UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934 (Amendment No.    )

Filed by the Registrant    x

Filed by a Party other than the Registrant    ¨

Check the appropriate box:

¨    Preliminary Proxy Statement

¨    Confidential, for use of the Commission Only (as Permitted By Rule 14A-6(e)(2))

x    Definitive Proxy Statement

¨    Definitive Additional Materials

¨    Soliciting Material Pursuant to Section 240.14a-12

SEARS HOMETOWN AND OUTLET STORES, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

x No fee required

¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies:

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(3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

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¨ Fee paid previously with preliminary materials.

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

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(4) Date Filed:

SEARS HOMETOWN AND OUTLET STORES, INC.

5500 Trillium Boulevard, Suite 501

Hoffman Estates, Illinois 60192

April 22, 2016

Will Powell

Chief Executive Officer and President

Dear Stockholder:

I am delighted to be able to invite you to attend the Annual Meeting of Stockholders of Sears Hometown and Outlet Stores, Inc. (the “Company” or “SHO”) to be held on Wednesday, May 25, 2016. The meeting will begin at 9:00 a.m. (Central time), and SHO will host the meeting at the offices of Sears Holdings Corporation (which are adjacent to our corporate headquarters), in CTC Room 702A&B, 3333 Beverly Road, Hoffman Estates, Illinois 60179. Stockholders will enter the Sears Holdings Corporation offices at the Elm Building main entrance.

Whether or not you plan to attend the Annual Meeting in person, please read the accompanying Proxy Statement and vote your shares. Instructions for Internet and telephone voting are included in your proxy card. We have also enclosed a copy of our 2015 Annual Report on Form 10-K.

ADMISSION TO THE 2016 ANNUAL MEETING

An Admission Ticket (or other proof of stock ownership) and some form of government-issued photo identification (such as a valid driver’s license or passport) will be required for admission to the Annual Meeting.

Only stockholders who own SHO common stock as of the close of business on April 5, 2016 will be entitled to attend the Annual Meeting. An Admission Ticket will serve as verification of your ownership.

• If your SHO shares are registered in your name, an Admission Ticket is attached to your proxy card—please bring that Admission Ticket with you to the Annual Meeting.

• If your SHO shares are held in a bank or brokerage account, you can attend the Annual Meeting if you bring a recent bank or brokerage statement showing that you owned shares of SHO common stock on April 5, 2016. You may also contact your bank or broker to obtain a written legal proxy.

Registration will begin at 8:30 a.m. and seating will begin at 8:45 a.m. Cameras, recording devices, and other electronic devices will not be permitted at the Annual Meeting.

Sincerely,

Will Powell

Sears Hometown and Outlet Stores, Inc.

5500 Trillium Boulevard, Suite 501

Hoffman Estates, Illinois 60192

Notice of 2016 Annual Meeting of Stockholders

Date:	May 25, 2016
Time:	9:00 a.m. (Central Time)
Place:	Sears Holdings Corporation
	CTC Room 702A&B
	3333 Beverly Road
	Hoffman Estates, Illinois 60179
	Stockholders will enter the Sears Holdings Corporation offices at the Elm Building main entrance.

Please attend the Annual Meeting of Stockholders of Sears Hometown and Outlet Stores, Inc. (the “Company” or “our”) to:

1. Elect the six director nominees named in the accompanying Proxy Statement;

2. Approve, on an advisory basis, the compensation of our Named Executive Officers;

3. Ratify the appointment by the Audit Committee of BDO USA, LLP as the Company’s independent registered public accounting firm for fiscal year 2016; and

4. Consider any other business that may properly come before the Annual Meeting or any adjournments or postponements of the Annual Meeting.

The record date for determining stockholders entitled to notice of, and to vote at, the Annual Meeting is April 5, 2016. Only stockholders of record at the close of business on that date can vote at, or will be eligible to attend, the Annual Meeting.

It is important that your shares are represented at the Annual Meeting. Stockholders may vote their shares (1) in person at the Annual Meeting, (2) by telephone, (3) through the Internet, or (4) by completing and mailing a proxy card. Specific instructions for voting by telephone or through the Internet (including voting deadlines) are included in your proxy card. If you attend and vote at the Annual Meeting, your vote at the Annual Meeting will replace any earlier vote.

By Order of the Board of Directors.

Charles J. Hansen

Vice President, General Counsel, and Secretary

April 22, 2016

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE 2016

ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 25, 2016.

The Company’s Proxy Statement for the 2016 Annual Meeting of Stockholders and the Company’s 2015 Annual Report on Form 10-K are available at www.proxyvote.com.

The accompanying proxy is solicited on behalf of the Board of Directors (the “Board” or the “Board of Directors”) of Sears Hometown and Outlet Stores, Inc. (“SHO,” the “Company,” “we,” or “our”) for use at the Annual Meeting of Stockholders to be held on May 25, 2016.

QUESTIONS AND ANSWERS	3
CORPORATE GOVERNANCE	7
•    Corporate Governance Practices	7
•    Director Independence	7
•    Audit Committee Financial Experts	8
ITEM 1. ELECTION OF DIRECTORS	9
•    Members of the Board of Directors	9
•    Board Leadership Structure	10
•    The Board’s Role in Risk Oversight	11
•    Nomination of Director Candidates	11
•    Board Meetings and Attendance	12
•    Committees of the Board of Directors	12
•    Communications with the Board of Directors	14
•    Amount and Nature of Beneficial Ownership	14
•    Executive Compensation	17
•    Compensation Discussion and Analysis	17
•    Compensation Committee Role in Executive Compensation Decisions	25
•    Compensation Committee Interlocks and Insider Participation	25
•    Compensation Committee Report	25
•    2015 Fiscal Year Summary Compensation Table	27
•    2015 Fiscal Year Grants of Plan-Based Awards	29
•    SHO Employment Arrangements	29
•    Outstanding Equity Awards at 2015 Fiscal Year End	31
•    2015 Fiscal Year Option Exercises and Stock Vested	32
•    Potential Payments upon Termination of Employment or Change in Control	32
•    Compensation of Directors	37
ITEM 2. ADVISORY VOTE TO APPROVE THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS	38
ITEM 3. RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	39
•    Independent Registered Public Accounting Firm Fees	39
•    Report of the Audit Committee	40

CERTAIN RELATIONSHIPS AND TRANSACTIONS	41
OTHER INFORMATION	53
•    Other Business That May Come Before the Meeting	53
•    2017 Annual Meeting of Stockholders	53
•    Section 16(a) Beneficial Ownership Reporting Compliance	53
•    Solicitation of Proxies	53
•    2015 Annual Report on Form 10-K	53
IMPORTANT	54

QUESTIONS AND ANSWERS

Q: What is a proxy statement?

A: A proxy statement is a document, such as this one, required by the SEC that, among other things, explains the items on which you are asked to vote on the proxy card.

Q: What will stockholders be asked to do at the Annual Meeting?

A: At the SHO 2016 Annual Meeting of Stockholders (the “Annual Meeting”), our stockholders will be asked to:

• elect the six director nominees named in this Proxy Statement (see discussion beginning on page 9);

• approve, on an advisory basis, the compensation of our Named Executive Officers (who are described under “Item 1—Executive Compensation—2015 Fiscal Year Summary Compensation Table” in this Proxy Statement (see page 27));

• ratify the appointment of BDO USA, LLP as our independent registered public accounting firm for fiscal year 2016 (see discussion beginning on page 39); and

• consider any other business that may properly come before the Annual Meeting or any adjournments or postponements of the Annual Meeting.

Q: What does it mean to vote by proxy?

A: It means that you give someone else the right to vote your shares in accordance with your instructions. In this way you ensure that your vote will be counted even if you are unable to attend the Annual Meeting. If you give your proxy but do not include specific instructions on how to vote, the individuals named as proxies will vote your shares as follows:

• FOR the election of six nominees for director;

• FOR the approval, on an advisory basis, of the compensation of our Named Executive Officers as described in this Proxy Statement;

• FOR the ratification of the appointment of BDO USA, LLP as our independent registered public accounting firm for fiscal year 2016.

Q: Who is entitled to vote?

A: Only holders of our common stock at the close of business on April 5, 2016 (the “Record Date”) are entitled to vote at the Annual Meeting. Each outstanding share of common stock is entitled to one vote. There were 22,718,800 shares of our common stock outstanding on the Record Date.

Q: How do I cast my vote?

A: If you hold your shares directly in your own name you are a “registered stockholder,” and you can vote in person at the Annual Meeting or you can complete and submit a proxy through the Internet, by telephone, or by mail. If your shares are registered in the name of a broker or other nominee you are a “street-name stockholder,” and you will receive instructions from your broker or other nominee describing how to vote your shares.

Q: How do I vote by telephone or through the Internet?

A: If you are a registered stockholder, you may vote by telephone or through the Internet following the instructions in the proxy card. If you are a street-name stockholder, your broker or other nominee will provide information for you to use in directing your broker or nominee how to vote your shares.

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Q: Who will count the vote?

A: A representative of Broadridge Financial Services, Inc., an independent tabulator, will count the vote and act as the inspector of election.

Q: Can I change my vote after I have voted?

A: A subsequent vote by any means will change your prior vote. For example, if you voted by telephone, a subsequent Internet vote will change your vote. If you are a registered stockholder and wish to change your vote by mail, you may do so by requesting, in writing, a proxy card from the Company’s Secretary at Sears Hometown and Outlet Stores, Inc., Law Department, 5500 Trillium Boulevard, Suite 501, E5-094B, Hoffman Estates, Illinois 60192, Attn: General Counsel and Secretary. The last vote received prior to the Annual Meeting will be the one counted. If you are a registered stockholder, you may also change your vote by voting in person at the Annual Meeting. Street-name stockholders wishing to change their votes after returning voting instructions to their broker or other nominee must contact the broker or nominee directly.

Q: Can I revoke a proxy?

A: Yes, registered stockholders may revoke a properly executed proxy at any time before it is exercised by submitting a letter addressed to, and received by, the Company’s Secretary at the address listed in the answer to the previous question. Street-name stockholders cannot revoke their proxies in person at the Annual Meeting because the actual registered stockholders, the brokers or other nominees, will not be present.

Q: What does it mean if I receive more than one proxy or voting instruction card?

A: It means your shares are registered differently or are in more than one account. Please sign and return all proxy cards or vote each account by telephone or the Internet to ensure that all of your shares are voted. We encourage you to register all your accounts in the same name and address. Registered stockholders may contact our transfer agent, Computershare Trust Company, N.A. at P.O. Box 43078, Providence, Rhode Island 02940-3078 (1-888-679-2864). Street-name stockholders holding shares through a broker or other nominee should contact their broker or nominee and request consolidation of their accounts.

Q: What shares are included on my proxy card?

A: Your proxy card includes all shares registered to your account under the same social security number and address.

Q: What makes a quorum?

A: Each outstanding share of our common stock as of the Record Date is entitled to one vote at the Annual Meeting. A majority of the outstanding shares entitled to vote being present or represented by proxy at the Annual Meeting constitutes a quorum. A quorum is necessary to conduct the Annual Meeting.

Q: How many votes are needed to approve each of the proposals?

A: Item 1: The director nominees will be elected by a plurality of the votes cast by the shares of common stock entitled to vote at the Annual Meeting and present in person or represented by proxy. This means that the six nominees who receive the most affirmative votes will be elected as directors.

Item 2: Advisory approval of the compensation of our Named Executive Officers requires the affirmative vote of a majority of those shares present in person or represented by proxy and entitled to vote at the Annual Meeting.

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Item 3: Ratification of the appointment of BDO USA, LLP as our independent registered public accounting firm requires the affirmative vote of a majority of those shares present in person or represented by proxy and entitled to vote at the Annual Meeting.

Q: How are votes counted?

A: In accordance with Delaware law, our Certificate of Incorporation, as amended, and our Amended and Restated Bylaws (“Bylaws”), all votes entitled to be cast by stockholders present in person or represented by proxy at the Annual Meeting and entitled to vote on the subject matter, whether those stockholders vote “for,” “against,” or abstain from voting, will be counted for purposes of determining the minimum number of affirmative votes required to (1) approve, on an advisory basis, the compensation of our Named Executive Officers and (2) ratify the appointment of BDO USA, LLP as our independent registered public accounting firm for the 2016 fiscal year.

Q: What is the effect of an abstention?

A: The shares of a stockholder who abstains from voting on a matter will be counted for purposes of determining whether a quorum is present at the Annual Meeting so long as the stockholder is present in person or represented by proxy. With regard to the election of directors, votes may be cast in favor or withheld, and votes that are withheld will have no effect. Abstentions may be specified on all other proposals. An abstention from voting on a matter by a stockholder present in person or represented by proxy at the Annual Meeting has the same legal effect as a vote “against” the proposals to approve, on an advisory basis, the compensation of our Named Executive Officers and to ratify the appointment of BDO USA, LLP as our independent registered public accounting firm for the 2016 fiscal year.

