10-Q

UNITEDSTATES

SECURITIESANDEXCHANGECOMMISSION

WASHINGTON, D.C. 20549

_______________________________________________

FORM 10-Q

_______________________________________________ 

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	FOR THE QUARTERLY PERIOD ENDED NOVEMBER 2, 2013

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-35641

_______________________________________________

SEARS HOMETOWN AND OUTLET STORES, INC.

(Exact name of registrant as specified in its charter)

_______________________________________________

DELAWARE	80-0808358
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
5500 TRILLIUM BOULEVARD, SUITE 501 HOFFMAN ESTATES, ILLINOIS	60192
(Address of principal executive offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code: (847) 286-7000

_______________________________________________

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 (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	ý	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

As of December 9, 2013, the registrant had 22,895,943 shares of common stock, par value $0.01 per share, outstanding.

SEARS HOMETOWN AND OUTLET STORES, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Income (Unaudited) for the 13 and 39 Weeks Ended November 2, 2013 and October 27, 2012	1
	Condensed Consolidated Balance Sheets (Unaudited) at November 2, 2013, October 27, 2012 and February 2, 2013	2
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the 39 Weeks Ended November 2, 2013 and October 27, 2012	3
	Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the 39 Weeks Ended November 2, 2013 and October 27, 2012	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37
Item 4.	Controls and Procedures	38
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 5.	Other Information	42
Item 6.	Exhibits	44

SEARS HOMETOWN AND OUTLET STORES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

	13 Weeks Ended						39 Weeks Ended
Thousands, except per share amounts	November 2, 2013			October 27, 2012			November 2, 2013			October 27, 2012
NET SALES	$	561,068		$	556,903		$	1,819,084		$	1,822,445
COSTS AND EXPENSES
Cost of sales and occupancy	425,596			418,490			1,380,966			1,365,347
Selling and administrative	121,698			122,054			379,815			368,031
Depreciation	2,177			2,282			6,569			6,815
Gain on the sale of assets	(1,567		)	—			(1,567		)	—
Total costs and expenses	547,904			542,826			1,765,783			1,740,193
Operating income	13,164			14,077			53,301			82,252
Interest income (expense)	(738		)	(70		)	(1,969		)	(111		)
Other income	460			382			1,306			968
Income before income taxes	12,886			14,389			52,638			83,109
Income tax expense	(5,191		)	(5,629		)	(20,812		)	(32,689		)
NET INCOME	$	7,695		$	8,760		$	31,826		$	50,420
NET INCOME PER COMMON SHARE
ATTRIBUTABLE TO STOCKHOLDERS
Basic:	$	0.33		$	0.38		$	1.38		$	2.18
Diluted:	$	0.33		$	0.38		$	1.38		$	2.18
Basic weighted average common shares outstanding	22,999			23,100			23,066			23,100
Diluted weighted average common shares outstanding	22,999			23,100			23,070			23,100

See Notes to Condensed Consolidated Financial Statements.

1

SEARS HOMETOWN AND OUTLET STORES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

Thousands	November 2, 2013		October 27, 2012		February 2, 2013
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	21,487	$	21,841	$	20,068
Accounts receivable	17,207		13,905		10,986
Merchandise inventories	488,626		429,407		428,437
Prepaid expenses and other current assets	8,113		12,301		14,321
Total current assets	535,433		477,454		473,812
PROPERTY AND EQUIPMENT, net	49,544		54,088		53,383
GOODWILL	167,000		167,000		167,000
LONG-TERM DEFERRED TAXES	63,916		70,648		69,001
OTHER ASSETS	32,115		22,509		22,607
TOTAL ASSETS	$	848,008	$	791,699	$	785,803
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings	$	87,900	$	47,100	$	20,000
Payable to Sears Holdings Corporation	57,414		77,687		79,491
Accounts payable	31,727		29,228		31,830
Other current liabilities	74,306		76,265		83,211
Current portion of capital lease obligations	1,082		1,499		1,463
Total current liabilities	252,429		231,779		215,995
CAPITAL LEASE OBLIGATIONS	98		870		769
OTHER LONG-TERM LIABILITIES	5,139		2,423		2,752
TOTAL LIABILITIES	257,666		235,072		219,516
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY
TOTAL STOCKHOLDERS' EQUITY	590,342		556,627		566,287
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	848,008	$	791,699	$	785,803

See Notes to Condensed Consolidated Financial Statements.

2

SEARS HOMETOWN AND OUTLET STORES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	39 Weeks Ended
Thousands	November 2, 2013			October 27, 2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	31,826		$	50,420
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation	6,569			6,815
Share-based compensation	598			—
Gain on the sale of assets	(1,567		)	—
Change in operating assets and liabilities:
Accounts receivable	(16,216		)	(12,913		)
Merchandise inventories	(60,189		)	(35,749		)
Payable to Sears Holdings Corporation	(22,077		)	77,687
Accounts payable	(103		)	12,072
Store closing accruals	—			(2,179		)
Customer deposits	5,998			7,106
Deferred income taxes	15,520			(4,754		)
Other operating assets	1,246			43
Other operating liabilities	(15,767		)	(5,287		)
Net cash provided by (used in) operating activities	(54,162		)	93,261
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of property and investments	2,641			—
Purchases of property and equipment	(5,995		)	(5,524		)
Net cash used in investing activities	(3,354		)	(5,524		)
CASH FLOWS FROM FINANCING ACTIVITIES
Transfers to Sears Holdings Corporation	—			(12,264		)
Dividend paid to Sears Holdings Corporation	—			(100,000		)
Common stock repurchased and retired	(8,369		)	—
Payments of capital lease obligations	(596		)	(1,426		)
Short-term borrowings	988,800			100,100
Payments of short-term borrowings	(920,900		)	(53,000		)
Net cash provided by (used in) financing activities	58,935			(66,590		)
NET CHANGE IN CASH AND CASH EQUIVALENTS	1,419			21,147
CASH AND CASH EQUIVALENTS—Beginning of period	20,068			694
CASH AND CASH EQUIVALENTS—End of period	$	21,487		$	21,841
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest	$	2,012		$	111

See Notes to Condensed Consolidated Financial Statements.

3

SEARS HOMETOWN AND OUTLET STORES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

Thousands	Number of Shares of Common Stock		Common Stock			Capital in Excess of Par Value			Retained Earnings			Divisional Equity prior to the Separation			Total Stockholders' Equity
Balance at January 28, 2012	—		$	—		$	—		$	—		$	538,106		$	538,106
Net income	—		—			—			(179		)	50,599			50,420
Net transfer to Sears Holdings Corporation	—		—			—			—			(12,264		)	(12,264		)
Dividend paid to Sears Holdings Corporation	—		—			—			—			(100,000		)	(100,000		)
Reclassification of divisional equity to common stock and additional paid in capital in conjunction with the Separation	23,100		231			476,210			—			(476,441		)	—
Tax adjustment related to the Separation						80,365			—			—			80,365
Balance at October 27, 2012	23,100		$	231		$	556,575		$	(179	)	$	—		$	556,627
Balance at February 2, 2013	23,100		231			556,575			9,481			—			566,287
Net income			—			—			31,826			—			31,826
Share-based compensation	88		1			597			—			—			598
Common stock repurchased and retired	(279	)	(3		)	(6,728		)	(1,638		)				(8,369		)
Balance at November 2, 2013	22,909		$	229		$	550,444		$	39,669		$	—		$	590,342

See Notes to Condensed Consolidated Financial Statements.

4

SEARS HOMETOWN AND OUTLET STORES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—BACKGROUND AND BASIS OF PRESENTATION

Background

Sears Hometown and Outlet Stores, Inc. is a national retailer primarily focused on selling home appliances, hardware, tools, and lawn and garden equipment. As of November 2, 2013 the Company and its dealers and franchisees operated 1,239 stores across all 50 states and in Puerto Rico and Bermuda. In these notes and in the other items of this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “SHO,” and the “Company” refer to Sears Hometown and Outlet Stores, Inc. and its subsidiaries.

Description of the Separation

On October 11, 2012, Sears Holdings Corporation (“Sears Holdings”) completed the separation of its Sears Hometown and Hardware and Sears Outlet businesses (the “Separation”). As part of the Separation on August 31, 2012, through a series of intercompany transactions, Sears Holdings and several of its subsidiaries transferred the assets and liabilities comprising the Sears Hometown and Hardware and Sears Outlet businesses to SHO, which was formed on April 23, 2012 as a wholly owned subsidiary of Sears Holdings. Effective upon the Separation, Sears Holdings ceased to own shares of our common stock, and thereafter our common stock began trading on the NASDAQ Stock Market under the trading symbol “SHOS.”

As part of the Separation, Sears Holdings contributed to SHO equity intercompany balances due to/from Sears Holdings, which included amounts arising from pre-Separation purchases of merchandise inventories and which were included in Divisional Equity. After the Separation, the Company continues to purchase the majority of its merchandise inventories from Sears Holdings and amounts payable to Sears Holdings are reflected separately on the condensed consolidated balance sheet contained herein.

Basis of Presentation

These unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. These unaudited condensed consolidated financial statements do not include all of the information and footnotes required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the fiscal quarter ended November 2, 2013 are not necessarily indicative of the results that may be expected for the full fiscal year. These financial statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

These unaudited condensed consolidated financial statements reflect for pre-Separation periods the Hometown and Hardware and Outlet businesses of Sears Holdings and, with respect to the pre-Separation periods, were derived from the consolidated financial statements and accounting records of Sears Holdings, principally representing the historical results of operations and the historical basis of assets and liabilities of the Company's business. As pre-Separation business operations of Sears Holdings, we did not maintain our own legal, tax, and certain other corporate support functions. In connection with the Separation, Sears Holdings and SHO entered into services agreements to provide SHO with certain support services under the terms described in Note 4. The costs and allocations charged to the Company by Sears Holdings do not necessarily reflect the costs of obtaining the services from unaffiliated third parties or of the Company providing the applicable services itself. The condensed consolidated financial statements contained herein may not be indicative of the Company’s financial position, operating results, and cash flows in the future or what they would have been if the Hometown and Hardware and Outlet businesses of Sears Holdings had been a stand-alone company during all periods prior to the Separation.

In connection with the Separation we entered into an asset-based senior secured revolving credit facility (the “Senior ABL Facility”) with a group of financial institutions. The Senior ABL Facility provides for maximum borrowings (subject to availability under a borrowing base) of up to the aggregate commitments of all of the lenders, which as of November 2, 2013 totaled $250 million. Up to $75 million of the Senior ABL Facility is available for the issuance of letters of credit and up to $25 million is available for swingline loans. The Senior ABL Facility permits us to request commitment increases in an aggregate principal amount of up to $100 million. Availability under the Senior ABL Facility as of November 2, 2013 was $158.7 million with $87.9 million drawn and $3.4 million of letters of credit outstanding under the facility.

We operate through two segments--our Sears Hometown and Hardware segment ("Hometown") and our Sears Outlet segment ("Outlet").

5

SEARS HOMETOWN AND OUTLET STORES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Our fiscal year end is the Saturday closest to January 31 each year.  Our third fiscal quarter end is the Saturday closest to October 31 each year.  Fiscal year 2012 consisted of 53 weeks compared to fiscal year 2013, which consists of 52 weeks.  As a result of the extra week at the end of fiscal 2012, the fiscal 2013 calendar is shifted by one week compared to fiscal 2012.

Fair Value of Financial Instruments

We determine the fair value of financial instruments in accordance with standards pertaining to fair value measurements. Such standards define fair value and establish a framework for measuring fair value under GAAP. Under fair value measurement accounting standards, fair value is considered to be the exchange price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. We report the fair value of financial assets and liabilities based on the fair value hierarchy prescribed by accounting standards for fair value measurements, which prioritizes the inputs to valuation techniques used to measure fair value into three levels, as follows:

Level 1 inputs—unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide ongoing pricing information.

Level 2 inputs—inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable for the asset or liability, such as interest rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risk and default rates.

Level 3 inputs—unobservable inputs for the asset or liability.

Cash and cash equivalents (level 1), accounts receivable, short-term debt (level 2), merchandise payables, and accrued expenses are reflected in the Condensed Consolidated Balance Sheets at cost, which approximates fair value due to the short-term nature of these instruments. For short-term debt, the variable interest rate is a significant input in our fair value assessments.

We measure certain non-financial assets and liabilities, including long-lived assets, at fair value on a non-recurring basis.

The Company was not required to measure any other significant non-financial asset or liability at fair value as of November 2, 2013.

NOTE 2—OTHER CURRENT AND LONG-TERM LIABILITIES

Other current and long-term liabilities consist of the following:

Thousands	November 2, 2013		October 27, 2012		February 2, 2013
Customer deposits	40,913		38,974		34,914
Sales and other taxes	14,072		7,617		13,607
Accrued expenses	13,267		12,733		24,703
Warranty accrual	—		10,919		3,734
Payroll and related items	11,193		8,423		9,005
Store closing accrual	—		22		—
Total other current and long-term liabilities	$	79,445	$	78,688	$	85,963

6

SEARS HOMETOWN AND OUTLET STORES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3—INCOME TAXES

In connection with the Separation, SHO and Sears Holdings entered into a Tax Sharing Agreement that governs the rights and obligations of the parties with respect to pre-Separation and post-Separation tax matters. Under the Tax Sharing Agreement, Sears Holdings is responsible for any federal, state, or foreign income tax liability relating to tax periods ending on or before the Separation. For all periods after the Separation, the Company is responsible for any federal, state, or foreign tax liability. Current income taxes payable for any federal, state, or foreign income tax returns is reported in the period incurred.

We account for uncertainties in income taxes according to accounting standards for uncertain tax positions. The Company is present in a large number of taxable jurisdictions and, at any point in time, can have audits underway at various stages of completion in one or more of these jurisdictions. We evaluate our tax positions and establish liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable. Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law, and closings of statutes of limitation. Such adjustments are reflected in the tax provision as appropriate. Pursuant to the Tax Sharing Agreement, Sears Holdings is responsible for any unrecognized tax liability or benefit through the date of the Separation and the Company is responsible for any uncertain tax position after the Separation. For the 39 weeks ended November 2, 2013 and October 27, 2012, no unrecognized tax benefits have been identified and reflected in the financial statements.

We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of income tax expense. As no unrecognized tax benefits have been identified and reflected in the condensed consolidated financial statements, no interest or penalties related to unrecognized tax benefits are reflected in the condensed consolidated balance sheets or statements of income.

As of July 28, 2012 the assets and liabilities of the Sears Hometown and Hardware and Sears Outlet businesses were owned by, or were the responsibilities of, subsidiaries of Sears Holdings. On August 31, 2012, through a series of intercompany transactions, Sears Holdings and several of its subsidiaries transferred the assets and liabilities comprising the Sears Hometown and Hardware and the Sears Outlet businesses to SHO.  In connection with the intercompany transactions, for tax purposes the transferred assets and liabilities were stepped up to their estimated fair market values as of August 31, 2012, but for financial statement purposes the book value of the assets and liabilities remained unchanged at their historical cost bases. As of November 2, 2013 the Company's net deferred tax asset balance was $61.1 million compared to $79.8 million as of October 27, 2012. 

NOTE 4—RELATED-PARTY AGREEMENTS AND TRANSACTIONS

According to a Schedule 13D/A filed on June 12, 2013 with the Securities and Exchange Commission, ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert (collectively, “ESL”), beneficially owned on the filing date approximately 48% of our outstanding shares of common stock. Based on publicly available information, ESL beneficially owns approximately 48% of Sears Holdings' outstanding shares of common stock.

In connection with the Separation, we entered into various agreements with Sears Holdings (the "SHO-Sears Holdings Agreements") that, among other things, (1) govern specified aspects of our relationship with Sears Holdings following the Separation, (2) establish terms under which subsidiaries of Sears Holdings provide services to us, and (3) establish terms pursuant to which subsidiaries of Sears Holdings obtain merchandise inventories for us. The terms of the SHO-Sears Holdings Agreements were agreed to prior to the Separation in the context of a parent-subsidiary relationship and in the overall context of the Separation. The Company engages in frequent discussions with Sears Holdings about the terms and conditions of the SHO-Sears Holdings Agreements, the business relationships that are reflected in the SHO-Sears Holdings Agreements, and the details of these business relationships, many of which details are not addressed by the terms and conditions of the SHO-Sears Holdings Agreements. These discussions from time to time result in adjustments to the relationships that the Company believes together are in Company's best interests.

On December 9, 2013 the Company entered into additional agreements with Sears Holdings (the "December 9 Agreements") that were intended to resolve disputes regarding the terms and conditions of the SHO-Sears Holdings Agreements. See Part II, Item 5 of this Quarterly Report on Form 10-Q for a description of the December 9 Agreements.

7

SEARS HOMETOWN AND OUTLET STORES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following is a summary of the nature of the related-party transactions between SHO and Sears Holdings:

• SHO receives commissions from Sears Holdings for specified sales of merchandise made through www.sears.com and www.searsoutlet.com, the sale of extended service contracts, delivery and handling services, and relating to the use in our stores of credit cards branded with the Sears name. For certain transactions SHO pays a commission to Sears Holdings.

• We obtain a significant amount of our merchandise inventories from Sears Holdings, leveraging the benefit of the Sears Holdings purchasing activities. We have a retailer's customary rights to return to Sears Holdings merchandise that is defective (except with respect to agreed-upon amounts of defective apparel that we purchase and then liquidate) or otherwise does not meet contract requirements. In addition, we may determine that an item of Outlet merchandise (usually merchandise that is not new in-box) we have received from Sears Holdings cannot be refurbished or reconditioned or is otherwise not in a physical condition to offer for sale to our customers. We and Sears Holdings (and our Outlet vendors generally) refer to an item of merchandise in this condition as “not saleable” or "non-saleable," and in the normal course we can return the item to Sears Holdings. We generally have comparable return rights with our other Outlet vendors.

• We pay royalties related to our sale of products branded with the KENMORE®, CRAFTSMAN®, and DIEHARD® marks (which marks are owned by subsidiaries of Sears Holdings).

• We pay fees for participation in Sears Holdings' SHOP YOUR WAY REWARDS® program.

• We have also entered into agreements with Sears Holdings for logistics, handling, warehouse, and transportation services, the charges for which are based on merchandise inventory units.

• Sears Holdings provides the Company with specified corporate services. These services include accounting and finance, human resources, information technology, and real estate. Sears Holdings charges the Company for these corporate services based on actual usage or a pro rata charge based upon sales, head count, or square footage.

The following table summarizes the results of the transactions with Sears Holdings reflected in the Company’s Condensed Consolidated Financial Statements:

	13 Weeks Ended				39 Weeks Ended
	November 2, 2013		October 27, 2012		November 2, 2013		October 27, 2012
Thousands
Net Commissions from Sears Holdings Corporation (1)	$	21,424	$	20,497	$	68,327	$	63,967
Purchases related to cost of sales and occupancy	419,022		366,855		1,293,931		1,235,105
Services	5,566		6,697		15,978		14,594

(1) We reduced the amounts presented for the 13 weeks ended October 27, 2012, the 39 weeks ended November 2, 2013, and the 39 weeks ended October 27, 2012 to exclude all transactions in which SHO received the entire sales revenue for on-line sales made to unrelated third-parties that were generated through Sears Holdings' websites. The excluded amounts for the 13 weeks ended October 27, 2012, the 39 weeks ended November 2, 2013, and the 39 weeks ended October 27, 2012 were $15.4 million, $47.2 million, and $53.3 million, respectively.

Following the Separation we incur payables to Sears Holdings for merchandise inventory purchases and service and occupancy charges (net of commissions) based on our Separation agreements.  Amounts due to or from Sears Holdings are non-interest bearing, settled on a net basis, and have payments terms of 10 days after the invoice date. Prior to the Separation these amounts were recorded and settled through intercompany transfers to Sears Holdings.

NOTE 5—STORE CLOSING CHARGES AND SEVERANCE COSTS

In accordance with accounting standards that govern costs associated with exit or disposal activities, expenses related to future rent payments for which the Company no longer intends to receive any economic benefit are accrued for when we cease to use the leased space and have been reduced for any income that the Company believes can be realized through subleasing the leased space. During the third quarter of 2013, we closed 27 stores which did not require additional store-closing or severance reserves.

8

SEARS HOMETOWN AND OUTLET STORES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Store closing activity recorded during the 39-week period ended October 27, 2012, and the remaining store closing accrual was as follows:

Thousands	Markdowns (1)			Severance Costs (2)			Lease Termination Costs (2)			Other Costs (2)			Total
Balance at January 28, 2012	$	8,147		$	150		$	56		$	1,995		$	10,348
Store closing costs	—			—			797			—			797
Payments/utilizations	(8,147		)	(150		)	(831		)	(1,995		)	(11,123		)
Balance at October 27, 2012	$	—		$	—		$	22		$	—		$	22

(1) This store closing activity is recorded within Cost of sales and occupancy on the Condensed Consolidated Statements of Income and remaining store closing cost accruals are reported within Merchandise inventories on the Condensed Consolidated Balance Sheets.

(2) This store closing activity is recorded within Selling and administrative on the Condensed Consolidated Statements of Income and remaining store closing cost accruals are reported within Other current liabilities on the Condensed Consolidated Balance Sheets.

NOTE 6—FINANCING ARRANGEMENT

Under the Senior ABL Facility the Company initially borrowed $100 million, which was used to pay a cash dividend to Sears Holdings prior to the Separation. As of November 2, 2013 we had $87.9 million outstanding under the Senior ABL Facility, which approximated the fair value of these borrowings. The Senior ABL Facility provides (subject to availability under a borrowing base) for maximum borrowings up to the aggregate commitments of all of the lenders, which as of November 2, 2013 totaled $250 million. Up to $75 million of the Senior ABL Facility is available for the issuance of letters of credit and up to $25 million is available for swingline loans. The Senior ABL Facility permits us to request commitment increases in an aggregate principal amount of up to $100 million. Availability under the Senior ABL Facility as of November 2, 2013 was $158.7 million, with $3.4 million of letters of credit outstanding under the facility.

The principal terms of the Senior ABL Facility are summarized below.

Senior ABL Facility

Maturity; Amortization and Prepayments

The Senior ABL Facility will mature on the earlier of (i) October 11, 2017 or (ii) six months prior to the expiration of our Merchandising Agreement dated August 8, 2012 with Sears Holdings, Sears Holdings Management Corporation, and Kmart Corporation (the "Merchandising Agreement") and the other agreements with Sears Holdings or its subsidiaries in connection with the Separation that are specified in the Senior ABL Facility, unless such agreements have been extended to a date later than October 11, 2017 or terminated on a basis reasonably satisfactory to the administrative agent under the Senior ABL Facility.

The Senior ABL Facility is subject to mandatory prepayment in amounts equal to the amount by which the outstanding extensions of credit exceed the lesser of the borrowing base and the commitments then in effect.

Guarantees; Security

The obligations under the Senior ABL Facility are guaranteed by us and each of our existing and future direct and indirect wholly owned domestic subsidiaries (subject to certain exceptions). The Senior ABL Facility and the guarantees thereunder are secured by a first priority security interest in certain assets of the borrowers and guarantors consisting primarily of accounts receivable, inventory, cash, cash equivalents, deposit accounts, and securities accounts, as well as certain other assets (other than intellectual property) ancillary to the foregoing and all proceeds of all of the foregoing, including cash proceeds and the proceeds of applicable insurance.

Interest; Fees

The interest rates per annum applicable to the loans under the Senior ABL Facility are based on a fluctuating rate of interest measured by reference to, at our election, either (1) an adjusted London inter-bank offered rate ("adjusted LIBOR") plus

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

a borrowing margin or (2) an alternate base rate plus a borrowing margin, with the borrowing margin subject to adjustment based on the average excess availability under the Senior ABL Facility for the preceding fiscal quarter. The interest rate was 4.25% at November 2, 2013.

Customary fees are payable in respect of the Senior ABL Facility, including letter of credit fees and commitment fees.

Covenants

The Senior ABL Facility includes a number of covenants that, among other things, limit or restrict our ability to, subject to specified exceptions, incur additional indebtedness (including guarantees), grant liens, make investments, make prepayments on other indebtedness, engage in mergers, or change the nature of our business.

The Senior ABL Facility limits SHO's ability to declare and pay cash dividends and repurchase its common stock. SHO may declare and pay cash dividends to its stockholders and may repurchase stock if the following conditions are satisfied: either (a) (i) no specified default then exists or would arise as a result of the declaration or payment of the cash dividend or as a result of the stock repurchase, (ii) SHO and its subsidiaries that are also borrowers have demonstrated to the reasonable satisfaction of the agent for the lenders that monthly availability (as determined in accordance with the Senior ABL Facility), immediately following the declaration and payment of the cash dividend or the stock repurchase and as projected on a pro forma basis for the twelve months following and after giving effect to the declaration and payment of the cash dividend or the stock repurchase, would be at least equal to the greater of (x) 25% of the Loan Cap (which is the lesser of (A) the aggregate commitments of the lenders and (B) the borrowing base) and (y) $50,000,000, and (iii) after giving pro forma effect to the declaration and payment of the cash dividend or the stock repurchase as if it constituted a specified debt service charge, the specified consolidated fixed charge coverage ratio, as calculated on a trailing twelve months basis, would be equal to or greater than 1.1:1.0, or (b) (i) no specified default then exists or would arise as a result of the declaration or payment of the cash dividend or the stock repurchase, (ii) payment of the cash dividend or the stock repurchase is not made with the proceeds of any credit extension under the Senior ABL Facility, (iii) during the 120-day period prior to declaration and payment of the cash dividend or the stock repurchase, no credit extension was outstanding under the Senior ABL Facility, and (iv) SHO demonstrates to the reasonable satisfaction of the agent for the lenders that, on a pro forma and projected basis, no credit extensions would be outstanding under the Senior ABL Facility for the 120-day period following the declaration and payment of the cash dividend or the stock repurchase.

The Senior ABL Facility also contains certain affirmative covenants, including financial and other reporting requirements.

Events of Default

The Senior ABL Facility includes customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross default to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments, and change of control.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7—SUMMARY OF SEGMENT DATA

The Hometown reportable segment consists of the aggregation of our Hometown Stores, Hardware Stores, and Home Appliance Showroom business formats described below in “Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations-Executive Overview.” The Outlet reportable segment also represents an operating format. The Outlet reportable segment reclassified $3.7 million and $10.0 million for the 13 weeks and 39 weeks ended November 2, 2013, respectively, of distribution center costs that were previously reflected in selling and administrative expense and now are reflected in cost of sales and occupancy. Amounts for the comparable 39 weeks ended October 27, 2012 have not been adjusted for the reclassification because it is impracticable to do so. These segments are evaluated by our Chief Operating Decision Maker to make decisions about resource allocation and to assess performance. Each of these segments derives its revenues from the sale of merchandise and related services to customers, primarily in the U.S. The net sales categories include appliances, lawn and garden, tools and paint, and other (which includes initial franchise revenue of $7.8 million and $1.5 million for the 13 weeks ended November 2, 2013 and the 13 weeks ended October 27, 2012, respectively). For the 39 weeks ended November 2, 2013, initial franchise revenue (which consists of franchise fees paid with respect to new or existing Company-operated stores we transfer to franchisees plus the net gain or loss on any related transfer of assets to the franchisees) was $14.8 million compared to $11.2 million in the 39 weeks ended October 27, 2012.

	13 Weeks Ended November 2, 2013
Thousands	Hometown			Outlet			Total
Net sales
Appliances	$	289,834		$	115,386		$	405,220
Lawn and garden	59,049			5,843			64,892
Tools and paint	44,516			3,458			47,974
Other	19,772			23,210			42,982
Total	413,171			147,897			561,068
Costs and expenses
Cost of sales and occupancy	318,362			107,234			425,596
Selling and administrative	94,818			26,880			121,698
Depreciation	760			1,417			2,177
Gain on the sale of assets				(1,567		)	(1,567		)
Total	413,940			133,964			547,904
Operating income	$	(769	)	$	13,933		$	13,164
Total assets	$	657,019		$	190,989		$	848,008
Capital expenditures	$	1,341		$	2,259		$	3,600

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	13 Weeks Ended October 27, 2012
Thousands	Hometown		Outlet		Total
Net sales
Appliances	$	275,827	$	112,076	$	387,903
Lawn and garden	64,703		5,512		70,215
Tools and paint	45,501		3,770		49,271
Other	28,954		20,560		49,514
Total	414,985		141,918		556,903
Costs and expenses
Cost of sales and occupancy	316,820		101,670		418,490
Selling and administrative	94,149		27,905		122,054
Depreciation	797		1,485		2,282
Total	411,766		131,060		542,826
Operating income	$	3,219	$	10,858	$	14,077
Total assets	$	648,341	$	143,358	$	791,699
Capital expenditures	$	1,172	$	980	$	2,152

	39 Weeks Ended November 2, 2013
Thousands	Hometown		Outlet			Total
Net sales
Appliances	$	868,489	$	362,600		$	1,231,089
Lawn and garden	280,029		20,938			300,967
Tools and paint	138,996		10,063			149,059
Other	74,394		63,575			137,969
Total	1,361,908		457,176			1,819,084
Costs and expenses
Cost of sales and occupancy	1,040,750		340,216			1,380,966
Selling and administrative	299,175		80,640			379,815
Depreciation	2,372		4,197			6,569
Gain on the sale of assets			(1,567		)	(1,567		)
Total	1,342,297		423,486			1,765,783
Operating income	$	19,611	$	33,690		$	53,301
Total assets	$	657,019	$	190,989		$	848,008
Capital expenditures	$	2,711	$	3,284		$	5,995

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	39 Weeks Ended October 27, 2012
Thousands	Hometown		Outlet		Total
Net sales
Appliances	$	845,502	$	337,447	$	1,182,949
Lawn and garden	306,420		15,669		322,089
Tools and paint	148,988		10,087		159,075
Other	102,308		56,024		158,332
Total	1,403,218		419,227		1,822,445
Costs and expenses
Cost of sales and occupancy	1,066,728		298,619		1,365,347
Selling and administrative	287,400		80,631		368,031
Depreciation	2,423		4,392		6,815
Total	1,356,551		383,642		1,740,193
Operating income	$	46,667	$	35,585	$	82,252
Total assets	$	648,341	$	143,358	$	791,699
Capital expenditures	$	1,785	$	3,739	$	5,524

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8—COMMITMENTS AND CONTINGENCIES

We are subject to various legal and governmental proceedings arising out of the ordinary course of business, the outcome of which, individually or in the aggregate, in the opinion of management, would not have a material adverse effect on our business, financial position, results of operations, or cash flows.

