e10vq

United States
Securities And Exchange Commission

Washington, D.C. 20549

FORM 10-Q


þ		Quarterly Report Pursuant To Section 13 Or 15(D) Of The Securities Exchange Act Of 1934 For The

Quarterly Period Ended October 29, 2005


o		Transition Report Pursuant To Section 13 Or 15(D) Of The Securities Exchange Act Of 1934

Commission file number 000-51217

SEARS HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		20-1920798
(State of Incorporation)		(I.R.S. Employer Identification No.)

3333 Beverly Road, Hoffman Estates, Illinois		60179
(Address of principal executive offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: (847) 286-2500

Indicate by check mark whether the Registrant [1] has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and [2] has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of November 26, 2005, the Registrant had 160,977,961 common shares, $0.01 par value, outstanding.

SEARS HOLDINGS CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements


millions, except per share data	13 Weeks Ended						39 Weeks Ended
	October 29,			October 27,			October 29,			October 27,
	2005			2004			2005			2004
REVENUES
Merchandise sales and services	$	12,118		$	4,426		$	32,868		$	13,893
Credit and financial products revenues		84			—			171			—

Total revenues		12,202			4,426			33,039			13,893


COSTS AND EXPENSES

Cost of sales, buying and occupancy		8,783			3,324			24,009			10,520
Selling and administrative		2,972			994			7,669			2,921
Depreciation and amortization		263			6			650			14
Provision for uncollectible accounts		21			—			38			—
Gain on sales of assets		(15	)		(807	)		(25	)		(911	)
Restructuring charges		59			—			104			—

Total costs and expenses		12,083			3,517			32,445			12,544

Operating income		119			909			594			1,349
Interest expense, net		(70	)		(25	)		(184	)		(86	)
Bankruptcy-related recoveries		1			1			33			13
Other income		22			1			33			4

Income before income taxes, minority interest and cumulative effect of change in accounting principle		72			886			476			1,280
Income taxes		28			334			183			483
Minority interest		(14	)		—			(7	)		—

Income before cumulative effect of change in accounting principle		58			552			300			797
Cumulative effect of change in accounting principle, net of tax		—			—			(90	)		—

NET INCOME	$	58		$	552		$	210		$	797


EARNINGS PER COMMON SHARE
BASIC
Earnings per share before cumulative effect of change in accounting principle	$	0.35		$	6.19		$	2.00		$	8.91
Cumulative effect of change in accounting principle		—			—			(0.60	)		—

Earnings per share	$	0.35		$	6.19		$	1.40		$	8.91


DILUTED
Earnings per share before cumulative effect of change in accounting principle	$	0.35		$	5.45		$	1.98		$	7.93
Cumulative effect of change in accounting principle		—			—			(0.59	)		—

Earnings per share	$	0.35		$	5.45		$	1.39		$	7.93


Average common shares outstanding		163.5			89.2			149.8			89.4

Diluted weighted average common shares outstanding		163.6			101.6			151.4			101.4

See accompanying notes.

SEARS HOLDINGS CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)


millions, except per share data	October 29,			October 27,			January 26,
	2005			2004			2005
ASSETS
Current assets
Cash and cash equivalents	$	922		$	2,564		$	3,435
Receivables		724			649			646
Merchandise inventories		10,750			3,902			3,281
Prepaid expenses, deferred charges and other current assets		463			200			150
Deferred income taxes		438			—			29
Assets held for sale		1,724			—			—

Total current assets		15,021			7,315			7,541

Property and equipment, net		9,944			288			315
Deferred income taxes		—			—			730
Goodwill		1,731			—			—
Tradenames and other intangible assets		3,648			—			—
Other assets		396			62			65

TOTAL ASSETS	$	30,740		$	7,665		$	8,651


LIABILITIES
Current liabilities
Short-term borrowings	$	152		$	—		$	—
Current portion of long-term debt and capitalized lease obligations		644			48			45
Merchandise payables		4,314			1,107			927
Income taxes payable		492			31			94
Other current liabilities		3,404			799			705
Unearned revenues		1,073			10			13
Other taxes		789			323			297
Liabilities of operations held for sale		133			—			—

Total current liabilities		11,001			2,318			2,081

Long-term debt and capitalized lease obligations		3,264			368			366
Pension and postretirement benefits		2,161			878			1,008
Minority interest and other liabilities		3,369			1,029			727

Total Liabilities		19,795			4,593			4,182


SHAREHOLDERS’ EQUITY
Preferred stock, 20 shares authorized; no shares outstanding
Common stock $0.01 par value; 500 shares authorized; 161, 89, and 89 shares outstanding, respectively		2			1			1
Capital in excess of par value		9,933			2,076			3,291
Retained earnings		1,550			1,031			1,340
Treasury stock — at cost		(465	)		(36	)		(86	)
Accumulated other comprehensive loss		(75	)		—			(77	)

Total Shareholders’ Equity		10,945			3,072			4,469


TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	30,740		$	7,665		$	8,651

See accompanying notes.

SEARS HOLDINGS CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	39 Weeks Ended
millions	October 29,			October 27,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	210		$	797
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		650			14
Cumulative effect of change in accounting principle, net of tax		90			—
Provision for uncollectible accounts		38			—
Gain on sales of assets and other income		(58	)		(915	)
Bankruptcy-related recoveries		(33	)		(13	)
Income tax benefit on nonqualified stock options		49			—
Net cash received from bankruptcy related settlements		30			13
Change in, net of effects of Merger:
Deferred income taxes		(92	)		381
Credit card receivables		(192	)		—
Merchandise inventories		(1,466	)		(663	)
Other operating assets		(20	)		47
Other operating liabilities ^{(1) (2)}		987			510

Net cash provided by operating activities		193			171


CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of businesses, net of cash acquired		(1,409	)		—
Proceeds from sales of property and investments		96			524
Purchases of property and equipment		(333	)		(179	)

Net cash (used in) provided by investing activities		(1,646	)		345


CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of debt		(760	)		(40	)
Proceeds from termination of interest rate swaps		60			—
Common shares purchased		(434	)		—
Debt issue costs paid		(21	)		—
Proceeds from the exercise of options		99			—

Net cash used in financing activities		(1,056	)		(40	)


Effect of exchange rate changes on cash and cash equivalents		(4	)		—


NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS		(2,513	)		476


CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		3,435			2,088


CASH AND CASH EQUIVALENTS, END OF PERIOD	$	922			2,564


Supplemental Cash Flow Data:
⁽¹⁾Income taxes paid	$	112	$	4
⁽²⁾Cash interest paid		184		42

See accompanying notes.

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 — BASIS OF PRESENTATION

Sears Holdings Corporation (“Holdings” or the “Company”) is a Delaware corporation formed for the purpose of consummating the business combination of Kmart Holding Corporation (“Kmart”) and Sears, Roebuck and Co. (“Sears”), which was completed on March 24, 2005 (the “Merger”). The Company is a broadline retailer with approximately 2,300 full-line and 1,200 specialty retail stores in the United States operating through Kmart and Sears and 370 full-line and specialty retail stores in Canada operating through Sears Canada Inc. (“Sears Canada”), a 54%-owned subsidiary. Sears Canada is a publicly traded company whose shares are traded on the Toronto Stock Exchange. Holdings common stock is traded on The NASDAQ National Market under the symbol “SHLD”.

The Merger has been accounted for as a purchase business combination, with Kmart designated as the acquirer. Therefore, the historical financial statements of Kmart became the historical financial statements of Holdings, the registrant. The accompanying condensed consolidated statements of operations and cash flows for the 39-week period ended October 29, 2005 include the results of operations of Sears from March 25, 2005 forward. Therefore, Holdings’ operating results for the 39-week period ended October 29, 2005 include approximately 31 weeks of Sears’ results and 39 weeks of Kmart’s results. See Note 2 for summary unaudited pro forma information and details on the purchase accounting.

Effective March 23, 2005, the Company changed its fiscal year end from the last Wednesday in January to the Saturday closest to January 31st. As the change in fiscal year end reflects a change of only three days, the historical financial statements have not been recast to reflect this change. Sears Canada’s fiscal year end is the Saturday closest to December 31st. The results of operations for Sears Canada are reported to Holdings on a one-month lag. Therefore, the condensed consolidated statements of operations for the 13-week period ended October 29, 2005 include operating results for Sears Canada for the period from July 3, 2005 through October 1, 2005. For the 39-week period ended October 29, 2005, the condensed consolidated statements of operations and cash flows include operating results for Sears Canada from March 25, 2005 through October 1, 2005.

These interim unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation have been included. All significant intercompany accounts and transactions have been eliminated. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year. The Company typically earns a disproportionate share of its operating income in the fourth quarter due to seasonal customer buying patterns.

Readers of these interim period statements should refer to the audited consolidated financial statements and notes thereto, which are included in Kmart’s Annual Report on Form 10-K for its fiscal year ended January 26, 2005. For information relating to Sears prior to the Merger, readers should refer to the audited consolidated financial statements and notes thereto, which are included in Sears’ Annual Report on Form 10-K for its fiscal year ended January 1, 2005.

Certain prior period amounts have been reclassified to conform to the current interim period presentation.

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

NOTE 2 — THE MERGER

On March 24, 2005, Kmart and Sears completed the Merger pursuant to the Agreement and Plan of Merger, dated as of November 16, 2004 (the “Merger Agreement”). Upon consummation of the Merger, Kmart and Sears became wholly-owned subsidiaries of Holdings.

Under the terms of the Merger Agreement, Kmart shareholders received one share of Holdings common stock for each Kmart share owned. Approximately 94.9 million shares of Holdings common stock were issued in exchange for all outstanding common stock of Kmart based on the one-for-one ratio. Sears shareholders had the right to elect to receive $50 in cash or 0.5 of a share of Holdings common stock for each Sears share owned. Sears shareholder elections were prorated to ensure that, in the aggregate, 55 percent of Sears shares were converted into Holdings shares and 45 percent of Sears shares were converted to cash. Shares of Sears restricted common stock were converted into Holdings common stock on a 0.5 for 1 basis. In aggregate, 62.2 million shares of Holdings common stock were issued to Sears shareholders at a value of approximately $6.5 billion (based on the average closing price of $104.33 of Kmart’s common stock during the period from November 15, 2004 through November 19, 2004, two business days before and after the date the Merger was announced). In addition, approximately $5.4 billion in cash was paid in consideration for (i) all outstanding common stock of Sears, based upon the proration provisions of the Merger Agreement, and (ii) all outstanding stock options of Sears. Including transaction costs of $18 million, the total consideration paid was approximately $11.9 billion.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”, the Merger has been treated as a purchase business combination for accounting purposes, with Kmart designated as the acquirer. In identifying Kmart as the acquiring entity, the companies took into account the relative share ownership of the Company after the Merger, the composition of the governing body of the combined entity and the designation of certain senior management positions. As such, the historical financial statements of Kmart became the historical financial statements of Holdings. The purchase price for the acquisition of Sears, including transaction costs, has been allocated to the assets acquired and liabilities assumed based on estimated fair values at the date of the Merger, March 24, 2005. The following purchase price allocation is preliminary and further refinements may be necessary.


millions
Cash	$	3,963
Merchandise inventories		6,134
Other current assets		1,861
Property and equipment		9,854
Goodwill		1,731
Tradenames and other intangible assets		4,080
Other assets		501

Total assets acquired	$	28,124

Merchandise payables, accrued expenses and other current liabilities	$	6,337
Unearned revenues (including non-current portion)		1,896
Total debt and capital leases		4,421
Deferred income taxes		1,249
Pension and postretirement benefits		1,563
Minority interest and other liabilities		796

Total liabilities assumed	$	16,262

Net assets acquired	$	11,862

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The Company has allocated approximately $4.1 billion to identifiable intangible assets, of which approximately $2.9 billion relates to the indefinite lived tradenames of Sears, Kenmore, Craftsman, Lands’ End and Diehard. The remaining intangible assets include finite lived tradenames, favorable leases, contractual arrangements and customer lists, which will be amortized over their estimated useful lives.

Selected Unaudited Pro Forma Combined Financial Information

The unaudited pro forma financial information in the table below summarizes the combined results of operations of Kmart and Sears for the 13-week period ended October 27, 2004 and the 39-week periods ended October 29, 2005 and October 27, 2004 as though the Merger had occurred as of the beginning of fiscal 2004. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the Merger had taken place at the beginning of each period, or that may result in the future. In addition, the following unaudited pro forma financial information has not been adjusted to reflect any operating efficiencies that may be realized as a result of the Merger.


	13 weeks ended				39 weeks ended
	October 29,		October 27,		October 29,		October 27,
millions, except per share data	2005		2004		2005		2004
	As reported		Pro forma		Pro forma		Pro forma
Revenues	$	12,202	$	12,838	$	38,176	$	39,122

Operating income	$	119	$	321	$	543	$	692

Income before cumulative effect of change in accounting principle	$	58	$	150	$	231	$	295

Net income	$	58	$	150	$	141	$	295

Diluted earnings per share before cumulative effect of change in accounting principle	$	0.35	$	0.93	$	1.42	$	1.84

Diluted earnings per share	$	0.35	$	0.93	$	0.87	$	1.84

NOTE 3 — RESTRUCTURING ACTIVITIES

During fiscal 2005, the Company has initiated a number of restructuring activities. As a result, the Company has recorded $59 million and $104 million in restructuring charges during the 13- and 39-week periods ended October 29, 2005, respectively, as follows:

Kmart

During fiscal 2005, the Company initiated actions to integrate the home office functions of Kmart and Sears and align its workforce accordingly. Approximately 1,435 Kmart associates were notified that their positions had been relocated, were under review, or had been eliminated. In connection therewith, the Company recorded restructuring charges of $6 million and $51 million during the 13- and 39-week periods ended October 29, 2005, respectively. The year-to-date restructuring charge of $51 million includes $16 million of severance, benefits and outplacement service costs for approximately 730 impacted Kmart associates and $35 million of relocation expenses for 523 associates who have accepted relocation offers. The Company estimates that the total costs related to the relocation, severance and outplacement services associated with these actions will be

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

approximately $63 million. The remaining costs to be incurred will be recognized over the associates’ remaining service periods in accordance with SFAS No. 146, “Accounting for Costs Associated with Disposal and Exit Activities”. As of October 29, 2005, total cash payments of $19 million had been made in connection with these actions, with the remaining reserve balance of $32 million at October 29, 2005 representing payments to be made throughout the remainder of 2005 and early 2006 in accordance with the Company’s severance and relocation plans.

Sears

In addition, the Company notified approximately 780 former Sears employees of the decision to eliminate their positions in connection with the home office integration efforts. In connection therewith, the Company recorded a reserve of $59 million for costs associated with severance, benefits and outplacement services for the impacted individuals. In accordance with Emerging Issues Task Force (“EITF”) No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination”, costs associated with these integration actions are reflected as a component of purchase accounting as an increase to goodwill. As of October 29, 2005, the Company had made payments totaling approximately $54 million in respect of these restructuring actions, with a reserve balance of $5 million at October 29, 2005 representing payments to be made throughout the remainder of 2005 in accordance with the Company’s severance plan.

Sears Canada

During the third quarter of fiscal 2005, Sears Canada implemented a series of productivity improvement initiatives, which included a workforce reduction of approximately 1,200 associates, primarily within Sears Canada’s merchandising operations. In connection with Sears Canada’s restructuring activities, the Company has recorded a restructuring charge of $53 million for the 13 weeks ended October 29, 2005 for costs associated with severance, benefits and outplacement services to be provided to the impacted individuals. The reserve balance of $53 million at October 29, 2005 represents payments to be made to the impacted individuals throughout the remainder of 2005 in accordance with Sears Canada’s severance plan.

NOTE 4 — CHANGE IN ACCOUNTING PRINCIPLE

Effective January 27, 2005, the Company changed its method of accounting for certain indirect buying, warehousing and distribution costs. Prior to this change, the Company had included indirect buying, warehousing and distribution costs as inventoriable costs. Beginning in the fiscal year ending January 28, 2006, such costs are expensed as incurred, which is the method of accounting previously followed by Sears. The Company believes that this change provides a better measurement of operating results in light of the anticipated changes to the Company’s supply chain to realize cost savings from the Merger, the anticipated closure of certain facilities and the combined capacity of the existing distribution and headquarters facilities. In accordance with Accounting Principles Board Opinion (“APB”) No. 20, “Accounting Changes”, changes in accounting policy to conform the acquirer’s policy to that of the acquired entity are treated as a change in accounting principle. The indirect buying, warehousing and distribution costs that were capitalized to inventory as of January 26, 2005 are reflected in the first quarter 2005 condensed consolidated statement of operations as a cumulative effect of change in accounting principle in the amount of $90 million net of income taxes of $58 million. The pro forma effect of application of the change to prior years’ quarterly net income and net income per share is not significant.

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

NOTE 5 — ASSETS HELD FOR SALE

The Company securitizes certain of Sears Canada’s credit card receivables through trusts. Under the Sears Canada securitization program, trusts purchase undivided interests in the credit card receivable balances funded by issuing short- and long-term debt, primarily commercial paper and senior and subordinated notes. These debt instruments entitle the holder to a series of scheduled cash flows under preset terms and conditions, the receipt of which is dependent upon cash flows generated by the related trusts’ assets. The trusts meet the definition of a qualified special purpose entity. In accordance with Financial Accounting Standards Board Interpretation (“FIN”) No. 46(R), “Consolidation of Variable Interest Entities”, qualifying special purpose entities are not consolidated. As a result, the Sears Canada securitized credit card receivables and related borrowings are not presented in the condensed consolidated balance sheets.

The undivided co-ownership interest in the receivable balances is sold on a fully serviced basis and the Company receives no fee for ongoing servicing responsibilities. The Company receives proceeds equal to fair value for the assets sold and retains rights to future cash flows arising after the investors in the securitization trusts have received the contracted return. The co-owners have no recourse to the Company’s retained interest in the receivables sold other than in respect of amounts in the cash reserve account and the interest-only strip receivable. Under the securitization program, there is a daily distribution of collections from credit card receivables and a reinvestment of those amounts by the trusts to purchase additional credit card receivables in order to maintain existing outstanding debt levels.

On November 15, 2005, Sears Canada completed the sale of its Credit and Financial Services operations to JPMorgan Chase & Co. (“JPMorgan Chase”) for approximately $1.9 billion in cash proceeds net of securitized receivables and other related costs and taxes. In addition, Sears Canada and JPMorgan Chase have entered into a long-term marketing and servicing alliance with an initial term of ten years. On December 2, 2005, Sears Canada’s Board of Directors declared that the net after-tax proceeds from the sale will be used to fund a cash distribution to shareholders in the amount of approximately $1.7 billion with the balance of sale proceeds to be used for general corporate purposes. The cash distribution to shareholders is scheduled to be paid on December 16, 2005.

The assets and liabilities of Sears Canada’s credit business are reported separately as assets and liabilities of operations held for sale in the condensed consolidated balance sheet at October 29, 2005. The major classes of assets and liabilities held for sale include:


	October 29,
millions	2005
Credit card receivables, net of $35 allowance	$	1,224
Other assets		500

Total assets held for sale		1,724

Accounts payable and accrued liabilities		133

Total liabilities of operations held for sale	$	133

The following table summarizes the Sears Canada credit card receivables:


	October 29,
millions	2005
Managed accounts	$	2,186
Less: co-ownership interest held by third parties		(873	)

Co-ownership retained by the Company		1,313
Less: long-term portion of deferred customer accounts receivable		(54	)

Total	$	1,259

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

NOTE 6 — DERIVATIVE FINANCIAL INSTRUMENTS

Also during the second quarter of fiscal 2005, the Company terminated interest rate swaps with a notional value of approximately $1.0 billion that had converted certain of the Company’s fixed rate debt to floating rate debt. The Company’s variable rate borrowings were reduced to approximately $340 million as a result of these interest rate swap terminations and the retirement of certain of the Company’s variable rate debt. The Company received $60 million in cash proceeds from the swap terminations, representing the aggregate fair value of these swaps as of the termination date. As the hedges related to these swaps qualified for hedge accounting, an offsetting adjustment was recorded to the carrying amount of the designated hedged debt, which remains outstanding, and this adjustment will be amortized to interest expense over the remaining term of the debt.

