STORE CLOSING CHARGES, SEVERANCE COSTS, IMPAIRMENTS AND REAL ESTATE TRANSACTIONS

Store Closings and Severance

We closed 14 stores in our Kmart segment and 7 stores in our Sears Domestic segment that we previously announced would close during the 13 week period ended July 29, 2017, and 125 stores in our Kmart segment and 51 stores in our Sears Domestic segment during the 26 week period ended July 29, 2017. We made the decision to close 92 stores in our Kmart segment and 45 stores in our Sears Domestic segment during the 13 week period ended July 29, 2017, and 114 stores in our Kmart segment and 55 stores in our Sears Domestic segment during the 26 week period ended July 29, 2017.

We closed 13 stores in our Kmart segment and 18 stores in our Sears Domestic segment we previously announced would close during the 13 week period ended July 30, 2016, and 58 stores in our Kmart segment and 23 stores in our Sears Domestic segment during the 26 week period ended July 30, 2016. We made the decision to close two stores in our Kmart segment and two stores in our Sears Domestic segment during the 13 week period ended July 30, 2016, and 95 stores in our Kmart segment and 26 stores in our Sears Domestic segment during the 26 week period ended July 30, 2016.

In accordance with accounting standards governing costs associated with exit or disposal activities, expenses related to future rent payments for which we no longer intend to receive any economic benefit are accrued for when we cease to use the leased space and have been reduced for any estimated sublease income.

We expect to record additional charges of approximately $42 million during 2017 related to stores that we had previously made the decision to close, but have not yet closed.

Store closing costs and severance recorded for the 13- and 26- week periods ended July 29, 2017 and July 30, 2016 were as follows:



millions	Markdowns⁽¹⁾		Severance Costs⁽²⁾		Lease Termination Costs⁽²⁾			Other Charges⁽²⁾		Impairment and Accelerated Depreciation⁽³⁾		Total Store Closing Costs
Kmart	$	68	$	8	$	(18	)	$	10	$	4	$	72
Sears Domestic	21		23		10			6		4		64
Total for the 13 week period ended July 29, 2017	$	89	$	31	$	(8	)	$	16	$	8	$	136

Kmart	$	3	$	1	$	(25	)	$	—	$	—	$	(21	)
Sears Domestic	1		1		1			—		1		4
Total for the 13 week period ended July 30, 2016	$	4	$	2	$	(24	)	$	—	$	1	$	(17	)

Kmart	$	78	$	13	$	(2	)	$	13	$	5	$	107
Sears Domestic	26		34		35			7		9		111
Total for the 26 week period ended July 29, 2017	$	104	$	47	$	33		$	20	$	14	$	218

Kmart	$	54	$	6	$	(19	)	$	11	$	4	$	56
Sears Domestic	10		2		2			3		1		18
Total for the 26 week period ended July 30, 2016	$	64	$	8	$	(17	)	$	14	$	5	$	74

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⁽¹⁾	Recorded within cost of sales, buying and occupancy in the Condensed Consolidated Statements of Operations.


⁽²⁾	Recorded within selling and administrative in the Condensed Consolidated Statements of Operations. Lease termination costs are net of estimated sublease income, and include the reversal of closed store reserves for which the lease agreement has been terminated and the reversal of deferred rent balances related to closed stores.


⁽³⁾	Costs for the 13- and 26- week periods ended July 29, 2017 and July 30, 2016 are recorded within depreciation and amortization in the Condensed Consolidated Statements of Operations.