NOTE 9—RECENT ACCOUNTING PRONOUNCEMENTS

Disclosures about Reclassification Adjustments out of Accumulated Other Comprehensive Income

In February 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income. The update requires entities to disclose additional information about reclassification adjustments, including changes in accumulated other comprehensive income balances by component and significant items reclassified out of accumulated other comprehensive income. This update was effective and adopted by the Company in the first quarter of 2013 and did not have an impact on the Company's consolidated financial position, results of operations or cash flows.

Testing Indefinite-Lived Intangible Assets for Impairment

In July 2012, the FASB issued an accounting standards update which provides, subject to certain conditions, the option to perform a qualitative, rather than quantitative, assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. This update was effective and adopted by the Company in the first quarter of 2013 and did not have an impact on the Company's consolidated financial position, results of operations, or cash flows.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10—INCOME PER COMMON SHARE

Basic income per common share is calculated by dividing net income by the weighted average number of common shares outstanding for each period. Diluted income per common share also includes the dilutive effect of potential common shares.In connection with the Separation, stockholders purchased from Sears Holdings a total of 23.1 million shares of our common stock upon the exercise of subscription rights distributed to Sears Holdings' stockholders. This share amount has been utilized for the calculation of basic and diluted income per share for all periods prior to the Separation.

The following table sets forth the components used to calculate basic and diluted income per common share attributable to our stockholders.

	13 Weeks Ended		13 Weeks Ended		39 Weeks Ended		39 Weeks Ended
	November 2, 2013		October 27, 2012		November 2, 2013		October 27, 2012
Thousands except income per common share
Basic weighted average shares	22,999		23,100		23,066		23,100
Dilutive effect of restricted stock	—		—		4		—
Diluted weighted average shares	22,999		23,100		23,070		23,100
Net income	$	7,695	$	8,760	$	31,826	$	50,420
Income per common share:
Basic	$	0.33	$	0.38	$	1.38	$	2.18
Diluted	$	0.33	$	0.38	$	1.38	$	2.18

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11—EQUITY

Stock-based Compensation

At the Company's Annual Meeting of Stockholders held on May 14, 2013 the stockholders approved the Sears Hometown and Outlet Stores, Inc. Amended and Restated 2012 Stock Plan. Four million shares of the Company's common stock are reserved for issuance under the plan. A total of 89,221 shares of restricted stock were granted in the second quarter of 2013 under the plan to a group of eligible individuals (as defined in the plan), all of whom are employees of the Company. We are authorized to grant stock options and to make other awards to eligible plan participants pursuant to the Amended and Restated 2012 Stock Plan. The Company has made no stock-option or other awards under the plan.

We account for stock-based compensation using the fair value method in accordance with accounting standards regarding share-based payment transactions. During the second and third quarters of 2013 we recorded $0.6 million in total compensation expense related to the 87,841 shares of restricted stock (none of which had vested and 1,380 had been forfeited as of November 2, 2013). At November 2, 2013, we had $3.3 million in total unrecognized compensation cost related to the 87,841 shares of non-vested restricted stock, which cost we expect to recognize over approximately the next 2.50 years.

The 87,841 shares of restricted stock will vest, if at all, on May 16, 2016 in accordance with and subject to the terms and conditions of restricted-stock agreements, including forfeiture conditions, and the Amended and Restated 2012 Stock Plan. The fair value of these awards is equal to the market price of our common stock on the date of grant. We do not currently have a broad-based program that provides for restricted-stock awards on an annual basis. Changes in restricted-stock awards for 2013 were as follows:

	39 Weeks Ended November 2, 2013
(Shares in Thousands)	Shares		Weighted-Average Fair Value on Date of Grant
Beginning of year balance	—		—
Granted	89		$	44.45
Vested	—		—
Forfeited	(1	)	44.45
Balance at 11/2/2013	88		$	44.45

The aggregate fair value of the shares granted based on the weighted average fair value at the date of grant was $3.9 million.

Share Repurchase Program

On August 28, 2013 the Company's Board of Directors authorized a $25 million repurchase program for the Company's outstanding shares of common stock. The timing and amount of repurchases depend on various factors, including market conditions, the Company's capital position and internal cash generation, and other factors. The Company's repurchase program does not include specific price targets, may be executed through open-market, privately negotiated, and other transactions that may be available, and may include utilization of Rule 10b5-1 plans. The repurchase program does not obligate the Company to repurchase any dollar amount, or any number of shares, of common stock. The repurchase program does not have a termination date, and the Company may suspend or terminate the repurchase program at any time. During the third quarter of 2013 the Company adopted a Rule 10b5-1 plan that terminates on December 6, 2013.

Shares that are repurchased by the Company pursuant to the repurchase program will be retired and resume the status of authorized and unissued shares of common stock.

During the 13 week period ended November 2, 2013, we repurchased 279,247 shares of our common stock at a total cost of $8.4 million under the repurchase program. Our repurchases for the 13-week period ended November 2, 2013 were made at an

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

average price of $29.97. At November 2, 2013 we had $16.6 million of remaining authorization under the repurchase program. From November 4, 2013 through December 5, 2013, we repurchased 12,651 shares of the Company's common stock for approximately $0.3 million, which brought total repurchases under the repurchase program to approximately $8.7 million.

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SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

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

The following discussion should be read in conjunction with the Consolidated Financial Statements and notes contained in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013. For pre-Separation periods these financial statements and notes reflect the combined Sears Hometown and Hardware and Sears Outlet businesses of Sears Holdings, which, together with our operation of these businesses following the Separation, are referred to herein as “our” financial condition and results of operations. This discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements.

Executive Overview

We are a national retailer primarily focused on selling home appliances, hardware, tools, and lawn and garden equipment. As of November 2, 2013, we and our dealers and franchisees operated 1,239 stores across all 50 states, Puerto Rico, and Bermuda. In the third quarter of 2013, the Company opened 16 new stores and closed 27 stores. Fourteen of the closures in the third quarter, and 21 year-to-date, resulted from the termination by Orchard Supply Hardware LLC ("OSH") during its bankruptcy proceeding of its Consignment Agreement with us pursuant to which OSH had sold our home-appliance inventory at appliance showrooms that OSH operated in its stores (the "OSH Termination").

In addition to merchandise, we provide our customers with access to a full suite of services, including home delivery, installation, and extended service contracts.

Our Hometown and Hardware stores are designed to provide our customers with in-store and online access to a wide selection of national brands of home appliances, tools, lawn and garden equipment, sporting goods, and household goods, depending on the particular format. Our Outlet stores are designed to provide our customers with in-store and online access to purchase, at prices that are significantly lower than manufacturers' list prices, new, one-of-a-kind, out-of-carton, discontinued, obsolete, used, reconditioned, overstocked and scratched and dented products across a broad assortment of merchandise categories, including home appliances, lawn and garden equipment, apparel, mattresses, sporting goods, and tools.

As of November 2, 2013, Hometown consisted of 1,108 stores as follows:

• 925 Sears Hometown Stores—Primarily independently owned stores, predominantly located in smaller communities and offering appliances, lawn and garden equipment, and hardware. Most of our Sears Hometown Stores carry proprietary Sears brand products, such as Kenmore, Craftsman, and DieHard, as well as a wide assortment of other national brands.

• 88 Sears Hardware Stores—Hardware stores that carry Craftsman brand tools and lawn and garden equipment, DieHard brand batteries and a wide assortment of other national brands and other home improvement products along with a selection of Kenmore and other national brands of home appliances.

• 95 Sears Home Appliance Showrooms—Stores that have a simple, primarily appliance showroom design that are positioned in metropolitan areas.

As of November 2, 2013, Hometown operated through 926 dealer-operated stores, 154 franchisee-operated stores, and 28 Company-operated stores. The business model and economic structure of the dealer-operated and franchisee-operated stores, which are independently owned, are substantially similar to Company-operated stores. The Company requires all of the dealers and franchisees to operate according to the Company’s standards. Dealers and franchisees must display the required merchandise, offer all required products and services, and use the Company’s point of sale system. Also, the Company has the right to approve advertising and promotional and marketing materials and imposes certain advertising requirements on the dealers and franchisees. The Company establishes selling prices of merchandise inventories (which are owned by the Company) and establishes a common commission structure for the dealers and for the franchisees, who are paid commissions on the merchandise they sell. Because the merchandise is owned by the Company and delivered to dealers and franchisees on consignment, we maintain general inventory risk (with specific exceptions) before the completion of the customer purchase and upon merchandise return by the customer, if any. In addition, because each transaction is recorded in the Company’s point-of-sale system (maintained by Sears Holdings), we bear the collection risk.

Dealers and franchisees exercise predominant control over the day-to-day operations of their stores, and are solely responsible for supervising their employees and making capital decisions.

The primary difference between independently operated stores and Company-operated stores is that the Company is responsible for occupancy and payroll costs associated with Company-operated stores. Independent store operators are responsible for the occupancy costs in their stores and the payroll of their employees.

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SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

In the normal course of business stores can transition from Company-operated to franchisee or dealer-operated, and vice-versa. Potential new store locations may be identified by the Company, an existing dealer or franchisee, or a potential dealer or franchisee. If the Company identifies and develops a location, it will generally seek to transfer that store to a dealer or franchisee. When a dealer or franchisee ceases to operate a store, the Company may take over the operation of the store, generally on an interim basis until the store can be transferred to a new dealer or franchisee. At any given time, the Company is generally operating a number of stores that are in transition from one dealer or franchisee to another dealer or franchisee. Transition stores are included in our count of Dealer or franchisee-operated stores and are not included in our count of Company-operated stores due to the expected short-term nature of transition operation.

Due to new stores developed and transferred to franchisees, as well as existing Company-operated stores transferred to franchisees, the Company has recorded initial franchise revenue in ten of the last eleven quarters. Both the number of store locations transferred in a period, and the revenue recorded on those transfers, is highly variable. The variation is driven by a number of factors, including (1) general economic conditions (which influence both the level of new store development and the level of interest of existing or potential dealers and franchisees in acquiring store locations), and (2) economic factors specific to our major product categories, such as appliances, which impact the expected returns on new store development and the number of Company-operated locations available for transfer.

Historically, all of the Company's Outlet stores have been owned by the Company. The Company began a trial program for franchising Outlet stores in late 2012. The initial franchise transfers under this program were completed in the first quarter of 2013. As of November 2, 2013, Outlet consisted of 131 Sears Outlet stores including fourteen franchisee-operated stores.

Impacts from Our Separation from Sears Holdings

Following the Separation, we have operated as a publicly traded company independent from Sears Holdings, which has, and will have, a range of impacts on our operations:

General Administrative and Separation Costs. SHO consists of what were formerly the Sears Hometown and Hardware and Sears Outlet businesses owned by Sears Holdings. Prior to the Separation we used the corporate functions of Sears Holdings for a variety of services including treasury, accounting, tax, legal, and other shared services, which included the costs of payroll, employee benefits and other payroll-related costs. Also prior to the Separation Sears Holdings contributed other corporate functions, such as senior management and centrally managed employee benefit arrangements. We were allocated $6.7 million and $14.6 million of shared services costs incurred by Sears Holdings in the third quarter and first three quarters of 2012, respectively. Such expenses may not be indicative of the actual level of expense that would have been incurred by us if we had operated as a publicly traded company independent from Sears Holdings. For the third quarter of 2013 and the first nine months of 2013, we were charged $5.6 million and $16.0 million, respectively, by Sears Holdings for shared services costs.

We will incur increased costs as a result of having become, and maintaining our status as, a publicly traded company independent from Sears Holdings. As an independent public company, we have incurred, and will continue to incur, incremental costs to support our businesses, including management personnel, legal, finance, and human resources costs.

Prior to the Separation, we entered into various agreements with Sears Holdings that, among other things, (1) govern the principal transactions relating to the Separation and aspects of our relationship with Sears Holdings following the Separation, (2) establish terms under which subsidiaries of Sears Holdings are providing services to us, and (3) establish terms pursuant to which subsidiaries of Sears Holdings obtain merchandise for us (collectively, the “Separation Transactions”). See Note 4 to our Condensed Consolidated Financial Statements included herein.

For the third quarter of 2013 the Company estimates that it incurred $5.0 million in costs above the level incurred in the third quarter of 2012 in categories impacted by the Separation. These higher costs included $1.0 million in commissions paid to Sears Holdings' online business, where such a commission arrangement was not in place pre-Separation. $1.1 million of the higher cost resulted from additional staffing, home office rent, D&O insurance, and other costs related to being independent. Another $2.9 million of the higher costs was associated with staffing, marketing, and other corporate services that had been provided by Sears Holdings but only some of which had been allocated to the combined Hometown and Hardware and Outlet business units prior to the Separation.

Part II, Item 5 includes a discussion of the December 9 Agreements between the Company and Sears Holdings regarding the resolution of disputes between them. While it is not practicable for the Company to calculate precise amounts, it estimates that, but for the uncertainties arising from these disputes, the Company might have been in a position to record in prior quarters

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13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

of 2013 between $4.0 million and $4.5 million of the operating income recorded in the third quarter of 2013. The Company estimates that of this amount an approximately even split would have been allocated to the Hometown segment and the Outlet segment.

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SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

Seasonality

Our business is not concentrated in the holiday season, as the majority of the products we sell are not typically thought of as holiday gifts. Lawn and Garden sales generally peak in our second quarter as customers prepare for and execute outdoor projects during the spring and early summer. Additional data on the revenue, cost, and net income seasonality of the business is available in the Quarterly Financial Data in Note 9 to our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

Results of Operations

The following table sets forth items derived from our consolidated results of operations for the 13 and 39 weeks ended November 2, 2013 and October 27, 2012.

	13 Weeks Ended						39 Weeks Ended
Thousands	November 2, 2013			October 27, 2012			November 2, 2013			October 27, 2012
NET SALES	$	561,068		$	556,903		$	1,819,084		$	1,822,445
COSTS AND EXPENSES
Cost of sales and occupancy	425,596			418,490			1,380,966			1,365,347
Gross margin dollars	135,472			138,413			438,118			457,098
Margin rate	24.1		%	24.9		%	24.1		%	25.1		%
Selling and administrative	121,698			122,054			379,815			368,031
Selling and administrative expense as a percentage of net sales	21.7		%	21.9		%	20.9		%	20.2		%
Depreciation	2,177			2,282			6,569			6,815
Gain on the sale of assets	(1,567		)	—			(1,567		)	—
Total costs and expenses	547,904			542,826			1,765,783			1,740,193
Operating income	13,164			14,077			53,301			82,252
Interest income (expense)	(738		)	(70		)	(1,969		)	(111		)
Other income	460			382			1,306			968
Income before income taxes	12,886			14,389			52,638			83,109
Income tax expense	(5,191		)	(5,629		)	(20,812		)	(32,689		)
NET INCOME	$	7,695		$	8,760		$	31,826		$	50,420

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 stores that have undergone format changes. Comparable store sales amounts have also been adjusted for the change in the unshipped sales reserves recorded at the end of each reporting period.

In addition to our net income determined in accordance with GAAP, for purposes of evaluating operating performance

we generally use Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization, or “Adjusted EBITDA.” Following the Separation our management has used Adjusted EBITDA to evaluate the operating performance of our business for comparable periods. While Adjusted EBITDA is a non-GAAP measurement, management believes that it can be an important indicator of operating performance because it excludes (1) the effects of financing and investing activities by eliminating interest and depreciation costs and (2) store closing charges and severance costs that may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results. During the 13 and 39 weeks ended November 2, 2013 and the 13 weeks ended October 27, 2012 we incurred zero store closing and severance charges. During the 39 weeks ended October 27, 2012 we incurred $0.8 million of store closing charges and severance costs. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as Adjusted EBITDA excludes a number of important cash and non-cash recurring items. Adjusted EBITDA should not be considered as a substitute for GAAP measurements.

The following table presents a reconciliation of Adjusted EBITDA to Net income, the most comparable GAAP measure, for each of the periods indicated:

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SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

	13 Weeks Ended						39 Weeks Ended
Thousands	November 2, 2013			October 27, 2012			November 2, 2013			October 27, 2012
Net income	$	7,695		$	8,760		$	31,826		$	50,420
Income tax expense	5,191			5,629			20,812			32,689
Other income	(460		)	(382		)	(1,306		)	(968		)
Interest expense	738			70			1,969			111
Operating income	13,164			14,077			53,301			82,252
Depreciation	2,177			2,282			6,569			6,815
Store closing charges and severance costs (1)	—			—			—			797
Gain on the sale of assets	(1,567		)	—			(1,567		)	—
Adjusted EBITDA	$	13,774		$	16,359		$	58,303		$	89,864

(1) See Note 5 to our Condensed Consolidated Financial Statements included herein.

22

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

13-Week Period Ended November 2, 2013 Compared to the 13-Week Period Ended October 27, 2012

Net Sales

Net sales in the third quarter of 2013 increased $4.2 million, or 0.7%, to $561.1 million from the third quarter of 2012. This increase was driven primarily by higher initial franchise revenues (which were $7.8 million in the third quarter of 2013 compared to $1.5 million in the third quarter of 2012) and new store sales (net of closures). Partially offsetting these increases were a 2.0% decrease in comparable store sales and an unfavorable impact of $3.6 million due to the the 53rd week calendar shift in 2012. The comparable store sales decrease of 2.0% was comprised of a 1.5% decrease in Hometown and a 3.4% decrease in Outlet. The 2.0% decrease was primarily driven by lower major appliances and apparel sales in Outlet; lower Hometown lawn and garden sales; lower tools category sales in both segments; and lower consumer electronics sales following a planned exit of the business in the majority of Hometown stores. These decreases were partially offset by higher major appliances sales in Hometown.

Gross Margin

Gross margin was $135.5 million, or 24.1% of net sales, in the third quarter of 2013 compared to $138.4 million, or

24.9% of net sales, in the third quarter of 2012. The decrease in gross margin rate was primarily driven by (1) lower margins on merchandise sales, (2) $3.7 million of Outlet distribution center costs that were separated from selling store costs and were reflected in selling and administrative expense in 2012, (3) a $2.3 million warranty expense timing benefit in 2012, (4) $0.9 million primarily consisting of additional occupancy costs incurred as a result of operating as an independent company since the Separation, and (5) lower Outlet merchandise-liquidation income. These decreases were partially offset by an increase in initial franchise revenues, $3.3 million to $3.8 million from the impact of items ultimately reflected in the December 9 Agreements, a $2.1 million increase in warranty reserves in 2012, and lower occupancy costs resulting from the conversion of Company-operated stores to franchisee-operated stores.

Selling and Administrative Expenses

Selling and administrative expenses decreased to $121.7 million, or 21.7% of net sales, in the third quarter of 2013 from $122.1 million, or 21.9% of net sales, in the prior year quarter. The decrease was primarily due to a reduction in payroll and benefits related to the franchise conversions and $3.7 million in Outlet distribution-center costs (which were separated from selling store costs and reflected in selling and administrative expense in the third quarter of 2012 and reflected in gross margin in the third quarter of 2013), and also included a reduction in expense of $0.7 million from the impact of items ultimately reflected in the December 9 Agreements. These decreases were partially offset by an estimated $4.1 million in higher costs resulting from operating as an independent company, higher owner commissions in both Hometown and Outlet (primarily related to the conversion of Company-operated stores to franchisee-operated stores) and higher marketing costs in Hometown.

Operating Income

We recorded operating income of $13.2 million and $14.1 million in the third quarters of 2013 and 2012, respectively. The $0.9 million decrease in operating income was driven by the above mentioned lower gross profit rate partially offset by higher net sales, lower selling and administrative expenses, and a $1.6 million gain on the sale of an Outlet store location.

Income Taxes

Income tax expense of $5.2 million and $5.6 million was recorded in the third quarters of 2013 and 2012, respectively. The effective tax rate was 40.3% and 39.1% in the third quarter of 2013 and 2012, respectively.

Net Income

We recorded net income of $7.7 million for the third quarter of 2013 compared to $8.8 million for the prior year quarter. The decrease in net income was primarily attributable to the factors discussed above.

23

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

39-Week Period Ended November 2, 2013 Compared to the 39-Week Period Ended October 27, 2012

Net Sales

Net sales in the first three quarters of 2013 decreased $3.4 million, or 0.2%, to $1,819.1 million from the first three quarters of 2012. This decrease was driven primarily by a 1.8% reduction in comparable store sales and lower Outlet merchandise liquidation revenues. These decreases were partially offset by an increase in initial franchise revenues and new store sales (net of closures). Initial franchise revenues were $14.8 million in the first three quarters of 2013 compared to $11.2 million in the first three quarters of 2012. The comparable store sales decrease of 1.8% was comprised of a 2.9% decrease in Hometown and a 1.9% increase in Outlet. The 1.8% comparable store sales decrease was primarily driven by lower sales of lawn and garden in Hometown due to weather-related late starts to the spring/summer and fall seasons and higher sales in 2012 related to Super Storm Sandy, lower consumer electronics sales due to the completed exit of the business in the majority of Hometown stores, and lower Outlet apparel sales due to a narrower assortment. These decreases were partially offset by increases in mattress sales following category expansion in fiscal 2012 and higher home appliances sales.

Gross Margin

Gross margin was $438.1 million, or 24.1% of net sales, in the first three quarters of 2013 compared to $457.1 million, or

25.1% of net sales, in the first three quarters of 2012. The decrease in gross margin rate was primarily driven by (1) lower margins on merchandise sales, (2) $10.0 million of distribution center costs that were separated from selling store costs and were reflected in selling and administrative expense in 2012 and are now reflected in gross margin, (3) a $3.7 million benefit in the first three quarters of 2012 from the impact of store closing reserves established in 2011 (which benefit did not recur in the first three quarters of 2013), (4) a $2.3 million warranty expense timing benefit in the third quarter of 2012, (5) $2.2 million primarily due to additional occupancy costs as a result of operating as an independent company, and (6) lower Outlet liquidation income. These decreases were partially offset by lower occupancy costs, excluding incremental standalone costs, resulting from the conversion of Company-operated stores to franchisee-operated stores, higher initial franchise revenues, a $2.1 million increase in warranty reserves in the third quarter of 2012, and the pass-through by Sears Holdings of higher cash discounts on Sears Holdings' purchases of merchandise sold to us.

Selling and Administrative Expenses

Selling and administrative expenses increased to $379.8 million, or 20.9% of net sales in the first three quarters of 2013 from $368.0 million, or 20.2% of net sales, in the prior year quarters. The increase was primarily due to higher owner commissions in both Hometown and Outlet (primarily related to the conversions of Company-operated stores to franchisee-operated stores) and an estimated $14.9 million of higher operating costs incurred as a result of operating as an independent company. These increases were partially offset by $10.0 million in Outlet distribution-center costs that were separated from selling store costs and were reflected in selling and administrative expense in the first three quarters of 2012 and a reduction in payroll and benefits related to the Company-operated stores conversions.

Operating Income

We recorded operating income of $53.3 million and $82.3 million in the first three quarters of 2013 and 2012, respectively. The $29.0 million decrease in operating income was driven by the decrease in sales, a lower gross margin rate, and an increase in selling and administrative expenses.

Income Taxes

Income tax expense of $20.8 million and $32.7 million was recorded in the first three quarters of 2013 and 2012, respectively. The effective tax rate was 39.5% and 39.3% in the first half of 2013 and 2012, respectively.

Net Income

We recorded net income of $31.8 million for the first three quarters of 2013 compared to $50.4 million for the first three quarters of the prior year. The decrease in net income was primarily attributable to the factors discussed above.

24

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

Business Segment Results

Hometown

Hometown results and key statistics were as follows:

	13 Weeks Ended						39 Weeks Ended
Thousands, except for number of stores	November 2, 2013			October 27, 2012			November 2, 2013			October 27, 2012
Net sales	$	413,171		$	414,985		$	1,361,908		$	1,403,218
Comparable store sales %	(1.5		)%	4.4		%	(2.9		)%	1.0		%
Cost of sales and occupancy	318,362			316,820			1,040,750			1,066,728
Gross margin dollars	94,809			98,165			321,158			336,490
Margin rate	22.9		%	23.7		%	23.6		%	24.0		%
Selling and administrative	94,818			94,149			299,175			287,400
Selling and administrative expense as a percentage of net sales	22.9		%	22.7		%	22.0		%	20.5		%
Depreciation	760			797			2,372			2,423
Total costs and expenses	413,940			411,766			1,342,297			1,356,551
Operating income	$	(769	)	$	3,219		$	19,611		$	46,667
Total Hometown stores							1,108			1,111

13-Week Period ended November 2, 2013 Compared to the 13-Week Period Ended October 27, 2012

Net Sales

Hometown net sales decreased $1.8 million, or 0.4%, to $413.2 million in the third quarter of 2013 from $415.0 million in the third quarter of 2012. The decrease was primarily due to a 1.5% decrease in comparable store sales, an unfavorable impact of $4.0 million due to the the 53rd week calendar shift and a $1.2 million reduction related to the OSH Termination. These declines were partially offset by new store sales (net of closures). The comparable store sales decline in the third quarter of 2013 was primarily driven by (1) lower consumer electronics sales after completing the exit of the category in most stores, (2) lower lawn and garden sales due to the impact of higher sales in 2012 related to Super Storm Sandy and declines in fall cleanup sales in 2013 resulting from a late fall, and (3) lower sales in tools and paint as a result of 2012 sales related to Super Storm Sandy that were not repeated in 2013 and a tool storage transition that shifted sales to clearance products as new product arrived. These decreases were partially offset by higher major appliance sales driven by the strong performance during the Labor Day and Columbus Day events of bottom freezers, side-by-side refrigeration, free-standing ranges and dishwashers.

Gross Margin

Gross margin was $94.8 million, or 22.9% of net sales, in the third quarter of 2013 compared to $98.2 million, or 23.7% of net sales, in the prior year quarter. The reduction in gross margin rate over the prior year quarter was driven primarily by lower margins on merchandise sales due to increased promotional activity, a $2.1 million warranty expense timing benefit in 2012, and lower commissions on online sales. These decreases were partially offset by an increase in warranty reserves in 2012, lower occupancy expenses in 2013 from the conversions of Company-operated stores to franchisee-operated stores, and the impact of items ultimately reflected in the December 9 Agreements.

Selling and Administrative Expenses

Selling and administrative expenses increased to $94.8 million, or 22.9% of net sales, in the third quarter of 2013 from $94.1 million, or 22.7% of net sales, in the prior year quarter. The increase was primarily due to an estimated $2.6 million in higher costs from operating as an independent company, higher owner commissions mainly related to the conversions of Company-operated stores to franchisee-operated stores, and higher marketing costs. These increases were partially offset by a reduction in payroll and benefits related to the Company-operated store conversions, $0.9 million in lower costs related to the OSH Termination and lower costs due to the impact of items ultimately reflected in the December 9 Agreements.

25

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

Operating Income

We recorded an operating loss of $0.8 million in the third quarter of 2013 and operating income of $3.2 million in the third quarter of 2012. The overall decrease in operating income of $4.0 million was driven by the decrease in sales, lower gross margin rate, the increase in selling and administrative expense as noted above, and $0.3 million related to the OSH Termination.

26

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

Business Segment Results

Hometown

39-Week Period Ended November 2, 2013 Compared to the 39-Week Period Ended October 27, 2012

Net Sales

Hometown net sales decreased $41.3 million, or 2.9%, to $1.36 billion in the first three quarters of 2013 from $1.40 billion in the first three quarters of 2012. The decrease was primarily due to a 2.9% decrease in comparable store sales and lower initial franchise revenues partially offset by new store sales (net of closures). The comparable store sales decrease was driven primarily by declines in lawn and garden resulting from weather-related late starts to the spring/summer and fall seasons, and in consumer electronics after completing the exit of the category in the majority of stores. These decreases were partially offset by increases in home appliances.

Gross Margin

Gross margin was $321.2 million, or 23.6% of net sales, in the first three quarters of 2013 compared to $336.5 million, or 24.0% of net sales, in the prior year quarters. The decrease in gross margin rate over the prior year was driven primarily by lower initial franchise revenues, lower margins on merchandise sales, a $3.7 million benefit in the first half of 2012 from the impact of store closing reserves established in 2011 (which benefit did not recur in the first half of 2013) and a $2.1 million warranty expense timing benefit in the third quarter of 2012. Partially offsetting these items were lower occupancy expenses from the conversion of Company-operated stores to franchisee-operated stores and a $1.7 million increase in warranty reserves in the third quarter of 2012.

Selling and Administrative Expenses

Selling and administrative expenses increased to $299.2 million, or 22.0% of net sales in the first three quarters of 2013 from $287.4 million, or 20.5% of net sales, in the first three quarters of 2012. The increase was primarily due to higher owner commissions mainly related to the conversion of Company-operated stores to franchisee-operated stores and an estimated $10.0 million in higher costs from operating as an independent company. These increases were partially offset by a reduction in payroll and benefits related to the Company-operated stores conversions.

Operating Income

We recorded operating income of $19.6 million and $46.7 million in the first three quarters of 2013 and 2012, respectively. The overall decrease in operating income of $27.1 million was driven by the decrease in sales, an increase in selling and administrative expense and the decrease in gross margin rate as noted above.

27

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

Outlet

Outlet results and key statistics were as follows:

	13 Weeks Ended						39 Weeks Ended
Thousands, except for number of stores	November 2, 2013			October 27, 2012			November 2, 2013			October 27, 2012
Net sales	$	147,897		$	141,918		$	457,176		$	419,227
Comparable store sales %	(3.4		)%	(0.8		)%	1.9		%	0.6		%
Cost of sales and occupancy	107,234			101,670			340,216			298,619
Gross margin dollars	40,663			40,248			116,960			120,608
Margin rate	27.5		%	28.4		%	25.6		%	28.8		%
Selling and administrative	26,880			27,905			80,640			80,631
Selling and administrative expense as a percentage of net sales	18.2		%	19.7		%	17.6		%	19.2		%
Depreciation	1,417			1,485			4,197			4,392
Gain on the sale of assets	(1,567		)	—			(1,567		)	—
Total costs and expenses	133,964			131,060			423,486			383,642
Operating income	$	13,933		$	10,858		$	33,690		$	35,585
Total Outlet stores							131			126

13-Week Period ended November 2, 2013 Compared to the 13-Week Period Ended October 27, 2012

Net Sales

Outlet net sales increased $6.0 million, or 4.2%, to $147.9 million in the third quarter of 2013 from $141.9 million in the third quarter of 2012. The increase was primarily due to $6.2 million of initial franchise revenues and sales from new stores (net of closures). These increases were partially offset by a 3.4% decrease in comparable store sales and lower apparel liquidation revenues compared to the third quarter of 2012. The decrease in comparable store sales for the third quarter of 2013 was primarily driven by lower sales in apparel due to a narrower assortment, lower home appliances sales, lower tools sales resulting from a special purchase and promotion of industrial tools in the third quarter of 2012, and lower availability of tools storage in the third quarter of 2013. These decreases were partially offset by sales in the furniture category, which was introduced in the second quarter of 2013 and was expanded into the majority of Outlet stores in the third quarter of 2013.