NOTE 7 — BORROWINGS

Total borrowings were as follows:


millions	October 29,		October 27,		January 26,
	2005		2004		2005
Short-term borrowings:
Unsecured commercial paper	$	152	$	—	$	—
Long-term debt, including current portion:
Convertible subordinated notes, net		—		40		43
Notes and debentures outstanding		3,047		44		52
Capital lease obligations		861		332		316

Total debt	$	4,060	$	416	$	411


Memo: Sears Canada debt	$	719	$	—	$	—

Debt Repurchase Authorization

In May 2005, the Finance Committee of the Board of Directors of the Company authorized the repurchase, subject to market conditions and other factors, of up to $500 million of the outstanding indebtedness of the Company and its subsidiaries in open market or privately negotiated transactions. The source of funds for the proposed purchases is expected to be the Company’s cash from operations or borrowings under the Company’s $4.0 billion, five-year credit agreement (the “Credit Agreement”). During the 13- and 39- weeks ended October 29, 2005, the Company’s subsidiary, Sears Roebuck Acceptance Corp. (“SRAC”), repurchased $36 million and $150 million of its outstanding notes, respectively, thereby reducing the unused balance of this authorization to $350 million.

Credit Agreement

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

and is secured by a first lien on domestic inventory, credit card accounts receivable and the proceeds thereof. Availability under the Credit Agreement is determined pursuant to a borrowing base formula, based on domestic inventory and credit card accounts receivable, subject to certain limitations. As of October 29, 2005, the Company had $592 million of letters of credit outstanding under the Credit Agreement with $3.4 billion of availability remaining under the Credit Agreement. There were no borrowings under the facility during the third quarter. The Credit Agreement does not contain provisions that would restrict borrowings or letter of credit issuances based on material adverse changes or credit ratings. The Company capitalized $19 million of debt issuance costs in connection with entering into the Credit Agreement. These costs are being amortized over the five-year life of the Credit Agreement.

Letter of Credit Agreement

The Company has an additional letter of credit agreement (the “LC Agreement”) with a commitment amount of up to $600 million. As of October 29, 2005, there were $305 million of letters of credit outstanding under the LC Agreement.

Under the terms of the LC Agreement, the Company has the ability to post cash, inventory or letters of credit, including letters of credit issued under the Credit Agreement, as collateral. However, the Credit Agreement prohibits the Company from using inventory as collateral under the LC Agreement. The cash collateral account is subject to a pledge and security agreement pursuant to which if the Company elects to post cash collateral, it must maintain cash in an amount equal to 100.5% of the face value of letters of credit outstanding. The Company had $306 million posted as collateral under the LC Agreement as of October 29, 2005, consisting of $150 million in the form of a letter of credit and $156 million in cash. The Company continues to classify the cash collateral as cash and cash equivalents due to its ability to substitute these letters of credit with letters of credit under the Credit Agreement, which does not require cash collateral, and its ability to provide letters of credit under the Credit Agreement as collateral. There are no provisions in the LC Agreement that would restrict issuances based on credit ratings, but issuances could be restricted under certain circumstances based on a material adverse change.

Cash Collateral

The Company posts cash collateral for certain self-insurance programs. The Company continues to classify the cash collateral as cash and cash equivalents in the accompanying condensed consolidated balance sheets due to the Company’s ability to convert the cash to letters of credit at any time at its discretion. As of October 29, 2005, $71 million of cash was posted as collateral for self-insurance programs.

Convertible Notes

On January 31, 2005, ESL Investments, Inc. (“ESL”) and its affiliates converted, in accordance with their terms, all of the outstanding 9% convertible subordinated notes of Kmart and six months of accrued interest into an aggregate of 6.3 million shares of Kmart common stock. In consideration of ESL’s conversion of the notes prior to maturity, ESL received a $3 million payment from Kmart. The cash payment was equivalent to the approximate discounted after-tax cost of the future interest payments that would have otherwise been paid by Kmart to ESL and its affiliates in the absence of the early conversion. In conjunction with the conversion, the Company recognized the remaining related unamortized debt discount of $17 million as interest expense.

Inter-company Loan

The Company has transferred certain domestic real estate assets to a wholly-owned consolidated subsidiary and segregated the assets into a trust owned by the consolidated subsidiary. The trust has issued mortgage-backed securities which are collateralized by these real estate assets. As of October 29, 2005, these debt

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

securities were entirely held by a wholly-owned consolidated subsidiary of the Company and the net book value of the securitized real estate was $1.1 billion.

NOTE 8 — BENEFIT PLANS

The following table summarizes the components of net periodic expense for the Company’s retirement plans:


	13 Weeks Ended						39 Weeks Ended
millions	October 29,			October 27,			October 29,			October 27,
	2005			2004			2005			2004
Components of net periodic expense:
Benefits earned during the period	$	23		$	—		$	52		$	—
Interest costs		87			38			239			115
Expected return on plan assets		(81	)		(35	)		(216	)		(104	)

Net periodic expense	$	29		$	3		$	75		$	11

Sears’ Benefit Plans

Expense associated with the Sears benefit plans is included in the condensed consolidated financial statements subsequent to the effective date of the Merger. Certain domestic full-time and part-time employees of Sears are eligible to participate in noncontributory defined benefit plans after meeting age and service requirements. Substantially all full-time Canadian employees as well as some part-time employees are eligible to participate in contributory defined benefit plans. Pension benefits are based on length of service, compensation and, in certain plans, social security or other benefits. Funding for the various plans is determined using various actuarial cost methods.

During the first quarter of fiscal 2005, Holdings announced that the Sears domestic pension plan would be frozen effective January 1, 2006. Domestic associates will earn no additional benefits after December 31, 2005. Benefits earned through December 31, 2005 will be paid out to eligible participants following retirement. The effect of this plan change, which is to reduce the projected benefit obligation of the Sears domestic pension plan by approximately $80 million, is recorded as a component of purchase accounting.

In connection with the decision to freeze the Sears domestic pension plan, Holdings revised the target allocation of the Sears domestic pension plan assets to approximately 42.5% fixed income, 42.5% equity, and 15% alternative investments that incorporate absolute return investment strategies. Previously, the plan asset allocation was approximately 70% equity and 30% fixed income. The Company annually reviews its long-term return rate assumption, which is currently 8%.

In addition to providing pension benefits, Sears provides domestic and Canadian employees and retirees certain medical benefits. Certain domestic Sears retirees are also provided life insurance benefits. The Company shares the cost of the retiree medical benefits with retirees based on years of service. Generally, the Company’s share of these benefit costs will be capped at Sears’ contribution calculated during the year of retirement. Sears’ postretirement benefit plans are not funded. The Company has the right to modify or terminate these plans.

During the third quarter of fiscal 2005, Holdings announced that the Company’s subsidization of retiree medical costs under the Sears domestic retiree medical plan will be eliminated January 1, 2006 for those Sears retirees under age 65 as of December 31, 2005. The effect of this plan change, which is to reduce the projected benefit obligation associated with the plan by approximately $174 million, is recorded as a component of purchase accounting.

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Contributions

Contributions were made to the Kmart and Sears domestic pension plans in the amount of $238 million and $0, respectively, for the 13-week period ended October 29, 2005 and $240 million and $33 million, respectively, for the 39-week period ended October 29, 2005. There are no minimum required pension contributions for the remainder of fiscal 2005 to either the Kmart or the Sears domestic pension plan.

NOTE 9 — EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:


	13 Weeks Ended				39 Weeks Ended
millions	October 29,		October 27,		October 29,		October 27,
	2005		2004		2005		2004
Average common shares outstanding		163.5		89.2		149.8		89.4
Dilutive effect of stock options		0.1		6.4		1.6		6.0
9% convertible subordinated notes		—		6.0		—		6.0


Diluted weighted average common shares		163.6		101.6		151.4		101.4

A reconciliation of net income available to common shareholders to net income available to common shareholders with assumed conversions is as follows:


	13 Weeks Ended				39 Weeks Ended
millions, except per share data	October 29,		October 27,		October 29,		October 27,
	2005		2004		2005		2004
Net income available to common shareholders	$	58	$	552	$	210	$	797
Interest and accretion of debt discount on 9% convertible notes, net of tax		—		2		—		7

Income available to common shareholders with assumed conversions	$	58	$	554	$	210	$	804


Earnings per share
Basic	$	0.35	$	6.19	$	1.40	$	8.91
Diluted	$	0.35	$	5.45	$	1.39	$	7.93

The 9% convertible subordinated notes and accrued interest were converted into 6.3 million shares of Kmart common stock on January 31, 2005.

Kmart’s outstanding treasury shares were retired and cancelled in connection with the Merger.

NOTE 10 — STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation using the fair value method in accordance with SFAS No. 123(R), “Accounting for Stock-Based Compensation”. The fair value of each stock option is estimated as of the date of grant using the Black-Scholes option-pricing model. Total stock-based compensation expense of approximately $11 million is expected to be recognized in 2005.

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Upon consummation of the Merger, 8,011 shares of restricted stock were granted to Aylwin B. Lewis, currently Chief Executive Officer and President of Holdings, at a grant price of $124.83 per share. The grant vests in installments over three years from the grant date, subject to satisfaction of certain performance criteria. The Company will recognize compensation expense of $1 million over the vesting period.

In addition, on March 28, 2005, Alan J. Lacy, Vice Chairman of Holdings, was granted 75,000 shares of restricted stock at a grant price of $131.11 per share. The grant vests in full on June 30, 2006. The Company will recognize compensation expense of $10 million over the vesting period. At the same time, Mr. Lacy was also granted a stock option to purchase 200,000 shares of common stock with an exercise price of $131.11 per share. The option vests in equal installments over four years, subject to acceleration in certain circumstances. The Company will recognize compensation expense of $11 million over the vesting period.

Upon the completion of the Merger, each option to purchase shares of Kmart common stock held by directors or executives of Kmart (whether vested or unvested) was converted into the right to purchase an equivalent number of shares of Holdings common stock at an exercise price per share equal to the exercise price per share of the option before the conversion. In addition, each restricted share of Kmart common stock was converted into a restricted share of Holdings’ common stock.

Upon adoption of the Merger Agreement by Sears stockholders, a pro rata portion of shares of Sears common stock owned by Sears employees that were subject to restrictions and that were granted at least six months prior to the adoption of the Merger Agreement became free of restrictions. As a result, the holders were able to make an election to receive shares of Holdings or cash with respect to such shares. The restricted shares of Sears stock that did not vest were each converted into 0.5 of a share of Holdings common stock and will continue to vest over their original vesting period. Approximately 250,000 shares of Holdings common stock resulted from this conversion. The Company remeasured these shares to fair value at $124.83 per share (as of the acquisition date) and will recognize compensation expense of $31 million over the remaining vesting period.

Options to acquire approximately 490,000 shares of Holdings common stock were outstanding as of October 29, 2005.

NOTE 11 — CLAIMS RESOLUTION AND BANKRUPTCY-RELATED SETTLEMENTS

Claims Resolution

On May 6, 2003, Kmart Corporation (the “Predecessor Company”) emerged from reorganization proceedings under Chapter 11 of the federal bankruptcy laws pursuant to the terms of a plan of reorganization. Kmart Corporation is presently an indirect, wholly-owned subsidiary of the Company.

The Company continues to make progress in the reconciliation and settlement of various classes of claims associated with the discharge of the Predecessor Company’s liabilities subject to compromise pursuant to the plan of reorganization. Since June 30, 2003, the first distribution date established in the plan of reorganization, approximately 25 million shares of the 31.9 million shares set aside for distribution have been distributed to holders of Class 5 claims and approximately $4 million in cash has been distributed to holders of Class 7 claims. Due to the significant volume of claims filed to-date, it is premature to estimate with any degree of accuracy the ultimate allowed amount of such claims for each class of claims under the plan of reorganization. Accordingly, the Company’s current distribution reserve for Class 5 claim settlements is 15 percent of the total shares expected to be distributed. Differences between amounts filed and the Company’s estimates are being investigated and will be resolved in connection with its claims resolution process. The claims reconciliation process may result in material adjustments to current estimates of allowable claims.

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

During the first quarter of fiscal 2005, the Company reduced the distribution reserve from 20 percent to 15 percent, resulting in the distribution of approximately 1.5 million additional shares to claimants who had previously received shares for allowed claims. In connection with this action, Kmart received an additional 66,889 shares in the first quarter as a result of bankruptcy-related settlements entered into prior to the April 1, 2005 distribution date in which the Company was assigned Class 5 claims.

The remaining shares in the distribution reserve will be issued to claimants on a pro-rata basis if, upon settlement of all claims, the ultimate amount allowed for Class 5 claims is consistent with the plan of reorganization. The next scheduled distribution under the plan of reorganization is expected to commence on or about January 1, 2006.

Bankruptcy-Related Settlements

The Company recognized recoveries of $1 million and $33 million for the 13- and 39-week periods ended October 29, 2005, respectively, related to vendors who had received cash payments for pre-petition obligations (critical vendor claims) or preference payments. In conjunction with these recoveries, the Company was assigned 7,302 and 216,965 shares of common stock (weighted average price of $124.35 and $119.15 per share) with an approximate value of $1 million and $26 million for the 13- and 39-week periods ended October 29, 2005, respectively. Of the 216,965 shares, 50,748 were cancelled on the effective date of the Merger.

NOTE 12 — SHAREHOLDERS’ EQUITY

The following table summarizes the changes in shareholders’ equity during the 39-week period ended October 29, 2005:

(millions)


Balance, beginning of year	$	4,469
Acquisition of Sears		6,491
Stock options exercised		100
Conversion of subordinated note		63
Income tax benefit on nonqualified stock options		49
Common shares repurchased		(434	)
Net income		210
Other comprehensive income		2
Other		(5	)

Balance, October 29, 2005	$	10,945

On March 25, 2005, ESL and its affiliates exercised an option to purchase approximately 6.5 million shares of Holdings common stock granted pursuant to an investment agreement dated January 24, 2003 between Kmart Corporation, ESL and Third Avenue Trust, on behalf of certain of its investment series (“Third Avenue”). In accordance with the investment agreement, Holdings issued shares of its common stock upon the receipt of $84 million. As a result of these transactions, ESL and its affiliates do not own any more options to purchase shares of Holdings pursuant to the investment agreement.

On April 26, 2005, Third Avenue Trust exercised options to purchase 140,000 shares of Holdings common stock for a purchase price of $2 million. Third Avenue acquired these options pursuant to an assignment and assumption agreement, dated May 5, 2003, by and between ESL and Third Avenue. All of the options assigned to Third Avenue under the assignment and assumption agreement were exercised as a result of this transaction.

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Directors during the third quarter of fiscal 2005, authorized the repurchase of up to an aggregate of $1.0 billion of the Company’s common shares. As of October 29, 2005, the Company had $566 million of remaining authorization under this program.

Comprehensive Income and Accumulated Other Comprehensive Loss

The following table shows the computation of comprehensive income:


	13 Weeks Ended					39 Weeks Ended
	October 29,			October 27,		October 29,			October 27,
millions	2005			2004		2005			2004
Net income	$	58		$	552	$	210		$	797

Other comprehensive (income)/loss:
Change in fair value of interest rate swaps		(3	)		—		(2	)		(1	)
Unrealized loss on foreign currency forwards		(30	)		—		(40	)		—
Foreign currency translation adjustments		48			—		44			—

Total accumulated other comprehensive (income)/loss		15			—		2			(1	)


Total comprehensive income	$	73		$	552	$	212		$	796

The following table displays the components of accumulated other comprehensive loss:


millions	October 29,			October 27,		January 26,
	2005			2004		2005
Cumulative unrealized derivative losses		(2	)		—		—
Unrealized loss on foreign currency forwards		4			—		—
Minimum pension liability, net of tax		(77	)				(77	)

Accumulated other comprehensive loss	$	(75	)	$	—	$	(77	)

NOTE 13 — INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the financial reporting and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion of or all of the deferred tax asset will not be realized.

During the first quarter of fiscal 2005, the Company recognized a reversal of approximately $1.1 billion of its pre-Merger deferred income tax valuation allowance as a result of the Merger and the combined tax attributes resulting from the Merger. Pursuant to SFAS No. 109, the recognition of this reversal is included in the Company’s purchase accounting adjustments as a reduction to goodwill attributable to the Merger. Given the Company’s current and forecasted levels of profitability, as well as its ability to realize the deferred tax assets through tax strategies if necessary, management believes that this portion of the deferred tax asset will more likely than not be realized.

In connection with the Merger, deferred tax assets of $284 million, with a corresponding valuation allowance, were recorded related to state tax benefits of Sears that are not expected to be realized. As a result, the consolidated valuation allowance as of October 29, 2005 is $460 million and relates to the uncertainty around the realization of certain state deferred tax assets. The Company will continue to assess the likelihood of

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

realization of these state deferred tax assets and will reduce the valuation allowance on such assets in the future if it becomes more likely than not that the net deferred tax assets will be utilized.

NOTE 14 — INVESTMENTS IN AFFILIATED COMPANIES

On March 2, 2004, Footstar, Inc. (“FTS”) and its direct and indirect subsidiaries, including the Meldisco subsidiaries of FTS, filed for Chapter 11 protection in the United States Bankruptcy Court for the Southern District of New York. FTS continues to operate its businesses and manage its properties as debtors-in-possession. Prior to FTS’s bankruptcy filing, Kmart was a party to a master agreement with FTS that provided FTS with a non-transferable, exclusive right and license to operate the footwear departments in Kmart stores. Pursuant to that agreement, subsidiaries of Meldisco, substantially all of which were 49% owned by Kmart and 51% owned by FTS, operated the footwear departments pursuant to license agreements between those subsidiaries and Kmart.

In August 2004, FTS filed a motion with the bankruptcy court to assume the master agreement and the license agreements. Kmart objected to that motion and filed a separate motion to terminate the master agreement and the license agreements. On July 2, 2005, FTS and Kmart entered into a comprehensive settlement agreement that resolved all outstanding disputes between Kmart and FTS. On August 25, 2005, the bankruptcy court entered an order approving the settlement agreement, and, consistent with the terms of the settlement agreement, permitting FTS and Kmart to amend and FTS to assume the master agreement. Among other things, the settlement (i) required FTS to pay Kmart $45 million to cure its monetary defaults under the master agreement, (ii) provides that the master agreement will terminate at the end of 2008 rather than in 2012, (iii) eliminated Kmart’s equity interests in the Meldisco subsidiaries effective as of January 2, 2005 in exchange for payments to Kmart based on a set percentage of gross sales, and (iv) permits Kmart to require FTS to vacate up to 550 stores that close or convert to the Sears Essentials format, provided that Kmart buys FTS’s inventory at each converting or closing store at book value. The settlement also permits Kmart to require FTS to vacate additional closing or converting stores in exchange for a per-store fee.

On August 26, 2005, FTS made the $45 million cure payment to Kmart. Holdings recorded a gain of $21 million, classified within other income, related to the settlement agreement in the third quarter of 2005. The cure payment was a final settlement of all of Kmart’s claims in respect of its interest in the Meldisco businesses through and including August 25, 2005.

In addition, during the third quarter of fiscal 2005 Kmart received payments totaling approximately $15 million as additional license fees earned from January 2, 2005 to August 27, 2005. This amount has been recognized as additional merchandise sales and service revenue in the third quarter of fiscal 2005.

FTS has filed a plan of reorganization with the bankruptcy court. Kmart’s results with respect to the amended footwear master agreement may be affected by whether (i) FTS obtains bankruptcy court approval of its plan of reorganization and successfully emerges from bankruptcy and (ii) FTS is able to successfully manage its business in the future.

As of October 29, 2005, ESL and its affiliates owned 9.9% of the common stock of FTS.

NOTE 15 — REAL ESTATE TRANSACTIONS

During fiscal 2004, the Company entered into multiple agreements with Home Depot U.S.A., Inc. (a subsidiary of The Home Depot, Inc.) (“Home Depot”) to sell four properties and assign 14 leased properties for an

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

aggregate purchase price of $271 million. The gain on sales of assets for the 13 and 39-week periods ended October 27, 2004 include $198 million and $241 million, respectively, attributable to these agreements.

