (13) (128) 41

Income tax expense (benefit) 159 (2) 188 19

Interest expense 78 61 221 181

Interest and investment income (97) (8) (133) (29)

Other income (2) (1) (4) —

Operating loss (490) (497) (1,379) (795)

Depreciation and amortization 148 181 455 559

Gain on sales of assets (68) (21) (148) (276)

Before excluded items (410) (337) (1,072) (512)

Closed store reserve and severance 70 4 138 27

Domestic pension expense 22 41 67 122

Other expenses (1) 9 — 9 —

Impairment charges — 6 25 14

Adjusted EBITDA (309) (286) (833) (349)

Lands' End separation — (29) (10) (70)

Adjusted EBITDA as defined(2) $ (309) $ (315) $ (843) $ (419)

Sears Canada segment 13 5 71 21

Domestic Adjusted EBITDA as defined (2) $ (296) $ (310) $ (772) $ (398)

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


48December 2014

Adjusted EBITDA

Amounts in millions

2014 2013 2014 2013

Revenues $ 7,207 $ 7,888 $ 22,877 $ 24,563

Margin 1,642 1,794 5,143 5,893

Margin rate 22.8% 21.7% 22.5% 24.0%

Expenses 1,951 2,109 5,986 6,312

Adjusted EBITDA (1) (309)$ (315)$ (843)$ (419)$

By Segment:Sears (199)$ (171)$ (468)$ (229)$ Kmart (97) (139) (304) (169)Sears Canada (13) (5) (71) (21)

(309)$ (315)$ (843)$ (419)$

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


49December 2014

Third QuarterAdjusted Segment Results

Amounts in millions

2014 2013 2014 2013 2014 2013 2014 2013 Revenue $ 2,707 $ 2,916 $ 3,889 $ 4,035 $ 611 $ 937 $ 7,207 $ 7,888 Gross margin dollars 591 601 897 944 154 249 1,642 1,794

Gross margin rate 21.8% 20.6% 23.1% 21.4% 25.2% 26.6% 22.8% 21.7%

Selling and administrative 688 740 1,096 1,115 167 254 1,951 2,109

Selling and administrative expense as a percentage of total revenues 25.4% 25.4% 28.2% 25.2% 27.3% 27.1% 27.1% 25.5%

Adjusted EBITDA (1) (97) (139) (199) (171) (13) (5) (309) (315)

Depreciation and amortization (25) (31) (110) (128) (13) (22) (148) (181)

Gain on sales of assets 24 19 44 2 - - 68 21

Special items:Domestic pension expense - - (22) (41) - - (22) (41)Closed store reserve and severance (48) (17) (20) 32 (2) (19) (70) (4)Other expenses (3) - (3) - (3) - (9) - Impairment charges - (3) - (2) - (1) - (6)Lands' End separation - - - 29 - - - 29

Operating loss $ (149) $ (171) $ (310) $ (279) $ (31) $ (47) $ (490) $ (497)

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

Kmart Sears Domestic Sears Canada Sears HoldingsQuarter Ended

50December 2014

Year-To-DateAdjusted Segment Results

Amounts in millions

2014 2013 2014 2013 2014 2013 2014 2013 Revenue $8,527 $ 9,187 $ 12,262 $ 12,677 $ 2,088 $ 2,699 $ 22,877 $ 24,563 Gross margin dollars 1,783 2,024 2,857 3,145 503 724 5,143 5,893

Gross margin rate 20.9% 22.0% 23.3% 24.8% 24.1% 26.8% 22.5% 24.0%

Selling and administrative 2,087 2,193 3,325 3,374 574 745 5,986 6,312

Selling and administrative expense as a percentage of total revenues 24.5% 23.9% 27.1% 26.6% 27.5% 27.6% 26.2% 25.7%

Adjusted EBITDA (1) (304) (169) (468) (229) (71) (21) (843) (419)

Depreciation and amortization (72) (97) (334) (390) (49) (72) (455) (559)

Gain on sales of assets 76 47 73 48 (1) 181 148 276

Special items:Domestic pension expense - - (67) (122) - - (67) (122)Closed store reserve and severance (84) (33) (27) 27 (27) (21) (138) (27)Other expenses (3) - (3) - (3) - (9) - Impairment charges (2) (3) (8) (10) (15) (1) (25) (14)Lands' End separation - - 10 70 - - 10 70

Operating income (loss) $ (389) $ (255) $ (824) $ (606) $ (166) $ 66 $ (1,379) $ (795)

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

Kmart Sears Domestic Sears Canada Sears HoldingsQ3 YTD

51December 2014

Third QuarterReconciliation to GAAP

millions, except per share data GAAP

DomesticPensionExpense

Domestic Closed Store Reserve and Severance

Domestic Gain on Sales of Assets

Other Expenses

Gain on Sears

Canada Disposition

Domestic Tax

Matters

Sears Canada

SegmentAs

Adjusted (1)