Gross Margin

Gross margin was $40.7 million, or 27.5% of net sales, in the third quarter of 2013 compared to $40.2 million, or 28.4% of net sales, in the prior year quarter. The gross margin rate decreased in the third quarter of 2013 compared to the prior year quarter primarily due to (1) lower margins on merchandise sales due to a higher balance-of-sales in lower-margin, in-box goods partially offset by improvements in apparel margins, (2) $3.7 million of distribution center costs that were separated from selling store costs and were reflected in selling and administrative expense in 2012 and are now reflected in gross margin, (3) $0.8 million primarily due to additional occupancy costs as a result of operating as an independent company, and (4) lower apparel liquidation margins. These decreases were partially offset by $6.2 million in initial franchise revenues (which had not been recorded prior to the first quarter of 2013), lower occupancy costs (excluding incremental standalone costs as a result of Company-operated store conversions), the impact of items ultimately reflected in the December 9 Agreements, and a net benefit of $0.2 million related to an increase in warranty reserves and a warranty timing benefit in 2012. Excluding the impact of the reclassification of distribution center expenses, gross margin was $44.4 million, or 30.0% of net sales, in the third quarter of 2013.

Selling and Administrative Expenses

Selling and administrative expenses decreased to $26.9 million, or 18.2%, in the third quarter of 2013 from $27.9 million, or 19.7%, in the prior year quarter. The decrease in selling and administrative expenses is primarily due to $3.7 million in distribution center costs that were separated from selling store costs and were reflected in selling and administrative expense in

28

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

2012 and are now reflected in gross margin, partially offset by an estimated $1.5 million in higher costs from operating as an independent company and higher franchisee commissions for stores that we converted from Company-operated to franchisee-operated. Excluding the impact of the reclassification of distribution center expenses, selling and administrative expenses were $30.6 million, or 20.7% of net sales, in the third quarter of 2013.

Operating Income

We recorded operating income of $13.9 million and $10.9 million in the third quarter of 2013 and 2012, respectively. The increase in operating income of $3.0 million was driven by higher net sales, a $1.6 million gain on the sale of the outlet store in Woodstock, Illinois in the third quarter of 2013, and lower selling and administrative expenses partially offset by a lower gross profit rate.

29

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

Outlet

39-Week Period Ended November 2, 2013 Compared to the 39-Week Period Ended October 27, 2012

Net Sales

Outlet net sales increased $38.0 million, or 9.1%, to $457.2 million in the first three quarters of 2013 from $419.2 million in the first three quarters of 2012. The increase was primarily due to new store openings (net of closures), $10.1 million of initial franchise revenues, and a 1.9% increase in comparable store sales, partially offset by lower apparel liquidation revenues. The increase in comparable store sales for 2013 was primarily driven by higher home appliances sales, increases in lawn and garden driven by grills, patio furniture and mowers, and in mattresses following category expansion in fiscal 2012, partially offset by a decrease in apparel due to a narrower assortment.

Gross Margin

Gross margin was $117.0 million, or 25.6% of net sales in the first three quarters of 2013 compared to $120.6 million, or 28.8% of net sales in the prior year. The gross margin rate decreased 320 basis points in the first three quarters of 2013 compared to the prior year primarily due to lower margins on merchandise sales due to lower availability of higher-margin scratch-and-dent items, $10.0 million of distribution center costs that were separated from selling store costs and were reflected in selling and administrative expense in 2012 and are now reflected in gross margin, lower liquidation income and an additional $2.1 million in occupancy costs as a result of operating as an independent company since the Separation. These decreases were partially offset by $10.1 million in initial franchise revenues, lower occupancy costs (excluding incremental standalone costs) as a result of Company-operated store conversions, and the pass-through by Sears Holdings of higher cash discounts on Sears Holdings' purchases of merchandise sold to us. No initial franchise revenues were recorded in Outlet prior to fiscal 2013. Excluding the impact of the reclassification of distribution center expenses, gross margin was $127.0 million, or 27.8% of net sales, for the first three quarters of 2013.

Selling and Administrative Expenses

Selling and administrative expenses were $80.6 million, or 17.6% of net sales, in the first three quarters of 2013 compared to $80.6 million, or 19.2% of net sales, in the prior year first three quarters. Selling and administrative expenses included an estimated $4.9 million in higher costs from operating as an independent company, higher franchise commissions for the Company-operated stores that we converted to franchisee-operated stores in the first three quarters of 2013, and increased marketing investments. These increases were offset by $10.0 million in distribution center costs that were separated from selling store costs and were reflected in selling and administrative expense in 2012 and are now reflected in gross margin. Excluding the impact of the reclassification of distribution center expenses, selling and administrative expenses were $90.6 million, or 19.8% of net sales, for the first three quarters of 2013.

Operating Income

We recorded operating income of $33.7 million and $35.6 million in the first three quarters of 2013 and 2012, respectively. The decrease in operating income of $1.9 million was driven by a lower gross profit rate partially offset by higher net sales and a $1.6 million gain in the third quarter of 2013 on the sale of the outlet store in Woodstock, Illinois.

30

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

Analysis of Financial Condition

Cash and Cash Equivalents

We had cash and cash equivalents of $21.5 million as of November 2, 2013, $21.8 million as of October 27, 2012, and $20.1 million as of February 2, 2013.

For the first, second, and third quarters of 2013 we financed our operations and investments primarily with short-term borrowings under the Senior ABL Facility. Our primary need for liquidity is to fund inventory purchases and capital expenditures and for general corporate purposes.

Cash Flows from Operating Activities

For the three quarters ended November 2, 2013 cash used in operating activities was $54.2 million compared to $93.3 million generated in the three quarters ended October 27, 2012. The decrease in operating cash flows compared to 2012 was due predominately to a decrease in the payable to Sears Holdings compared to an increase in the first nine months of 2012, increased investments in inventory, and lower net income.

Total merchandise inventories were $488.6 million at November 2, 2013 and $429.4 million at October 27, 2012. Merchandise inventories for Hometown increased from $336.9 million at October 27, 2012 to $352.0 million at November 2, 2013 primarily due to (1) home appliances resets, (2) completion of the tools expansion initiative, (3) inventory associated with new stores (net of closures), (4) higher air conditioner inventory due to a cooler summer, (5) expansion of vacuum cleaner inventory, and (6) an increase in the cost of Kenmore and Craftsman merchandise resulting from a post-Separation change in the treatment of warranty costs. Post-Separation SHO purchases Kenmore and Craftsman products with warranty included, which results in a higher product cost but eliminates any later warranty costs to SHO. The Company expects that generally the higher product costs and the resulting warranty savings will typically offset each other. These inventory increases were partially offset by a reduction in consumer electronics due to the exit of this category in the majority of Hometown stores. Merchandise inventories for Outlet increased from $92.5 million at October 27, 2012 to $136.6 million at November 2, 2013, primarily driven by (1) home appliances due to additional flow of scratch-and-dent units and large buys of discontinued and obsolete product, (2) an increase in the number of stores, (3) higher receipts in mattresses, and (4) seasonal-purchases of grills and late-season receipts of lawn tractors in lawn and garden. These increases were partially offset by lower receipts of apparel.

We obtain our merchandise through agreements with Sears Holdings and from other vendors. In the first three quarters of 2013 merchandise acquired from subsidiaries of Sears Holdings, including Kenmore, Craftsman, DieHard, and other products, accounted for approximately 84% of total purchases of all inventory from all vendors. The loss of, or a material reduction in, the amount of merchandise made available to us by Sears Holdings could have a material adverse effect on our business and results of operations.

Cash Flows from Investing Activities

Cash used in investing activities was $3.3 million for the first three quarters of 2013 compared to $5.5 million for the first three quarters of 2012. Cash used in investing activities in both periods was for purchases of property and equipment partially offset by $2.6 million in proceeds from sales of property and investments in 2013.

Cash Flows from Financing Activities

Cash generated by financing activities was $58.9 million for the 39 weeks ended November 2, 2013 compared to $66.6 million used for the 39 weeks ended October 27, 2012. The increase of $125.5 million in cash generated by financing activities in 2013 from 2012 was primarily due to the cash dividend paid to Sears Holdings of $100.0 million at the time of Separation, an increase of $20.8 million in short-term borrowing in the first three quarters of 2013 and a $12.3 million reduction in transfers to Sears Holdings at the time of Separation partially offset by the repurchase of 0.3 million shares of stock for $8.4 million as part of the $25 million share repurchase program authorized by the Company's Board of Directors on August 28, 2013.

Financing Arrangements

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SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

Under the Senior ABL Facility the Company initially borrowed $100 million which was used to pay a cash dividend to Sears Holdings prior to the Separation. As of November 2, 2013, we had $87.9 million outstanding under the Senior ABL Facility, which approximated the fair value of these borrowings. The Senior ABL Facility provides (subject to availability under a borrowing base) for maximum borrowings up to the aggregate commitments of all of the lenders, which as of November 2, 2013 totaled $250 million. Up to $75 million of the Senior ABL Facility is available for the issuance of letters of credit and up to $25 million is available for swingline loans. The Senior ABL Facility permits us to request commitment increases in an aggregate principal amount of up to $100 million. Availability under the Senior ABL Facility as of November 2, 2013 was $158.7 million with $3.4 million of letters of credit outstanding under the facility.

32

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

The principal terms of the Senior ABL Facility are summarized below.

Senior ABL Facility

Maturity; Amortization and Prepayments

The Senior ABL Facility will mature on the earlier of (i) October 11, 2017 or (ii) six months prior to the expiration of the Merchandising Agreement and the other agreements with Sears Holdings or its subsidiaries in connection with the Separation that are specified in the Senior ABL Facility, unless such agreements have been extended to a date later than October 11, 2017 or terminated on a basis reasonably satisfactory to the administrative agent under the Senior ABL Facility.

The Senior ABL Facility is subject to mandatory prepayment in amounts equal to the amount by which the outstanding extensions of credit exceed the lesser of the borrowing base and the commitments then in effect.

Guarantees; Security

The obligations under the Senior ABL Facility are guaranteed by us and each of our existing and future direct and indirect wholly owned domestic subsidiaries (subject to certain exceptions). The Senior ABL Facility and the guarantees thereunder are secured by a first priority security interest in certain assets of the borrowers and guarantors consisting primarily of accounts receivable, inventory, cash, cash equivalents, deposit accounts and securities accounts, as well as certain other assets (other than intellectual property) ancillary to the foregoing and all proceeds of all of the foregoing, including cash proceeds and the proceeds of applicable insurance.

Interest; Fees

The interest rates per annum applicable to the loans under the Senior ABL Facility are based on a fluctuating rate of interest measured by reference to, at our election, either (1) adjusted LIBOR plus a borrowing margin or (2) an alternate base rate plus a borrowing margin, with the borrowing margin subject to adjustment based on the average excess availability under the facility for the preceding fiscal quarter. The interest rate was 4.25% at November 2, 2013.

Customary fees are payable in respect of the Senior ABL Facility, including letter of credit fees and commitment fees.

Covenants

The Senior ABL Facility includes a number of covenants that, among other things, limit or restrict our ability to, subject to specified exceptions, incur additional indebtedness (including guarantees), grant liens, make investments, make prepayments on other indebtedness, engage in mergers, or change the nature of our business.

The Senior ABL Facility limits SHO's ability to declare and pay cash dividends and repurchase its common stock. SHO may declare and pay cash dividends to its stockholders and may repurchase stock if the following conditions are satisfied: either (a) (i) no specified default then exists or would arise as a result of the declaration or payment of the cash dividend or as a result of the stock repurchase, (ii) SHO and its subsidiaries that are also borrowers have demonstrated to the reasonable satisfaction of the agent for the lenders that monthly availability (as determined in accordance with the Senior ABL Facility), immediately following the declaration and payment of the cash dividend or the stock repurchase and as projected on a pro forma basis for the twelve months following and after giving effect to the declaration and payment of the cash dividend or the stock repurchase, would be at least equal to the greater of (x) 25% of the Loan Cap (which is the lesser of (A) the aggregate commitments of the lenders and (B) the borrowing base) and (y) $50,000,000, and (iii) after giving pro forma effect to the declaration and payment of the cash dividend or the stock repurchase as if it constituted a specified debt service charge, the specified consolidated fixed charge coverage ratio, as calculated on a trailing twelve months basis, would be equal to or greater than 1.1:1.0, or (b) (i) no specified default then exists or would arise as a result of the declaration or payment of the cash dividend or the stock repurchase, (ii) payment of the cash dividend or the stock repurchase is not made with the proceeds of any credit extension under the Senior ABL Facility, (iii) during the 120-day period prior to declaration and payment of the cash dividend or the stock repurchase, no credit extension was outstanding under the Senior ABL Facility, and (iv) SHO demonstrates to the reasonable satisfaction of the agent for the lenders that, on a

33

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

pro forma and projected basis, no credit extensions would be outstanding under the Senior ABL Facility for the 120-day period following the declaration and payment of the cash dividend or the stock repurchase.

The Senior ABL Facility also contains certain affirmative covenants, including financial and other reporting requirements.

Events of Default

The Senior ABL Facility includes customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross default to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments, and change of control.

Uses and Sources of Liquidity

We believe that our existing cash and cash equivalents, cash flows from our operating activities and, to the extent necessary, availability under the Senior ABL Facility will be sufficient to meet our anticipated liquidity needs for at least the next 12 months. As of November 2, 2013, we had cash and cash equivalents of $21.5 million. Over the next twelve months, we expect to fund our ongoing operations and any stock repurchases with cash on-hand, cash generated by operating activities, and borrowings under the Senior ABL Facility. The adequacy of our available funds will depend on many factors, including the macroeconomic environment and the operating performance of our stores.

Capital lease obligations as of November 2, 2013 and October 27, 2012 were $1.2 million and $2.4 million, respectively.

Off-Balance Sheet Arrangements

As of November 2, 2013, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission's Regulation S-K.

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SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

Recent Accounting Pronouncements

See Part I, Item 1, “Financial Statements—Notes to Condensed Consolidated Financial Statements— Note 9 — Recent Accounting Pronouncements,” for information regarding new accounting pronouncements.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements made in this Quarterly Report on Form 10-Q contain 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. Forward-looking statements include without limitation information concerning our future financial performance, business strategy, plans, goals, and objectives.

Statements preceded or followed by, or that otherwise include, the words “believes,” “expects,” “anticipates,” “intends,” “project,” “estimates,” “plans,” “forecast,” “is likely to,” "continue," and similar expressions or future or conditional verbs such as “will,” “may,” “would,” “should” and “could” are generally forward-looking in nature and not historical facts. Such statements are based upon the current beliefs and expectations of our 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 our actual results, performance or achievements to differ from those set forth in the forward-looking statements:

• our continued reliance on Sears Holdings for most products and services that are important to the successful operation of our business;

• our continuing dependence on Sears Holdings subsequent to the Separation, and our potential need to depend on Sears Holdings beyond the expiration of certain of our agreements with Sears Holdings;

• our ability to offer merchandise and services that our customers want, including those under the Kenmore, Craftsman, and DieHard brands.

• the sale by Sears Holdings and its subsidiaries to other retailers that compete with us of major home appliances and other products branded with the Kenmore, Craftsman and DieHard brands;

• our ability to successfully manage our inventory levels and implement initiatives to improve inventory management and other capabilities;

• competitive conditions in the retail industry;

• worldwide economic conditions and business uncertainty, the availability of consumer and commercial credit, changes in consumer confidence, tastes, preferences and spending, and changes in vendor relationships;

• the fact that our past performance generally, as reflected in on our historical financial statements, may not be indicative of our future performance as a result of, among other things, the consolidation of Hometown and Outlet into a single business entity, the Separation, and operating as a standalone business entity;

• the impact of increased costs due to a decrease in our purchasing power following the Separation and other losses of benefits that were associated with having been wholly owned by Sears Holdings and its subsidiaries;

• our agreements related to the rights offering and Separation Transactions and our continuing relationship with Sears Holdings were negotiated while we were a subsidiary of Sears Holdings and we may have received different terms from unaffiliated third parties;

• the ability and willingness of Sears Holdings to perform its contractual obligations to us;

• our ability to successfully resolve existing and, if any arise, future contractual disputes with Sears Holdings;

• limitations and restrictions in the Senior ABL Facility and our ability to service our indebtedness;

• our ability to obtain additional financing on acceptable terms;

• our dependence on independent dealers and franchisees to operate our stores profitably and in a manner consistent with our concepts and standards;

• our dependence on sources outside the U.S. for significant amounts of our merchandise;

• impairment charges for goodwill or fixed-asset impairment for long-lived assets;

• our ability to attract, motivate, and retain key executives and other employees;

• the impact of increased costs associated with being an independent company;

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SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

• our ability to maintain effective internal controls as a public company;

• our ability to realize the benefits that we expect to achieve from the Separation;

• low trading volume of our common stock due to limited liquidity or a lack of analyst coverage; and

• the impact on our common stock and our overall performance as a result of our principal stockholders’ ability to exert control over us.

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements, including our "Risk Factors," that are included in our other filings with the Securities and Exchange Commission and our other public announcements. While we believe that our forecasts and assumptions are reasonable, we caution that actual results may differ materially. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Consequently, actual events and results may vary significantly from those included in or contemplated or implied by our forward-looking statements. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to publicly update or review any forward-looking statement made by us or on our behalf, whether as a result of new information, future developments, subsequent events or circumstances, or otherwise.

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SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to interest rate risk associated with our Senior ABL Facility, which requires us to pay interest on outstanding borrowings at variable rates. Assuming our Senior ABL Facility were fully drawn in principal amount equal to $250 million, each one percentage point change in interest rates payable with respect to the Senior ABL Facility would result in a $2.5 million change in annual cash interest expense with respect to our Senior ABL Facility.

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SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 2, 2013 and October 27, 2012

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the 13 weeks ended November 2, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

As of the date hereof, we are not party to any litigation that we consider material to our operations.

Notwithstanding the above, from time to time we are, and will continue to be, subject to various legal claims, including those alleging wage and hour violations, employment discrimination, unlawful employment practices, Americans with Disabilities Act claims, product liability claims as a result of the sale of merchandise and services, claims with respect to franchise and dealer transactions and relationships, as well as various legal and governmental proceedings. Litigation is inherently unpredictable. Each proceeding, claim, and regulatory action against us, whether meritorious or not, could be time consuming, result in significant legal expenses, require significant amounts of management time, result in the diversion of significant operational resources, require changes in our methods of doing business that could be costly to implement, reduce our net sales, increase our expenses, require us to make substantial payments to settle claims or satisfy judgments, require us to cease conducting certain operations or offering certain products in certain areas or generally, and otherwise harm our business, results of operations, financial condition, and cash flows, perhaps materially. See also "Cautionary Statement Regarding Forward-Looking Information" in this Quarterly Report on Form 10-Q.

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Item 1A. Risk Factors

There have been no material changes from the risk factors as previously disclosed in our our Annual Report on Form 10-K for the fiscal year ended February 2, 2013. However, the risks described in “Risk Factors” beginning on page 9 of our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 should be carefully considered. Those risks could materially affect our business, consolidated results of operations, or financial condition. Those risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Cautionary Statement Regarding Forward-Looking Information,” and the risks to our businesses described elsewhere, in this Quarterly Report on Form 10-Q.

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

The following table provides information about shares of our common stock that we acquired during the third quarter of 2013 pursuant to our share repurchase program. During the 13 weeks ended November 2, 2013, we repurchased 0.3 million shares of our common stock at a total cost of $8.4 million under our share repurchase program. At November 2, 2013, we had $16.6 million of remaining authorization under the program.

	39 Weeks Ended November 2, 2013
	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program (1)	Average Price Paid Per Share		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
August 4, 2013 to August 31, 2013	—	$	—	—	$	—	$	—
September 1, 2013 to October 5, 2013	157,229	31.11		157,229	31.11		20,107,973
October 6, 2013 to November 2, 2013	122,018	28.50		122,018	28.50		16,629,936
For the quarter ended November 2, 2013	279,247	$	29.97	279,247	$	29.97

(1) Our share repurchase program was initially announced on August 30, 2013 and has a total authorization, since inception of the program, of $25 million. The program has no stated expiration date.

The Senior ABL Facility limits SHO's ability to declare and pay cash dividends and repurchase its common stock. SHO may declare and pay cash dividends to its stockholders and may repurchase stock if the following conditions are satisfied: either (a) (i) no specified default then exists or would arise as a result of the declaration or payment of the cash dividend or as a result of the stock repurchase, (ii) SHO and its subsidiaries that are also borrowers have demonstrated to the reasonable satisfaction of the agent for the lenders that monthly availability (as determined in accordance with the Senior ABL Facility), immediately following the declaration and payment of the cash dividend or the stock repurchase and as projected on a pro forma basis for the twelve months following and after giving effect to the declaration and payment of the cash dividend or the stock repurchase, would be at least equal to the greater of (x) 25% of the Loan Cap (which is the lesser of (A) the aggregate commitments of the lenders and (B) the borrowing base) and (y) $50,000,000, and (iii) after giving pro forma effect to the declaration and payment of the cash dividend or the stock repurchase as if it constituted a specified debt service charge, the specified consolidated fixed charge coverage ratio, as calculated on a trailing twelve months basis, would be equal to or greater than 1.1:1.0, or (b) (i) no specified default then exists or would arise as a result of the declaration or payment of the cash dividend or the stock repurchase, (ii) payment of the cash dividend or the stock repurchase is not made with the proceeds of any credit extension under the Senior ABL Facility, (iii) during the 120-day period prior to declaration and payment of the cash dividend or the stock repurchase, no credit extension was outstanding under the Senior ABL Facility, and (iv) SHO demonstrates to the reasonable satisfaction of the agent for the lenders that, on a pro forma and projected basis, no credit extensions would be outstanding under the Senior ABL Facility for the 120-day period following the declaration and payment of the cash dividend or the stock repurchase.

The Senior ABL Facility also imposes various other requirements, such as a cash dominion requirement and a requirement that the fixed charge ratio at the last day of any quarter be not less than 1.0 to 1.0, which take effect if availability falls below designated thresholds and which may limit our ability to make share repurchases.

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Item 5. Other Information

The terms and conditions of the December 9 Agreements are briefly described below. According to a Schedule 13D/A filed on June 12, 2013 with the Securities and Exchange Commission, ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert (collectively, “ESL”), beneficially owned on the filing date approximately 48% of our outstanding shares of common stock. Based on publicly available information, ESL beneficially owns approximately 48% of Sears Holdings’ outstanding shares of common stock.

The December 9 Agreements arose out of, and are intended to resolve, disputes between the Company and Sears Holdings regarding the terms and conditions of the SHO-Sears Holdings Agreements. Some of these disputes involved amounts that the Company and Sears Holdings each claimed were due from the other. Following negotiations regarding the disputes, representatives of the Company and representatives of Sears Holdings prior to the end of the third quarter of 2013 reached a mutual, but non-binding, understanding regarding resolution of a number of the disputes. The December 9 Agreements implemented most of the items that were the subject of the understanding. As noted in the summaries below, the December 9 Agreements include payments to be made by the Company to Sears Holdings and waivers by Sears Holdings of amounts claimed to have been due from the Company. Following the Separation and during the negotiations regarding the disputes the Company and Sears Holdings each denied that it was required to pay to the other, or waive, disputed amounts. While it is not practicable for the Company to calculate precise amounts, it estimates that, but for the uncertainties arising from the disputes between the Company and Sears Holdings, the Company might have been in a position to record in prior quarters of 2013 between $4.0 million and $4.5 million of the operating income recorded in the third quarter of 2013. The Company estimates that this amount would have been split approximately evenly between the Hometown segment and the Outlet segment.

A.Amendment No. 2 to Merchandising Agreement dated December 9, 2013 between (i) Sears, Roebuck and Co. (“SRC”), Kmart Corporation, (“Kmart” and together with SRC, “Seller”), and (ii) the Company, Sears Authorized Hometown Stores, LLC (“SAHS”), and Sears Outlet Stores, L.L.C. (together with the Company and SAHS, “Buyer”) (the “MA Amendment”). SRC and Kmart are wholly owned subsidiaries of Sears Holdings. SAHS and Sears Outlet Stores, L.L.C. are wholly owned subsidiaries of the Company. A copy of the MA Amendment is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and is incorporated herein by reference. The following brief description of the terms and conditions of the MA Amendment is qualified by, and is subject to, the terms and conditions of the MA Amendment.

The MA Amendment amends the Merchandising Agreement dated August 8, 2012 between Seller and Buyer (the “Merchandising Agreement”). Among other things, the MA Amendment (1) provides that Seller waives $4.35 million in warranty charges and with respect to freight charges on specified categories of Outlet merchandise that Seller claims are due from Buyer, (2) adds a requirement that Buyer pay $1 million to Seller with respect to Craftsman lifetime warranty charges and adds Seller’s waiver of $2.3 million of additional Craftsman lifetime warranty charges that Seller claims are due from Buyer, (3) amends the prices Buyer pays Seller for specified categories of Outlet merchandise, (4) adds details regarding Buyer’s obligations with respect to damaged/defective apparel acquired from Seller and provides that Seller waives $1.3 million that Seller claims are due from Buyer, and adds a requirement that Buyer pay $1 million to Seller, with respect to damaged/defective apparel, (5) extends for a period of one year specified pricing for mark-out-of stock Outlet apparel that Buyer acquires from Seller, (6) amends the calculation for determining vendor allowances that Seller is obligated to pay to Buyer, (7) amends the restrictions regarding Buyer’s ability to open new Sears Hometown Stores, Sears Home Appliance Showrooms, and Sears Hardware stores, (8) adds a limitation on the types of new merchandise that Buyer may sell at Outlet Stores that are located within two miles of specified Seller stores, (9) adds that Buyer will report to Seller specified new-store arrangements, (10) clarifies the responsibilities of Buyer and Seller with respect to Seller’s warranties on specified non-repairable Craftsman products, (11) adds an additional charge payable by Buyer for products that Seller sells to Buyer that are covered by the Craftsman lifetime warranty, and (12) amends the terms and conditions regarding the “Kenmore Royalty Credit."

B.    Amendment No. 1 to Separation Agreement dated December 9, 2013 between the Company and Sears Holdings (the “SA Amendment”). A copy of the SA Amendment is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Qand is incorporated herein by reference. The following brief description of the terms and conditions of the SA Amendment is qualified by, and is subject to, the terms and conditions of the SA Amendment.

The SA Amendment amends the Separation Agreement dated as of August 8, 2012 between the Company and Sears Holdings (the “Separation Agreement”). Among other things, the SA Amendment (1) amends the definition of “Ancillary Agreements” to include the Supplemental Agreement (defined below), (2) adds that Sears Holdings will cause its affiliates not to unreasonably withhold or delay consents to requests by the Company to sublease its rights under leases with Sears Holdings’

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affiliates, (3) adds that the Company and Sears Holdings will negotiate in good faith with respect to the Company’s proposals to conduct its franchise and dealer businesses in the Caribbean region, (4) adds that the Company may establish, acquire, and operate businesses that do not use the “Sears” name and that are not specified retailers, (5) adds obligations of the Company and Sears Holdings affiliates regarding specified store locations that are subject to ground leases, (6) adds obligations of the Company and Sears Holdings regarding a store in Norristown, Pennsylvania, (7) clarifies the obligations of the Company and Sears Holdings affiliates for specified stores with respect to lease obligations for HVAC, utilities, CAM, taxes, insurance, roofs, parking lots, and related items, and (8) adds that, in the event of a dispute, the Company and Sears Holdings each will provide the other with specified information with respect to compliance with the Separation Agreement.

C.    Amendment No. 1 to Services Agreement dated December 9, 2013 between the Company and Sears Holdings Management Corporation (“SHMC”) (the “Services Amendment”). SHMC is a wholly owned subsidiary of Sears Holdings. A copy of the Services Amendment is filed as Exhibit 10.3 to this Quarterly Report on Form 10-Q and is incorporated herein by reference. The following brief description of the terms and conditions of the Services Amendment is qualified by, and is subject to, the terms and conditions of the Services Amendment.

The Services Amendment amends the Services Agreement dated as of August 8, 2012 between the Company and SHMC (the “Services Agreement”). Among other things, the Services Amendment (1) amends the obligations of the Company and SHMC regarding the hybrid-delivery market process and how related margin is shared between the Company and SHMC, (2) provides that SHMC waives approximately $1.3 million of IT retail-support charges that SHMC claims are due from the Company and that the Company owes no additional IT retail-support charges for its 2013 fiscal year (except for net store increases), (3) amends the Company’s retail-support charges for the 2014 and 2015 fiscal years to be $1 million and $2 million, respectively (plus a specified per-store fee for net new stores over a base number of stores), (4) clarifies the components of IT retail-support services, and (4) expands the scope of services that SHMC will provide to assist the migration of IT services provided by SHMC to the Company and successor IT service providers.

D.    Supplemental Agreement dated December 9, 2013 between the Company and Sears Holdings (the “Supplemental Agreement”). A copy of the Supplemental Agreement is filed as Exhibit 10.4 to this Quarterly Report on Form 10-Q and is incorporated herein by reference. The following brief description of the terms and conditions of the Supplemental Agreement is qualified by, and is subject to, the terms and conditions of the Supplemental Agreement.

The Supplemental Agreement provides that the Company and Sears Holdings each releases the other and related persons from specified claims and defenses to claims that are described on an appendix to the Supplemental Agreement. A separate appendix to the Supplemental Agreement describes claims that the Company and Sears Holdings have not released and have reserved for continuing discussions.

E.    Statement of Work #1 to Employee Transition and Administrative Services Agreement dated as of December 9, 2013 between (i) the Company, SAHS, and Sears Outlet Stores, L.L.C. and (ii) SHMC (the “Statement of Work”). A copy of the Statement of Work is filed as Exhibit 10.5 to this Quarterly Report on Form 10-Q and is incorporated herein by reference. The following brief description of the terms and conditions of the Statement of Work is qualified by, and is subject to, the terms and conditions of the Statement of Work.

