10-K 1 shld201510k.htm 10-K 10-K


 
United States
Securities and Exchange Commission
Washington, D.C. 20549
 
 
 
 
 
FORM 10-K
 
 
 
 
 
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended January 30, 2016
or
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number 000-51217, 001-36693
 
 
 
 
 
SEARS HOLDINGS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
 
 
 
Delaware
 
20-1920798
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
3333 Beverly Road, Hoffman Estates, Illinois
 
60179
(Address of principal executive offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (847) 286-2500
 
 
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of Each Exchange on Which Registered
Common Shares, par value $0.01 per share
 
The NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act:
None
 
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨  No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨  No  x
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 response) and (2) has been subject to such filing requirements for the past 90 days. Yes  x  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 x No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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.
Large accelerated filer   x  Accelerated filer    ¨   Non-accelerated filer    ¨   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 x
On March 10, 2016, the registrant had 106,767,902 common shares outstanding. The aggregate market value (based on the closing price of the Registrant's common shares for stocks quoted on the NASDAQ Global Select Market) of the Registrant's common shares owned by non-affiliates as of the last business day of the Registrant's most recently completed second fiscal quarter, was approximately $1.2 billion.
Documents Incorporated By Reference
Part III of this Form 10-K incorporates by reference certain information from the Registrant’s definitive proxy statement relating to our Annual Meeting of Stockholders to be held on May 11, 2016 (the "2016 Proxy Statement"), which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Form 10-K relates.
 



PART I
Item  1.
Business
General
Sears Holdings Corporation ("Holdings") is the parent company of Kmart Holding Corporation ("Kmart") and Sears, Roebuck and Co. ("Sears"). Holdings (together with its subsidiaries, "we," "us," "our," or the "Company") was formed as a Delaware corporation in 2004 in connection with the merger of Kmart and Sears (the "Merger") on March 24, 2005. We are an integrated retailer with significant physical and intangible assets, as well as virtual capabilities enabled through technology. We operate a national network of stores with 1,672 full-line and specialty retail stores in the United States operating through Kmart and Sears. Further, we operate a number of websites under the sears.com and kmart.com banners which offer millions of products and provide the capability for our members and customers to engage in cross-channel transactions such as free store pickup; buy in store/ship to home; and buy online, return in store. We are also the home of Shop Your Way®, a free member-based social shopping platform that offers rewards, personalized services and a unique experience. Shop Your Way® connects all of the ways members shop - in store, at home, online and by phone. The Company is the leading home appliance retailer, as well as a leader in tools, lawn and garden, fitness equipment, automotive repair and maintenance, and is a significant player in the rapidly emerging Connected Solutions market. Key proprietary brands include Kenmore®, Craftsman® and DieHard®. We also maintain a broad apparel and home offering including such well-known labels as Jaclyn Smith, Joe Boxer, Route 66, Cannon, Ty Pennington Style and Levi's and also offer Lands' End® merchandise in some of our Full-line stores. Additionally, we offer the Adam Levine and Nicki Minaj collections in approximately 500 Kmart stores and on shopyourway.com/kmart.com. We are the nation's largest provider of home services, with nearly 12 million service and installation calls made annually.
The retail industry is changing rapidly. The progression of the Internet, mobile technology, social networking and social media is fundamentally reshaping the way we interact with our core customers and members. As a result, we are transitioning to a member-centric company. Our focus continues to be on our core customers, our members, and finding ways to provide them value and convenience through Integrated Retail and our Shop Your Way® membership platform. We have invested significantly in our online ecommerce platforms, our membership program and the technology needed to support these initiatives.
Business Segments
Through the third quarter of 2014, we operated three reportable segments: Kmart, Sears Domestic and Sears Canada. Since the de-consolidation of Sears Canada in October 2014, we have operated in two segments, Kmart and Sears Domestic. Financial information, including revenues, operating income (loss), total assets and capital expenditures for each of these business segments is contained in Note 17 of Notes to Consolidated Financial Statements. Information regarding the components of revenue for Holdings is included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as Note 17.
Kmart     
At January 30, 2016, the Company operated a total of 941 Kmart stores across 49 states, Guam, Puerto Rico and the U.S. Virgin Islands. This store count consists of 934 discount stores, averaging 95,000 square feet, and seven Super Centers, averaging 170,000 square feet. Most Kmart stores are one-floor, free-standing units that carry a wide array of products across many merchandise categories, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables and apparel, including products sold under such well-known labels as Jaclyn Smith, Joe Boxer, and certain proprietary Sears brand products (such as Kenmore, Craftsman and DieHard) and services. We also offer an assortment of major appliances, including Kenmore-branded products, in virtually all of our locations. There are 697 Kmart stores that also operate in-store pharmacies. The Super Centers generally operate 24 hours a day and combine a full-service grocery along with the merchandise selection of a discount store. There are also seven Sears Auto Centers operating in Kmart stores, offering a variety of professional automotive repair and maintenance services, as well as a full assortment of automotive accessories. Kmart offers a layaway program, which allows members and customers to cost-effectively finance their purchases

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both in-store and online. In addition, we have expanded the ways our members and customers can receive their purchases, allowing our members and customers to buy online and pick up in store. This service is now available in over 900 Kmart stores via either mygofer.com, kmart.com or shopyourway.com. Kmart also sells its products through its kmart.com website and provides members and customers enhanced cross-channel options such as buying through a mobile app or online and picking up merchandise in one of our Kmart or Sears Full-line stores.
Sears Domestic
At January 30, 2016, Sears Domestic operations consisted of the following:
Full-line Stores—705 stores, of which 697 are Full-line stores, located across all 50 states and Puerto Rico. These stores are primarily mall-based locations averaging 138,000 square feet. Full-line stores offer a wide array of products and service offerings across many merchandise categories, including appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, certain automotive services and products, such as tires and batteries, home fashion products, as well as apparel, footwear, jewelry and accessories for the whole family. Our product offerings include our proprietary Kenmore, Craftsman, DieHard, Bongo, Covington, Canyon River Blues, Everlast, Metaphor, Roebuck & Co., Outdoor Life and Structure brand merchandise, and other brand merchandise such as Roadhandler, Ty Pennington Style, Levi's and WallyHome. Lands' End, Inc. continues to operate 227 "store within a store" departments inside Sears Domestic Full-line locations. We also have 620 Sears Auto Centers operating in association with Full-line stores and seven Sears Auto Centers operating out of Sears Essentials/Grand stores. In addition, there are 24 free-standing Sears Auto Centers that operate independently of Full-line stores. Sears extends the availability of its product selection through the use of its sears.com and shopyourway.com website, which offers an assortment of home, apparel and accessory merchandise and provides members and customers the option of buying through a mobile app or online and picking up their merchandise in one of our Full-line or Kmart stores.
Specialty Stores—26 specialty stores (primarily consisting of the 24 free-standing Sears Auto Centers noted above) located in free-standing, off-mall locations or high-traffic neighborhood shopping centers.
Commercial Sales—We sell Sears merchandise, parts and services to commercial customers through our business-to-business Sears Commercial Sales and Appliance Builder/Distributor businesses.
Home Services—Product Repair Services, the nation's largest product repair service provider, is a key element in our active relationship with more than 37 million households. With approximately 6,700 service technicians making over 12 million service and installation calls annually, this business delivers a broad range of retail-related residential and commercial services across all 50 states, Puerto Rico, Guam and the Virgin Islands under either the Sears Parts & Repair Services or A&E Factory Service trade names. Commercial and residential customers can obtain parts and repair services for all major brands of products within the appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems categories. We also provide repair parts with supporting instructions for "do-it-yourself" members and customers through our searspartsdirect.com website. This business also offers protection agreements, product installation services and Kenmore and Carrier brand residential heating and cooling systems. Home Services also includes home improvement services (primarily siding, windows, cabinet refacing, kitchen remodeling, roofing, carpet and upholstery cleaning, air duct cleaning, and garage door installation and repair) provided through Sears Home Improvement Services and Sears Home & Business Franchises.
Sears Canada Rights Offering
On October 2, 2014, the Company announced that its board of directors had approved a rights offering of up to 40 million shares of Sears Canada Inc. ("Sears Canada"). The operating results for Sears Canada through October 16, 2014 are presented within the consolidated operations of Holdings and the Sears Canada segment in the accompanying Consolidated Financial Statements. The Company de-consolidated Sears Canada on October 16, 2014. See Note 2 of Notes to Consolidated Financial Statements for further information.

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Separation of Lands' End, Inc.
On April 4, 2014, we completed the separation of our Lands' End business through a spin-off transaction. The operating results for Lands' End through the date of the spin-off are presented within the consolidated continuing operations of Holdings and the Sears Domestic segment in the accompanying Consolidated Financial Statements. See Note 1 of Notes to Consolidated Financial Statements for further information.
Real Estate Transactions
In the normal course of business, we consider opportunities to purchase leased operating properties, as well as offers to sell owned, or assign leased, operating and non-operating properties. These transactions may, individually or in the aggregate, result in material proceeds or outlays of cash. In addition, we review leases that will expire in the short term in order to determine the appropriate action to take with respect to them.
On April 1, 2015, April 13, 2015 and April 30, 2015, Holdings and General Growth Properties, Inc. ("GGP"), Simon Property Group, Inc. ("Simon") and The Macerich Company ("Macerich"), respectively, announced that they entered into three distinct real estate joint ventures (collectively, the "JVs"). Holdings contributed 31 properties to the JVs where Holdings currently operates stores (the "JV properties") in exchange for a 50% interest in the JVs and $429 million in cash (the "JV transactions").
On July 7, 2015, Holdings completed its rights offering and sale-leaseback transaction (the "Seritage transaction") with Seritage Growth Properties ("Seritage"), a recently formed, independent publicly traded real estate investment trust ("REIT"). As part of the Seritage transaction, Holdings sold 235 properties to Seritage (the "REIT properties") along with Holdings' 50% interest in the JVs. Holdings received aggregate gross proceeds from the Seritage transaction of $2.7 billion.
Further information concerning our real estate transactions is contained in Note 11 of Notes to Consolidated Financial Statements.
 Trademarks and Trade Names
The KMART® and SEARS® trade names, service marks and trademarks, used by us both in the United States and internationally, are material to our retail and other related businesses.
We sell proprietary branded merchandise under a number of brand names that are important to our operations. Our KENMORE®, CRAFTSMAN® and DIEHARD® brands are among the most recognized proprietary brands in retailing. These marks are the subject of numerous United States and foreign trademark registrations. Other well recognized Company trademarks and service marks include CANYON RIVER BLUES®, COVINGTON®, SHOP YOUR WAY®, SMART SENSE®, STRUCTURE®, THOM MCAN® and TOUGHSKINS®, which also are registered or are the subject of pending registration applications in the United States. Generally, our rights in our trade names and marks continue so long as we use them.
Seasonality
The retail business is seasonal in nature, and we generate a high proportion of our revenues, operating income and operating cash flows during the fourth quarter of our year, which includes the holiday season. As a result, our overall profitability is heavily impacted by our fourth quarter operating results. Additionally, in preparation for the fourth quarter holiday season, we significantly increase our merchandise inventory levels, which are financed from operating cash flows, credit terms received from vendors and borrowings under our domestic credit agreement (described in the "Uses and Sources of Liquidity" section below). Fourth quarter reported revenues accounted for approximately 29% of total reported revenues in 2015, 28% of total reported revenues in 2014, excluding the impact of transactions related to Sears Canada and Lands' End, and 30% of total reported revenues in 2013. See Note 19 of Notes to Consolidated Financial Statements for further information on revenues earned by quarter in 2015 and 2014.
Competition
Our business is subject to highly competitive conditions. We compete with a wide variety of retailers, including other department stores, discounters, home improvement stores, consumer electronics dealers, auto service

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providers, specialty retailers, wholesale clubs, as well as many other retailers operating on a national, regional or local level in the U.S. and Canada. Online and catalog businesses, which handle similar lines of merchandise, also compete with us. Walmart, Target, Kohl's, J.C. Penney, Macy's, The Home Depot, Lowe's, Best Buy and Amazon are some of the national retailers and businesses with which we compete. The Home Depot and Lowe's are major competitors in relation to our home appliance business, which accounted for approximately 15% of our 2015, 15% of our 2014 and 13% of our 2013 reported revenues. Success in these competitive marketplaces is based on factors such as price, product assortment and quality, service and convenience, including availability of retail-related services such as access to credit, product delivery, repair and installation. Additionally, we are influenced by a number of factors including, but not limited to, the cost of goods, consumer debt availability and buying patterns, economic conditions, customer preferences, inflation, currency exchange fluctuations, weather patterns, and catastrophic events. Item 1A in this Annual Report on Form 10-K contains further information regarding risks to our business.
Employees
At January 30, 2016, subsidiaries of Holdings had approximately 178,000 employees in the United States and U.S. territories. These employee counts include part-time employees.
 Our Website; Availability of SEC Reports and Other Information
Our corporate website is located at searsholdings.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports are available, free of charge, through the "SEC Filings" portion of the Investor Information section of our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission ("SEC").
The Corporate Governance Guidelines of our Board of Directors, the charters of the Audit, Compensation, Finance and Nominating and Corporate Governance Committees of the Board of Directors, our Code of Conduct and the Board of Directors Code of Conduct are available in the Corporate Governance section of searsholdings.com. References to our website address do not constitute incorporation by reference of the information contained on such website, and the information contained on the website is not part of this document.