Q: How will votes be counted on shares held through brokers and other nominees?

A: If you are a street-name stockholder and do not provide your broker or other nominee with voting instructions, your shares may constitute “broker non-votes.” Generally, broker non-votes occur on a matter when a broker or other nominee is not permitted to vote on that matter without instructions from the beneficial owner and instructions are not given. Brokers and other nominees are not entitled to vote on the election of directors or the advisory proposal to approve the compensation of our Named Executive Officers unless the brokers or other nominees receive voting instructions from the beneficial owner. The shares of a stockholder whose shares are not voted because of a broker non-vote on a particular matter will be counted for purposes of determining whether a quorum is present at the Annual Meeting so long as the stockholder is represented by proxy. In tabulating the voting result for any particular proposal, shares that constitute broker non-votes are not considered present and entitled to vote on that proposal. Thus, broker non-votes will not affect the outcome of any matter being voted on at the Annual Meeting, assuming that a quorum is obtained. Brokers and other nominees will be permitted to vote without voting instructions on the ratification of the appointment of BDO USA, LLP as our independent registered public accounting firm for the 2016 fiscal year.

Q: Who may attend the Annual Meeting?

A: All stockholders as of the Record Date may attend. Seating and parking are limited and admission is on a first-come basis. If you are a registered stockholder, an admission ticket is attached to your proxy card. Each stockholder may be asked to present valid picture identification (for example, a driver’s license or a passport). If you are a street-name stockholder and you received printed copies of your proxy materials, you will need to bring a copy of a brokerage statement, proxy materials, or a letter from the broker or other nominee confirming ownership of SHO shares as of the Record Date.

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Q: Can I access future annual meeting materials through the Internet rather than receiving them by mail?

A: Yes. Registered stockholders can sign up for electronic delivery at www.proxyvote.com. If you vote through the Internet, you can also sign up for electronic delivery. Just follow the instructions that appear after you finish voting. You will receive an e-mail next year containing the Company’s 2016 Annual Report on Form 10-K and the proxy statement for our 2017 Annual Meeting of Stockholders. Street-name stockholders may also have the opportunity to receive copies of these documents electronically. Please check the information provided in the proxy materials mailed to you by your broker or other nominee regarding the availability of this service. This procedure reduces the printing costs and fees we incur in connection with the solicitation of proxies.

Q: What is “householding”?

A: SHO has adopted a procedure called “householding,” which has been approved by the SEC. Under this procedure, registered stockholders who have the same address and last name and do not receive proxy materials electronically will receive a single set of proxy materials, unless one or more of these stockholders notifies the Company that they wish to continue receiving individual copies. Stockholders who participate in householding will continue to receive separate proxy cards. This procedure can result in significant savings to SHO by reducing printing and postage costs.

If you participate in householding and wish to receive a separate set of proxy materials, or if you wish to receive separate copies of future proxy materials, Annual Reports on Form 10-K, and proxy statements please contact Broadridge Financial Solutions at Broadridge Financial Solutions, Inc., Householding Department, 51 Mercedes Way, Edgewood, New York 11717 or 1-800-542-1061. The Company will deliver the requested documents to you promptly upon your request.

Registered stockholders who share the same address, currently receive multiple copies of proxy materials, and who wish to receive only one copy of these materials per household in the future may contact Broadridge Financial Solutions at the address or telephone number listed above. Street-name stockholders should contact their broker or other nominee to request information about householding.

Q: How do I revoke my consent to the householding program?

A: Registered stockholders who wish to discontinue their participation in the householding of Annual Reports on Form 10-K, proxy statements, and other disclosure documents may revoke their consent to the householding program by writing to Broadridge Financial Solutions, Inc., Householding Department, 51 Mercedes Way, Edgewood, New York 11717. Registered stockholders may also revoke their consent by contacting SHO’s householding agent toll free at 1-800-542-1061 and following the voice prompts. These stockholders will be removed from the householding program within 30 days of receipt of the revocation of consent.

A number of brokerage firms have instituted householding. Street-name stockholders should contact their broker or other nominee to request information about householding.

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CORPORATE GOVERNANCE

Corporate Governance Practices

E.J. Bird, James F. Gooch, Josephine Linden, William K. Phelan, Will Powell, and David Robbins currently serve as the members of our Board of Directors. The Board is committed to effective corporate governance as a publicly traded company. To that end, the Board has approved and adopted Corporate Governance Guidelines and Board committee charters that provide the framework for SHO’s governance and that are in compliance with the corporate governance requirements of the Stock Market Rules of The Nasdaq Stock Market LLC. The Nominating and Corporate Governance Committee will review and assess the Corporate Governance Guidelines annually and recommend changes to the Board as appropriate. The Corporate Governance Guidelines, the charters of Board committees, our Code of Conduct, and our Board of Directors Code of Conduct, are available on our website at www.shos.com under the heading “Governance.” Among other things, the Corporate Governance Guidelines provide that:

• A majority of the members of our Board must satisfy the independence standards of Nasdaq’s Stock Market Rules.

• Independent directors are to meet regularly, at least twice a year, in executive session without management present.

• The Board and its committees have the power to engage, at the Company’s expense, independent legal, financial, and other advisors as deemed necessary, without consulting or obtaining the approval of the Company’s officers in advance.

• The Board will conduct annual evaluations to assess whether it and its committees are functioning effectively.

The Company’s Insider Trading Policies provide that Board members and the Company’s employees are prohibited from (i) holding the Company’s securities in a margin account or pledging the Company’s securities as collateral for a loan and (ii) engaging in transactions in publicly traded options based on the Company’s securities, such as puts, calls, and other derivative securities, on an exchange or in any other organized market.

The Company’s Annual Incentive Plan and the Company’s Long-Term Incentive Program provide that the Company will seek reimbursement from the Company’s executive officers if the Company’s financial statements or approved financial measures are subject to restatement due to error or misconduct, to the extent permitted by law. The Company’s Annual Incentive Plan and the Company’s Long-Term Incentive Program are included as exhibits to the Company’s 2015 Annual Report on Form 10-K.

Director Independence

The Board of Directors analyzed the independence of each director. In the course of the Board’s independence determinations the Board considered, among other things, relationships and arrangements required to be disclosed pursuant to SEC rules. As a result of this review, the Board affirmatively determined that E.J. Bird, James F. Gooch, Josephine Linden, William K. Phelan, and David Robbins each meets the standards of independence with respect to Board membership under our Corporate Governance Guidelines and the applicable Nasdaq listing rules, including that each of them is free of any relationship that would interfere with his or her individual exercise of independent judgment.

The Board of Directors also determined that (1) all three members of the Compensation Committee meet the independence criteria applicable to compensation committee members under the Nasdaq listing rules and (2) all three members of the Audit Committee meet additional, heightened independence criteria applicable to audit committee members under the Nasdaq listing rules. The Board of Directors also determined during the Company’s 2015 fiscal year (February 1, 2015 to January 30, 2016) that James F. Gooch, who resigned as Chair and as a member of the Audit Committee on February 1, 2016, had prior to his resignation met the heightened independence criteria applicable to audit committee members under the Nasdaq listing rules.

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Audit Committee Financial Experts

The Board has determined that William K. Phelan and David Robbins, members of the Audit Committee, each is an “audit committee financial expert” as defined in Item 407(d)(5) of the SEC’s Regulation S-K.

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ITEM 1. ELECTION OF DIRECTORS

Item 1 concerns the election of the following six nominees to our Board of Directors: E.J. Bird; James F. Gooch; Josephine Linden; William K. Phelan; Will Powell; and David Robbins. Each of the nominees is a current member of the Board of Directors. If elected, the six nominees each will hold office until the earlier of the next annual meeting of stockholders or his or her successor is elected and qualified. The persons named in the proxy card (the “proxies”) will vote FOR the election of all of the nominees listed below unless otherwise instructed. You may not vote for a greater number of persons than the number of nominees named in this Proxy Statement.

The Board of Directors expects all of the nominees to be available for election. If a nominee should become unavailable to serve as a director for any reason prior to the Annual Meeting, the Board may substitute another person as a nominee. In that case your shares will be voted for that other person.

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE ELECTION OF THE FOLLOWING

SIX INDIVIDUALS, EACH OF WHOM IS A CURRENT MEMBER OF THE BOARD OF

DIRECTORS: E.J. BIRD; JAMES F. GOOCH; JOSEPHINE LINDEN; WILLIAM K. PHELAN;

WILL POWELL; AND DAVID ROBBINS

Members of the Board of Directors

The following biographies of the nominees to our Board of Directors contain information for each nominee regarding the nominee’s service as a director, business experience, director positions held currently or at any time during the last five years, information regarding involvement in certain legal or administrative proceedings, if applicable, and the experiences, qualifications, attributes, or skills that caused the Board to determine that the nominee should serve as a member of our Board of Directors.

E.J. Bird, 53, has been a director of SHO since the Company’s 2012 separation (the “Separation”) from Sears Holdings Corporation, a retailer holding company (“Sears Holdings”). Since March 15, 2013 he has served as Executive Vice President and Chief Financial Officer of Sears Canada Inc., a retailer. Mr. Bird has advised the Company that he has resigned this employment effective June 30, 2016. Mr. Bird served as a director of Sears Canada Inc. from May 2006 until September 2013. Prior to his Sears Canada Inc. employment he was a private investor. He is also the President of Overflow Ministries, a not-for-profit organization, and has held this position since October 2003. Mr. Bird served as an analyst for Levine Investments, an investment partnership with public and private investments, from July 2002 to February 2010 and as Chief Financial Officer of ESL Investments, Inc., a hedge fund, from September 1991 to June 2002. Mr. Bird brings a wealth of financial knowledge to the Board and has extensive expertise with respect to financial matters.

James F. Gooch, 48, has been a director of SHO since March 2013. Since January 30, 2016 he has served as Chief Operating Officer and Chief Financial Officer of Lands’ End, Inc., a retailer. He served as Co-Chief Executive Officer and Chief Administrative Officer of DeMoulas Supermarkets, Inc., a retailer, from March 2014 until December 2014. From December 2014 to January 2016 he served as a retail consultant. He served as President and Chief Executive Officer of RadioShack Corporation, an electronics retailer, from May 2011 to October 2012, as President and Chief Financial Officer of RadioShack Corporation from January 2011 to May 2011, and as Chief Financial Officer of RadioShack Corporation from August 2006 to January 2011. Earlier in his career he was employed by Helene Curtis (a personal-care and beauty-products company), The Quaker Oats Company (a food-products company), Kmart Corporation (a retailer), and Sears Holdings. Mr. Gooch brings to the Board extensive experience, knowledge, and understanding about retail and consumer-product businesses.

Josephine Linden, 64, has been a director of SHO since the Separation. She founded and has been the managing member and principal of Linden Global Strategies LLC, a New York-based, SEC-registered investment management firm, since September 2011. From September 2010 to July 2011, she taught as an Adjunct Professor in the Finance department of Columbia Business School. In November 2008, Mrs. Linden

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retired from Goldman, Sachs & Co., as a Partner and Managing Director after having been with the firm for more than 25 years, where she held a variety of roles, including Managing Director and Regional Manager of the New York office for Private Wealth Management, head of Global Equities Compliance, and an Advisor to GSJBWere, Australia. She has served as a director of Lands’ End, Inc. since March 2014 and as its Chairman of the Board since October 2014. She is currently a trustee, and serves as chair of the Finance Committee and Treasurer, of Collegiate School in New York, New York and acts as financial advisor to The Prince of Wales Foundation, a not-for-profit organization. Mrs. Linden brings extensive knowledge of capital markets and other financial matters to the Board from her 25-year career with Goldman Sachs.

William K. Phelan, 53, has been a director of SHO since October 2015. Since September 2015 he has served as the Senior Associate Executive Director and Chief Financial Officer of the American Bar Association (“ABA”), a voluntary professional membership organization that serves the U.S. legal profession. From December 2013 to September 2015 he served as the Chief Financial Officer of the ABA. From August 2011 to December 2013 he was employed by Sears Holdings as its Senior Vice President, Finance and from 2005 to August 2011 he served in a number of financial positions with Sears Holdings, including as its Acting Chief Financial Officer from May 2011 to August 2011. He was employed by Sears, Roebuck and Co. from 1992 to 2005 and by Deloitte & Touche from 1985 to 1992. Mr. Phelan is a Certified Public Accountant. Mr. Phelan brings extensive knowledge and expertise with respect to financial matters, particularly regarding retail.

