8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________

FORM 8-K

_____________________

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): February 28, 2013

_________________________

SEARS HOLDINGS CORPORATION

(Exact name of registrant as specified in charter)

Delaware	000-51217	20-1920798
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS 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

(Former name or former address, if changed since last report): Not Applicable

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Section 2 - Financial Information

Item 2.02	Results of Operations and Financial Condition.
	On February 28, 2013, the Registrant issued a press release regarding its fourth quarter 2012 and full year 2012 results. The press release is attached hereto as Exhibit 99.1.

Section 8 - Other Events

Item 8.01	Other Events.
	On February 28, 2013, the Chairman and Chief Executive Officer of the Registrant issued a letter to shareholders. The letter will be available on the Registrant's website, www.searsholdings.com, and is attached hereto as Exhibit 99.2.

Section 9 - Financial Statements and Exhibits

Item 9.01	Financial Statements and Exhibits.
	(d) Exhibits
	Exhibit 99.1 - Press release dated February 28, 2013, furnished pursuant to Item 2.02.
	Exhibit 99.2 - Letter from the Chairman and Chief Executive Officer dated February 28, 2013.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SEARS HOLDINGS CORPORATION

By: /s/ Robert A. Riecker

Robert A. Riecker

Vice President, Controller and Chief

Accounting Officer

Date: February 28, 2013

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Exhibit Index

99.1 Press release dated February 28, 2013, furnished pursuant to Item 2.02.

99.2 Letter from the Chairman and Chief Executive Officer dated February 28, 2013.

EX-99.1

Exhibit 99.1

NEWS MEDIA CONTACT:

Sears Holdings Public Relations

(847) 286-8371

                         FOR IMMEDIATE RELEASE:

February 28, 2013

SEARS HOLDINGS REPORTS FOURTH QUARTER AND FULL YEAR 2012 RESULTS

HOFFMAN ESTATES, Ill. - Sears Holdings Corporation (“Holdings,” “we,” “us,” “our” or the “Company”) (NASDAQ: SHLD) today reported its fourth quarter and full year 2012 results. In summary, we reported:

• Adjusted EBITDA of $429 million for the fourth quarter of 2012 and $626 million for the year, which were both in line with our guidance provided on January 7, 2013. Adjusted EBITDA for the prior year fourth quarter and year were $351 million and $277 million, respectively;

• Gross margin rate increased 130 basis points for the fourth quarter of 2012 and 90 basis points for the year from the comparable prior year periods;

• Continued discipline of our investment in inventory with Domestic inventory declining $895 million from the prior year. Excluding the inventory related to the Sears Hometown and Outlet businesses, Domestic inventory declined $501 million;

• Sears Domestic's comparable store sales improved 0.8% in the fourth quarter of 2012 and declined 1.4% for the year. Kmart's comparable store sales declined 3.7% in the fourth quarter and for the year. Sears Canada's comparable store sales declined 3.8% in the fourth quarter and 5.6% for the year;

• Our integrated online business grew over 25% in the fourth quarter of 2012 and 17% for the full year;

• SHOP YOUR WAY Members drove over 50 percent of our revenues at Sears Domestic and Kmart for the 2012 fourth quarter and year;

• Net loss from continuing operations attributable to Holdings' shareholders of $489 million and $930 million, ($4.61 and $8.78 loss per diluted share from continuing operations), respectively, for the fourth quarter and full year 2012. Prior year fourth quarter and year net losses were $2.4 billion and $3.1 billion ($22.47 and $29.15 per diluted share from continuing operations), respectively; and

• Adjusted earnings per diluted share from continuing operations for the fourth quarter of $1.12 in 2012 and $0.54 in 2011 and adjusted loss per diluted share from continuing operations for the year of $2.03 in 2012 and $4.52 in 2011.

“Sears Holdings made progress in 2012 improving the profitability of our business, but we know there's more work to be done in 2013,” said Edward S. Lampert, Sears Holdings' Chairman and Chief Executive Officer. “Our focus continues to be on our core customers, our Members, and finding ways to provide them value and convenience, through Integrated Retail and our SHOP YOUR WAY Membership platform. We have invested significantly in our online ecommerce platforms, our Membership rewards program and the technology needed to support these initiatives.”

Fourth Quarter and Full Year Revenues and Comparable Store Sales

We follow a retail-based financial reporting calendar. Accordingly, our fourth quarter and fiscal year 2012 results reflect the 14- and 53- week periods ended February 2, 2013, respectively, whereas 2011 contained 13- and 52- weeks for the fourth quarter and year, respectively.

For the quarter, revenues decreased $224 million to $12.3 billion for the quarter ended February 2, 2013, as compared to revenues of $12.5 billion for the quarter ended January 28, 2012. The decrease was primarily due to the

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separation at the end of the third quarter of the Sears Hometown and Outlet businesses, the effect of having fewer Kmart and Sears Full-line stores in operation and lower comparable store sales, partially offset by the inclusion of an additional week of revenues in the fourth quarter of 2012. Full year revenues decreased $1.7 billion to $39.9 billion for the 53 weeks ended February 2, 2013, as compared to revenues of $41.6 billion last year. The decrease in full year revenues was primarily due to the effect of having fewer Kmart and Sears Full-line stores in operation, lower comparable store sales and the separation of the Sears Hometown and Outlet businesses, partially offset by the inclusion of an additional week of revenues in the current year. Fourth quarter 2012 revenues included an increase of $36 million due to foreign currency exchange rates. Full year 2012 revenues included a decrease of $37 million due to foreign currency exchange rates.

For the quarter, domestic comparable store sales declined 1.6%, comprised of a decrease of 3.7% at Kmart and an increase at Sears Domestic of 0.8%. Excluding the consumer electronics category, total domestic comparable store sales decreased 0.2% with Sears Domestic increasing 2.4% and Kmart decreasing 2.5%.

Sears Domestic generated a comparable store sales increase of 0.8% in the fourth quarter as increases in the apparel, home appliance and home categories were partially offset by declines in the consumer electronics, sporting goods and lawn & garden categories, as well as at Sears Auto Centers. The Sears apparel category has now achieved comparable store sales increases for six consecutive quarters.

Kmart's fourth quarter comparable store sales decline of 3.7% reflects a significant decrease in the consumer electronics category, as well as declines in the pharmacy and grocery & household categories. The decline in pharmacy reflects the conversion of brand name drugs to equivalent generic drugs.

For the year, domestic comparable store sales declined 2.5%, with declines of 1.4% at Sears Domestic and 3.7% at Kmart. Excluding the consumer electronics category, total domestic comparable store sales decreased 1.4% with Sears Domestic decreasing only 0.1% and Kmart decreasing 2.8%.

Decreases in comparable store sales at Sears Domestic of 1.4% for the year were driven by decreases in consumer electronics, lawn & garden and home appliances, as well as at Sears Auto Centers. These decreases were partially offset by increases in apparel and home. The Kmart decline in comparable store sales of 3.7% reflects decreases in a majority of its categories, most notably the consumer electronics, pharmacy, grocery & household and drug store categories.

Operating Performance

Operating loss was $622 million for the quarter ended February 2, 2013, compared to $691 million for the quarter ended January 28, 2012.