Store closing costs and severance accruals of $228 million, $126 million and $216 million at July 29, 2017, July 30, 2016 and January 28, 2017, respectively, were as shown in the table below. Store closing accruals included $128 million, $57 million and $122 million within other current liabilities and $100 million, $69 million and $94 million within other long-term liabilities in the Condensed Consolidated Balance Sheets at July 29, 2017, July 30, 2016, and January 28, 2017, respectively.



millions	Severance Costs			Lease Termination Costs			Other Charges			Total
Balance at July 30, 2016	$	38		$	82		$	6		$	126
Store closing costs	33			98			27			158
Payments/utilizations	(17		)	(36		)	(15		)	(68		)
Balance at January 28, 2017	54			144			18			216
Store closing costs	47			53			20			120
Store closing capital lease obligations	—			25			—			25
Payments/utilizations	(53		)	(60		)	(20		)	(133		)
Balance at July 29, 2017	$	48		$	162		$	18		$	228

Long-Lived Assets

In accordance with accounting standards governing the impairment or disposal of long-lived assets, we performed an impairment test of certain of our long-lived assets due to events and changes in circumstances during the 13- and 26- week periods ended July 29, 2017 that indicated an impairment might have occurred. As a result of impairment testing, the Company recorded impairment charges of $5 million, of which $2 million and $3 million were recorded within the Sears Domestic and Kmart segments, respectively, during the 13 week period ended July 29, 2017, and $20 million, of which $12 million and $8 million were recorded within the Sears Domestic and Kmart segments, respectively, during the 26 week period ended July 29, 2017.

As a result of impairment testing, the Company recorded impairment charges of $7 million, of which $6 million and $1 million were recorded within the Sears Domestic and Kmart segments, respectively, during the 13 week period ended July 30, 2016, and $15 million, of which $11 million and $4 million were recorded within the Sears Domestic and Kmart segments, respectively, during the 26 week period ended July 30, 2016.

Real Estate Transactions

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 ($426 million, net of closing costs) (the "JV transactions"). The JV transactions valued the JV properties at $858 million in the aggregate.

On July 7, 2015, Holdings completed its rights offering and sale-leaseback transaction (the "Seritage transaction") with Seritage Growth Properties ("Seritage"), an 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 ($2.6 billion, net of closing costs). The Seritage transaction valued the REIT properties at $2.3 billion in the aggregate.

In connection with the Seritage transaction and JV transactions, Holdings entered into agreements with Seritage and the JVs under which Holdings leases 255 of the properties (the "Master Leases"), with the remaining properties being leased by Seritage to third parties. Holdings has closed 15 stores pursuant to recapture notices from Seritage or the JVs and 36 stores pursuant to lease terminations. Also, in July 2017, Seritage sold a 50% joint venture interest in five of the properties and Holdings will pay rent to the new landlord. Holdings recorded rent expense of $22 million and $26 million within cost of sales, buying and occupancy in the Condensed Consolidated Statements of Operations for the 13 week periods ended July 29, 2017 and July 30, 2016, respectively, and $44 million and $50 million for the 26 week periods ended July 29, 2017 and July 30, 2016, respectively. Rent expense consisted of straight-line rent expense offset by amortization of deferred gain on sale-leaseback, as shown in the tables below.



	13 Weeks Ended July 29, 2017									13 Weeks Ended July 30, 2016
millions	Kmart			Sears Domestic			Sears Holdings			Kmart			Sears Domestic			Sears Holdings
Straight-line rent expense	$	5		$	36		$	41		$	8		$	40		$	48
Amortization of deferred gain on sale-leaseback	(2		)	(17		)	(19		)	(5		)	(17		)	(22		)
Rent expense	$	3		$	19		$	22		$	3		$	23		$	26



	26 Weeks Ended July 29, 2017									26 Weeks Ended July 30, 2016
millions	Kmart			Sears Domestic			Sears Holdings			Kmart			Sears Domestic			Sears Holdings
Straight-line rent expense	$	11		$	73		$	84		$	17		$	77		$	94
Amortization of deferred gain on sale-leaseback	(6		)	(34		)	(40		)	(9		)	(35		)	(44		)
Rent expense	$	5		$	39		$	44		$	8		$	42		$	50

We accounted for the Seritage transaction and JV transactions in accordance with accounting standards applicable to real estate sales and sale-leaseback transactions. We determined that the Seritage and JV transactions qualify for sales recognition and sale-leaseback accounting, with the exception of four properties for which we had continuing involvement as a result of an obligation to redevelop the stores for a third-party tenant and pay rent on behalf of the third-party tenant until it commences rent payments to the JVs.