The Statement of Work is required by the terms and conditions of the Employee Transition and Administrative Services Agreement dated as of August 31, 2012 between (i) the Company, SAHS, and Sears Outlet Stores, L.L.C. and (ii) SHMC (the “ETASA”) and the Statement of Work provides that it replaces the Human Resources section of Appendix 101-A to the Services Agreement. The Statement of Work provides for the following human resource services to be governed by the terms and conditions of the ETASA: support center; payroll; time and attendance; HR reporting and analytics; unemployment; compliance; employee record keeping; learning; management/leadership development; compensation management; benefits and benefits administration; and HR systems.

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Item 6. Exhibits

The Exhibits listed in the accompanying “Exhibit Index” have been filed as part of this Quarterly Report on Form 10-Q.

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SIGNATURE

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 Hometown and Outlet Stores, Inc.
By:	/S/ STEVEN D. BARNHART
Name:	Steven D. Barnhart
Title:	Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
Date:	December 10, 2013

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SEARS HOMETOWN AND OUTLET STORES, INC.

EXHIBIT INDEX

Exhibit Number	Document Description
3.1	Amended and Restated Bylaws of Sears Hometown and Outlet Stores, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed on December 9, 2013 (File No. 001-35641)).
*#10.1	Amendment No. 2 to Merchandising Agreement dated December 9, 2013 between (i) Sears, Roebuck and Co. and Kmart Corporation and (ii) Sears Hometown and Outlet Stores, Inc., Sears Authorized Hometown Stores, LLC, and Sears Outlet Stores, L.L.C.
*10.2	Amendment No. 1 to Separation Agreement dated December 9, 2013 between Sears Hometown and Outlet Stores, Inc. and Sears Holdings Corporation.
*10.3	Amendment No. 1 to Services Agreement dated December 9, 2013 between Sears Hometown and Outlet Stores, Inc. and Sears Holdings Management Corporation.
*10.4	Supplemental Agreement dated December 9, 2013 between Sears Hometown and Outlet Stores, Inc. and Sears Holdings Corporation.
*10.5	Statement of Work #1 to Employee Transition and Administrative Services Agreement dated December 9, 2013 between (i) Sears Hometown and Outlet Stores, Inc., Sears Authorized Hometown Stores, LLC, and Sears Outlet Stores, L.L.C. and (ii) Sears Holdings Management Corporation.
*31.1	Certification of Chief Executive Officer Required Under Rule 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of 1934, as amended.
*31.2	Certification of Chief Financial Officer Required Under Rule 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of 1934, as amended.
*32.1	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 (furnished only).
**101	The following financial information from the Quarterly Report on Form 10-Q for the fiscal quarter ended November 2, 2013, formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Statements of Income (Unaudited) for the 13 and 39 Weeks Ended November 2, 2013 and October 27, 2012; (ii) the Condensed Consolidated Balance Sheets (Unaudited) at November 2, 2013, October 27, 2012 and February 2, 2013; (iii) the Condensed Consolidated Statements of Cash Flows (Unaudited) for the 39 Weeks Ended November 2, 2013 and October 27, 2012; (iv) the Condensed Combined Statements of Stockholders' Equity (Unaudited) for the 13 and 39 Weeks Ended November 2, 2013 and October 27, 2012; and (v) the Notes to the Condensed Consolidated Financial Statements (Unaudited).

* Filed herewith.

# Specified provisions of this exhibit have been omitted and separately filed with the Securities and Exchange Commission pursuant to a request for confidential treatment.

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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EX-10.1

EXHIBIT 10.1

Execution Copy

The use of “[***]” in this Exhibit indicates that a confidential portion has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission.

AMENDMENT NO. 2 TO MERCHANDISING AGREEMENT

Dated: December 9, 2013

THIS AMENDMENT NO. 2 TO MERCHANDISING AGREEMENT (this “Amendment”) between (1) SEARS, ROEBUCK AND CO., a New York corporation (“SRC”), KMART CORPORATION, a Michigan corporation(“Kmart” and together with SRC, “Seller”), and (2) SEARS HOMETOWN AND OUTLET STORES, INC., a Delaware corporation (“SHO”), SEARS AUTHORIZED HOMETOWN STORES, LLC, a Delaware limited liability company (“SAHS”), and SEARS OUTLET STORES, L.L.C., a Delaware limited liability company (“Outlet Co.” and together with SHO and SAHS, “Buyer”), and is retroactive to October 6, 2013 (the “Amendment Date”), and amends that certain Merchandising Agreement between Seller and Buyer dated August 8, 2012 (as amended, the “Agreement”). Capitalized terms used but not otherwise defined herein have the meanings ascribed to such terms in the Agreement.

WHEREAS, the parties have agreed to amend certain provisions of the Agreement as provided for below.

NOW, THEREFORE, in consideration of the above premises and the mutual covenants and other good and valuable consideration contained herein, the parties agree as follows:

1. Amendments. The Agreement shall be modified as set forth below:

a.Invoice Prices for DRM. Appendix 4(b)(i) (Invoice Prices for DRM) to the Agreement is amended and restated as of the Amendment Date as set forth in Attachment #1 hereto. Further, Seller agrees to waive the approximately $4.35 million dollars in warranty charges on DRM and the parties’ dispute of whether the Invoice Price for DRM already excluded freight charges, in each case, contested by SHO prior to the Amendment Date.

b.MOS Sears Apparel.

i.15% Cap On Damaged Sears Apparel. Appendix 4(c)(ii) (MOS Categories and Initial MOS Invoice Prices) of the Agreement is amended and restated as of the Amendment Date as set forth on Attachment #2 hereto. Buyer will, within 5 days of execution of this Amendment, pay Seller $1 million and Seller waives the remaining approximately $1.3 million in charges that Buyer has withheld prior to the Amendment Date related to the disputed damaged (Blue Label) items in Sears MOS (as defined below).

ii.1 Year Extension of Fixed Pricing for Sears MOS (Apparel). Section 4(c)(ii) (MOS Invoice Prices; Negotiated Price Changes) of the Agreement is amended by adding at the end of that Section the following:

“Notwithstanding the above, for Sears MOS the fixed price period is extended for one additional year (for a total of 4 years from the Effective Date) at the invoice prices set forth in Appendix 4(c)(ii).”

1

DMLIB-#442072-v6-SH_and_SHO_AMENDMENT_NO__2_TO_MERCHANDISING_AGREEMENT.DOCX

Execution Copy

The use of “[***]” in this Exhibit indicates that a confidential portion has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission.

c.Modification of Vendor Subsidies. As of the Amendment Date, the parties agree that Section 8(a) (Vendor Subsidies), is amended by adding the following at the end of such Section:

“Notwithstanding the above, for each vendor from whom Seller only purchases products for resale to SHO (each a “SHO Unique Vendor”), then, in each such instance, Seller’s purchases from the SHO Unique Vendor shall be excluded from the calculation (numerator and denominator) of the Subsidy Pro Rata Share.”

d.HTS Store Restrictions.

i. Seller agrees to drop its objections to the following 4 stores (collectively the “No-EBITDA Stores”): Austin, TX, Plano, TX, Los Angeles (Hawthorn)), CA, and Murray, UT stores (and Buyer will not be obligated to pay any of its EBITDA on these locations under Section 9(b)(i)(C)). Buyer agrees that the stores extinguish Buyer’s right to open two new stores (Los Angles (Item #8) and West Plano (Item #84)) provided for on Appendix 9(b)(i)(A) to the Agreement.Seller also agrees to drop its objections to the following 5 stores:Westlake, OH, Overland Park, KS, Southfield, MI, Grand Prairie, TX and Louisville, KY locations, andfor each of the five stores Buyeragrees that Buyer is obligated to pay Seller annually 30% of the store’s annual EBITDA, if any, for the first five of Buyer’s fiscal years that the store is open for business.

ii.Section 9(b)(i)(B) is amended and restated as of the Amendment Date as follows:

“(B)    The New HTS Store or other new store (other than a No-EBITDA Stores) is at least eight miles (using the most logical driving route) from all existing Seller-owned or operated full-line stores branded with the name “Sears” and the New HTS Store or other new store is at least two miles (using the most logical driving route) from the Kmart locations set forth on Appendix #3 (Kmart Locations) (collectively the “Sears Stores”),”

iii.Section 9(b)(i)(C) is amended and restated as follows:

“(C)    The New HTS Store or other new store (other than a No-EBITDA Stores) is between five miles and eight miles (using the most logical driving route) from all existing Sears Stores (each an “EBITDA Store”) and Buyer has requested (in advance of committing to such location), and received Seller’s prior written approval (which approval will not be unreasonably withheld or delayed). For each EBITDA Store, Buyer will pay Seller annually 30% of the new EBITDA Store’s annual EBITDA, if any, for the first five of Buyer’s fiscal years that the new EBITDA Store is open for business, or”

2

DMLIB-#442072-v6-SH_and_SHO_AMENDMENT_NO__2_TO_MERCHANDISING_AGREEMENT.DOCX

Execution Copy

The use of “[***]” in this Exhibit indicates that a confidential portion has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission.

e.Outlet Store Restrictions. As of the Amendment Date, Section 9(b)(ii) (Sears Outlet Stores) is amended and restated as follows:

“(ii)    Sears Outlet Stores. Buyer and its Affiliates may continue to own and operate all Sears Outlet Stores owned and operated on the Effective Date without restriction. Buyer may open, own, and operate after the Effective Date new Sears Outlet Stores without restriction, except that on and after October 31, 2013 Buyer and its Affiliates will not sell and Buyer and its Affiliates will not authorize third parties (e.g., dealers, franchisees) to sell “New Products” at any Sears Outlet Store that is: (a) acquired by SHO after October 31, 2013 or subject to a lease executed after October 31, 2013 (other than the renewal or extension of a lease if the lease was executed on or before October 31, 2013 and other than a lease or sublease by SHO to a SHO dealer or franchisee); and (b) within two miles (using the most logical driving route) of an operating Sears Store . “New Products” means home appliance products, patio products and Craftsman lawn and garden products that are, in each case, new and in box and are a current model (not obsolete); however a model designated in writing as discontinued by the manufacturer (or in the case of Kenmore, by SHMC or its Affiliates), shall not be a “New Product”.”

f.Notice Provisions. As of the Amendment Date, a new Section 9(b)(iii) (New SHO Location Notice) is added as follows:

“(iii) Buyer will, within five (5) Business Days of the beginning of each month, notify Seller in writing of any new locations Buyer intends to open during the month. In addition, Buyer will notify Seller in writing (at least 5 days prior to signing a lease for such location) of any: (i) New HTS Store locations that are within 9 miles (using the most logical driving distance) of a Sears Store, and (ii) new Sears Outlet Store locations that are that are within 3 miles of a Sears Store (using the most logical driving distance). ”

g.Craftsman Lifetime Warranty Exchange. The parties agree that:

iv.Buyer will, within 5 days of execution of this Amendment, pay Seller $1 million with respect to charges that Buyer has withheld prior to the Amendment Date related to the Craftsman lifetime warranty exchange;

v.Seller waives approximately $2.3 million dollars in charges that Buyer has withheld prior to the Amendment Date related to the Craftsman lifetime warranty exchange;

vi.as of the Amendment Date, Section 10(b)(ii) is amended and restated in its entirety as follows:

“(ii)    Non-Repairable Products. For each Product that (A) a customer returns to Buyer for the reason that the Product is defective, (B) the returned Product is covered by a Warranty, and (C) Buyer, in Good Faith, determines

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The use of “[***]” in this Exhibit indicates that a confidential portion has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission.

is not repairable, Buyer, at its sole expense and using commercially reasonable arrangements determined by Seller, will replace the Product for the customer and dispose of the Product. For each HTS Product that Seller replaces in Good Faith pursuant to and in accordance with Seller’s “Craftsman lifetime warranty exchange” (or any successor lifetime program Seller offers on Craftsman products, each a “CLW Replacement Product”) Buyer will be entitled to a credit equal to the HTS Invoice Price paid by Buyer to Seller for the CLW Replacement Product Buyer provided to its customer. Except for as noted above, the CLW Replacement Product credit does not apply to any Products that is not a CLW Replacement Product; regardless of whether such Product is warranted by Seller or not.”

and

vii.effective February 2^nd, 2014, the following language is added at the end of Section 10(b)(ii):

“In addition to all other amounts due under the Agreement, for each HTS Product subject to Seller’s “Craftsman lifetime warranty exchange” (or any successor lifetime program Seller offers on Craftsman products) Buyer will separately pay Seller, via a separate payment at the time of its purchase, an additional *** percent (***%) on top of the invoice price charged to Buyer for such products (the “Lifetime Warranty Charge”). For example, if a particular socket set (which was subject to the Seller’s “Craftsman lifetime warranty exchange,”) was bought by Buyer at an invoice price of $10, then Buyer will pay Seller an additional $*** for such product. Seller will, once per month, rebate to Buyer the Lifetime Warranty Charge paid by Buyer to Seller on the CLW Replacement Product provided by Seller to its customers during the previous month.”

h.Hometown Balance of Sale Rebate. As of the Amendment Date, Section II (KENMORE ROYALTY CREDIT) of Appendix 5(a) (Royalty Rates; Kenmore Royalty Credits) of the Agreement is deleted in its entirety and replaced with the following. For clarity the parties’ note that the revised Kenmore Royalty Credit language below will only be used for the final fiscal quarter of 2013.

“II.    “KENMORE ROYALTY CREDIT

1. Select Definitions

“Buyer’s Balance of Sales in the Home Appliance Category” means a fraction, expressed as a decimal, (i) the numerator of which is Buyer’s Net Sales during a Buyer fiscal quarter of HTS Products at Sears Hometown Stores and Sears Home Appliance Showrooms formats in the Home Appliance Category that are Kenmore-Branded Products, and (ii) the denominator of which is Buyer’s Net Sales during the fiscal quarter of HTS Products sold at

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The use of “[***]” in this Exhibit indicates that a confidential portion has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission.

Sears Hometown Stores and Sears Home Appliance Showrooms formats in the Home Appliance Category (regardless of brand). Buyer’s Net Sales at Sears Hardware Stores and Sears Outlet stores do not factor into the calculation of Buyer’s Balance of Sales in the Home Appliance Category and such sales are not subject to the Kenmore Royalty Credit.

The “Home ApplianceCategory” means the following product categories:

Cooking & Cleanup—Division 22

Laundry—Division 26

Air & Water Appliances—Division 42

Food Storage—Division 46

Floorcare/Sewing—Division 20

Home Environment—Division 32

2. Calculation of Kenmore Royalty Credit

The “Kenmore Royalty Credit” will be determined by Seller by reducing the Royalties on the incremental sales that result in a change to Buyer’s Balance of Sales in the Home Appliance Category in accordance with the following:

Buyer’s Balance of Sales in the Home Appliance Category	63.2% and below	63.2% to 64.99%	65.0% to 69.99%	70.0& to 74.99%	75.0% and over
Royalty Rates
Royalty on Step Incremental Sales	***%	***%	***%	***%	***%

                      (No Reduction)

For clarity, the parties note that each tier of HTS Product sales is subject to its own reduced royalty rate.

Example 1. Buyer’s Net Sales during the quarter of HTS Products at Sears Hometown Stores and Sears Appliance Showroom formats in the Home Appliance Category is equal to $250,000,000. Buyer’s Net Sales during the quarter of HTS Products that were branded Kenmore Branded Products at Sears Hometown Stores and Sears Home Appliance Showroom formats in the Home Appliance Category is equal to $200,000,000, for a total Buyer’s Balance of Sales in the Home Appliance Category of 80.0%.

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The use of “[***]” in this Exhibit indicates that a confidential portion has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission.

$ millions

Total applicable Sales

$

250.00

Kenmore BOS

63.2% and below

63.2% to 65.00%

65.0% to 70.00%

70.0& to 75.00%

Over 75.0%

Total

Kenmore Sales

$

158.00

$

4.50

$

12.50

$

12.50

$12.50

$200.00

Kenmore Base Royalty (% Kenmore Sales)

***%

***%

***%

***%

***%

Kenmore Base Royalty $

$***

$***

$***

$***

$***

$***

Kenmore Royalty Credit %

***%

***%

***%

***%

***%

Kenmore Royalty Credit $

$***

$***

$***

$***

$***

$***

Kenmore Net Royalty %

***%

***%

***%

***%

***%

Kenmore Net Royalty $

$***

$***

$***

$***

$***

$***

Example 2. Buyer’s Net Sales during the quarter of HTS Products at Sears Hometown Stores and Sears Appliance Showroom formats in the Home Appliance Category is equal to $300,000,000. Buyer’s Net Sales during the quarter of HTS Products that are Kenmore Branded Products at Sears Hometown Stores and Sears Appliance Showroom formats in the Home Appliance Category is equal to $200,000,000, for a total Buyer’s Balance of Sales in the Home Appliance Category of 66.7%.

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The use of “[***]” in this Exhibit indicates that a confidential portion has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission.

$ millions

Total HST Sales

$300.00

Kenmore BOS

63.2% and below

63.2% to 64.99%

65.0% to 69.99%

70.0& to 74.99%

75.0% and over

Total

Kenmore Sales

$189.60

$5.40

$5.10

$0.00

$0.00

$200.00

Kenmore Base Royalty (% Kenmore Sales)

***%

***%

***%

***%

***%

Kenmore Base Royalty $

$***

$***

$***

$***

$***

$***

Kenmore Royalty Credit %

***%

***%

***%

***%

***%

Kenmore Royalty Credit $

$***

$***

$***

$***

$***

$***

Kenmore Net Royalty %

***%

***%

***%

***%

***%

Kenmore Net Royalty $

$7.39

$0.14

$0.10

$0.00

$0.00

$7.63

3.Balance of Floor Requirement. In addition to the other requirements set forth in the Agreement, in order for Buyer to be eligible for the Kenmore Royalty Credit, in a particular fiscal quarter no less than 45% of all floor space dedicated to products in the Home Appliance Category must be dedicated to Kenmore Branded Products.”

i.Average Aggregate Minimum Commission. As of the Amendment Date, the Average Aggregate Minimum Commission section of Appendix 5(d) of the Agreement is deleted in its entirety and replaced with the following:

“The “Aggregate Average Minimum Commission Rate” on Kenmore-Branded Products in the Home Appliance Category means a commission rate that is not less than *** basis points higher than the average aggregate merchandise commission rate paid by Buyer to owners of Sears Hometown Stores and Franchisees with respect to sales of non-Kenmore-Branded Products in the Home Appliance Category calculated based on Buyer’s customary methods of calculating commission rates payable to owners of Sears Hometown Stores and to Franchisees.”

2. SHC’S SOLE OBLIGATION. Sears Holding Corporation (“SHC”) is signing this Amendment’s pursuant to Section 21 (SHC’S Sole Obligation) of the Agreement. SHC signature does not expanded SHC obligations under the Agreement.

3. Condition Precedent. It is a condition precedent to the effectiveness of this Amendment that the parties (or their Affiliates, as applicable) also execute: (a) that certain Amendment No. 1 to Separation Agreement, (b) that certain Amendment No. 1 to Services Agreement,

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The use of “[***]” in this Exhibit indicates that a confidential portion has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission.

(c) that certain Amendment No. 1 to Store License Agreement (Outlet), and (d) that certain Supplemental Agreement.

4. No Other Amendments. Except as expressly amended herein, the Agreement shall continue in full force and effect, in accordance with its terms, without any waiver, amendment or other modification of any provision thereof, including the parties’ choice of Illinois law (pursuant to Section 22.(s) of the Agreement) which also applies to this Amendment.

Signature Page Follows

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The use of “[***]” in this Exhibit indicates that a confidential portion has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date set forth below by their respective officers thereunto duly authorized.

SEARS, ROEBUCK AND CO. KMART CORPORATION By: Sears Holdings Management Corporation, their agent By: /s/ RONALD BOIRE Name: Ronald Boire Title: Executive Vice President Date: December 9, 2013	SEARS HOMETOWN AND OUTLET STORES, INC. By: /s/ W.BRUCE JOHNSON W. Bruce Johnson Chief Executive Officer and President Date: December 9, 2013
SEARS HOLDINGS CORPORATION By: /s/ RONALD BOIRE Name: Ronald Boire Title: Executive Vice President Date: December 9, 2013	SEARS AUTHORIZED HOMETOWN STORES, LLC By: /s/ W.BRUCE JOHNSON W. Bruce Johnson President December 9, 2013
	SEARS OUTLET STORES, L.L.C. By: /s/ W.BRUCE JOHNSON W. Bruce Johnson President December 9, 2013

DMLIB-#442072-v4-SH_and_SHO_AMENDMENT_NO__2_TO_MERCHANDISING_AGREEMENT

Execution Copy

The use of “[***]” in this Exhibit indicates that a confidential portion has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission.

Attachment #1

Appendix 4(b)(i)

Invoice Prices for DRM

Effective 10/6/13

The Outlet Invoice Prices for DRM are described on the following table; provided that for all DRM that are No-Vendor Warranty Products, in addition to the amount set forth below, Buyer shall pay Seller (as part of the Invoice Price) an additional *** percent (***%) of such DRM’s DOS Cost. For example, if a particular lawn mower that was a No-Vendor Warranty Product was purchased by Buyer on November 1^st, 2013 and that product had a $100 DOS Cost, then Buyer would pay Seller $40 for such product, plus $*** (for a total Invoice Price of $***). Buyer is responsible for carriage only from Seller’s MDOs to the Sears Outlet Stores. As used herein, “DOS Cost” means the cost shown in Seller’s Distribution Operations System, or such replacement system as Seller may utilize from time to time.

Table A—For All Outlet Products

Description and Seller Division	Percentage Off Seller’s DOS Cost
Furniture-In Store (Div 001)	***%
Sporting Goods (Div 006)	***%
Housewares (Div 008)	***%
Tools (Div 009)	***%
Floorcare, Sewing (Div 020)	***%
Cooking And Cleanup (Div 022)	***%
Laundry (Div 026)	***%
Plumbing & Heating (Div 042)	***%
Food Storage (Div 046)	***%
Baby Furniture – Children’s Hardlines	***%
Audio/Visual (Div 057)	***%
Lawn, Garden, Patio (Div 071)	***%
Mattresses (Div 082)	***%

End of Attachment

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Execution Copy

The use of “[***]” in this Exhibit indicates that a confidential portion has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission.

Attachment #2

Appendix 4(c)(ii)

MOS Categories and Initial MOS Invoice Prices

Effective 10/6/13

The categories of MOS that Seller will sell, and Buyer will purchase, in accordance with, and subject to, Section 4(b) of the Merchandising Agreement to which this Appendix 4(c)(ii) is attached and forms a part are described in the table below in the column labeled “Source and Merchandise Description.” The invoice prices for MOS for the first three 12-month periods during the Initial Term will be the sum of (1) the applicable amounts listed in the following table in the column labeled “Base Price” plus (2) at the end of each of the first three years of the Term, an additional amount equal to ***% of Buyer’s ***, if any, with respect to MOS sold by Buyer, which amount (if any) Buyer will pay on or before the 45^th day after the end of Buyer’s fiscal year. Buyer is responsible for carriage only from Seller’s CRC’s to the Sears Outlet Stores.

Source and Merchandise Description	Base Price
Kmart —all items in all categories of MOS, including all product sold by Kmart.com that is returned to Kmart stores.	Per pallet $***
Lands’ End —all items in all categories of MOS (Apparel) and all items in all categories of MOS shoes, including all product sold by LandsEnd.com that is returned to Sears stores.	Per item $*** Per item $***
Sears, Roebuck and Co. (including Sears.com)—all items in all categories of MOS (Apparel), including all product sold by Sears.com that is returned to Sears stores. *	Per item $***

*Commencing October 6, 2013, in the event in a particular month’s deliveries of MOS (Apparel) from Sears, Roebuck and Co. (including Sears.com) (collectively, “Sears MOS”), the amount of damaged/defective (Blue Label) product exceeds 15% of the items delivered in such month (the “Sears MOS Cap”), then Buyer will not be charged anything for each damaged/defective (Blue Label) item in excess of the Sears MOS Cap. Buyer shall be liable for payment for the $***per item charge for each item of damaged/defective (Blue Label) product at or below the monthly Sears MOS Cap threshold. If Buyer identifies that an item is damaged/defective Buyer will use commercially reasonable efforts to ensure that such items are only scraped or recycled; Buyer will use commercially reasonable efforts to ensure that all damaged/defective it identifies are not sold by Buyer (directly or indirectly) to consumers; provided that Buyer may sell such MOS Products to liquidators as long as Buyer complies with Section 12(a)(iii)(B)(5). Seller will include on each invoice for Sears MOS the total number of items in each shipment and the total number of damaged/defective (Blue Label) items. If Buyer disputes the amount of damaged/defective (Blue Label) product, Buyer must promptly notify Seller in writing, and hold the damaged/defective products that Buyer has identified at its location for a minimum of fourteen (14) days after Buyer presents its claims for rejected units to Seller (so that Seller may review such products/claims); after which time the damaged/defective Products shall be scrapped or recycled by Buyer (including selling to liquidators), and Buyer will use commercially reasonable efforts to ensure that none of such damaged/defective (Blue Label) product is sold by Buyer (directly or indirectly) to consumers; provided that Buyer

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Execution Copy

The use of “[***]” in this Exhibit indicates that a confidential portion has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission.

may sell such MOS Products to liquidators as long as Buyer complies with Section 12(a)(iii)(B)(5). Seller will promptly notify Buyer of any change to which items Seller classifies as damaged/defective (Blue Label) product that Seller is selling to Buyer and Buyer is free to contest any such change which Buyer in Good Faith believes will significantly decrease Buyer’s return on Sears MOS.

End of Attachment

2

DMLIB-#442072-v4-SH_and_SHO_AMENDMENT_NO__2_TO_MERCHANDISING_AGREEMENT

Execution Copy

The use of “[***]” in this Exhibit indicates that a confidential portion has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission.

Attachment #3

Kmart Locations

Store #	Location	Address	City	State	Country
1992	TAMUNING - D	404 N MARINE CORPS DR	TAMUNING	GU	Guam
2151	ST CROIX - D	93A ESTATE DIAMOND	ST CROIX	VI	US Virgin Islands
2270	HOMEWOOD - D	17550 HALSTEAD	HOMEWOOD	IL	USA
9016	ST THOMAS - D	CHARLOTTE AMALIE	ST THOMAS	VI	US Virgin Islands
2725	LIHUE – D	4303 NAWILIWILI RD	LIHUE	HI	USA
1420	BIG BEAR LAKE - D	42126 BIG BEAR LAKE	BIG BEAR LAKE	CA	USA
5205	BRIDGEHAMPTON - D	2044 MONTAUK HWY	BRIDGEHAMPTON	NY	USA
5078	KEARNY - D	200 PASSAIC AVE	KEARNY	NJ	USA
5170	LAS VEGAS - D	5051 E BONANZA RD	LAS VEGAS	NV	USA
2573	PASSAIC - D	24 34 BARBOUR AVENUE	PASSAIC	NJ	USA

End of Attachment

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EX-10.2

Exhibit 10.2

Execution Copy

Amendment No. 1 to Separation Agreement

Dated: December 9^th, 2013

This Amendment No. 1 (“Amendment”), to that certain Separation Agreement (the “Agreement”) between Sears Holdings Corporation, a Delaware corporation (“SHLD”), and Sears Hometown and Outlet Stores, Inc., a Delaware corporation (“SHO”), is made by the parties thereto and is retroactive to November 30^th, 2013 (the “Amendment Date”). Capitalized terms used but not otherwise defined herein have the meanings ascribed to such terms in the Agreement.

Whereas, the parties have determined that it is in both parties interest to amend the Separation Agreement and certain of the Ancillary Agreements thereto in connection with certain disputes that have arisen between the parties.

NOW, THEREFORE, in consideration of the above premises and the mutual covenants and other good and valuable consideration contained herein, the parties agree as follows:

1. Amendments. As of the Amendment Date, the Agreement shall be modified as set forth below:

a. Ancillary Agreements. The definition of “Ancillary Agreements” in Section 1.1 of the Agreement is amended by adding a new subsection (viii) as follows:

“(vii)    the “Retail Establishment Agreement; and

(viii)    the Supplemental Agreement.

b. Additional Cooperation. A new Section 12.2 is added to the Agreement as follows:

“12.2    Additional Cooperation. The parties agree to further cooperate with each other as follows (including, where applicable, causing their Affiliates to provide such cooperation):

(a)    Subleasing by SHO and its Affiliates. For each lease or sublease to SHO granted by SHLD’s Affiliates that require SHLD’s Affiliates’ consent to sublease, SHLD’s Affiliate will not unreasonably withhold or delay their consent to subleases by SHO to its dealers and franchises. For each such request, SHO will pay SHLD a $2,500 per-sublease consent fee. SHLD’s Affiliates’ may not withhold its consent to a sublease due to the proximity of such location to a Sears FLS (unless such location is in violation of the proximity restrictions contained in the parties’ Merchandising Agreement).”

(b)    Sears Canada. SHO is permitted to hold direct discussions with Sears Canada about business opportunities (thru October 31, 2018). The rights of Sears Canada’s shareholders will not be affected. For clarity, the parties note that this provision does not grant SHO any additional rights under the parties’ Ancillary Agreements.

DMLIB-#442077-v5-SHLD_SHO_Amendment_No__1_to_Separation_Agreement.DOCX

Exhibit 10.2

Execution Copy

(c)    Caribbean. SHO and SHC will negotiate in good faith with respect to SHO’s proposals from time to time to conduct its dealer and franchise business in the Caribbean region; provided that neither party is obligated to enter into a definitive agreement. SHO acknowledges that SHC has existing contractual obligations and rights in effect with counterparties conducting business in the region. For clarity, the parties note that this provision does not grant SHO any additional rights under the parties’ Ancillary Agreements.

(d)     Additional Businesses. SHO may own, establish, acquire, and operate businesses (each a “New SHO Business”) that do not: (i) use the “Sears” name, and (ii) that is not a Seller Competitor. SHLD’s Affiliates will not be obligated to supply merchandise or provide services for any New SHO Businesses (under the Ancillary Agreements and SHO and its Affiliates will not be obligated to accept performance from SHLD’s Affiliates under the Ancillary Agreements), but upon SHO’s request, SHLD Affiliates and SHO will negotiate in good faith, regarding SHLD’s Affiliates continuing to, on commercially reasonable terms, supply merchandise and to provide services for New SHO Businesses permitted under this subsection (d); provided that neither party is obligated to enter into a definitive agreement.