For the quarter, our gross margin increased $101 million to $3.2 billion in 2012. Gross margin included charges of $3 million and $93 million related to store closures for 2012 and 2011, respectively. In addition, Sears Canada's gross margin included an increase of $11 million related to the impact of foreign currency exchange rates. Excluding these items, gross margin was flat to the prior year as the decrease in total revenues noted above was more than offset by an increase in gross margin due to improved rate.

As compared to the prior year, Sears Domestic's gross margin rate improved 120 basis points for the quarter primarily due to apparel and home services, which were partially offset by declines in consumer electronics. Kmart's gross margin rate for the fourth quarter improved 210 basis points primarily due to apparel, toys and pharmacy which were partially offset by a decline in the consumer electronics category. Sears Canada's gross margin rate declined 120 basis points for the fourth quarter due to accessories, women's intimates and footwear categories.

Selling and administrative expenses increased $361 million in the fourth quarter of 2012 compared to the fourth quarter of 2011 and included expenses related to pension plans, store closings, store impairments and severance of $543 million for 2012 and $114 million for 2011. The fourth quarter of 2012 also included $2 million of transaction costs associated with strategic initiatives while the fourth quarter of 2011 included expense of $3 million related to

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hurricane losses. Excluding these items, selling and administrative expenses declined $67 million due to decreases in advertising and supplies expenses, which were partially offset by an increase in domestic payroll expense. Selling and administrative expenses at Sears Canada for 2012 included a decrease of $8 million related to the impact of foreign currency exchange rates.

Operating loss for the fourth quarter of 2012 included non-cash charges related to our pension settlements and the impairment of Sears Canada goodwill balances, expenses related to domestic pension plans, store closings, store impairments and severance and transaction costs, as well as gains on sales of assets, which aggregated to $863 million. Operating loss for the fourth quarter of 2011 included a non-cash impairment charge for goodwill balances related to our Sears Domestic segment, expenses related to domestic pension plans, store closings, severance and hurricane losses, as well as gains on sales of assets, which aggregated to $847 million. See the attached schedule, “Adjusted Earnings per Share,” for a reconciliation from GAAP to as adjusted amounts, including adjusted earnings per diluted share from continuing operations.

Our effective tax rate for the fourth quarter was a benefit of 1.4% in 2012 and an expense rate of 216.6% in 2011. The current year tax rate continues to reflect the effect of not recognizing the benefit of current period losses in certain domestic jurisdictions where it is not more likely than not that such benefits would be realized. The prior year tax rate was the result of significant tax matters in 2011, which included a non-cash charge of $1.7 billion to establish a valuation allowance against certain deferred income tax assets.

Operating loss was $838 million for the year ended February 2, 2013, compared to $1.5 billion for the year ended January 28, 2012.

For the year, our gross margin declined $87 million to $10.5 billion in 2012 and included charges of $35 million and $130 million related to store closures for 2012 and 2011, respectively. Excluding these items, gross margin declined $182 million as the above noted decline in revenues was only partially offset by an improvement in gross margin rate. In addition, Sears Canada's gross margin included a decrease of $11 million related to the impact of foreign currency exchange rates.

Sears Domestic's gross margin rate improved 120 basis points in 2012 primarily due to the apparel, home appliance and footwear categories, which were partially offset by declines in the consumer electronics category and the Lands' End customer direct business. Kmart's gross margin rate improved 70 basis points in 2012 mainly due to the apparel, pharmacy and toys categories which were partially offset by a decline in the consumer electronics category. Sears Canada's gross margin rate decreased 10 basis points in 2012 due to the fitness & recreation, children's wear, jewelry, accessories & luggage and footwear categories.

For the year, selling and administrative expenses were flat to the prior year and included expenses related to pension plans, store closings, store impairments and severance of $725 million and $198 million for 2012 and 2011, respectively. The current year also included $12 million of transaction costs associated with strategic initiatives while 2011 included expense of $12 million related to hurricane losses. Excluding these items, selling and administrative expenses declined $531 million due to reductions in advertising, supplies and payroll expenses. Selling and administrative expenses at Sears Canada for 2012 included a decrease of $10 million related to the impact of foreign currency exchange rates.

Operating loss for 2012 included non-cash charges related to pension settlements and the impairment of Sears Canada goodwill balances, expenses related to domestic pension plans, store closings, store impairments and severance and transaction costs, as well as gains on sales of assets which aggregated to $705 million. Operating loss for 2011 included a non-cash impairment charge for goodwill balances related to our Sears Domestic segment, expenses related to domestic pension plans, store closings, severance and hurricane losses, and a net gain on sales of assets, which aggregated to $964 million. See the attached schedule, “Adjusted Earnings per Share,” for a reconciliation from GAAP to as adjusted amounts, including adjusted loss per diluted share.

Our effective tax rate for the year was 4.4% in 2012 and 78.2% in 2011. The 2012 year tax rate continues to reflect the effect of not recognizing the benefit of current period losses in certain domestic jurisdictions where it is not more

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likely than not that such benefits would be realized. The prior year tax rate is the result of significant tax matters in 2011, which included a non-cash charge of $1.8 billion to establish a valuation allowance against certain deferred income tax assets.

Financial Position

“As we previously announced, we expect to generate at least $500 million of additional liquidity through monetization of assets over the next twelve months,” said Rob Schriesheim, Sears Holdings' Chief Financial Officer. “We are an asset-rich enterprise with substantial liquidity, unencumbered real estate and well-established stand-alone businesses, including Lands' End and Sears Canada. In addition to our asset monetizations, we currently expect to reduce 2013 peak domestic inventory by $500 million from the 2012 level of $8.6 billion at the end of the third quarter as a result of stores already or expected to be closed, initiatives underway to reduce slow-moving inventory and modest productivity improvement. This action is expected to generate $300 million of cash after consideration of related payables. We also expect to further reduce our fixed cost base by another $200 million. In 2012, we generated an additional $1.8 billion in liquidity by unlocking value in our asset base.”

We had cash balances of $618 million at February 2, 2013 ($380 million domestic and $238 million at Sears Canada) as compared to $754 million ($357 million domestic and $397 million at Sears Canada) at January 28, 2012. The decrease in cash during 2012 was primarily due to contributions to our pension and post-retirement benefit plans of $593 million, capital expenditures of $378 million and repayments of long-term debt of $335 million, partially offset by cash generated from the sales of properties of $532 million and from the dividend from and sale of Sears Hometown and Outlet Stores, Inc. of $447 million and reductions in working capital needs.

Merchandise inventories at February 2, 2013 were $7.6 billion, as compared to $8.4 billion at January 28, 2012. Domestic inventory decreased $895 million to $6.8 billion at February 2, 2013. Excluding the inventory related to the Sears Hometown and Outlet businesses, domestic inventory decreased $501 million from the prior year's fourth quarter driven by both improved productivity and store closures. Sears Domestic inventory decreased in virtually all categories, with the most notable decreases in the consumer electronics, home appliances, home and tools & paint categories. Kmart inventory also decreased in virtually all categories with the most notable decreases in consumer electronics, pharmacy & drug and grocery & household categories. Sears Canada's inventory levels increased $46 million to $791 million at February 2, 2013, primarily due to the timing of receipts and a reduction in reserves due to improved inventory quality.