With the exception of the four properties that had continuing involvement, in accordance with accounting standards related to sale-leaseback transactions, Holdings recognized any loss on sale immediately, any gain on sale in excess of the present value of minimum lease payments immediately, and any remaining gain was deferred and will be recognized in proportion to the related rent expense over the lease term. Accordingly, during the second quarter of 2015, Holdings recognized an immediate net gain of $508 million within gain on sales of assets in the Consolidated Statement of Operations for 2015.

The remaining gain of $894 million was deferred and will be recognized in proportion to the related rent expense, which is a component of cost of sales, buying and occupancy, in the Condensed Consolidated Statements of Operations, over the lease term. At July 29, 2017, July 30, 2016 and January 28, 2017, respectively, $156 million, $90 million and $132 million of the deferred gain on sale-leaseback is classified as current within other current liabilities. At July 29, 2017, July 30, 2016 and January 28, 2017, respectively, $455 million, $686 million and $563 million is classified as long-term deferred gain on sale-leaseback in the Condensed Consolidated Balance Sheets.

During the 26 week periods ended July 29, 2017 and July 30, 2016, respectively, Holdings recorded gains of $49 million and $26 million related to the 100% recapture of seven and three stores that closed pursuant to recapture notices from Seritage, of which $27 million and $13 million related to the gain that had previously been deferred as we no longer have continuing involvement in those properties, and $22 million and $13 million related to lease termination proceeds. In addition, the Master Leases provide Seritage and the JVs a recapture right with respect to 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, and all outparcels or outlots, as well as certain portions of parking areas and common areas, except as set forth in the Master Leases, for no additional consideration. As space is recaptured pursuant to the recapture right, Holdings' obligation to pay rent is reduced proportionately. Accordingly, Holdings recognizes gains equal to the unamortized portion of the gain that had previously been deferred which exceeds the present value of minimum lease payments, as reduced due to recapture activity. During the 26 week periods ended July 29, 2017 and July 30, 2016, respectively, Holdings recorded gains as a result of recapture activity of $5 million and $9 million that had previously been deferred. The Master Leases also provide Holdings certain rights to terminate the Master Leases with respect to REIT properties or JV properties that cease to be profitable for operation by Holdings. In order to terminate the Master Lease with respect to a certain property, Holdings must make a payment to Seritage or the JV of an amount equal to one year of rent (together with taxes and other expenses) with respect to such property. Holdings recorded gains related to stores that closed pursuant to lease terminations of $24 million that had previously been deferred during the 26 week period ended July 29, 2017. The corresponding expenses for termination payments to Seritage were recorded in fiscal year 2016 when we notified Seritage of our intention to terminate the leases and the stores were announced for closure. Holdings also recorded expenses of $24 million for termination payments to Seritage, which is reported as amounts payable to Seritage at July 29, 2017. Holdings also recorded immediate gains of $40 million during the 26 week period ended July 29, 2017, for the amount of gains on sale in excess of the present value of minimum lease payments for two of the properties that were previously accounted for as financing transactions. As the redevelopment at the stores had been completed and the third-party tenant had commenced rent payments to the JVs, the Company determined that the continuing involvement no longer existed and that the properties qualified for sales recognition and sale-leaseback accounting.

Holdings initially accounted for the four properties that had continuing involvement as a financing transaction in accordance with accounting standards related to sale-leaseback transactions. Accordingly, Holdings recorded a sale-leaseback financing obligation of $164 million, which is classified as a long-term sale-leaseback financing obligation on the Condensed Consolidated Balance Sheets at July 30, 2016 and January 28, 2017. The sale-leaseback financing obligation decreased to $70 million at July 29, 2017 as two of the properties qualified for sales recognition and sale-leaseback accounting as further described above. We continued to report the real property assets of $22 million, $61 million and $62 million at July 29, 2017, July 30, 2016 and January 28, 2017, respectively, in our Condensed Consolidated Balance Sheets, which are included in our Sears Domestic segment.