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Item 1A.
Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described below, which could adversely affect our business, results of operations and financial condition.
If we are unable to compete effectively in the highly competitive retail industry, our business and results of operations could be materially adversely affected.
The retail industry is highly competitive with few barriers to entry. We compete with a wide variety of retailers, including other department stores, discounters, home improvement stores, appliances and consumer electronics retailers, auto service providers, specialty retailers, wholesale clubs, online and catalog retailers and many other competitors operating on a national, regional or local level. Some of our competitors are actively engaged in new store expansion. Online and catalog businesses, which handle similar lines of merchandise, and some of which are not required to collect sales taxes on purchases made by their customers, also compete with us. In this competitive marketplace, success is based on factors such as price, product assortment and quality, service and convenience.
Our success depends on our ability to differentiate ourselves from our competitors with respect to shopping convenience, a quality assortment of available merchandise and superior customer service and experience. We must also successfully respond to our members' and customers' changing tastes. The performance of our competitors, as well as changes in their pricing policies, marketing activities, new store openings and other business strategies, could have a material adverse effect on our business, financial condition and results of operations.
If we fail to offer merchandise and services that our members and customers want, our sales may be limited, which would reduce our revenues and profits.
In order for our business to be successful, we must identify, obtain supplies of, and offer to our members and customers, attractive, innovative and high-quality merchandise. Our products and services must satisfy the desires of our members and customers, whose preferences may change in the future. If we misjudge either the demand for products and services we sell or our members' and customers' purchasing habits and tastes, our relationship with our members may be negatively impacted, and we may be faced with excess inventories of some products, which may impact our sales or require us to sell the merchandise we have obtained at lower prices, and missed opportunities for products and services we chose not to offer. This would have a negative effect on our business and results of operations.
If our integrated retail strategy to transform into a member-centric retailer is not successful, our business and results of operations could be adversely affected.
We are seeking to transform into a member-centric retailer through our integrated retail strategy, which is based on a number of initiatives, including our Shop Your Way® program, that depend, among other things, on our ability to respond quickly to ongoing technology developments and implement new ways to understand and rely on the data to interact with our members and customers and our ability to provide attractive, convenient and consistent online and mobile experience for our members. Failure to execute these initiatives or provide our members with positive experiences may result in a loss of active members, failure to attract new members and lower than anticipated sales.
If we do not successfully manage our inventory levels, our operating results will be adversely affected.
We must maintain sufficient inventory levels to operate our business successfully. However, we also must guard against accumulating excess inventory as we seek to minimize out-of-stock levels across all product categories and to maintain in-stock levels. We obtain a significant portion of our inventory from vendors located outside the United States. Some of these vendors require lengthy advance notice of our requirements in order to be able to supply products in the quantities we request. This usually requires us to order merchandise, and enter into purchase order contracts for the purchase and manufacture of such merchandise, well in advance of the time these products will be offered for sale. As a result, we may experience difficulty in responding quickly to a changing retail environment, which makes us vulnerable to changes in price and demand. If we do not accurately anticipate the

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future demand for a particular product or the time it will take to obtain new inventory, our inventory levels will not be appropriate and our results of operations may be negatively impacted.
Our business has been and will continue to be affected by worldwide economic conditions; an economic downturn, a renewed decline in consumer-spending levels and other conditions, including inflation and changing prices of energy, could lead to reduced revenues and gross margins, and negatively impact our liquidity.
Many economic and other factors are outside of our control, including consumer and commercial credit availability, consumer confidence and spending levels, as well as the impact of payroll tax and medical cost increases on U.S. consumers, inflation, employment levels, housing sales and remodels, consumer debt levels, fuel costs and other challenges currently affecting the global economy, the full impact of which on our business, results of operations and financial condition cannot be predicted with certainty. These economic conditions adversely affect the disposable income levels of, and the credit available to, our members and customers, which could lead to reduced demand for our merchandise. Although fuel and energy costs have decreased in recent months, future increases may have a significant impact on our operations. We require significant quantities of fuel for the vehicles used by technicians in our home services business and we are exposed to the risk associated with variations in the market price for petroleum products. We could experience a disruption in energy supplies, including our supply of gasoline, as a result of factors that are beyond our control, which could have an adverse effect on our business. Certain of our vendors also could experience increases in the cost of various raw materials, such as cotton, oil-related materials, steel and rubber, which could result in increases in the prices that we pay for merchandise, particularly apparel, appliances and tires. Domestic and international political events also affect consumer confidence. The threat, outbreak or escalation of terrorism, military conflicts or other hostilities could lead to a decrease in consumer spending. Any of these events and conditions could inhibit sales or cause us to increase inventory markdowns and promotional expenses, thereby reducing our gross margins.
The lack of willingness of our vendors to provide acceptable payment terms could negatively impact our liquidity and/or reduce the availability of products or services we seek to procure.
We depend on our vendors to provide us with financing on our purchases of inventory and services. Our vendors could seek to limit the availability of vendor credit to us or other terms under which they sell to us, or both, which could negatively impact our liquidity. In addition, the inability of vendors to access liquidity, or the insolvency of vendors, could lead to their failure to deliver inventory or other services. Certain of our vendors finance their operations and/or reduce the risk associated with collecting accounts receivable from us by selling or "factoring" the receivables or by purchasing credit insurance or other forms of protection from loss associated with our credit risks. The ability of our vendors to do so is subject to the perceived credit quality of the Company. Such vendors could be limited in their ability to factor receivables or obtain credit protection in the future because of our perceived financial position and creditworthiness, which could reduce the availability of products or services we seek to procure, increase the cost to us of those products and services, or both.
We have ongoing discussions concerning our liquidity and financial position with the vendor community and third parties that offer various credit protection services to our vendors. The topics discussed have included such areas as pricing, payment terms and ongoing business arrangements. As of the date of this report, we have not experienced any significant disruption in our access to merchandise or our operations.
Certain factors, including changes in market conditions and our credit ratings, may limit our access to capital markets and other financing sources and materially increase our borrowing costs.
In addition to credit terms from vendors, our liquidity needs are funded by our operating cash flows and, to the extent necessary, borrowings under our credit agreements and commercial paper program, asset sales and access to capital markets. The availability of financing depends on numerous factors, including economic and market conditions, our operating performance, our credit ratings, and lenders' assessments of our prospects and the prospects of the retail industry in general. Changes in these factors may affect our cost of financing, liquidity and our ability to access financing sources, including our commercial paper program and possible second lien indebtedness that is permitted under the domestic revolving credit facility, with respect to each of which we have no

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lender commitments. Rating agencies revise their ratings for the companies that they follow from time to time and our ratings may be revised or withdrawn in their entirety at any time.
The Company's domestic revolving credit facility currently provides for up to $3.275 billion of lender commitments, with the revolving commitments decreasing to $1.971 billion on April 8, 2016. Our ability to borrow funds under this facility is limited by a borrowing base determined by the value, from time to time, of eligible inventory, accounts receivable and certain other assets. In addition, our ability to incur possible second lien indebtedness that is otherwise permitted under the domestic revolving credit facility is limited by a borrowing base requirement under the indenture that governs our senior secured notes due 2018. If, through asset sales or other means, the value of these eligible assets is not sufficient to support borrowings of up to the full amount of the commitments under this facility, we will not have full access to the facility, but rather could have access to a lesser amount determined by the borrowing base. Such a decline in the value of eligible assets also could result in our inability to borrow up to the full amount of second lien indebtedness permitted by the domestic credit facility, but rather we could be limited to borrowing a lesser amount determined by the borrowing base as calculated pursuant to the terms of the indenture. The domestic revolving credit facility imposes various other requirements, which take effect if availability falls below designated thresholds, including a cash dominion requirement. The domestic credit facility also effectively limits full access to the facility if our fixed charge ratio at the last day of any quarter is less than 1.0 to 1.0. As of January 30, 2016, our fixed charge ratio was less than 1.0 to 1.0. If availability under the domestic revolving credit facility were to fall below 10%, the Company would be required to test the fixed charge coverage ratio, and would not comply with the facility, and the lenders under the facility could demand immediate payment in full of all amounts outstanding and terminate their obligations under the facility. In addition, the domestic credit facility provides that in the event we make certain prepayments of indebtedness, for a period of one year thereafter we must maintain availability under the facility of at least 12.5%. As a result of the Company's tender offer for its Senior Secured Notes due 2018 consummated August 28, 2015, we are required to maintain 12.5% availability under the domestic credit facility until August 28, 2016.
The lenders under our credit facilities may not be able to meet their commitments if they experience shortages of capital and liquidity and there can be no assurance that our ability to otherwise access the credit markets will not be adversely affected by changes in the financial markets and the global economy.
We cannot predict whether our plans to enhance our financial flexibility and liquidity to fund our transformation will be successful.
We are continuing to pursue a transformation strategy and to explore potential initiatives to enhance our financial flexibility and liquidity. We have incurred losses and experienced negative operating cash flows for the past several years, and accordingly we have taken a number of actions to enhance our financial flexibility and fund our continued transformation, including the amendment and extension or our revolving credit facility, the rights offering and sale-leaseback transaction with Seritage Growth Properties, the senior secured term loan facility due 2018, the separation of our Lands' End subsidiary, the Sears Canada rights offering, the rights offering for senior unsecured notes with warrants, and various real estate transactions. In addition, on March 3, 2016, we announced our intention to obtain a new senior secured term loan facility of up to $750 million under the accordion feature in our credit facility (the "Incremental Term Loan"), which is currently being marketed to potential lenders and is uncommitted. We also expect to pursue other near-term actions to bolster liquidity. If we continue to incur losses, additional actions may be required to further enhance our financial flexibility and liquidity. The success of our initiatives is subject to risks and uncertainties with respect to market conditions and other factors that may cause our actual results, performance or achievements to differ materially from our plans. Our proposed Incremental Term Loan is currently uncommitted, and there can be no assurance that the Incremental Term Loan or our other proposed transactions to enhance financial flexibility, monetize assets, or other actions to generate liquidity will become available on terms that are acceptable to us, on intended timetables or at all. In addition, there can be no assurance that the evaluation and/or completion of any potential transactions will not have a negative impact on our other businesses.
We cannot predict the outcome of the actions to generate liquidity to fund our transformation, whether such actions would generate the expected liquidity to fund the transformation as currently planned or whether the costs of such actions will be available on reasonable terms or at all. If we continue to experience operating losses, and we are not able to generate enough funds from the above actions (or some combination of other actions), the availability

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under our domestic revolving credit facility might be fully utilized, in particular during our peak borrowing period, and we would need to secure additional sources of funds.
Our business results and ability to fund our transformation depend on our ability to achieve cost savings initiatives.
We have announced plans to take actions that will reduce our costs by between $550 million and $650 million, depending on the overall volume of sales, in 2016. Since 2012, we have reduced annual expenses by approximately $1.4 billion in the aggregate. If we are unable to deliver the expected cost reductions, while continuing to invest in business growth, our financial results could be adversely impacted. Our ability to successfully manage and execute these initiatives and realize expected savings and benefits in the amounts and at the times anticipated is important to our business success, and any failure to do so, which could result from our inability to successfully execute plans, changes in global or regional economic conditions, competition, changes in the industries in which we compete, unanticipated costs or charges and other factors described herein, could adversely affect our businesses, financial condition and results of operations.
Our business results may be negatively impacted as a result of the recapture rights included in the Master Leases in connection with the Seritage transaction and JV transactions.
In connection with the Seritage transaction and JV transactions, Holdings has entered into agreements with Seritage and the JVs pursuant to which Holdings leases 255 of the properties (the "Master Leases"). The Master Leases include recapture provisions that allow Seritage or the JVs, as applicable, to reclaim approximately 50% of the space within the stores at the REIT properties and JV properties (subject to certain exceptions), in addition to all of the automotive care centers which are free-standing or attached as "appendages", and all outparcels or outlots, as well as certain portions of parking areas and common areas. While we believe these provisions are generally beneficial for Holdings as they facilitate the transformation of our physical stores, potentially enable us to rationalize our footprint by reducing the space we occupy in a given location, and provide us with substantial flexibility in how we manage our store network moving forward, if we are unable to successfully manage and execute our plans to operate our stores in the smaller footprint, our business, financial condition and results of operations could be adversely impacted. Additionally, the recapture rights are within the control of Seritage and the JVs and we cannot predict the timing on which the recapture rights may be exercised, if at all, or whether the timing of any such exercise of these rights will align well with the timing of our transformation, which could create disruptions in our operations.
Potential liabilities in connection with the separation of Lands' End may arise under fraudulent conveyance and transfer laws and legal capital requirements.
With respect to the separation of our Lands' End, Inc. subsidiary through a pro rata distribution to our stockholders (the "LE Spin-off"), if either Holdings or Lands' End subsequently fails to pay its creditors or enters insolvency proceedings, the transaction may be challenged under U.S. federal, U.S. state and foreign fraudulent conveyance and transfer laws, as well as legal capital requirements governing distributions and similar transactions. If a court were to determine under these laws that, (a) at the time of the LE Spin-off, the entity in question: (1) was insolvent; (2) was rendered insolvent by reason of the LE Spin-off; (3) had remaining assets constituting unreasonably small capital; (4) intended to incur, or believed it would incur, debts beyond its ability to pay these debts as they matured; or (b) the transaction in question failed to satisfy applicable legal capital requirements, the court could determine that the LE Spin-off was voidable, in whole or in part. Subject to various defenses, the court could then require Holdings or Lands' End, or other recipients of value in connection with the LE Spin-off (potentially including Lands' End stockholders as recipients of shares of Lands' End common stock in connection with the spin-off), as the case may be, to turn over value to other entities involved in the LE Spin-off and contemplated transactions for the benefit of unpaid creditors. The measure of insolvency and applicable legal capital requirements will vary depending upon the jurisdiction whose law is being applied.