Will Powell, 45, has served as SHO’s Chief Executive Officer and President and a director since July 1, 2015. From the time of the Separation until July 1, 2015 he served as the Company’s Senior Vice President and Chief Operating Officer. Prior to his employment with the Company he served as Sears Holdings’ Senior Vice President and President, Hometown Stores (at that time a division of Sears Holdings), positions he held from November 2008 to October 2012. From November 2007 until November 2008 Mr. Powell served as Sears Holdings’ Vice President and General Manager, Outlet Stores (at that time a division of Sears Holdings), and from January 2006 to November 2007 he served as Sears Holdings’ Divisional Vice President, Stores/Sales-Dealer Stores. He joined Sears Holdings in August 2003. Mr. Powell has developed a thorough understanding of all aspects of SHO’s business and the issues its faces.

David Robbins, 56, was elected to the Board of Directors of the Company on March 9, 2016. He is engaged in the asset management field, primarily in alternative assets and private equity with an emphasis in healthcare. He served as a director of Bally Technologies, Inc. from July 1994 to September 1997 (and as Chairman of the Board from February 1997 through September 1997), and then rejoined Bally as a director (and Chairman) in December 1997, serving as Chairman through December 2010. From 1984 to 2004 he practiced corporate, securities, and real estate law at several law firms in New York City including Cahill Gordon & Reindel LLP and Kramer Levin Naftalis & Frankel LLP. Mr. Robbins is also a certified public accountant (inactive status) in the state of New York. Since January 2003, Mr. Robbins has co-managed investment funds, with an emphasis in the healthcare field, and in 2005 he was one of the co-founders of Trevi Health Capital, which manages private investments in the healthcare field. He serves on the boards of directors of various private companies in which the Trevi Health Capital funds have invested, and as a trustee or member of a steering committee of various not-for-profit entities, including the McCarton Foundation and the NYU Langone Medical Center Comprehensive Epilepsy Center. Mr. Robbins brings extensive knowledge and expertise regarding business, financial, and legal matters, particularly with respect to the management and allocation of investment capital.

Board Leadership Structure

We separate the roles of Chief Executive Officer and Chairman of the Board. Our Chief Executive Officer is responsible for the day-to-day leadership and performance of the Company, while the Chairman of the Board provides guidance to our Chief Executive Officer and senior management and sets the agenda for, and presides over, Board meetings. In carrying out his responsibilities, the Chairman preserves the distinction between management and oversight, maintaining the responsibility of management to develop and execute corporate strategy and the responsibility of the Board to review and express its views on corporate strategy and management’s execution of that strategy.

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The Board’s Role in Risk Oversight

Consistent with our leadership structure, our Chief Executive Officer and other members of senior management are responsible for the identification, assessment, and management of risks that could affect the Company. The Board provides oversight in connection with these efforts. We do not believe that the Board’s role in risk oversight has an effect on the Company’s leadership structure. The Board’s oversight is conducted primarily through committees of the Board, as indicated in the descriptions of the Audit Committee and the Compensation Committee below and in the charters of the Audit Committee and the Compensation Committee. The Compensation Committee’s charter provides that the Compensation Committee will evaluate whether the risks arising from the Company’s compensation policies and practices for its employees would be reasonably likely to have a material adverse effect on the Company. The Board has retained responsibility for general oversight of risks. The Board will satisfy this responsibility through the monitoring of each committee’s considerations and actions, as well as through regular reports directly from officers responsible for oversight of particular risks within the Company, including our Chief Financial Officer, our Director, Internal Audit, and our General Counsel, whom the Board has appointed as our Chief Compliance Officer.

Nomination of Director Candidates

Directors may be nominated by the Board or by stockholders in accordance with our Bylaws. If nominated by the Board, new director nominees will generally be recommended to the Board by the Nominating and Corporate Governance Committee in accordance with the policies and principles in its charter. The ultimate responsibility for the selection of directors, however, resides with the Board of Directors. The Nominating and Corporate Governance Committee will, when it deems appropriate, actively seek individuals qualified to become Board members, and will solicit input on director candidates from a variety of sources, including current directors. The Nominating and Corporate Governance Committee will evaluate a candidate’s qualifications and review all proposed nominees for the Board of Directors, including those proposed by stockholders, in accordance with its charter and our Corporate Governance Guidelines. This will include a review of the person’s qualifications as well as consideration of diversity, skills, and experience in the context of the needs of the Board. While the Nominating and Corporate Governance Committee has the ability to retain a third party to assist in the nomination process, the Company did not pay a fee to any third party to identify or assist in identifying or evaluating potential external nominees in the 2015 fiscal year.

Director nominees recommended by the Nominating and Corporate Governance Committee will be expected to be committed to representing the long-term interests of our stockholders. The Nominating and Corporate Governance Committee believes that it is important to align the interests of directors with those of our stockholders. Board members should possess a high degree of integrity and have broad knowledge, experience, and mature judgment. In addition to a meaningful economic commitment to the Company as expressed in our stock ownership requirements, directors and nominees should have predominately business backgrounds, have experience at policy-making levels in business, and bring a varied set of business experiences, skills, and perspectives to the Board. While the Company does not have a formal diversity policy, the Board considers diversity in identifying director nominees. The Board and the Nominating and Governance Committee believe that it is important that our directors represent diverse viewpoints. The Nominating and Corporate Governance Committee discusses the diversity of the Board annually.

Stockholders may nominate a candidate for election to the Board by complying with the nomination procedures in our Bylaws. Subject to the next sentence, for an election to be held at an annual meeting of stockholders other than the Annual Meeting (the “subject annual meeting”), nomination by a stockholder must be made by notice in writing delivered to the Company not later than the 90th day, and not earlier than the 120th day, prior to the first anniversary of the preceding year’s annual meeting. If the date of the subject annual meeting is more than 30 days before or more than seventy 70 days after the first anniversary of the preceding year’s annual meeting, notice by the stockholder must be delivered not earlier than the 120th day prior to the subject annual meeting and not later than the 90th day prior to the subject annual meeting or the 10th day following the day on which public announcement of the date of the subject annual meeting is first made by the Company.

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For an election to be held at a special meeting of stockholders, the stockholder’s notice in writing must be delivered to the Company not earlier than the 120th day prior to the special meeting and not later than the later of the 90th day prior to the special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at the special meeting.

A stockholder’s written notice described in the preceding two paragraphs must be delivered to Sears Hometown and Outlet Stores, Inc., 5500 Trillium Boulevard, Suite 501, Hoffman Estates, Illinois 60192, Attn: General Counsel and Secretary, and must include each of the following:

• the name and address of the stockholder;

• the name, age, and business address of each nominee proposed in the notice;

• such other information concerning each nominee as must be disclosed with respect to director nominees in proxy solicitations under the proxy rules of the SEC; and

• the written consent of each nominee to serve as a director if so elected.

The chairman of the Annual Meeting or any other annual meeting or special meeting of stockholders may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedures. A stockholder’s compliance with these procedures will not require the Company to include information regarding a proposed nominee in the Company’s proxy solicitation materials.

Board Meetings and Attendance

The Board met eleven times during the Company’s 2015 fiscal year. All of the directors attended at least 75% of the Board meetings and at least 75% of the meetings of the committees on which they served. Our Corporate Governance Guidelines provide that directors are expected to attend our annual meetings of stockholders. Five of our six directors at the beginning of our 2015 Annual Meeting of Stockholders attended the meeting.

Committees of the Board of Directors

The Board has standing Audit, Compensation, and Nominating and Corporate Governance Committees. All members of these committees are independent as defined in Nasdaq’s Stock Market Rules.

The below table reflects the membership of each committee as of April 1, 2016, the number of meetings held by each committee of the Board of Directors during the 2015 fiscal year, and the membership of each committee as of April 1, 2016.

	Audit			Compensation			Nominating  and Corporate Governance
E.J. Bird		—			—			—
James F. Gooch		—			X	*		X
Josephine Linden		X			X			X	*
William K. Phelan		X	*		X			—
Will Powell		—			—			—
David Robbins		X			—			—
Number of Meetings during the 2015 fiscal year		6			7			4

* Committee Chair

Each committee operates under a written charter. Current copies of the charters are available on our corporate website, www.shos.com, under the heading “Governance.” Below is a description of the Board’s standing committees, their membership, and their functions.

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Audit Committee

The current members of the Board’s Audit Committee are Josephine Linden, William K. Phelan (Chair), and David Robbins. Jeffrey Flug resigned as a member of the Audit Committee on September 30, 2015. The Board of Directors appointed Mr. Phelan to serve as a member of the Audit Committee on October 14, 2015 and to serve as Chair of the Audit Committee on March 9, 2016. James F. Gooch resigned as a member, and as Chair, of the Audit Committee on February 1, 2016. The Board of Directors appointed Mr. Robbins to serve as a member of the Audit Committee on March 9, 2016. The Audit Committee’s Charter provides that the Audit Committee is principally responsible for, among other things, the following summarized functions:

• Reviewing the compensation of, and overseeing the work of, our independent registered public accounting firm in connection with the annual audit report;

• Hiring the independent registered public accounting firm to perform the annual audit;

• Reviewing the Company’s annual and quarterly financial statements, including disclosures made in management’s discussion and analysis of results of operations and financial condition;

• Reviewing the reports prepared by the independent registered public accounting firm and management’s responses thereto;

• Pre-approving audit and permitted non-audit services performed by the independent registered public accounting firm;

• Reviewing financial reports, internal controls and risk exposures;

• Reviewing management’s plan for establishing and maintaining internal controls;

• Reviewing the scope of work performed by internal audit staff;

• Discussing with the Company’s Chief Compliance Officer matters that involve our compliance and ethics policies; and

• Reviewing and approving all related party transactions, as defined by applicable Nasdaq rules.

Compensation Committee

The current members of the Board’s Compensation Committee are James F. Gooch (Chair), Josephine Linden, and William K. Phelan. Jeffrey Flug resigned as a member, and as Chair, of the Compensation Committee on September 30, 2015. The Board of Directors appointed Mr. Gooch to serve as a member, and as Chair, of the Compensation Committee on October 1, 2015 and Mr. Phelan to serve as a member of the Compensation Committee on October 14, 2015.

The Compensation Committee’s Charter provides that the Compensation Committee is principally responsible for, among other things, the following summarized functions:

• Reviewing recommendations for, and approving the compensation of, executive officers;

• Reviewing and approving corporate goals and objectives relevant to CEO compensation;

• Evaluating the CEO’s performance and recommending to the Board the CEO’s overall compensation level;

• Reviewing and approving employment agreements, severance arrangements and change in control arrangements affecting the CEO and other executive officers; and

• Evaluating whether the risks arising from the Company’s compensation policies and practices for its employees would be reasonably likely to have a material adverse effect on the Company.

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Nominating and Corporate Governance Committee

The current members of the Nominating and Corporate Governance Committee are James F. Gooch and Josephine Linden (Chair). Jeffrey Flug resigned as a member of the Nominating and Corporate Governance Committee on September 30, 2015. The Board of Directors appointed Mr. Gooch to serve as a member of the Nominating and Corporate Governance Committee on October 1, 2015.

The Nominating and Corporate Governance Committee’s Charter provides that the Nominating and Corporate Governance Committee is principally responsible for:

• Reporting annually to the Board with an assessment of the performance of the Board and its committees;

• Recommending to the Board new nominees for directors;

• Reviewing recommended compensation arrangements for the Board; and

• Reviewing and reassessing the adequacy of our Corporate Governance Guidelines.

Communications with the Board of Directors

Our Board has adopted a policy and process for stockholders to communicate with the Board or an individual director. Stockholders may communicate with the Board collectively, or with any of its individual non-employee directors, by writing to Sears Hometown and Outlet Stores, Inc. Board of Directors—Non-Employee Directors, c/o Secretary, Sears Hometown and Outlet Stores, Inc., Law Department, 5500 Trillium Boulevard, Suite 501, Hoffman Estates, Illinois 60192. The Secretary has discretion to determine whether stockholder communications are proper for submission to the intended recipient. Examples of stockholder communications that would be considered presumptively inappropriate for submission include the following: communications regarding the Company’s pricing of products or services; personal grievances or solicitations; communications that do not relate, directly or indirectly, to the Company; spam and other junk mail; product and service complaints or inquiries; new product suggestions; resumes and other job inquiries; surveys; business solicitations or advertisements, communications that are unduly hostile, threatening, illegal, or similarly unsuitable; and communications that are duplicative of previously submitted communications or are frivolous in nature. We will make available to any director any excluded communication at the director’s request.

Amount and Nature of Beneficial Ownership

Security Ownership of Directors and Management

The following table sets forth information with respect to the beneficial ownership of our common stock as of April 5, 2016 by each of our directors, each Named Executive Officer, and all of our directors and executive officers as a group.