(e)     Ground Leases. SHO is the owner of certain buildings on land leased by a SHLD Affiliate at the following locations: (x) Portage, IN; (y) O’Fallon, MO; and (z) Shelton, CT (the “SHLD Ground Leases”). With respect to each location, SHLD’s Affiliates have authorized SHO to speak with the landlord on the SHLD Ground Lease regarding (1) the cancellation of the SHLD Ground Lease for the location, at no charge or liability to SHLD and (2) the execution and delivery of a new ground lease for the location between the landlord and SHO, at no charge to SHLD (each new lease, a “New Ground Lease”). SHO will use commercially reasonable efforts to enter into a New Ground Lease for each location on the foregoing terms, and if, with respect to a location, SHO and the Landlord enter into a New Ground Lease; SHLD will consent to the cancelation of the existing SHLD Ground Lease; provided that it is at no cost to SHLD. Subject to the next sentence, if with respect to a location SHO has complied with the preceding sentence but the Landlord for the location is unwilling to enter into a New Ground Lease with SHO and/or cancel the existing SHLD Ground Lease, the applicable SHLD Affiliate will assign the SHLD Ground Lease for the location to SHO provided that either a landlord’s consent is not required or SHO has obtained such consent at its sole cost and expense. With respect to each such assignment, SHLD Affiliate’s will not be obligated to (i) pay any amount in connection with such assignment (other than amounts which SHO agrees in advance and in writing to pre-fund to such SHLD Affiliate for payment to the landlord or applicable third parties) or (ii) incur any other additional liability or any ongoing liability (except remaining liable as tenant on the SHLD Ground Lease) in connection such assignment. If SHLD’s Affiliates remain liable as tenant or otherwise with respect to an SHLD Ground Lease that is assigned to SHO, SHO will provide SHLD’s Affiliates with an indemnification agreement containing commercially reasonable terms and conditions.

(f)     Norristown. SHLD and SHO will enter a lease to zero out rent back to the Effective Date and SHO will have responsibility under that lease for the upkeep of the

2

DMLIB-#442077-v5-SHLD_SHO_Amendment_No__1_to_Separation_Agreement.DOCX

Exhibit 10.2

Execution Copy

Norristown property. In addition, upon SHO’s request, SHLD will convey to SHO, via a quit-claim deed, title to the buildings, structures, and improvements (that includes all existing easements and development rights, to the extent they exist) associated with the Norristown estate for years; in which case SHO will be liable for all costs associated with transferring such property to SHO (e.g. transfer taxes) and SHO will within 5 days reimburse SHLD for any such costs pay by SHLD.\

(g) HVAC, Utilities, and Related Matters Regarding Certain SHO-SHLD Leases/Subleases. SHO’s obligations under the leases and subleases from SHLD’s Affiliates listed on Schedule 12.2(g) regarding HVAC, utilities, taxes, insurance, and similar items (such as roofs, other structural matters, parking lot repairs, and storm drains) will reflect the following resolution of these matters (which resolutions are reflected in the four recently executed TGI leases):

(1)SHO will have no responsibility for CAM, taxes, and insurance, which will be included in the existing basic rent.

(2)SHO will be responsible for utilities (gas, water, electric, sewer) based on the percent of building being leased/subleased by SHO (assumes co-tenant is similar user). For example, if SHO occupies 30,000 sf of a 100,000 sf building, SHO will pay 30% of total utility expense. If SHO occupies all of a building SHO will pay 100% of the total utility expense.

(3)SHLD’s Affiliates will have sole responsibility for maintenance, repair and replacement of roofs, building structures, sprinkler systems, parking lots, storm drains, common areas, and similar obligations.

(4)SHO will be responsible for maintenance, repair, and replacement of the HVAC units directly serving the area it occupies subject to an annual, per location, cap on such charges of $15,000 (“Annual HVAC Cap”). Expenses in excess of the Annual HVAC Cap will be reimbursed by SHLD Affiliates and amortized over the remaining years of lease (but no less than 3 years) and will be paid as additional rent up to the Annual HVAC CAP in years when HVAC service does not exceed the cap.  SHO will have no obligation to pay outstanding amortized amounts at lease/sublease termination. For example, if a property on Schedule 12.2(h): (i) SHLD had 3 years left on its lease (2014-2016) and (iii) that property needed a single 30K HVAC repair in 2014on an HVAC unit directly serving the area occupied by SHO, then SHO’s rent would be increased by $15K in 2014, and by $7.5K in 2015 and 2016 to cover the repair.

(h)     Changes Affecting accounting entries. Each party agrees that prior to changing an established practice for entering accounting entries that affect the other party’s accounts (e.g., due to a change in such party’s interpretation of an Ancillary Agreement),

3

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Exhibit 10.2

Execution Copy

such party will notify the other party in writing of such change in accordance with the notice provisions of the Services Agreement.

(i)     Reporting. In the event of a Dispute, each party agrees that it will, upon reasonable request of the other party, provide specific information requested which is necessary to confirm whether such party is in conformance with this Agreement with respect to such disputed matter; provided that neither party will be required to produce information: (1) that cannot be readably obtained without incurring significant expense or (2) is protectable from discovery because it is legally privileged or constitutes attorney client work product.”

c. Schedule 12.2(g). A new Schedule 12.2(g)is added to the Agreement as set forth on Appendix #1 hereto:

2. Condition Precedent. It is a condition precedent to the effectiveness of this Amendment that the parties (or their Affiliates, as applicable) also execute (collectively the “Related Amendments”): (a) that certain Amendment #2 to Merchandising Agreement, (b) that certain Amendment No. 1 to Services Agreement, (c) that certain Amendment No. 1 to Store License Agreement (Outlet), and (d) that certain Supplemental Agreement.

3. No Other Amendments. Except as expressly amended herein, the Agreement and the Ancillary Agreements shall continue in full force and effect, in accordance with its terms, without any waiver, amendment or other modification of any provision thereof, including the parties’ choice of Illinois law (pursuant to Section 14.10(a) of the Agreement) which also applies to this Amendment.

Signature Page Follows

4

DMLIB-#442077-v5-SHLD_SHO_Amendment_No__1_to_Separation_Agreement.DOCX

Exhibit 10.2

Execution Copy

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date set forth below by their respective officers thereunto duly authorized.

SEARS HOLDINGS CORPORATION

By:     /s/ RONALD BOIRE

Ronald Boire

Executive Vice President, Chief Merchandising Officer and President, Sears Full-Line Stores & Kmart Formats

December 9, 2013

SEARS HOMETOWN AND OUTLET STORES, INC.

By:     /s/ W.BRUCE JOHNSON

W. Bruce Johnson

Chief Executive Officer and President

Date: December 9, 2013

DMLIB-#442077-v5-SHLD_SHO_Amendment_No__1_to_Separation_Agreement.DOCX

Exhibit 10.2

Execution Copy

Appendix #1

Schedule 12.2(g)

Leases/Subleases Between SHLD Affiliates and SHO

Property Name	Format	Lease Type
West Babylon NY	OUT	Sublease
West Covina CA	OUT	Sublease
Tampa FL	OUT	Sublease
Tucson AZ	OUT	Sublease
Holyoke MA	OUT	Lease
North Miami Beach FL	OUT	Sublease
Cudahy WI	OUT	Sublease
Bridgeview IL	OUT	Sublease
Chesapeake VA	OUT	Sublease
Englewood CO	OUT	Sublease
Henderson NV	OUT	Lease
Bloomfield MI	OUT	Sublease
Raleigh NC	OUT	Lease
Greensboro NC	OUT	Lease
El Monte CA	OUT	Sublease
Concord NC	OUT	Lease
Norfolk VA	OUT	Lease
Pittsburgh PA ORDC	OUT	Lease
Pearl City HI ORDC	OUT	Sublease
Cupey Bajo PR ORC	OUT	Lease
San Diego CA ORDC	OUT	Lease
Nashville TN ORDC	OUT	Lease
Santa Ana CA ORDC	OUT	Lease
Jacksonville FL	OUT	Lease
Shoreline WA	OUT	Lease
Hendersonville TN	OUT	Sublease
Minneapolis MN	OUT	Lease
St.Petersburg FL ORDC	OUT	Lease
Melrose Park IL ORDC	OUT	Lease
Tucker GA ORDC	OUT	Lease
Winter Park FL ORDC	OUT	Lease
Richmond VA ORDC	OUT	Lease
Sacramento CA ORDC	OUT	Sublease
Sparks NV	OUT	Lease
Hayward CA	OUT	Sublease
Houston TX ORDC	OUT	Lease
Wauwatosa WI	OUT	Sublease

DMLIB-#442077-v5-SHLD_SHO_Amendment_No__1_to_Separation_Agreement.DOCX

EX-10.3

Exhibit 10.3 Execution Copy Amendment No. 1 to Services Agreement Dated: December 9, 2013 This Amendment No. 1 (“Amendment”), to that certain Services Agreement (the “Agreement”) between Sears Holdings Management Corporation, a Delaware corporation (“SHMC”), and Sears Hometown and Outlet Stores, Inc., a Delaware corporation (“SHO”), is made by the parties thereto and is retroactive to October 6, 2013 (the “Amendment Date”). Capitalized terms used but not otherwise defined herein have the meanings ascribed to such terms in the Agreement. Whereas, the parties have determined that it is in both parties interest to amend the Separation Agreement and certain of the Ancillary Agreements thereto in connection with certain disputes that have arisen between the parties. NOW, THEREFORE, in consideration of the above premises and the mutual covenants and other good and valuable consideration contained herein, the parties agree as follows: 1. Amendments. The Agreement shall be modified as set forth below: a. Exhibit 1 (Outlet: Retainer Services Agreement). References in Appendix 1.01-A to the “FY12 Sears Outlet: Retainer Services Agreement” (which is attached to Appendix 1.01-A as Exhibit 1) are, retroactive to February 1, 2013, deemed to be references to the Exhibit 1 attached hereto as Attachment #1. b. Hybrid Delivery. Effective February 2, 2014: i. Section 1(g) under the heading “Sears.com Functionality” in the 2nd column on page A-13 of Appendix 1.01-A of the Agreement, is amended and restated as follows “ “SHO will pay SHMC a 3% commission on hybrid delivery sales originating in a store operated by SHMC or its Affiliates.” ii. In the 2nd column, on page A-65 of Appendix1.01-A of the Agreement, the four paragraphs under the heading “Hybrid Delivery Market Process” in the “HOME SERVICES” Section is deleted and replaced with the following: “Hybrid Delivery Market Process

Exhibit 10.3 Execution Copy A Hybrid Delivery Market is a market that is either serviced out of a Sears, Roebuck and Co. full-line department store (SDO) or out of a SHO Store (by the SHO Store owner). SHO will assign the Delivery Rate for each zip code and transmit the completed zip code file with the rates to Home Services Delivery for entry into the POS (Point of Sale) system. When a Sears’ full-line store sells merchandise for delivery into a Hybrid Delivery Market zip code that is assigned to a SHO store, 50% of the SPRS margin is transferred from the Sears full-line store to the SHO store performing that delivery. For a period of 30 months, beginning on February 2, 2014, SHMC will use the SHO stores who have been selected for Hybrid Delivery as of the October 31, 2013 exclusively to provide deliveries to customer location zip codes identified as Hybrid Delivery Markets. The Parties will work in good faith to expand the list of Hybrid Delivery Markets where economically justified.” c. Retail Support Services (currently provided by IBM). i. Seller waives the approximately $1.3M in Retail Support Charges (f/k/a the IBM Charges) SHO has withheld in 2013 and SHMC agrees that SHO will not be charged any additional Retail Support Charges for 2013 (except charges related to any new SHO store openings). ii. As of the February 2nd, 2014, a new row is added to page A-64 in Appendix 1.01-A of the Agreement at the end of the “IT Services” Section as follows: IT Service Costs – Retail Support Charges “Retail Support Charges” means the charges incurred for services for in- store information technology services (currently provided by IBM) which SHO was being charged by SHMC as of the Amendment Date under that certain Amended and Restated Exhibit for Retail Support Services (f/k/a Exhibit 15) between SHMC and IBM effective as of May 9, 2011 (or any successor agreement SHMC enters into for such services, collectively, the “Retail Support Agreement”). The Services under the Retail Support Agreement include level 2 support for LAN management, asset tracking, security services, software distribution and QA, monitoring, incident and FY 2014 SHO will be billed base Retail Support Charges of $1,000,000 in 2014; however the actual number billed will be adjusted as of January 1st, 2014 based upon the

Exhibit 10.3 Execution Copy problem management, and special retail services (related to store openings, closings, and moves). The Retail Support Charges do not cover, among other things, onsite hardware maintenance (e.g., cash registers) and hardware depot, and SHMC will be continued to be charged for such services as otherwise provided for in this Agreement. SHO will be charged for the Retail Support Charges as provided for herein; unless SHO terminates the underlying Retail Support Services as permitted under Section 3.01 of the Agreement; in which case these charges will be prorated on a daily basis. In addition to the Retail Support Charges in the right hand column, SHO will continue to be charged: (i) for all “Special Retail Services (e.g., store openings/closings) and per incident charges (e.g., hot box replacement) under the Retail Support Agreement, and (ii) other retail support and non- retail charges for third party IT contractors providing Services (e.g., IBM and NCR) passed along to SHO in accordance with the Agreement. In the event that SHO’s number of locations supported under the Retail Support Agreement (e.g. stores, ORDCS), open at the first day of fiscal year 2014 and 2015, respectively (each a “Beginning SHO Locations Count”) vary from 1,239 (the number of SHO locations as of November 2, 2013); then the Retail Support Charges in the right hand column of this row will be adjusted for that year (up or down, as applicable), by $807.10 in fiscal 2014 and $1,614.20 in fiscal 2015. Furthermore, in the event that SHO’s net number of locations (after taking into account opening and closings) supported under the Retail Support Charges as of the last fiscal day of 2014 and 2015, respectively (each the “Ending SHO Locations Count”) vary from the Beginning SHO Locations Count for that year, then SHO (in the event of an net increase) or SHMC (in the event of a net decrease) will pay the other party a true-up amount by the 20th day of such fiscal year equal to: (x) the difference between the Beginning SHO number of SHO locations being serviced as provided in the middle column of this row. These Retail Support Charges will be paid by SHO in 4 equal, quarterly payments. FY 2015 SHO will be billed Retail Support Charges of $2,000,000 in 2015; however the actual number billed will be adjusted as of January 1st, 2015 based upon the number of SHO locations being serviced as provided in the middle column of this row. These Retail Support Charges will be paid by SHO in 4 equal, quarterly payments.

Exhibit 10.3 Execution Copy Locations Count and the Ending SHO Locations Count, multiplied by $807.10 in fiscal 2014 and $1,560.06 in fiscal 2015. For example if: (a) the Beginning SHO Locations Count was 1,300 for fiscal 2014, (b) the Ending SHO Locations Count was 1,400 for 2014, then the 4 quarterly payments would for 2014 would be increased to $12,308.31 and SHO would pay SHMC a true-up payment of $80,710.25 in January 2015 for 2014. On or before the 10th day of fiscal 2015 and fiscal 2016 SHO will report to SHMC in writing the Beginning SHO Locations Count and the Ending SHO Locations Count for 2014 and 2015, respectively. d. System Migration. As of the February 2nd, 2014, a new row is added to page A-64 in Appendix 1.01-A of the Agreement at the end of the “IT Services” Section as follows: IT Service Costs – System Migration For a period of three (3) years, beginning on October 31, 2013, SHMC shall use Good Faith efforts to provide appropriate IT and related services (including people, access to systems and data/information migration, testing, verification, integration, and similar services) on a time and materials basis to assist SHO in its desire to successfully migrate within the time frames set forth in each SHO Migration Plan (as defined below) from SHMC systems, infrastructure, and managed services (“System Migration Services”) to: (1) SHO’s systems and infrastructure and/or (2) systems, infrastructure and managed services provided to SHO by third parties. SHO shall be responsible for creating a detailed migration plan for each such SHMC system, infrastructure and managed service used by SHO (each a “SHO Migration Plan”) and for managing each such migration. The parties will, by December 31, 2014 use Good Faith efforts to mutually agree on the final migration date for each SHO Migration Plan. SHO will provide each SHO Migration Plan to SHMC for its review and comment. SHO will, in Good Faith, take into account SHMC’s comments in finalizing each SHO Migration Plan.

Exhibit 10.3 Execution Copy The Labor Rates for System Migration Charges are as follows: Labor Type Skill Set Hourly Rate SHMC or its Affiliates Associate Associate $100.00 3rd Party Contractor Variable 3rd party charges to SHMC or its Affiliates without mark- up.  SHO will pay no data/information-transfer or other charges assessed by SHMC for System Migration Services.  SHO will reimburse SHMC upon demand for its reasonable, out- of-pocket costs necessarily incurred to provide the System Migration Services (including all costs assessed by third parties). All costs and expenses approved by SHO in writing, shall be conclusively deemed to be necessarily and reasonable. Upon a written request by SHO for System Migration Services, SHMC in Good Faith will assess with respect to each request for System Migration Services whether: (i) it has the internal resources that are qualified to perform the requested services and whether they are available to assist SHO (based upon SHMC’s estimates of its internal needs for its associates); or (ii) external resources are necessary. If external resources are necessary, and if those resources will be modifying SHMC’s or its Affiliates’ systems, SHMC will retain such resources at SHO’s request and at SHO’s sole expense. If external resources do not need to modify or access SHMC’s of its’ Affiliates

Exhibit 10.3 Execution Copy systems, SHO will hire such resources directly. 2. Condition Precedent. It is a condition precedent to the effectiveness of this Amendment that the parties (or their Affiliates, as applicable) also execute: (a) that certain Amendment No. 1 to Separation Agreement, (b) that certain Amendment #2 to Merchandising Agreement, (c) that certain Amendment No. 1 to Store Licensing Agreement (Outlet), and (d) that certain Supplemental Agreement. 3. No Other Amendments. Except as expressly amended herein, the Agreement shall continue in full force and effect, in accordance with its terms, without any waiver, amendment or other modification of any provision thereof, including the parties’ choice of Illinois law (pursuant to Section 12.14 of the Agreement) which also applies to this Amendment. Signature Page Follows

Exhibit 10.3 Execution Copy IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date set forth below by their respective officers thereunto duly authorized. SEARS, HOLDINGS MANAGEMENT CORPORATION By: /s/ RONALD BOIRE Executive Vice President, Chief Merchandising Officer and President, Sears Full-Line Stores & Kmart Formats December 9, 2013 SEARS HOMETOWN AND OUTLET STORES, INC. By: /s/ W.BRUCE JOHNSON W. Bruce Johnson Chief Executive Officer and President Date: December 9, 2013

Exhibit 10.3 Execution Copy Attachment #1 Exhibit 1 (Outlet: Retainer Services Agreement) See attached 6 page document End of Attachment

Exhibit 10.3 Execution Copy OBU Project Outline – Exhibit 1 Dated: December 9, 2013 Requesting Party: Sears Hometown and Outlet Stores, Inc. (“SHO”) Requesting Party Contact: Donnie Franzen Date Submitted: 11/06/2013 OBU Account Manager: Syed Ali Project Name: Sears Outlet: Retainer Services Agreement 2013 - 18244 1 Statement of Work   WorkLenz ID: 18244 1.1 Project Description  The Online Business Unit at Sears Holdings Management Corporation  (“OBU”) will  provide design, development, project management, QA and Support services for the  evolution  and maintenance  of  the  SHO’s  online  platforms  set  forth  below.  All  services  provided  under  this  Exhibit  1  (the  “Online SOW”)  shall  be  deemed  “Services”  provided  under  the  Service  Agreement  between  SHO  and  the OBU.   The aim of this understanding is to provide a basis for close co‐operation between  the SHO and the OBU in support of SHO’s website and supporting functionality,  but does not address promotions, marketing or related capabilities.  Objectives of Service 1. Propose the OBU Delivery Team structure and associated budget to support  the following  SHO online platforms: SearsOutlet.com and  ReturnsFlow.com.  2. To define the cost structure associated with the services  with the intent to  achieve  a  price/value  relationship  that  exceeds  what  can  be  managed/sourced  via  competitive  bid  by  SHO  from  providers  other  than  SHMC and its current supporting vendor/partners.   

Exhibit 10.3 Execution Copy 1.2 Team   The OBU will provide both dedicated and shared resources based on and offshore to  drive and support the development needs of SHO’s online business.   The current  team and costs can be  found  in Section 3. Appendix A attached hereto  provides monthly staffing and cost detail.     A dedicated resource will work primarily on SHO projects and will not be staffed onto  other projects  for  significant  time unless  first discussed with and approved by SHO.  Dedicated  resources  will  continue  to  perform  administrative,  management,  performance management, recruiting, and other OBU required tasks outside of core  project work. These tasks typically require no more than 5 hours per week.  1.3 Hiring and Staffing Notes  • Increasing Team Size: OBU requires 60 days‐notice to add additional team members  to those supporting SHO’s projects.  • Reducing Team Size: OBU requires 60 days‐notice to reduce the number of  its team  members supporting SHO projects.    • OBU will  provide  an  adjusted  quote  and  addendum  to  this  Exhibit  1  to  reduce  or  increase the size of its team supporting SHO.  • Interchanging Resources: At  its discretion, OBU may  interchange resources on SHO’s  project(s) by providing 30 days prior notice to SHO’s online team. OBU will provide a  week  overlap  between  the  outgoing  and  the  incoming  resource  for  knowledge  transfer. During  such  a  time, Online will not  charge  additional  fees  for overlapping  time. The OBU may then remove resources once a replacement  is  in place, and such  replacement  has  undergone  the  previously  described  training/knowledge  transfer  process.   • Hiring  and  Recruiting:  OBU  is  solely  responsible  for  recruiting  resources  including  compensation, bonus etc. However, OBU will work closely with SHO to ensure SHO’s  needs for specific skills are met. OBU  is solely responsible for determining use of full  time employees and/or contract resources.  • Performance Management: On unsatisfactory resource performance, SHO will provide  in writing the resource name and examples of poor performance. There after OBU will  determine how  to handle  resource  issues  (e.g. coaching, performance  improvement  plan, reallocate tasks/roles, interchange resources, etc.)  • Resource Replacement and backfill: OBU will use commercially reasonable efforts to 

Exhibit 10.3 Execution Copy promptly backfill departing  team members. Notwithstanding  the  forgoing, OBU will  continue  to  meet  deliverable  deadlines  by  adding  temporary  resources,  working  overtime, or other implementing other contingencies.  • Team Location: Dedicated resources will be based either at Hoffman Estate or offsite.  • Temporary Resources: Additional temporary resources may be added to augment the  team supporting SHO as needed and/or to meet specific skill set needs of SHO.   This  work will be quoted and contracted separately.   1.4 Key Assumptions and Specifics of Budget   See Appendix A  1.5 Term and Termination  • This Online SOW is in effect from February 1, 2013 through January 31, 2014. • After January 31, 2014, this Online SOW will renew monthly unless a new this Online  SOW or extension is put in place.  • This Online SOW may be terminated in accordance with the Services Agreement.  • Upon termination, OBU will release and/or redeploy team resources  • Project costs may be evaluated and adjusted from time‐to‐time as necessary  with mutual agreement from OBU and SHO.  • Appendix A reflects February – July 2013 actual, mutually agreed upon  charges and forecasted charges for August 2013  through January 2014  assuming stated staffing.  

Exhibit 10.3 Execution Copy 2 Funding and Chargeback   Please provide  signatures; development will not begin without acceptance and approval of  Project Costs.  Payment Terms (EFFECTIVE FEBRUARY 1ST, 2013): Sears Outlet shall be charged on a monthly basis. Details of the charges can be found in Appendix A of this document. Expenses: Pricing does not include image royalty or software licensing, if applicable. All third party costs are estimates. Third party expenses directly incurred by the OBU exclusively for SHO projects will be billed and paid by SHO at cost to OBU. Signature constitutes agreement to pay the fees outlined in Appendix A hereto in accordance with the Agreement. JA # (Required): Unit/Overhead: Sign-off: Name Title Signature Date BU Requestor Donnie Franzen Director, E-Commerce BU Approval J.J. Ethridge VP, Supply Chain & Technology - SHO 3 Annual Cost Summary  SHO 2013 - OBU Delivery Team - Budget Proposal / Exec Summary Cost Category Amount (in $) Labor $3,200,792 OBU $3,267,108 Ux $515,233 Onshore $1,467,024 Offshore $1,284,851 Infosys $289,328 Total Labor $3,556,436 Total Labor Bill (at 10% Discount) $3,200,792 Other Expenses $83,598

Exhibit 10.3 Execution Copy Site Hosting SHO Site Hosting & Support $169,000 SHO Site Hosting (Discount - same as 2012) -$122,000 Returns Flow Site Hosting $14,214 Tools Tools $22,384 Product Reviews $0 Total Bill - (Labor & Other Expenses) - To SHO online business* $3,284,390 *Of the Annual Costs listed above, SHO has paid $ 2,526,345 through October 31st, 2013.  Includes Labor for Core Outlet – Engineering & Ux Delivery Team Only  Assumes the Core Team is ramped up full staffing level from FY 2013 (Feb 1st).  Other Expenses Includes o SHO Returns Flow Site hosting and maintenance o Tools à Dynatrace, Catch Point o Tools à Akamai (this cost is absorbed by Sears OBU and not charged to SHO)  Doesn’t include o Any new SHO required infrastructure (hardware or software) if needed for 2013 o Any new operational site monitoring tools that will be needed by SHO at later time (ex: Tea Leaf, etc.) o Incremental delivery work from OBU (Outside of Core Outlet Delivery Team) o Incremental delivery work from I&TG, or other teams external to OBU, within SHMC that need to work on SHO projects

Exhibit 10.3 Execution Copy 4 Appendix A 

Exhibit 10.3 Execution Copy

EX-10.4

Exhibit 10.4

Execution Copy

SUPPLEMENTAL AGREEMENT

Dated: December 9, 2013

This Supplemental Agreement (this “Agreement”) between Sears Holdings Corporation, a Delaware corporation (“SHLD”), and Sears Hometown and Outlet Stores, Inc., a Delaware corporation (“SHO”), is retroactive to October 6, 2013 (the “Effective Date”).

SHLD and SHO each are sometimes referred to as a “Party” and together sometimes are referred to as the “Parties.” “Affiliates” means (solely for purposes of this Agreement and for no other purpose) (i) with respect to SHO, its subsidiaries, and (ii) with respect to SHLD the subsidiaries of SHLD.

Whereas, the parties have entered into that Separation Agreement dated August 8, 2012 (the “Separation Agreement”).

    Whereas, the parties have entered into that Services Agreement dated August 8, 2012 (the “Services Agreement”).

Whereas, the parties have agreed to certain additional terms and conditions as set forth below.

Terms and Conditions

For good and valuable consideration, the receipt of which SHLD and SHO acknowledge, SHLD and SHO agree as follows:

Article I.SUPPLEMENTAL TERMS

1.01Confidentiality. This Agreement is ancillary to the Services Agreement between the parties. Information disclosed by the parties and their Representatives (as that term is defined in the Services Agreement), shall be subject to Section 4.01(a) (Confidential Information) of the Services Agreement.

1.02Dispute Resolution.

a.Released Claims. SHO and its Affiliates on the one hand and SHLD and its Affiliates on the other hand, have made certain claims against each other under the Ancillary Agreements. SHLD and its affiliates deny each claim made by SHO and its affiliates. SHO and its affiliates deny each claim made by SHLD’s affiliates. In order to avoid the risks, burdens and uncertainties of litigation, SHO and SHLD have agreed to resolve certain of the foregoing claims, which resolved claims are set forth on Appendix #1 hereto (the “Released Claims”). Appendix #2 hereto lists certain matters that are not Released Claims and that SHO and SHLD have reserved for continuing discussions (such matters together

1

DMLIB-#442086-v5-SHLD_SHO_Supplemental_Agreement.DOCX

Exhibit 10.4

Execution Copy

the “Open Issues”); provided that neither party admits that any Open Issues raised by the opposing party have merit.

b.SHO Limited Release. Subject to the terms and conditions of this Agreement, SHO, on behalf of itself and its past and present parents, affiliates, subsidiaries, owners, directors, officers, partners, executives, employees, agents, attorneys, representatives, heirs, successors, predecessors, and assigns, hereby forever acquits, releases, absolves, waives, and discharges SHLD and any and all of its past and present parents, affiliates, subsidiaries, and each of the foregoing's owners, directors, officers, partners, executives, employees, agents, attorneys, representatives, heirs, successors, predecessors, and assigns (the “SHLD Releasees”) of, for, and from any and all actions, causes of action, suits, claims, damages, obligations, liabilities, losses, demands, attorneys' fees, costs, sanctions, expenses, sums of money, and accounts of any kind, direct or indirect, actual or potential, foreseen or unforeseen, at law or in equity, in contract or in tort or otherwise, whether known or unknown, liquidated or unliquidated, that it has or has had against them for, upon, by reason of, or arising as a result of or in connection with any matter, cause, transaction, occurrence, or thing whatsoever, from the beginning of the world to the Effective Date; provided, however, that this limited release shall only apply to Released Claims (i.e. all of the claims expressly set forth in the Appendix #1 (Released Claims)) and shall not apply to any other claims. For the avoidance of doubt, SHO is hereby releasing each of the “Claims Made By SHO” and each SHO defense of the “Claims Made by SHLD” contained in Appendix1 (but such defenses are only released as to those specific Released Claims). Moreover, SHO expressly: (a) represents and warrants that it is not aware of any facts giving rise to any actual or potential claim or cause of action (other than the Open Issues) arising from the Released Claims against any of the SHLD Releasees that would not be released as a result of this Agreement; and (b) covenants not to assert in the future any claim or cause of action arising from the Released Claims against any of the SHLD Releasees.

c.SHLD Limited Release. Subject to the terms and conditions of this Agreement, SHLD, on behalf of itself and its past and present parents, affiliates, subsidiaries, owners, directors, officers, partners, executives, employees, agents, attorneys, representatives, heirs, successors, predecessors, and assigns, hereby forever acquits, releases, absolves, waives, and discharges SHO and any and all of its past and present parents, affiliates, subsidiaries, and each of the foregoing's owners, directors, officers, partners, executives, employees, agents, attorneys, representatives, heirs, successors, predecessors, and assigns (the “SHO Releasees”) of, for, and from any and all actions, causes of action, suits, claims, damages, obligations, liabilities, losses, demands, attorneys' fees, costs, sanctions, expenses, sums of money, and accounts of any kind, direct or indirect, actual or potential, foreseen or unforeseen, at law or in equity, in contract or in tort or otherwise, whether known or unknown, liquidated or unliquidated, that it has or has had against them for, upon, by reason of, or arising as a result of or in connection with any matter, cause, transaction, occurrence, or thing whatsoever, from the beginning of the world to the Effective Date; provided, however, that this limited release shall only apply to Released Claims (i.e., all of the claims expressly set forth in the Appendix #1 (Released Claims)) and shall not apply to any other claims. For the avoidance of doubt, SHLD is hereby releasing each of the “Claims Made By SHLD”

2

DMLIB-#442086-v5-SHLD_SHO_Supplemental_Agreement.DOCX

Exhibit 10.4

Execution Copy

and each SHLD defense of the “Claims Made by SHO” contained in Appendix 1 (but such defenses are only released as to those specific Released Claims). Moreover, SHLD expressly: (a) represents and warrants that it is not aware of any facts giving rise to any actual or potential claim or cause of action (other than the Open Issues) arising from the Released Claims against any of the SHO Releasees that would not be released as a result of this Agreement; and (b) covenants not to assert in the future any claim or cause of action arising from the Released Claims against any of the SHO Releasees.

d.Unreleased Claims. The parties acknowledge that this Agreement does not release any claims the parties may have that do not arise from the Released Claims.

e.No Admission of Liability. Neither this Agreement, the Related Amendments nor anything contained in this Agreement or the Related Amendments are to be construed or considered an admission of wrongdoing or liability by any person or party.