9


We rely extensively on computer systems to implement our integrated retail strategy, process transactions, summarize results and otherwise manage our business. Disruptions in these systems could harm our ability to run our business.
Given the significance of our online and mobile capabilities, our collection and use of data to create personalized experiences, and the number of individual transactions we have each year, including in our stores, it is critical that we maintain uninterrupted operation of our computer and communications hardware and software systems, some of which are based on end-of-life or legacy technology, operate with minimal or no vendor support and are otherwise difficult to maintain. Our systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, catastrophic events such as fires, tornadoes and hurricanes, and usage errors by our employees. Operating legacy systems subjects us to inherent costs and risks associated with maintaining, upgrading and replacing these systems and retaining sufficiently skilled personnel to maintain and operate the systems, demands on management time, and other risks and costs. Any material interruption in our computer operations may have a material adverse effect on our business or results of operations, including on our Shop Your Way® program and participation in or engagement with that program. We are pursuing initiatives to transform our information technology processes and systems. These initiatives are highly complex and include replacing legacy systems, upgrading existing systems, and acquiring new systems and hardware with updated functionality. The risk of disruption is increased in periods when such complex and significant systems changes are undertaken.
If we do not maintain the security of our member and customer, associate or company information, we could damage our reputation, incur substantial additional costs and become subject to litigation.
Cyber-security risks such as malicious software and attempts to gain unauthorized access to data are rapidly evolving. Techniques or software used to gain unauthorized access, and/or disable, degrade or harm our systems may be difficult to detect or scope for prolonged periods of time, and we may be unable to anticipate these techniques or put in place protective or preventive measures. These attempts to gain unauthorized access could lead to disruptions in our systems, unauthorized release of confidential or otherwise protected information or corruption of data. If individuals are successful in infiltrating, breaking into, disrupting, damaging or otherwise stealing from the computer systems of the Company or its third-party providers we may have to make a significant investment to fix or replace them, we may suffer interruptions in our operations in the interim, we may face costly litigation, government investigations, government enforcement actions, fines and/or lawsuits, the ability for our members to earn or redeem points in our Shop Your Way® program may be impacted or halted, and our reputation with our members and customers may be significantly harmed. There is no guarantee that the procedures that we have implemented to protect against unauthorized access to secured data are adequate to safeguard against all data security breaches. A data security breach or any failure by us to comply with applicable privacy and information security laws and regulations could result in a loss of customer or member confidence and negatively impact our business, including our Shop Your Way® program, and our results of operations. As publicly announced on October 10, 2014, Kmart’s information technology team detected on October 9, 2014 that the Kmart store payment data system had been criminally breached beginning in early September 2014, that the payment data systems at Kmart stores were purposely infected with a new form of malware, and that debit and credit card numbers were potentially compromised. The Company is defending a class-action lawsuit in the Northern District of Illinois alleging violations relating to, and harm resulting from this incident.
We are subject to payment-related risks that could increase our operating costs, expose us to fraud or theft, subject us to potential liability and potentially disrupt our business operations.
As a retailer who accepts payments using a variety of methods, including credit and debit cards, PayPal, and gift cards, the Company is subject to rules, regulations, contractual obligations and compliance requirements, including payment network rules and operating guidelines, data security standards and certification requirements, and rules governing electronic funds transfers. The regulatory environment related to information security and privacy is increasingly rigorous, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs or accelerate these costs. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which could increase over time and raise our operating costs. We rely on third parties to provide payment processing services, including the processing

10


of credit cards, debit cards, and other forms of electronic payment. If these companies become unable to provide these services to us, or if their systems are compromised, it could disrupt our business.
The payment methods that we offer also subject us to potential fraud and theft by persons who seek to obtain unauthorized access to or exploit any weaknesses that may exist in the payment systems. The payment card industry established October 1, 2015 as the date on which it will shift liability for certain transactions to retailers who are not able to accept EMV card transactions. The Company did not implement the EMV technology and receive certification prior to October 1, 2015, and accordingly may be liable for costs incurred by payment card issuing banks and other third parties as a result of fraudulent use of credit card information improperly obtained from information captured by us until such time as the technology has been implemented and certified. The Company presently expects to complete the implementation and receive certification in its second quarter 2016.
Due to the seasonality of our business, our annual operating results would be adversely affected if our business performs poorly in the fourth quarter.
Our business is seasonal, with a high proportion of revenues, operating income and operating cash flows being generated during the fourth quarter of our year, which includes the holiday season. As a result, our fourth quarter operating results significantly impact our annual operating results. Our fourth quarter operating results may fluctuate significantly, based on many factors, including holiday spending patterns and weather conditions.
Our sales may fluctuate for a variety of reasons, which could adversely affect our results of operations.
Our business is sensitive to customers' spending patterns, which in turn are subject to prevailing economic conditions. Our sales and results of operations have fluctuated in the past, and we expect them to continue to fluctuate in the future. A variety of other factors affect our sales and financial performance, including:
actions by our competitors, including opening of new stores in our existing markets or changes to the way these competitors go to market online,
seasonal fluctuations due to weather conditions,
changes in our merchandise strategy and mix,
changes in population and other demographics, and
timing of our promotional events.
Accordingly, our results for any one quarter are not necessarily indicative of the results to be expected for any other quarter, and comparable store sales for any particular future period may increase or decrease. For more information on our results of operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Annual Report on Form 10-K.
We rely on foreign sources for significant amounts of our merchandise, and our business may therefore be negatively affected by the risks associated with international trade.
We depend on a large number of products produced in foreign markets. We face risks, including reputational risks, associated with the delivery of merchandise originating outside the United States, including:
potential economic and political instability in countries where our suppliers are located,
increases in shipping costs,
manufacturing and transportation delays and interruptions,
supplier compliance with applicable laws, including labor and environmental laws, and with our global compliance program for suppliers and factories,
adverse fluctuations in currency exchange rates, and
changes in U.S. and foreign laws affecting the importation and taxation of goods, including duties, tariffs and quotas, or changes in the enforcement of those laws.

11


We rely on third parties to provide us with services in connection with the administration of certain aspects of our business.
We have entered into agreements with third-party service providers (both domestic and overseas) to provide processing and administrative functions over a broad range of areas, and we may continue to do so in the future. These areas include finance and accounting, information technology, including IT development, call center, human resources and procurement functions. Services provided by third parties could be interrupted as a result of many factors, such as acts of God or contract disputes, and any failure by third parties to provide us with these services on a timely basis or within our service level expectations and performance standards could result in a disruption of our business. In addition, to the extent we are unable to maintain our outsourcing arrangements, we could incur substantial costs, including costs associated with hiring new employees or finding an alternative outsourced solution. These outsourcing arrangements also carry the risk that the Company will fail to adequately retain the significant internal historical knowledge of our business and systems that is transferred to the service providers as the employment of the Company's personnel who possess such knowledge ends.
We could incur charges due to impairment of goodwill, intangible and long-lived assets.
At January 30, 2016, we had goodwill and intangible asset balances of $2.2 billion, which are subject to periodic testing for impairment. Our long-lived assets, primarily stores, also are subject to periodic testing for impairment. A significant amount of judgment is involved in the periodic testing. Failure to achieve sufficient levels of cash flow within our reporting unit, or sales of our branded products or cash flow generated from operations at individual store locations could result in impairment charges for goodwill and intangible assets or fixed asset impairment for long-lived assets, which could have a material adverse effect on our reported results of operations. Impairment charges, if any, resulting from the periodic testing are non-cash. A significant and sustained decline in our stock price could result in goodwill and intangible asset impairment charges. During times of financial market volatility, significant judgment is used to determine the underlying cause of the decline and whether stock price declines are short-term in nature or indicative of an event or change in circumstances. See Notes 12 and 13 of Notes to Consolidated Financial Statements for further information.
Our failure to attract or retain key personnel may disrupt our business and adversely affect our financial results.
We depend on the contributions of key personnel, including Edward S. Lampert, our Chairman and Chief Executive Officer, and other key employees, for our future success. Although certain executives have employment agreements with us, changes in our senior management and any future departures of key employees may disrupt our business and materially adversely affect our results of operations.
Affiliates of our Chairman and Chief Executive Officer, whose interests may be different than your interests, exert substantial influence over our Company.
Affiliates of Edward S. Lampert, our Chairman and Chief Executive Officer, collectively own approximately 50% of the outstanding shares of our common stock. These affiliates are controlled, directly or indirectly, by Mr. Lampert. Accordingly, these affiliates, and thus Mr. Lampert, have substantial influence over many, if not all, actions to be taken or approved by our stockholders, including the election of directors and any transactions involving a change of control.
The interests of these affiliates, which have investments in other companies, including Seritage and our former subsidiaries, Sears Hometown and Outlet Stores, Inc., Lands' End, Inc. and Sears Canada, may from time to time diverge from the interests of our other stockholders, particularly with regard to new investment opportunities. This substantial influence may also have the effect of discouraging offers to acquire our Company because the consummation of any such acquisition would likely require the consent of these affiliates.
We may be unable to protect or preserve the image of our brands and our intellectual property rights, which could have a negative impact on our business.
We regard our copyrights, service marks, trademarks, trade dress, trade secrets, patents and similar intellectual property as critical to our success, particularly those that relate to our private branded merchandise. As such, we rely

12


on trademark and copyright law, patent law, trade secret protection and confidentiality agreements with our associates, consultants, vendors, and others to protect our proprietary rights. Nevertheless, the steps we take to protect our proprietary rights may be inadequate. If we are unable to protect or preserve the value of our trademarks, copyrights, trade secrets, patents or other proprietary rights for any reason, or if we fail to maintain the image of our brands due to merchandise and service quality issues, actual or perceived, adverse publicity, governmental investigations or litigation, or other reasons, our brands and reputation could be damaged and we could lose members and customers.
We may be subject to product liability claims if people or properties are harmed by the products we sell or the services we offer.
Some of the products we sell may expose us to product liability claims relating to personal injury, death, or property damage caused by such products, and may require us to take actions such as product recalls. We also provide various services, which could also give rise to such claims. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all.
We may be subject to periodic litigation and other regulatory proceedings. These proceedings may be affected by changes in laws and government regulations or changes in the enforcement thereof.
From time to time, we may be involved in lawsuits and regulatory actions relating to our business, certain of which may be in jurisdictions with reputations for aggressive application of laws and procedures against corporate defendants. Some of these actions have the potential for significant statutory penalties, and compensatory, treble or punitive damages. Our pharmacy, home services and grocery businesses, in particular, are subject to numerous federal, state and local regulations, and a significant change in, or noncompliance with, these regulations could have a material adverse effect on our compliance costs and results of operations. We are impacted by trends in litigation, including class-action allegations brought under various consumer protection and employment laws, including wage and hour laws, patent infringement claims and investigations and actions that are based on allegations of untimely compliance or noncompliance with applicable regulations or statutes. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have a material adverse impact on our business, financial condition and results of operations. In addition, regardless of the outcome of any litigation or regulatory proceedings, these proceedings could result in substantial costs and may require that we devote substantial resources to defend our Company. Further, changes in governmental regulations both in the United States and in the other countries where we operate could have adverse effects on our business and subject us to additional regulatory actions. For a description of current legal proceedings, see Item 3, "Legal Proceedings," as well as Note 18 of Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Our pension and postretirement benefit plan obligations are currently underfunded, and we may have to make significant cash payments to some or all of these plans, which would reduce the cash available for our businesses.
We have unfunded obligations under our domestic pension and postretirement benefit plans. The funded status of our pension plans is dependent upon many factors, including returns on invested assets, the level of certain market interest rates and the discount rate used to determine pension obligations. Unfavorable returns on the plan assets or unfavorable changes in applicable laws or regulations could materially change the timing and amount of required plan funding, which would reduce the cash available for our businesses. In addition, a decrease in the discount rate used to determine pension obligations could result in an increase in the valuation of pension obligations, which could affect the reported funding status of our pension plans and future contributions, as well as the periodic pension cost in subsequent years. Moreover, unfavorable regulatory action could materially change the timing and amount of required plan funding and negatively impact our business operations and impair our business strategy.
On September 4, 2015, we announced the entry into a term sheet with the Pension Benefit Guaranty Corporation ("PBGC"), concerning a five-year pension plan protection and forbearance agreement with the PBGC.  The Company is in discussions with the PBGC to enter into a definitive agreement with the PBGC on terms

13


consistent with the previously disclosed term sheet, pursuant to which the Company would continue to protect, or "ring-fence," pursuant to customary covenants, the assets of certain special purpose subsidiaries (the "Relevant Subsidiaries") holding real estate and/or intellectual property assets. Also under the proposed agreement, the Relevant Subsidiaries would grant PBGC a springing lien on the ring-fenced assets, which lien would be triggered only by (a) failure to make required contributions to the Company's pension plan (the "Plan"), (b) prohibited transfers of ownership interests in the Relevant Subsidiaries, (c) termination events with respect to the Plan, and (d) bankruptcy events with respect to the Company or certain of its material subsidiaries. 
The Company will continue to make required contributions to the Plan, the scheduled amounts of which are not affected by the arrangement. Under the proposed agreement, the PBGC would agree to forbear from initiating an involuntary termination of the Plan, except upon the occurrence of specified conditions. If the PBGC were to initiate an involuntary termination of the Plan, our financial condition could be materially and adversely affected.
Item 1B.
Unresolved Staff Comments
Not applicable.