Also during fiscal 2004, Kmart agreed to sell four owned properties, assign 45 leased properties and lease one owned store to Sears for a total purchase price of approximately $576 million. Included in the gain on sales of assets for the 13 and 39-week periods ended October 27, 2004 is a gain of $599 million related to this agreement.

The Company also sold certain other real and personal property assets, resulting in net gains of $15 million and $25 million for the 13 and 39-weeks ended October 29, 2005, respectively, and $10 million and $71 million for the 13 and 39-weeks ended October 27, 2004, respectively. Included within this gain for the 39-week period ended October 27, 2004 was $18 million related to the sale of the Company’s Trinidad subsidiary and its associated property, $12 million related to the sale of corporate airplanes and $41 million from sales of other real and personal property.

During the 39-weeks ended October 29, 2005 and October 27, 2004, the Company purchased 19 and 28 previously leased operating properties for $98 million and $103 million, respectively. In the normal course of business, the Company considers opportunities to purchase leased operating properties, as well as offers to sell owned, or assign leased, operating and non-operating properties. These transactions may, individually or in the aggregate, result in material proceeds or outlays of cash. In addition, the Company reviews leases that will expire in the short-term in order to determine the appropriate action to take with respect to them.

NOTE 16 — RELATED PARTY DISCLOSURE

The Company’s Board of Directors has delegated authority to direct investment of the Company’s surplus cash to Edward S. Lampert, subject to various limitations that have been or may be from time to time adopted by the Board of Directors and/or the Finance Committee of the Board of Directors. Mr. Lampert is Chairman of the Company’s Board of Directors and is the Chairman and Chief Executive Officer of ESL. Neither Mr. Lampert nor ESL will receive compensation for any such investment activities undertaken on behalf of the Company. ESL beneficially owned approximately 40% of the Company’s outstanding common stock as of October 29, 2005.

Further, to clarify the expectations that the Board of Directors has with respect to the investment of the Company’s surplus cash, the Board has renounced, in accordance with Delaware law, any interest or expectancy of the Company associated with any investment opportunities in securities that may come to the attention of Mr. Lampert or any employee, officer, director or advisor to ESL and its affiliated investment entities who also serves as an officer or director of the Company (each, a “Covered Party”) other than (a) investment opportunities that come to such Covered Party’s attention directly and exclusively in such Covered Party’s capacity as a director, officer or employee of the Company, (b) control investments in companies in the mass merchandising, retailing, commercial appliance distribution, product protection agreements, residential and commercial product installation and repair services and automotive repair and maintenance industries and (c) investment opportunities in companies or assets with a significant role in the Company’s retailing business, including investment in real estate currently leased by the Company or in suppliers for which the Company is a substantial customer representing over 10% of such companies’ revenues, but excluding pre-existing investments of ESL.

Holdings employs certain employees of ESL. William C. Crowley is a director and the Executive Vice President and Chief Financial and Administrative Officer of the Company while continuing his role as President and Chief Operating Officer of ESL. The Vice President of Business Development and the Senior Vice President of Real Estate for the Company are also employed by ESL.

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

NOTE 17 — FINANCIAL GUARANTEES

The Company issues various types of guarantees in the normal course of business. The Company had the following guarantees outstanding as of October 29, 2005:


millions
	Bank		SRAC
	Issued		Issued		Other		Total
Standby letters of credit	$	839	$	133	$	—	$	972
Commercial letters of credit		145		215		—		360
Secondary lease obligations and performance guarantee		—		—		130		130

The secondary lease obligations relate to certain store leases of previously divested Sears businesses. The Company remains secondarily liable if the primary obligor defaults. As of October 29, 2005, the Company had a $19 million liability recorded in other liabilities, which represents the Company’s current estimate of potential obligations related to these leases. The performance guarantee relates to certain municipal bonds issued in connection with the Company’s headquarters building. This guarantee expires in 2007.

NOTE 18 — SUMMARY OF SEGMENT DATA

Holdings is continuing the process of integrating Kmart and Sears. To date, for purposes of reviewing results of operations and making asset-allocation decisions, senior management has continued to utilize principally the reporting structures which existed independently for Sears and Kmart prior to the Merger. As a result, the Company currently has three reportable segments: Kmart, Sears Domestic and Sears Canada, compared to one segment in the prior year. The accompanying summary of segment data for the 39-week period ended October 29, 2005 includes the results of operations of Sears subsequent to March 24, 2005, the date of the Merger. Sears Canada’s results are reported to Holdings on a one-month lag. Therefore, the results of operations for the 13-week period ended October 29, 2005 include operating results for Sears Canada for the period from July 3, 2005 to October 1, 2005. For the 39-week period ended October 29, 2005, the results of operations include operating results for Sears Canada from March 25, 2005 to October 1, 2005.


	For the 13 Weeks Ended
												October 27,
millions	October 29, 2005											2004
									Sears			Sears
	Kmart			Sears					Holdings			Holdings
				Domestic		Canada
Merchandise sales and services	$	4,172		$	6,803	$	1,143		$	12,118		$	4,426
Credit and financial products revenues		—			—		84			84			—

Total revenues		4,172			6,803		1,227			12,202			4,426

Costs and expenses
Cost of sales, buying and occupancy		3,145			4,805		833			8,783			3,324
Selling and administrative		942			1,716		314			2,972			994
Depreciation and amortization		13			214		36			263			6
Provision for uncollectible accounts		—			—		21			21			—
Gain on sales of assets		(17	)		—		2			(15	)		(807	)
Restructuring charges		6			—		53			59			—

Total costs and expenses		4,089			6,735		1,259			12,083			3,517

Operating income (loss)	$	83		$	68	$	(32	)	$	119		$	909


Total assets	$	7,745		$	18,654	$	4,341		$	30,740		$	7,665

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)


	For the 39 Weeks Ended
												October 27,
millions	October 29, 2005											2004
									Sears			Sears
	Kmart			Sears					Holdings			Holdings
				Domestic		Canada
Merchandise sales and services	$	13,354		$	17,141	$	2,373		$	32,868		$	13,893
Credit and financial products revenues		—			—		171			171			—

Total revenues		13,354			17,141		2,544			33,039			13,893

Costs and expenses
Cost of sales, buying and occupancy		10,164			12,112		1,733			24,009			10,520
Selling and administrative		2,840			4,175		654			7,669			2,921
Depreciation and amortization		33			541		76			650			14
Provision for uncollectible accounts		—			—		38			38			—
Gain on sales of assets		(25	)		—		—			(25	)		(911	)
Restructuring charges		51			—		53			104			—


Total costs and expenses		13,063			16,828		2,554			32,445			12,544

Operating income (loss)	$	291		$	313	$	(10	)	$	594		$	1,349


Total assets	$	7,745		$	18,654	$	4,341		$	30,740		$	7,665

NOTE 19 — LEGAL PROCEEDINGS

Pending against Sears and certain of its officers and directors are a number of lawsuits, described below, that relate to Sears’ credit card business and public statements about it. The Company believes that all of these claims lack merit and is defending against them vigorously.

On and after October 18, 2002, several actions were filed in the United States District Court for the Northern District of Illinois against Sears and certain current and former officers alleging that certain public announcements by Sears concerning its credit card business violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Court has consolidated the actions and certified the consolidated action as a class action. Discovery is underway. The trial is scheduled to begin in September 2006.

On and after November 15, 2002, several actions were filed in the United States District Court for the Northern District of Illinois against Sears, certain officers and directors, and alleged fiduciaries of Sears’ 401(k) Savings Plan (the “Plan”), seeking damages and equitable relief under the Employee Retirement Income Security Act of 1974 (“ERISA”). The plaintiffs purport to represent participants in the Plan, and allege breaches of fiduciary duties under ERISA in connection with the Plan’s investment in Sears’ common shares and alleged communications made to Plan participants regarding Sears’ financial condition. The Court has consolidated these actions and certified the consolidated action as a class action. Discovery is underway. No trial date has been set.

On October 23, 2002, a purported derivative suit was filed in the Supreme Court of the State of New York (the “New York Court”) against Sears (as a nominal defendant) and certain current and former directors seeking damages on behalf of Sears. The complaint purports to allege a breach of fiduciary duty by the directors with respect to Sears’ management of its credit business. Two similar suits were subsequently filed in the Circuit Court of Cook County, Illinois (the “Illinois State Court”), and a third was filed in the United States District Court for the Northern District of Illinois. The New York Court derivative suit was dismissed on June 21, 2004 and the plaintiff has appealed. The two Illinois State Court derivative suits were dismissed on September 30, 2004. The order of dismissal became final on December 1, 2004, and the

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

		time to appeal has expired. The Illinois federal court suit has been stayed pending resolution of the New York Court derivative action.

§		On June 17, 2003, an action was filed in the Northern District of Illinois against Sears and certain officers, purportedly on behalf of a class of all persons who, between June 21, 2002 and October 17, 2002, purchased the 7% notes that SRAC issued on June 21, 2002. An amended complaint was filed, naming as additional defendants certain former officers, SRAC and several investment banking firms who acted as underwriters for SRAC’s March 18, May 21 and June 21, 2002 notes offerings. The amended complaint alleges that the defendants made misrepresentations or omissions concerning its credit business during the class period and in the registration statements and prospectuses relating to the offerings. The amended complaint alleges that these misrepresentations and omissions violated Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder, and Sections 11, 12 and 15 of the Securities Act of 1933 and purports to be brought on behalf of a class of all persons who purchased any security of SRAC between October 24, 2001 and October 17, 2002, inclusive. The defendants filed motions to dismiss the action. On September 24, 2004, the court granted these motions in part, and denied them in part. The court dismissed the claims related to the March 18 and May 21, 2002 note offerings because the plaintiff did not purchase notes in those offerings. The court dismissed the Section 10(b) and Rule 10b-5 claims against several of the individual defendants because the plaintiff failed to adequately plead such claims. The court sustained the remaining claims. By leave of court, the plaintiffs filed a second amended complaint on November 15, 2004. Defendants (other than one of the underwriter defendants) filed motions to partially dismiss the second amended complaint on January 10, 2005. The defendant that did not move to partially dismiss filed an answer to the second amended complaint on January 28, 2005, denying all liability. On September 14, 2005, the court granted the pending motions to dismiss in part, and denied them in part. The court dismissed the Section 11 claim with respect to SRAC’s May 21, 2002 notes on the ground that the plaintiffs lacked standing, and the Section 12 claims with respect to SRAC’s March 18, 2002 notes and May 21, 2002 notes on the ground that the plaintiffs could not allege damages. The court dismissed the Section 15 claim on the ground that the plaintiffs had failed to allege a predicate violation of the Securities Act of 1933 on the part of SRAC. The court dismissed the Section 10(b) and Rule 10b-5 claims as to some, but not all, of the individual defendants. The court sustained the remaining claims. By leave of court, the plaintiffs filed a third amended complaint on October 28, 2005. The non-underwriter defendants filed a motion to partially dismiss the third amended complaint on November 15, 2005.

Following the announcement of the Merger on November 17, 2004, several actions have been filed relating to the transaction. These lawsuits are in their preliminary stages, and defendants have not yet been required to respond to certain of the complaints. The Company believes that all of these claims lack merit and intends to defend against them vigorously.

Three actions have been filed in the Circuit Court of Cook County, Illinois. These actions assert claims on behalf of a purported class of Sears’ stockholders against Sears and certain of its officers and directors, together with Kmart, Edward S. Lampert, William C. Crowley and other affiliated entities, alleging breach of fiduciary duty in connection with the merger. The plaintiffs allege that the merger favors interested defendants by awarding them disproportionate benefits, and that the defendants failed to take appropriate steps to maximize the value of a merger transaction for Sears’ stockholders. The actions have been consolidated, and an amended complaint was filed in early January 2005. The amended complaint asserts similar breach-of-fiduciary duty claims, as well as alleging that defendants have made insufficient and misleading disclosures in connection with the mergers, and seeks injunctive relief. The plaintiffs have moved for expedited discovery. On February 1, 2005, the court granted the defendants’ motion to stay or dismiss these actions in favor of then-pending parallel litigation in the New York Supreme Court. Plaintiffs appealed the stay order to the Appellate Court of Illinois-First District. On October 28, 2005, following the dismissal with prejudice of the New York actions and the New York plaintiffs’ failure to appeal, the Appellate Court of Illinois dismissed the appeal as moot. The cases are now pending in the Circuit Court, and the defendants intend to renew their motion to dismiss.

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Two actions were filed in the Supreme Court of the State of New York, New York County, asserting substantially similar claims against Sears and certain of its officers and directors. The parties agreed to consolidate these two actions. Pending consolidation, the defendants moved to dismiss the complaint in both actions for lack of standing and failure to state a cause of action. On February 15, 2005, the Court ordered that the two cases be consolidated as a single action. On February 16, 2005, the plaintiffs filed a superceding consolidated amended class action complaint. The amended complaint asserts claims on behalf of a purported class of Sears’ stockholders against Sears and certain of its officers and directors for breach of fiduciary duty in connection with the merger on the grounds that defendants allegedly failed to take proper steps to maximize the value of a merger transaction for Sears’ stockholders. Additionally, the plaintiffs claim that the defendants made insufficient and misleading disclosures in connection with the mergers. The amended complaint also names Kmart, Edward S. Lampert and ESL, Inc. as defendants on the grounds that they aided and abetted the alleged breaches of fiduciary duty. The amended complaint seeks provisional and permanent injunctive relief, as well as damages. On March 24, 2005, the Court denied plaintiffs’ motions for expedited discovery and a preliminary injunction against the closing of the mergers. On July 29, 2005, the Court granted all defendants’ motions to dismiss the action with prejudice. The time to appeal has expired, and plaintiffs have not filed an appeal.

One action has been filed in the United States District Court for the Northern District of Illinois. This action asserts claims under the federal securities laws on behalf of a purported class of Sears’ stockholders against Sears and Alan J. Lacy, for allegedly failing to make timely disclosure of merger discussions with Kmart during the period November 8 through 16, 2004, and seeks damages. The court appointed a lead plaintiff and lead counsel, and an amended complaint was filed on March 11, 2005. The amended complaint, names Edward S. Lampert and ESL Partners, L.P., as additional defendants, and purports to assert claims on behalf of sellers of Sears stock during the period September 9 through November 16, 2004. All defendants have moved to dismiss, and briefing on the motions was completed in early July 2005.

Effective May 11, 2005, Sears terminated for cause its Master Services Agreement (the “Agreement”) with Computer Sciences Corporation (“CSC”). CSC has been providing information technology infrastructure support services, including desktops, servers, and systems to support Sears-related websites, voice and data networks and decision support technology to Sears and its subsidiaries under the 10-year Agreement entered into in June 2004. CSC is obligated to continue providing these services for an extended period following termination of the Agreement. CSC disputes Sears’ assertion that grounds for termination for cause existed and claims that, as a result of terminating this Agreement, Sears is liable to CSC for damages.

CSC had filed a lawsuit in the United States District Court for the Northern District of Illinois (the “District Court”) on March 18, 2005 seeking a declaratory judgment that CSC was not in material breach of the Agreement and an injunction to prevent Sears from terminating the Agreement for cause. On April 14, 2005, the District Court denied CSC’s motion for a preliminary injunction and granted Sears’ motion to compel arbitration. On April 22, 2005 the District Court denied CSC’s motion for reconsideration of the District Court’s April 14^th ruling, and CSC appealed the District Court’s ruling to the United States Court of Appeals for the Seventh Circuit. That appeal remains pending. On April 14, 2005, CSC filed an emergency claim with the American Arbitration Association (“AAA”), seeking to enjoin Sears from terminating the Agreement for cause. The AAA denied CSC’s request for emergency relief on April 18, 2005. In compliance with the District Court’s order compelling arbitration, the parties began selecting an arbitration panel. While arbitrator selection was in progress, the parties agreed to suspend arbitration and the appeal while they voluntarily mediate their disputes. Mediation and settlement efforts are ongoing.

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

and failure to provide accurate information regarding the Predecessor Company’s financial condition. In July 2002, the plaintiffs filed proofs of claim with the bankruptcy court in an aggregate amount of $180 million. In July 2005, tentative agreement was reached to settle this action. The settlement is subject to final court approval. Kmart is not a defendant in this action. The settlement is expected to be covered by insurance, except for $50,000 that Kmart expects to contribute as part of the settlement. Once the settlement is approved, Kmart will move to have the proofs of claim filed expunged.

In November 2003, the Creditor Trust created pursuant to the Predecessor Company’s plan of reorganization (the “Creditor Trust”) filed suit in the Oakland County (Michigan) Circuit Court against six former executives of the Predecessor Company (the “ Officer Defendants”) and PricewaterhouseCoopers LLP, the Predecessor Company’s independent auditor. The allegations against the Officer Defendants include violations of their fiduciary duty and breach of contract related to their employment agreements with the Predecessor Company. Kmart is not a defendant in this action. The claims against the Officer Defendants were ordered to arbitration by the Oakland County Circuit Court based on the terms of the employment agreements. In July 2005, in the first of six scheduled arbitrations involving the Officer Defendants, the arbitration panel found in favor of the Predecessor Company’s former chief executive officer, Charles Conaway, on all of the Creditor Trust’s claims against him.

The Creditor Trust has also filed complaints in the United States Bankruptcy Court for the Northern District of Illinois (the “Bankruptcy Court”) against four of the Predecessor Company’s former executives to recover amounts aggregating approximately $2 million paid to them as retention loans. The former executives filed counterclaims/third party complaints against the Creditor Trust and Kmart requesting that the Bankruptcy Court set-off whatever contractual severance payments they were entitled to receive against the amounts of the retention loans. Kmart filed motions to dismiss the counterclaims, which the Bankruptcy Court has now granted.

In Capital Factors v. Kmart Corporation, the United States District Court for the Northern District of Illinois ruled that the Bankruptcy Court did not have the authority to authorize the payment of pre-petition claims of certain trade vendors by the Company. An appeal of the ruling and subsequent motions for rehearing were denied. In order to satisfy its fiduciary responsibility to pursue claims against the critical vendors during the pendency of the appeal, in January 2004 the Company filed suit against a total of 1,189 vendors that received these payments seeking to recover in excess of $174 million paid to the critical vendors. To date, Kmart has settled approximately 750 critical vendor claims for a total recovery the Company values at approximately $61 million.

Kmart is a defendant in a pending pre-petition nationwide class action relating to proper access to facilities for the disabled under the Americans with Disabilities Act. The class action is pending in the United States District Court in Denver, Colorado. On July 14, 2005, the court certified a nationwide class of Kmart’s approximately 1,500 stores. On August 22, 2005, the 10^th Circuit Court of Appeals granted Kmart leave to file an interlocutory appeal challenging class certification, which Kmart has done. At the same time, the parties are engaged in settlement discussions. The Company is not presently able to determine the outcome of this case.

As previously reported in Kmart’s Annual Report on Form 10-K for its fiscal year ended January 26, 2005, the staff of the SEC has been investigating, and the U.S. Attorney for the Eastern District of Michigan has undertaken an inquiry into, the manner in which Kmart recorded vendor allowances before a change in accounting principles at the end of fiscal 2001 and the disclosure of certain events bearing on the Predecessor Company’s liquidity in the fall of 2001. Kmart has cooperated with the SEC and the U.S. Attorney’s office with respect to these matters.

SEARS HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

officer alleging that they misled investors about the Predecessor Company’s liquidity and related matters in the months preceding its bankruptcy in violation of federal securities law. The complaint seeks permanent injunctions, disgorgement with interest, civil penalties and officer and director bars. Kmart is not named as a defendant in the action. In its press release announcing the filing of the complaint, the SEC stated that its Kmart investigation is continuing.

The Creditor Trust was determined to be the preferred available mechanism for resolving any legal claims the Company might have based on information from these investigations. The trustee of the Creditor Trust is charged with responsibility for determining which claims to pursue and, thereafter, litigating the claims. As discussed above, the Creditor Trust has commenced litigation against former officers of the Predecessor Company based on information from these investigations.

The Company is subject to various other legal and governmental proceedings, many involving litigation incidental to the businesses. Some matters contain class action allegations, environmental and asbestos exposure allegations and other consumer-based claims that involve compensatory, punitive or treble damage claims in very large amounts as well as other types of relief. The consequences of these matters are not presently determinable but, in the opinion of management of the Company after consulting with legal counsel, and taking into account insurance and reserves, the ultimate liability is not expected to have a material adverse effect on annual results of operations, financial position, liquidity or capital resources of the Company. Additional information regarding legal proceedings may be found in Kmart’s Annual Report on Form 10-K for its fiscal year ended January 26, 2005.