Total debt (consisting of short-term borrowings, long-term debt and capital lease obligations) was $3.1 billion at February 2, 2013, down from $3.5 billion at January 28, 2012. Availability under our credit facilities was $2.3 billion ($1.8 billion domestic and $0.5 billion at Sears Canada, prior to taking into consideration possible reserves) at the end of 2012. Availability under our credit facilities was $2.2 billion ($1.8 billion domestic and $0.4 billion at Sears Canada) at the end of 2011.

Sears Canada Partial Spin-off

On November 13, 2012, we completed a partial spin-off (the “spin-off”) of our interest in Sears Canada. Prior to the spin-off, Holdings owned approximately 96% of the issued and outstanding common shares of Sears Canada. In connection with the spin-off, we distributed approximately 45 million common shares of Sears Canada held by Holdings on a pro rata basis to holders of Holdings' common stock. Following the spin-off, Holdings was beneficial holder of approximately 51% of the issued and outstanding common shares of Sears Canada.

Adjusted EBITDA

In addition to our net loss determined in accordance with GAAP, for purposes of evaluating operating performance, we use an Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") measurement. Adjusted EBITDA is computed as net loss attributable to Sears Holdings Corporation appearing on the statements of operations excluding loss attributable to noncontrolling interest, income tax expense, interest expense, interest and investment income, other income (loss), depreciation and amortization and gain on sales of

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assets. In addition, it is adjusted to exclude certain significant items as set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our businesses, as well as executive compensation metrics, for comparable periods. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items. While Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of operating performance because:

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

• Management considers gains/(losses) on the sale of assets to result from investing decisions rather

than ongoing operations; and

• Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects the comparability of results.

Adjusted EBITDA was determined as follows:

	Quarters Ended						Years Ended
millions	February 2, 2013			January 28, 2012			February 2, 2013			January 28, 2012
Net loss attributable to SHC per statement of operations	$	(489	)	$	(2,403	)	$	(930	)	$	(3,140	)
Loss attributable to noncontrolling interest	(128		)	(1		)	(124		)	(7		)
Loss from discontinued operations, net of tax	—			17			—			27
Income tax expense (benefit)	(9		)	1,633			44			1,369
Interest expense	68			73			267			289
Interest and investment income	(66		)	(10		)	(94		)	(41		)
Other income (loss)	2			—			(1		)	2
Operating loss	(622		)	(691		)	(838		)	(1,501		)
Depreciation and amortization	205			212			830			853
Gain on sales of assets	(32		)	(29		)	(468		)	(64		)
Before excluded items	(449		)	(508		)	(476		)	(712		)
Impairment charges	330			649			330			649
Pension settlements	455			—			455			—
Closed store reserve and severance	50			189			140			254
Domestic pension expense	41			18			165			74
Transaction costs	2			—			12			—
Hurricane losses	—			3			—			12
Adjusted EBITDA as defined	$	429		$	351		$	626		$	277
% to revenues	3.5		%	2.8		%	1.6		%	0.7		%

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Adjusted EBITDA for our segments is as follows:

	Quarters Ended
	Adjusted EBITDA				% To Revenues
millions	February 2, 2013		January 28, 2012		February 2, 2013		January 28, 2012
Kmart	$	168	$	158	3.6	%	3.3	%
Sears Domestic	197		96		3.2	%	1.5	%
Sears Canada	64		97		4.9	%	7.3	%
Total Adjusted EBITDA	$	429	$	351	3.5	%	2.8	%
	Years Ended
	Adjusted EBITDA				% To Revenues
millions	February 2, 2013		January 28, 2012		February 2, 2013		January 28, 2012
Kmart	$	201	$	172	1.4	%	1.1	%
Sears Domestic	356		4		1.7	%	—	%
Sears Canada	69		101		1.6	%	2.2	%
Total Adjusted EBITDA	$	626	$	277	1.6	%	0.7	%

Forward-Looking Statements

Results are preliminary and unaudited. This press release contains forward-looking statements about our expectations for the fourth quarter of fiscal 2012. Forward-looking statements are subject to risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: our ability to offer merchandise and services that our customers want, including our proprietary brand products; our ability to successfully implement initiatives to improve our liquidity through inventory management and other actions; competitive conditions in the retail and related services industries; worldwide economic conditions and business uncertainty, including the availability of consumer and commercial credit, changes in consumer confidence and spending, the impact of rising fuel prices, and changes in vendor relationships, including the impact of increases in the cost of raw materials experienced by certain of our vendors; vendors’ lack of willingness to provide acceptable payment terms or otherwise restricting financing to purchase inventory or services; the impact of seasonal buying patterns, including seasonal fluctuations due to weather conditions, which are difficult to forecast with certainty;  our dependence on sources outside the United States for significant amounts of our merchandise; our extensive reliance on computer systems to process transactions, summarize results and manage our business, which may be subject to disruptions or security breaches; our reliance on third parties to provide us with services in connection with the administration of certain aspects of our business; impairment charges for goodwill and intangible assets or fixed-asset impairment for long-lived assets; our ability to attract, motivate and retain key executives and other associates; our ability to protect or preserve the image of our brands; the outcome of pending and/or future legal proceedings, including product liability claims and proceedings with respect to which the parties have reached a preliminary settlement; and the timing and amount of required pension plan funding; and other risks, uncertainties and factors discussed in our most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. We intend the forward-looking statements to speak only as of the time made and do not undertake to update or revise them as more information becomes available.

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About Sears Holdings Corporation

Sears Holdings Corporation is a leading integrated retailer with over 2,500 full-line and specialty retail stores in the United States and Canada and the home of SHOP YOUR WAY, a social shopping experience where members have the ability to earn points and receive benefits across a wide variety of physical and digital formats through ShopYourWay.com. Sears Holdings is the leading home appliance retailer as well as a leader in tools, lawn and garden, fitness equipment and automotive repair and maintenance. Key proprietary brands include Kenmore, Craftsman and DieHard, with a broad apparel offering, including such well-known labels as Lands' End, the Kardashian Kollection, Jaclyn Smith and Joe Boxer, as well as Sofia by Sofia Vergara and The Country Living Home Collection. We are the nation's largest provider of home services, with more than 15 million service and installation calls made annually and have a long-established commitment to those who serve in the military through initiatives like the Heroes at Home program. We have been named the 2011 Mobile Retailer of the Year, Recipient of the 2012 ENERGY STAR® "Corporate Commitment Award" for Product Retailing and Energy Management and one of the Top 20 Best Places to Work for Recent Grads. Sears Holdings Corporation operates through its subsidiaries, including Sears, Roebuck and Co. and Kmart Corporation. For more information, visit Sears Holdings' website at www.searsholdings.com. Twitter: @searsholdings||Facebook: http://www.facebook.com/SHCCareers