14


Item 2.
Properties
The following table summarizes the locations of our Kmart and Sears Domestic stores at January 30, 2016:
 
 
Kmart
 
Sears Domestic
State / Territory
 
Discount Stores & Super Centers
 
Full-line Mall Stores & Essentials/Grand Stores
 
Specialty Stores
Alabama
 
17

 
7

 

Alaska
 

 
3

 

Arizona
 
13

 
13

 

Arkansas
 
5

 
7

 

California
 
83

 
76

 
4

Colorado
 
12

 
10

 

Connecticut
 
6

 
8

 

Delaware
 
4

 
3

 

Florida
 
47

 
51

 
1

Georgia
 
23

 
19

 

Hawaii
 
7

 
4

 

Idaho
 
7

 
4

 

Illinois
 
35

 
25

 
5

Indiana
 
23

 
14

 
1

Iowa
 
16

 
6

 
1

Kansas
 
8

 
5

 
1

Kentucky
 
24

 
6

 

Louisiana
 
10

 
12

 
1

Maine
 
6

 
4

 

Maryland
 
16

 
18

 

Massachusetts
 
17

 
20

 

Michigan
 
51

 
21

 

Minnesota
 
11

 
11

 

Mississippi
 
5

 
4

 

Missouri
 
17

 
11

 

Montana
 
8

 
1

 

Nebraska
 
6

 
4

 

Nevada
 
10

 
5

 
1

New Hampshire
 
4

 
6

 

New Jersey
 
27

 
20

 
1

New Mexico
 
11

 
7

 

New York
 
46

 
39

 
5

North Carolina
 
29

 
18

 

North Dakota
 
5

 
4

 

Ohio
 
47

 
35

 

Oklahoma
 
7

 
7

 

Oregon
 
7

 
6

 
1

Pennsylvania
 
81

 
36

 

Rhode Island
 
1

 
2

 

South Carolina
 
17

 
9

 

South Dakota
 
8

 
2

 

Tennessee
 
28

 
15

 

Texas
 
19

 
57

 
1

Utah
 
12

 
5

 
1

Vermont
 
2

 
1

 

Virginia
 
27

 
19

 

Washington
 
11

 
17

 
1

West Virginia
 
15

 
6

 

Wisconsin
 
15

 
11

 

Wyoming
 
9

 
2

 

Puerto Rico
 
21

 
9

 
1

U.S. Virgin Islands
 
4

 

 

Guam
 
1

 

 

Totals
 
941

 
705

 
26


15


  
 
 
Kmart
 
Sears Domestic
 
 
Discount Stores & Super Centers
 
Full-line Mall Stores & Essentials/Grand Stores
 
Specialty Stores
Owned
 
97

 
302

 
20

Leased
 
844

 
403

 
6

January 30, 2016
 
941

 
705

 
26

In addition, at January 30, 2016, we had 28 domestic supply chain distribution centers, of which nine were owned and 19 were leased with remaining lease terms ranging up to six years. Of the total, six primarily support Kmart stores, 18 primarily support Sears stores and four support both Sears and Kmart stores. We also had 416 domestic store warehouses, customer call centers and service facilities (including 17 facilities related to our appliance builder/distributor business), most of which are leased for terms ranging from one to six years or are part of other facilities included in the above table. Many of our facilities are also used to support our online channels.
Our principal executive offices are located on a 200-acre site owned by us at the Prairie Stone office park in Hoffman Estates, Illinois. The complex consists of six interconnected office buildings totaling approximately two million gross square feet of office space. We also own an 86,000 square foot office building in Troy, Michigan. We operate numerous buying offices throughout the world that procure product internationally, as well as an information technology center in Pune, India.
A description of our leasing arrangements and commitments appears in Note 14 of Notes to Consolidated Financial Statements.
Item 3.
Legal Proceedings
See Part II, Item 8, "Financial Statements—Notes to Consolidated Financial Statements," Note 18—"Legal Proceedings," for additional information regarding legal proceedings, which information is incorporated herein by this reference.
Item 4.
Mine Safety Disclosures
Not applicable.

16


EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and information sets forth the names of our executive officers, their current positions and offices with the Company, the date they first became executive officers of the Company, their current ages, and their principal employment during the past five years.
Name
 
Position
 
Date First Became an Executive Officer
 
Age
Edward S. Lampert
 
Chairman of the Board and Chief Executive Officer
 
2013
 
53
Jeffrey A. Balagna
 
Executive Vice President
 
2013
 
55
Robert A. Schriesheim
 
Executive Vice President and Chief Financial Officer
 
2011
 
55
Girish Lakshman

 
President, Fulfillment - Supply Chain and Sourcing

 
2015
 
51
Kristin M. Coleman
 
Senior Vice President, General Counsel and Corporate Secretary
 
2014
 
47
Joelle Maher
 
President and Chief Member Officer, Sears

 
2015
 
49
Leena Munjal
 
Senior Vice President, Customer Experience and Integrated Retail
 
2013
 
39
Alasdair James
 
President and Chief Member Officer, Kmart
 
2014
 
45
Robert A. Riecker
 
Vice President, Controller and Chief Accounting Officer
 
2012
 
51
__________________
Mr. Lampert has served as Chairman of the Company's Board of Directors since 2004 and as our Chief Executive Officer since February 2013. He also is the Chairman and Chief Executive Officer of ESL Investments, Inc., which he founded in April 1988.
Mr. Balagna joined the Company as Executive Vice President and Chief Information Officer in May 2013 and currently serves as Executive Vice President of the Company. Prior to joining the Company, he served as the Senior Vice President and Chief Information Officer of Eli Lilly and Company, a pharmaceutical company, since February 2012. He previously served in senior positions for Carlson Companies, including President and Chief Executive Officer for Carlson Marketing Worldwide, a marketing, travel and hospitality company, which was acquired by Groupe Aeroplan, Inc. in 2009, from 2008 to September 2011, Chief Executive Officer of Carlson’s T.G.I. Friday’s and Pickup Stix casual restaurant businesses in 2008, and Executive Vice President, Chief Information Officer and Customer Technology Officer for Carlson Companies from 2005 to 2008. He previously served in senior positions for Medtronic, Inc., General Electric Company, and Ford Motor Company.
Mr. Schriesheim joined the Company as Executive Vice President in August 2011 and became Executive Vice President and Chief Financial Officer that same month. Prior to joining the Company, he served as the Chief Financial Officer of Hewitt Associates, Inc., a global human resources consulting and outsourcing company, from January 2010 to October 2010. From October 2006 to January 2010, he served as Executive Vice President and Chief Financial Officer of Lawson Software, Inc., an ERP software provider. From August 2002 to October 2006, he was affiliated with ARCH Development Partners, LLC, a seed stage venture capital fund. Before joining ARCH, Mr. Schriesheim held executive positions at Global TeleSystems, SBC Equity Partners, Ameritech, AC Nielsen and Brooke Group Ltd. Mr. Schriesheim serves as: a director of Skyworks Solutions, Inc. (since May 2006) and chairman of its audit committee; a director of Houlihan Lokey, Inc. (since August 2015) and chairman of its audit committee; and a director of NII Holdings, Inc. (since August 2015) and chairman of its audit committee. Mr. Schriesheim also served as a director of Dobson Communications Corp. from 2004 to 2007, a director of Lawson Software from 2006 to 2011, a director and Co-Chairman of MSC Software Corporation from 2007 to 2009 and a director of Georgia Gulf Corporation from 2009 to 2010.
Mr. Lakshman joined the Company as President, Fulfillment - Supply Chain and Sourcing in September 2015. Prior to joining the Company, he served in a variety of roles with Amazon.com, Inc. since July 1999, most recently as Vice President of Worldwide Transportation Strategy, Technology and Customer Returns. Mr. Lakshman serves as a director of Grubhub, Inc.


17


Ms. Coleman joined the Company as Senior Vice President, General Counsel and Corporate Secretary in July 2014. Prior to joining the Company, she served as Vice President, General Counsel and Secretary of Brunswick Corporation from 2009 to 2014.
Ms. Maher joined the Company as President and Chief Member Officer, Sears, in July 2015. Prior to joining the Company, she served as chief operating officer at Gymboree Corporation since 2013. Prior to Gymboree Corporation, Ms. Maher held several positions with Levi, Strauss & Co. since 2007, most recently as Executive Vice President, Retail.
Ms. Munjal was appointed to her current position in October 2012. She was appointed as Divisional Vice President, Integrated Retail and Member Experience, in July 2011 and was promoted to Vice President in June 2012. From October 2009 to June 2011, she served as Divisional Vice President, and Chief of Staff, Office of the Chairman, and served as Chief of Staff, Office of the CEO, from November 2007 to November 2009. Ms. Munjal joined Sears as Director, Information Technology, in March 2003.
Mr. James joined the Company in August 2014 and serves as President and Chief Member Officer, Kmart. Prior to joining the Company, he served in various roles at Tesco plc, a multinational grocery and general merchandise retailer, from June 2007 until August 2013, including Commercial Director Global Business Unit. From June 2001 to June 2007, he served in various roles at GSK plc, a pharmaceutical company, including Global Marketing Director. He previously served in senior positions for Visual Voyage Ltd. and PepsiCo Inc.
Mr. Riecker was appointed to his current position in January 2012. He joined the Company as Assistant Controller in October 2005 and served as Vice President and Assistant Controller from May 2007 to October 2011. From October 2011 until his election as Vice President, Controller and Chief Accounting Officer, he served as the Company's Vice President, Internal Audit.

18


PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Holdings' common stock is quoted on The NASDAQ Stock Market under the ticker symbol SHLD. There were 11,185 shareholders of record at March 10, 2016. The quarterly high and low sales prices for Holdings' common stock are set forth below.
 
Fiscal Year 2015 
 
Sears Holdings
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Common stock price
 
 
 
 
 
 
 
    High
$
46.23

 
$
44.72

 
$
28.31

 
$
25.24

    Low
$
31.35

 
$
20.86

 
$
19.08

 
$
16.27

 
 
 
Fiscal Year 2014 
 
Sears Holdings
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Common stock price
 
 
 
 
 
 
 
    High
$
51.06

 
$
45.00

 
$
40.78

 
$
48.25

    Low
$
31.26

 
$
34.88

 
$
24.10

 
$
30.70

Holdings has not paid cash dividends over the two most recent fiscal years and does not expect to pay cash dividends in the foreseeable future.
Equity Compensation Plan Information
The following table reflects information about securities authorized for issuance under our equity compensation plans at January 30, 2016.
Plan Category
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and
rights 
 
Weighted-average
exercise price of
outstanding
options,
warrants and
rights
 
Number of securities
remaining available for
future issuance
under equity
compensation plans*
Equity compensation plans approved by security holders
 
 
4,979,161
Equity compensation plans not approved by security holders
 
 
Total
 
 
4,979,161
 
__________________
*
Represents shares of common stock that may be issued pursuant to our 2006 Stock Plan or our 2013 Stock Plan. Awards under the 2006 Stock Plan may be restricted stock awards, a grant of shares of our common stock in connection with an award made under a long-term incentive plan, or certain other stock-based awards. Awards under the 2013 Stock Plan may be restricted stock, stock unit awards, incentive stock options, nonqualified stock options, stock appreciation rights, or certain other stock-based awards. The 2013 Stock Plan also allows common stock of Holdings to be awarded in settlement of an incentive award under the Sears Holdings Corporation Umbrella Incentive Program (and any incentive program established thereunder). The shares shown consist of 359,684 shares of common stock that are available for future issuance pursuant to our 2006 Stock Plan and 4,619,477 shares of common stock that are available for future issuance pursuant to our 2013 Stock Plan. Excludes shares covered by an outstanding plan award that, subsequent to January 30, 2016, ultimately are not delivered on an unrestricted basis (for example, because the award is forfeited, canceled, settled in cash or used to satisfy tax withholding obligations).

19


Stock Performance Graph
Comparison of Five-Year Cumulative Stockholder Return
The following graph compares the cumulative total return to stockholders on Holdings' common stock from January 28, 2011 through January 29, 2016, the last trading day before the end of fiscal year 2015, based on the market prices at the last trading day before the end of each fiscal year through and including fiscal year 2015, with the return on the S&P 500 Index, the S&P 500 Retailing Index and the S&P 500 Department Stores Index for the same period. The graph assumes an initial investment of $100 on January 28, 2011 in each of our common stock, the S&P 500 Index, the S&P Retailing Index and the S&P 500 Department Stores Index. The graph further assumes reinvestment of the value of: (i) shares of Orchard Supply Hardware Stores Corporation ("OSH") on January 3, 2012, the first day OSH shares traded on NASDAQ; (ii) subscription rights to purchase shares of common stock of SHO on September 13, 2012, the ex-distribution date of the distribution of such rights to Holdings’ shareholders; (iii) common shares of Sears Canada on November 13, 2012, the distribution date of such shares to Holdings’ shareholders; (iv) shares of Lands' End on April 7, 2014, the ex-distribution date of the distribution of such shares to Holdings' shareholders; (v) subscription rights to purchase shares of common stock of Sears Canada on October 17, 2014, the ex-distribution date of the distribution of such rights to Holdings' shareholders; (vi) subscription rights to purchase up to $625 million in aggregate principal amount of 8% senior unsecured notes due 2019 and warrants to purchase shares of Holdings' common stock on November 3, 2014, the ex-distribution date of the distribution of such rights to Holdings' shareholders; and (vii) subscription rights to purchase shares of common stock of Seritage Growth Properties on June 12, 2015, the distribution date of such rights to Holdings’ shareholders.
The S&P 500 Retailing Index consists of companies included in the S&P 500 Index in the broadly defined retail sector, which includes competing retailers of softlines (apparel and domestics) and hardlines (appliances, electronics and home improvement products), as well as food and drug retailers. The S&P 500 Department Stores Index consists primarily of department stores that compete with our full-line stores.
 
Jan 28, 2011
 
Jan 27, 2012
 
Feb 1, 2013
 
Jan 31, 2014
 
Jan 30, 2015
 
Jan 29, 2016
Sears Holdings
$
100.00

 
$
60.01

 
$
72.91

 
$
55.77

 
$
64.70

 
$
41.38

S&P 500 Index
$
100.00

 
$
105.32

 
$
123.85

 
$
148.98

 
$
170.15

 
$
169.01

S&P 500 Retailing Index
$
100.00

 
$
113.42

 
$
144.15

 
$
180.63

 
$
216.93

 
$
253.36

S&P 500 Department Stores Index
$
100.00

 
$
113.09

 
$
116.58

 
$
135.30

 
$
168.81

 
$
121.73


20


Purchase of Equity Securities
During the quarter ended January 30, 2016, we did not repurchase any shares of our common stock under our common share repurchase program. At January 30, 2016, we had approximately $504 million of remaining authorization under the program.
 
Total
Number of
Shares
Purchased
(1)
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased
as Part of  Publicly
Announced
Program
(2)
 
Average
Price Paid
per  Share
for
Publicly
Announced
Program
 
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under
the Program
November 1, 2015 to November 28, 2015
1,048

 
$
19.96

 

 
$

 
 
November 29, 2015 to January 2, 2016

 

 

 

 
 
January 3, 2016 to January 30, 2016

 

 

 

 
 
Total
1,048

 
$
19.96

 

 
$

 
$
503,907,832

__________________
(1) 
Consists entirely of 1,048 shares acquired from associates to meet withholding tax requirements from the vesting of restricted stock.
(2) 
Our common share repurchase program was initially announced on September 14, 2005 and has a total authorization since inception of the program of $6.5 billion, including the authorizations to purchase up to an additional $500 million of common stock on each of December 17, 2009 and May 2, 2011. The program has no stated expiration date.
The Amended Domestic Credit Agreement (described in Management's Discussion and Analysis of Financial Condition and Results of Operation - "Uses and Sources of Liquidity" section below) limits our ability to make restricted payments, including dividends and share repurchases, subject to specified exceptions that are available if, in each case, no event of default under the credit facility exists immediately before or after giving effect to the restricted payment. These include exceptions that require that projected availability under the credit facility, as defined, is at least 15%, exceptions that may be subject to certain maximum amounts and an exception that requires that the restricted payment is funded from cash on hand and not from borrowings under the credit facility. Further, the Amended Domestic Credit Agreement includes customary covenants that restrict our ability to make dispositions, prepay debt, and make investments, subject, in each case, to various exceptions. The Amended Domestic Credit Agreement also imposes various other requirements, which take effect if availability falls below designated thresholds, including 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.