Name of Beneficial Owner(1)	Shares of Common Stock(2)			Percent of Class(3)
E.J. Bird		6,900		*
David Buckley		1,725	(4)	*
James F. Gooch		2,000		*
Michael A. Gray		4,600	(4)	*
Charles J. Hansen		5,475	(4)	*
W. Bruce Johnson(5)		—
Josephine Linden		2,000		*
William K. Phelan		7,000		*
Will Powell		26,290	(4)	*
David Robbins		—
Ryan D. Robinson		24,000	(4)	*
Directors and executive officers as a group (14 persons)		79,990		*

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* Less than 1%

(1) The address of each beneficial owner is c/o Sears Hometown and Outlet Stores, Inc., 5500 Trillium Boulevard, Suite 501, Hoffman Estates, Illinois 60192.

(2) Except as indicated in note (4), the persons listed in the table have sole voting and investment power with respect to the common stock listed next to their names. Information is provided for reporting purposes only and should not be construed as an admission of actual beneficial ownership.

(3) There were 22,718,800 shares of our common stock outstanding as of April 5, 2016.

(4) For Messrs. Powell, Robinson, Gray, Buckley and Hansen, the amount disclosed includes, respectively, 16,099, 14,000, 4,600, 1,725, and 5,175 shares of restricted stock. All of these shares of restricted stock include the right to vote the shares but do not vest until May 16, 2016 (July 10, 2017 with respect to Mr. Robinson’s shares) subject to forfeiture conditions.

(5) By mutual agreement with the Company’s Board of Directors, Mr. Johnson’s employment with the Company ended on August 8, 2015.

Beneficial Owners of more than 5% of our Common Stock

The following table sets forth information with respect to beneficial ownership of our common stock by persons known by us to beneficially own more than 5% of our outstanding common stock.

Name and Address of Beneficial Owner	Amount and Nature  of Beneficial Ownership(a)		Percent of Class(b)
ESL Investments, Inc. and investment affiliates(c)		11,520,423		50.7	%
1170 Kane Concourse, Suite 200
Bay Harbour, FL 33154
Chou Associates Management Inc. and investment affiliates(d)		1,519,222		6.7	%
110 Sheppard Avenue East, Suite 301, Box 18
Toronto, ON M2N 6Y8 Canada

(a) Information is provided for reporting purposes only and should not be construed as an admission of actual beneficial ownership.

(b) There were 22,718,800 shares of our common stock outstanding as of April 5, 2016. The “Percent of Class” was calculated by using the disclosed number of beneficially owned shares as the numerator and 22,718,800 shares of the Company’s common stock outstanding as of April 5, 2016 as the denominator.

(c) Beneficial ownership is based on the amended Schedule 13D filed on February 11, 2016 by ESL Investments, Inc. and investment affiliates including Edward S. Lampert (collectively, “ESL”). ESL consists of the following: ESL Investments, Inc. (“Investments”); Edward S. Lampert; CRK Partners, LLC (“CRK LLC”); ESL Partners, L.P. (“Partners”); and RBS Partners, L.P. (“RBS”). RBS is the general partner of Partners. Investments is the general partner of RBS and the sole member of CRK LLC. Mr. Lampert is Chairman, Chief Executive Officer, and Director of Investments and a limited partner of RBS. The principal business of each of these persons is purchasing, holding, and selling securities for investment purposes. Edward S. Lampert also is the Chairman of the Board and the Chief Executive Officer of Sears Holdings. ESL Investments disclosed sole voting power and sole dispositive power as to 4,771,352 shares and shared dispositive power as to 6,749,071 shares; Mr. Lampert disclosed sole voting power as to 11,520,423 shares, sole dispositive power as to 4,771,352 shares, and shared dispositive power as to 6,749,071 shares; CRK LLC disclosed sole voting power and sole dispositive power as to 170 shares; Partners disclosed sole voting power and sole dispositive power as to 4,771,352 shares and shared dispositive power as to 6,749,071 shares; and RBS disclosed sole voting power and sole dispositive power as to 4,771,352 shares and shared dispositive power as to 6,749,071 shares.

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(d) Beneficial ownership is based on the Schedule 13G filed on February 16, 2016 by Chou Associates Fund, Chou Associates Management Inc., Chou Asia Fund, Chou Bond Fund, Chou RRSP Fund, Chou Opportunity Fund, Chou Income Fund, Chou America Management, Inc. and Francis S. M. Chou (the “Chou 13G”). According to the Chou 13G Chou Associates Management Inc. is the investment advisor of Chou Associates Fund and other investment funds and, through investment advisory contracts or otherwise, may be deemed to beneficially own securities owned by other persons, including Chou Associates Fund, Chou Asia Fund, Chou Bond Fund, and Chou RRSP Fund. Chou America Management, Inc. is the investment adviser to the Chou Opportunity Fund and the Chou Income Fund. Francis S. M. Chou is the Chief Executive Officer and Portfolio Manager of Chou Associates Management Inc. and the Portfolio Manager of Chou Associates Fund, Chou Asia Fund, Chou Bond Fund, and the Chou RRSP Fund. Mr. Chou is the Chief Executive Officer of Chou America Management Inc. and the portfolio manager of the Chou Opportunity Fund and the Chou Income Fund. Chou Associates Management Inc., Mr. Chou, and Chou Associates Fund each disclosed sole voting power and sole dispositive power as to 1,519,222 shares.

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Introduction

This Compensation Discussion and Analysis provides information about our compensation objectives and philosophy, the components of our compensation program, and the reasons why we provide each component. We also discuss how we determine targeted compensation and the basis of our pay decisions for the Company’s executive officers named in the “2015 Fiscal Year Summary Compensation Table” in this Proxy Statement (the “Named Executive Officers”).

The Compensation Committee of the Board of Directors, with recommendations from the Company’s Chief Executive Officer, is responsible for determining the compensation of the executive officers and evaluating, approving, and administering the plans in which the executive officers and the Company’s other associates participate. The members of the Compensation Committee during our 2015 fiscal year were Jeffrey Flug (a member and Chair until his resignation effective September 30, 2015), James F. Gooch (a member and chair beginning October 1, 2015), Josephine Linden, and William K. Phelan (a member beginning October 14, 2015). The Board determined that Messrs. Gooch and Phelan and Mrs. Linden each qualified as (1) an “outside director” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder (together, the “Section 162(m) Rules”) and (2) a “non-employee director” within the meaning of Rule 16b-3 of the Securities and Exchange Act of 1934, as amended.

Executive Compensation Philosophy and Objectives

The goals of the Company’s compensation programs are to attract, motivate, and retain talented individuals who are committed to our vision, mission, and values. Our values, which we believe encourage individual and collective accountability and foster an environment of results and recognition, include independence, focus, efficiency, and collaboration, which the Company believes supports its mission to provide great service to its customers every day while enhancing the Company’s commitment to financial priorities and achieving long-term sustainable growth. SHO is further committed to increasing stockholder value through the efficient use of our assets. Our compensation programs for executive officers (including the Named Executive Officers) and the Company’s other associates are designed to maintain these commitments and to encourage strong financial performance on an annual and long-term basis by using appropriate compensation structures and sound pay practices without creating undue stockholder risk. As executive officers assume greater responsibilities, generally larger portions of their total cash compensation opportunities would be designed to be dependent on Company performance.

The Compensation Committee believes that total annual compensation paid to executive officers should generally depend on SHO’s financial performance, the level of job responsibility, individual performance, and SHO’s need to attract top executive talent and retain key executives. The total compensation arrangements provided to executive officers may include annual and long-term programs that are designed to motivate and encourage executive officers to drive performance and achieve superior results for SHO and its stockholders. The Compensation Committee also believes that compensation should reflect the value of the job in the marketplace and believes that, in order to attract qualified external candidates and retain valuable executives, the Company must offer executive-compensation arrangements that include elements that candidates would view favorably when considering other employment opportunities that may reasonably be available to them. While the Compensation Committee’s objective is to approve compensation and benefits arrangements that reflect a pay-for-performance compensation philosophy, the Compensation Committee recognizes that the Company should be able to provide additional inducements, such as sign-on bonuses and other arrangements, in order to recruit, retain, and motivate highly qualified executives.

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Executive Compensation Highlights

Highlighted below are the key actions with respect to our executive compensation that were approved by the Compensation Committee during the 2015 fiscal year:

• Adoption of, and determination of cash payments under, the Company’s 2015 Annual Incentive Plan available to the Named Executive Officers and other eligible associates (“2015 AIP”), which is based on the Company’s financial performance for the 2015 fiscal year.

• Addition of SHO working capital as a measurement of financial performance for the 2015 AIP.

• Adoption of the Company’s 2015 Long-Term Incentive Plan (“2015 LTIP”), which for specified Named Executive Officers is based on the achievement of sustained price growth of the Company’s common stock.

• Granting of a $100,000 cash retention award to Will Powell, at the time of the award the Company’s Senior Vice President and Chief Operating Officer and currently the Company’s Chief Executive Officer and President, and a $100,000 cash retention award to Ryan D. Robinson, at the time of the award the Company’s Senior Vice President and Chief Financial Officer and currently the Company’s Senior Vice President, Chief Administrative Officer, and Chief Financial Officer. See “Other Compensation Elements” in this Item 1 for additional information regarding the cash retention awards for Messrs. Powell and Robinson (each a “Cash Retention Award”).

• Granting of a restricted stock award to Ryan D. Robinson, the Company’s Senior Vice President, Chief Administrative Officer, and Chief Financial Officer.

On April 21, 2015 the Company announced that, by mutual agreement with the Company’s Board of Directors, W. Bruce Johnson, Chief Executive Officer and President, would leave the Company. See “2015 Fiscal Year Summary Compensation Table” and “Severance Benefits upon Involuntary Termination for ‘Good Reason’ or Without ‘Cause’” in this Item 1 for additional information regarding the payments to which Mr. Johnson was entitled to receive upon a termination of employment without “cause” in accordance with, and the payments made to Mr. Johnson with respect to, his Executive Severance/Non-Compete Agreement with the Company, which payments were approved by the Compensation Committee on April 20, 2015. Mr. Johnson served as an employee of the Company until August 8, 2015.

On July 1, 2015 the Board of Directors of the Company elected Will Powell as the Company’s Chief Executive Officer and President, effective immediately. At the same time the Board of Directors elected Mr. Powell as a member of the Board of Directors.

Factors Affecting Compensation

In making compensation decisions, the Compensation Committee seeks to implement the Company’s compensation philosophy and objectives. The Compensation Committee generally seeks input from our Chief Executive Officer when discussing the performance and compensation of the Company’s other executive officers (including the Named Executive Officers). The Compensation Committee gives considerable weight to the Chief Executive Officer’s evaluation of other executive officers because of his direct knowledge of each executive officer’s performance and contributions. The Compensation Committee also considers recommendations from our Vice President, Human Resources regarding the form and amounts of compensation to be paid to other executives and our compensation program generally. The recommendations of the Vice President, Human Resources will reflect management’s assessment of competition for talent, individual performance, tenure in position, internal pay equity (meaning the relative pay differences for different positions within the Company), the effect on our general and administrative expenses, and from time to time compensation and market data and other human resource and recruiting resources, which data, where appropriate, focuses on, or relates to, comparable positions and retail-specific organizations. We did not benchmark against a set list of competitors or a peer group in the 2015 fiscal year.

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During the 2015 fiscal year the Compensation Committee retained Frederic W. Cook & Co., Inc. (“Cook & Co.”) as an independent compensation consultant to the Compensation Committee to advise it regarding the reasonableness and appropriateness of the Company’s compensation program structure in supporting the Company’s business strategies and human resources objectives. The Compensation Committee in particular sought advice with respect to the 2015 AIP and 2015 LTIP. Prior to the foregoing engagement Cook & Co. had not performed services for, or received compensation from, the Company. The Compensation Committee considered Nasdaq’s enumerated independence factors regarding compensation consultants prior to retaining Cook & Co.

In making decisions regarding executive compensation, the Compensation Committee also took into account the fact that more than 99% of the shares that voted on our proposal to approve, on an advisory basis, the compensation of our named executive officers as disclosed in our 2015 proxy statement voted to approve our executive compensation program at our 2015 Annual Meeting of Stockholders. The Compensation Committee believes that this stockholder vote supports the Compensation Committee’s belief that our current executive compensation program has been effective in implementing our compensation philosophy and objectives.

The Compensation Committee did not make any overall changes to the Company’s executive compensation program in response to the 2015 stockholder vote. Nevertheless, the Compensation Committee recognizes that pay practices continue to evolve and as a result the Compensation Committee continues to refine our executive compensation practices in its ongoing effort to ensure that our executive compensation aligns with our compensation philosophy and objectives.