* * * * *

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Sears Holdings Corporation
Consolidated Statements of Operations
(Unaudited)
	Amounts are Preliminary and Subject to Change
		Quarters Ended						Years Ended
	millions, except per share data	February 2, 2013			January 28, 2012			February 2, 2013			January 28, 2012
REVENUES
	Merchandise sales and services	$	12,260		$	12,484		$	39,854		$	41,567
COSTS AND EXPENSES
	Cost of sales, buying and occupancy	9,097			9,422			29,340			30,966
	Gross margin dollars	3,163			3,062			10,514			10,601
	Gross margin rate	25.8		%	24.5		%	26.4		%	25.5		%
	Selling and administrative	3,282			2,921			10,660			10,664
	Selling and administrative expense as a percentage of total revenues	26.8		%	23.4		%	26.7		%	25.7		%
	Depreciation and amortization	205			212			830			853
	Impairment charges	330			649			330			649
	Gain on sales of assets	(32		)	(29		)	(468		)	(64		)
	Total costs and expenses	12,882			13,175			40,692			43,068
Operating loss		(622		)	(691		)	(838		)	(1,501		)
Interest expense		(68		)	(73		)	(267		)	(289		)
Interest and investment income		66			10			94			41
Other income (loss)		(2		)	—			1			(2		)
Loss from continuing operations before income taxes		(626		)	(754		)	(1,010		)	(1,751		)
Income tax (expense) benefit		9			(1,633		)	(44		)	(1,369		)
Loss from continuing operations		(617		)	(2,387		)	(1,054		)	(3,120		)
Loss from discontinued operations, net of tax		—			(17		)	—			(27		)
Net loss		(617		)	(2,404		)	(1,054		)	(3,147		)
Loss attributable to noncontrolling interest		128			1			124			7
NET LOSS ATTRIBUTABLE TO HOLDINGS' SHAREHOLDERS		$	(489	)	$	(2,403	)	$	(930	)	$	(3,140	)
Amounts attributable to Holdings' shareholders:
Loss from continuing operations, net of tax		$	(489	)	$	(2,386	)	$	(930	)	$	(3,113	)
Loss from discontinued operations, net of tax		—			(17		)	—			(27		)
Net loss		$	(489	)	$	(2,403	)	$	(930	)	$	(3,140	)
NET LOSS PER COMMON SHARE:
	Diluted:
	Continuing operations	$	(4.61	)	$	(22.47	)	$	(8.78	)	$	(29.15	)
	Discontinued operations	—			(0.16		)	—			(0.25		)
		$	(4.61	)	$	(22.63	)	$	(8.78	)	$	(29.40	)
	Diluted weighted average common shares outstanding	106.0			106.2			105.9			106.8

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Sears Holdings Corporation
Condensed Consolidated Balance Sheets
Amounts are Preliminary and Subject to Change
	(Unaudited)
millions	February 2, 2013		January 28, 2012
ASSETS
Current assets
Cash and cash equivalents	$	609	$	747
Restricted cash	9		7
Accounts receivable	635		695
Merchandise inventories	7,558		8,407
Prepaid expenses and other current assets	454		388
Total current assets	9,265		10,244
Property and equipment, net	6,053		6,577
Goodwill	379		841
Trade names and other intangible assets	2,881		2,937
Other assets	762		782
TOTAL ASSETS	$	19,340	$	21,381
LIABILITIES
Current liabilities
Short-term borrowings	$	1,094	$	1,175
Current portion of long-term debt and capitalized lease obligations	83		230
Merchandise payables	2,761		2,912
Unearned revenues	931		964
Other taxes	480		523
Short-term deferred tax liabilities	382		516
Other current liabilities	2,683		2,892
Total current liabilities	8,414		9,212
Long-term debt and capitalized lease obligations	1,943		2,088
Pension and postretirement benefits	2,730		2,738
Long-term deferred tax liabilities	955		816
Other long-term liabilities	2,126		2,186
Total Liabilities	16,168		17,040
Total Equity	3,172		4,341
TOTAL LIABILITIES AND EQUITY	$	19,340	$	21,381
Total common shares outstanding	106.4		106.3

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Sears Holdings Corporation
Segment Results
(Unaudited)
Amounts are Preliminary and Subject to Change
	Quarter Ended February 2, 2013
millions, except store data	Kmart			Sears Domestic			Sears Canada			Sears Holdings
Merchandise sales and services	$	4,697		$	6,253		$	1,310		$	12,260
Cost of sales, buying and occupancy	3,598			4,561			938			9,097
Gross margin dollars	1,099			1,692			372			3,163
Gross margin rate	23.4		%	27.1		%	28.4		%	25.8		%
Selling and administrative	969			1,987			326			3,282
Selling and administrative expense as a percentage of total revenues	20.6		%	31.8		%	24.9		%	26.8		%
Depreciation and amortization	37			141			27			205
Impairment charges	10			25			295			330
Gain on sales of assets	(20		)	(11		)	(1		)	(32		)
Total costs and expenses	4,594			6,703			1,585			12,882
Operating income (loss)	$	103		$	(450	)	$	(275	)	$	(622	)
Number of:
Kmart Stores	1,221			—			—			1,221
Full-Line Stores	—			798			118			916
Specialty Stores	—			54			357			411
Total Stores	1,221			852			475			2,548
	Quarter Ended January 28, 2012
millions, except store data	Kmart			Sears Domestic			Sears Canada			Sears Holdings
Merchandise sales and services	$	4,840		$	6,308		$	1,336		$	12,484
Cost of sales, buying and occupancy	3,807			4,674			941			9,422
Gross margin dollars	1,033			1,634			395			3,062
Gross margin rate	21.3		%	25.9		%	29.6		%	24.5		%
Selling and administrative	936			1,674			311			2,921
Selling and administrative expense as a percentage of total revenues	19.3		%	26.5		%	23.3		%	23.4		%
Depreciation and amortization	38			148			26			212
Impairment charges	15			634			—			649
Gain on sales of assets	(25		)	(4		)	—			(29		)
Total costs and expenses	4,771			7,126			1,278			13,175
Operating income (loss)	$	69		$	(818	)	$	58		$	(691	)
Number of:
Kmart Stores	1,305			—			—			1,305
Full-Line Stores	—			867			122			989
Specialty Stores	—			1,338			378			1,716
Total Stores	1,305			2,205			500			4,010

10

Sears Holdings Corporation
Segment Results
(Unaudited)
Amounts are Preliminary and Subject to Change
	Year Ended February 2, 2013
millions, except store data	Kmart			Sears Domestic			Sears Canada			Sears Holdings
Merchandise sales and services	$	14,567		$	20,977		$	4,310		$	39,854
Cost of sales, buying and occupancy	11,158			15,107			3,075			29,340
Gross margin dollars	3,409			5,870			1,235			10,514
Gross margin rate	23.4		%	28.0		%	28.7		%	26.4		%
Selling and administrative	3,284			6,184			1,192			10,660
Selling and administrative expense as a percentage of total revenues	22.5		%	29.5		%	27.7		%	26.7		%
Depreciation and amortization	147			578			105			830
Impairment charges	10			25			295			330
Gain on sales of assets	(37		)	(261		)	(170		)	(468		)
Total costs and expenses	14,562			21,633			4,497			40,692
Operating income (loss)	$	5		$	(656	)	$	(187	)	$	(838	)
Number of:
Kmart Stores	1,221			—			—			1,221
Full-Line Stores	—			798			118			916
Specialty Stores	—			54			357			411
Total Stores	1,221			852			475			2,548
	Year Ended January 28, 2012
millions, except store data	Kmart			Sears Domestic			Sears Canada			Sears Holdings
Merchandise sales and services	$	15,285		$	21,649		$	4,633		$	41,567
Cost of sales, buying and occupancy	11,818			15,849			3,299			30,966
Gross margin dollars	3,467			5,800			1,334			10,601
Gross margin rate	22.7		%	26.8		%	28.8		%	25.5		%
Selling and administrative	3,371			6,042			1,251			10,664
Selling and administrative expense as a percentage of total revenues	22.1		%	27.9		%	27.0		%	25.7		%
Depreciation and amortization	149			601			103			853
Impairment charges	15			634			—			649
Gain on sales of assets	(34		)	(30		)	—			(64		)
Total costs and expenses	15,319			23,096			4,653			43,068
Operating loss	$	(34	)	$	(1,447	)	$	(20	)	$	(1,501	)
Number of:
Kmart Stores	1,305			—			—			1,305
Full-Line Stores	—			867			122			989
Specialty Stores	—			1,338			378			1,716
Total Stores	1,305			2,205			500			4,010