ARTICLE II.MISCELLANEOUS

2.01Expenses. Except as otherwise provided herein, in the Separation Agreement or the Ancillary Agreements, in connection with the provision of this Agreement, each Party will bear its own expenses.

2.02Waiver of Compliance. Any failure of a Party to comply with any obligation, covenant, agreement or condition in this Agreement may be waived in writing by the other Party, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition will not operate as a waiver of, or estoppel with respect to, any subsequent or other failure.

2.03Amendment. This Agreement may not be amended except by a written amendment signed by each Party.

2.04Assignment. SHO may not assign its rights or obligations under this Agreement without the prior written consent of SHLD, to be withheld in SHLD’s absolute discretion. SHLD may freely assign its rights and obligations under this Agreement to any of its Affiliates without the prior consent of SHO; provided that any such assignment will not relieve SHLD of its obligations hereunder. This Agreement will be binding on, and will inure to the benefit of, the successors and assigns of the Parties.

2.05Notices. All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement must be in writing and will be deemed to have been duly given (i) when delivered by hand, (ii) three business days after it is mailed, certified or registered mail, return receipt requested, with postage prepaid, (iii) on the same business day when sent by facsimile if the transmission is completed before 5:00 p.m. recipient’s time, or one business day after the facsimile is sent, if the transmission is completed on or after 5:00 p.m. recipient’s time or (iv) one business day after it is sent by Express Mail, Federal Express or other courier service, as follows:

3

DMLIB-#442086-v5-SHLD_SHO_Supplemental_Agreement.DOCX

Exhibit 10.4

Execution Copy

(a)    if to SHLD:

Sears Holdings Management Corporation

3333 Beverly Road B5-119A

Hoffman Estates, Illinois 60179

Attention: Senior Vice President-Finance

Telephone: (847) 286-8991

Facsimile: (847) 286-1699

with a copy to:

Sears Holdings Management Corporation

3333 Beverly Road, B6-210B

Hoffman Estates, Illinois 60179

Attention: General Counsel

Telephone: (847) 286-5933 

Facsimile: (847) 286-2471

(b)    if to SHO:

Sears Hometown and Outlet Stores, Inc.

3333 Beverly Road B4-150A

Hoffman Estates, Illinois 60179

Attention: Senior Vice President and Chief Operating Officer

Telephone: (847) 286-9741

Facsimile: (847) 286-7838

with a copy to:

Sears Hometown and Outlet Stores, Inc.

3333 Beverly Road

Hoffman Estates, Illinois 60179

Attention: General Counsel

or such other address as the person to whom notice is to be given has furnished in writing to the other Parties. A notice of change in address will not be deemed to have been given until received by the addressee.

2.06Survival. The provisions of Articles I (Supplemental Terms) and II (Miscellaneous) will survive any termination or expiration of this Agreement.

2.07Headings. The article and section headings contained in this Agreement are inserted for reference purposes only and will not affect the meaning or interpretation of this Agreement.

4

DMLIB-#442086-v5-SHLD_SHO_Supplemental_Agreement.DOCX

Exhibit 10.4

Execution Copy

2.08No Third Party Rights. Except for the releases in this Agreement of any SHLD Releasees or any SHO Releasees in their respective capacities as such, this Agreement is intended to be solely for the benefit of the Parties and is not intended to confer any benefits upon, or create any rights in favor of, any person other than the Parties.

2.09Counterparts. This Agreement may be executed by facsimile and in any number of counterparts, each of which will be deemed to be an original, and all of which together will be deemed to be one and the same instrument.

2.10Severability. If any provision of this Agreement is declared by any court of competent jurisdiction to be illegal, invalid, void or unenforceable, such provision will (to the extent permitted under applicable law) be construed by modifying or limiting it so as to be legal, valid and enforceable to the maximum extent compatible with, and possibly under, applicable law, and all other provisions of this Agreement will not be affected and will remain in full force and effect.

2.11Entire Agreement. This Agreement (including the Appendixes hereto) constitutes the entire agreement between the parties hereto and supersedes all prior agreements and understandings, oral and written, between the parties hereto with respect to the subject matter hereof.

2.12Fair Construction. This Agreement will be deemed to be the joint work product of the Parties without regard to the identity of the draftsperson, and any rule of construction that a document will be interpreted or construed against the drafting Party will not be applicable.

2.13No Agency. Nothing in this Agreement creates a relationship of agency, partnership, or employer/employee between SHLD and SHO and it is the intent and desire of the Parties that the relationship be and be construed as that of independent contracting parties and not as agents, partners, joint venturers or a relationship of employer/employee.

2.14Governing Law; Jurisdiction; Waiver of Jury Trial.

(a)This Agreement will be governed and construed in accordance with the laws of the State of Illinois, without regard to any choice or conflicts of law provision that would cause the application of the laws of any other jurisdiction. This Agreement will not be subject to any of the provisions of the United Nations Convention on Contracts for the International Sale of Goods.

(b)Each of the Parties irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of any Illinois state court or Federal court of the United States of America, in either case sitting in Cook County, Illinois, and any appellate court to any thereof, in any action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby or for recognition or enforcement of any judgment relating thereto, and each of the Parties irrevocably and unconditionally (i) agrees not to commence any such action or proceeding except in such courts, (ii) agrees that any claim in respect of any such action or proceeding may be heard and determined in such Illinois state court or, to the extent permitted by law, in such Federal court, (iii) waives, to the fullest extent it may legally and

5

DMLIB-#442086-v5-SHLD_SHO_Supplemental_Agreement.DOCX

Exhibit 10.4

Execution Copy

effectively do so, any objection that it may now or hereafter have to the laying of venue of any such action or proceeding in any such Illinois state or Federal court, and (iv) waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such Illinois state or Federal court. A final judgment in any such action or proceeding will be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Each Party irrevocably consents to service of process in the manner provided for notices in Section 2.05. Nothing in this Agreement will affect the right of any Party to serve process in any other manner permitted by law.

(c)Each Party acknowledges that each controversy that may arise under this Agreement is likely to involve complicated and difficult issues and, therefore, it irrevocably and unconditionally waives all rights it may have to a trial by jury in respect of any litigation directly or indirectly arising out of or relating to this Agreement or the transactions contemplated hereby. Each Party certifies and acknowledges that (i) it understands and has considered the implications of such waivers, (ii) it makes such waivers voluntarily, and (iii) it has been induced to enter into this Agreement by, among other things, the mutual waivers and certifications in this Section 2.14.

2.15Condition Precedent. It is a condition precedent to the effectiveness of this Agreement that the parties (or their Affiliates, as applicable) also execute (collectively the “Related Amendments”): (a) that certain Amendment #2 to Merchandising Agreement (the“Merchandise Amendment”), (b) that certain Amendment No. 1 to Services Agreement, (c) that certain Amendment No. 1 to Store License Agreement (Outlet), and (d) that certain Amendment No. 1 to the Separation Agreement (the“Separation Amendment”).

Signature Page Follows

6

DMLIB-#442086-v5-SHLD_SHO_Supplemental_Agreement.DOCX

Exhibit 10.4

Execution Copy

SEARS HOLDINGS MANAGEMENT CORPORATION

By:    /s/ Ronald Boire

Executive Vice President, Chief Merchandising Officer and President, Sears Full-Line Stores & Kmart Formats

December 9, 2013

SEARS HOMETOWN AND OUTLET STORES, INC.

By:     /s/ W.BRUCE JOHNSON

W. Bruce Johnson

Chief Executive Officer and President

Date: December 9, 2013

DMLIB-#442086-v5-SHLD_SHO_Supplemental_Agreement.DOCX

Exhibit 10.4

Execution Copy

Appendix #1

Released Claims

All references to SHO in this Appendix #1 shall be deemed references to SHO and its Affiliates. Further, all references to SHLD in this Appendix #1 shall be deemed references to and SHLD and its Affiliates.

Issue	Claims Made By SHO
1.Relationship	Claims that SHO should not expect SHLD to perform as a normal service provider—SHLD has said, and acted in ways that indicate, that it doesn’t want SHO’s services business.
2.Authority to negotiate and enter into agreements	Claims that SHO has in good faith negotiated agreements with SHLD and then is told that unspecified “others” at SHLD have rejected the negotiated terms for reasons unrelated to the negotiated agreements. SHO does not understand who is empowered to negotiate the terms of, and enter into, binding agreements on SHLD’s behalf.
3.Pricing and promotional information	Claims that SHLD has refused to deliver the information, has delivered the information late, or has delivered inaccurate information.
4.MOS apparel	•Claims that SHLD has delayed delivery dates with inadequate notice, resulting in SHO’s inability to efficiently schedule labor, allocate selling-floor space, and plan sales volumes. •Claims that SHLD has diverted merchandise to liquidators.
5.IBM Charges	Claims that SHLD has overcharged SHO approximately $2.2M from separation through April 2013, and the overcharges continue.

DMLIB-#442086-v5-SHLD_SHO_Supplemental_Agreement.DOCX

Exhibit 10.4

Execution Copy

6.Outlet HA Product	Claims that SHLD has prior to the Effective Date refused to sell to SHO at the prices specified in the Merchandising Agreement the following categories of DRM merchandise: (1) transitions (displays); (2) web order cancellations that are not part of SHLD’s Take-It-Home-Today program; and (3) customer returns that are not otherwise subject to the Merchandising Agreement.
7.Clearance centers	Claims that SHLD prior to the Effective Date aggregated DRM merchandise in SHLD Outlet clearance centers, which violate the Merchandising Agreement.
8.Kenmore Save-A-Sale	Claims that SHO and KCD agreed post-separation to this promotional initiative to increase Kenmore sales, including royalty rebates and fixture reimbursement. SHO incurred expense in reliance on the agreement. SHLD has failed to honor the agreement.
9.Subsidy sharing	Claims that SHLD on numerous occasions has attempted to avoid sharing with SHO subsidies that SHLD is obligated to share in accordance with the Merchandising Agreement.
10.Outlet’s costs for Outlet merchandise	•Claims that SHLD has overcharged SHO $1.1M through week 10 by calculating pricing to SHO using landed cost rather than core cost and continues to do so. •Claims that SHLD has overcharged SHO $1.6M through week 10 by calculating pricing to SHO for KCD products using higher non-KCD-product pricing and continues to do so.
11.Trade Area Restriction	Claims that SHLD recently announced that it is closing its Christianburg, VA, Chicago-79th Street, and Chicago-Western stores. Claims that SHLD then notified SHO that SHLD intends to continue its retail presence in the trade areas for these stores. Claims that SHLD’s notification blocks SHO’s opportunity to expand into, and maintain a physical “Sears” presence in, these markets.

DMLIB-#442086-v5-SHLD_SHO_Supplemental_Agreement.DOCX

Exhibit 10.4

Execution Copy

12.Real estate

•Claims that Subleases and related documents were withheld until immediately prior to separation; documentation does not include commercially reasonable terms and are not consistent with status quo pre-separation. •Claims that SHO had limited time review the leases and subleases between the parties and that such limited review time is a basis for changing what the parties agreed to. •Claims that SHLD has demanded charges post-separation that were either not charged pre-separation or the post-separation charges are significantly greater than pre-separation charges. Most of these charges were not addressed at the Steering Committee, and they were not contemplated when determining the Duff & Phelps valuation. •Claims that SHLD’s subleases do not permit subleasing to SHO’s franchisees. These restrictions, which were not addressed pre-separation at the Steering Committee, restrict SHO’s franchising initiative for more than 60 Outlet Store locations. •Claims that SHLD’s claims that SHO is responsible for SHLD’s failures to maintain, prior to the separation, premises that SHLD has subleased to SHO (roof, HVAC, and other major tenant repairs). •Claims that SHLD refuses to acknowledge SHO’s request to extend leases. •Claims that SHLD refused to agree to SHO’s requested 60-day extension for the Newark, DE ORDC. •Claims that SHLD refuses to negotiate leases extensions for former TGI premises; SHO’s offered renewal terms are the same as the terms approved pre-separation by SHLD’s CAPCON. •Claims that SHLD refuses to allow Outlet to temporarily use adjoining unused and unleased space in premises that SHO has leased from SHLD.

13.MetaScale agreement

Claims that SHLD (1) demanded, unreasonably, that SHO provide adequate assurance of SHO’s due performance and (2) suspended contract work. •SHLD’s demand is based apparently on SHO’s assertion (made in good faith) that it did not have to pay IBM charges in excess of the $9.6M for IT services specified in the Services Agreement. •Charges have been the subject of a good faith dispute, and were paid promptly in full, prior to the delivery of the request for adequate assurance. Claims that SHLD’s work stoppage has delayed implementation of the contract work. Claims that SHLD’s unjustified demand raises legitimate SHO concerns about SHLD’s reliability as a service provider.

DMLIB-#442086-v5-SHLD_SHO_Supplemental_Agreement.DOCX

Exhibit 10.4

Execution Copy

14.HR training materials	Claims that SHLD has refused to consistently give to SHO training materials in accordance with the applicable agreements.
15.IT services	Claims that SHLD’s service levels have been substandard.
16.Craftsman Lifetime Warranty Exchange	Claims that SHO was not obligated to perform Craftsman Lifetime Warranty Exchanges and Claims that SHO was entitled to reimbursement for such exchanges prior to October 6, 2013.
17.Written Agreement	Claims by SHO that SHO is able to proceed without Seller’s written agreement when the applicable agreement between the parties state that “and Buyer and Seller agree in writing.”
18.Blue Label MOS Apparel	Claims that SHLD was improperly sending SHO damaged or defective (Blue Label) goods as part of MOS
19.Outlet Warranty Charges	Claims that SHLD’s charges for Outlet Products improperly included charges for warranty.

DMLIB-#442086-v5-SHLD_SHO_Supplemental_Agreement.DOCX

Exhibit 10.4

Execution Copy

Issue	Claims Made By Sears Holdings
1.Hybrid Delivery Issue	Claims that SHLD has overpaid SHO for Hybrid Deliveries for orders originating from SHLD’s Affiliates stores.
2.Outlet Increased sale of New Products	Claims that SHO’s increase in the amount of new products sold at Outlets (new products, increased SCIM, etc.) prior to the Effective Date are in violation of the Outlet License Agreement.
3.Franchising	Claims that SHO has been pursuing franchises of Sears Outlet without SHLD’s permission in violation of the Outlet License Agreement.
4.2012 IT Service Charges	Claims that SHO has refused to pay the same rate for project IT Services that SHLD pays.
5.Certain Real Estate Leases	For the properties listed on Schedule 12.2(h) to the Separation Agreement, claims that SHO failed to pay amounts under the leases for those properties which are allocated to SHLD as its responsibility under the Separation Amendment.
6.New HTS Stores within 5-8 miles	Claims that SHO opened the specific stores listed in Section 1.(d)(i) to the Merchandise Amendment in violation of Section 9(b)(i)(C) of the Merchandise Agreement.

DMLIB-#442086-v5-SHLD_SHO_Supplemental_Agreement.DOCX

Exhibit 10.4

Execution Copy

Appendix #2

Open Issues

Issue	Open Issues
1.Excess Inventory and Storage Fees	Claims that SHO is not properly incented to control its demand forecast to SHC because SHC bears the carrying costs on DC inventory for SHO.
2.Clearance centers	Claims that SHLD is not permitted to open “Clearance Centers.”
3.Outlet Products	All Claims related to SHLD’s on-going investigation into how SHO was charged for Outlet Products; except those claims expressly included in the Released Claims. For example, SHLD has notified SHO that SHLD has determined: (1) that in some instances, the DRM discount was applied more than once to an Outlet Product (2) SHO received a credit for DRM products not sold to SHO), and (3) SHO received excess credits when products were returned.
4.CRC Pick-Up Timeframes	Claims that SHO has not been picking up freight from the CRC in a timely manner.
5.Selective Acceptance by SHO of DRM From CRC	Claims that SHO has been selectively rejecting certain goods from the CRC (e.g., Tempur-Pedic)
6.Damaged Goods	Claims that SHO been unilaterally taking markdowns for damaged DRM.
7.W2S Expansion (All Formats)	Claims that SHC has refused to provide W2S services for SHO’s Outlet Store and Home Appliance Showroom locations, including SHLD’s proposals for altering the economics between the parties related for all Web 2 Store transactions, including hybrid deliveries which originate online.
8.Outlet HA Product	Claims after the Effective Date that SHLD is obligated to sell SHO the following categories of DRM merchandise: (1) transitions (displays); (2) web order cancellations that are not part of SHLD’s Take-It-Home-Today program; and (3) customer returns that are not otherwise subject to the Merchandising Agreement.

1

EX-10.5

Exhibit 10.5 Execution Copy DMLIB-#429909-v6-HR_SHO_Adminstrative_Services_SOW schedule 10 5 1 Administrative Services SOW STATEMENT OF WORK # 1 Dated: December 9, 2013 This Statement of Work # 1 (“SOW”) is made retroactive to July 1, 2013 (“Effective Date”) between Sears Holdings Management Corporation (“SHMC”) and Sears Hometown and Outlet Stores, Inc. (“SHO”), Sears Authorized Hometown Stores, LLC (“Hometown”), and Sears Outlet Stores, L.L.C. (“Outlet” and together with SHO and Hometown, collectively the “SHO Group”). This SOW is incorporated as part of, and is governed by the terms and conditions of, that certain Employee Transition and Administrative Services Agreement between SHMC and the SHO Group dated as of August 31, 2012 (the “Agreement”). All terms capitalized herein, but not defined herein, shall have the meanings ascribed to them in the Agreement. Sears Holdings Management Corporation By: /s/ RONALD BOIRE Ronald Boire Executive Vice President, Chief Merchandising Officer and President, Sears Full-Line Stores & Kmart Formats December 9, 2013 Sears Hometown and Outlet Stores, Inc. By: /s/ W.BRUCE JOHNSON W. Bruce Johnson Chief Executive Officer and President December 9, 2013 Sears Authorized Hometown Stores, LLC By: /s/ W.BRUCE JOHNSON W. Bruce Johnson President December 9, 2013 Sears Outlet Stores, L.L.C. By: /s/ W.BRUCE JOHNSON W. Bruce Johnson President December 9, 2013 End of Cover Page

Exhibit 10.5 Execution Copy DMLIB-#429909-v6-HR_SHO_Adminstrative_Services_SOW schedule 10 5 2 1. Services. Pursuant to Article 4.1 of the Agreement, this SOW (in Appendix A) describes the Administrative Services that SHMC shall provide to the SHO Group under the terms of the Agreement. 2. Governing Law. Article 9.17 of the Agreement is specifically restated herein by reference. 3. Not an Offer. This SOW shall only be binding if it is signed by SHMC and each member of the SHO Group. End of SOW

Exhibit 10.5 Execution Copy DMLIB-#429909-v6-HR_SHO_Adminstrative_Services_SOW schedule 10 5 1 APPENDIX A Administrative Services Provided by SHMC to the SHO Group 1. SHMC will provide administrative services to the SHO Group as described in the following table and in accordance with the terms of the Agreement: HUMAN RESOURCES SERVICES Support Center  Provide 88SEARS online and call center access and support to SHO employees in English and Spanish, generally including answering SHO employee questions, providing scenario specific information based on inquiries made and forwarding calls to more appropriate resources, as needed.  Key HR transactions for the purposes of transfers, promotions, terminations and general employee data changes per the standard SHMC process; provide PeopleSoft support to SHO HR as necessary to complete transactions if SHO is unable to process due to system issues not caused by SHO.  Assemble Transitional Pay Packages (TPPs) if developed by SHO based on data provided by SHO legal team, send out TPPs to respective locations and, after the package is covered with the employee by SHO and signed, process documents that are returned to the HR Support Center and enter into PeopleSoft per the standard SHMC TPP Process.  Note: Data entry services for new hire files from external service providers are not included. These must be paid for directly based on SHMC costs plus a 30% mark up (currently equal to $30/Hour). Payroll  Process payroll according to ongoing SHMC payroll cycles (Silver, Weekly, Semi Monthly and Monthly); process incentive and bonus payments in the same manner. Provide wage and/or employment verification services for active and terminated SHO associates through SHMC standard processes.  Process manual paychecks (out of cycle) when necessary and on the same basis as SHMC currently employs.  Perform U.S. and Puerto Rico payroll and employee withholding tax remittances to local, state and federal agencies and filing of corresponding tax returns with respect to employee withholding and payroll taxes for SHO Group employees including Puerto Rico.  Maintain employee direct deposit records and voluntary deduction records for SHO Group employees.  Issue termination payments via “on demand” checks for SHO Group employees.  Process direct deposit recall, stop payment orders with appropriate bank confirmation and check reissue, where applicable, for SHO Group employees - charge a per transaction fee as currently done in SHMC; This does not include using the SHMC overpayment process to seek reimbursement of funds from employees overpaid as a result of any error or omission by SHO. If an overpayment is the result of any error or omission by SHMC, SHMC will take action it deems appropriate and reasonable under the circumstances, which may include using the SHMC overpayment process at its expense to promptly seek reimbursement of funds from employees.  Process garnishments, deductions and remittances to third parties with respect to SHO Group employees - this will be handled in the same manner as the current SHMC process; SHO must provide adequate lead time, for example, in instances where vendor changes occur, resulting in IT and HR project work that will need to be estimated before work can commence or when SHO receives documents that require action.  Perform accounting accruals and reconciliations related to payroll that mirrors SHMC process.  Process and distribute SHO Group employee W-2 statements according to SHMC standard process on behalf of SHO. Time and Attendance  Provide the system and punch technology / software within the point-of-sale system linked to payroll to enable capture of hours and time off for hourly associates in the same manner

Exhibit 10.5 Execution Copy DMLIB-#429909-v6-HR_SHO_Adminstrative_Services_SOW schedule 10 5 2 SHMC provides for its employees.  Provide time and attendance reporting according to SHMC standard process.  Scheduling is not included in services provided as these reside in retail operations.  Note: It is the sole responsibility of SHO to commit payroll data (e.g., number of hours worked, correct hourly rate/salary, commissions, etc.) to SHMC by the standard SHMC established deadlines to ensure timely processing. SHO acknowledges that processing delays caused by SHO’s failure to meet the established cycle cutoffs may result in delayed payments to SHO’s employees. In the event that errors in payroll data are caused by SHMC, SHMC will promptly reperform the services. HR Reporting & Analytics  Provide ongoing access to WFA for SHO Group HR Reporting needs, and, if applicable, provide access to upgrades that SHMC has implemented in its sole discretion.  Support HR reporting requests for special reports using the standard request process found at http://support.searshc.com/wfi/SiteAdmin/WFIReportRequestForm/tabid/4372/Default.aspx  Note: Standard turnaround times that are published by the HRIS reporting team will apply to SHO. Upon request by SHO, SHMC may, at its sole discretion, provide expedited requests. Expedited requests will be considered incremental and result in a fee based on the effort involved in fulfilling the request (and the hourly rate charged will correspond to the incremental project rate in this SOW), provided the reporting team has the capacity to expedite the request as determined by SHMC. If SHO has a regulatory or litigation related request for information, SHO will make that request of the SHMC law department. Sharing of information for litigation purposes will be subject to the parties’ Separation Agreement.  Note: If the volume of requests increases by more than 10% over the prior year, SHMC reserves the right to charge for additional requests. Once these thresholds are met, the cost for additional reports will be charged at the incremental project rate in this SOW. Unemployme nt  Equifax will continue to provide unemployment hearing representation for SHO Group unemployment claims according to SHMC standard process, Equifax will continue to provide standard reports as needed, provided that Equifax, if it is willing to do so, works directly with SHO Group HR. Compliance  Provide access to the SHC handbooks and policies listed below for SHO’s use and reference in developing SHO policies as SHO deems appropriate for its associates for one (1) year after the spin date. The parties agree that because SHC’s policies have been customized for SHC associates, SHO must modify the listed policies to remove all references to SHC, Sears, Kmart and other SHC affiliates/subsidiaries as appropriate prior to incorporating these materials into SHO’s policies. Upon request (one-time), SHC will provide editable versions of such SHC handbooks and policies if SHC determines that such editable versions are readily available. Employee discount policy Credit (WOTC) Employment Poster Requirements FMLA Leave Policy and Extended Care Leave I-9 and WOTC Process Pay for Work Policy Resources Return to Work Short-Term Disability Guide Welfare to Work (WTW) and Work Opportunity Tax Youth Compliance Anti-Harassment & EEO policy FULL TIME CERTIFICATIONS FT Commitment for Employee

Exhibit 10.5 Execution Copy DMLIB-#429909-v6-HR_SHO_Adminstrative_Services_SOW schedule 10 5 3 Full-Time Employee Commitment Hourly Employee Availability Form Employee SPIFFs Commission Tables Hourly Compensation Guide ATTENDANCE POLICY - ENGLISH and SPANISH 3 Points - Personnel Interview Record 4 Points - Notice of Corrective Action 5 Points - Notice of Corrective Action Employee Attendance Record Attendance Policy Attendance Policy Poster Daily Absentee Log FAQ Attendance and Punctuality Policy No Call No Show - Notice of Corrective Action STAFFING Hourly Interview Guide Hourly Interview Guide Overview Hourly Interview Guide Training Aid Hourly Interview Process FAQs POLICIES & PROCEDURES HR Policy and Procedures Manual Outlet Dress Code Seasonal Employment Acknowledgment Social Media Policy TERMINATIONS Termination Matrix ALL POLICIES AND DOCUMENTS ARE PROVIDED FOR REFERENCE AND INFORMATIONAL PURPOSES ONLY AND NOT FOR THE PURPOSE OF PROVIDING LEGAL ADVICE. ALL POLICIES ARE PROVIDED “AS IS” AND SHC MAKES NO WARRANTIES REGARDING THEIR ACCURACY, COMPLETENESS OR APPLICABILITY.  Provide centralized Leave of Absence (“LOA”) (CLMT) support including the administration of existing and new LOA documentation and cases, existing policies, documents, and administrative services in order to administer decisions made by SHO Group HR relative to Family Medical Leave Act (“FMLA”) and all other Leaves of Absences (no advice or counseling is provided to SHO Group HR)  Unless already provided, provide a one-time copy of policies, documents, and administrative services relative to ADA accommodations (no advice or counseling is provided to SHO Group HR) Employee Record Keeping  Maintain standard employee files and documents in accordance with SHMC document storage practices.  Note: If SHO needs to obtain data dumps or copies of records, the fee will be the standard

Exhibit 10.5 Execution Copy DMLIB-#429909-v6-HR_SHO_Adminstrative_Services_SOW schedule 10 5 4 cost that is charged to SHMC by Xerox plus a 30% mark up. Learning  Provide access to electronic copies of the below listed SHC compliance training materials, including e-learning courses, policy certifications, job aids and quizzes, for the sole purpose of SHO’s use and reference in developing compliance training as SHO deems appropriate for its associates, contractors and vendors until October 13, 2013. The parties agree that because SHC’s compliance training has been customized for SHC associates, SHO shall not utilize those courses in their current form for the purpose of providing training to SHO associates. Instead, SHO must modify the aforementioned compliance courses at its own cost to remove all references to SHC, Sears, Kmart and other SHC affiliates/subsidiaries and remove or replace all references to SHC’s policies with references to SHO policies as appropriate prior to incorporating these materials into SHO’s training materials. ALL COMPLIANCE TRAINING MATERIALS ARE PROVIDED FOR REFERENCE AND INFORMATIONAL PURPOSES ONLY AND NOT FOR THE PURPOSE OF PROVIDING LEGAL ADVICE. ALL COMPLIANCE TRAINING MATERIALS ARE PROVIDED “AS IS” AND SHC MAKES NO WARRANTIES REGARDING THEIR ACCURACY, COMPLETENESS OR APPLICABILITY. Ethics and Integrity Spring 2011 Evaluating Employment Accommodations Monthly Compliance Training Topics Motorized Materials Handling Equipment (MMHE) Safety & Awareness Personal Protective Equipment (PPE) Certification Safe Lifting OSHA Record Keeping Lockout/Tagout Awareness Credit and PCI Compliance Advanced Environmental Training for Managers Asbestos Awareness Environmental Hazardous Waste Environmental Inspections Facilities Environmental Management Pest Control Bloodborne Pathogens Exposure Control / Awareness Compactor and Baler Safety DOT Hazmat Electrical Safety Emergency Action Plan Fire Safety Gasoline Storage & Handling Hazard Communication (Right to Know) Ladder Safety Managing Business Records Hourly Wage & Hour Guidelines Information Security Basics Sexual Harassment Prevention Respect in the Workplace Addressing Leaves and Accommodations Puerto Rico Domestic Violence Training Performance Management / Talent Management / Leadership  Provide access to standard online HRP system used by SHMC for performance management, succession planning and 9 box grid forms.