Executive Compensation Program: Key Elements

The key elements of our compensation program for our executive officers (including the Named Executive Officers) in the 2015 fiscal year include base salary and annual and long-term (three-year) incentive compensation opportunities. The annual nature of the annual AIP compensation opportunities seeks to focus attention on the key business drivers for a specified fiscal year and seeks to link the individual’s performance to the Company’s annual performance. Long-term compensation opportunities could include performance-based programs designed to drive long-term Company performance through effective long- and short-term decision making.

The following is a discussion of the key elements of compensation for our Named Executive Officers for the 2015 fiscal year.

Rewarding Short-Term Performance

• Base Salary—Base salary is the fixed element of each Named Executive Officer’s cash compensation.

• Annual Incentive Plan—Our annual incentive plan is intended to be a pay-for-performance program providing for annual cash awards to qualified participants, including the Named Executive Officers, based on achievement of financial performance goals relating to the applicable fiscal year. The purpose of our annual incentive plan is to motivate the qualified participants, including the Named Executive Officers, to achieve financial performance goals for the applicable SHO fiscal year by making their cash incentive awards variable and dependent upon SHO’s financial performance for the fiscal year.

Rewarding Long-Term Performance

• Long-Term Performance-Based Program—Our 2015 LTIP, adopted in accordance with the Sears Hometown and Outlet Stores, Inc. Long-Term Incentive Program (“LTI Program”) is intended to be a pay-for-performance program designed to motivate the qualified participants, including the Named Executive Officers, to focus on long-term performance. Our 2015 LTIP reinforces accountability by linking executive compensation to sustained performance goals over a three-year period. SHO believes that the 2015 LTIP is an important incentive that will encourage the alignment of each Named Executive Officer’s goals with SHO’s strategic direction and initiatives, which in turn should result in increased stockholder returns.

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The Company has not adopted formal policies for allocating compensation among the above elements. Rather, the Compensation Committee seeks to evaluate, with respect to each Named Executive Officer, the Named Executive Officer’s individual performance, professional experience, current and anticipated scope of job responsibilities, department performance, ability to affect Company objectives, fiscal accountability, and other considerations deemed relevant, to determine the allocation of total compensation among the above elements. The expectation of the Compensation Committee is that, as an executive assumes greater responsibility within the Company, in most cases an increasingly larger portion of the executive’s total cash compensation opportunity will be designed to depend on Company performance.

How Elements Are Used to Achieve Our Compensation Objectives

The Compensation Committee believes that the most fair and effective way to motivate the Company’s executive officers (including the Named Executive Officers) to achieve the best results for our stockholders (and to avoid taking inappropriate risks) is to condition a significant proportion of executive compensation on Company performance. The size of awards granted to executive officers, relative to total compensation, should be based, depending on the particular executive, primarily upon the executive’s potential to affect the Company’s financial performance and secondarily upon such factors as the scope of the executive’s responsibilities and fiscal accountability. As an executive assumes greater job responsibilities, a portion of the executive’s total cash compensation opportunity should be increasingly dependent on Company performance. The Compensation Committee will consider compensation that is not performance-based, such as service-based equity awards, to the extent the Compensation Committee deems appropriate.

During the 2015 fiscal year our executive officers (including the Named Executive Officers) participated in the 2015 AIP. The 2015 AIP awards were designed to promote the Company’s compensation objectives by offering the Named Executive Officers an opportunity for cash compensation based upon SHO EBITDA and SHO working capital, each as described below, for our 2015 fiscal year. The 2015 AIP award made to each Named Executive Officer provided for threshold, plan, target, and maximum amounts that were based on a percentage of the Named Executive Officer’s base salary.

Compensation Decisions Made During the 2015 fiscal year

Base Salary

With respect to each of our executive officers (including our Named Executive Officers), the Compensation Committee establishes the amount of base salary paid to that executive with the goal of providing the executive with a stable income stream that is commensurate with the executive’s current and reasonably anticipated level of job responsibilities and professional experience and takes into account the Company’s assessment of competitive market conditions and external pay for comparable positions. The Compensation Committee also considers internal pay equity. The Compensation Committee sets the amount of our executive compensation with the belief that an appropriate base salary can create a secure environment necessary for our executive officers to remain with the Company and focus their efforts on the Company’s sustained, meaningful growth.

During the 2015 fiscal year, the Compensation Committee increased the base salaries of Messrs. Powell, Buckley, and Gray in connection with their promotions. At the end of 2015 fiscal year the annual base salaries of Messrs. Powell, Robinson, Gray, Buckley, and Hansen were $700,000, $500,000, $350,000, $260,000, and $450,000, respectively. On February 10, 2016 the Compensation Committee approved a $50,000 increase to Mr. Gray’s base salary in connection with his promotion to Senior Vice President, Store Operations.

Annual and Long-Term Compensation Programs

Annual Incentive Plan

Our 2015 AIP was a cash-based program that was intended to reward eligible associates for achieving financial performance goals relating to SHO EBITDA and SHO working capital during the 2015 fiscal year.

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2015 Annual Incentive Compensation

During the 2015 fiscal year the Named Executive Officers and other SHO associates participated in the 2015 AIP.

The Compensation Committee made the awards under the 2015 AIP based, in part, on recommendations from our Chief Executive Officer and our Vice President, Human Resources. The recommendations were made in conjunction with, and took into account, the projected results of operations underlying the Company’s business operating plan that was presented to the Board for the 2015 fiscal year and a number of assumptions reflected in that plan.

For the 2015 AIP the Compensation Committee approved SHO EBITDA (excluding franchise sales) and SHO working capital (if the Company’s reported fiscal year 2015 EBITDA exceeded a specified level) as the performance measures for awards made under the plan to our Named Executive Officers, with SHO EBITDA and SHO working capital accounting for 75% and 25%, respectively, of the combined performance measures. Management recommended the addition of SHO working capital as an additional performance measure because of management’s belief that this performance measure would augment achievement of key financial and business objectives. SHO EBITDA remains an appropriate component of the performance measure because it is a metric used by the Company to measure business performance. The Compensation Committee believes that using SHO EBITDA and SHO working capital to measure performance assists the Company in achieving its compensation objectives of promoting the profitable growth of the Company’s business.

For purposes of the 2015 AIP and elsewhere in this Compensation Discussion and Analysis, SHO EBITDA generally means the Company’s externally reported Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) and excludes franchise sales. The Company also excludes from SHO EBITDA (A) specified expenses and accounting adjustments that impact externally reported Adjusted EBITDA but that the Compensation Committee believes do not result from management’s performance in operating SHO’s businesses and (B) the effects of the following items: (1) gains, losses, and costs associated with asset sales (other than gains, losses, costs, and initial franchise fees associated with franchise conversions); (2) litigation or claim judgments or settlements that exceed $250,000; (3) the effect of purchase accounting and changes in accounting methods; (4) gains, losses, and costs associated with store closings, acquisitions, and divestitures; (5) integration costs that are disclosed as merger related; (6) asset writedown/impairment charges; (7) items classified as “extraordinary”; and (8) restructuring activities.

For purposes of the 2015 AIP SHO working capital means merchandise inventory less accounts payable and is calculated as a percent of monthly revenue on a trailing twelve-month basis. Under the 2015 AIP no payment with respect to the SHO working capital performance measure would be made unless SHO’s reported EBITDA exceeded a specified level.

Under the 2015 AIP as adopted by the Compensation Committee, Messrs. Powell, Johnson, Robinson, Gray, Buckley, and Hansen, had an annual incentive opportunity (as a percent of base salary) of 100%, 100%, 75%, 50%, 50%, and 50%, respectively. The below table describes the 2015 AIP payment metrics for each of the Named Executive Officers. During 2015 the Compensation Committee increased Mr. Buckley’s annual incentive opportunity for future annual incentive plan awards to 50% of annual base salary. On February 10, 2016 the Compensation Committee approved an increase to Mr. Gray’s annual incentive opportunity to 75% of base salary in connection with his promotion to Senior Vice President, Store Operations.

Performance Level(1)	SHO EBITDA (75% of performance measure)	Percentage of Incentive Payable	SHO Working Capital (25% of performance measure)(2)	Percentage of Incentive Payable
Threshold	61% of plan	30%	61% of plan	30%
Plan	100% of plan	70%	100% of plan	70%
Target	183% of plan	100%	183% of plan	100%
Maximum	338% of plan	200%	338% of plan	200%

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(1) The 2015 AIP provided that the payment percentage between the threshold and maximum payout would be based on a series of straight-line (linear) interpolations between the applicable performance levels.

(2) No payout on account of the SHO working capital component would have been made under the 2015 AIP, regardless of the growth of SHO working capital achieved, unless 2015 fiscal year reported EBITDA exceeded a specified level.

Based on the Company’s 2015 fiscal year performance management advised the Compensation Committee that, in accordance with the terms of the 2015 AIP, less than the threshold level of SHO EBITDA was achieved and 2015 fiscal year reported EBITDA failed to exceed the specified level. As a result no payouts under the 2015 AIP were earned by, and no payments were made to, the Named Executive Officers with respect to the 2015 AIP.

Long-Term Incentive Plan

Long-Term Compensation Opportunity—2015 LTIP and Stock Units

The LTI Program provides that it is designed to motivate SHO’s executive leadership, including the Named Executive Officers, to achieve significant and lasting change that successfully positions SHO for future growth.

During our 2015 fiscal year W. Bruce Johnson, our then-Chief Executive Officer and President, and our then-serving Vice President, Human Resources, made recommendations to the Compensation Committee regarding 2015 LTIP and stock-unit awards for the Named Executive Officers. In addition, the Compensation Committee consulted with Cook & Co. regarding the 2015 LTIP. During our 2015 fiscal year the Compensation Committee approved the 2015 LTIP and the 2015 LTIP awards to eligible participants including Messrs. Powell, Robinson, and Hansen, and the stock-unit awards to eligible participants including Messrs. Gray and Buckley. The Compensation Committee did not make a 2015 LTIP award or stock-unit award to Mr. Johnson at his request.

For Messrs. Powell, Robinson, and Hansen the awards approved by the Compensation Committee for the 2015 LTIP (payable solely in cash) consist of (1) a three-year (April 2015 to April 2018) performance-measurement period, (2) the requirement that during the performance-measurement period SHO’s stock price must exceed a minimum specified level for ten consecutive trading days, and (3) the requirement that the closing price of the Company’s common stock on the last day of the performance-measurement period must be greater than the closing stock price on the date that the Compensation Committee approved the 2015 LTIP. The Committee’s 2015 LTIP awards for Messrs. Powell, Robinson, and Hansen include incentive opportunities as a percent of base salary of 100%, 100%, and 50%, respectively.

For Messrs. Gray and Buckley the Compensation Committee awarded 20,661 stock units and 7,404 stock units, respectively, which are payable solely in cash. Each of these awards will vest on the third anniversary of the date the award was made by the Compensation Committee, unless the recipient’s employment terminates for any reason other than death or disability or the recipient is deemed to have acted in a manner harmful to the best interests of the Company. If these awards vest in accordance with their terms the Company will pay, solely in cash, to Messrs. Buckley and Gray each an amount equal to the product of the number of his stock units multiplied by the closing price of the Company’s common stock on the vesting date.

The Compensation Committee approved the 2015 LTIP awards for Messrs. Powell, Robinson, and Hansen to reward performance for achieving significant and lasting financial and operational improvements that would generate sustained stock-price growth during the three-year performance-measurement period. The Compensation Committee approved the stock-unit awards for Messrs. Gray and Buckley (and stock-unit awards for fifteen other executives) to foster continuity and retention during what the Compensation Committee and senior management of the Company believe will be a critical transformation period for the Company.

Whether the Company’s results of operations during the performance-measurement period will generate sustained stock-price growth is quite uncertain and will depend on a number of factors, many of which (such as

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consumer sentiment and the economic and retail environment during the remainder of the performance-measurement period) are not reasonably within our control. The Compensation Committee established the performance measures for the 2015 LTIP with respect to Messrs. Powell, Robinson, and Hansen to encourage what the Compensation Committee believes would be the achievement of strong and lasting financial and operational improvements. The target level of performance of their awards has been designed to be achievable with sustained performance at a high level and favorable economic and retail conditions, while payout at the maximum level has been designed to be very difficult to achieve. Whether the Company’s results of operations during the performance-measurement period will generate sustained stock-price growth that creates economic value in the stock-unit awards for Messrs. Gray and Buckley that is sufficient to retain their services and the benefits of their employment continuity also is quite uncertain and will depend on comparable factors, among others.

Other Long-Term Compensation Opportunities

On May 16, 2013 the Compensation Committee’s former Benefit-Plan Subcommittee approved restricted stock awards to Messrs. Powell, Gray, Buckley, and Hansen in the amount of 16,099 shares, 4,600 shares, 1,725 shares, and 5,175 shares, respectively. Those shares will vest on May 16, 2016 for each recipient unless the recipient’s employment terminates for any reason other than death or disability or the recipient is deemed to have acted in a manner harmful to the best interests of the Company.