Gross margin impact 1,601$ —$ 41$ —$ —$ —$ —$ (154)$ 1,488$

Selling and administrative impact 2,011 (22) (27) — (6) — — (172) 1,784

Depreciation and amortization impact 148 — (6) — — — — (13) 129

Gain on sales of assets impact (68) — — 42 — — — — (26)

Operating loss impact (490) 22 74 (42) 6 — — 31 (399)

Interest expense impact (78) — — — — — — 1 (77)

Interest and investment income impact 97 — — — — (70) — (12) 15

Other income impact 2 — — — — — — (2) —

Income tax expense impact (159) (8) (28) 16 (2) 26 180 148 173

Loss attributable to noncontrolling interest impact 80 — — — — — — (80) —

After tax and noncontrolling interest impact (548) 14 46 (26) 4 (44) 180 86 (288)

Diluted loss per share impact (5.15)$ 0.13$ 0.43$ (0.25)$ 0.04$ (0.41)$ 1.69$ 0.81$ (2.71)$

(1) Adjusted for the results of the Sears Canada business w hich w ere included in our results prior to the disposition.


Domestic Pension Expense

Domestic Closed Store

Reserve, Store Impairments

and Severance

Domestic Tax

Matters

Sears Canada

SegmentLands' End Separation

As Adjusted (2)

Gross margin impact 1,931$ —$ 13$ —$ (249)$ (150)$ 1,545$

Selling and administrative impact 2,262 (41) 28 — (273) (121) 1,855

Depreciation and amortization impact 181 — (3) — (22) (5) 151

Impairment charges impact 6 — (5) — (1) — —

Operating loss impact (497) 41 (7) — 47 (24) (440)

Interest expense impact (61) — — — (4) — (65)

Interest and investment income impact 8 — — — (6) — 2

Income tax expense impact 2 (15) 3 200 (11) 9 188

Loss attributable to noncontrolling interest impact 13 — — — (13) — —

After tax and noncontrolling interest impact (534) 26 (4) 200 13 (15) (314)

Diluted loss per share impact (5.03)$ 0.25$ (0.04)$ 1.88$ 0.12$ (0.14)$ (2.96)$

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

Adjustments

13 Weeks Ended November 1, 2014

Adjustments


52December 2014

Third Quarter Year-to-DateReconciliation to GAAP


DomesticPensionExpense



and Severance


Other Expenses

Gain on Sears

Canada Disposition

Domestic Tax

Matters

Sears Canada


As Adjusted (1)

Gross margin impact 5,171$ —$ 58$ —$ —$ —$ —$ (502)$ (87)$ 4,640$

Selling and administrative impact 6,218 (67) (53) — (6) — — (603) (77) 5,412

Depreciation and amortization impact 455 — (7) — — — — (49) (3) 396

Impairment charges impact 25 — (10) — — — — (15) — —

Gain on sales of assets impact (148) — — 65 — — — (1) — (84)

Operating loss impact (1,379) 67 128 (65) 6 — — 166 (7) (1,084)

Interest expense impact (221) — — — — — — 5 — (216)

Interest and investment income impact 133 — — — — (70) — (38) — 25

Other income impact 4 — — — — — — (4) — —

Income tax expense impact (188) (25) (48) 25 (2) 26 554 136 3 481

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

After tax and noncontrolling interest impact (1,523) 42 80 (40) 4 (44) 554 137 (4) (794)

Diluted loss per share impact (14.33)$ 0.40$ 0.75$ (0.38)$ 0.04$ (0.41)$ 5.21$ 1.29$ (0.04)$ (7.47)$


Domestic Pension Expense



and Severance


Domestic Tax

Matters

Sears Canada


As Adjusted (1)

Gross margin impact 6,273$ —$ 28$ —$ —$ (724)$ (408)$ 5,169$

Selling and administrative impact 6,771 (122) 22 — — (766) (338) 5,567

Depreciation and amortization impact 559 — (5) — — (72) (16) 466

Impairment charges impact 14 — (13) — — (1) — —

Gain on sales of assets impact (276) — — 55 — 181 — (40)

Operating loss impact (795) 122 24 (55) — (66) (54) (824)

Interest expense impact (181) — — — — (2) — (183)

Interest and investment income impact 29 — — — — (17) — 12

Other income impact — — — — — 1 — 1

Income tax expense impact (19) (45) (10) 21 406 (1) 21 373

Income attributable to noncontrolling interest impact (41) — — — — 41 — —

After tax and noncontrolling interest impact (1,007) 77 14 (34) 406 (44) (33) (621)

Diluted loss per share impact (9.49)$ 0.73$ 0.13$ (0.32)$ 3.82$ (0.41)$ (0.31)$ (5.85)$

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


Adjustments


Adjustments

Q3 2014 EarningsDeck-Final - Sears Holdings … 2014 9 Third Quarter Year-Over-Year Revenue Change...

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