On July 17, 2017, Holdings completed a sale-leaseback transaction pursuant to which Holdings sold three distribution centers that served as collateral for the 2016 Secured Loan Facility for cash proceeds of $89 million ($84 million net of prepaid rent). The net proceeds were used to pay interest and a portion of the 2016 Secured Loan Facility. We accounted for the transaction as a financing transaction in accordance with accounting standards applicable to sale-leaseback transactions as a result of the requirement to prepay rent for one year. Accordingly, Holdings recorded a sale-leaseback financing obligation of $89 million, which is classified as a sale-leaseback financing obligation in the Condensed Consolidated Balance Sheets at July 29, 2017. We continued to report real property assets of $7 million at July 29, 2017 in our Condensed Consolidated Balance Sheets, which are included in our Sears Domestic segment. The obligation for future minimum lease payments at July 29, 2017 is $12 million over the lease term, and is $2 million, $4 million, $4 million and $2 million in 2017, 2018, 2019 and 2020, including $4 million that was prepaid upon closing the transaction.

On January 27, 2017, Holdings and CBL and Associates Properties, Inc. ("CBL") completed a sale-leaseback transaction pursuant to which Holdings sold five Sears Full-line stores and two Sears Auto Centers located at CBL malls for net proceeds of $71 million (the "CBL transaction"). In connection with the CBL transaction, Holdings entered into 10-year leaseback agreements. The agreements provide both CBL and Holdings the right to terminate each lease, and provide Holdings the option to relocate its operations at each mall to a location of up to 15,000 square feet. The agreement also contains an earn-out provision pursuant to which Holdings would receive a maximum amount of $14.5 million additional consideration if CBL redevelops any of the properties within a specified time period and achieves more than a specified return on investment. We accounted for the CBL transaction as a financing transaction in accordance with accounting standards applicable to sale-leaseback transactions as a result of continuing involvement through the earn-out provision. Accordingly, Holdings recorded a sale-leaseback financing obligation of $71 million, which is classified as a sale-leaseback financing obligation in the Condensed Consolidated Balance Sheets at both July 29, 2017 and January 28, 2017. We continued to report real property assets of $33 million and $34 million at July 29, 2017 and January 28, 2017, respectively, in our Condensed Consolidated Balance Sheets, which are included in our Sears Domestic segment.

In addition to the Seritage transaction, JV transactions and other sale-leaseback financing transactions described above, we recorded gains on the sales of assets for other significant items described as follows. During the 13 week period ended July 29, 2017, we recorded gains of $176 million on the sale of three Sears Full-line stores that served as collateral for our real estate loan facilities. We received net proceeds of $202 million for the sale of these stores, of which $126 million was used to pay interest and a portion of the 2016 Secured Loan Facility, $19 million was used to pay interest and a portion of the 2017 Secured Loan Facility, and $57 million was used to repay a portion of our revolving credit facility. During the 13 week period ended July 29, 2017, we also recorded gains of $74 million on the sale of four Sears Full-line stores and amendment and lease termination of two Sears Full-line stores for which we received $94 million of cash proceeds, $21 million of which was received in 2016. In connection with the sales of three of the Sears Full-line stores, we entered into leaseback agreements with terms ranging from six months to one year.

During the 26 week period ended July 29, 2017, we also recorded gains of $96 million on the sale of three Sears Full-line stores for which we received $104 million of cash proceeds. In connection with the sales of the Sears Full-line stores, we entered into leaseback agreements for up to one year.

During the 26 week period ended July 29, 2017, we recorded gains on the sales of assets of $40 million recognized on the sale of two Kmart stores that served as collateral for our real estate loan facilities. We received net proceeds of $48 million for the sale of these stores, of which $28 million was used to pay interest and a portion of the 2016 Secured Loan Facility and $20 million was used to pay interest and a portion of the 2017 Secured Loan Facility.

During the 26 week period ended July 30, 2016, we recorded gains on the sales of assets of $12 million recognized on the sale of one distribution center for which we received $23 million of cash proceeds.

We determined that we have surrendered substantially all of our rights and obligations, and, therefore, immediate gain recognition is appropriate on all of these transactions.