On July 9, 2015 the Compensation Committee approved the promotion of Mr. Robinson to his current position and in connection with the promotion authorized the granting of 15,000 shares of restricted stock to Mr. Robinson, subject to Mr. Powell’s reduction of the number of shares to be awarded (but not less than 10,000 shares). Mr. Powell determined that Mr. Robinson’s award would consist of 14,000 shares of restricted stock. These shares will vest on July 10, 2017 unless Mr. Robinson’s employment terminates for any reason other than death or disability or he is deemed to have acted in a manner harmful to the best interests of the Company.

Other Compensation Elements

Perquisites and Other Benefits

During the 2015 fiscal year until the termination of his employment on August 8, 2015, Mr. Johnson was entitled to receive benefits consisting of round trip ground transportation between his residence in the Chicago metropolitan area and SHO’s headquarters in Hoffman Estates, Illinois. Mr. Johnson is responsible for any related taxes associated with the personal use of Company-furnished transportation. The Compensation Committee believes that the amount and continuation of these executive perquisites served the Company’s objective and philosophy of key executive retention during the term of Mr. Johnson’s employment. See “2015 Fiscal Year Summary Compensation Table” in this Item 1 regarding these benefits.

In connection with Mr. Powell’s July 1, 2015 promotion to Chief Executive Officer and President, the Compensation Committee authorized the Company to agree with Mr. Powell that, if he elects to move his family to the Chicago, Illinois area, the Company will provide up to $100,000 to be used in connection with the sale of his current family home, the purchase of a new family home in the Chicago, Illinois area, house-hunting trips, moving household goods, and brokerage fees. Mr. Powell agreed that if either (a) he voluntarily terminates his employment prior to July 1, 2016 other than for specified “Good Reason” or (b) prior to July 1, 2016 the Company terminates his employment for specified “Cause,” then Mr. Powell will repay to the Company all relocation assistance paid or reimbursed to him or paid directly to vendors by the Company.

Retirement Plans and Welfare Benefits

We maintain a 401(k) defined contribution plan (the “401(k) Savings Plan”) for the benefit of all eligible employees, including our Named Executive Officers (on the same basis as all eligible employees). The 401(k) Savings Plan provides for an annual match of 100% on the first 3% of participant contributions, and 50% on each

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additional percent (in excess of 3%) of participant contributions up to 5%, all subject to IRS-imposed plan maximums. The Company does not have, and does not intend to establish, a defined benefit plan.

We also provide our eligible employees, including our Named Executive Officers, with medical, dental and vision coverage, life and accidental death and dismemberment insurance, short-term and long-term disability insurance, and the opportunity to enroll in our flexible spending and health savings account programs.

Severance Benefits

Each of our Named Executive Officers is a party to an executive severance agreement with, or that has been assigned to and assumed by, SHO. See “Severance Benefits Upon Involuntary Termination for ‘Good Reason’ or Without ‘Cause’ “ and “Other Terms of Severance Agreements” in this Item 1 regarding severance benefits.

Cash Retention Awards

On April 20, 2015 the Compensation Committee approved the Cash Retention Awards to Mr. Powell and to Mr. Robinson (each is referred to as a “Grantee”). The Cash Retention Awards were granted in conjunction with the Company’s announcement that Mr. Johnson’s employment as Chief Executive Officer and President would end and that the Board had retained an executive search firm to assist the Board in identifying and evaluating external and internal candidates for Chief Executive Officer and President. Each Cash Retention Award is governed by the terms and conditions of a Cash Retention Agreement, each of which provides that the Cash Retention Award is payable in cash and that the Cash Retention Award will vest on the earliest of the following dates (the applicable date, the “Vesting Date”): (a) June 15, 2016; (b) the date on which the Company terminates the Grantee’s employment without specified “Cause”; and (c) the date on which the Grantee terminates his employment with the Company for specified “Good Reason,” but in each circumstance only if the Grantee has served as a full-time employee of the Company continuously during the period from April 20, 2015 to the Vesting Date and the Grantee has maintained continuously satisfactory job performance to the Vesting Date.

CEO Compensation

Mr. Powell was promoted to serve as our Chief Executive Officer and elected as a member of the Board of Directors on July 1, 2015. At that time the Compensation Committee approved for Mr. Powell an annual base salary of $700,000, AIP incentive opportunities equal to 100% of annual base salary, and LTI Program opportunities equal to 200% of annual base salary. As more fully described elsewhere in this Compensation Discussion and Analysis, in the 2015 fiscal year Mr. Powell participated in the Company’s 2015 AIP (but received no payout from that plan) and in the Company’s 2015 LTIP.

On April 21, 2015 the Company announced that, by mutual agreement with the Company’s Board of Directors, Mr. Johnson would leave the Company, which occurred effective August 8, 2015. The Compensation Committee authorized the Company to pay to Mr. Johnson all amounts payable in accordance with his Executive Severance/Non-Compete Agreement (which had been assigned to, and assumed by, the Company) with respect to an employment termination by the Company without “Cause.” See “Severance Benefits upon Involuntary Termination for ‘Good Reason’ or Without ‘Cause’ ” in this Item 1 for information regarding the amounts payable to Mr. Johnson upon an employment termination by the Company without “Cause.” See also “2015 Fiscal Year Summary Compensation Table” in this Item 1 for a description of amounts paid by the Company to Mr. Johnson during our 2015 fiscal year with respect to his employment termination. At the time of Mr. Johnson’s employment termination he executed and delivered to the Company a general release of the Company and other persons substantially in the form specified by his Executive Severance/Non-Compete Agreement. Mr. Johnson’s Executive Severance/Non-Compete Agreement provides that the Company’s obligations to continue to make payments to Mr. Johnson in accordance with his Executive Severance/Non-Compete Agreement will cease if he is employed by specified “Competitors” or engages in other specified conduct.

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Certain Tax Consequences

In setting an executive officer’s compensation arrangement, the Compensation Committee considers the requirements of the Section 162(m) Rules, which provide that compensation in excess of $1 million paid to the chief executive officer and the other three most highly compensated executive officers (other than the chief financial officer) is not deductible unless it is performance-based and paid under a program that meets certain other legal requirements. Base salary and cash and stock awards that vest based solely on continued service do not qualify as performance-based compensation under the Section 162(m) Rules. While the Compensation Committee recognizes the desirability of preserving the deductibility of payments made to the Named Executive Officers, the Compensation Committee believes that it must maintain flexibility in its approach in order to structure a program that is the most effective in attracting, motivating, and retaining the Company’s key executives.

Compensation Committee Role in Executive Compensation Decisions

The Compensation Committee is appointed by the Board to fulfill the Board’s responsibilities relating to the compensation of our Chief Executive Officer, our Named Executive Officers, and other senior executives. The Compensation Committee has overall responsibility for approving and evaluating all compensation plans and our policies and programs as they affect the Chief Executive Officer and the Company’s other executive officers and senior executives, including the Named Executive Officers.

The Compensation Committee has the sole authority to retain and terminate all compensation consultants that it uses to assist it in the evaluation of Chief Executive Officer and other executive compensation and has the sole authority to approve the consultant’s fees and the terms and conditions of the consultant’s retention. See “Factors Affecting Compensation” in this Item 1 regarding the Compensation Committee’s retention during the 2015 fiscal year of Cook & Co. Neither the Compensation Committee nor the Company’s management retained any other consultant that played a role in determining or recommending the amount or form of executive compensation in the 2015 fiscal year. The Compensation Committee also has authority to obtain advice and assistance from internal and external legal, accounting, and other advisors. See also “Committees of the Board of Directors—Compensation Committee.” During the 2015 fiscal year the Company’s management retained AON Hewitt Consulting to estimate the fair value of the 2015 LTIP awards for financial accounting and reporting purposes.

During 2015 the Compensation Committee received input and recommendations from Messrs. Johnson and Powell and a former Vice President, Human Resources regarding the forms and the amounts of compensation for the Company’s associates, including the Named Executive Officers, and regarding our compensation programs generally.

Compensation Committee Interlocks and Insider Participation

During our 2015 fiscal year Josephine Linden served on the Company’s Compensation Committee. Also during our 2015 fiscal year Jeffrey Flug served as the Chair of the Compensation Committee until his resignation on September 30, 2015. James F. Gooch has served as the Chair of the Compensation Committee since October 1, 2015. William K. Phelan has served as a member of the Compensation Committee since October 14, 2015. During our 2015 fiscal year none of Jeffrey Flug, James F. Gooch, Josephine Linden, and William K. Phelan served as an officer or employee of the Company or any of its subsidiaries. There were no interlocks during our 2015 fiscal year with other companies within the meaning of the SEC’s proxy rules.

Compensation Committee Report

The Compensation Committee reviewed and discussed the Compensation Discussion and Analysis contained in this Proxy Statement with management of the Company. Based on the review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be

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included in the Company’s 2015 Annual Report on Form 10-K and in this Proxy Statement. Jeffrey Flug resigned as Chair and as a member of the Compensation Committee on September 30, 2015. James F. Gooch has served as a member, and as the Chair, of the Compensation Committee since October 1, 2015. William K. Phelan has served as a member of the Compensation Committee since October 14, 2015.

Compensation Committee

James F. Gooch (Chair)

Josephine Linden

William K. Phelan

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2015 Fiscal Year Summary Compensation Table

The following table provides information concerning the total compensation paid to the following Named Executive Officers. Each of the following Named Executive Officers, except for Michael A. Gray and W. Bruce Johnson, was serving in the capacity shown in the table at the end of our 2015 fiscal year. Mr. Gray was promoted to his current position in February 2016. By mutual agreement with the Company’s Board of Directors, Mr. Johnson’s employment with the Company ended on August 8, 2015.

Name and Principal Position	Year		Salary (a)		Bonus (b)		Stock Awards (c)		Non-Equity Incentive Plan Compensation		Change in Pension Value and Nonqualified Deferred Compensation Earnings		All Other Compensation (d)		Total
Will Powell		2015	$	639,423		—		—		—		—	$	10,670	$	650,093
Chief Executive Officer and     President		2014	$	550,000	$	232,349		—		—		—	$	10,470	$	792,819
		2013	$	550,000	$	214,319	$	715,601		—	$	2,761	$	7,720	$	1,490,401
W. Bruce Johnson		2015	$	583,333		—		—		—		—	$	636,939	$	1,220,272
Chief Executive Officer and     President		2014	$	1,000,000	$	623,891			$	106,240		—	$	33,888	$	1,764,019
		2013	$	1,000,000	$	623,891	$	1,022,306		—		—	$	29,359	$	2,675,556
Ryan D. Robinson		2015	$	500,000	$	100,000	$	131,320		—		—	$	10,670	$	741,990
Senior Vice President, Chief     Administrative Officer, and     Chief Financial Officer		2014	$	317,308	$	350,000		—		—		—	$	250,041	$	917,349
Michael A. Gray		2015	$	333,077		—	$	150,000		—		—	$	10,670	$	493,747
Senior Vice President, Store     Operations
David J. Buckley		2015	$	247,308	$	50,000	$	53,750		—		—	$	9,743	$	360,801
Vice President, Marketing and     eCommerce
Charles J. Hansen		2015	$	450,000		—		—		—		—	$	9,482	$	459,482
Vice President, General     Counsel, and Secretary		2014	$	450,000		—		—		—		—	$	4,570	$	454,570
		2013	$	442,308		—	$	230,029		—		—	$	1,579	$	673,916

(a) The Company’s Board of Directors promoted Mr. Powell, at that time the Company’s Senior Vice President and Chief Operating Officer, to serve as the Company’s Chief Executive Officer and President effective July 1, 2015, and the Compensation Committee increased Mr. Powell’s annual base salary from $550,000 to $700,000. By mutual agreement with the Company’s Board of Directors, Mr. Johnson’s employment with the Company ended on August 8, 2015. The amount in this column reflects Mr. Johnson’s annual base salary paid to him through that date at the annual rate of $1,000,000. See note (d) below with respect to the salary continuation that the Company paid to Mr. Johnson during the 2015 fiscal year. The Company’s Board of Directors promoted Mr. Gray, at that time the Company’s Vice President and General Manager, Stores, to serve as the Company’s Senior Vice President-Store Operations effective February 10, 2016, and the Compensation Committee increased Mr. Gray’s annual base salary from $350,000 (previously increased during the 2015 fiscal year from $310,000) to $400,000. The Company’s Board of Directors promoted Mr. Buckley, at that time the Company’s Divisional Vice President, Marketing, to serve as the Company’s Vice President, Marketing and eCommerce, effective July 9, 2015, and the Compensation Committee increased Mr. Buckley’s annual base salary from $230,000 to $260,000.