Exhibit 10.5 Execution Copy DMLIB-#429909-v6-HR_SHO_Adminstrative_Services_SOW schedule 10 5 5 Development Compensa- tion Management  Provide administrative support for processing of exempt and non-exempt compensation programs including Annual Incentive Plans, Long Term Incentive Plans, and ad-hoc bonus plans as needed. Implementation of new SHO compensation plans will be incremental project work that will need to be scoped, estimated and planned before work can commence.  Unless already shared, share existing compensation policies as of the date of separation, existing employment related agreements as of the date of separation and other standard documents that are applicable to SHO employees. Benefits & Benefits Administra- tion In accordance with and subject to Section 3.4 and subsection 3.4(f) (including Appendix B):  Eligible employees of SHO Group will continue to participate in the Continuing Plans during the Benefits Transition Period. SHO will be required to move the SHO Group (including post-Separation COBRA continues) to separate SHO-sponsored health and/or welfare benefit programs administered by its own benefits service provider), effective no later than January 1, 2014.  With respect to the Continuing Plans, SHMC will continue to select and manage consultants, brokers, vendors and the like, as necessary to handle: § Plan design, terms and conditions, including eligibility; § Day to day operations of the benefit programs, including: the processing of enrollments, coverage changes and coverage termination; the remittance of premiums and fees to carriers and third-party administrators; and the handling of claim process (provided, however, that SHO Group HR may be consulted with respect to certain benefit claim appeals and COBRA administration to the extent such processes have not already been delegated or allocated to a service provider). § Benchmarking; § Plan contract performance guarantees; and § Government required reporting and disclosure (e.g. SPD distribution and Form 5500 and SAR filings.) § SHMC benefits department will continue to determine cost sharing and P&L allocations  With respect to the Continuing Plans, SHMC will continue to administer, contract and negotiate with service providers/third party administrators/contractor/etc.  SHMC will continue to administer non-contracted benefits (e.g., vacation and personal days) in effect from time to time for SHO Group employees under standard SHMC processes.  If a request by SHO for any deviations from the SHMC process with respect to any Continuing Plan or any other benefit or payroll program or policy, is approved by SHMC and results in incremental project work, SHO will bear the cost of such incremental work.  SHMC will provide SHO employees with access to participate in the SHMC child development center pursuant to the terms and conditions of SHMC’s arrangement with the child development center. HR Systems  Access to the following systems will be provided – the service provided is limited to the actual functionality of the system (SHO is responsible for entering information into the systems and processing transactions to ensure their data is accurate): a. PeopleSoft b. TPC c. MPI d. WFA e. HRP

Exhibit 10.5 Execution Copy DMLIB-#429909-v6-HR_SHO_Adminstrative_Services_SOW schedule 10 5 6 f. Red Prairie  SHO will be able to utilize the existing security profiles/setup established in the systems above that are used by SHMC. Creating additional profiles, configurations and rules will be considered incremental project work. 2. Unless otherwise stated herein, administrative services will be provided with the same level of effort, timeliness and in the same manner that SHMC provides the same administrative services to its internal operations. 3. Services not described in this SOW or not covered by this SOW (other than Inherent Services) are considered incremental services. All incremental services will be charged at a rate of $112.50/hour (unless specialty skills are required, in which case the cost would depend on the market rate for the resources needed to meet the needs). When possible, an estimate of total cost will be provided prior to work being initiated. However, SHO will be charged for actual hours worked by SHMC resources. If additional time is required above the estimate, SHMC will inform SHO of the revised time/cost as soon as practical. SHMC will disclose to SHO the number of hours worked by project for all incremental services. 4. This SOW replaces the Human Resources Section in Appendix 1.01-A (Pages A-1 through A-4) of the Services Agreement between SHO and SHMC dated August 8, 2012. It is the intent of the parties that all human resource services provided by SHMC to SHO as of the Effective Date will be provided under this SOW and the Agreement, except that all charges and fees described in this SOW will become payable, if at all, only from and after the date of this SOW, except that all charges and fees described in this SOW will become payable, if at all, only from and after the Effective Date. For the avoidance of doubt, nothing stated in this Section 4 shall relieve SHO from any previously agreed to payment obligations for Services delivered prior to the Effective Date.

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, W. Bruce Johnson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sears Hometown and Outlet Stores, Inc.

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 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

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(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.

Date:	December 10, 2013
/s/ W. Bruce Johnson
W. Bruce Johnson
Chief Executive Officer and President
Sears Hometown and Outlet Stores, Inc.

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Steven D. Barnhart, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sears Hometown and Outlet Stores, Inc.

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 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

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(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.

Date:	December 10, 2013
/s/ Steven D. Barnhart
Steven D. Barnhart
Senior Vice President and Chief Financial Officer
Sears Hometown and Outlet Stores, Inc.

EX-32.1

EXHIBIT 32.1

CERTIFICATION

Pursuant to 18 U.S.C. 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

Each of the undersigned, W. Bruce Johnson, Chief Executive Officer and President of Sears Hometown and Outlet Stores, Inc. (the “Company”) and Steven D. Barnhart, Senior Vice President and Chief Financial Officer of the Company, has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 2, 2013 (the “Report”).

Each of the undersigned hereby certifies that:

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. 

December 10, 2013

/s/ W. Bruce Johnson

W. Bruce Johnson

Chief Executive Officer and President

/s/ Steven D. Barnhart

Steven D. Barnhart

Senior Vice President and

Chief Financial Officer

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Other Current and Long-Term Liabilities (Tables)

9 Months Ended

Nov. 02, 2013

Payables and Accruals [Abstract]

Schedule of Accrued Expenses and Other Long-term Liabilities

Other current and long-term liabilities consist of the following:

Thousands	November 2, 2013		October 27, 2012		February 2, 2013
Customer deposits	40,913		38,974		34,914
Sales and other taxes	14,072		7,617		13,607
Accrued expenses	13,267		12,733		24,703
Warranty accrual	—		10,919		3,734
Payroll and related items	11,193		8,423		9,005
Store closing accrual	—		22		—
Total other current and long-term liabilities	$	79,445	$	78,688	$	85,963

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Condensed Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Nov. 02, 2013	Oct. 27, 2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$ 31,826	$ 50,420
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation	6,569	6,815
Share-based compensation	598	0
Gain on the sale of assets	(1,567)	0
Change in operating assets and liabilities:
Accounts receivable	(16,216)	(12,913)
Merchandise inventories	(60,189)	(35,749)
Payable to Sears Holdings Corporation	(22,077)	77,687
Accounts payable	(103)	12,072
Store closing accruals	0	(2,179)
Customer deposits	5,998	7,106
Deferred income taxes	15,520	(4,754)
Other operating assets	1,246	43
Other operating liabilities	(15,767)	(5,287)
Net cash provided by (used in) operating activities	(54,162)	93,261
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of property and investments	2,641	0
Purchases of property and equipment	(5,995)	(5,524)
Net cash used in investing activities	(3,354)	(5,524)
CASH FLOWS FROM FINANCING ACTIVITIES
Transfers to Sears Holdings Corporation	0	(12,264)
Dividend paid to Sears Holdings Corporation	0	(100,000)
Common stock repurchased and retired	(8,369)	0
Payments of capital lease obligations	(596)	(1,426)
Short-term borrowings	988,800	100,100
Payments of short-term borrowings	(920,900)	(53,000)
Net cash provided by (used in) financing activities	58,935	(66,590)
NET CHANGE IN CASH AND CASH EQUIVALENTS	1,419	21,147
CASH AND CASH EQUIVALENTS—Beginning of period		694
CASH AND CASH EQUIVALENTS—End of period	21,487	21,841
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest	$ 2,012	$ 111

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Store Closing Charges and Severance Costs

9 Months Ended

Nov. 02, 2013

Restructuring and Related Activities [Abstract]

STORE CLOSING CHARGES AND SEVERANCE COSTS

STORE CLOSING CHARGES AND SEVERANCE COSTS

In accordance with accounting standards that govern costs associated with exit or disposal activities, expenses related to future rent payments for which the Company no longer intends to receive any economic benefit are accrued for when we cease to use the leased space and have been reduced for any income that the Company believes can be realized through subleasing the leased space. During the third quarter of 2013, we closed 27 stores which did not require additional store-closing or severance reserves.

Store closing activity recorded during the 39-week period ended October 27, 2012, and the remaining store closing accrual was as follows:

Thousands	Markdowns (1)			Severance Costs (2)			Lease Termination Costs (2)			Other Costs (2)			Total
Balance at January 28, 2012	$	8,147		$	150		$	56		$	1,995		$	10,348
Store closing costs	—			—			797			—			797
Payments/utilizations	(8,147		)	(150		)	(831		)	(1,995		)	(11,123		)
Balance at October 27, 2012	$	—		$	—		$	22		$	—		$	22

(1) This store closing activity is recorded within Cost of sales and occupancy on the Condensed Consolidated Statements of Income and remaining store closing cost accruals are reported within Merchandise inventories on the Condensed Consolidated Balance Sheets.

(2) This store closing activity is recorded within Selling and administrative on the Condensed Consolidated Statements of Income and remaining store closing cost accruals are reported within Other current liabilities on the Condensed Consolidated Balance Sheets.

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Other Current and Long-Term Liabilities (Details) (USD $) In Thousands, unless otherwise specified	Nov. 02, 2013	Feb. 02, 2013	Oct. 27, 2012
Payables and Accruals [Abstract]
Customer deposits	$ 40,913	$ 34,914	$ 38,974
Sales and other taxes	14,072	13,607	7,617
Accrued expenses	13,267	24,703	12,733
Warranty accrual	0	3,734	10,919
Payroll and related items	11,193	9,005	8,423
Store closing accrual	0	0	22
Total other current and long-term liabilities	$ 79,445	$ 85,963	$ 78,688

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Related Party Agreements (Tables)

9 Months Ended

Nov. 02, 2013

Related Party Transactions [Abstract]

Schedule of Related Party Transactions

The following table summarizes the results of the transactions with Sears Holdings reflected in the Company’s Condensed Consolidated Financial Statements:

	13 Weeks Ended				39 Weeks Ended
	November 2, 2013		October 27, 2012		November 2, 2013		October 27, 2012
Thousands
Net Commissions from Sears Holdings Corporation (1)	$	21,424	$	20,497	$	68,327	$	63,967
Purchases related to cost of sales and occupancy	419,022		366,855		1,293,931		1,235,105
Services	5,566		6,697		15,978		14,594

(1) We reduced the amounts presented for the 13 weeks ended October 27, 2012, the 39 weeks ended November 2, 2013, and the 39 weeks ended October 27, 2012 to exclude all transactions in which SHO received the entire sales revenue for on-line sales made to unrelated third-parties that were generated through Sears Holdings' websites. The excluded amounts for the 13 weeks ended October 27, 2012, the 39 weeks ended November 2, 2013, and the 39 weeks ended October 27, 2012 were $15.4 million, $47.2 million, and $53.3 million, respectively.

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Store Closing Charges and Severance Costs (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended	9 Months Ended
	Nov. 02, 2013 store	Oct. 27, 2012
Restructuring Cost and Reserve [Line Items]
Stores closed	27
Restructuring Cost and Reserve [Roll Forward]
Beginning balance		$ 10,348
Store closing costs		797
Payments/utilizations		(11,123)
Ending balance		22
Markdowns [Member]
Restructuring Cost and Reserve [Roll Forward]
Beginning balance		8,147	[1]
Store closing costs		0	[1]
Payments/utilizations		(8,147)	[1]
Ending balance		0	[1]
Severance Costs [Member]
Restructuring Cost and Reserve [Roll Forward]
Beginning balance		150	[2]
Store closing costs		0	[2]
Payments/utilizations		(150)	[2]
Ending balance		0	[2]
Lease Termination Costs [Member]
Restructuring Cost and Reserve [Roll Forward]
Beginning balance		56	[2]
Store closing costs		797	[2]
Payments/utilizations		(831)	[2]
Ending balance		22	[2]
Other Costs [Member]
Restructuring Cost and Reserve [Roll Forward]
Beginning balance		1,995	[2]
Store closing costs		0	[2]
Payments/utilizations		(1,995)	[2]
Ending balance		$ 0	[2]

[1] This store closing activity is recorded within Cost of sales and occupancy on the Condensed Consolidated Statements of Income and remaining store closing cost accruals are reported within Merchandise inventories on the Condensed Consolidated Balance Sheets.

[2] This store closing activity is recorded within Selling and administrative on the Condensed Consolidated Statements of Income and remaining store closing cost accruals are reported within Other current liabilities on the Condensed Consolidated Balance Sheets.

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Related Party Agreements (Details) (USD $)	3 Months Ended	9 Months Ended			3 Months Ended				9 Months Ended
	Oct. 27, 2012	Nov. 02, 2013	Oct. 27, 2012	Oct. 11, 2012 ESL [Member]	Nov. 02, 2013 Sears Holdings Corporation [Member]		Oct. 27, 2012 Sears Holdings Corporation [Member]		Nov. 02, 2013 Sears Holdings Corporation [Member]		Oct. 27, 2012 Sears Holdings Corporation [Member]
Related Party Transaction [Line Items]
Beneficial interest acquired by related party, percentage				48.00%
Net Commissions from Sears Holdings Corporation					$ 21,424,000	[1]	$ 20,497,000	[1]	$ 68,327,000	[1]	$ 63,967,000	[1]
Purchases related to cost of sales and occupancy					419,022,000		366,855,000		1,293,931,000		1,235,105,000
Services					5,566,000		6,697,000		15,978,000		14,594,000
Exclusion of on-line sales	$ 15,400,000	$ 47,200,000	$ 53,300,000
Invoice payment term					10 days

[1] We reduced the amounts presented for the 13 weeks ended October 27, 2012, the 39 weeks ended November 2, 2013, and the 39 weeks ended October 27, 2012 to exclude all transactions in which SHO received the entire sales revenue for on-line sales made to unrelated third-parties that were generated through Sears Holdings' websites. The excluded amounts for the 13 weeks ended October 27, 2012, the 39 weeks ended November 2, 2013, and the 39 weeks ended October 27, 2012 were $15.4 million, $47.2 million, and $53.3 million, respectively.

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Equity (Narrative) (Details) (USD $)	0 Months Ended	3 Months Ended	9 Months Ended		3 Months Ended	9 Months Ended		1 Months Ended
	Aug. 29, 2013	Nov. 02, 2013	Nov. 02, 2013	May 14, 2013	Nov. 02, 2013 Restricted Stock [Member]	Nov. 02, 2013 Restricted Stock [Member]	Nov. 02, 2013 Restricted Stock [Member] May 16, 2016 [Member]	Dec. 05, 2013 Subsequent Event [Member]
Stock-based Compensation
Shares reserved under plan				4,000,000
Stock granted					89,221	87,841	87,841
Forfeited in period						1,380
Share-based compensation expense					$ 600,000	$ 3,300,000
Period for recognition						2 years 6 months
Aggregate fair value of the shares granted						3,900,000
Share Repurchase Program
Authorized amount	25,000,000							8,700,000
Shares repurchased		279,247						12,651
Amount repurchased		8,400,000	8,369,000					300,000
Share price		$ 29.97	$ 29.97
Remaining authorized repurchase amount		$ 16,600,000

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Income Taxes (Details) (USD $) In Millions, unless otherwise specified	Nov. 02, 2013	Oct. 27, 2012
Income Tax Disclosure [Abstract]
Deferred tax assets	$ 61.1	$ 79.8

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Background and Basis of Presentation

9 Months Ended

Nov. 02, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

BACKGROUND AND BASIS OF PRESENTATION

BACKGROUND AND BASIS OF PRESENTATION

Background

Sears Hometown and Outlet Stores, Inc. is a national retailer primarily focused on selling home appliances, hardware, tools, and lawn and garden equipment. As of November 2, 2013 the Company and its dealers and franchisees operated 1,239 stores across all 50 states and in Puerto Rico and Bermuda. In these notes and in the other items of this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “SHO,” and the “Company” refer to Sears Hometown and Outlet Stores, Inc. and its subsidiaries.

Description of the Separation

On October 11, 2012, Sears Holdings Corporation (“Sears Holdings”) completed the separation of its Sears Hometown and Hardware and Sears Outlet businesses (the “Separation”). As part of the Separation on August 31, 2012, through a series of intercompany transactions, Sears Holdings and several of its subsidiaries transferred the assets and liabilities comprising the Sears Hometown and Hardware and Sears Outlet businesses to SHO, which was formed on April 23, 2012 as a wholly owned subsidiary of Sears Holdings. Effective upon the Separation, Sears Holdings ceased to own shares of our common stock, and thereafter our common stock began trading on the NASDAQ Stock Market under the trading symbol “SHOS.”

As part of the Separation, Sears Holdings contributed to SHO equity intercompany balances due to/from Sears Holdings, which included amounts arising from pre-Separation purchases of merchandise inventories and which were included in Divisional Equity. After the Separation, the Company continues to purchase the majority of its merchandise inventories from Sears Holdings and amounts payable to Sears Holdings are reflected separately on the condensed consolidated balance sheet contained herein.

Basis of Presentation

These unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. These unaudited condensed consolidated financial statements do not include all of the information and footnotes required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the fiscal quarter ended November 2, 2013 are not necessarily indicative of the results that may be expected for the full fiscal year. These financial statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

These unaudited condensed consolidated financial statements reflect for pre-Separation periods the Hometown and Hardware and Outlet businesses of Sears Holdings and, with respect to the pre-Separation periods, were derived from the consolidated financial statements and accounting records of Sears Holdings, principally representing the historical results of operations and the historical basis of assets and liabilities of the Company's business. As pre-Separation business operations of Sears Holdings, we did not maintain our own legal, tax, and certain other corporate support functions. In connection with the Separation, Sears Holdings and SHO entered into services agreements to provide SHO with certain support services under the terms described in Note 4. The costs and allocations charged to the Company by Sears Holdings do not necessarily reflect the costs of obtaining the services from unaffiliated third parties or of the Company providing the applicable services itself. The condensed consolidated financial statements contained herein may not be indicative of the Company’s financial position, operating results, and cash flows in the future or what they would have been if the Hometown and Hardware and Outlet businesses of Sears Holdings had been a stand-alone company during all periods prior to the Separation.

In connection with the Separation we entered into an asset-based senior secured revolving credit facility (the “Senior ABL Facility”) with a group of financial institutions. The Senior ABL Facility provides for maximum borrowings (subject to availability under a borrowing base) of up to the aggregate commitments of all of the lenders, which as of November 2, 2013 totaled $250 million. Up to $75 million of the Senior ABL Facility is available for the issuance of letters of credit and up to $25 million is available for swingline loans. The Senior ABL Facility permits us to request commitment increases in an aggregate principal amount of up to $100 million. Availability under the Senior ABL Facility as of November 2, 2013 was $158.7 million with $87.9 million drawn and $3.4 million of letters of credit outstanding under the facility.

We operate through two segments--our Sears Hometown and Hardware segment ("Hometown") and our Sears Outlet segment ("Outlet").

Our fiscal year end is the Saturday closest to January 31 each year.  Our third fiscal quarter end is the Saturday closest to October 31 each year.  Fiscal year 2012 consisted of 53 weeks compared to fiscal year 2013, which consists of 52 weeks.  As a result of the extra week at the end of fiscal 2012, the fiscal 2013 calendar is shifted by one week compared to fiscal 2012.

Fair Value of Financial Instruments

We determine the fair value of financial instruments in accordance with standards pertaining to fair value measurements. Such standards define fair value and establish a framework for measuring fair value under GAAP. Under fair value measurement accounting standards, fair value is considered to be the exchange price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. We report the fair value of financial assets and liabilities based on the fair value hierarchy prescribed by accounting standards for fair value measurements, which prioritizes the inputs to valuation techniques used to measure fair value into three levels, as follows:

Level 1 inputs—unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide ongoing pricing information.

Level 2 inputs—inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable for the asset or liability, such as interest rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risk and default rates.

Level 3 inputs—unobservable inputs for the asset or liability.

Cash and cash equivalents (level 1), accounts receivable, short-term debt (level 2), merchandise payables, and accrued expenses are reflected in the Condensed Consolidated Balance Sheets at cost, which approximates fair value due to the short-term nature of these instruments. For short-term debt, the variable interest rate is a significant input in our fair value assessments.

We measure certain non-financial assets and liabilities, including long-lived assets, at fair value on a non-recurring basis.

The Company was not required to measure any other significant non-financial asset or liability at fair value as of November 2, 2013.

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Income Taxes

9 Months Ended

Nov. 02, 2013

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

In connection with the Separation, SHO and Sears Holdings entered into a Tax Sharing Agreement that governs the rights and obligations of the parties with respect to pre-Separation and post-Separation tax matters. Under the Tax Sharing Agreement, Sears Holdings is responsible for any federal, state, or foreign income tax liability relating to tax periods ending on or before the Separation. For all periods after the Separation, the Company is responsible for any federal, state, or foreign tax liability. Current income taxes payable for any federal, state, or foreign income tax returns is reported in the period incurred.

We account for uncertainties in income taxes according to accounting standards for uncertain tax positions. The Company is present in a large number of taxable jurisdictions and, at any point in time, can have audits underway at various stages of completion in one or more of these jurisdictions. We evaluate our tax positions and establish liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable. Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law, and closings of statutes of limitation. Such adjustments are reflected in the tax provision as appropriate. Pursuant to the Tax Sharing Agreement, Sears Holdings is responsible for any unrecognized tax liability or benefit through the date of the Separation and the Company is responsible for any uncertain tax position after the Separation. For the 39 weeks ended November 2, 2013 and October 27, 2012, no unrecognized tax benefits have been identified and reflected in the financial statements.

We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of income tax expense. As no unrecognized tax benefits have been identified and reflected in the condensed consolidated financial statements, no interest or penalties related to unrecognized tax benefits are reflected in the condensed consolidated balance sheets or statements of income.

As of July 28, 2012 the assets and liabilities of the Sears Hometown and Hardware and Sears Outlet businesses were owned by, or were the responsibilities of, subsidiaries of Sears Holdings. On August 31, 2012, through a series of intercompany transactions, Sears Holdings and several of its subsidiaries transferred the assets and liabilities comprising the Sears Hometown and Hardware and the Sears Outlet businesses to SHO.  In connection with the intercompany transactions, for tax purposes the transferred assets and liabilities were stepped up to their estimated fair market values as of August 31, 2012, but for financial statement purposes the book value of the assets and liabilities remained unchanged at their historical cost bases. As of November 2, 2013 the Company's net deferred tax asset balance was $61.1 million compared to $79.8 million as of October 27, 2012.

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Financing Arrangements

9 Months Ended

Nov. 02, 2013

Debt Disclosure [Abstract]

Financing Arrangements

FINANCING ARRANGEMENT

Under the Senior ABL Facility the Company initially borrowed $100 million, which was used to pay a cash dividend to Sears Holdings prior to the Separation. As of November 2, 2013 we had $87.9 million outstanding under the Senior ABL Facility, which approximated the fair value of these borrowings. The Senior ABL Facility provides (subject to availability under a borrowing base) for maximum borrowings up to the aggregate commitments of all of the lenders, which as of November 2, 2013 totaled $250 million. Up to $75 million of the Senior ABL Facility is available for the issuance of letters of credit and up to $25 million is available for swingline loans. The Senior ABL Facility permits us to request commitment increases in an aggregate principal amount of up to $100 million. Availability under the Senior ABL Facility as of November 2, 2013 was $158.7 million, with $3.4 million of letters of credit outstanding under the facility.

The principal terms of the Senior ABL Facility are summarized below.

Senior ABL Facility

Maturity; Amortization and Prepayments

The Senior ABL Facility will mature on the earlier of (i) October 11, 2017 or (ii) six months prior to the expiration of our Merchandising Agreement dated August 8, 2012 with Sears Holdings, Sears Holdings Management Corporation, and Kmart Corporation (the "Merchandising Agreement") and the other agreements with Sears Holdings or its subsidiaries in connection with the Separation that are specified in the Senior ABL Facility, unless such agreements have been extended to a date later than October 11, 2017 or terminated on a basis reasonably satisfactory to the administrative agent under the Senior ABL Facility.

The Senior ABL Facility is subject to mandatory prepayment in amounts equal to the amount by which the outstanding extensions of credit exceed the lesser of the borrowing base and the commitments then in effect.

Guarantees; Security

The obligations under the Senior ABL Facility are guaranteed by us and each of our existing and future direct and indirect wholly owned domestic subsidiaries (subject to certain exceptions). The Senior ABL Facility and the guarantees thereunder are secured by a first priority security interest in certain assets of the borrowers and guarantors consisting primarily of accounts receivable, inventory, cash, cash equivalents, deposit accounts, and securities accounts, as well as certain other assets (other than intellectual property) ancillary to the foregoing and all proceeds of all of the foregoing, including cash proceeds and the proceeds of applicable insurance.

Interest; Fees

The interest rates per annum applicable to the loans under the Senior ABL Facility are based on a fluctuating rate of interest measured by reference to, at our election, either (1) an adjusted London inter-bank offered rate ("adjusted LIBOR") plus a borrowing margin or (2) an alternate base rate plus a borrowing margin, with the borrowing margin subject to adjustment based on the average excess availability under the Senior ABL Facility for the preceding fiscal quarter. The interest rate was 4.25% at November 2, 2013.

Customary fees are payable in respect of the Senior ABL Facility, including letter of credit fees and commitment fees.

Covenants

The Senior ABL Facility includes a number of covenants that, among other things, limit or restrict our ability to, subject to specified exceptions, incur additional indebtedness (including guarantees), grant liens, make investments, make prepayments on other indebtedness, engage in mergers, or change the nature of our business.

The Senior ABL Facility limits SHO's ability to declare and pay cash dividends and repurchase its common stock. SHO may declare and pay cash dividends to its stockholders and may repurchase stock if the following conditions are satisfied: either (a) (i) no specified default then exists or would arise as a result of the declaration or payment of the cash dividend or as a result of the stock repurchase, (ii) SHO and its subsidiaries that are also borrowers have demonstrated to the reasonable satisfaction of the agent for the lenders that monthly availability (as determined in accordance with the Senior ABL Facility), immediately following the declaration and payment of the cash dividend or the stock repurchase and as projected on a pro forma basis for the twelve months following and after giving effect to the declaration and payment of the cash dividend or the stock repurchase, would be at least equal to the greater of (x) 25% of the Loan Cap (which is the lesser of (A) the aggregate commitments of the lenders and (B) the borrowing base) and (y) $50,000,000, and (iii) after giving pro forma effect to the declaration and payment of the cash dividend or the stock repurchase as if it constituted a specified debt service charge, the specified consolidated fixed charge coverage ratio, as calculated on a trailing twelve months basis, would be equal to or greater than 1.1:1.0, or (b) (i) no specified default then exists or would arise as a result of the declaration or payment of the cash dividend or the stock repurchase, (ii) payment of the cash dividend or the stock repurchase is not made with the proceeds of any credit extension under the Senior ABL Facility, (iii) during the 120-day period prior to declaration and payment of the cash dividend or the stock repurchase, no credit extension was outstanding under the Senior ABL Facility, and (iv) SHO demonstrates to the reasonable satisfaction of the agent for the lenders that, on a pro forma and projected basis, no credit extensions would be outstanding under the Senior ABL Facility for the 120-day period following the declaration and payment of the cash dividend or the stock repurchase.

The Senior ABL Facility also contains certain affirmative covenants, including financial and other reporting requirements.

Events of Default

The Senior ABL Facility includes customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross default to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments, and change of control.

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Related Party Agreements

9 Months Ended

Nov. 02, 2013

Related Party Transactions [Abstract]

RELATED PARTY AGREEMENTS

RELATED-PARTY AGREEMENTS AND TRANSACTIONS

According to a Schedule 13D/A filed on June 12, 2013 with the Securities and Exchange Commission, ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert (collectively, “ESL”), beneficially owned on the filing date approximately 48% of our outstanding shares of common stock. Based on publicly available information, ESL beneficially owns approximately 48% of Sears Holdings' outstanding shares of common stock.

In connection with the Separation, we entered into various agreements with Sears Holdings (the "SHO-Sears Holdings Agreements") that, among other things, (1) govern specified aspects of our relationship with Sears Holdings following the Separation, (2) establish terms under which subsidiaries of Sears Holdings provide services to us, and (3) establish terms pursuant to which subsidiaries of Sears Holdings obtain merchandise inventories for us. The terms of the SHO-Sears Holdings Agreements were agreed to prior to the Separation in the context of a parent-subsidiary relationship and in the overall context of the Separation. The Company engages in frequent discussions with Sears Holdings about the terms and conditions of the SHO-Sears Holdings Agreements, the business relationships that are reflected in the SHO-Sears Holdings Agreements, and the details of these business relationships, many of which details are not addressed by the terms and conditions of the SHO-Sears Holdings Agreements. These discussions from time to time result in adjustments to the relationships that the Company believes together are in Company's best interests.

On December 9, 2013 the Company entered into additional agreements with Sears Holdings (the "December 9 Agreements") that were intended to resolve disputes regarding the terms and conditions of the SHO-Sears Holdings Agreements. See Part II, Item 5 of this Quarterly Report on Form 10-Q for a description of the December 9 Agreements.

The following is a summary of the nature of the related-party transactions between SHO and Sears Holdings:

• SHO receives commissions from Sears Holdings for specified sales of merchandise made through www.sears.com and www.searsoutlet.com, the sale of extended service contracts, delivery and handling services, and relating to the use in our stores of credit cards branded with the Sears name. For certain transactions SHO pays a commission to Sears Holdings.

• We obtain a significant amount of our merchandise inventories from Sears Holdings, leveraging the benefit of the Sears Holdings purchasing activities. We have a retailer's customary rights to return to Sears Holdings merchandise that is defective (except with respect to agreed-upon amounts of defective apparel that we purchase and then liquidate) or otherwise does not meet contract requirements. In addition, we may determine that an item of Outlet merchandise (usually merchandise that is not new in-box) we have received from Sears Holdings cannot be refurbished or reconditioned or is otherwise not in a physical condition to offer for sale to our customers. We and Sears Holdings (and our Outlet vendors generally) refer to an item of merchandise in this condition as “not saleable” or "non-saleable," and in the normal course we can return the item to Sears Holdings. We generally have comparable return rights with our other Outlet vendors.

• We pay royalties related to our sale of products branded with the KENMORE®, CRAFTSMAN®, and DIEHARD® marks (which marks are owned by subsidiaries of Sears Holdings).

• We pay fees for participation in Sears Holdings' SHOP YOUR WAY REWARDS® program.

• We have also entered into agreements with Sears Holdings for logistics, handling, warehouse, and transportation services, the charges for which are based on merchandise inventory units.

• Sears Holdings provides the Company with specified corporate services. These services include accounting and finance, human resources, information technology, and real estate. Sears Holdings charges the Company for these corporate services based on actual usage or a pro rata charge based upon sales, head count, or square footage.