21


Item 6.
Selected Financial Data
The table below summarizes our recent financial information. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 and our Consolidated Financial Statements and notes thereto in Item 8.
 
Fiscal
dollars in millions, except per share and store data
2015
 
2014
 
2013
 
2012
 
2011
Summary of Operations
 
 
 
 
 
 
 
 
 
Revenues(1)
$
25,146

 
$
31,198

 
$
36,188

 
$
39,854

 
$
41,567

Domestic comparable store sales %
(9.2
)%
 
(1.8
)%
 
(3.8
)%
 
(2.5
)%
 
(2.2
)%
Net loss from continuing operations attributable to Holdings' shareholders(2)
(1,129
)
 
(1,682
)
 
(1,365
)
 
(930
)
 
(3,113
)
Per Common Share
 

 
 

 
 

 
 

 
 

Basic:
 

 
 

 
 

 
 

 
 

Net loss from continuing operations attributable to Holdings' shareholders
$
(10.59
)
 
$
(15.82
)
 
$
(12.87
)
 
$
(8.78
)
 
$
(29.15
)
Diluted:
 

 
 

 
 

 
 

 
 

Net loss from continuing operations attributable to Holdings' shareholders
$
(10.59
)
 
$
(15.82
)
 
$
(12.87
)
 
$
(8.78
)
 
$
(29.15
)
Holdings' book value per common share
$
(18.40
)
 
$
(8.93
)
 
$
16.34

 
$
25.89

 
$
40.26

Financial Data
 
 
 

 
 

 
 

 
 

Total assets
$
11,337

 
$
13,185

 
$
18,234

 
$
19,320

 
$
21,357

Long-term debt
1,971

 
2,878

 
2,531

 
1,560

 
1,668

Long-term capital lease obligations
137

 
210

 
275

 
364

 
395

Capital expenditures
211

 
270

 
329

 
378

 
432

Adjusted EBITDA(3)
(836
)
 
(718
)
 
(487
)
 
428

 
51

Domestic Adjusted EBITDA(3)
(836
)
 
(647
)
 
(490
)
 
359

 
(50
)
Domestic Adjusted EBITDA excluding Seritage/JV rent(3)
(703
)
 
(647
)
 
(490
)
 
359

 
(50
)
Number of stores
1,672

 
1,725

 
2,429

 
2,548

 
4,010

_________________
 
(1) 
We follow a retail-based financial reporting calendar. Accordingly, the fiscal year ended February 2, 2013 contained 53 weeks, while all other years presented contained 52 weeks.
(2) 
The periods presented were impacted by certain significant items, which affected the comparability of amounts reflected in the above selected financial data. For 2015, 2014 and 2013, these significant items are discussed within Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." 2012 results include the impact of non-cash charges of domestic pension settlements of $452 million, domestic pension expense of $103 million, domestic store closings and severance of $109 million, domestic transaction costs of $6 million, domestic gain on the sales of assets of $160 million and the results of the Lands' End, Sears Canada and Sears Hometown and Outlet businesses that were included in the results of our operations prior to the respective separations of $50 million, $(51) million and $51 million, respectively. 2011 results include the impact of non-cash charges of $551 million related to the impairment of goodwill balances, a $1.8 billion non-cash charge to establish a valuation allowance against our domestic deferred tax assets, domestic pension expense of $46 million, store closings and severance of $225 million, mark-to-market losses of $3 million on Sears Canada hedge transactions, gain on the sale of real estate of $20 million, and hurricane losses of $7 million.
(3) 
See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 for a reconciliation of this measure to GAAP and a discussion of management’s reasoning for using such measure.

22


Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
We have divided our "Management's Discussion and Analysis of Financial Condition and Results of Operations" into the following six sections:
Overview of Holdings
Results of Operations:
Fiscal Year
Holdings' Consolidated Results
Business Segment Results
Analysis of Consolidated Financial Condition
Contractual Obligations and Off-Balance Sheet Arrangements
Application of Critical Accounting Policies and Estimates
Cautionary Statement Regarding Forward-Looking Information
The discussion that follows should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8.
OVERVIEW OF HOLDINGS
Holdings, the parent company of Kmart and Sears, was formed in connection with the March 24, 2005 Merger of these two companies. We are an integrated retailer with significant physical and intangible assets, as well as virtual capabilities enabled through technology. We operate a national network of stores, with 1,672 full-line and specialty retail stores in the United States, operating as Kmart and Sears. Further, we operate a number of websites under the Sears.com and Kmart.com banners which offer millions of products and provide the capability for our members and customers to engage in cross-channel transactions such as free store pickup; buy in store/ship to home; and buy online, return in store. We are also the home of Shop Your Way®, a free member-based social shopping platform that offers rewards, personalized services and a unique experience. Shop Your Way® connects all of the ways members shop - in store, at home, online and by phone.
Through the third quarter of 2014, we conducted our operations in three business segments: Kmart, Sears Domestic and Sears Canada. As a result of the de-consolidation of Sears Canada as described in Note 2 of Notes to the Consolidated Financial Statements, Sears Canada is no longer an operating or reportable segment. We now conduct our operations in two business segments: Kmart and Sears Domestic. The nature of operations conducted within each of these segments is discussed within the "Business Segments" section of Item 1 in this Annual Report on Form 10-K. Our business segments have been determined in accordance with accounting standards regarding the determination, and reporting, of business segments.
RESULTS OF OPERATIONS
Fiscal Year
Our fiscal year end is the Saturday closest to January 31 each year. Fiscal years 2015, 2014 and 2013 consisted of 52 weeks. Unless otherwise stated, references to years in this report relate to fiscal years rather than to calendar years.

23


Holdings' Consolidated Results
Holdings' consolidated results of operations for 2015, 2014 and 2013 are summarized as follows:
millions, except per share data
 
2015
 
2014
 
2013
REVENUES
 
 
 
 
 
 
Merchandise sales and services
 
$
25,146

 
$
31,198

 
$
36,188

COSTS AND EXPENSES
 
 
 
 
 
 
Cost of sales, buying and occupancy
 
19,336

 
24,049

 
27,433

Gross margin dollars
 
5,810

 
7,149

 
8,755

Gross margin rate
 
23.1
%
 
22.9
%
 
24.2
%
Selling and administrative
 
6,857

 
8,220

 
9,384

Selling and administrative expense as a percentage of revenues
 
27.3
%
 
26.3
%
 
25.9
%
Depreciation and amortization
 
422

 
581

 
732

Impairment charges
 
274

 
63

 
233

Gain on sales of assets
 
(743
)
 
(207
)
 
(667
)
Total costs and expenses
 
26,146

 
32,706

 
37,115

Operating loss
 
(1,000
)
 
(1,508
)
 
(927
)
Interest expense
 
(323
)
 
(313
)
 
(254
)
Interest and investment income (loss)
 
(62
)
 
132

 
207

Other income
 

 
4

 
2

Loss before income taxes
 
(1,385
)
 
(1,685
)
 
(972
)
Income tax (expense) benefit
 
257

 
(125
)
 
(144
)
Net loss
 
(1,128
)
 
(1,810
)
 
(1,116
)
(Income) loss attributable to noncontrolling interests
 
(1
)
 
128

 
(249
)
NET LOSS ATTRIBUTABLE TO HOLDINGS’ SHAREHOLDERS
 
$
(1,129
)
 
$
(1,682
)
 
$
(1,365
)
NET LOSS PER COMMON SHARE ATTRIBUTABLE TO HOLDINGS’ SHAREHOLDERS
 
 
 
 
 
 
Diluted loss per share
 
$
(10.59
)
 
$
(15.82
)
 
$
(12.87
)
Diluted weighted average common shares outstanding
 
106.6

 
106.3

 
106.1


24


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. Domestic comparable store sales amounts include sales from sears.com and kmart.com shipped directly to customers. These online sales resulted in a negative impact to our domestic comparable store sales results of approximately 10 basis points for 2015 and a benefit of 120 basis points for 2014. In addition, domestic comparable store sales have been adjusted for the change in the unshipped sales reserves recorded at the end of each reporting period, which resulted in a positive impact of approximately 10 basis points and a negative impact of 10 basis points for 2015 and 2014, respectively.
Domestic comparable store sales results for 2015 were calculated based on the 52-week period ended January 30, 2016 as compared to the comparable 52-week period in the prior year, while domestic comparable store sales results for 2014 were calculated based on the 52-week period ended January 31, 2015 as compared to the comparable 52-week period in the prior year.
2015 Compared to 2014
Net Loss Attributable to Holdings' Shareholders
We recorded a net loss attributable to Holdings' shareholders of $1.1 billion ($10.59 loss per diluted share) and $1.7 billion ($15.82 loss per diluted share) for 2015 and 2014, respectively. Our results for 2015 and 2014 were affected by a number of significant items. Our net loss as adjusted for these significant items, which are further discussed below, was $953 million ($8.94 loss per diluted share) for 2015 and $830 million ($7.81 loss per diluted share) for 2014. The increase in net loss as adjusted for the year primarily reflected a decline in gross margin, which was driven by the decline in revenues, partially offset by a decrease in selling and administrative expenses.
In addition to our net loss attributable to Sears Holdings' shareholders determined in accordance with Generally Accepted Accounting Principles ("GAAP"), for purposes of evaluating operating performance, we use Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA"), Domestic Adjusted EBITDA and Domestic Adjusted EBITDA excluding Seritage/JV rent as well as Adjusted Earnings per Share ("Adjusted EPS"). Domestic Adjusted EBITDA, excluding Seritage/JV rent, reflects the impact of the additional rent expense and assigned sub-tenant rental income as a result of the Seritage and JV transactions. The terms of our leases with Seritage and the JVs provide us with the ability to accelerate the transformation of our physical stores. We expect that our cash rent obligation will decrease significantly as space in these stores is recaptured.

25


Adjusted EBITDA, Domestic Adjusted EBITDA, and Domestic Adjusted EBITDA excluding Seritage/JV rent were determined as follows:
millions
2015
 
2014
 
2013
Net loss attributable to Holdings per statement of operations
$
(1,129
)
 
$
(1,682
)
 
$
(1,365
)
Income (loss) attributable to noncontrolling interests
1

 
(128
)
 
249

Income tax expense (benefit)
(257
)
 
125

 
144

Interest expense
323

 
313

 
254

Interest and investment (income) loss
62

 
(132
)
 
(207
)
Other income

 
(4
)
 
(2
)
Operating loss
(1,000
)
 
(1,508
)
 
(927
)
Depreciation and amortization
422

 
581

 
732

Gain on sales of assets
(743
)
 
(207
)
 
(667
)
Before excluded items
(1,321
)
 
(1,134
)
 
(862
)
 
 
 
 
 
 
Closed store reserve and severance
98

 
224

 
130

Domestic pension expense
229

 
89

 
162

Other expenses(1)
(64
)
 
50

 

Amortization of deferred Seritage gain
(52
)
 

 

Impairment charges
274

 
63

 
233

Adjusted EBITDA
(836
)
 
(708
)
 
(337
)
 
 
 
 
 
 
Lands' End separation

 
(10
)
 
(150
)
Adjusted EBITDA as defined(2)
$
(836
)
 
$
(718
)
 
$
(487
)
 
 
 
 
 
 
Sears Canada segment

 
71

 
(3
)
Domestic Adjusted EBITDA as defined(2)
$
(836
)
 
$
(647
)
 
$
(490
)
 
 
 
 
 
 
Seritage/JV rent
133

 

 

Domestic Adjusted EBITDA as defined(2) excluding Seritage/JV rent
$
(703
)
 
$
(647
)
 
$
(490
)

(1) Consists of one-time credits from vendors, expenses associated with legal matters, transaction costs associated with strategic initiatives and other expenses.
(2) Adjusted to reflect the results of the Lands' End and Sears Canada businesses that were included in our results of operations prior to the separation/disposition.

26


Adjusted EBITDA for our segments was as follows:
 
2015
 
2014
 
2013
millions
Kmart
Sears Domestic
Sears Holdings
 
Kmart
Sears Domestic
Sears Canada
Sears Holdings
 
Kmart
Sears Domestic
Sears Canada
Sears Holdings
Operating income (loss) per statement of operations
$
(292
)
$
(708
)
$
(1,000
)
 
$
(422
)
$
(920
)
$
(166
)
$
(1,508
)
 
$
(351
)
$
(940
)
$
364

$
(927
)
Depreciation and amortization
72

350

422

 
95

437

49

581

 
129

511

92

732

(Gain) loss on sales of assets
(185
)
(558
)
(743
)
 
(103
)
(105
)
1

(207
)
 
(66
)
(63
)
(538
)
(667
)
Before excluded items
(405
)
(916
)
(1,321
)
 
(430
)
(588
)
(116
)
(1,134
)
 
(288
)
(492
)
(82
)
(862
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Closed store reserve, severance and other
86

12

98

 
142

55

27

224

 
89

(31
)
72

130

Domestic pension expense

229

229

 

89


89

 

162


162

Other expenses(1)
43

(107
)
(64
)
 
43

4

3

50

 




Amortization of deferred Seritage gain
(11
)
(41
)
(52
)
 




 




Impairment charges
14

260

274

 
29

19

15

63

 
70

150

13

233

Adjusted EBITDA
(273
)
(563
)
(836
)
 
(216
)
(421
)
(71
)
(708
)
 
(129
)
(211
)
3

(337
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lands' End separation



 

(10
)

(10
)
 

(150
)

(150
)
Adjusted EBITDA as defined(2)
$
(273
)
$
(563
)
$
(836
)
 
$
(216
)
$
(431
)
$
(71
)
$
(718
)
 
$
(129
)
$
(361
)
$
3

$
(487
)
% to revenues(3)
(2.7
)%
(3.8
)%
(3.3
)%
 
(1.8
)%
(2.6
)%
(3.4
)%
(2.3
)%
 
(1.0
)%
(2.0
)%
0.1
%
(1.4
)%

(1) Consists of one-time credits from vendors, expenses associated with legal matters, transaction costs associated with strategic initiatives and other expenses.
(2) Adjusted to reflect the results of the Lands' End business that were included in our results of operations prior to the separation.
(3) Excludes revenues of the Lands' End business that were included in our results of operations prior to the separation.