(b) The amount shown in this column for Mr. Robinson for the 2015 fiscal year reflects payment of one-third of his $300,000 cash retention bonus paid to him in accordance with the terms of his Offer Letter. The amount shown in this column for Mr. Buckley for the 2015 fiscal year reflects a bonus of $50,000 payable in accordance with the terms of his 2015 Letter Agreements.

(c) The amount shown in this column for Mr. Robinson for the 2015 fiscal year represents the full grant-date fair value of an award of 14,000 shares of restricted stock. The amounts shown in the column for Messrs. Gray and Buckley for the 2015 fiscal year represent the full grant-date fair values of awards of 20,661 stock units and 7,404 stock units, respectively. These stock units are payable solely in cash. The full grant-date fair values for these awards have been determined in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation—Stock Compensation. The full grant-date fair value for each of these awards is the amount that the Company would expense in its financial statements over the award’s vesting period, which expense amount is the market price of the Company’s common stock on the date of grant multiplied by the number of shares of restricted stock, or the number of stock units, subject to the award. See “Executive Compensation—Compensation Discussion and Analysis” in this Item 1 for additional information regarding these awards.

(d) The Compensation Committee authorized the Company to pay to Mr. Johnson all amounts payable in accordance with, and subject to, his Executive Severance/Non-Compete Agreement with respect to an employment termination by the Company without “Cause.” See “Severance Benefits upon Involuntary Termination for ‘Good Reason’ or Without ‘Cause’ ” in this Item 1 for information regarding the

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amounts payable to Mr. Johnson upon an employment termination by the Company without “Cause.” For Mr. Johnson the amount shown in this column for the 2015 fiscal year includes (1) $535,000 of salary continuation paid in accordance with his Executive Severance/Non-Compete Agreement, (2) $10,400 of Company-match contributions to the Company’s 401(k) Savings Plan, (3) $70 paid by the Company for life insurance provided by the Company, (4) $80,128 of accrued vacation pay, and (5) $11,341 attributable to the aggregate incremental cost of Mr. Johnson’s commuter travel using Company-furnished vehicles. For purposes of determining the aggregate incremental cost to the Company of the personal use of Company-furnished vehicles by Mr. Johnson during the 2015 fiscal year prior to the termination of employment, we first calculated the personal and commuting mileage attributable to his use as a percentage of the vehicle’s overall annual mileage. This percentage was then applied to the annual cost of operating the vehicle, which included the cost of leasing, fuel, insurance, license and title, tolls, depreciation, maintenance, and repairs. Drivers’ salaries and overtime are also included in the costs associated with the use of Company-furnished vehicles and drivers.

For Mr. Robinson the amount shown in this column for the 2015 fiscal year includes $70 paid by the Company for life insurance provided by the Company and $10,600 of Company-match contributions to the Company’s 401(k) Savings Plan.

For Messrs. Gray, Powell, and Robinson the amount shown in this column for the 2015 fiscal year includes for each of them $10,600 of Company-match contributions to the Company’s 401(k) Savings Plan and $70 paid by the Company for life insurance provided by the Company. For Mr. Hansen the amount shown in this column for the 2015 fiscal year includes $9,412 of Company-match contributions to the Company’s 401(k) Savings Plan and $70 paid by the Company for life insurance provided by the Company. For Mr. Buckley the amount shown in this column for the 2015 fiscal year includes $9,673 of Company-match contributions to the Company’s 401(k) Savings Plan and $70 paid by the Company for life insurance provided by the Company.

The Company did not provide a tax gross-up on income imputed for personal use of Company-furnished vehicles or other perquisites.

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2015 Fiscal Year Grants of Plan-Based Awards

The grants in the following table were made in accordance with the Company’s 2015 AIP, which is generally described in “Compensation Discussion and Analysis” in this Item 1. As described in “Compensation Discussion and Analysis” in this Item 1, the 2015 AIP provided for incentive awards payable in 2015 with respect to achievement of SHO EBITDA and SHO working capital performance objectives for the 2015 fiscal year. Based on the Company’s financial performance for the 2015 fiscal year no payments were earned by, and no payments were made to, the Named Executive Officers with respect to the 2015 AIP.

	Plan	Estimated Future Payouts Under Non-Equity Incentive Plan Awards(a)
Name		Threshold		Plan		Target		Maximum
Will Powell	2015 AIP	$	210,000	$	490,000	$	700,000	$	1,400,000
W. Bruce Johnson(b)	2015 AIP	$	300,000	$	700,000	$	1,000,000	$	2,000,000
Ryan D. Robinson	2015 AIP	$	112,500	$	262,500	$	375,000	$	750,000
Michael A. Gray	2015 AIP	$	52,500	$	122,500	$	175,000	$	350,000
David Buckley(c)	2015 AIP	$	39,000	$	91,000	$	130,000	$	260,000
Charles J. Hansen	2015 AIP	$	67,500	$	157,500	$	225,000	$	450,000

(a) The amounts in these columns include the threshold, plan, target, and maximum amounts for the Named Executive Officers in accordance with the 2015 AIP as more fully described in “Compensation Discussion and Analysis” of this Item 1. The Company’s financial performance—as measured by a combination of SHO EBITDA and SHO working capital for the 2015 fiscal year—was used to determine whether the Named Executive Officers earned payouts under their respective 2015 AIP awards; they did not.

(b) Mr. Johnson’s employment with the Company, and his participation in the 2015 AIP, ended on August 8, 2016.

(c) Mr. Buckley’s 2015 Letter Agreements provide that he will be paid a $50,000 bonus for the 2015 fiscal year (less any amounts payable to him in accordance with the 2015 AIP).

SHO Employment Arrangements

Set forth below are summary descriptions of the terms of the Offer Letters and Letter Agreements for our Named Executive Officers, which summaries, among other things, describe material terms of the Offer Letters and the Letter Agreements as they affected the compensation earned by and paid to our Named Executive Officers in the 2015 fiscal year. The below summaries are qualified by reference, and are subject to, the terms and conditions of the Offer Letters and Letter Agreements, which are provided as exhibits to the Company’s 2015 Annual Report on Form 10-K.

Mr. Powell’s Offer Letter

Pursuant to his Offer Letter, Mr. Powell serves as Chief Executive Officer and President of SHO with an annual base salary of $700,000. His Offer Letter authorizes his participation in the Company’s AIP with an annual incentive opportunity of 100% of his base salary and in LTI Program awards, as they are approved and finalized by the Board, with an incentive opportunity of 200% of his base salary. Mr. Powell also receives retirement, health, and welfare benefits made available by the Company to its employees pursuant to his Offer Letter. His Offer Letter provides that if he elects to move his family to the Chicago, Illinois area SHO will provide up to $100,000 to be used in conjunction with the sale of his current home, the purchase of a new home, house-hunting trips, moving household goods, and brokerage fees.

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Mr. Johnson’s Offer Letter

Mr. Johnson’s employment with the Company ended on August 8, 2015. See the Summary Compensation Table for a description of salary continuation and other compensation paid to him in 2015. In accordance with Mr. Johnson’s Offer Letter, his Executive Severance Agreement with Sears Holdings was assigned to, and assumed by, the Company effective as of the Separation.

Pursuant to his Offer Letter, Mr. Johnson served as Chief Executive Officer and President of SHO with an annual base salary of $1,000,000. Mr. Johnson also was authorized to receive retirement, health, and welfare benefits made available by the Company to its employees pursuant to his Offer Letter. Also in accordance with his Offer Letter during 2015 until the termination of his employment on August 8, 2015 the Company provided ground transportation for Mr. Johnson to travel between his residence in the Chicago metropolitan area and the Company’s corporate headquarters in Hoffman Estates, Illinois as described in “Compensation Discussion and Analysis—Other Compensation Elements—Perquisites and Other Benefits.”

Mr. Robinson’s Offer Letter

Pursuant to his Offer Letter, Mr. Robinson serves as the Company’s Senior Vice President and Chief Financial Officer of SHO with an annual base salary of $500,000. In 2015 Mr. Robinson was promoted to Senior Vice President, Chief Administrative Officer, and Chief Financial Officer. His Offer Letter authorizes his participation in the Company’s AIP with an annual incentive opportunity of 75% of his base salary and LTI Program awards, starting in fiscal year 2015 as they are approved and finalized by the Board, with an annual incentive opportunity of 100% of his base salary. With respect to fiscal year 2015, if management recommends to the Compensation Committee that it make an LTI Program award to any of its named executive officers management will recommend to the Compensation Committee that it make an award to Mr. Robinson for that year with a value no less than 100% of his base salary. Mr. Robinson also receives retirement, health, and welfare benefits made available by the Company to its employees pursuant to his Offer Letter.

In accordance with the terms and conditions of his Offer Letter, Mr. Robinson elected to receive a one-time cash incentive award of $250,000 (less all amounts payable to him under the 2014 AIP (of which there were none)) for the 2014 fiscal year, which amount the Company paid to Mr. Robinson in 2014.

Mr. Robinson’s Offer Letter also provides for a cash retention bonus of $300,000 to be paid in three installments, the first of which vested on his start date and was paid shortly thereafter. The second installment was paid in 2015 and remaining portion of his cash retention bonus is scheduled to vest and become payable as soon as administratively possible on the second anniversary of his start date if he remains actively employed by the Company on the applicable payment date.

Mr. Robinson’s Offer Letter also provides that he will receive $250,000 (all of which the Company paid to Mr. Robinson in 2014) to be used to offset expenses incurred by him and expenses incurred by SHO with respect the sale of his home, the purchase of a new home in the Chicago metropolitan area, house hunting trips, moving household goods, and related expenses.

Mr. Gray’s Offer Letter

Pursuant to his Offer Letter, Mr. Gray serves as the Company’s Vice President/General Manager. In February 2016 Mr. Gray was promoted to Senior Vice President, Store Operations. In connection with his promotion Mr. Gray’s annual base salary was increased to $400,000, his AIP opportunity was increased from 50% to 75% of his annual base salary, his LTI Program opportunity was increased from 50% to 100% of his annual base salary, and his severance benefit was increased from 50% to 100% of annual base salary. Mr. Gray also receives retirement, health and welfare benefits made available by the Company to its employees pursuant to his Offer Letter.

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Mr. Buckley’s 2015 Letter Agreements

Pursuant to his 2015 Letter Agreements Mr. Buckley serves as the Company’s Vice President of Marketing and eCommerce. The 2015 Letter Agreements established Mr. Buckley’s annual base salary at $260,000 and his AIP and LTI Program opportunities each at 50% of annual base salary. His 2015 Letter Agreements also provide that Mr. Buckley will be paid a $50,000 bonus for each of the 2015 and 2016 fiscal years (less any amounts payable to him in accordance with an AIP). The Company’s obligation to make these $50,000 payments are subject to specified conditions. Mr. Buckley also is eligible to receive retirement, health and welfare benefits made available by the Company to its employees.

Mr. Hansen’s Offer Letter

Pursuant to his Offer Letter, Mr. Hansen serves as Vice President and General Counsel of SHO and participates in the Company’s AIP with an annual incentive opportunity of 50% of his base salary and in awards under the LTI Program with an incentive opportunity of 50% of his base salary. Mr. Hansen also receives retirement, health and welfare benefits made available by the Company to its employees pursuant to his Offer Letter.

In accordance with Mr. Hansen’s Offer Letter, his Executive Severance Agreement with Sears Holdings was assigned to, and assumed by, the Company effective as of the Separation.

Outstanding Equity Awards at 2015 Fiscal Year End

Messrs. Powell, Robinson, Gray, Buckley, and Hansen held unvested shares of the Company’s restricted stock, and Messrs. Gray and Buckley held unvested stock units, on January 30, 2016, the last day of our 2015 fiscal year. During the 2015 fiscal year the Compensation Committee awarded to Messrs. Gray and Buckley 20,661 stock units and 7,404 stock units, respectively. During the 2015 fiscal year the Compensation Committee awarded 14,000 shares of the Company’s restricted stock to Mr. Robinson. The Company did not make any other stock awards and did not make any stock option grants during the 2015 fiscal year. On January 30, 2016 none of the Named Executive Officers held unvested options to purchase shares of the Company’s common stock.

	Stock Awards
Name	Number of Shares of Stock that have Not Vested(a)		Market Value of Shares of Stock that have Not Vested(b)
Will Powell		16,099	$	112,049
Ryan D. Robinson		14,000	$	97,440
Michael A. Gray		25,261	$	175,817
David Buckley		9,129	$	63,537
Charles J. Hansen		5,175	$	36,018

(a) The shares reported in this column for Messrs. Powell, Gray, Buckley, and Hansen reflect shares of restricted stock awarded by the Compensation Committee during the Company’s 2013 fiscal year, which shares are subject to restrictions preventing their sale and transfer until May 16, 2016, the vesting date for these awards. The shares reported in this column for Mr. Robinson reflect shares of restricted stock awarded by the Compensation Committee during the Company’s 2015 fiscal year, which shares are subject to restrictions preventing their sale and transfer until July 10, 2017, the vesting date for the award. The stock units reported in this column for Messrs. Gray and Buckley do not represent outstanding shares of the Company’s common stock, are not transferable, do not include dividend or voting rights, and if they vest will be paid solely in cash.