11

Sears Holdings Corporation
Adjusted EBITDA
Amounts are Preliminary and Subject to Change
	Quarters Ended
millions	February 2, 2013												January 28, 2012
	Kmart			Sears Domestic			Sears Canada			Sears Holdings			Kmart			Sears Domestic			Sears Canada			Sears Holdings
Operating income (loss) per statement of operations	$	103		$	(450	)	$	(275	)	$	(622	)	$	69		$	(818	)	$	58		$	(691	)
Depreciation and amortization	37			141			27			205			38			148			26			212
Gain on sales of assets	(20		)	(11		)	(1		)	(32		)	(25		)	(4		)	—			(29		)
Before excluded items	120			(320		)	(249		)	(449		)	82			(674		)	84			(508		)
Closed store reserve and severance	38			(3		)	15			50			61			115			13			189
Impairment charges	10			25			295			330			15			634			—			649
Pension settlements	—			452			3			455			—			—			—			—
Domestic pension expense	—			41			—			41			—			18			—			18
Transaction costs	—			2			—			2			—			—			—			—
Hurricane losses	—			—			—			—			—			3			—			3
Adjusted EBITDA as defined	$	168		$	197		$	64		$	429		$	158		$	96		$	97		$	351
% to revenues	3.6		%	3.2		%	4.9		%	3.5		%	3.3		%	1.5		%	7.3		%	2.8		%
	Years Ended
millions	February 2, 2013												January 28, 2012
	Kmart			Sears Domestic			Sears Canada			Sears Holdings			Kmart			Sears Domestic			Sears Canada			Sears Holdings
Operating income (loss) per statement of operations	$	5		$	(656	)	$	(187	)	$	(838	)	$	(34	)	$	(1,447	)	$	(20	)	$	(1,501	)
Depreciation and amortization	147			578			105			830			149			601			103			853
Gain on sales of assets	(37		)	(261		)	(170		)	(468		)	(34		)	(30		)	—			(64		)
Before excluded items	115			(339		)	(252		)	(476		)	81			(876		)	83			(712		)
Closed store reserve and severance	76			44			20			140			76			160			18			254
Impairment charges	10			25			295			330			15			634			—			649
Pension settlements	—			452			3			455			—			—			—			—
Domestic pension expense	—			165			—			165			—			74			—			74
Transaction costs	—			9			3			12			—			—			—			—
Hurricane losses	—			—			—			—			—			12			—			12
Adjusted EBITDA as defined	$	201		$	356		$	69		$	626		$	172		$	4		$	101		$	277
% to revenues	1.4		%	1.7		%	1.6		%	1.6		%	1.1		%	—		%	2.2		%	0.7		%

12

Sears Holdings Corporation

Adjusted Earnings per Share

Amounts are Preliminary and Subject to Change

	Quarter Ended February 2, 2013
millions, except per share data	GAAP			Closed Store Reserve, Store Impairments and Severance			Gain on Sales of Assets			Transaction Costs			Goodwill Impairment			January 7, 2013 Outlook Adjusted			Pension Settlements			Domestic Pension Expense			Gain on Sale of Canadian Joint Venture			Tax Matters			As Adjusted
Cost of sales, buying and occupancy impact	$	9,097		$	(3	)	$	—		$	—		$	—		$	9,094		$	—		$	—		$	—		$	—		$	9,094
Selling and administrative impact	3,282			(47		)	—			(2		)	—			3,233			(455		)	(41		)	—			—			2,737
Depreciation and amortization impact	205			(6		)	—			—			—			199			—			—			—			—			199
Impairment charges impact	330			(35		)	—			—			(295		)	—			—			—			—			—			—
Gain on sales of assets impact	(32		)	—			21			—			—			(11		)	—			—			—			—			(11		)
Operating loss impact	(622		)	91			(21		)	2			295			(255		)	455			41			—			—			241
Interest and investment income impact	66			—			—			—			—			66			—			—			(25		)	—			41
Income tax benefit impact	9			(35		)	8			(1		)	—			(19		)	—			(15		)	9			(55		)	(80		)
Loss attributable to noncontrolling interest impact	128			(7		)	—			—			(145		)	(24		)	(1		)	—			12			—			(13		)
After tax and noncontrolling interest impact	(489		)	49			(13		)	1			150			(302		)	454			26			(4		)	(55		)	119
Diluted loss per share impact	$	(4.61	)	$	0.46		$	(0.12	)	$	0.01		$	1.41		$	(2.85	)	$	4.28		$	0.25		$	(0.04	)	$	(0.52	)	$	1.12

	Quarter Ended January 28, 2012
millions, except per share data	GAAP			Domestic Pension Expense			Closed Store Reserve, Store Impairments and Severance			Gain on Sales of Assets			Hurricane Losses			Goodwill Impairment			Tax Matters		Discontinued Operations		As Adjusted
Cost of sales, buying and occupancy impact	$	9,422		$	—		$	(93	)	$	—		$	—		$	—		$	—	$	—	$	9,329
Selling and administrative impact	2,921			(18		)	(96		)	—			(3		)	—			—		—		2,804
Impairment charges impact	649			—			(98		)	—			—			(551		)	—		—		—
Gain on sales of assets impact	(29		)	—			—			12			—			—			—		—		(17		)
Operating loss impact	(691		)	18			287			(12		)	3			551			—		—		156
Income tax expense impact	(1,633		)	(7		)	(108		)	5			(1		)	—			1,709		—		(35		)
Loss from discontinued operations, net of tax impact	(17		)	—			—			—			—			—			—		17		—
Loss attributable to noncontrolling interest impact	1			—			(1		)	—			—			—			—		—		—
After tax and noncontrolling interest impact	(2,403		)	11			178			(7		)	2			551			1,709		17		58
Diluted loss per share impact	$	(22.63	)	$	0.10		$	1.68		$	(0.07	)	$	0.02		$	5.19		$	16.09	$	0.16	$	0.54

13

Sears Holdings Corporation

Adjusted Earnings per Share

Amounts are Preliminary and Subject to Change

	Year Ended February 2, 2013
millions, except per share data	GAAP			Closed Store Reserve, Store Impairments and Severance			Gain on Sales of Assets			Transaction Costs			Goodwill Impairment			Pension Settlements			Domestic Pension Expense			Gain on Sale of Canadian Joint Venture			Tax Matters		As Adjusted
Cost of sales, buying and occupancy impact	$	29,340		$	(35	)	$	—		$	—		$	—		$	—		$	—		$	—		$	—	$	29,305
Selling and administrative impact	10,660			(105		)	—			(12		)	—			(455		)	(165		)	—			—		9,923
Depreciation and amortization impact	830			(22		)	—			—			—			—			—			—			—		808
Impairment charges impact	330			(35		)	—			—			(295		)	—			—			—			—		—
Gain on sales of assets impact	(468		)	—			419			—			—			—			—			—			—		(49		)
Operating loss impact	(838		)	197			(419		)	12			295			455			165			—			—		(133		)
Interest and investment income impact	94			—			—			—			—			—			—			(25		)	—		69
Income tax expense impact	(44		)	(74		)	157			(5		)	—			—			(62		)	9			143		124
Loss attributable to noncontrolling interest impact	124			(7		)	8			—			(145		)	(1		)	—			12			—		(9		)
After tax and noncontrolling interest impact	(930		)	116			(254		)	7			150			454			103			(4		)	143		(215		)
Diluted loss per share impact	$	(8.78	)	$	1.09		$	(2.40	)	$	0.07		$	1.42		$	4.29		$	0.97		$	(0.04	)	$	1.35	$	(2.03	)