NOTE 20 — SUBSEQUENT EVENTS

Orchard Supply Hardware

On November 23, 2005, the Company closed the sale of 19.9% of the voting stock of Orchard Supply Hardware Stores Corporation (“OSH”) to the private equity fund of Ares Management LLC (“Ares”). Prior to the sale, OSH had been a wholly-owned subsidiary of the Company. The private equity fund paid $59 million in cash for the 19.9% equity interest and a three-year option to purchase, for $127 million, additional shares of OSH that currently represent 30.2% of OSH’s outstanding voting stock. Also, OSH subsidiaries entered into arrangements for $250 million in financing, consisting of a $130 million senior secured revolving credit facility and a $120 million commercial mortgage-backed loan. Approximately $56 million of the revolving credit facility has been drawn down at closing. After the closing of the transaction, the Company has an 80.1% interest in OSH that would be reduced to approximately 19.9% should the private equity fund of Ares exercise its option.

Sears Canada

On December 5, 2005 Holdings announced its intention to acquire the 49.5 million outstanding shares of common stock of Sears Canada which it does not currently own. To acquire that 46% equity interest, Holdings plans to offer C$16.86 (Canadian dollars) per share for an aggregate purchase price of C$835 million or $720 million in U.S. dollars. Holdings also announced that it entered into an agreement with the largest shareholder of Sears Canada (other than Holdings) pursuant to which the investor, Natcan Investment Management, Inc., has agreed to tender all common shares owned or controlled by it (approximately 9.1% of the outstanding common shares of Sears Canada) into Sears Holdings’ offer for the same consideration. If the transaction is consummated, Sears Canada would become a wholly-owned subsidiary of Holdings.

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with Part II, Item 7 of Kmart Holding Corporation’s Annual Report on Form 10-K for the year ended January 26, 2005. The information contained herein is not a comprehensive discussion and analysis of the financial condition and results of operations of the Company, but rather an update of the previous disclosures.

OVERVIEW AND CONSOLIDATED OPERATIONS

Overview

Sears Holdings Corporation (“Holdings” or the “Company”) was formed for the purpose of consummating the business combination of Kmart Holding Corporation (“Kmart”) and Sears, Roebuck and Co. (“Sears”), which was completed on March 24, 2005 (the “Merger”) pursuant to the Agreement and Plan of Merger, dated as of November 16, 2004 (the “Merger Agreement”). Upon consummation of the Merger, Kmart and Sears became wholly-owned subsidiaries of the Company. The Company is a broadline retailer with approximately 2,300 full-line and 1,200 specialty retail stores in the United States operating through Kmart and Sears and 370 full-line and specialty stores in Canada operating through Sears Canada Inc. (“Sears Canada”), a 54%-owned subsidiary.

Effective March 23, 2005, the Company changed its fiscal year from the last Wednesday in January to the Saturday closest to January 31^st. As the change in fiscal year end reflects a change of only three days, the historical financial statements have not been recast to reflect this change. Sears Canada’s fiscal year end is the Saturday closest to December 31. The results of operations for Sears Canada are reported to Holdings on a one-month lag. Therefore, the condensed consolidated statement of operations for the 13-week period ended October 29, 2005 includes operating results for Sears Canada from July 3, 2005 through October 1, 2005. For the 39-week period ended October 29, 2005, the condensed consolidated statements of operations and cash flows include operating results for Sears Canada from March 25, 2005 through October 1, 2005.

In aggregate, 62.2 million shares of Holdings common stock were issued to Sears shareholders at a value of approximately $6.5 billion (based on the average closing price of $104.33 of Kmart’s common stock during the period from November 15, 2004 through November 19, 2004, two business days before and after the date the Merger was announced). In addition, approximately $5.4 billion in cash was paid in consideration for (i) all outstanding common stock of Sears, based upon the proration provisions of the Merger Agreement, and (ii) all outstanding stock options of Sears. Including transaction costs of $18 million, the total consideration paid was approximately $11.9 billion.

The Merger created a new retail company with significant earnings and cash flow opportunities as a result of the scale of the combined company. Through the leading proprietary brands owned by Sears and those exclusively offered by Kmart, Holdings believes that the Company’s retail operations will be able to better distinguish themselves from competitors.

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

The combination also expands the points of distribution for Sears and Kmart products in key markets, especially in Kmart’s urban and high-density suburban locations where the Company believes itself to have a competitive advantage relative to other retailers. The advantages include Kmart’s and Sears’ name recognition in these locations. In addition, the Merger will accelerate Sears’ strategy for stand-alone stores located outside of malls, with Kmart’s real estate adding important urban and high–density suburban locations, resulting in more rapid and lower-cost store base growth than Sears would have been able to accomplish on its own.

In order to realize the opportunities provided by the Merger, the Company is working to become more customer-focused while taking the necessary actions to improve the profitability of its business model.

Building long-term customer relationships

Holdings interacts with customers in a variety of ways through its various retail formats, as well as directly in customers’ homes. The Company’s goal is to make its products, brands and services more responsive to the needs of its customers and to build long-term relationships with those customers. In order to achieve this goal, the Company is making a number of changes to its store formats and associated product offerings and closely monitoring customer response to these changes. The Company’s strategies and plans will continue to evolve as it incorporates learnings from customer response to these changes. Specific initiatives to date include:

launching Sears Essentials, a new retail format. This mid-size store format offers customers the “best of both”, meeting the everyday needs of customers as well as offering more-destination-focused purchase categories. As of October 29, 2005, Holdings had opened 50 Sears Essentials stores, which have achieved varying degrees of success. The Company continues to evaluate alternatives that would allow it to capture the potential of providing Sears brands and, particularly appliances, to our customers from our existing Kmart stores. While the Company continues to believe that Sears Essentials offers an attractive means to provide customers with these products, the Company has also found success with selling Sears branded products and appliances in Kmarts. As a result, the Company has reduced the number of stores planned for conversion to the Sears Essentials format in 2006. The Company will continue to assess the pace and planned location of Sears Essentials in future years and of offering Sears products in existing or remodeled Kmart stores based on customer response and the capital required;

introducing select Sears private label branded products, including Kenmore and Craftsman products, into certain Kmart stores, enabling the Company to better differentiate itself from other mass market retailers;

remodeling Kmart stores, where the expected financial returns merit the required capital outlay, to include home appliances. The Company intends to continue its roll-out of home appliances, including Sears Kenmore products, into both Sears Essentials and Kmart locations over the next several years as a means of expanding its points of distribution in response to competitor outlet growth. As of October 29, 2005, a total of 88 Kmart stores offered broad assortments of home appliances;

completing a national roll-out of Sears credit card payment acceptance to all Kmart locations and offering Kmart customers the opportunity to apply for Sears credit cards and related financial services at Kmart locations; and

testing multiple new initiatives at select locations, including the addition of certain Sears customer services to Kmart stores including Sears Auto Centers, licensed businesses such as hearing and optical centers, and auto and truck rental services.

Improving Profitability

The Company is committed to improving its profitability through increasing the efficiency and effectiveness of its operations. Actions to date include:

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

initiating and continuing efforts to improve gross margins, particularly at Sears, by reducing reliance on certain promotional events. The impact of these efforts on Sears Domestic’s operating results is discussed in the Results of Operations section below;

integrating the home office functions of Kmart and Sears to reduce the overall cost structure of Holdings. As of October 29, 2005, Holdings has eliminated approximately 1,500 positions between Sears’ and Kmart’s combined home office functions. In addition, a majority of the 523 Kmart associates who were offered and accepted relocations opportunities have been relocated as of October 29, 2005;

improving efficiencies and cost effectiveness of the supply chain, including the identification of transportation synergies and the consolidation of international buying offices;

lowering the fixed costs associated with marketing expenditures by reducing the number of creative agencies utilized by Sears;

optimizing Kmart and Sears terms with vendors by sourcing goods on a combined basis, where possible, to obtain better costs, vendor support and terms, as well as leveraging the use of common suppliers where practical; and

implementing a rigorous process to ensure that the Company’s capital is expended on only those efforts that have higher potential for creating long-term value for shareholders.

Results of Operations

The condensed consolidated statements of operations for the 13- and 39-week periods ended October 29, 2005 are not comparable to the prior year periods because the prior year periods do not include Sears’ results. Additionally, the condensed consolidated statement of operations for the 39-week period ended October 29, 2005 is not representative of the Company’s operations as it only includes Sears’ results of operations from March 25, 2005 forward. Therefore, the Company believes that an understanding of its reported results, trends and on-going performance is not complete without presenting results on a pro forma basis.

The Holdings consolidated results of operations on both a reported and pro forma basis are summarized below. The pro forma adjustments are described on page 40. References to comparable store sales amounts within the following discussion 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 format changes.

The unaudited pro forma financial information in the tables below summarizes the combined results of operations of Kmart and Sears for the 13-week period ended October 27, 2004 and the 39-week periods ended October 29, 2005 and October 27, 2004 as though the Merger had occurred as of the beginning of fiscal 2004. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the Merger had taken place at the beginning of each period, or that may result in the future. In addition, the following unaudited pro forma information has not been adjusted to reflect any operating efficiencies that may be realized as a result of the Merger.

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004


	Reported						Pro forma
	13 Weeks Ended						13 Weeks Ended
	October 29,			October 27,			October 29,			October 27,
millions, except per common share data	2005			2004			2005			2004
Merchandise sales and services	$	12,118		$	4,426		$	12,118		$	12,753
Credit and financial products revenues		84			—			84			85

Total revenues	$	12,202		$	4,426		$	12,202		$	12,838


Cost of sales, buying and occupancy		8,783			3,324			8,783			9,336
Gross margin rate		27.5	%		24.9	%		27.5	%		26.8	%

Selling and administrative		2,972			994			2,972			3,090
Selling and administrative expense as a percentage of total revenues		24.4	%		22.5	%		24.4	%		24.1	%

Depreciation and amortization		263			6			263			283
Provision for uncollectible accounts		21			—			21			16
Gain on sales of assets ⁽¹⁾		(15	)		(807	)		(15	)		(208	)
Restructuring charges ⁽¹⁾		59			—			59			—

Total costs and expenses		12,083			3,517			12,083			12,517

Operating income		119			909			119			321
Interest expense, net		(70	)		(25	)		(70	)		(84	)
Bankruptcy-related recoveries		1			1			1			1
Other income		22			1			22			8


Income before income taxes, minority interest and cumulative effect of change in accounting principle		72			886			72			246
Income taxes		28			334			28			89
Minority interest		(14	)		—			(14	)		7


Income before cumulative effect of change in accounting principle		58			552			58			150
Cumulative effect of change in accounting principle, net of tax		—			—			—			—

NET INCOME	$	58		$	552		$	58		$	150


Diluted earnings per share before cumulative effect of change in accounting principle	$	0.35		$	5.45		$	0.35		$	0.93
Diluted earnings per share ⁽¹⁾	$	0.35		$	5.45		$	0.35		$	0.93


⁽¹⁾ Diluted earnings per share impact of certain significant items
Gain on sale of assets	$	0.06		$	4.95		$	0.06		$	0.81
Restructuring charges		(0.13	)		—			(0.13	)		—

Total	$	(0.07	)	$	4.95		$	(0.07	)	$	0.81

These items include Kmart’s store sale and lease assignment transactions with The Home Depot, Inc. and Sears in the as reported 2004 period and the transaction with The Home Depot, Inc. in the pro forma 2004 period as described in Note 15 to the condensed consolidated financial statements and charges described in Note 3 to the condensed consolidated financial statements associated with Kmart and Sears Canada restructuring initiatives implemented during the fiscal 2005 periods. Items like these periodically affect the Company’s results; however, the amounts of these types of items may vary significantly from period to period and have a disproportionate effect on the periods presented, which affects the comparability of the Company’s financial performance. Management considers the total impact of these items, along with reported results, when it reviews and evaluates the Company’s financial performance.

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004


	Reported						Pro forma
	39 Weeks Ended						39 Weeks Ended
	October 29,			October 27,			October 29,			October 27,
millions, except per common share data	2005			2004			2005			2004
Merchandise sales and services	$	32,868		$	13,893		$	37,919		$	38,869
Credit and financial products revenues		171			—			257			253

Total revenues	$	33,039		$	13,893		$	38,176		$	39,122


Cost of sales, buying and occupancy		24,009			10,520			27,681			28,721
Gross margin rate		27.0	%		24.3	%		27.0	%		26.1	%

Selling and administrative		7,669			2,921			8,994			9,076
Selling and administrative expense as a percentage of total revenues		23.2	%		21.0	%		23.6	%		23.2	%

Depreciation and amortization		650			14			826			871
Provision for uncollectible accounts		38			—			54			42
Gain on sales of assets ⁽¹⁾		(25	)		(911	)		(26	)		(321	)
Restructuring charges ⁽¹⁾		104			—			104			41

Total costs and expenses		32,445			12,544			37,633			38,430

Operating income		594			1,349			543			692
Interest expense, net		(184	)		(86	)		(217	)		(269	)
Bankruptcy-related recoveries		33			13			33			13
Other income		33			4			43			57


Income before income taxes, minority interest and cumulative effect of change in accounting principle		476			1,280			402			493
Income taxes		183			483			172			184
Minority interest		(7	)		—			(1	)		14


Income before cumulative effect of change in accounting principle		300			797			231			295
Cumulative effect of change in accounting principle, net of tax		(90	)		—			(90	)		—

NET INCOME	$	210		$	797		$	141		$	295


Diluted earnings per share before cumulative effect of change in accounting principle	$	1.98		$	7.93		$	1.42		$	1.84
Diluted earnings per share⁽¹⁾	$	1.39		$	7.93		$	0.87		$	1.84


⁽¹⁾ Diluted EPS impact of selected significant items
Gain on sale of assets	$	0.10		$	5.59		$	0.09		$	1.22
Restructuring charges		(0.32	)		—			(0.28	)		(0.16	)

Total	$	(0.22	)	$	5.59		$	(0.19	)	$	1.06

These items include Kmart’s store sale and lease assignment transactions with The Home Depot, Inc. and Sears in the 2004 as reported period and the transaction with The Home Depot, Inc. in the pro forma 2004 period as described in Note 15 to the condensed consolidated financial statements and charges described in Note 3 to the condensed consolidated financial statements associated with Kmart and Sears Canada restructuring initiatives implemented during the fiscal 2005 periods. Items like these periodically affect the Company’s results; however, the amounts of these types of items may vary significantly from period to period and have a disproportionate effect on the periods presented, which affects the comparability of the Company’s financial performance. Management considers the total impact of these items, along with reported results, when it reviews and evaluates the Company’s financial performance.

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

Holdings Reported Results

13-week period ended October 29, 2005 compared to the 13-week period ended October 27, 2004

Total revenues increased $7.8 billion, or 176%, to $12.2 billion for the 13 weeks ended October 29, 2005, as compared to total revenues of $4.4 billion for the 13 weeks ended October 27, 2004. The increase was primarily attributable to the addition of Sears revenues of $8.0 billion in 2005, partially offset by a $0.3 billion, or 5.7%, decline in Kmart’s revenues, due to a reduction in the total number of Kmart stores in operation and a comparable store sales decline of 2.8%. While Kmart’s overall comparable store sales declined as a result of lower transaction volumes across most businesses, most notably home products and electronics, its apparel business outperformed other businesses and had positive comparable store sales during the period.

Gross margin as a percentage of merchandise sales and services revenue was 27.5% for the 13 weeks ended October 29, 2005, as compared to 24.9% for the 13 weeks ended October 27, 2004. The increase was primarily attributable to the addition of Sears, which had a higher overall gross margin rate than Kmart in the current year period, partially offset by a decrease in Kmart’s gross margin rate. Kmart’s gross margin rate as a percentage of merchandise sales and services revenue was 24.6% for the 13 weeks ended October 29, 2005, as compared to 24.9% for the 13 weeks ended October 27, 2004. The decrease was primarily attributable to increased promotional and clearance markdowns.

Selling and administrative expenses as a percentage of total revenues was 24.4% for the 13 weeks ended October 29, 2005, as compared to 22.5% for the 13 weeks ended October 27, 2004. The increase was primarily attributable to the addition of Sears, which had a higher cost structure than Kmart in the current year period.

Depreciation and amortization was $263 million for the 13 weeks ended October 29, 2005, as compared to $6 million for the 13 weeks ended October 27, 2004. The increase was primarily attributable to the addition of Sears, which accounted for $250 million of the combined expense in the current year period.

Restructuring charges were $59 million for the 13 weeks ended October 29, 2005. These charges included a $53 million charge for employee-related termination costs associated with Sears Canada restructuring initiatives implemented during the third quarter of fiscal 2005, including a workforce reduction of approximately 1,200 associates, as well as a $6 million charge at Kmart for relocation assistance and employee termination-related costs associated with Holdings’ home office integration efforts.

Included in operating income were gains on sales of assets of $15 million and $807 million for the 13 week periods ended October 29, 2005 and October 27, 2004, respectively. During fiscal 2004, the Company entered into multiple agreements with The Home Depot, Inc. to sell four properties and assign 14 leased properties for an aggregate purchase price of $271 million. The gain on sales of assets for the 13 weeks ended October 27, 2004 included $198 million attributable to these agreements. Also during fiscal 2004, Kmart agreed to sell four owned properties, assign 45 leased properties and lease one owned store to Sears for a total purchase price of approximately $576 million. Included in the gain on sales of assets for the 13 weeks ended October 27, 2004 was a gain of $599 million related to this agreement.

Operating income was $119 million for the 13 weeks ended October 29, 2005, as compared to $909 million for the 13 weeks ended October 27, 2004. The decrease was primarily attributable to $790 million less in gains on the sale of assets realized by Kmart in the current year. Further, the addition of Sears, which had $36 million in operating income in the current year period, was offset by a $36 million decline in Kmart operating results, excluding the impact of gain on asset sales.

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

Interest expense increased $45 million in the current year period primarily as a result of the inclusion of Sears debt in the current year period. Other income increased by $21 million in the current year period due to a gain recognized in connection with the settlement pertaining to Kmart’s license agreement with Footstar, Inc. (“FTS”) for the operation of Kmart’s footwear departments. The effective tax rate was 38.9% for the 13 weeks ended October 29, 2005, as compared to 37.7% for the 13 weeks ended October 27, 2004, with the increase primarily attributable to the inclusion of Sears in the current year period.

39-week period ended October 29, 2005 compared to the 39-week period ended October 27, 2004

Total revenues increased $19.1 billion, or 138%, to $33.0 billion for the 39 weeks ended October 29, 2005, as compared to total revenues of $13.9 billion for the 39 weeks ended October 27, 2004. The increase was primarily attributable to the addition of Sears revenues of $19.7 billion in fiscal 2005, partially offset by a decline in Kmart’s revenues of $0.5 billion, or 3.9%, due to a reduction in the total number of Kmart stores in operation and a comparable store sales decline of 2.1%. Kmart’s comparable store sales declined primarily as a result of lower transaction volumes. Total sales benefited from $153 million of sales being recorded during the first quarter of fiscal 2005 as a result of three additional days being included in the fiscal 2005 period due to the Company’s change from a Wednesday to a Saturday month end. However, this favorable impact was more than offset by a reduction in the total number of Kmart stores in operation.

Gross margin as a percentage of merchandise sales and services revenue was 27.0% for the 39 weeks ended October 29, 2005, as compared to 24.3% for the 39 weeks ended October 27, 2004. The increase was primarily attributable to the addition of Sears, which had a higher overall gross margin rate than Kmart in the current year period, partially offset by a decrease in Kmart’s gross margin rate due primarily to increased promotional markdowns.

Selling and administrative expenses as a percentage of total revenues was 23.2% for the 39 weeks ended October 29, 2005, as compared to 21.0% for the 39 weeks ended October 27, 2004. The increase was primarily attributable to the addition of Sears, which had a higher cost structure than Kmart in the current year period.

Depreciation and amortization was $650 million for the 39 weeks ended October 29, 2005, as compared to $14 million for the 39 weeks ended October 27, 2004. The increase was primarily attributable to the addition of Sears, which accounted for $617 million of the combined expense in the current year period.