27


The following tables set forth results of operations on a GAAP and "As Adjusted" basis, as well as the impact each significant item used in calculating Adjusted EBITDA had on specific income and expense amounts reported in our Consolidated Statements of Operations during the years 2015, 2014 and 2013.
 
Year Ended January 30, 2016
 
 
Adjustments
 
millions, except per share data
GAAP
Domestic
Pension
Expense
Domestic Closed Store Reserve, Store Impairments and Severance
Trade name Impairment
Domestic Gain on Sales of Assets
Mark-to-Market Adjustments
Amortization of Deferred Seritage Gain
Other(1)
Domestic Tax Matters
As
Adjusted
Gross margin impact
$
5,810

$

$
44

$

$

$

$
(52
)
$
(146
)
$

$
5,656

Selling and administrative impact
6,857

(229
)
(54
)




(82
)

6,492

Depreciation and amortization impact
422


(3
)






419

Impairment charges impact
274


(94
)
(180
)






Gain on sales of assets impact
(743
)



687





(56
)
Operating loss impact
(1,000
)
229

195

180

(687
)

(52
)
(64
)

(1,199
)
Interest and investment loss impact
(62
)




59




(3
)
Income tax benefit impact
257

(86
)
(73
)
(68
)
258

(22
)
20

24

263

573

After tax and noncontrolling interests impact
(1,129
)
143

122

112

(429
)
37

(32
)
(40
)
263

(953
)
Diluted loss per share impact
$
(10.59
)
$
1.34

$
1.14

$
1.05

$
(4.02
)
$
0.35

$
(0.30
)
$
(0.38
)
$
2.47

$
(8.94
)
(1) Consists of one-time credits from vendors, expenses associated with legal matters, transaction costs associated with strategic initiatives and other expenses.

28


 
Year Ended January 31, 2015
 
 
Adjustments
 
millions, except per share data
GAAP
Domestic
Pension
Expense
Domestic Closed Store Reserve, Store Impairments and Severance
Domestic Gain on Sales of Assets
Other Expenses
Gain on Sears Canada Disposition
Domestic Tax Matters
Sears Canada Segment
Lands' End Separation
As Adjusted(1)
Gross margin impact
$
7,149

$

$
68

$

$

$

$

$
(502
)
$
(87
)
$
6,628

Selling and administrative impact
8,220

(89
)
(129
)

(47
)


(603
)
(77
)
7,275

Depreciation and amortization impact
581


(8
)




(49
)
(3
)
521

Impairment charges impact
63


(48
)




(15
)


Gain on sales of assets impact
(207
)


87




(1
)

(121
)
Operating loss impact
(1,508
)
89

253

(87
)
47



166

(7
)
(1,047
)
Interest expense impact
(313
)






5


(308
)
Interest and investment income impact
132





(70
)

(38
)

24

Other income impact
4







(4
)


Income tax expense impact
(125
)
(33
)
(95
)
33

(18
)
26

574

136

3

501

Loss attributable to noncontrolling interests impact
128







(128
)


After tax and noncontrolling interests impact
(1,682
)
56

158

(54
)
29

(44
)
574

137

(4
)
(830
)
Diluted loss per share impact
$
(15.82
)
$
0.53

$
1.48

$
(0.51
)
$
0.27

$
(0.41
)
$
5.40

$
1.29

$
(0.04
)
$
(7.81
)
(1) Adjusted to reflect the results of the Lands' End and Sears Canada businesses that were included in our results prior to the separation/disposition.
 
Year Ended February 1, 2014
 
 
Adjustments
 
millions, except per share data
GAAP
Domestic
Pension
Expense
Domestic Closed Store Reserve, Store Impairments and Severance
Domestic Gain on Sales of Assets
Domestic Tax Matters
Sears Canada Segment
Lands' End Separation
As Adjusted(1)
Gross margin impact
$
8,755

$

$
56

$

$

$
(1,016
)
$
(616
)
$
7,179

Selling and administrative impact
9,384

(162
)
(2
)


(1,085
)
(466
)
7,669

Depreciation and amortization impact
732


(11
)


(92
)
(22
)
607

Impairment charges impact
233


(220
)


(13
)


Gain on sales of assets impact
(667
)


67


538


(62
)
Operating loss impact
(927
)
162

289

(67
)

(364
)
(128
)
(1,035
)
Interest expense impact
(254
)




1


(253
)
Interest and investment income impact
207





(187
)

20

Other income impact
2





(2
)


Income tax expense impact
(144
)
(60
)
(109
)
26

655

59

49

476

Income attributable to noncontrolling interests impact
(249
)




249



After tax and noncontrolling interests impact
(1,365
)
102

180

(41
)
655

(244
)
(79
)
(792
)
Diluted loss per share impact
$
(12.87
)
$
0.96

$
1.70

$
(0.39
)
$
6.17

$
(2.30
)
$
(0.73
)
$
(7.46
)
(1) Adjusted to reflect the results of the Lands' End and Sears Canada businesses that were included in our results of operations prior to the separation/disposition.

29


Adjusted EBITDA is computed as net loss attributable to Sears Holdings Corporation appearing on the Statements of Operations excluding income (loss) attributable to noncontrolling interests, income tax (expense) benefit, interest expense, interest and investment income (loss), other income, depreciation and amortization and gain on sales of assets. In addition, it is adjusted to exclude certain significant items as set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our businesses, as well as executive compensation metrics, for comparable periods. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items.
While Adjusted EBITDA, Domestic Adjusted EBITDA and Domestic Adjusted EBITDA excluding Seritage/JV rent are non-GAAP measurements, management believes that they are important indicators of ongoing operating performance, and useful to investors, because:
EBITDA excludes the effects of financings and investing activities by eliminating the effects of interest and depreciation costs;
Management considers gains/(losses) on the sale of assets to result from investing decisions rather than ongoing operations; and
Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results. We have adjusted our results for these items to make our statements more comparable and therefore more useful to investors as the items are not representative of our ongoing operations and reflect past investment decisions.
We also believe that our use of Adjusted EPS provides an appropriate measure for investors to use in assessing our performance across periods, given that this measure provides an adjustment for certain significant items which may vary significantly from period to period, improving the comparability of year-to-year results and is therefore representative of our ongoing performance. Therefore, we have adjusted our results for significant items to make our statements more useful and comparable. However, we do not, and do not recommend that you, solely use Adjusted EPS to assess our financial and earnings performance. We also use, and recommend that you use, diluted earnings per share in addition to Adjusted EPS in assessing our earnings performance.
These other significant items included in Adjusted EBITDA, Domestic Adjusted EBITDA, Domestic Adjusted EBITDA excluding Seritage/JV rent and Adjusted EPS are further explained as follows:
Domestic pension expense – Contributions to our pension plans remain a significant use of our cash on an annual basis. Cash contributions to our pension and postretirement plans are separately disclosed on the cash flow statement. While the Company's pension plan is frozen, and thus associates do not currently earn pension benefits, we have a legacy pension obligation for past service performed by Kmart and Sears associates. The annual pension expense included in our statement of operations related to these legacy domestic pension plans was relatively minimal in years prior to 2009. However, due to the severe decline in the capital markets that occurred in the latter part of 2008, and the resulting abnormally low interest rates, which continue to persist, our domestic pension expense was $229 million in 2015, $89 million in 2014 and $162 million in 2013. Pension expense is comprised of interest cost, expected return on plan assets and recognized net loss and other. This adjustment eliminates the entire pension expense from the statement of operations to improve comparability. Pension expense is included in the determination of net income (loss).
The components of the adjustments to EBITDA related to domestic pension expense were as follows:
millions
2015
 
2014
 
2013
Components of net periodic expense:
 
 
 
 
 
Interest cost
$
210

 
$
221

 
$
219

Expected return on plan assets
(249
)
 
(247
)
 
(224
)
Recognized net loss and other
268

 
115

 
167

Net periodic expense
$
229

 
$
89

 
$
162


30


In accordance with GAAP, we recognize on the balance sheet actuarial gains and losses for defined benefit pension plans annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement during a fiscal year. For income statement purposes, these actuarial gains and losses are recognized throughout the year through an amortization process. The Company recognizes in its results of operations, as a corridor adjustment, any unrecognized actuarial net gains or losses that exceed 10% of the larger of projected benefit obligations or plan assets. Accumulated gains/losses that are inside the 10% corridor are not recognized, while accumulated actuarial gains/losses that are outside the 10% corridor are amortized over the "average future service" of the population and are included in the amortization of experience losses line item above.
Actuarial gains and losses occur when actual experience differs from the estimates used to allocate the change in value of pension plans to expense throughout the year or when assumptions change, as they may each year. Significant factors that can contribute to the recognition of actuarial gains and losses include changes in discount rates used to remeasure pension obligations on an annual basis or upon a qualifying remeasurement, differences between actual and expected returns on plan assets and other changes in actuarial assumptions. Management believes these actuarial gains and losses are primarily financing activities that are more reflective of changes in current conditions in global financial markets (and in particular interest rates) that are not directly related to the underlying business and that do not have an immediate, corresponding impact on the benefits provided to eligible retirees. For further information on the actuarial assumptions and plan assets referenced above, see Management's Discussion and Analysis of Financial Condition and Results of Operations - Application of Critical Accounting Policies and Estimates - Defined Benefit Pension Plans, and Note 7 of Notes to Consolidated Financial Statements.
Closed store reserve and severance – We are transforming our Company to a less asset-intensive business model. Throughout this transformation, we continue to make choices related to our stores, which could result in sales, closures, lease terminations or a variety of other decisions.
Impairment charges – Accounting standards require the Company to evaluate the carrying value of fixed assets, goodwill and intangible assets for impairment. As a result of the Company's analysis, we have recorded impairment charges related to certain fixed asset and indefinite-lived intangible asset balances.
Domestic gains on sales of assets – We have recorded significant gains on sales of assets, as well as gains on sales of joint venture interests, which were primarily attributable to several real estate transactions. Management considers these gains on sale of assets to result from investing decisions rather than ongoing operations.
Mark-to-market adjustments – We elected the fair value option for the equity method investment in Sears Canada, and the change in fair value is recorded in interest and investment income on the Consolidated Statement of Operations. Management considers activity related to our retained investment in Sears Canada to result from investing decisions rather than ongoing operations. Furthermore, we do not consider the short term fluctuations in Sears Canada's stock price useful in assessing our operating performance.
Amortization of deferred Seritage gain – A portion of the gain on the Seritage transaction was deferred and will be recognized in proportion to the related rent expense, which is a component of cost of sales, buying and occupancy on the Consolidated Statement of Operations, over the lease term. Management considers the amortization of the deferred Seritage gain to result from investing decisions rather than ongoing operations.
Other – consists of one-time credits from vendors, transaction costs associated with strategic initiatives, expenses associated with legal matters and other expenses.
Domestic tax matters – In 2011, we recorded a non-cash charge to establish a valuation allowance against substantially all of our domestic deferred tax assets. Accounting rules generally require that a valuation reserve be established when income has not been generated over a three-year cumulative period to support the deferred tax asset. While an accounting loss was recorded, we believe no economic loss has occurred as these net operating losses and tax benefits remain available to reduce future taxes as income is generated in subsequent periods. As this valuation allowance has a significant impact on the effective tax rate, we have

31


adjusted our results to reflect a standard effective tax rate for the Company beginning in fiscal 2011 when the valuation allowance was first established.
Gain on Sears Canada disposition – We recognized a gain upon de-consolidation of Sears Canada. Management considers the gain to result from investing decisions rather than ongoing operations.
Sears Canada segment – Reflects the results of the Sears Canada business that were included in our results of operations prior to the disposition. The adjustment also includes the valuation allowance that was recorded in the third quarter of 2014 prior to the de-consolidation of Sears Canada.
Lands' End separation – Reflects the results of the Lands' End business that were included in our results of operations prior to the separation.
Seritage/JV rent – Reflects the impact of the additional rent expense and assigned sub-tenant income as a result of the Seritage and joint venture transactions. The terms of our leases with Seritage and the joint venture partners provide us with the ability to accelerate the transformation of our physical stores. We expect that our cash rent obligation will decrease significantly as space in these stores is recaptured.
Revenues and Comparable Store Sales
Revenues decreased $6.1 billion, or 19.4%, to $25.1 billion in 2015, as compared to revenues of $31.2 billion in 2014. Much of the decline related to actions we took during 2014 to streamline our operations and focus on our transformation into a member-centric retailer. The decrease in revenue included a decrease of $2.1 billion associated with Sears Canada, which was de-consolidated in October 2014, $222 million from the separation of the Lands’ End business, which was completed on April 4, 2014, and $1.5 billion from fewer Kmart and Sears Full-line stores. In addition, domestic comparable store sales declined 9.2%, which contributed to $2.0 billion of the decline. The decline in comparable store sales was driven by reduced, but more highly targeted promotional and marketing spend to better align with member needs and a shift away from low margin categories, such as consumer electronics. Comparable store sales in the latter part of the year, particularly in the apparel and softlines businesses, were negatively impacted by unseasonably warm weather and a highly promotional environment.
Kmart comparable store sales declined 7.3% with increases in the home appliances, mattresses and seasonal categories, which were more than offset by declines in the consumer electronics, apparel, grocery & household and drugstore categories. Excluding the impact of the consumer electronics business, which is a business we continue to alter to meet our members' needs, Kmart comparable store sales would have decreased 5.5%. Sears Domestic comparable store sales decreased 11.1%, and were also negatively impacted by consumer electronics. Excluding the impact of consumer electronics, Sears Domestic comparable store sales would have decreased 9.5%, primarily driven by decreases in apparel, home appliances, lawn & garden and Sears Auto Centers, which were partially offset by an increase in the mattresses category.
Gross Margin
Gross margin declined $1.3 billion to $5.8 billion in 2015 from $7.1 billion in 2014 as the above noted decline in sales was partially offset by an improvement in gross margin rate. Gross margin for 2015 included one-time vendor credits of $146 million, as well as a credit of $52 million related to the amortization of the deferred gain on sale of assets associated with the Seritage transaction, while 2014 included gross margin of $502 million from Sears Canada and $87 million from the Lands' End business. Gross margin for 2015 and 2014 also included charges of $44 million and $68 million, respectively, related to store closures.
As compared to the prior year, Kmart's gross margin rate for 2015 declined 10 basis points, as increases experienced in a majority of categories, most notably consumer electronics, grocery & household, drugstore and toys, were more than offset by decreases in the apparel and pharmacy categories. Sears Domestic's gross margin rate for 2015 improved 50 basis points. Excluding the impact of significant items, Sears Domestic's gross margin rate declined 60 basis points, with the most notable decreases experienced in the apparel and home appliances categories driven by an increase in promotional activities, particularly during the fourth quarter of 2015 as a result of the highly competitive promotional environment.
In addition, as a result of the Seritage and JV transactions, 2015 included additional rent expense and assigned sub-tenant income of approximately $133 million.