	Year Ended January 28, 2012
millions, except per share data	GAAP			Domestic Pension Expense			Closed Store Reserve, Store Impairments and Severance			Mark-to-Market Losses			Gain on Sales of Assets			Hurricane Losses			Goodwill Impairment			Tax Matters		Discontinued Operations		As Adjusted
Cost of sales, buying and occupancy impact	$	30,966		$	—		$	(130	)	$	—		$	—		$	—		$	—		—		$	—	$	30,836
Selling and administrative impact	10,664			(74		)	(124		)	—			—			(12		)	—			—		—		10,454
Depreciation and amortization impact	853			—			(8		)	—			—			—			—			—		—		845
Impairment charges impact	649			—			(98		)	—			—			—			(551		)	—		—		—
Gain on sales of assets impact	(64		)	—			—			—			33			—			—			—		—		(31		)
Operating loss impact	(1,501		)	74			360			—			(33		)	12			551			—		—		(537		)
Other loss impact	(2		)	—			—			6			—			—			—			—		—		4
Income tax expense impact	(1,369		)	(28		)	(134		)	(2		)	13			(5		)	—			1,819		—		294
Loss from discontinued operations, net of tax impact	(27		)	—			—			—			—			—			—			—		27		—
Loss attributable to noncontrolling interest impact	7			—			(1		)	(1		)	—			—			—			—		—		5
After tax and noncontrolling interest impact	(3,140		)	46			225			3			(20		)	7			551			1,819		27		(482		)
Diluted loss per share impact	$	(29.40	)	$	0.43		$	2.10		$	0.03		$	(0.19	)	$	0.07		$	5.16		$	17.03	$	0.25	$	(4.52	)

14

EX-99.2

Exhibit 99.2

February 28, 2013

To Our Shareholders, Associates and Members:

I am addressing you today not only as your Chairman, but also as your Chief Executive Officer. As you know, we announced in January that Lou D'Ambrosio, our CEO for the past two years, was stepping down due to family health matters. I want to thank Lou for his service to Sears Holdings and wish the best to him and his family. Our Board of Directors asked me to step into the CEO role in order to sharpen our strategy, to continue the momentum of our transformation, and to accelerate the progress we have made. I greatly appreciate their trust.

I am proud of our associates for the resilience they showed over the past year. We entered 2012 prepared to answer questions some had about the future of our company. After reporting poor results for 2011, culminating in a very poor fourth quarter, we declared that we would take significant actions in 2012 to restore confidence in and financial stability to the company, while, at the same time, remaining focused on transforming Sears Holdings and creating long-term value for our shareholders.

2012 IN REVIEW

We completed the separation of Sears Hometown and Outlet Stores, Inc. in October, raising $446.5 million for Sears Holdings. This transaction allowed those shareholders who exercised their rights and continue to hold stock in the separated business to share in the results of that business. Those who sold their rights or related shares were able to realize value without reducing their stake in Sears Holdings. Separating the management of these businesses from Sears Holdings allows them to pursue their own strategic opportunities in a more focused manner and brings our Business Unit structure to life outside of the Sears Holdings portfolio.

We distributed nearly half of our ownership in Sears Canada in 2012, while retaining 51% ownership of the outstanding shares. The performance of Sears Canada continued to be disappointing in 2012, significantly below what we believe the potential is for that business. With increased competition in Canada we know that we have to accelerate the pace of improvement as well as be aware of other potential means of creating value from our interest in this business.

Our Sears and Kmart Apparel businesses both improved in 2012, helped by declining cotton prices, improved assortments and better inventory management. Both Sears and Kmart Apparel are significant users of our store real estate, and improving the productivity of each business is essential to our goal of using our

company's assets effectively.

Last month, we announced that we would be developing two new apparel lines in a collaboration between SHOP YOUR WAY, our social commerce platform, and our Kmart format. We have a long heritage of building celebrity brands, both at Sears and Kmart. We chose to partner with Nicki Minaj (shopyourway.com/nickiminaj) and Adam Levine (shopyourway.com/adamlevine) for this collaboration because of their creativity, their global appeal and their strong interest in developing their clothing brands in a unique and innovative manner.

We managed our inventory much more effectively in 2012. Our peak inventory and average inventory balances were significantly below prior years, allowing us to demonstrate more financial flexibility and a margin of safety to our vendors. We expect to make further progress in 2013, and have a number of work streams designed to improve our productivity and lower our financial risk. Adapting our supply chain to buy what Members want, when they want it, rather than accumulating inventory which depends upon promotional pricing to sell, is key to the Membership model I will discuss later.

We also contributed more than $500 million to our domestic pension plan in 2012, with a voluntary $203 million contribution allowing us to offer lump sum elections to approximately 86,000 eligible pension plan participants with pension benefits of roughly $2 billion in aggregate. This allowed a significant number of our pension participants to elect a one-time payment instead of a multi-year payment, and reduced the number of go-forward pension plan participants by about one-third. Our legacy pension plan funding obligation remains a drag on our financial flexibility.

Finally, we demonstrated that the operating performance of the company, while still significantly below what it should be, was not on a continued downward trajectory. We have managed our fixed expenses closely and have continued to close stores that are unable to produce acceptable financial results. As we have said before, almost all of our store closings are cash flow positive as we convert net inventory (gross inventory less payables) into cash, receive proceeds from select real estate transactions and relieve ourselves of lease obligations. I will address store closings later in the letter. Our asset base and financial foundation remain strong.

SHOP YOUR WAY REWARDS

Sears Holdings is becoming a Membership company. Members of our SHOP YOUR WAY Rewards program have recently exceeded 60% of our transactions and sales. Members buy more, spend more and visit us more often. It starts with us. All of our associates should be engaged Members, and we invite all of our customers and shareholders to join our SHOP YOUR WAY Member community at shopyourway.com.

SHOP YOUR WAY is more than just a typical loyalty program. It is a comprehensive platform that transforms customer transactions into relationships and allows us to know our Members better and to serve them better as well. It includes the rewards program, our shopyourway.com social shopping platform, our SHOP YOUR WAY Max free shipping platform and a variety of other applications and components. Collectively, these elements change the way we do business both inside and outside the company.

In 2012, we continued to build SHOP YOUR WAY into a social and engaging platform that enables our Members to enjoy their shopping experience in store with their friends and family and also online at shopyourway.com. This social commerce platform learns from our Members' interactions to make their experiences more personalized and relevant. We're also building capabilities to enable our Members to directly communicate with associates via the Member Assist feature in the SHOP YOUR WAY mobile app.