Restructuring charges were $104 million for the 39 weeks ended October 29, 2005. These charges included a $53 million charge for employee-related termination costs associated with Sears Canada restructuring initiatives implemented during the third quarter of fiscal 2005, including a workforce reduction of approximately 1,200 associates, as well as $51 million at Kmart for relocation assistance and employee termination-related costs associated with Holdings’ home office integration efforts.

Included in operating income were gains on sales of assets of $25 million and $911 million for the 39-week periods ended October 29, 2005 and October 27, 2004, respectively. During fiscal 2004, the Company entered into multiple agreements with The Home Depot, Inc. to sell four properties and assign 14 leased properties for an aggregate purchase price of $271 million. The gain on sales of assets for the 39 weeks ended October 27, 2004 included $241 million attributable to these agreements. Also during fiscal 2004, Kmart agreed to sell four owned properties, assign 45 leased properties and lease one owned store to Sears for a total purchase price of approximately $576 million. Included in the gain on sales of assets for the 39 weeks ended October 27, 2004 was a gain of $599 million related to this agreement. Additionally, the Company sold certain other real and personal property, resulting in net gains of $25 million and $71 million for the 39-week periods ended October 29, 2005 and October 27, 2004, respectively. Included within these gains for the 39-week period ended October

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

27, 2004 were $18 million related to the sale of the Company’s Trinidad subsidiary and its associated property, $12 million related to the sale of corporate airplanes and $41 million from sales of other real and personal property.

Operating income was $594 million for the 39 weeks ended October 29, 2005, as compared to $1.35 billion for the 39 weeks ended October 27, 2004. The decrease was primarily attributable to $886 million less in gains on the sale of assets realized by Kmart in the current year and, to a lesser degree, a decline in Kmart operating results, including restructuring charges of $51 million recorded in the current year period, partially offset by the addition of Sears, which had $303 million in operating income in the current year period.

Interest expense increased $98 million in the current year period as a result of the inclusion of Sears debt in the current year period, as well as additional interest expense incurred upon the conversion of Kmart’s 9% subordinated convertible notes. Bankruptcy-related recoveries increased $20 million in the current year period and represent amounts recognized from vendors who had received cash payment for pre-petition obligations. Other income increased by $29 million in the current year period primarily due to a gain of $21 million recognized in connection with the settlement with FTS. The effective tax rate increased to 38.4% in 2005 from 37.7% in 2004, with the increase primarily attributable to the inclusion of Sears in the current year period.

Effective January 30, 2005, the Company determined that it would be preferable to conform one of the accounting practices utilized by Kmart to that of Sears. The Company changed its method of accounting for certain indirect overhead costs from inventoriable costs to period expenses. In accordance with Accounting Principles Board Opinion No. 20, “Accounting Changes”, a change in accounting policy to conform the acquirer’s policy to that of the acquired entity is treated as a change in accounting principle. As a result of the accounting change, the Company recorded a charge of $90 million, net of taxes, in the first quarter of fiscal 2005 for the cumulative effect of change in accounting principle. The charge represents the amount of indirect costs reflected within inventory at the beginning of fiscal 2005.

Holdings Pro Forma Results

The following discussion of Holdings’ pro forma results is provided to facilitate an understanding of Holdings’ trends and on-going performance.

13-week period ended October 29, 2005 compared to the pro forma 13-week period ended October 27, 2004

Total revenues declined $0.6 billion, or 5.0%, to $12.2 billion for the 13 weeks ended October 29, 2005, as compared to total revenues of $12.8 billion for the 13 weeks ended October 27, 2004. The decline was primarily attributable to revenue declines of 6.3% and 5.7% at Sears Domestic and Kmart, respectively, partially offset by a 6.3% revenue increase at Sears Canada, primarily due to favorable exchange rates. Domestic comparable store sales were down 7.4% in the aggregate, with Sears Domestic and Kmart comparable store sales declining 10.8% and 2.8%, respectively. The Sears Domestic comparable store sales decrease was primarily attributable to efforts initiated in fiscal 2005 to improve gross margin rates by reducing reliance on certain promotional events and weak apparel sales resulting from weaker than anticipated customer response to fashion offerings within the full-line stores. While Kmart’s overall comparable store sales declined as a result of lower transaction volumes across most businesses, most notably home products and electronics, its apparel business outperformed other businesses and had positive comparable store sales during the period.

Gross margin as a percentage of merchandise sales and services revenue was 27.5% for the 13 weeks ended October 29, 2005, as compared to 26.8% for the 13 weeks ended October 27, 2004. The increase was primarily attributable to improvement in the Sears Domestic gross margin rate, mainly as a result of improved inventory

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

management and the utilization of more targeted clearance and promotional markdowns versus historical reliance on storewide events. Sears Domestic’s gross margin rate as a percentage of merchandise sales and services revenue was 29.4% for the 13 weeks ended October 29, 2005, as compared to 28.0% for the 13 weeks ended October 27, 2004. Kmart’s gross margin rate as a percentage of merchandise sales and services revenue was 24.6% for the 13 weeks ended October 29, 2005, as compared to 24.9% for the 13 weeks ended October 27, 2004. The decrease was primarily attributable to increased promotional and clearance markdowns.

Selling and administrative expenses as a percentage of total revenues was 24.4% for the 13 weeks ended October 29, 2005, as compared to 24.1% for the 13 weeks ended October 27, 2004. While selling and administrative expenses decreased by $118 million, selling and administrative expenses as a percentage of total revenues increased as the impact of reductions in payroll and related expenditures resulting from cost saving initiatives was offset by reduced expense leverage given lower overall sales.

Restructuring charges were $59 million during for the 13 weeks ended October 29, 2005. These charges included a $53 million charge for employee-related termination costs associated with Sears Canada restructuring initiatives implemented during the third quarter of fiscal 2005, including a workforce reduction of approximately 1,200 associates, as well as a $6 million charge at Kmart for relocation assistance and employee termination-related costs associated with Holdings’ home office integration efforts.

Operating income was $119 million for the 13 weeks ended October 29, 2005, as compared to $321 million for the 13 weeks ended October 27, 2004. The decrease was primarily attributable to $191 million less in gains on the sale of assets realized by Kmart in the current year and, to a lesser degree, a $36 million decline in Kmart operating income, excluding the impact of gains on asset sales, partially offset by Sears, which had $25 million in additional operating income in the current year period.

Interest expense declined $14 million in the 13 weeks ended October 29, 2005, as compared to the 13 weeks ended October 27, 2004 due primarily to lower average borrowings. Other income increased by $14 million in the current year period primarily due to a gain of $21 million being recognized in connection with the settlement pertaining to the footwear license agreement with FTS in the current year period.

Pro forma 39-week period ended October 29, 2005 compared to the pro forma 39-week period ended October 27, 2004

Total revenues declined $0.9 billion, or 2.4%, to $38.2 billion for the 39 weeks ended October 29, 2005, as compared to total revenues of $39.1 billion for the 39 weeks ended October 27, 2004. The decline was primarily attributable to revenue declines of 3.0% and 3.9% at Sears Domestic and Kmart, respectively, partially offset by a 7.4% revenue increase at Sears Canada, primarily due to favorable exchange rates. Domestic comparable store sales were down 5.0% in the aggregate, with Sears Domestic comparable store sales declining 7.2% and Kmart comparable store sales declining 2.1%. The Sears Domestic comparable store sales decrease was primarily attributable to efforts initiated in fiscal 2005 to improve gross margin rates by reducing reliance on certain promotional events. Kmart’s comparable store sales declined primarily as a result of lower transaction volumes.

Gross margin as a percentage of merchandise sales and services revenue was 27.0% for the 39 weeks ended October 29, 2005, as compared to 26.1% for the 39 weeks ended October 27, 2004. The increase was primarily attributable to improvement in the Sears Domestic gross margin rate, mainly as a result of improved inventory management and the utilization of more targeted clearance and promotional markdowns versus historical reliance on storewide events. Sears Domestic’s gross margin rate as a percentage of merchandise sales and services revenue was 29.0% for the 39 weeks ended October 29, 2005, as compared to 27.3% for the 39 weeks ended October 27, 2004. Kmart’s gross margin rate as a percentage of merchandise sales and services revenue

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

was 23.9% for the 39 weeks ended October 29, 2005, as compared to 24.3% for the 39 weeks ended October 27, 2004. The decline in gross margin rate was primarily due to increased promotional markdowns.

Selling and administrative expenses as a percentage of total revenues was 23.6% for the 39 weeks ended October 29, 2005, as compared to 23.2% for the 39 weeks ended October 27, 2004. While selling and administrative expenses decreased by $82 million, selling and administrative expenses as a percentage of total revenues increased as the impact of reductions in payroll and related expenditures resulting from cost saving initiatives was offset by reduced expense leverage given lower overall sales.

Restructuring charges for the current year period totaled $104 million as compared to $41 million for the comparable prior year period. The current year period charges include a $53 million charge for employee-related termination costs associated with Sears Canada restructuring initiatives, including a workforce reduction of approximately 1,200 associates, as well as $51 million at Kmart for relocation assistance and employee termination-related costs associated with Holdings’ home office integration efforts. The $41 million charge recorded in the comparable prior year period reflected a charge recorded by Sears in the second quarter of fiscal 2004 as part of a productivity initiative.

Operating income was $543 million for the 39 weeks ended October 29, 2005, as compared to $692 million for the 39 weeks ended October 27, 2004. The decrease was primarily attributable to $287 million less in gains on the sale of assets realized by Kmart in the current year and, to a lesser degree, a $172 million decline in Kmart operating income, excluding gains on asset sales, partially offset by the inclusion of Sears, which had $310 million in additional operating income in the current year period.

Interest expense declined $52 million in the 39 weeks ended October 29, 2005, as compared to the 39 weeks ended October 27, 2004 due primarily to lower average borrowings. Bankruptcy-related recoveries increased $20 million in the current year period and represent amounts recognized from vendors who had received cash payment for pre-petition obligations.

SEGMENT OPERATIONS

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

Kmart

Kmart results and key statistics were as follows:


Kmart	13 Weeks Ended						39 Weeks Ended
millions, except number of stores	October 29,			October 27,			October 29,			October 27,
	2005			2004			2005			2004
Merchandise sales and services	$	4,172		$	4,426		$	13,354		$	13,893

Cost of sales, buying and occupancy		3,145			3,324			10,164			10,520

Gross margin rate		24.6	%		24.9	%		23.9	%		24.3	%

Selling and administrative		942			994			2,840			2,921
Selling and administrative expenses as a percentage of total revenues		22.6	%		22.5	%		21.3	%		21.0	%
Depreciation and amortization		13			6			33			14
Gain on sales of assets		(17	)		(807	)		(25	)		(911	)
Restructuring charges		6			—			51			—

Total costs and expenses		4,089			3,517			13,063			12,544

Operating income	$	83		$	909		$	291		$	1,349


Number of stores								1,426			1,486

13-week period ended October 29, 2005 compared to the 13-week period ended October 27, 2004

Comparable store sales and total sales decreased 2.8% and 5.7% respectively, for the 13 weeks ended October 29, 2005, as compared to the 13 weeks ended October 27, 2004. Total sales were negatively impacted by a reduction in the total number of Kmart stores in operation. While Kmart’s overall comparable store sales declined as a result of lower transaction volumes across most businesses, most notably home products and electronics, the apparel business outperformed other businesses and had positive comparable store sales during the period.

Gross margin as a percentage of merchandise sales and services revenue was 24.6% for the 13 weeks ended October 29, 2005, as compared to 24.9% for the 13 weeks ended October 27, 2004. The decrease was primarily attributable to increased promotional and clearance markdowns.

Selling and administrative expenses as a percentage of revenues was 22.6% for the 13 weeks ended October 29, 2005, as compared to 22.5% for the 13 weeks ended October 27, 2004. The impact of reductions in selling and administrative expenses for payroll and related expenditures resulting from the operation of fewer Kmart stores, as well as cost saving initiatives and reductions in advertising, was more than offset by reduced expense leverage given lower overall sales.

Restructuring charges related to Holdings’ home office integration efforts were $6 million during the 13 weeks ended October 29, 2005, including $2 million of relocation assistance for associates who have accepted relocation offers and $4 million for costs associated with severance, benefits and outplacement services.

Operating income was $83 million for the 13 weeks ended October 29, 2005, as compared to $909 million for the 13 weeks ended October 27, 2004. The decrease was primarily attributable to $790 million less in gains on the sale of assets realized this year compared to the prior year period, the 5.7% decline in merchandise sales and services revenue, the lower gross margin rate as a result of increased promotional and clearance markdowns, and restructuring charges of $6 million recognized in the current year, partially offset by lower selling and administrative costs.

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

39-week period ended October 29, 2005 compared to 39-week period ended October 27, 2004

Comparable store sales and total sales decreased 2.1% and 3.9%, respectively, for the 39 weeks ended October 29, 2005, as compared to the 39 weeks ended October 27, 2004. Kmart’s comparable store sales declined primarily as a result of lower transaction volumes across most businesses, most notably home products and electronics. Total sales benefited from $153 million of sales being recorded during the first quarter of fiscal 2005 as a result of three additional days being included in the fiscal 2005 period due to the Company’s change from a Wednesday to a Saturday month end. However, this favorable impact was more than offset by a reduction in the total number of Kmart stores in operation, including 48 Kmart stores converted to the Sears Essentials format in 2005.

Gross margin as a percentage of merchandise sales and services revenue was 23.9% for the 39 weeks ended October 29, 2005, as compared to 24.3% for the 39 weeks ended October 27, 2004. The decline in gross margin rate was primarily due to increased promotional markdowns.

Selling and administrative expenses as a percentage of total revenues was 21.3% for the 39 weeks ended October 29, 2005, as compared to 21.0% for the 39 weeks ended October 27, 2004. The impact of reductions in selling and administrative expenses for payroll and related expenditures resulting from the operation of fewer Kmart stores and cost saving initiatives was offset by reduced expense leverage given lower overall sales.

Restructuring charges related to Holdings’ home office integration efforts were $51 million during the 39 weeks ended October 29, 2005, including $35 million for relocation assistance and $16 million for employee termination-related costs.

Operating income for the 39 weeks ended October 29, 2005 decreased compared to the 39 weeks ended October 27, 2004 primarily attributable to $886 million less in gains on the sale of assets realized in the current year and, to a lesser degree, a decline in gross margin and the restructuring charges of $51 million recorded in the current year period.

Sears Domestic

Sears Domestic operations consist of the following:

	§		Full-line Stores: includes merchandise sales as well as the operations of Sears Auto Centers, Sears Essentials and Sears Grand stores, and online revenues of sears.com

	§		Specialty Stores: includes the operations of Dealer Stores, Sears Hardware Stores, Orchard Supply Hardware, The Great Indoors, Commercial Sales and Outlet stores

	§		Direct to Customer: includes Lands’ End online, catalog and retail store operations as well as direct marketing of goods and services through specialty catalogs and other direct channels

	§		Home Services: includes product repair services, product protection agreements and installation services for all major brands of home products; also includes home improvement services, primarily siding, windows and cabinet refacing, carpet cleaning and the installation and servicing of residential heating and cooling systems

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

The condensed consolidated statement of operations for Holdings for the 39-week period ended October 29, 2005 includes Sears results from March 25, 2005 forward. It does not reflect a full 39-week period for Sears or any prior year operating results for comparison. The Company believes that an understanding of its reported results and its ongoing financial performance is not complete without presenting the Sears results of operations on a pro forma basis. The presentation below provides the results of operations on a reported and pro forma basis.


Sears Domestic	Reported			Pro Forma			Reported			Pro Forma
	13 Weeks			13 Weeks			39 Weeks
millions, except number of stores	Ended			Ended			Ended			39 Weeks Ended
	October 29,			October 30,			October 29,			October 29,			October 30,
	2005			2004			2005			2005			2004
Merchandise sales and services	$	6,803		$	7,258		$	17,141		$	21,311		$	21,959

Cost of sales, buying and occupancy		4,805			5,223			12,112			15,130			15,973
Gross margin rate		29.4	%		28.0	%		29.3	%		29.0	%		27.3	%

Selling and administrative		1,716			1,823			4,175			5,246			5,342
Selling and administrative expense as a percentage of total revenues		25.2	%		25.1	%		24.4	%		24.6	%		24.3	%
Depreciation and amortization		214			248			541			683			766
Gain on sales of assets		—			—			—			(1	)		(4	)
Restructuring charges		—			—			—			—			41

Total costs and expenses		6,735			7,294			16,828			21,058			22,118

Operating income (loss)	$	68		$	(36	)	$	313		$	253		$	(159	)


Number of :
Full-line Stores								926			926			872
Specialty Stores								1,146			1,146			1,139
Total Domestic Sears Stores								2,072			2,072			2,011

Sears Domestic Pro Forma Results

The discussion below pertains to pro forma information in the table above which compares Sears results for the 13- and 39-week periods ended October 29, 2005 with Sears results for the comparable 13-and 39-week periods ended October 30, 2004. These pro forma results have been prepared assuming the Merger occurred at the beginning of fiscal 2004.

13-week period ended October 29, 2005 compared to the pro forma 13-week period ended October 30, 2004

Merchandise sales and services revenue declined $0.5 billion, or 6.3%, to $6.8 billion for the 13 weeks ended October 29, 2005, as compared to total revenues of $7.3 billion for the 13 weeks ended October 27, 2004. The decline was due to a 10.8% decrease in comparable store sales across all retail formats partially offset by an increase in the total number of Sears stores in operation combined with strong Home Services sales. Comparable store sales declines for the period were recorded across all product categories, except home appliances which generated a modest increase in comparable store sales, with more pronounced declines in apparel lines and more moderate declines in non-appliance hardlines categories. The modest increase in home appliances was mainly due to a higher average sale price per unit sold. The declines recorded in the other product categories reflect efforts initiated in fiscal 2005 to improve gross margin by reducing reliance on certain promotional events and weak apparel sales resulting from weaker than anticipated customer response to fashion offerings within the full-line stores.

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

Gross margin as a percentage of merchandise sales and services revenue was 29.4% for the 13 weeks ended October 29, 2005, as compared to 28.0% for the 13 weeks ended October 27, 2004. The 140 basis point increase was attributable primarily to improved inventory management and the utilization of more targeted clearance and promotional markdowns versus historical reliance on storewide events. The rate improvement over the prior year, however, was less in the third quarter of fiscal 2005 than in the previous two fiscal quarters as poor customer response to full line apparel offerings resulted in additional markdowns being taken to clear spring and summer fashion items.

Selling and administrative expenses as a percentage of total revenues was 25.2% for the 13 weeks ended October 29, 2005, as compared to 25.1% for the 13 weeks ended October 27, 2004. While selling and administrative expenses decreased by $107 million, selling and administrative expenses as a percentage of total revenues increased as decreases in payroll and related expenditures resulting from cost saving initiatives were offset by reduced expense leverage given lower overall sales.

Depreciation and amortization expense declined $34 million for the quarter due primarily to lower capital expenditure levels.

Operating income increased $104 million as a result of the lower selling and administrative expense and lower depreciation and amortization expense, partially offset by the margin impact of lower overall sales levels.

Pro forma 39-week period ended October 29, 2005 compared to the pro forma 39-week period ended October 30, 2004

Merchandise sales and services revenues declined $0.6 billion, or 3.0%, to $21.3 billion for the 39 weeks ended October 29, 2005, as compared to total revenues of $22.0 billion for the 39 weeks ended October 27, 2004. The decline was due to a 7.2% decrease in comparable store sales across all retail formats, partially offset by an increase in the total number of Sears stores in operation and strong Home Services sales. The decline in Sears Domestic comparable store sales primarily reflects the efforts initiated in fiscal 2005 to improve gross margin rates and, to a lesser extent, weaker than anticipated customer response to fashion offerings within the full-line stores as discussed above.

Gross margin as a percentage of merchandise sales and services revenue was 29.0% for the 39 weeks ended October 29, 2005, as compared to 27.3% for the 39 weeks ended October 27, 2004. The 170 basis point increase was attributable primarily to improved inventory management and the utilization of more targeted clearance and promotional markdowns versus historical reliance on storewide events.