32


Selling and Administrative Expenses
Selling and administrative expenses decreased $1.4 billion to $6.9 billion in 2015 from $8.2 billion in 2014 and included significant items which aggregated to expense of $365 million and $945 million for 2015 and 2014, respectively, with 2014 including expenses of $603 million from Sears Canada and $77 million from the Lands' End business. Excluding these items, selling and administrative expenses declined $783 million, primarily due to decreases in payroll and advertising expenses.
Selling and administrative expenses as a percentage of revenues ("selling and administrative expense rate") were 27.3% and 26.3% for 2015 and 2014, respectively, as the decreases in overall selling and administrative expenses were more than offset by the above noted decline in revenues.
Depreciation and Amortization
Depreciation and amortization expense decreased by $159 million during 2015 to $422 million, primarily due to having fewer assets to depreciate. Depreciation and amortization expense during 2014 included expense of $52 million related to Sears Canada and the Lands' End business.
Impairment Charges
We recorded impairment charges of $274 million in 2015, which consisted of impairment of $180 million related to the Sears trade name, as well as $94 million related to the impairment of long-lived assets. We recorded impairment charges of $63 million in 2014, which were related to the impairment of long-lived assets. Impairment charges recorded in both years are described further in Notes 1 and 13 of Notes to Consolidated Financial Statements.
Gain on Sales of Assets
We recorded total gains on sales of assets of $743 million in 2015 and $207 million in 2014, which were primarily attributable to several significant real estate transactions. The gains recorded in 2015 included $508 million recognized in connection with the joint venture transactions and the sale-leaseback transaction with Seritage. Gains on sales of assets recorded in both years are described further in Note 11 of Notes to Consolidated Financial Statements.
Operating Loss
We recorded an operating loss of $1.0 billion and $1.5 billion in 2015 and 2014, respectively. The operating loss for 2015 included significant items which aggregated to operating income of $199 million, while operating loss for 2014 included significant items which aggregated to operating expense of $461 million. Excluding these items, we would have reported an operating loss of $1.2 billion and $1.0 billion in 2015 and 2014, respectively. The increase in operating loss in 2015 was primarily driven by the decrease in gross margin, partially offset by the decline in selling and administrative expenses.
Interest Expense
We incurred $323 million and $313 million in interest expense during 2015 and 2014, respectively. The increase is due to an increase in average outstanding borrowings in 2015.
Interest and Investment Income (Loss)
We recorded interest and investment loss of $62 million during 2015 compared to interest and investment income of $132 million during 2014. Interest and investment income (loss) is described further in Note 6 of Notes to Consolidated Financial Statements.
Income Taxes
We recorded an income tax benefit of $257 million in 2015 compared with income tax expense of $125 million in 2014. During 2015, the Company realized a significant tax benefit on the deferred taxes related to

33


indefinite-life assets associated with the property sold in the transaction with Seritage. As a result, our effective tax rate for 2015 was a benefit of 18.6% compared to expense of 7.4% for 2014. Also, the application of the requirements for accounting for income taxes, after consideration of our valuation allowance, causes a significant variation in the typical relationship between income tax expense and pretax income. Our tax rate in 2015 continues to reflect the effect of not recognizing the benefit of current period losses in certain domestic and foreign jurisdictions where it is not more likely than not that such benefits would be realized. In addition, 2015 was negatively impacted by foreign branch taxes and state income taxes.
The 2014 rate was negatively impacted by a valuation allowance established on Sears Canada’s deferred tax assets in the third quarter, prior to de-consolidation, and increased foreign taxes in Puerto Rico resulting from a new tax law change, which became effective during the second quarter of 2014. These items were partially offset by state audit settlements and statute expirations. In addition, the 2014 rate was favorably impacted by the book to tax difference for the original issue discount relating to the $625 million 8% senior unsecured notes issued in November 2014, which resulted in the creation of a deferred tax liability through additional paid-in capital and a valuation allowance reversal through continuing operations.
2014 Compared to 2013
Net Loss Attributable to Holdings' Shareholders
We recorded a net loss attributable to Holdings' shareholders of $1.7 billion ($15.82 loss per diluted share) and $1.4 billion ($12.87 loss per diluted share) for 2014 and 2013, respectively. Our results for 2014 and 2013 were affected by a number of significant items. Our net loss as adjusted for these significant items was $830 million ($7.81 loss per diluted share) for 2014 and $792 million ($7.46 loss per diluted share) for 2013. The increase in net loss for the year primarily reflected a decline in gross margin, which resulted from both a decline in revenues, as well as a decline in gross margin rate, partially offset by a decrease in selling and administrative expenses.
Revenues and Comparable Store Sales
Revenues decreased $5.0 billion, or 13.8%, to $31.2 billion in 2014, as compared to revenues of $36.2 billion in 2013. Much of the decline related to actions we took during 2014 to streamline our operations and focus on our transformation into a member-centric retailer. The revenue decrease included a decrease of $1.7 billion associated with Sears Canada, which was de-consolidated in October 2014, $1.3 billion from the separation of the Lands’ End business, which was completed on April 4, 2014, and $1.3 billion in less revenue from fewer Kmart and Sears Full-line stores. Revenues in 2014 also declined as a result of lower domestic comparable store sales, which accounted for $421 million of the decline. Finally, we also experienced a revenue decline in our Home Services business during 2014, as well as a decline in delivery revenues, which when combined, accounted for $145 million of the decline and a decline in our revenues from SHO of $119 million.
Sears Canada's revenue decline of $1.7 billion was predominantly driven by the de-consolidation of Sears Canada, which occurred on October 16, 2014 and accounted for $1.3 billion of the revenue decline. Revenues also declined due to an 8.0% decline in comparable store sales, which accounted for an additional $161 million of the decline, as well as the effect of having fewer stores in operation, which accounted for $97 million of the decline. Sears Canada experienced declines in the Home Services business, which accounted for $27 million of the decline. Revenues also included a decrease of $125 million due to foreign currency exchange rates.
Domestic comparable store sales declined 1.8%, comprised of decreases of 1.4% at Kmart and 2.1% at Sears Domestic. The decline at Kmart reflects positive performance in several categories, most notably apparel and jewelry, offset by declines in the consumer electronics and grocery & household categories. Excluding the impact of the consumer electronics and grocery & household goods businesses, comparable store sales would have increased 0.8% for the year. Excluding the impact of consumer electronics, Sears Domestic comparable store sales would have decreased 0.5%, reflecting improved performance in the home appliance and mattress categories offset by declines in Sears Auto Centers, apparel and lawn & garden.

34


Gross Margin
Gross margin declined $1.6 billion to $7.1 billion in 2014 from $8.8 billion in 2013 due to the above noted decline in revenues, as well as a decline in gross margin rate. Gross margin included significant items which aggregated to $521 million and $1.6 billion for 2014 and 2013, respectively.
The gross margin rate for both Kmart and Sears Domestic for the year were impacted by transactions that offer both traditional promotional marketing discounts and Shop Your Way® points, predominantly in the first half of the year. As compared to the prior year, Kmart's gross margin rate decreased 50 basis points primarily driven by decreases in home, consumer electronics and seasonal, which were partially offset by an improvement in the apparel category. Sears Domestic's gross margin rate decreased 140 basis points in 2014 primarily driven by decreases in apparel, tools, home and consumer electronics, partially offset by an improvement in mattresses.
Selling and Administrative Expenses
Selling and administrative expenses decreased $1.2 billion to $8.2 billion in 2014 from $9.4 billion in 2013, and included significant items which aggregated to expense of $945 million and $1.7 billion for 2014 and 2013, respectively. Excluding these items, domestic selling and administrative expenses declined $394 million primarily due to decreases in payroll and advertising expenses.
Selling and administrative expenses as a percentage of revenues ("selling and administrative expense rate") were 26.3% and 25.9% for 2014 and 2013, respectively, and increased primarily as the decrease in overall selling and administrative expenses was offset by lower expense leverage due to the above noted decline in revenues.
Impairment Charges
We recorded impairment charges of $63 million and $233 million in 2014 and 2013, respectively, related to the impairment of long-lived assets as a result of store closings and impairment tests of our long-lived assets. Impairment charges recorded in both years are described further in Note 13 of Notes to Consolidated Financial Statements.
Gain on Sales of Assets
We recorded total gains on sales of assets of $207 million in 2014 and $667 million in 2013, which were primarily attributable to several significant real estate transactions. Gains on sales of assets recorded in both years are described further in Note 11 of Notes to Consolidated Financial Statements.
Operating Loss
We recorded an operating loss of $1.5 billion and $927 million in 2014 and 2013, respectively. The operating loss for 2014 included significant items which aggregated to expense of $461 million. The operating loss for 2013 included significant items which aggregated to operating income of $108 million. Excluding these items, we would have reported an operating loss of $1.0 billion in both 2014 and 2013.
Interest Expense
We incurred $313 million and $254 million in interest expense during 2014 and 2013, respectively. The increase is due to an increase in average outstanding borrowings in 2014.
Interest and Investment Income
We recorded interest and investment income of $132 million and $207 million during 2014 and 2013, respectively. Interest and investment income is described further in Note 6 of Notes to Consolidated Financial Statements.

35


Income Taxes
We recorded income tax expense of $125 million and $144 million in 2014 and 2013, respectively. Our effective tax rate for 2014 was 7.4% compared to 14.8% in 2013. The application of the requirements for accounting for income taxes, after consideration of our valuation allowance, causes a significant variation in the typical relationship between income tax expense and pretax income/loss. Our tax rate in 2014 continues to reflect the effect of not recognizing the benefit of current period losses in certain domestic and foreign jurisdictions where it is not more likely than not that such benefits would be realized. The 2014 rate was negatively impacted by a valuation allowance established on Sears Canada’s deferred tax assets in the third quarter, prior to de-consolidation, and increased foreign taxes in Puerto Rico resulting from a new tax law change, which became effective during the second quarter of 2014. These items were partially offset by state audit settlements and statute expirations. In addition, the 2014 rate was favorably impacted by the book to tax difference for the original issue discount relating to the $625 million 8% senior unsecured notes issued in November 2014, which resulted in the creation of a deferred tax liability through additional paid-in capital and a valuation allowance reversal through continuing operations.
Business Segment Results
Kmart
Kmart results and key statistics were as follows:
millions, except number of stores
2015
 
2014
 
2013
Merchandise sales and services
$
10,188

 
$
12,074

 
$
13,194

Comparable store sales %
(7.3
)%
 
(1.4
)%
 
(3.6
)%
Cost of sales, buying and occupancy
8,042

 
9,513

 
10,329

Gross margin dollars
2,146

 
2,561

 
2,865

Gross margin rate
21.1
 %
 
21.2
 %
 
21.7
 %
Selling and administrative
2,537

 
2,962

 
3,083

Selling and administrative expense as a percentage of total revenues
24.9
 %
 
24.5
 %
 
23.4
 %
Depreciation and amortization
72

 
95

 
129

Impairment charges
14

 
29

 
70

Gain on sales of assets
(185
)
 
(103
)
 
(66
)
Total costs and expenses
10,480

 
12,496

 
13,545

Operating income (loss)
$
(292
)
 
$
(422
)
 
$
(351
)
Adjusted EBITDA
$
(273
)
 
$
(216
)
 
$
(129
)
Total Kmart stores
941

 
979

 
1,152

2015 Compared to 2014
Revenues and Comparable Store Sales
Kmart’s revenues decreased by $1.9 billion to $10.2 billion in 2015, primarily due to the effect of having fewer stores in operation, which accounted for approximately $1.1 billion of the decline. Revenues were also impacted by a decrease in comparable store sales of 7.3%, which accounted for approximately $787 million of the decline.
The decline in comparable store sales was primarily driven by declines in the consumer electronics, apparel, grocery & household and drugstore categories, partially offset by increases in the home appliances, mattresses and seasonal categories. Excluding the impact of the consumer electronics business, which is a business we continue to alter to meet our members' needs, Kmart comparable store sales would have decreased 5.5%.