We have created capabilities that make SHOP YOUR WAY Membership an even more rewarding experience. Members can participate in dozens of sweepstakes, where they can earn a chance to win points and great prizes. Since inception, Members have won millions of points, great products and experiences including Dream Kitchen Makeovers and trips to special concerts and destinations. In addition, we built a Member-only coupon experience where Members can find coupons, load them to their Membership account and redeem them in any channel they prefer. The experience is simple, hassle free and completely digital.

The transformation to a Membership company is not a quick one, and it is not inexpensive. Since launching SHOP YOUR WAY Rewards in late 2009, we have invested hundreds of millions of dollars in our technology platform, in our associates and in the rewards we have made available to our Members. We are deepening the engagement of our associates behind the program and the attitudes and values of a Membership company will pervade our culture.

When we started this journey three years ago, the number of Members, the capabilities of our company, the number of associates involved and the dollars invested were relatively small for a company of our size. It was easy for many to ignore. Now, as the platform has evolved, there is no part of our company that is not being significantly impacted by it.

INTEGRATED RETAIL

We are living in a hyper-connected world. Customers are looking for convenience and they are more networked than ever. They want to get what they want, when they want it and where they want it-on their own terms.

They are visiting stores to talk to expert associates and get advice, they are

researching online, and they are making purchases and comparing products through their mobile devices. An integrated store, online and mobile experience is not a “nice to have” anymore. Companies that are not innovating and are not connected across their channels to provide a seamless experience are becoming less and less relevant to their customers.

To win the game, we have to change the game. We not only need to adapt, we need to lead and stay ahead of the curve. Our strategy to transform the company has remained consistent in the face of this change.

Our focus continues to be on our core customers, our Members, and finding ways to provide them value and convenience through Integrated Retail and our SHOP YOUR WAY Membership platform. We have invested significantly in our online ecommerce platforms, our Membership rewards program and the technology needed to support these initiatives.

In 2012, we rolled out tablets and mobile devices to Sears stores across the country. The tablets are equipped to help our store associates provide a better overall shopping experience for our Members. Our associates can use tablets to look at product specifications, compare products side-by-side and search for inventory if it isn't readily available at the store. More information about products, inventory, pricing and reviews, is now available at their fingertips, which means Members can have more confidence in their product selection.

Recently we introduced mobile checkout at many Sears stores, which speeds up the checkout process for Members. When Members are ready to buy, our associates can use a credit or debit card to complete check out on the tablet without having to go to a register, and then email our Member a digital receipt. It provides a complete end-to-end digital experience.

In addition to our efforts to leverage technology in our stores, we continue to broaden the assortment online so our Members now have access to more than 60 million items in the Sears Marketplace on Sears.com and shopyourway.com via the web, their mobile device or our in-store terminals and tablets.

We also have designed other experiences that provide seamless and convenient integrated experiences for our Members. Building on our Buy Online Pick Up In Store and Ready in 5 promise, we developed a Return/Exchange in 5 capability that allows Members to fill out the product return information online. Members simply drop off or exchange the item they want to return at our Merchandise Pick Up area within 5 minutes or less.

We built the capability for our Members to make layaway payments online and have the items from their layaway shipped directly to their homes when their contract has been completed. Integrating the experiences and the information that drive people's shopping decisions is at the heart of our transformation.

THE RETAIL INDUSTRY

The retail industry is complex and changing rapidly. But, it's not just retail. Many industries are going through a transformation driven by information technology-financial services, newspapers and magazines, books, music, movies, healthcare, you name it.

As anybody can now see from the events surrounding JCPenney, Best Buy, Toys “R” Us, Staples, Barnes & Noble and others, the retail landscape is fundamentally shifting. In our case, observers have mistakenly concluded that our issues were primarily related to underinvesting in our stores. This ignores the significant investment that the retailers cited above and many others have made in their stores without relieving themselves of what I believe are the more fundamental issues facing the retail industry today. If it were just about store investment, then Best Buy would be thriving after the demise of Circuit City, Barnes & Noble would be thriving after the demise of Borders and other retailers who made significant store investments would be thriving instead of struggling to chart a new course.

In reality, and as I have discussed in prior shareholder letters, the progression of the Internet and mobile technology is fundamentally reshaping many industries, with retail being one of the largest. Increased price transparency, better customer-level information and analytics, faster supply chains and the advent of social networking and social media are all contributing to making running a large retail organization more complex.

There has been a significant amount of turnover at the highest levels of retail leadership and it only seems to be increasing. Changes at the CEO or President level of Safeway, Toys “R” Us, Staples, JCPenney, Best Buy and others are signs that the talent needed to transform companies in the retail industry today and the persistence required to see transformations through are not easy to come by. I believe that we are seeing an enormous shift in the type of talent that will be running retail enterprises in the future, similar to the shift that Google brought to the advertising business and that quants brought to financial services. It isn't that the qualities required to be a successful executive in retail in the past are no longer valuable. Instead, additional skills are required to adapt to the speed, creativity, analytics and experiences that customers require in their shopping as new competitors emerge to excite and educate them, and to disrupt the status quo.

As this process plays out, I would expect to see significant levels of management turnover as companies try new ideas and new types of capabilities and organizational structures. I believe that Sears Holdings has been early in pursuing these ideas and that some of the turnover we have experienced is a product of this change. But if we don't change, and if our talent can't adapt to that

change, we won't be successful. This is just as true for many others in our industry and other industries as well. We aim to make Sears Holdings a great place to work for those who are excited about learning and trying new things.

EMBRACING FEEDBACK

We are rebuilding Sears Holdings' culture with an acute focus on creating “wow” experiences for our Members and putting Members First. We will embrace feedback at every point where a Member comes in contact with the company. We know we do many things well. We are going to be proactive in reaching out to those who have great experiences with us and rewarding them for letting us know and for allowing us to publicize them.

Having said that, we realize that one bad experience has the potential to impact hundreds, if not thousands, of our Members. If we interact (not just transact) with Members one billion times per year and 99% of those interactions are good ones, that still leaves 10 million interactions that are disappointing. In almost any business, 99% positive against 1% negative would be an outstanding achievement. But, in today's world of social media, and given our size, 10 million negative interactions translate into 30,000 per day. That's just staggering. This makes us an easy target for those seeking negative things to publicize.

We want our reputation for providing great service back and we intend to earn it. Our associates are embracing the idea that we want to know who our Members are, that we want to serve them well and that we want to know how we're doing every day. This means that we will use technology and training to encourage and embrace feedback to improve and make it much more transparent to everyone, thereby increasing accountability at the store and associate level. We know we won't get everything right, but we expect to fix things when we do things wrong and get more things right day after day. Increasing transparency, both internally and externally, through digital tools can be very powerful. This letter includes suggestions from associates at all levels, which I solicited through our internal enterprise social network.

CREATING LONG-TERM VALUE

Sears Holdings generated the highest EBITDA in its history in 2006, six years ago. Since then, there have been several significant changes to our portfolio. We no longer own our Hometown and Outlet Stores business; our Sears Hardware stores were combined into the Hometown and Outlet Stores business; Orchard Supply Hardware is a separate company; our ownership interest in Sears Canada is at 51%; and The Great Indoors format no longer exists.