Selling and administrative expenses as a percentage of total revenues was 24.6% for the 39 weeks ended October 29, 2005, as compared to 24.3% for the 39 weeks ended October 27, 2004. While selling and administrative expenses decreased by $96 million, selling and administrative expenses as a percentage of total revenues increased as decreases in payroll and related expenditures resulting from cost saving initiatives were offset by reduced expense leverage given lower overall sales.

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

Depreciation and amortization expense declined $83 million for the 39-week period ended October 29, 2005 due primarily to lower capital expenditure levels and additional depreciation recognized in the prior year period in connection with shortening the estimated remaining useful life of certain information technology assets that were sold to an outside IT service provider during fiscal 2004.

Operating income increased $412 million as a result of the increased gross margin, lower selling and administrative costs, and lower depreciation and amortization expense, as well as the comparable prior year period being unfavorably impacted by the $41 million charge recorded in the second quarter of fiscal 2004 as part of a productivity initiative.

Sears Canada

Sears Canada, a consolidated, 54%-owned subsidiary of Sears, conducts retail and credit operations. In November 2005, Sears Canada completed the sale of its Credit and Financial Services operations.

The results of operations for Sears Canada are reported to Holdings on a one-month lag. Therefore, the condensed consolidated statement of operations for the 13-week period ended October 29, 2005 includes operating results for Sears Canada from July 3, 2005 through October 1, 2005. For the 39-week period ended October 29, 2005, the condensed consolidated statement of operations includes operating results for Sears Canada from March 25, 2005 through October 1, 2005. The Company believes that an understanding of its reported results and its ongoing financial performance is not complete without presenting the Sears Canada results of operations on a pro forma basis. The presentation below provides the results of operations on a reported and pro forma basis.


	Reported			Pro Forma			Reported			Pro Forma
	13 Weeks			13 Weeks			39 Weeks
millions, except number of stores	Ended			Ended			Ended			39 Weeks Ended
	October 29,			October 30,			October 29,			October 29,			October 30,
	2005			2004			2005			2005			2004
Merchandise sales and services	$	1,143		$	1,069		$	2,373			3,254		$	3,017

Credit and financial products revenues		84			85			171			257			253

Total revenues		1,227			1,154			2,544			3,511			3,270

Cost of sales, buying and occupancy		833			789			1,733			2,387			2,228
Gross margin rate		27.1	%		26.2	%		27.0	%		26.6	%		26.2	%

Selling and administrative		314			273			654			908			813
Selling and administrative expense as a percentage of total revenues		25.6	%		23.7	%		25.7	%		25.9	%		24.9	%
Depreciation and amortization		36			29			76			110			91
Provision for uncollectible accounts		21			16			38			54			42
Loss (Gain) on sales of assets		2			—			—			—			(5	)
Restructuring charges		53			—			53			53			—

Total costs and expenses		1,259			1,107			2,554			3,512			3,169

Operating income	$	(32	)	$	47		$	(10	)		(1	)	$	101


Number of :
Full-line Stores								122			122			121
Specialty Stores								248			248			212
Total Sears Canada Stores								370			370			333

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

The discussion below pertains to pro forma information in the table above which compares Sears Canada’s results for the 13- and 39-week periods ended October 29, 2005 with Sears Canada’s results for the comparable 13-and 39-week periods ended October 30, 2004. These pro forma results have been prepared assuming the Merger occurred at the beginning of fiscal 2004.

Total revenues increased 6.3% and 7.4% for the 13- and 39-week periods ended October 29, 2005, respectively, versus the comparable prior year periods. The increases were due primarily to favorable exchange rates.

The gross margin rate for the 13-week period ended October 29, 2005 increased primarily due to improved inventory controls which resulted in less liquidation losses. For the 39-week period ended October 29, 2005, the favorable impact of improved inventory controls was partially offset by liquidation losses in the first quarter of fiscal 2005.

Selling and administrative expense as a percentage of total revenue for the 13- and 39-week periods ended October 29, 2005 increased due primarily to increased marketing costs. In addition, the 13-week period included $18 million of expense for associate stock-based compensation, which resulted from a change in the Sears Canada plan to allow associates to take cash payments in lieu of shares. The plan change was made to avoid dilution of the share base.

Restructuring charges of $53 million were recognized for the 13 weeks ended October 29, 2005 for productivity initiatives, which included a workforce reduction of approximately 1,200 associates.

Operating income declined $79 million and $102 million for the 13- and 39-week periods ended October 29, 2005, respectively, due primarily to the $53 million restructuring charge recorded in the third quarter of 2005 and higher selling and administrative expenses, partially offset by increased gross margin due to increased total revenues.

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

PRO FORMA RECONCILIATION

The following tables provide a reconciliation from the as reported results to the pro forma results presented above for Sears Holdings for the 13-week period ended October 27, 2004 and for Sears Domestic and Sears Canada for the 13-week period ended October 30, 2004.

Sears Holdings


	2005			13-week period ended October 27, 2004
millions, except per common share data							Pre-
	As			As			merger			Purchase			Pro
	reported			reported			Activity⁽¹⁾			Acctng			Forma
Merchandise sales and services	$	12,118		$	4,426		$	8,327		$	—		$	12,753
Credit and financial products revenues		84			—			85			—			85

Total revenue		12,202			4,426			8,412			—			12,838


Cost of sales, buying and occupancy		8,783			3,324			6,012			—			9,336
Gross margin rate		27.5	%		24.9	%		27.8	%		—	%		26.8	%
Selling and administrative		2,972			994			2,076			20	⁽²⁾		3,090
Selling and administrative as % of total revenues		24.4	%		22.5	%		24.7	%		—	%		24.1	%
Depreciation and amortization		263			6			228			49	⁽³⁾		283
Provision for uncollectible accounts		21			—			16			—			16
Gain on sales of assets		(15	)		(807	)		—			599	⁽⁴⁾		(208	)
Restructuring charges		59			—			—			—			—

Total costs and expenses		12,083			3,517			8,332			668			12,517


Operating income (loss)		119			909			80			(668	)		321
Interest (expense) income, net		(70	)		(25	)		(66	)		7	⁽⁵⁾		(84	)
Bankruptcy-related recoveries		1			1			—			—			1
Other income		22			1			7			—			8

Income before income taxes, minority interest and cumulative effect of change in accounting principle		72			886			21			(661	)		246
Income tax expense (benefit)		28			334			9			(254	)⁽⁶⁾		89
Minority interest		(14	)		—			7			—			7

Income before cumulative effect of change in accounting principle		58			552			5			(407	)		150
Cumulative effect of change in accounting principle, net of tax		—			—			—			—			—


NET INCOME (LOSS)		58		$	552		$	5		$	(407	)	$	150


Diluted earnings per share before cumulative effect of change in accounting principle	$	0.35		$	5.45								$	0.93
Diluted earnings per share	$	0.35		$	5.45								$	0.93


⁽¹⁾		Represents the 2004 results of operations for the period August 1, 2004 through October 30, 2004 for Sears Domestic and the period July 4, 2004 through October 2, 2004 for Sears Canada.

⁽²⁾		Represents an increase to selling and administrative expense resulting from the adjustment to Sears’ pension and postretirement plans based on the adjustment of such liabilities to fair value.

⁽³⁾		Represents an increase in depreciation and amortization expense resulting from the adjustment to Sears’ property and equipment and identifiable intangible assets based on the adjustment of such assets to fair value.

⁽⁴⁾		On September 29, 2004, Sears acquired ownership or leasehold interest in 50 Kmart stores for approximately $575 million. During the thirteen weeks ended October 27, 2004, Kmart recognized a gain on the sale amounting to $599 million. This adjustment eliminates the gain on the sale recognized by Kmart.

⁽⁵⁾		Represents a decrease to interest expense resulting from the adjustment to Sears debt based on the adjustments of such liabilities to fair value.

⁽⁶⁾		Represents the aggregate pro forma effective income tax effect (38.4%) of notes (3) through (5) above.

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

Sears Domestic


	2005			13-week period ended October 30, 2004
millions	As			As			Pre-merger			Purchase			Pro
	reported			reported			Activity⁽¹⁾			Acctng			forma
Merchandise sales and services	$	6,803		$	—		$	7,258		$	—		$	7,258

Cost of sales, buying and occupancy		4,805			—			5,223			—			5,223
Gross margin rate		29.4	%		—	%		28.0	%		—	%		28.0	%
Selling and administrative		1,716			—			1,803			20	⁽²⁾		1,823
Selling and administrative as % of total revenues		25.2	%		—	%		24.8	%		—	%		25.1	%
Depreciation and amortization		214			—			200			48	⁽⁴³		248
Gain on sales of assets		—			—			—			—			—
Restructuring charges		—			—			—			—			—

Total costs and expenses		6,735			—			7,226			68			7,294


Operating income (loss)		68		$	—		$	32		$	(68	)	$	(36	)

Sears Canada


	2005			13-week period ended October 30, 2004
millions	As			As			Pre-merger			Purchase			Pro
	reported			reported			Activity⁽¹⁾			Acctng			forma
Merchandise sales and services	$	1,143		$	—		$	1,069		$	—		$	1,069
Credit and financial product revenues		84			—			85			—			85

Total revenues		1,227			—			1,154			—			1,154


Cost of sales, buying and occupancy		833			—			789			—			789
Gross margin rate		27.1	%		—	%		26.2	%		—	%		26.2	%
Selling and administrative		314			—			273			—			273
Selling and administrative as % of total revenues		25.6	%		—	%		23.7	%		—	%		23.7	%
Depreciation and amortization		36			—			28			1	⁽³⁾		29
Provision for uncollectible accounts		21			—			16			—			16
Gain on sales of assets		2			—			—			—			—
Restructuring charges		53			—			—			—			—

Total costs and expenses		1,259			—			1,106			1			1,107


Operating income (loss)		(32	)	$	—		$	48		$	(1	)	$	47


⁽¹⁾		Represents the 2004 results of operations for the period August 1, 2004 through October 30, 2004 for Sears Domestic and the period July 4, 2004 through October 2, 2004 for Sears Canada.

⁽²⁾		Represents an increase to selling and administrative expense resulting from the adjustment to Sears’ pension and postretirement plans based on the adjustment of such liabilities to fair value.

⁽³⁾		Represents an increase in depreciation and amortization expense resulting from the adjustment to Sears’ property and equipment and identifiable intangible assets based on the adjustment of such assets to fair value.

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

The following tables provide a reconciliation from the as reported results to the pro forma results presented above for Sears Holdings for the 39-week periods ended October 29, 2005 and October 27, 2004, respectively, as well as for Sears Domestic and Sears Canada for the 39-week periods ended October 29, 2005 and October 30, 2004, respectively.

Sears Holdings


	39-week period ended October 29, 2005												39-week period ended October 30, 2004
millions, except per common share data				Pre-
				merger												Pre-
	As			Activity			Purchase			Pro			As			merger			Purchase			Pro
	reported			⁽¹⁾			Acctng			forma			reported			Activity⁽¹⁾			Acctng			forma
Merchandise sales and services	$	32,868		$	5,051		$	—		$	37,919		$	13,893		$	24,976		$	—		$	38,869
Credit and financial products revenues		171			86			—			257			—			253			—			253

Total revenue		33,039			5,137			—			38,176			13,893			25,229			—			39,122

Cost of sales, buying and occupancy		24,009			3,672			—			27,681			10,520			18,193			8	⁽²⁾		28,721
Gross margin rate		27.0	%		27.3	%		—	%		27.0	%		24.3	%		27.2	%		—	%		26.1	%
Selling and administrative		7,669			1,314			11	⁽³⁾		8,994			2,921			6,094			61	⁽³⁾		9,076
Selling and administrative as % of total revenues		23.2	%		25.6	%		—	%		23.6	%		21.0	%		24.2	%		—	%		23.2	%
Depreciation and amortization		650			147			29	⁽⁴⁾		826			14			712			145	⁽⁴⁾		871
Provision for uncollectible accounts		38			16			—			54			—			42			—			42
Gain on sales of assets		(25	)		(1	)		—			(26	)		(911	)		(9	)		599	⁽⁵⁾		(321	)
Restructuring charges		104			—			—			104			—			41			—			41

Total costs and expenses		32,445			5,148			40			37,633			12,544			25,073			813			38,430

Operating income (loss)		594			(11	)		(40	)		543			1,349			156			(813	)		692
Interest (expense) income, net		(184	)		(35	)		2	⁽⁶⁾		(217	)		(86	)		(200	)		17	⁽⁶⁾		(269	)
Bankruptcy-related recoveries		33			—			—			33			13			—			—			13
Other income		33			10			—			43			4			53			—			57

Income before income taxes, minority interest and cumulative effect of change in accounting principle		476			(36	)		(38	)		402			1,280			9			(796	)		493
Income tax expense (benefit)		183			4			(15	)⁽⁷⁾		172			483			5			(304	)⁽⁷⁾		184
Minority interest		(7	)		6			—			(1	)		—			14			—			14


Income before cumulative effect of change in accounting principle		300			(46	)		(23	)		231			797			(10	)		(492	)		295
Cumulative effect of change in accounting principle, net of tax		(90	)		—			—			(90	)		—			—			—			—


NET INCOME (LOSS)	$	210			(46	)		(23	)		141		$	797		$	(10	)	$	(492	)	$	295


Diluted earnings per share before cumulative effect of change in accounting principle	$	1.98								$	1.42		$	7.93								$	1.84
Diluted earnings per share	$	1.39								$	0.87		$	7.93								$	1.84


⁽¹⁾		Represents the 2005 results of operations for the period January 30, 2005 through March 24, 2005 for Sears Domestic and the period January 2, 2005 through March 24, 2005 for Sears Canada and the 2004 results of operations for the period February 1, 2004 through October 30, 2004 for Sears Domestic and the period January 4, 2004 through October 2, 2004 for Sears Canada.

⁽²⁾		Represents an increase to cost of sales, buying and occupancy expense resulting from the adjustment to Sears’ inventory based on the adjustment of such assets to fair value.

⁽³⁾		Represents an increase to selling and administrative expense resulting from the adjustment to Sears’ pension and postretirement plans based on the adjustment of such liabilities to fair value.

⁽⁴⁾		Represents an increase in depreciation and amortization expense resulting from the adjustment to Sears’ property and equipment and identifiable intangible assets based on the adjustment of such assets to fair value.

⁽⁵⁾		On September 29, 2004, Sears acquired ownership or leasehold interest in 50 Kmart stores for approximately $575 million. During the thirteen weeks ended October 27, 2004, Kmart recognized a gain on the sale amounting to $599 million. This adjustment eliminates the gain on the sale recognized by Kmart.

⁽⁶⁾		Represents a decrease to interest expense resulting from the adjustment to Sears debt based on the adjustments of such liabilities to fair value.

⁽⁷⁾		Represents the aggregate pro forma effective income tax effect (38.4%) of notes (2) through (6) above.

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

Sears Domestic


	39-week period ended October 29, 2005												39-week period ended October 30, 2004
millions				Pre-
				merger												Pre-
	As			Activity			Purchase			Pro			As			merger			Purchase			Pro
	reported			⁽¹⁾			Acctng			forma			reported			Activity⁽¹⁾			Acctng			forma
Merchandise sales and services	$	17,141		$	4,170		$	—		$	21,311		$	—		$	21,959		$	—		$	21,959

Cost of sales, buying and occupancy		12,112			3,018			—			15,130			—			15,971			2	⁽²⁾		15,973
Gross margin rate		29.3	%		27.6	%		—	%		29.0	%		—	%		27.3	%		—	%		27.3	%
Selling and administrative		4,175			1,060			11	⁽³⁾		5,246			—			5,281			61	⁽³⁾		5,342
Selling and administrative as % of total revenues		24.4	%		25.4	%		—	%		24.6	%		—	%		24.0	%		—	%		24.3	%
Depreciation and amortization		541			116			26	⁽⁴⁾		683			—			628			138	⁽⁴⁾		766
Gain on sales of assets		—			(1	)		—			(1	)		—			(4	)		—			(4	)
Restructuring charges		—			—			—			—			—			41			—			41

Total costs and expenses		16,828			4,193			37			21,058			—			21,917			201			22,118


Operating income (loss)	$	313		$	(23	)	$	(37	)	$	253		$	—		$	42		$	(201	)	$	(159	)

Sears Canada


	39-week period ended October 29, 2005												39-week period ended October 30, 2004
millions				Pre-												Pre-
				merger												merger
	As			Activity			Purchase			Pro			As			Activity			Purchase			Pro
	reported			⁽¹⁾			Acctng			forma			reported			⁽¹⁾			Acctng			forma
Merchandise sales and services	$	2,373		$	881		$	—		$	3,254		$	—		$	3,017		$	—		$	3,017
Credit and financial product revenues		171			86			—			257			—			253			—			253

Total revenues		2,544			967			—			3,511			—			3,270			—			3,270


Cost of sales, buying and occupancy		1,733			654			—			2,387			—			2,222			6	⁽²⁾		2,228
Gross margin rate		27.0	%		25.8	%		—	%		26.6	%		—	%		26.4	%		—	%		26.2	%
Selling and administrative		654			254			—			908			—			813			—			813
Selling and administrative as % of total revenues		25.7	%		26.3	%		—	%		25.9	%		—	%		24.9	%		—	%		24.9	%
Depreciation and amortization		76			31			3	⁽⁴⁾		110			—			84			7	⁽⁴⁾		91
Provision for uncollectible accounts		38			16			—			54			—			42			—			42
Gain on sales of assets		—			—			—			—			—			(5	)		—			(5	)
Restructuring charges		53			—			—			53			—			—			—			—

Total costs and expenses		2,554			955			3			3,512			—			3,156			13			3,169


Operating income (loss)	$	(10	)	$	12		$	(3	)	$	(1	)	$	—		$	114		$	(13	)	$	101


⁽¹⁾		Represents the 2005 results of operations for the period January 30, 2005 through March 24, 2005 for Sears Domestic and the period January 2, 2005 through March 24, 2005 for Sears Canada and the 2004 results of operations for the period February 1, 2004 through October 30, 2004 for Sears Domestic and the period January 4, 2004 through October 2, 2004 for Sears Canada.

⁽²⁾		Represents an increase to cost of sales, buying and occupancy expense resulting from the adjustment of Sears’ inventory to fair value.

⁽³⁾		Represents an increase to selling and administrative expense resulting from the adjustment to Sears’ pension and postretirement plans based on the adjustment of such liabilities to fair value.

⁽⁴⁾		Represents an increase in depreciation and amortization expense resulting from the adjustment to Sears’ property and equipment and identifiable intangible assets based on the adjustment of such assets to fair value.

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION

As of October 29, 2005, the Company had $0.9 billion of cash and cash equivalents. The Company ended fiscal 2004 with approximately $3.4 billion of cash and cash equivalents. Prior to the consummation of the Merger on March 24, 2005, Kmart and Sears had a combined total of approximately $7.4 billion in cash. As a result of the Merger, $5.4 billion of cash was paid in consideration for (i) all outstanding common stock of Sears, based upon the proration provisions of the Merger Agreement, and (ii) all outstanding stock options of Sears.

The Company had total merchandise inventories of approximately $10.8 billion as of October 29, 2005 compared to $3.9 billion as of October 27, 2004. The increase in reported merchandise inventories is mainly due to the acquisition of Sears. Sears Domestic merchandise inventories totaled $5.9 billion as of October 29, 2005 compared to pro forma Sears Domestic merchandise inventories of approximately $6.7 billion as of October 30, 2004. The 11.9% reduction in Sears Domestic merchandise inventories was primarily the result of improved inventory management controls put into place during fiscal 2005. Pro forma Sears Domestic inventory at October 30, 2004 was adjusted to take into account the impact of purchase accounting as if the Merger had taken place at the beginning of fiscal 2004.

During the third quarter of fiscal 2005, approximately 50 of the Company’s stores and facilities located in the states of Louisiana, Mississippi and Florida were damaged by Hurricanes Katrina, Rita or Wilma. The Company expects the majority of losses incurred to be covered by insurance.

Investing Activities

During the 39-week period ended October 29, 2005, the Company spent $333 million on capital expenditures compared to $179 million and $605 million spent by Kmart and Sears, respectively, during the equivalent 39-week period in the prior year. The current year spending of $333 million excludes approximately $40 million of capital expenditures made by Sears during the period January 30, 2005 through March 24, 2005 (pre-Merger period).