36


Gross Margin
Kmart generated $2.1 billion in gross margin in 2015 compared to $2.6 billion in 2014. The decrease in Kmart’s gross margin is due to the above noted decrease in sales, as well as a slight decrease in gross margin rate. Gross margin included significant items which aggregated to $28 million and $54 million for 2015 and 2014, respectively. Excluding these items, gross margin decreased $441 million.
Kmart's gross margin rate declined 10 basis points to 21.1% in 2015 from 21.2% in 2014, as increases experienced in a majority of categories, most notably grocery & household, consumer electronics, drugstore and toys, were more than offset by decreases in the apparel and pharmacy categories.
In addition, as a result of the Seritage and JV transactions, 2015 included additional rent expense and assigned sub-tenant rental income of approximately $25 million.
Selling and Administrative Expenses
Kmart's selling and administrative expenses decreased $425 million in 2015. Selling and administrative expenses included significant items which aggregated to expense of $90 million and $131 million for 2015 and 2014, respectively. Excluding these items, selling and administrative expenses decreased $384 million primarily due to decreases in payroll and advertising expenses.
Kmart's selling and administrative expense rate was 24.9% in 2015 and 24.5% in 2014 and increased primarily as a result of lower expense leverage due to the sales decline noted above.
Depreciation and Amortization
Depreciation and amortization expense decreased by $23 million during 2015 to $72 million, primarily due to having fewer assets to depreciate.
Impairment charges
Kmart recorded impairment charges of $14 million and $29 million in 2015 and 2014, respectively, related to the impairment of long-lived assets. Impairment charges recorded during 2015 and 2014 are further described in Note 13 of Notes to Consolidated Financial Statements.
Gain on Sales of Assets
Kmart recorded total gains on sales of assets of $185 million and $103 million in 2015 and 2014, respectively. Gains recorded in 2015 included gains of $137 million recognized in connection with the sale-leaseback transaction with Seritage. Gains on sales of assets recorded in both years are described further in Note 11 of Notes to Consolidated Financial Statements.
Operating Loss
Kmart recorded an operating loss of $292 million in 2015 as compared to $422 million in 2014. Operating loss for 2015 included significant items which aggregated to operating income of $14 million, while operating loss for 2014 included significant items which aggregated to operating expense of $208 million. Excluding these items, Kmart would have reported an operating loss of $306 million and $214 million for 2015 and 2014, respectively. The increase in Kmart's operating loss was primarily driven by the decrease in gross margin, partially offset by the decrease in selling and administrative expenses.

37


2014 Compared to 2013
Revenues and Comparable Store Sales
Kmart’s revenues decreased by $1.1 billion to $12.1 billion in 2014 due to the effect of having fewer stores in operation in 2014, which accounted for approximately $968 million of the decline. Revenues were also impacted by a decrease in comparable store sales of 1.4%, which accounted for approximately $170 million of the decline.
The decline in comparable store sales of 1.4% reflects positive performance in several categories, most notably apparel and jewelry, partially offset by declines in the consumer electronics and grocery & household goods categories. Excluding the impact of the consumer electronics and grocery & household goods businesses, comparable store sales would have increased 0.8% for the year.
Gross Margin
Kmart generated $2.6 billion in gross margin in 2014 compared to $2.9 billion in 2013. The decrease in Kmart’s gross margin is due to the above noted decrease in sales, as well as a decline in gross margin rate. Gross margin included significant items which aggregated to $54 million and $45 million for 2014 and 2013, respectively. Excluding these items, gross margin decreased $295 million.
Kmart's gross margin rate declined 50 basis points to 21.2% in 2014 from 21.7% in 2013, and was impacted by transactions that offer both traditional promotional marketing discounts and Shop Your Way® points. The gross margin rate decline was primarily driven by decreases in home, consumer electronics and seasonal, which were partially offset by an improvement in the apparel category.
Selling and Administrative Expenses
Kmart’s selling and administrative expenses decreased $121 million in 2014. The decrease primarily reflects decreases in payroll and advertising expenses. Selling and administrative expenses included significant items which aggregated to expense of $131 million and $44 million for 2014 and 2013, respectively.
Kmart’s selling and administrative expense rate was 24.5% in 2014 and 23.4% in 2013 and increased primarily as a result of lower expense leverage due to the sales decline noted above.
Depreciation and Amortization
Depreciation and amortization expense decreased $34 million in 2014 to $95 million and included charges of $4 million and $9 million in 2014 and 2013, respectively, taken in connection with store closings. The overall decrease is primarily due to having fewer assets to depreciate.
Impairment charges
Kmart recorded impairment charges of $29 million and $70 million in 2014 and 2013, respectively, related to the impairment of long-lived assets. Impairment charges recorded during 2014 and 2013 are further described in Note 13 of Notes to Consolidated Financial Statements.
Gain on Sales of Assets
Kmart recorded total gains on sales of assets of $103 million and $66 million in 2014 and 2013, respectively. Gains on sales of assets recorded in both years are described further in Note 11 of Notes to Consolidated Financial Statements.

38


Operating Loss
Kmart recorded an operating loss of $422 million in 2014 as compared to $351 million in 2013. Operating loss in 2014 included significant items which aggregated to an operating expense of $208 million. Operating income in 2013 also included significant items which aggregated to an operating expense of $144 million. Excluding these items, Kmart would have reported an operating loss of $214 million and $207 million in 2014 and 2013, respectively. This decline in operating performance was primarily the result of the above noted declines in sales and gross margin, partially offset by decreases in selling and administrative and depreciation expenses.
Sears Domestic
Sears Domestic results and key statistics were as follows:
millions, except number of stores
2015
 
2014
 
2013
Merchandise sales and services
$
14,958

 
$
17,036

 
$
19,198

Comparable store sales %
(11.1
)%
 
(2.1
)%
 
(1.4
)%
Cost of sales, buying and occupancy
11,294

 
12,950

 
14,324

Gross margin dollars
3,664

 
4,086

 
4,874

Gross margin rate
24.5
 %
 
24.0
 %
 
25.4
 %
Selling and administrative
4,320

 
4,655

 
5,216

Selling and administrative expense as a percentage of total revenues
28.9
 %
 
27.3
 %
 
27.2
 %
Depreciation and amortization
350

 
437

 
511

Impairment charges
260

 
19

 
150

Gain on sales of assets
(558
)
 
(105
)
 
(63
)
Total costs and expenses
15,666

 
17,956

 
20,138

Operating loss
$
(708
)
 
$
(920
)
 
$
(940
)
Adjusted EBITDA
$
(563
)
 
$
(421
)
 
$
(211
)
Lands' End separation

 
(10
)
 
(150
)
Adjusted EBITDA as defined(1)
$
(563
)
 
$
(431
)
 
$
(361
)
Number of:
 
 
 
 
 
Full-line stores
705

 
717

 
778

Specialty stores
26

 
29

 
50

Total Domestic Sears Stores
731

 
746

 
828

__________________
(1) Adjusted to reflect the results of the Lands' End business that were included in our results of operations prior to the separation.
2015 Compared to 2014
Revenues and Comparable Store Sales
Sears Domestic's revenues decreased by $2.1 billion to $15.0 billion in 2015. This decline in revenues was primarily driven by a decrease in comparable store sales of 11.1%, which accounted for $1.2 billion of the decline, and the effect of having fewer Full-line stores in operation, which accounted for $433 million of the decline. The revenue decline also included $222 million lower revenue as a result of the separation of the Lands' End business, which occurred in the first quarter of 2014, as well as lower revenues from our Home Services business of approximately $110 million. The decline in comparable store sales was driven by reduced, but more highly targeted promotional and marketing spend to better align with member needs and a shift away from low margin categories, such as consumer electronics. Comparable store sales in the latter part of the year, particularly in the apparel and

39


softlines businesses, were negatively impacted by unseasonably warm weather and a highly promotional environment.
Sears Domestic comparable store sales were also negatively impacted by consumer electronics. Excluding the impact of consumer electronics, Sears Domestic comparable store sales would have decreased 9.5%, primarily driven by decreases in apparel, home appliances, lawn & garden and Sears Auto Centers, which were partially offset by an increase in the mattresses category.
Gross Margin
Sears Domestic generated gross margin of $3.7 billion and $4.1 billion in 2015 and 2014, respectively, and included significant items which aggregated to additional gross margin of $182 million and $73 million for 2015 and 2014, respectively. Excluding these items, gross margin decreased $531 million.
Sears Domestic's gross margin rate for the year improved 50 basis points to 24.5% in 2015 from 24.0% in 2014. Excluding the impact of significant items recorded in gross margin during the year, Sears Domestic's gross margin rate declined 60 basis points, with the most notable decreases experienced in the apparel and home appliances categories, primarily driven by increased promotional activities, particularly during the fourth quarter of 2015 as a result of the highly competitive promotional environment.
In addition, as a result of the Seritage and JV transactions, 2015 includes additional rent expense and assigned sub-tenant rental income of approximately $108 million.
Selling and Administrative Expenses
Sears Domestic’s selling and administrative expenses decreased $335 million in 2015 as compared to 2014 and included significant items which aggregated to $275 million and $211 million for 2015 and 2014, respectively. Excluding these items, selling and administrative expenses decreased $399 million, primarily due to a decrease in payroll expense.
Sears Domestic’s selling and administrative expense rate was 28.9% in 2015 and 27.3% in 2014 and increased as the above noted expense reduction was more than offset by the decline in sales noted above.
Depreciation and Amortization
Depreciation and amortization expense decreased by $87 million during 2015 to $350 million, primarily due to having fewer assets to depreciate.
Impairment Charges
Sears Domestic recorded impairment charges of $260 million which consisted of impairment of $180 million related to the Sears trade name, as well as $80 million related to the impairment of long-lived assets. We recorded impairment charges of $19 million in 2014 related to the impairment of long-lived assets. Impairment charges recorded in both years are described further in Notes 1 and 13 of Notes to Consolidated Financial Statements.
Gain on Sales of Assets
Sears Domestic recorded total gains on sales of assets of $558 million and $105 million in 2015 and 2014, respectively. The gains recorded in 2015 included $371 million recognized in connection with the joint venture transactions and the sale-leaseback transaction with Seritage. Gains on sales of assets recorded in both years are described further in Note 11 of Notes to Consolidated Financial Statements.
Operating Loss
Sears Domestic reported an operating loss of $708 million in 2015 compared to $920 million in 2014. Sears Domestic’s operating loss in 2015 included significant items which aggregated to operating income of $185 million, while Sears Domestic's operating loss for 2014 included significant items which aggregated to operating expense of $87 million. Excluding these items, we would have reported an operating loss of $893 million and $833 million for

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2015 and 2014, respectively. The increase in operating loss in 2015 was driven by the above noted decrease in gross margin, partially offset by the decline in selling and administrative expenses.
2014 Compared to 2013
Revenues and Comparable Store Sales
Sears Domestic's revenues decreased by $2.2 billion to $17.0 billion in 2014. The decline in revenue was driven by the separation of the Lands' End business, which was completed on April 4, 2014, and accounted for $1.3 billion of the decline, as well as the effect of having fewer Full-line stores in operation in 2014, which accounted for $311 million of the decline. Sears Domestic also experienced a revenue decline in its Home Services business in 2014 of $139 million, as well as a decline in revenues from SHO of $119 million. Revenues were also impacted by a decrease in comparable store sales of 2.1%, which accounted for $251 million of the decline.
Excluding the impact of consumer electronics, Sears Domestic comparable store sales would have decreased 0.5%, reflecting improved performance in the home appliance and mattress categories offset by declines in Sears Auto Centers, apparel and lawn & garden.
Gross Margin
Sears Domestic generated gross margin of $4.1 billion and $4.9 billion in 2014 and 2013, respectively. Gross margin included significant items which aggregated to $73 million and $605 million for 2014 and 2013, respectively. Excluding these items, gross margin decreased $256 million.
Sears Domestic’s gross margin rate was 24.0% in 2014 and 25.4% in 2013 and was impacted by transactions that offer both traditional promotional marketing discounts and Shop Your Way® points, predominantly in the first half of the year. The decrease in gross margin rate of 140 basis points in 2014 was primarily driven by decreases in apparel, tools, home and consumer electronics, partially offset by an improvement in mattresses.
Selling and Administrative Expenses
Sears Domestic’s selling and administrative expenses decreased $561 million in 2014 as compared to 2013. Selling and administrative expenses included significant items which aggregated to expense of $211 million and $586 million for 2014 and 2013, respectively. Excluding these items, selling and administrative expenses decreased by $186 million primarily due to declines in payroll and advertising expenses.
Sears Domestic’s selling and administrative expense rate was 27.3% in 2014 and 27.2% in 2013 and increased slightly as the above noted expense reduction was more than offset by the decline in sales noted above.
Depreciation and Amortization
Depreciation and amortization expense decreased $74 million in 2014 to $437 million and included charges of $4 million and $2 million in 2014 and 2013, respectively, taken in connection with store closings. The decrease is primarily attributable to having fewer assets available for depreciation.
Impairment Charges
Sears Domestic recorded impairment charges of $19 million and $150 million in 2014 and 2013, respectively, related to the impairment of long-lived assets. Impairment charges recorded in both years are described further in Note 13 of Notes to Consolidated Financial Statements.
Gain on Sales of Assets
Sears Domestic recorded total gains on sales of assets of $105 million in 2014 and $63 million in 2013. Gains on sales of assets recorded in both years are described further in Note 11 of Notes to Consolidated Financial Statements.

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Operating Loss
Sears Domestic reported an operating loss of $920 million in 2014 compared to $940 million in 2013. Sears Domestic’s operating loss in 2014 included significant items which aggregated to an operating expense of $87 million. Operating loss in 2013 included significant items which aggregated to an operating expense of $112 million. Excluding these items, Sears Domestic would have reported an operating loss of $833 million and $828 million in 2014 and 2013, respectively. The slight increase in operating loss in 2014 was driven by the above noted decline in sales and gross margin, partially offset by decreases in selling and administrative and depreciation expenses.
Sears Canada
Sears Canada conducts similar retail operations as Sears Domestic. As previously noted, the Company completed a rights offering for a portion of its interest in Sears Canada in the third quarter of 2014. As such, the Company no longer maintained control of Sears Canada resulting in the de-consolidation of Sears Canada on October 16, 2014.
Sears Canada results and key statistics through the date of de-consolidation were as follows:
millions, except number of stores
2014
 
2013
Merchandise sales and services
$
2,088

 
$
3,796

Comparable sales %
(8.0
)%
 
(2.7
)%
Cost of sales, buying and occupancy
1,586