Since 2006, we have closed just over 300 Sears Full-line and Kmart stores, or 13% of the Sears Full-line and Kmart stores we operated at that time, with about half of these store closings coming in our last fiscal year. Obviously, this is

disappointing to us because in most cases we were unable to take low performing stores and make them successful. However, there are several benefits that come with closing poorly performing stores.

First, we no longer suffer the operating losses of the money-losing stores. Second, in most cases, we are no longer penalized by the rating agencies for the lease expense (or obligation) associated with those stores. Third, we are usually able to generate significant cash from the net inventory invested in the stores, as the net inventory proceeds typically exceed the severance and closing costs. Fourth, we are able to realize the value of the real estate in situations where we own the stores or where the lease terms are attractive to third parties.

Now, let's look at the stores we have closed to see how much profit they contributed in 2006, our peak operating earnings year. While we have closed just over 300 domestic stores since 2006, we have retained most of the stores that contributed significantly to our profitability in that year. We calculate that the amount of EBITDA that the closed stores generated in 2006 was a little more than $100 million of the $3.2 billion in domestic Adjusted EBITDA that the company had in 2006. Through a combination of net inventory and real estate proceeds, we estimate that we have generated roughly $1 billion in value from these stores. While we closed these stores at different times over the past six years, if you combined their performance for the twelve months prior to the start of the process to close each store, they generated an EBITDA loss of over $50 million in aggregate.

While commentators have suggested that we have underinvested in our stores, the data shows that in most cases, stores that were losing money in 2006 or were marginally profitable did not improve over the past six years. Let's assume we had invested $3 million in each of these 300 stores in an attempt to resuscitate them. Had we done this, and had they not improved, we would have thrown $1 billion of good money after bad. Instead, we were able to receive almost $1 billion in proceeds, which is not a bad result given the circumstances.

As we have explained previously, we have invested selectively in our better performing stores without throwing good money after bad in our poor performing stores. Perhaps we would have been better off in hindsight simply closing the poor performing stores rather than trying to fix them, but we were able to preserve some jobs for many more years while we gave the associates and stores time to try to improve their performance.

CONCLUSION

As we look ahead into 2013, we will continue to transform into a Member-focused company with Integrated Retail playing a key role in helping deliver “wow” experiences to our Members. As a company, our mission is to serve, delight and engage our Members while they shop their way.

We will continue to focus our investment on innovation related to Integrated Retail and our Membership Program, so we can create deeper relationships with Members and continue to adapt in how we deliver information, products and services to them. We intend to leverage our strengths-our social and ecommerce online platforms, our stores and our knowledgeable associates, and our robust supply chain capabilities-to deliver a truly differentiated and integrated experience for our Members.

In our stores, we will continue to invest heavily in technology and will continue training our associates on how to use the technology to serve our Members better. We will deploy the latest technology to more stores so our associates are equipped with the tools to make shopping easier and more informed for our Members. One of the areas we will be working on is to make SHOP YOUR WAY a much bigger part of the store experience. This includes pricing for Members only and training for our associates, so they can explain the exclusive benefits to the Members and their friends and family.

On our online sites, we will be working to further increase the amount of products in our Marketplace, and we plan on doing it in partnership with our Members. They can add items from their favorite brands and retailers to shopyourway.com, so we can build an eco-system that promotes collaboration and engagement. We will also continue to improve our product assortments and continue to offer exceptional values of owned brands, trusted brands and exclusive offerings.

When you combine the capabilities of our stores with the broad assortment we have available online, it will help bring an endless aisle of products from our Marketplace to our Members and start to blur the four walls of our stores. If our Members can't find the items they need in a store, they can order through the terminals or tablets in store and have them delivered to their homes. We will leverage our supply chain capabilities to find the inventory across all our locations, including our stores and our warehouses, and get it shipped to our Members as quickly as possible. We have the assets to establish a market leading two-day, next-day and same-day capability, by leveraging select current store locations and our warehouses to serve as Market Delivery Centers. The same breadth of assortment will also be available for purchase online and can be picked up in store same day.

While we invest in these key strategic areas, we will also look at other areas to become more efficient and repurpose resources consistent with the mission we have outlined. We will invest our resources where we can create competitive advantage and look at areas much more openly where we have not been able to compete effectively. We will also continue to work on LEAN initiatives to streamline the operational processes and systems, and at the same time continue to test and learn with technologies such as Digital Signs and RFID, so

our associates can spend less time in the backroom and more time on the floor serving Members.

As we look ahead, we know we still have a lot of work to do. It will not be easy at times, but we will take bold actions to get through it. We have knowledgeable and experienced associates who have been with the company for many years. And we also have new associates who bring fresh and innovative ideas on how to transform the business to cater to our Members. With this right mix of engaged associates, who are all aligned to our mission, committed to winning, and excited about the possibilities, we will all work together to position the company to compete effectively in the 21st Century. I want to thank our associates for their passion, our customers and Members for their business and feedback, and our shareholders for their support, all of which is crucial to our transformation.

Respectfully,

Edward S. Lampert

Cautionary Statement Regarding Forward-Looking Statements: Certain statements contained in this letter contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that use words and phrases such as the company “believes,” “continue,” “expects,” “intends,” “plans,” “transform,” “going to be” and similar expressions or future or conditional verbs such as “will,” “may,” and “could” are generally forward-looking in nature and not historical facts and are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: our ability to offer merchandise and services that our customers want, including our proprietary brand products; our ability to complete liquidity generating initiatives on terms that are acceptable to us and to successfully implement initiatives to otherwise improve our liquidity through inventory management and other actions; competitive conditions in the retail and related services industries; worldwide economic conditions and business uncertainty, including the availability of consumer and commercial credit, changes in consumer confidence and spending, the impact of rising fuel prices, and changes in vendor relationships, including the impact of increases in the cost of raw materials experienced by certain of our vendors; vendors' lack of willingness to provide acceptable payment terms or otherwise restricting financing to purchase inventory or services; potential limitations on our access to credit markets due to

changes in our credit ratings and other factors; the impact of seasonal buying patterns, including seasonal fluctuations due to weather conditions, which are difficult to forecast with certainty; our dependence on sources outside the United States for significant amounts of our merchandise; our extensive reliance on computer systems to process transactions, summarize results and manage our business, which may be subject to disruptions or security breaches; our reliance on third parties to provide us with services in connection with the administration of certain aspects of our business; impairment charges for goodwill and intangible assets or fixed-asset impairment for long-lived assets; our ability to attract, motivate and retain key executives and other associates; possible conflicts of interest involving affiliates or our Chairman and CEO; our ability to protect or preserve the image of our brands; the outcome of pending and/or future legal proceedings, including product liability claims and proceedings with respect to which the parties have reached a preliminary settlement; and the timing and amount of required pension plan funding; and other risks, uncertainties and factors discussed in our most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. We intend the forward-looking statements to speak only as of the time made and do not undertake to update or revise them as more information becomes available.

	Domestic Operations
Operating income per statement of    income	$	2,271
Plus depreciation and amortization	1,004
Less gain on sale of assets/businesses	(82		)
Before excluded items	3,193
Vice Chairman separation expense	8
Visa/MasterCard settlement	(36		)
Merger transaction costs	—
Legal reserve - AIG Annuity Insurance    Co., et al. v. Sears Roebuck	74
Restructuring charges	9
Adjusted EBITDA as defined	$	3,248