During the 39-weeks ended October 29, 2005, the Company purchased 19 previously leased operating properties for $98 million. In the normal course of business, the Company considers opportunities to purchase leased operating properties, as well as offers to sell owned, or assign leased, operating and non-operating properties. These transactions may, individually or in the aggregate, result in material proceeds or outlays of cash. In addition, the Company reviews leases that will expire in the short-term to determine the appropriate action to take with respect to them.

Financing Activities

The Company considers the securitization of Sears Canada’s credit card receivables to be a financing activity. As such, the Company’s financing activities include borrowings, off-balance sheet debt related to the securitization of Sears Canada’s credit card receivables, share issuances and share and debt repurchases. The Company’s total funding as of October 29, 2005, October 27, 2004, and January 26, 2005 was as follows:

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004


millions	October 29,		October 27,		January 26,
	2005		2004		2005
Short-term borrowings:
Unsecured commercial paper	$	152	$	—	$	—

Long-term debt, including current portion:
Convertible subordinated notes, net		—		40		43
Notes and debentures outstanding		3,047		44		52
Capital lease obligations		861		332		316

Subtotal		4,060		416		411


Securitized borrowing (Sears Canada)		873		—		—

Total Funding	$	4,933	$	416	$	411


Memo: Sears Canada debt and securitized borrowing	$	1,592	$	—	$	—

The increase in total funding from January 26, 2005 is due primarily to the acquisition of Sears. Sears and its subsidiaries had approximately $3.9 billion of debt, $0.9 billion of securitized borrowings, and $0.5 billion of capital lease obligations at the time of the Merger.

In May 2005, the Finance Committee of the Board of Directors of the Company authorized the repurchase, subject to market conditions and other factors, of up to $500 million of the outstanding indebtedness of the Company and its subsidiaries in open market or privately negotiated transactions. The source of funds for the proposed purchases is expected to be the Company’s cash from operations or borrowings under the Company’s $4.0 billion, five-year credit agreement (the “Credit Agreement”). During the 13- and 39- week periods ended October 29 2005, the Company’s subsidiary, Sears Roebuck Acceptance Corp. (“SRAC”), repurchased $36 million and $150 million of its outstanding notes, respectively, thereby reducing the unused balance of this authorization to $350 million. In addition, for the 39-week period ended October 29, 2005, the Company made $610 million of scheduled debt repayments.

The Company uses interest rate derivatives to synthetically convert fixed-rate debt to variable-rate debt to manage its exposure to interest rate risks. The interest rate derivatives qualify as fair value hedges in accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” and are recorded on the balance sheets at market value with an offsetting entry to the underlying hedged debt.

During the second quarter of fiscal 2005, the Company terminated interest rate swaps with a notional value of approximately $1.0 billion that had converted certain of the Company’s fixed rate debt to floating rate debt. The Company’s variable rate borrowings were reduced to approximately $340 million as a result of these interest rate swap terminations and the retirement of certain of the Company’s variable rate debt. The Company received $60 million in cash proceeds from the swap terminations, representing the aggregate fair value of these swaps as of the termination date. As the hedges related to these swaps qualified for hedge accounting, an offsetting adjustment was recorded to the carrying amount of the designated hedged debt, which remains outstanding, and this adjustment will be amortized into interest expense over the remaining term of the debt.

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

During the 13 weeks ended October 29, 2005, the Company repurchased 3.7 million of its common shares at a total cost of $434 million under a common share repurchase program. This program, approved by the Board of Directors during the third quarter of fiscal 2005, authorized the repurchase of up to an aggregate of $1.0 billion of the Company’s common shares. As of October 29, 2005, the Company had $566 million of remaining authorization under this program.

The Company securitizes certain of its Canadian credit card receivables through trusts. Under the Sears Canada securitization program, trusts purchase undivided interests in the credit card receivable balances funded by issuing short- and long-term debt, primarily commercial paper and senior and subordinated notes. These debt instruments entitle the holder to a series of scheduled cash flows under preset terms and conditions, the receipt of which is dependent upon cash flows generated by the related trusts’ assets. The trusts meet the definition of a qualified special purpose entity. As a result, the Sears Canada securitized credit card receivables and related borrowings are not presented in the condensed consolidated balance sheets of Holdings.


	October 29,
millions	2005
Credit card receivables, net of $35 allowance	$	1,224
Other assets		500

Total assets held for sale		1,724

Accounts payable and accrued liabilities		133

Total liabilities of operations held for sale	$	133

The following table summarizes the Sears Canada credit card receivables:


	October 29,
millions	2005
Managed accounts	$	2,186
Less: co-ownership interest held by third parties		(873	)

Co-ownership retained by the Company		1,313
Less: long-term portion of deferred customer accounts receivable		(54	)

Total	$	1,259

Liquidity

The Company’s primary need for liquidity is to fund capital expenditures and seasonal working capital requirements of its retail businesses and for general corporate purposes. These needs generally will be funded by the Company’s operating cash flows and, to the extent necessary, borrowings under the Credit Agreement. At October 29, 2005, $3.4 billion was available under this facility. While the Company expects to use the

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

Credit Agreement as its primary funding source, it may also access the public debt markets on an opportunistic basis. The Company may from time to time consider selective strategic transactions to create value and improve performance, which may include acquisitions, dispositions, restructurings, joint ventures and partnerships.

Sears Canada’s Board of Directors declared a cash distribution to its shareholders to be paid on December 16, 2005. Holdings expects that its after-tax proceeds from this distribution will approximate $820 million. Further, on December 5, 2005, Holdings announced its intention to offer to acquire the 46% of Sears Canada which it does not currently own for a purchase price of $720 million. Holdings expects to fund the acquisition with cash on hand.

Debt Ratings

The ratings of the Company’s domestic debt securities as of October 29, 2005 appear in the table below:

Moody’s

Standard &

Investors

Poor’s Ratings

Fitch

Service

Services

Ratings

Unsecured long-term debt

Ba1

BB+

Unsecured commercial paper

⁽¹⁾


⁽¹⁾		On November 2, 2005, Standard & Poor’s Ratings Service raised its ratings of the Company’s short-term debt and commercial paper to ‘B-1’ from ‘B’.

Credit Agreement

The Credit Agreement is available for general corporate purposes and includes a $1.5 billion letter of credit sublimit. The Credit Agreement is a revolving credit facility under which SRAC and Kmart Corporation are the borrowers. The Credit Agreement is guaranteed by Holdings and certain of its direct and indirect subsidiaries and is secured by a first lien on domestic inventory, credit card accounts receivable and the proceeds thereof. Availability under the Credit Agreement is determined pursuant to a borrowing base formula, based on domestic inventory and credit card accounts receivable, subject to certain limitations. As of October 29, 2005, the Company had $592 million of letters of credit outstanding under the Credit Agreement with $3.4 billion of availability remaining under the Credit Agreement. There were no borrowings under the facility during the third quarter. The Credit Agreement does not contain provisions that would restrict borrowings or letter of credit issuances based on material adverse changes or credit ratings. The Company capitalized $19 million of debt issuance costs in connection with entering into the Credit Agreement. These costs are being amortized over the five-year life of the Credit Agreement.

Letter of Credit Agreement

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

issuances based on credit ratings, but issuances could be restricted under certain circumstances based on a material adverse change.

Cash Collateral

OSH Supply Hardware LLC (“LLC”) Credit Agreement

In November 2005, LLC entered into a five-year, $130 million senior secured revolving credit facility (the “LLC Facility”). The LLC Facility is available for LLC’s general corporate purposes and is secured by a first lien on substantially all of LLC’s non-real estate assets. Availability under the LLC Facility is determined pursuant to a borrowing base formula based on inventory and accounts and credit card accounts receivable, subject to certain limitations.

SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES

In preparing the financial statements, certain accounting policies require considerable judgment to select the appropriate assumptions to calculate financial estimates. These estimates are complex and subject to an inherent degree of uncertainty. The Company bases its estimates on historical experience, terms of existing contracts, evaluation of trends and other assumptions that the Company believes to be reasonable under the circumstances. The Company continually evaluates the information used to make these estimates as its business and the economic environment change. Although the use of estimates is pervasive throughout the financial statements, the Company considers an accounting estimate to be critical if:

	§		it requires assumptions to be made about matters that were highly uncertain at the time the estimate was made, and

	§		changes in the estimate that are reasonably likely to occur from period to period or different estimates that could have been selected would have a material effect on the Company’s financial condition, cash flows or results of operations.

Management believes the current assumptions and other considerations used to estimate amounts reflected in the financial statements are appropriate. However, if actual experience differs from the assumptions and the considerations used in estimating amounts, the resulting changes could have a material adverse effect on the Company’s condensed consolidated results of operations, and in certain situations, could have a material adverse effect on its financial condition.

Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of its Board of Directors and the Audit Committee has reviewed the disclosure presented below relating to the selection of these estimates.

The following is a summary of the Company’s most critical estimates.

Revenue Recognition

Revenues from merchandise sales and services, including delivery fees, are reported net of estimated returns and allowances and are recognized when the related goods are shipped and all significant obligations of the Company have been satisfied. The reserve for returns and allowances is calculated as a percentage of sales

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

based on historical return percentages. Revenues from product installation and repair services are recognized as the services are provided. Revenues from the sale of long-term service contracts are deferred and amortized over the lives of the contracts while the service costs are expensed as incurred.

Valuation of Inventory

Most of the Company’s inventory is valued at the lower of cost or market determined primarily using the retail inventory method (“RIM”). RIM is an averaging method that is widely used in the retail industry. To determine inventory cost under RIM, inventory at its retail selling value is segregated into groupings of merchandise having similar characteristics, which are then converted to a cost basis by applying specific average cost factors for each grouping of merchandise. Cost factors represent the average cost-to-retail ratio for each merchandise group based upon the fiscal year purchasing activity for each store location. Accordingly, a significant assumption under the retail method is that inventory in each group is similar in terms of its cost-to-retail relationship and has similar turnover rates. Management monitors the content of merchandise in these groupings to prevent distortions that would have a material effect on inventory valuation.

RIM inherently requires management judgment and certain estimates that may significantly affect the ending inventory valuation as well as gross margin. Among others, two significant estimates used in inventory valuation are the level and timing of permanent markdowns (clearance markdowns used to clear unproductive or slow-moving inventory) and shrinkage. Amounts are charged to cost of sales, buying and occupancy at the time the retail value of inventory is reduced through the use of permanent markdowns.

Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age of the merchandise, fashion trends and weather conditions. In addition, inventory is also evaluated against corporate pre-determined historical markdown cadences. When a decision is made to permanently markdown merchandise, the resulting gross margin reduction is recognized in the period the markdown is recorded. The timing of the decision, particularly surrounding the balance sheet date, can have a significant effect on the results of operations.

Shrinkage is estimated as a percentage of sales for the period from the date of the last physical inventory to the end of the fiscal year. Physical inventories are taken at least annually for all stores on a staggered basis throughout the year and inventory records are adjusted accordingly. The shrinkage rate from the most recent physical inventory, in combination with historical experience, is used as the standard for the shrinkage accrual following the physical inventory.

Self Insurance Reserves

The Company uses a combination of third-party insurance and/or self-insurance for a number of risks including workers’ compensation, asbestos and environmental, automobile, product and general liability claims. The Company’s liability reflected on the condensed consolidated balance sheets represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. In estimating this liability, the Company utilizes loss development factors prepared by independent third-party actuaries. These development factors utilize historical data to project the future development of incurred losses. Loss estimates are adjusted based upon actual claims settlements and reported claims. Although the Company does not expect the amounts ultimately paid to differ significantly from its estimates, self-insurance reserves could be affected if future claim experience differs significantly from the historical trends and the actuarial assumptions.

Defined Benefit Retirement Plans

The fundamental components of accounting for defined benefit retirement plans consist of the compensation cost of the benefits earned, the interest cost from deferring payment of those benefits into the future and the

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

results of investing any assets set aside to fund the obligation. Such retirement benefits are earned by associates ratably over their service careers. Therefore, the amounts reported in the income statement for these retirement plans have historically followed the same pattern. Accordingly, changes in the obligations or the value of assets to fund them have been recognized systematically and gradually over the associate’s estimated period of service. The largest drivers of experience losses in recent years have been the discount rate used to determine the present value of the obligation and the actual return on pension assets. Kmart recognizes the changes by amortizing experience gains/losses in excess of the 10% corridor into expense over the associate service period and by recognizing the difference between actual and expected asset returns over a five-year period. While the accounting policy for the Sears domestic pension plans was to immediately recognize any experience gains or loss in excess of the 10% corridor, the Company will conform the accounting for the Sears domestic plans to that of Kmart. The Sears domestic pension plans had no unrecognized experience gain or loss as of the date of the Merger.

Effective January 31, 1996, Kmart’s pension plans were frozen, and associates no longer earn additional benefits under the plans. Therefore, there are no assumptions related to future compensation costs relating to the Kmart pension plans. During the first quarter of 2005, Holdings announced that the Sears domestic pension plan would be frozen effective January 1, 2006. Domestic associates will earn no additional benefits after December 31, 2005. Benefits earned through December 31, 2005 will be paid out to eligible participants following retirement.

Holdings’ actuarial valuations utilize key assumptions including discount rates and expected returns on plan assets. The Company is required to consider current market conditions, including changes in interest rates and plan asset investment returns, in determining these assumptions. Actuarial assumptions may differ materially from actual results due to changing market and economic conditions, changes in investment strategies and higher or lower withdrawal rates or longer or shorter life spans of participants.

Income Taxes

During the first quarter of fiscal 2005, the Company recognized a reversal of approximately $1.1 billion of its pre-Merger deferred income tax valuation allowance as a result of the Merger and the combined tax attributes resulting from it. According to SFAS No. 109, the recognition of this reversal is included in the Company’s purchase accounting adjustments as a reduction to goodwill attributable to the Merger. Given the Company’s current and forecasted levels of profitability, as well as its ability to realize the deferred tax assets through tax strategies if necessary, management believes that a significant portion of the deferred tax assets will more likely than not be realized.

The consolidated valuation allowance as of October 29, 2005 is $460 million and relates to the uncertainty around the realization of certain state deferred tax assets, including $284 million related to state tax benefits of Sears, which are not expected to be realized. The Company will continue to assess the likelihood of realization

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

of these state deferred tax assets and will reduce the valuation allowance on such assets in the future if it becomes more likely than not that the net deferred tax assets will be utilized.

The tax balances and income tax expense recognized by the Company are based on management’s interpretation of the tax laws of multiple jurisdictions. Income tax expense also reflects the Company’s best estimates and assumptions regarding, among other things, the level of future taxable income, interpretation of the tax laws, and tax planning. Future changes in tax laws, changes in projected levels of taxable income, and tax planning could affect the effective tax rate and tax balances recorded by the Company. Domestic and foreign tax authorities periodically audit the Company’s income tax returns. These audits include questions regarding its tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating its various tax filing positions, the Company records tax benefits to the extent that, in management’s judgment, it is probable that the Company’s tax position will ultimately be sustained. A number of years may elapse before a particular matter, for which the Company has established a reserve, is audited and fully resolved. Management’s estimates as of the date of the financial statements reflect its best judgment giving consideration to all currently available facts and circumstances. As such, these estimates may require adjustment in the future, as additional facts become known or as circumstances change.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

To facilitate an understanding of the Company’s contractual obligations, the following data is provided:

Contractual Obligations


			Payments Due by Period
millions	Total		Within 1 Year		1-3 Years		4-5 Years		After 5 Years
Long-term debt	$	2,935	$	575	$	902	$	575	$	883
Short-term debt		152		152		—		—		—
Capital lease obligations		973		69		119		104		681
Operating leases		6,624		791		1,398		1,125		3,310


Total contractual obligations	$	10,684	$	1,587	$	2,419	$	1,804	$	4,874

The Company has no material unconditional purchase obligations as defined by SFAS No. 47, “Disclosure of Long-Term Purchase Obligations”.

Defined benefit retirement plans

During the first quarter of fiscal 2005, Holdings announced that the Sears domestic pension plan will be frozen effective January 1, 2006. Domestic associates will earn no additional benefits after December 31, 2005. Benefits earned through December 31, 2005 will be paid out to eligible participants following retirement.

Contributions were made to the Kmart and Sears domestic pension plans in the amount of $238 million and $0 million, respectively, for the 13-week period ended October 29, 2005 and $240 million and $33 million, respectively, for the 39-week period ended October 29, 2005. There are no minimum required pension contributions for the remainder of fiscal 2005 to either the Kmart or the Sears domestic pension plan.

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements made in this Quarterly Report on Form 10-Q and in other public announcements by the Company contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include information concerning the Company’s future financial performance, business strategy, plans, goals and objectives. Statements preceded or followed by, or that otherwise include, the words “believes”, “expects”, “anticipates”, “intends”, “estimates”, “plans”, “forecasts”, “is likely to”, “projected” and similar expressions or future or conditional verbs such as “will”, “should”, “would”, “may” and “could” are generally forward-looking in nature and not historical facts. Such statements include, but are not limited to, statements about the expected benefits of the business combination of Sears and Kmart and future financial and operating results. Such statements are based upon the current beliefs and expectations of Holdings’ management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements.

The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: the risk that the businesses of Sears and Kmart will not be integrated successfully; failure to quickly realize synergies and cost-savings from the Merger; the effects of substantial headquarters workforce reductions; the ability to attract, motivate and retain key executives and other associates; disruption from the Merger making it more difficult to maintain relationships with clients, employees and suppliers; competitive conditions in the retail and related services industries; changes in consumer confidence, tastes, preferences and spending, including the impact of fuel costs on spending patterns; marketplace demand for the products of the Company’s key brand partners as well as the engagement of appropriate new brand partners; operational or financial difficulties at any of the Company’s business partners; the availability and level of consumer debt; the successful execution of, and customer response to, strategic initiatives, including the full-line store strategy, the conversion of Kmart stores to the Sears Essentials nameplate and the integration of other new store locations; the pace of growth in store locations, which may be higher or lower than anticipated; the possibility that new business and strategic options for one or more business segments will be identified, potentially including selective acquisitions, dispositions, restructurings, joint ventures and partnerships; trade restrictions, tariffs, and other factors potentially affecting the ability to do business with qualified vendors and access products in an efficient manner; the ability to successfully implement initiatives to improve inventory management capabilities; unanticipated increases in paper, postage or printing costs; anticipated cash flow and the ability of the Company to maintain sufficient operating cash flow and liquidity; changes in interest rates; the outcome of pending and/or future legal proceedings and bankruptcy claims; social and political conditions such as war, political unrest and terrorism or natural disasters; the possibility of negative investment returns in pension plans; volatility in financial markets; the terms and availability of debt financing; changes in debt ratings, credit spreads and cost of funds; unexpected difficulties accessing the public debt markets; the impact of seasonal buying patterns, which are difficult to forecast with certainty; uncertainty as to the operating cash flows to be derived by Sears Canada from its long-term marketing and servicing alliance with JP Morgan Chase; and general economic conditions and normal business uncertainty. In addition, the Company typically earns a disproportionate share of its operating income in the fourth quarter due to seasonal buying patterns, which are difficult to forecast with certainty.

Certain of these and other factors are discussed in more detail in the Company’s filings with the Securities and Exchange Commission and the Annual Reports on Form 10-K of Sears and Kmart for their fiscal years ended January 1 and January 26, 2005, respectively, all of which may be accessed through the Commission’s website at www.sec.gov.

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

While the Company believes that its forecasts and assumptions are reasonable, it cautions that actual results may differ materially. The Company intends the forward-looking statements to speak only as of the time made and does not undertake to update or revise them as more information becomes available.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The nature of market risks faced by the Company at October 29, 2005 are the same as disclosed in Sears’ Annual Report on Form 10-K for the year ended January 1, 2005. As of October 29, 2005, 8% of the Company’s funding portfolio, excluding securitized debt of Sears Canada, was variable rate (including fixed rate debt synthetically converted to variable rate through the use of derivative financial instruments). Based on the size of this variable rate funding portfolio at October 29, 2005, which totaled approximately $340 million, an immediate 100 basis point change in interest rates would have affected annual pretax funding costs by approximately $3.4 million. These estimates do not take into account the effect on revenue resulting from invested cash or the returns on assets being funded. These estimates also assume that the variable rate funding portfolio remains constant for an annual period and that the interest rate change occurs at the beginning of the period. During the second quarter of fiscal 2005, the Company terminated interest rate swaps, which converted fixed rate debt to floating rate debt, with a notional value of approximately $1.0 billion. The Company’s variable rate borrowings were reduced to approximately $340 million as a result of these interest rate swap terminations and retirement of variable rate debt. The Company received $60 million in cash proceeds from the swap terminations, representing the aggregate fair value of these swaps as of the termination date. As the hedges related to these swaps qualified for hedge accounting, an offsetting adjustment was recorded to the carrying amount of the designated hedged debt, which remains outstanding, and this adjustment will be amortized into interest expense over the remaining term of the debt.