The following table summarizes the results of the transactions with Sears Holdings reflected in the Company’s Condensed Consolidated Financial Statements:

	13 Weeks Ended				39 Weeks Ended
	November 2, 2013		October 27, 2012		November 2, 2013		October 27, 2012
Thousands
Net Commissions from Sears Holdings Corporation (1)	$	21,424	$	20,497	$	68,327	$	63,967
Purchases related to cost of sales and occupancy	419,022		366,855		1,293,931		1,235,105
Services	5,566		6,697		15,978		14,594

(1) We reduced the amounts presented for the 13 weeks ended October 27, 2012, the 39 weeks ended November 2, 2013, and the 39 weeks ended October 27, 2012 to exclude all transactions in which SHO received the entire sales revenue for on-line sales made to unrelated third-parties that were generated through Sears Holdings' websites. The excluded amounts for the 13 weeks ended October 27, 2012, the 39 weeks ended November 2, 2013, and the 39 weeks ended October 27, 2012 were $15.4 million, $47.2 million, and $53.3 million, respectively.

Following the Separation we incur payables to Sears Holdings for merchandise inventory purchases and service and occupancy charges (net of commissions) based on our Separation agreements.  Amounts due to or from Sears Holdings are non-interest bearing, settled on a net basis, and have payments terms of 10 days after the invoice date. Prior to the Separation these amounts were recorded and settled through intercompany transfers to Sears Holdings.

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Financing Arrangements (Details) (USD $)	9 Months Ended
	Nov. 02, 2013	Oct. 11, 2012
Debt Instrument [Line Items]
Interest rate	4.25%
Senior ABL Facility [Member]
Debt Instrument [Line Items]
Amount outstanding		$ 100,000,000
Covenant, maximum percentage of Loan Cap	25.00%
Covenant, component of aggregate commitment calculation	50,000,000
Covenant, fixed charge coverage ratio	1.1
Covenant, period of credit extensions outstanding	120 days
Revolving Credit Facility [Member] | Senior ABL Facility [Member]
Debt Instrument [Line Items]
Aggregate maximum borrowings	250,000,000
Increases in aggregate principal	100,000,000
Letter of Credit [Member] | Senior ABL Facility [Member]
Debt Instrument [Line Items]
Aggregate maximum borrowings	75,000,000
Swingline Loans [Member] | Senior ABL Facility [Member]
Debt Instrument [Line Items]
Aggregate maximum borrowings	25,000,000
Separation [Member] | Senior ABL Facility [Member]
Debt Instrument [Line Items]
Remaining borrowing capacity	87,900,000
Separation [Member] | Letter of Credit [Member] | Senior ABL Facility [Member]
Debt Instrument [Line Items]
Amount outstanding	3,400,000
Remaining borrowing capacity	$ 158,700,000

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Equity (Restricted Stock Awards) (Details) (Restricted Stock [Member], USD $) In Thousands, except Per Share data, unless otherwise specified	9 Months Ended
	Nov. 02, 2013	Feb. 02, 2013
Restricted Stock [Member]
Shares
Beginning of year balance		0
Granted	89
Vested	0
Forfeited	(1)
Balance at end of period	88	0
Weighted-Average Fair Value on Date of Grant
Beginning of year balance (in dollars per share)		$ 0.00
Granted (in dollars per share)	$ 44.45
Vested (in dollars per share)	$ 0.00
Forfeited (in dollars per share)	$ 44.45
Balance at end of period (in dollars per share)	$ 44.45	$ 0.00

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Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Nov. 02, 2013	Feb. 02, 2013	Oct. 27, 2012
CURRENT ASSETS
Cash and cash equivalents	$ 21,487	$ 20,068	$ 21,841
Accounts receivable	17,207	10,986	13,905
Merchandise inventories	488,626	428,437	429,407
Prepaid expenses and other current assets	8,113	14,321	12,301
Total current assets	535,433	473,812	477,454
PROPERTY AND EQUIPMENT, net	49,544	53,383	54,088
GOODWILL	167,000	167,000	167,000
LONG-TERM DEFERRED TAXES	63,916	69,001	70,648
OTHER ASSETS	32,115	22,607	22,509
TOTAL ASSETS	848,008	785,803	791,699
CURRENT LIABILITIES
Short-term borrowings	87,900	20,000	47,100
Payable to Sears Holdings Corporation	57,414	79,491	77,687
Accounts payable	31,727	31,830	29,228
Other current liabilities	74,306	83,211	76,265
Current portion of capital lease obligations	1,082	1,463	1,499
Total current liabilities	252,429	215,995	231,779
CAPITAL LEASE OBLIGATIONS	98	769	870
OTHER LONG-TERM LIABILITIES	5,139	2,752	2,423
TOTAL LIABILITIES	257,666	219,516	235,072
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY
TOTAL STOCKHOLDERS' EQUITY	590,342	566,287	556,627
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 848,008	$ 785,803	$ 791,699

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Recent Accounting Pronouncements

9 Months Ended

Nov. 02, 2013

Accounting Changes and Error Corrections [Abstract]

RECENT ACCOUNTING PRONOUNCEMENTS

RECENT ACCOUNTING PRONOUNCEMENTS

Disclosures about Reclassification Adjustments out of Accumulated Other Comprehensive Income

In February 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income. The update requires entities to disclose additional information about reclassification adjustments, including changes in accumulated other comprehensive income balances by component and significant items reclassified out of accumulated other comprehensive income. This update was effective and adopted by the Company in the first quarter of 2013 and did not have an impact on the Company's consolidated financial position, results of operations or cash flows.

Testing Indefinite-Lived Intangible Assets for Impairment

In July 2012, the FASB issued an accounting standards update which provides, subject to certain conditions, the option to perform a qualitative, rather than quantitative, assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. This update was effective and adopted by the Company in the first quarter of 2013 and did not have an impact on the Company's consolidated financial position, results of operations, or cash flows.

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Condensed Consolidated Statements of Stockholders' Equity (USD $) In Thousands, except Share data, unless otherwise specified	Total	Common Stock [Member]	Capital in Excess of Par Value [Member]	Retained Earnings (accumulated deficit) [Member]	Divisional Equity prior to the Separation [Member]
Beginning balance at Jan. 28, 2012	$ 538,106	$ 0	$ 0	$ 0	$ 538,106
Beginning balance, Shares at Jan. 28, 2012		0
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income	50,420			(179)	50,599
Net transfer to Sears Holdings Corporation	(12,264)				(12,264)
Dividend paid to Sears Holdings Corporation	(100,000)				(100,000)
Reclassification of divisional equity to common stock and additional paid in capital in conjunction with the Separation	0	231	476,210		(476,441)
Reclassification of divisional equity to common stock and additional paid in capital in conjunction with the Separation, shares		23,100,000
Tax adjustment related to the Separation	80,365		80,365	0	0
Ending balance at Oct. 27, 2012	556,627	231	556,575	(179)	0
Ending balance, Shares at Oct. 27, 2012		23,100,000
Beginning balance at Feb. 03, 2013
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income	31,826			31,826
Share-based compensation	598	1	597
Share-based compensation, Shares		88,000
Common stock repurchased and retired, shares	(8,369)	(3)	(6,728)	(1,638)
Common stock repurchased and retired		(279,000)
Ending balance at Nov. 02, 2013	$ 590,342	$ 229	$ 550,444	$ 39,669	$ 0
Ending balance, Shares at Nov. 02, 2013		22,909,000

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Condensed Consolidated Statements of Income (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Nov. 02, 2013	Oct. 27, 2012	Nov. 02, 2013	Oct. 27, 2012
NET SALES	$ 561,068	$ 556,903	$ 1,819,084	$ 1,822,445
COSTS AND EXPENSES
Cost of sales and occupancy	425,596	418,490	1,380,966	1,365,347
Selling and administrative	121,698	122,054	379,815	368,031
Depreciation	2,177	2,282	6,569	6,815
Gain on the sale of assets	(1,567)	0	(1,567)	0
Total costs and expenses	547,904	542,826	1,765,783	1,740,193
Operating income	13,164	14,077	53,301	82,252
Interest income (expense)	(738)	(70)	(1,969)	(111)
Other income	460	382	1,306	968
Income before income taxes	12,886	14,389	52,638	83,109
Income tax expense	(5,191)	(5,629)	(20,812)	(32,689)
NET INCOME	$ 7,695	$ 8,760	$ 31,826	$ 50,420
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO STOCKHOLDERS
Basic (in dollars per share)	$ 0.33	$ 0.38	$ 1.38	$ 2.18
Diluted (in dollars per share)	$ 0.33	$ 0.38	$ 1.38	$ 2.18
Basic weighted average common shares outstanding (in shares)	22,999	23,100	23,066	23,100
Diluted weighted average common shares outstanding (in shares)	22,999	23,100	23,070	23,100

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Summary of Segment Data (Details) (USD $)	0 Months Ended	3 Months Ended		9 Months Ended
	Aug. 31, 2012	Nov. 02, 2013	Oct. 27, 2012	Nov. 02, 2013	Oct. 27, 2012	Feb. 02, 2013
Segment Reporting Information [Line Items]
Initial franchise revenue	$ 1,500,000	$ 7,800,000		$ 14,800,000	$ 11,200,000
Net sales		561,068,000	556,903,000	1,819,084,000	1,822,445,000
Cost of sales and occupancy		425,596,000	418,490,000	1,380,966,000	1,365,347,000
Selling and administrative		121,698,000	122,054,000	379,815,000	368,031,000
Depreciation		2,177,000	2,282,000	6,569,000	6,815,000
Gain on the sale of assets		(1,567,000)	0	(1,567,000)	0
Total costs and expenses		547,904,000	542,826,000	1,765,783,000	1,740,193,000
Operating income		13,164,000	14,077,000	53,301,000	82,252,000
Total assets	791,699,000	848,008,000	791,699,000	848,008,000	791,699,000	785,803,000
Capital expenditures		3,600,000	2,152,000	5,995,000	5,524,000
Appliances [Member]
Segment Reporting Information [Line Items]
Net sales		405,220,000	387,903,000	1,231,089,000	1,182,949,000
Lawn and Garden [Member]
Segment Reporting Information [Line Items]
Net sales		64,892,000	70,215,000	300,967,000	322,089,000
Tools and Paint [Member]
Segment Reporting Information [Line Items]
Net sales		47,974,000	49,271,000	149,059,000	159,075,000
Other [Member]
Segment Reporting Information [Line Items]
Net sales		42,982,000	49,514,000	137,969,000	158,332,000
Sears Hometown and Hardware [Member]
Segment Reporting Information [Line Items]
Net sales		413,171,000	414,985,000	1,361,908,000	1,403,218,000
Cost of sales and occupancy		318,362,000	316,820,000	1,040,750,000	1,066,728,000
Selling and administrative		94,818,000	94,149,000	299,175,000	287,400,000
Depreciation		760,000	797,000	2,372,000	2,423,000
Total costs and expenses		413,940,000	411,766,000	1,342,297,000	1,356,551,000
Operating income		(769,000)	3,219,000	19,611,000	46,667,000
Total assets	648,341,000	657,019,000	648,341,000	657,019,000	648,341,000
Capital expenditures		1,341,000	1,172,000	2,711,000	1,785,000
Sears Hometown and Hardware [Member] | Appliances [Member]
Segment Reporting Information [Line Items]
Net sales		289,834,000	275,827,000	868,489,000	845,502,000
Sears Hometown and Hardware [Member] | Lawn and Garden [Member]
Segment Reporting Information [Line Items]
Net sales		59,049,000	64,703,000	280,029,000	306,420,000
Sears Hometown and Hardware [Member] | Tools and Paint [Member]
Segment Reporting Information [Line Items]
Net sales		44,516,000	45,501,000	138,996,000	148,988,000
Sears Hometown and Hardware [Member] | Other [Member]
Segment Reporting Information [Line Items]
Net sales		19,772,000	28,954,000	74,394,000	102,308,000
Sears Outlet [Member]
Segment Reporting Information [Line Items]
Reclassification of distribution center costs		3,700,000		10,000,000
Net sales		147,897,000	141,918,000	457,176,000	419,227,000
Cost of sales and occupancy		107,234,000	101,670,000	340,216,000	298,619,000
Selling and administrative		26,880,000	27,905,000	80,640,000	80,631,000
Depreciation		1,417,000	1,485,000	4,197,000	4,392,000
Gain on the sale of assets		(1,567,000)		(1,567,000)
Total costs and expenses		133,964,000	131,060,000	423,486,000	383,642,000
Operating income		13,933,000	10,858,000	33,690,000	35,585,000
Total assets	143,358,000	190,989,000	143,358,000	190,989,000	143,358,000
Capital expenditures		2,259,000	980,000	3,284,000	3,739,000
Sears Outlet [Member] | Appliances [Member]
Segment Reporting Information [Line Items]
Net sales		115,386,000	112,076,000	362,600,000	337,447,000
Sears Outlet [Member] | Lawn and Garden [Member]
Segment Reporting Information [Line Items]
Net sales		5,843,000	5,512,000	20,938,000	15,669,000
Sears Outlet [Member] | Tools and Paint [Member]
Segment Reporting Information [Line Items]
Net sales		3,458,000	3,770,000	10,063,000	10,087,000
Sears Outlet [Member] | Other [Member]
Segment Reporting Information [Line Items]
Net sales		$ 23,210,000	$ 20,560,000	$ 63,575,000	$ 56,024,000

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Background and Basis of Presentation (Details) (USD $) In Millions, unless otherwise specified	9 Months Ended	12 Months Ended			9 Months Ended
	Nov. 02, 2013 segment store state	Feb. 02, 2013	Jan. 28, 2012	Oct. 11, 2012 Senior ABL Facility [Member]	Nov. 02, 2013 Revolving Credit Facility [Member] Senior ABL Facility [Member]	Nov. 02, 2013 Letter of Credit [Member] Senior ABL Facility [Member]	Nov. 02, 2013 Swingline Loans [Member] Senior ABL Facility [Member]	Nov. 02, 2013 Separation [Member] Senior ABL Facility [Member]	Nov. 02, 2013 Separation [Member] Letter of Credit [Member] Senior ABL Facility [Member]
Significant Accounting Policies [Line Items]
Number of stores	1,239
Number of states in which the Company operates	50
Aggregate maximum borrowings					$ 250	$ 75	$ 25
Increases in aggregate principal					100
Remaining borrowing capacity								87.9	158.7
Amount outstanding				$ 100.0					$ 3.4
Number of operating segments	2
Number of weeks in fiscal year		P53W	P52W

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Commitments and Contingencies

9 Months Ended

Nov. 02, 2013

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

We are subject to various legal and governmental proceedings arising out of the ordinary course of business, the outcome of which, individually or in the aggregate, in the opinion of management, would not have a material adverse effect on our business, financial position, results of operations, or cash flows.

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Income Per Common Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Nov. 02, 2013	Oct. 27, 2012	Nov. 02, 2013	Oct. 27, 2012
Class of Warrant or Right [Line Items]
Basic weighted average shares	22,999,000	23,100,000	23,066,000	23,100,000
Dilutive effect of restricted stock	0	0	4,000	0
Diluted weighted average shares	22,999,000	23,100,000	23,070,000	23,100,000
Net income	$ 7,695	$ 8,760	$ 31,826	$ 50,420
Income per common share:
Basic (in dollars per share)	$ 0.33	$ 0.38	$ 1.38	$ 2.18
Diluted (in dollars per share)	$ 0.33	$ 0.38	$ 1.38	$ 2.18
Separation [Member]
Class of Warrant or Right [Line Items]
Number of shares of common stock purchsed from Sears Holdings	23,100,000		23,100,000

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Equity

9 Months Ended

Nov. 02, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

EQUITY

EQUITY

Stock-based Compensation

At the Company's Annual Meeting of Stockholders held on May 14, 2013 the stockholders approved the Sears Hometown and Outlet Stores, Inc. Amended and Restated 2012 Stock Plan. Four million shares of the Company's common stock are reserved for issuance under the plan. A total of 89,221 shares of restricted stock were granted in the second quarter of 2013 under the plan to a group of eligible individuals (as defined in the plan), all of whom are employees of the Company. We are authorized to grant stock options and to make other awards to eligible plan participants pursuant to the Amended and Restated 2012 Stock Plan. The Company has made no stock-option or other awards under the plan.

We account for stock-based compensation using the fair value method in accordance with accounting standards regarding share-based payment transactions. During the second and third quarters of 2013 we recorded $0.6 million in total compensation expense related to the 87,841 shares of restricted stock (none of which had vested and 1,380 had been forfeited as of November 2, 2013). At November 2, 2013, we had $3.3 million in total unrecognized compensation cost related to the 87,841 shares of non-vested restricted stock, which cost we expect to recognize over approximately the next 2.50 years.

The 87,841 shares of restricted stock will vest, if at all, on May 16, 2016 in accordance with and subject to the terms and conditions of restricted-stock agreements, including forfeiture conditions, and the Amended and Restated 2012 Stock Plan. The fair value of these awards is equal to the market price of our common stock on the date of grant. We do not currently have a broad-based program that provides for restricted-stock awards on an annual basis. Changes in restricted-stock awards for 2013 were as follows:

	39 Weeks Ended November 2, 2013
(Shares in Thousands)	Shares		Weighted-Average Fair Value on Date of Grant
Beginning of year balance	—		—
Granted	89		$	44.45
Vested	—		—
Forfeited	(1	)	44.45
Balance at 11/2/2013	88		$	44.45

The aggregate fair value of the shares granted based on the weighted average fair value at the date of grant was $3.9 million.

Share Repurchase Program

On August 28, 2013 the Company's Board of Directors authorized a $25 million repurchase program for the Company's outstanding shares of common stock. The timing and amount of repurchases depend on various factors, including market conditions, the Company's capital position and internal cash generation, and other factors. The Company's repurchase program does not include specific price targets, may be executed through open-market, privately negotiated, and other transactions that may be available, and may include utilization of Rule 10b5-1 plans. The repurchase program does not obligate the Company to repurchase any dollar amount, or any number of shares, of common stock. The repurchase program does not have a termination date, and the Company may suspend or terminate the repurchase program at any time. During the third quarter of 2013 the Company adopted a Rule 10b5-1 plan that terminates on December 6, 2013.

Shares that are repurchased by the Company pursuant to the repurchase program will be retired and resume the status of authorized and unissued shares of common stock.

During the 13 week period ended November 2, 2013, we repurchased 279,247 shares of our common stock at a total cost of $8.4 million under the repurchase program. Our repurchases for the 13-week period ended November 2, 2013 were made at an average price of $29.97. At November 2, 2013 we had $16.6 million of remaining authorization under the repurchase program. From November 4, 2013 through December 5, 2013, we repurchased 12,651 shares of the Company's common stock for approximately $0.3 million, which brought total repurchases under the repurchase program to approximately $8.7 million.

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Summary of Segment Data

9 Months Ended

Nov. 02, 2013

Segment Reporting [Abstract]

SUMMARY OF SEGMENT DATA

SUMMARY OF SEGMENT DATA

The Hometown reportable segment consists of the aggregation of our Hometown Stores, Hardware Stores, and Home Appliance Showroom business formats described below in “Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations-Executive Overview.” The Outlet reportable segment also represents an operating format. The Outlet reportable segment reclassified $3.7 million and $10.0 million for the 13 weeks and 39 weeks ended November 2, 2013, respectively, of distribution center costs that were previously reflected in selling and administrative expense and now are reflected in cost of sales and occupancy. Amounts for the comparable 39 weeks ended October 27, 2012 have not been adjusted for the reclassification because it is impracticable to do so. These segments are evaluated by our Chief Operating Decision Maker to make decisions about resource allocation and to assess performance. Each of these segments derives its revenues from the sale of merchandise and related services to customers, primarily in the U.S. The net sales categories include appliances, lawn and garden, tools and paint, and other (which includes initial franchise revenue of $7.8 million and $1.5 million for the 13 weeks ended November 2, 2013 and the 13 weeks ended October 27, 2012, respectively). For the 39 weeks ended November 2, 2013, initial franchise revenue (which consists of franchise fees paid with respect to new or existing Company-operated stores we transfer to franchisees plus the net gain or loss on any related transfer of assets to the franchisees) was $14.8 million compared to $11.2 million in the 39 weeks ended October 27, 2012.

	13 Weeks Ended November 2, 2013
Thousands	Hometown			Outlet			Total
Net sales
Appliances	$	289,834		$	115,386		$	405,220
Lawn and garden	59,049			5,843			64,892
Tools and paint	44,516			3,458			47,974
Other	19,772			23,210			42,982
Total	413,171			147,897			561,068
Costs and expenses
Cost of sales and occupancy	318,362			107,234			425,596
Selling and administrative	94,818			26,880			121,698
Depreciation	760			1,417			2,177
Gain on the sale of assets				(1,567		)	(1,567		)
Total	413,940			133,964			547,904
Operating income	$	(769	)	$	13,933		$	13,164
Total assets	$	657,019		$	190,989		$	848,008
Capital expenditures	$	1,341		$	2,259		$	3,600

	13 Weeks Ended October 27, 2012
Thousands	Hometown		Outlet		Total
Net sales
Appliances	$	275,827	$	112,076	$	387,903
Lawn and garden	64,703		5,512		70,215
Tools and paint	45,501		3,770		49,271
Other	28,954		20,560		49,514
Total	414,985		141,918		556,903
Costs and expenses
Cost of sales and occupancy	316,820		101,670		418,490
Selling and administrative	94,149		27,905		122,054
Depreciation	797		1,485		2,282
Total	411,766		131,060		542,826
Operating income	$	3,219	$	10,858	$	14,077
Total assets	$	648,341	$	143,358	$	791,699
Capital expenditures	$	1,172	$	980	$	2,152

	39 Weeks Ended November 2, 2013
Thousands	Hometown		Outlet			Total
Net sales
Appliances	$	868,489	$	362,600		$	1,231,089
Lawn and garden	280,029		20,938			300,967
Tools and paint	138,996		10,063			149,059
Other	74,394		63,575			137,969
Total	1,361,908		457,176			1,819,084
Costs and expenses
Cost of sales and occupancy	1,040,750		340,216			1,380,966
Selling and administrative	299,175		80,640			379,815
Depreciation	2,372		4,197			6,569
Gain on the sale of assets			(1,567		)	(1,567		)
Total	1,342,297		423,486			1,765,783
Operating income	$	19,611	$	33,690		$	53,301
Total assets	$	657,019	$	190,989		$	848,008
Capital expenditures	$	2,711	$	3,284		$	5,995

	39 Weeks Ended October 27, 2012
Thousands	Hometown		Outlet		Total
Net sales
Appliances	$	845,502	$	337,447	$	1,182,949
Lawn and garden	306,420		15,669		322,089
Tools and paint	148,988		10,087		159,075
Other	102,308		56,024		158,332
Total	1,403,218		419,227		1,822,445
Costs and expenses
Cost of sales and occupancy	1,066,728		298,619		1,365,347
Selling and administrative	287,400		80,631		368,031
Depreciation	2,423		4,392		6,815
Total	1,356,551		383,642		1,740,193
Operating income	$	46,667	$	35,585	$	82,252
Total assets	$	648,341	$	143,358	$	791,699
Capital expenditures	$	1,785	$	3,739	$	5,524

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Other Current and Long-Term Liabilities

9 Months Ended

Nov. 02, 2013

Payables and Accruals [Abstract]

OTHER CURRENT AND LONG-TERM LIABILITIES

OTHER CURRENT AND LONG-TERM LIABILITIES

Other current and long-term liabilities consist of the following:

Thousands	November 2, 2013		October 27, 2012		February 2, 2013
Customer deposits	40,913		38,974		34,914
Sales and other taxes	14,072		7,617		13,607
Accrued expenses	13,267		12,733		24,703
Warranty accrual	—		10,919		3,734
Payroll and related items	11,193		8,423		9,005
Store closing accrual	—		22		—
Total other current and long-term liabilities	$	79,445	$	78,688	$	85,963

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Store Closing Charges and Severance Costs (Tables)

9 Months Ended

Nov. 02, 2013

Restructuring and Related Activities [Abstract]

Schedule of Closing Cost Accruals

Store closing activity recorded during the 39-week period ended October 27, 2012, and the remaining store closing accrual was as follows:

Thousands	Markdowns (1)			Severance Costs (2)			Lease Termination Costs (2)			Other Costs (2)			Total
Balance at January 28, 2012	$	8,147		$	150		$	56		$	1,995		$	10,348
Store closing costs	—			—			797			—			797
Payments/utilizations	(8,147		)	(150		)	(831		)	(1,995		)	(11,123		)
Balance at October 27, 2012	$	—		$	—		$	22		$	—		$	22

(1) This store closing activity is recorded within Cost of sales and occupancy on the Condensed Consolidated Statements of Income and remaining store closing cost accruals are reported within Merchandise inventories on the Condensed Consolidated Balance Sheets.

(2) This store closing activity is recorded within Selling and administrative on the Condensed Consolidated Statements of Income and remaining store closing cost accruals are reported within Other current liabilities on the Condensed Consolidated Balance Sheets.

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Income Per Common Share

9 Months Ended

Nov. 02, 2013

Earnings Per Share [Abstract]

INCOME PER COMMON SHARE

INCOME PER COMMON SHARE

Basic income per common share is calculated by dividing net income by the weighted average number of common shares outstanding for each period. Diluted income per common share also includes the dilutive effect of potential common shares.In connection with the Separation, stockholders purchased from Sears Holdings a total of 23.1 million shares of our common stock upon the exercise of subscription rights distributed to Sears Holdings' stockholders. This share amount has been utilized for the calculation of basic and diluted income per share for all periods prior to the Separation.

The following table sets forth the components used to calculate basic and diluted income per common share attributable to our stockholders.

	13 Weeks Ended		13 Weeks Ended		39 Weeks Ended		39 Weeks Ended
	November 2, 2013		October 27, 2012		November 2, 2013		October 27, 2012
Thousands except income per common share
Basic weighted average shares	22,999		23,100		23,066		23,100
Dilutive effect of restricted stock	—		—		4		—
Diluted weighted average shares	22,999		23,100		23,070		23,100
Net income	$	7,695	$	8,760	$	31,826	$	50,420
Income per common share:
Basic	$	0.33	$	0.38	$	1.38	$	2.18
Diluted	$	0.33	$	0.38	$	1.38	$	2.18

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Equity (Tables)

9 Months Ended

Nov. 02, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of Restricted Stock Award Activity

We do not currently have a broad-based program that provides for restricted-stock awards on an annual basis. Changes in restricted-stock awards for 2013 were as follows:

	39 Weeks Ended November 2, 2013
(Shares in Thousands)	Shares		Weighted-Average Fair Value on Date of Grant
Beginning of year balance	—		—
Granted	89		$	44.45
Vested	—		—
Forfeited	(1	)	44.45
Balance at 11/2/2013	88		$	44.45

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Summary of Segment Data (Tables)

9 Months Ended

Nov. 02, 2013

Segment Reporting [Abstract]

Schedule of Segment Data

	13 Weeks Ended November 2, 2013
Thousands	Hometown			Outlet			Total
Net sales
Appliances	$	289,834		$	115,386		$	405,220
Lawn and garden	59,049			5,843			64,892
Tools and paint	44,516			3,458			47,974
Other	19,772			23,210			42,982
Total	413,171			147,897			561,068
Costs and expenses
Cost of sales and occupancy	318,362			107,234			425,596
Selling and administrative	94,818			26,880			121,698
Depreciation	760			1,417			2,177
Gain on the sale of assets				(1,567		)	(1,567		)
Total	413,940			133,964			547,904
Operating income	$	(769	)	$	13,933		$	13,164
Total assets	$	657,019		$	190,989		$	848,008
Capital expenditures	$	1,341		$	2,259		$	3,600

	13 Weeks Ended October 27, 2012
Thousands	Hometown		Outlet		Total
Net sales
Appliances	$	275,827	$	112,076	$	387,903
Lawn and garden	64,703		5,512		70,215
Tools and paint	45,501		3,770		49,271
Other	28,954		20,560		49,514
Total	414,985		141,918		556,903
Costs and expenses
Cost of sales and occupancy	316,820		101,670		418,490
Selling and administrative	94,149		27,905		122,054
Depreciation	797		1,485		2,282
Total	411,766		131,060		542,826
Operating income	$	3,219	$	10,858	$	14,077
Total assets	$	648,341	$	143,358	$	791,699
Capital expenditures	$	1,172	$	980	$	2,152

	39 Weeks Ended November 2, 2013
Thousands	Hometown		Outlet			Total
Net sales
Appliances	$	868,489	$	362,600		$	1,231,089
Lawn and garden	280,029		20,938			300,967
Tools and paint	138,996		10,063			149,059
Other	74,394		63,575			137,969
Total	1,361,908		457,176			1,819,084
Costs and expenses
Cost of sales and occupancy	1,040,750		340,216			1,380,966
Selling and administrative	299,175		80,640			379,815
Depreciation	2,372		4,197			6,569
Gain on the sale of assets			(1,567		)	(1,567		)
Total	1,342,297		423,486			1,765,783
Operating income	$	19,611	$	33,690		$	53,301
Total assets	$	657,019	$	190,989		$	848,008
Capital expenditures	$	2,711	$	3,284		$	5,995

	39 Weeks Ended October 27, 2012
Thousands	Hometown		Outlet		Total
Net sales
Appliances	$	845,502	$	337,447	$	1,182,949
Lawn and garden	306,420		15,669		322,089
Tools and paint	148,988		10,087		159,075
Other	102,308		56,024		158,332
Total	1,403,218		419,227		1,822,445
Costs and expenses
Cost of sales and occupancy	1,066,728		298,619		1,365,347
Selling and administrative	287,400		80,631		368,031
Depreciation	2,423		4,392		6,815
Total	1,356,551		383,642		1,740,193
Operating income	$	46,667	$	35,585	$	82,252
Total assets	$	648,341	$	143,358	$	791,699
Capital expenditures	$	1,785	$	3,739	$	5,524

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Document and Entity Information Document	9 Months Ended
	Nov. 02, 2013	Dec. 09, 2013
Document and Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Nov. 02, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q3
Entity Registrant Name	Sears Hometown & Outlet Stores, Inc.
Entity Central Index Key	0001548309
Current Fiscal Year End Date	--02-01
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding		22,895,943

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Income Per Common Share (Tables)

9 Months Ended

Nov. 02, 2013

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted

The following table sets forth the components used to calculate basic and diluted income per common share attributable to our stockholders.

	13 Weeks Ended		13 Weeks Ended		39 Weeks Ended		39 Weeks Ended
	November 2, 2013		October 27, 2012		November 2, 2013		October 27, 2012
Thousands except income per common share
Basic weighted average shares	22,999		23,100		23,066		23,100
Dilutive effect of restricted stock	—		—		4		—
Diluted weighted average shares	22,999		23,100		23,070		23,100
Net income	$	7,695	$	8,760	$	31,826	$	50,420
Income per common share:
Basic	$	0.33	$	0.38	$	1.38	$	2.18
Diluted	$	0.33	$	0.38	$	1.38	$	2.18