During the second quarter of fiscal 2005, the Company entered into a series of six- and nine-month foreign currency forward contracts totaling $1.0 billion Canadian notional value designed to hedge the Company’s net investment in Sears Canada against adverse changes in exchange rates. The aggregate fair value of the forward contracts as of October 29, 2005 was negative $40 million. These hedges qualify for hedge accounting and, as such, an unrealized loss of $40 million was recorded as a component of other comprehensive loss in the Company’s condensed consolidated balance sheet as of October 29, 2005. A hypothetical 10% adverse movement in the level of the Canadian exchange rate relative to the U.S. dollar as of October 29, 2005, with all other variables held constant, would have resulted in a loss in the fair value of the Company’s foreign currency forward contracts of $94 million as of October 29, 2005.

Item 4. Controls and Procedures

The Company’s management, including Aylwin B. Lewis, Chief Executive Officer and President (principal executive officer) , and William C. Crowley, Executive Vice President and Chief Financial and Administrative Officer (principal financial officer), have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based upon their evaluation, the principal executive officer and the principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

SEARS HOLDINGS CORPORATION
13 and 39 Weeks Ended October 29, 2005 and October 27, 2004

In addition, as required by Rule 13a-15(d) under the Exchange Act, the Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the Company’s internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company considers the acquisition of Sears material to the results of its operations, financial position and cash flows from the date of acquisition through October 29, 2005 and considers the internal controls and procedures of Sears to be reasonably likely to materially affect the Company’s internal control over financial reporting. The Company has extended its Sarbanes-Oxley Act Section 404 compliance program to include Sears.

SEARS HOLDINGS CORPORATION

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

§		On and after October 18, 2002, several actions were filed in the United States District Court for the Northern District of Illinois against Sears and certain current and former officers alleging that certain public announcements by Sears concerning its credit card business violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Court has consolidated the actions and certified the consolidated action as a class action. Discovery is underway. The trial is scheduled to begin in September 2006.

§		On and after November 15, 2002, several actions were filed in the United States District Court for the Northern District of Illinois against Sears, certain officers and directors, and alleged fiduciaries of Sears’ 401(k) Savings Plan (the “Plan”), seeking damages and equitable relief under the Employee Retirement Income Security Act of 1974 (“ERISA”). The plaintiffs purport to represent participants in the Plan, and allege breaches of fiduciary duties under ERISA in connection with the Plan’s investment in Sears’ common shares and alleged communications made to Plan participants regarding Sears’ financial condition. The Court has consolidated these actions and certified the consolidated action as a class action. Discovery is underway. No trial date has been set.

§		On October 23, 2002, a purported derivative suit was filed in the Supreme Court of the State of New York (the “New York Court”) against Sears (as a nominal defendant) and certain current and former directors seeking damages on behalf of Sears. The complaint purports to allege a breach of fiduciary duty by the directors with respect to Sears’ management of its credit business. Two similar suits were subsequently filed in the Circuit Court of Cook County, Illinois (the “Illinois State Court”), and a third was filed in the United States District Court for the Northern District of Illinois. The New York Court derivative suit was dismissed on June 21, 2004 and the plaintiff has appealed. The two Illinois State Court derivative suits were dismissed on September 30, 2004. The order of dismissal became final on December 1, 2004, and the time to appeal has expired. The Illinois federal court suit has been stayed pending resolution of the New York Court derivative action.

§		On June 17, 2003, an action was filed in the Northern District of Illinois against Sears and certain officers, purportedly on behalf of a class of all persons who, between June 21, 2002 and October 17, 2002, purchased the 7% notes that SRAC issued on June 21, 2002. An amended complaint was filed, naming as additional defendants certain former officers, SRAC and several investment banking firms who acted as underwriters for SRAC’s March 18, May 21 and June 21, 2002 notes offerings. The amended complaint alleges that the defendants made misrepresentations or omissions concerning its credit business during the class period and in the registration statements and prospectuses relating to the offerings. The amended complaint alleges that these misrepresentations and omissions violated Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder, and Sections 11, 12 and 15 of the Securities Act of 1933 and purports to be brought on behalf of a class of all persons who purchased any security of SRAC between October 24, 2001 and October 17, 2002, inclusive. The defendants filed motions to dismiss the action. On September 24, 2004, the court granted these motions in part, and denied them in part. The court dismissed the claims related to the March 18 and May 21, 2002 note offerings because the plaintiff did not purchase notes in those offerings. The court dismissed the Section 10(b) and Rule 10b-5 claims against several of the individual defendants because the plaintiff failed to adequately plead such claims. The court sustained the remaining claims. By leave of court, the plaintiffs filed a second amended complaint on November 15, 2004. Defendants (other than one of the underwriter defendants) filed motions

SEARS HOLDINGS CORPORATION

to partially dismiss the second amended complaint on January 10, 2005. The defendant that did not move to partially dismiss filed an answer to the second amended complaint on January 28, 2005, denying all liability. On September 14, 2005, the court granted the pending motions to dismiss in part, and denied them in part. The court dismissed the Section 11 claim with respect to SRAC’s May 21, 2002 notes on the ground that the plaintiffs lacked standing, and the Section 12 claims with respect to SRAC’s March 18, 2002 notes and May 21, 2002 notes on the ground that the plaintiffs could not allege damages. The court dismissed the Section 15 claim on the ground that the plaintiffs had failed to allege a predicate violation of the Securities Act of 1933 on the part of SRAC. The court dismissed the Section 10(b) and Rule 10b-5 claims as to some, but not all, of the individual defendants. The court sustained the remaining claims. By leave of court, the plaintiffs filed a third amended complaint on October 28, 2005. The non-underwriter defendants filed a motion to partially dismiss the third amended complaint on November 15, 2005.

§		Three actions have been filed in the Circuit Court of Cook County, Illinois. These actions assert claims on behalf of a purported class of Sears’ stockholders against Sears and certain of its officers and directors, together with Kmart, Edward S. Lampert, William C. Crowley and other affiliated entities, alleging breach of fiduciary duty in connection with the merger. The plaintiffs allege that the merger favors interested defendants by awarding them disproportionate benefits, and that the defendants failed to take appropriate steps to maximize the value of a merger transaction for Sears’ stockholders. The actions have been consolidated, and an amended complaint was filed in early January 2005. The amended complaint asserts similar breach-of-fiduciary duty claims, as well as alleging that defendants have made insufficient and misleading disclosures in connection with the mergers, and seeks injunctive relief. The plaintiffs have moved for expedited discovery. On February 1, 2005, the court granted the defendants’ motion to stay or dismiss these actions in favor of then-pending parallel litigation in the New York Supreme Court. Plaintiffs appealed the stay order to the Appellate Court of Illinois-First District. On October 28, 2005, following the dismissal with prejudice of the New York actions and the New York plaintiffs’ failure to appeal, the Appellate Court of Illinois dismissed the appeal as moot. The cases are now pending in the Circuit Court, and the defendants intend to renew their motion to dismiss.

§		Two actions were filed in the Supreme Court of the State of New York, New York County, asserting substantially similar claims against Sears and certain of its officers and directors. The parties agreed to consolidate these two actions. Pending consolidation, the defendants moved to dismiss the complaint in both actions for lack of standing and failure to state a cause of action. On February 15, 2005, the Court ordered that the two cases be consolidated as a single action. On February 16, 2005, the plaintiffs filed a superceding consolidated amended class action complaint. The amended complaint asserts claims on behalf of a purported class of Sears’ stockholders against Sears and certain of its officers and directors for breach of fiduciary duty in connection with the merger on the grounds that defendants allegedly failed to take proper steps to maximize the value of a merger transaction for Sears’ stockholders. Additionally, the plaintiffs claim that the defendants made insufficient and misleading disclosures in connection with the mergers. The amended complaint also names Kmart, Edward S. Lampert and ESL, Inc. as defendants on the grounds that they aided and abetted the alleged breaches of fiduciary duty. The amended complaint seeks provisional and permanent injunctive relief, as well as damages. On March 24, 2005, the Court denied plaintiffs’ motions for expedited discovery and a preliminary injunction against the closing of the mergers. On July 29, 2005, the Court granted all defendants’ motions to dismiss the action with prejudice. The time to appeal has expired, and plaintiffs have not filed an appeal.

§		One action has been filed in the United States District Court for the Northern District of Illinois. This action asserts claims under the federal securities laws on behalf of a purported class of Sears’ stockholders against

SEARS HOLDINGS CORPORATION

Sears and Alan J. Lacy, for allegedly failing to make timely disclosure of merger discussions with Kmart during the period November 8 through 16, 2004, and seeks damages. The court appointed a lead plaintiff and lead counsel, and an amended complaint was filed on March 11, 2005. The amended complaint, names Edward S. Lampert and ESL Partners, L.P., as additional defendants, and purports to assert claims on behalf of sellers of Sears stock during the period September 9 through November 16, 2004. All defendants have moved to dismiss, and briefing on the motions was completed in early July.

In March 2002, a class action was filed in the United States District court for the Eastern District of Michigan on behalf of participants or beneficiaries of the Kmart Corporation Retirement Savings Plan against various current and former employees and former directors of Kmart Corporation alleging breach of fiduciary duty under the Employee Retirement Income Security Act for excessive investment in the Predecessor Company’s stock, failure to provide complete and accurate information about the Predecessor Company’s common stock and failure to provide accurate information regarding the Predecessor Company’s financial condition. In July 2002, the plaintiffs filed proofs of claim with the bankruptcy court in an aggregate amount of $180 million. In July 2005, tentative agreement was reached to settle this action. The settlement is subject to final court approval. Kmart is not a defendant in this action. The settlement is expected to be covered by insurance, except for $50,000 that Kmart expects to contribute as part of the settlement. Once the settlement is approved, Kmart will move to have the proofs of claim filed expunged.

SEARS HOLDINGS CORPORATION

On August 23, 2005, the SEC filed a complaint in the United States District Court for the Eastern District of Michigan against the Predecessor Company’s former chief executive officer and its former chief financial officer alleging that they misled investors about the Predecessor Company’s liquidity and related matters in the months preceding its bankruptcy in violation of federal securities law. The complaint seeks permanent injunctions, disgorgement with interest, civil penalties and officer and director bars. Kmart is not named as a defendant in the action. In its press release announcing the filing of the complaint, the SEC stated that its Kmart investigation is continuing.

SEARS HOLDINGS CORPORATION

annual results of operations, financial position, liquidity or capital resources of the Company. Additional information regarding legal proceedings may be found in Kmart’s Annual Report on Form 10-K for its fiscal year ended January 26, 2005.

Item 2. Unregistered Sales of Equity Securities and Uses of Proceeds

The following table provides information about shares of common stock the Company acquired during the third quarter of fiscal 2005, including shares assigned to the Company as part of settlement agreements resolving claims arising from the Chapter 11 reorganization of Kmart Corporation. During the 13 weeks ended October 29, 2005, the Company repurchased 3.7 million of its common shares at a total cost of $434 million under a common share repurchase program. This program, approved by the Board of Directors during the third quarter of 2005, authorized the repurchase of up to an aggregate of $1.0 billion of the Company’s common shares. As of October 29, 2005, the Company had $566 million of remaining authorization under this program.

Issuer Purchases of Equity Securities


					Total Number of Shares		Approximate Dollar Value
	Total Number				Purchased as Part of		of Shares that May Yet
	of Shares		Average Price		Publicly Announced		Be Purchased Under the
Period	Purchased		Paid per Share		Plans or Programs²		Plans or Programs
July 31, 2005 — August 27, 2005		1,748	$	139.33		—

August 28, 2005 — October 1, 2005		2,573,711		120.10		2,567,794

October 2, 2005 — October 29, 2005		1,094,457		116.00		1,083,405

Total		3,669,916	$	118.89		3,651,199	$	566,000,000


¹		Includes the following numbers of shares acquired as payment of withholding taxes in connection with the vesting of restricted stock and Bankruptcy-related settlements:


July 31, 2005 — August 27, 2005			1,748
August 28, 2005 — October 1, 2005			5,917
October 2, 2005 — October 29, 2005			11,052

² During the third quarter of fiscal 2005, the Company’s Board of Directors approved a common share repurchase program authorizing the repurchase of up to an aggregate of $1.0 billion of the Company’s common shares.

Item 6. Exhibits

(a) Exhibits.

An Exhibit Index has been filed as part of this Report on Page E-1.

SEARS HOLDINGS CORPORATION
EXHIBIT INDEX

2		Agreement and Plan of Merger, dated as of November 16, 2004, by and among Kmart Holding Corporation, Sears, Roebuck and Co., Sears Holdings Corporation, Kmart Acquisition Corp. and Sears Acquisition Corp. (incorporated by reference to Annex A to the joint proxy statement — prospectus in Part I of the Registrant’s Registration Statement on Form S-4, file No. 333-120954).

3.1		Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K, dated March 24, 2005, filed on March 24, 2005 (File No. 000-51217)).

3.2		Restated By-Laws (incorporated by reference to Exhibit 3.2 to Registrant’s Current Report on Form 8-K, dated March 24, 2005, filed on March 24, 2005 (File No. 000-51217)).

4		Registrant hereby agrees to furnish to the Commission, upon request, the instruments defining the rights of holders of each issue of long-term debt of Registrant and its consolidated subsidiaries.

10.1		Registrant’s 2005 Senior Executive Long-Term Incentive Program (incorporated by reference to Exhibit 10 to Registrant’s Current Report on Form 8-K/A (Amendment No. 1) dated September 29, 2005 (File No. 000-51217)).

10.2		Amended and Restated Employment Agreement, dated September 7, 2005, between the Registrant and Alan J. Lacy (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated September 8, 2005 (File No. 000-51217)).

10.3		First Amendment to the Sears Holdings Corporation Senior Executive Long-Term Incentive Program (incorporated by reference to Exhibit 10(a) to Registrant’s Current Report on Form 8-K dated September 29, 2005 (File No. 000-51217)).

10.4		Sears Holdings Corporation Director Compensation Program (incorporated by reference to Exhibit 10(b) to Registrant’s Current Report on Form 8-K dated September 29, 2005 (File No. 000-51217)).

*10.5		Revised form of Executive Severance/Non-Compete Agreement for Senior Executives of the Registrant.

*10.6		Revised form of Executive Severance/Non-Compete Agreement for Senior Executives of the Registrant.

*31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*32		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*		Filed herewith

E - 1


	SEARS HOLDINGS CORPORATION
	(Registrant)

December 5, 2005	By	/s/ William K. Phelan

		William K. Phelan
		Vice President and Controller
		(Principal Accounting Officer and duly authorized officer
		of Registrant)

	iii.		Executive acknowledges that Sears shall have the right to propose modifications to Appendix B periodically to include (1) emergent Competitors in Sears existing lines of business and (2) Competitors in lines of business that are new for Sears with the prior written consent of Executive, which shall not be unreasonably withheld.

	iv.		Executive further acknowledges that Sears does business throughout the United States, Puerto Rico and Canada and that this non-compete provision applies in any state of the United States, Puerto Rico or province of Canada in which Sears does business.


			Page
PART I — FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Condensed Consolidated Statements of Operations (Unaudited) for the 13 and 39 Weeks Ended October 29, 2005 and October 27, 2004		1

		Condensed Consolidated Balance Sheets (Unaudited) as of October 29, 2005, October 27, 2004 and January 26, 2005		2

		Condensed Consolidated Statements of Cash Flows (Unaudited) for the 39 Weeks Ended October 29, 2005 and October 27, 2004		3

		Notes to Condensed Consolidated Financial Statements (Unaudited)		4

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		53

	Item 4.	Controls and Procedures		53

PART II — OTHER INFORMATION

	Item 1.	Legal Proceedings		55

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		59

	Item 6.	Exhibits		E-1
Revised Form of Executive Severance/Non-Compete Agreement
Revised Form of Executive Severance/Non-Compete Agreement
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification Pursuant to Section 906

	(a)		Non-Disclosure and Non-Solicitation. Executive acknowledges that Executive has previously or has simultaneously executed and will continue to be bound by an Executive Non-Disclosure and Non-Solicitation of Employees Agreement, which agreement sets forth, among other things, the definition of Sears Confidential Information and is incorporated by reference herein.

	(b)		Non-Competition. Executive acknowledges that as a result of Executive’s position at Sears, Executive has learned or developed, or will learn or develop, Sears Confidential Information and that use or disclosure of such Confidential Information is likely to occur if Executive were to render advice or services to any Sears Competitor.

	1.		Those companies listed on Appendix A, each of which Executive acknowledges is a Sears Competitor, whether or not it falls within the categories in (2), below, and further acknowledges that this is not an exclusive list of Sears Competitors and is not intended to limit the generality of subsection 6(b)(ii)(2), below, and

	2.		Any party (A) engaged in any retail business (whether in a department store, specialty store, discount store, direct marketing, or electronic commerce or other business format), that consists of selling furniture, appliances, electronics, hardware, auto parts and/or apparel products, or providing home improvement, product repair and/or home services, with combined annual revenue in excess of $500 million, (B) any vendor with combined annual gross sales of services or merchandise to Sears in excess of $100 million, or (C) a party engaged in any other line of business, in which Sears has commenced business prior to the end of Executive’s active employment, with Sears having annual gross sales in that line of business in excess of $50 million.


Date:	SAMPLE ONLY — DO NOT SIGN	Signed by:	SAMPLE ONLY — DO NOT SIGN

		Witness by:


Retail		Home/Product Services
Department Stores		Ace Hardware Corporation
Dillard’s, Inc.		TruServe Corporation
Federated Department Stores, Inc.		Lowe’s Companies, Inc.
J. C. Penney Company, Inc.		Menard, Inc.
Kohls’ Corporation		The Home Depot, Inc.
The May Department Stores Company
Mervyn’s
Saks Incorporated

Discount Stores		Other
Kohl’s Corporation		Maytag Corporation
Target Corporation		Whirlpool Corporation
Wal-Mart Stores, Inc.		The ServiceMaster Company

Specialty Stores
AutoZone, Inc.
Bed Bath & Beyond Inc.
Best Buy Co., Inc.
CarMax, Inc.
Circuit City Stores, Inc.
CompUSA Inc. (eliminate hyphen)
Finlay Enterprises, Inc. (Jewelry)
Gap Inc.
Limited Brands, Inc.
Linens ‘n Things, Inc.
Office Depot, Inc.
The Pep Boys — Manny, Moe & Jack
Pier 1 Imports, Inc.
Tandy Brands Accessories, Inc.
Zale Corporation

	i.		Therefore, for one (1) year from Executive’s last day of active employment, whether or not Executive receives severance benefits pursuant to Section 1 hereto (“Severance Pay”), Executive will not, directly or indirectly, aid, assist, participate in, consult with, render services for, accept a position with, become employed by, or otherwise enter into any relationship with (other than having a passive ownership interest in or being a customer of) any Sears Competitor.

	ii.		For purposes of this Agreement, “Sears Competitor” means

1.		I have reviewed this quarterly report on Form 10-Q of Sears Holdings Corporation;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


/s/ Aylwin B. Lewis
Aylwin B. Lewis
Chief Executive Officer and
President
Sears Holdings Corporation


/s/ William C. Crowley
William C. Crowley
Executive Vice President,
Chief Financial Officer and Chief
Administrative Officer
Sears Holdings Corporation

	1.		The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	2.		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ Aylwin B. Lewis
Aylwin B. Lewis
Chief Executive Officer and President

/s/ William C. Crowley
William C. Crowley
Executive Vice President, Chief Financial
Officer and Chief Administrative Officer