(b) The market values reported in this column was calculated by multiplying the closing market price of the Company’s common stock on January 29, 2016 ($6.96), the last trading day of the Company’s 2015 fiscal year, by the number of shares of common stock, or the number of stock units, comprising each award.

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2015 Fiscal Year Option Exercises and Stock Vested

During the 2015 fiscal year none of our Named Executive Officers owned or exercised any SHO stock options. No restricted stock or stock-unit awards vested during the 2015 fiscal year.

Potential Payments upon Termination of Employment or Change in Control

The Company has entered directly into severance agreements with Messrs. Powell, Robinson, Gray, and Buckley. Sears Holdings entered into severance agreements with Messrs. Johnson and Hansen prior to the Separation, which severance agreements as part of the Separation were assigned to and assumed by the Company effective as of the Separation. The amounts shown in the table for involuntary termination for “good reason” or termination without “cause” are based on the following agreement provisions.

Good Reason: A termination by the Named Executive Officer is for good reason if it results from (1) a reduction of more than 10% in the sum of the Named Executive Officer’s annual salary and target bonus from those in effect as of the date of the severance agreement, (2) a Named Executive Officer’s mandatory relocation to an office more than 50 miles from the primary location at which the Named Executive Officer is required to perform the Named Executive Officer’s duties, or (3) any action or inaction that constitutes a material breach under the severance agreement, including the failure of a successor company to assume or fulfill the obligations under the severance agreement.

Cause: A termination by a Named Executive Officer is without cause if the Named Executive Officer is involuntarily terminated because of job elimination (other than poor performance) or without “cause.” “Cause” generally is defined as (1) a material breach by the Named Executive Officer, other than due to incapacity or due to a disability, of the Named Executive Officer’s duties and responsibilities which breach is demonstrably willful and deliberate on the Named Executive Officer’s part, is committed in bad faith or without reasonable belief that such breach is in the best interests of SHO and such breach is not remedied by the Named Executive Officer in a reasonable period of time after receipt of written notice from SHO specifying such breach, (2) the commission by the Named Executive Officer of a felony (in certain cases defined as a felony involving moral turpitude), or (3) dishonesty or willful misconduct in connection with the Named Executive Officer’s employment.

Severance Benefits upon Involuntary Termination for “Good Reason” or Without “Cause”

For Mr. Powell, the sum of (1) his annual base salary at the rate in effect immediately prior to the date of termination, (2) the amount, if any, determined by the Compensation Committee of the Board of Directors to have been actually earned by him under the AIP for the year in which the termination occurs, prorated to the date of termination, plus (3) if the termination occurs prior to his receipt of his actually earned annual bonus under the AIP (as determined by the Compensation Committee) for the year that is prior to the year in which the termination occurs, that bonus to be paid at the time when the Company makes payments of bonuses earned with respect to the prior year. All amounts owed to Mr. Powell as described in this paragraph are payable in the form of salary continuation for 12 months and subject to mitigation.

For Mr. Robinson, the sum of (1) his annual base salary at the rate in effect immediately prior to the date of termination and (2) the payout he would have earned, if any, under the Company’s AIP for the most recently ended fiscal year but only if such payout, if any, has not yet been made because the termination occurred after the end of a fiscal year and before the payment date for the AIP. All amounts owed to Mr. Robinson as described in this paragraph are payable in the form of salary continuation for 12 months and subject to mitigation.

For Messrs. Gray, Buckley and Hansen, base salary at the rate in effect immediately prior to the date of termination, payable in the form of salary continuation for six months, subject to mitigation. In February 2016 the Compensation Committee increased Mr. Gray’s annual base salary to $400,000 and his salary-continuation amount to twelve months.

By mutual agreement with the Company’s Board of Directors, Mr. Johnson’s employment with the Company ended on August 8, 2015. With respect to the termination of Mr. Johnson’s employment with the

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Company, the Compensation Committee authorized the Company to pay to Mr. Johnson all amounts payable in accordance with, and subject to, his Executive Severance/Non-Compete Agreement with respect to an employment termination by the Company without “Cause,” which includes an amount equal to the sum of (1) his annual base salary at the rate in effect immediately prior to the date of termination ($1,000,000) and (2) a bonus equivalent to his target bonus opportunity for the 2015 fiscal year (100% of annual base salary ($1,000,000)), in the form of monthly salary-continuation installments, subject to mitigation and forfeiture upon the occurrence of specified events.

For all Named Executive Officers, continuation of active medical and dental coverage in which the Named Executive Officer was eligible to participate to the end of employment during the salary continuation period.

Other Terms of Severance Agreements

None of the Named Executive Officers is entitled to a severance payment under the Named Executive Officer’s severance agreement in the event of termination for “Cause” or voluntary termination for reason other than “Good Reason.” Under the severance agreements, the Named Executive Officers agree to non-disclosure of confidential information, non-solicitation and non-compete (where permissible under applicable state law) covenants, as well as a release of liability for specified claims against the Company.

The severance agreements do not provide for salary-continuation payments to the participating Named Executive Officers upon termination of employment due to death, disability, retirement, or upon the occurrence of a change in control. Assuming that a termination had been effective as of January 30, 2016, the last day of our 2015 fiscal year, all of the Named Executive Officers employed by the Company as of that date would have been eligible to receive payments under the 2015 AIP upon death or disability as described below.

Payments Pursuant to Incentive and Other Compensation Programs

As described under “Compensation Discussion and Analysis” in this Item 1, SHO provides annual and long-term incentive awards to our Named Executive Officers. Payments under these programs for termination of employment are limited. If a Named Executive Officer voluntarily terminates his employment (for any reason including for “Good Reason” but other than disability) or is involuntarily terminated (for any reason including without “Cause” but other than death or disability) prior to the payment date, then he will forfeit his 2015 AIP award, except as prohibited by law.

If a Named Executive Officer is terminated because of death or disability, he will be entitled to a pro-rated payment through the termination date if the achievement of the performance measures under the 2015 AIP equal or exceed the threshold level of performance. Because SHO did not achieve the threshold level of performance under the 2015 AIP, none of Named Executive Officers would have been entitled to receive distributions under the 2015 AIP at the threshold level of performance if their employment had terminated due to death or disability on January 30, 2016, the last day of SHO’s 2015 fiscal year.

If a Named Executive Officer voluntarily terminates employment (for any reason other than disability) or is involuntary terminated for any reason (other than death), then he will forfeit his award under each LTIP in which he participates and the restricted stock awards (if he has any), except as prohibited by law. Mr. Johnson forfeited all of his shares of restricted stock issued by the Company effective upon the termination of his employment.

With respect to awards under an LTIP, if a Named Executive Officer’s employment is terminated because of disability, the Named Executive Officer generally will be entitled to a pro-rated payment at the target level through the termination date if (1) performance for the period from the inception of the performance period through the last completed full month that occurs on or preceding his date of termination due to disability is equal to or greater than the target for that performance period, pro-rated through the date of termination, (2) the performance for the entire three-year performance period is equal to or greater than the target for that performance period, and (3) as of the date of termination, he had been employed by one or more of the Company or a subsidiary for at least 12 months of the performance period applicable to him. If a Named Executive

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Officer’s employment is terminated due to his death, his estate generally will be entitled to a pro-rated payment at the target level through the date of death if (A) the performance for the period from the inception of the performance period through the last completed full month that occurs on or preceding his date of death is equal to or greater than the target for that performance measure, pro-rated through the date of death, (B) the performance for the entire three-year measurement period is equal to or greater than the target for that performance period, and (C) as of the date of termination, he had been employed by one or more of the Company or a subsidiary for at least 12 months of the performance period applicable to him. All pro-rations of awards under LTIPs generally will be based on a fraction, the numerator of which is the number of full months during the performance period in which the participant was a participant in the LTIP and the denominator of which is the full number of months in the performance period.

With respect to the restricted stock awards currently held by Messrs. Powell, Robinson, Gray, Buckley, and Hansen, if the employment of any of any of them with the Company terminates by reason of his death or disability, the forfeiture condition restricting the sale or transfer of the common stock forming his restricted stock award will be deemed to have lapsed on the day immediately preceding his termination. The stock-unit awards made to Messrs. Gray and Buckley will be deemed to have vested on the day immediately preceding the date of termination of employment due to death or disability. As a result, if the employment of any of Messrs. Powell, Robinson, Gray, Buckley, and Hansen terminated by reason of death or disability on January 30, 2016, his restricted stock award, and his stock-unit award (with respect to Messrs. Gray and Buckley) would be deemed to have vested as of January 29, 2016. See “SHO Employment Arrangements” in this Item 1 for further information regarding Mr. Johnson’s Offer Letter.

The table below summarizes the potential payouts to the Named Executive Officers actively employed by the Company upon a termination of employment assuming the termination occurred on January 30, 2016, the last day of the Company’s 2015 fiscal year (the table below does not reflect the action taken by the Compensation Committee in February 2016 to increase Mr. Gray’s annual base salary to $400,000 and his salary-continuation amount to twelve months):

Will Powell	Salary Continuation		Continuation of Medical/ Welfare Benefits (a)		Target Bonus (b)		2015 AIP Payment (b)		LTIP Payments		Accelerated Vesting of Restricted Stock Awards (d)		Total
Termination for Good Reason	$	700,000	$	8,520	$	100,000		—		—		—	$	808,520
Termination Without Cause	$	700,000	$	8,520	$	100,000		—		—		—	$	808,520
Termination With Cause		—		—		—		—		—		—		—
Voluntary Termination		—		—		—		—		—		—		—
Termination due to Disability		—		—		—		—		—	$	112,049	$	112,049
Termination due to Retirement		—		—		—		—		—		—		—
Termination due to Death		—		—		—		—		—	$	112,049	$	112,049
Ryan D. Robinson	Salary Continuation		Continuation of Medical/ Welfare Benefits (a)		Target Bonus (b)		2015 AIP Payment (c)		LTIP Payments		Accelerated Vesting of Restricted Stock Awards (d)		Total
Termination for Good Reason	$	500,000	$	8,520	$	100,000		—		—		—	$	608,520
Termination Without Cause	$	500,000	$	8,520	$	100,000		—		—		—	$	608,520
Termination With Cause		—		—		—		—		—		—		—
Voluntary Termination		—		—		—		—		—		—		—
Termination due to Disability		—		—		—		—		—	$	97,440	$	97,440
Termination due to Retirement		—		—		—		—		—		—		—
Termination due to Death		—		—		—		—		—	$	97,440	$	97,440

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Michael A. Gray	Salary Continuation		Continuation of Medical/ Welfare Benefits (a)		Target Bonus		2015 AIP Payment (c)		LTIP Payments		Accelerated Vesting of Restricted Stock and Stock-Unit Awards (d)		Total
Termination for Good Reason	$	175,000	$	4,260		—		—		—		—	$	179,260
Termination Without Cause	$	175,000	$	4,260		—		—		—		—	$	179,260
Termination With Cause		—		—		—		—		—		—		—
Voluntary Termination		—		—		—		—		—		—		—
Termination due to Disability		—		—		—		—		—	$	175,817	$	175,817
Termination due to Retirement		—		—		—		—		—		—		—
Termination due to Death		—		—		—		—		—	$	175,817	$	175,817
David Buckley	Salary Continuation		Continuation of Medical/ Welfare Benefits (a)		Target Bonus		2015 AIP Payment (c)		LTIP Payments		Accelerated Vesting of Restricted Stock and Stock-Unit Awards (d)		Total
Termination for Good Reason	$	130,000	$	4,260		—		—		—		—	$	134,260
Termination Without Cause	$	130,000	$	4,260		—		—		—		—	$	134,260
Termination With Cause		—		—		—		—		—		—		—
Voluntary Termination		—		—		—		—		—		—		—
Termination due to Disability		—		—		—		—		—	$	63,537	$	63,537
Termination due to Retirement		—		—		—		—		—		—		—
Termination due to Death		—		—		—		—		—	$	63,537	$	63,537
Charles J. Hansen	Salary Continuation		Continuation of Medical/ Welfare Benefits (a)		Target Bonus		2015 AIP Payment (c)		LTIP Payments		Accelerated Vesting of Restricted Stock Awards (d)		Total
Termination for Good Reason	$	225,000	$	4,260		—		—		—		—	$	229,260
Termination Without Cause	$	225,000	$	4,260		—		—		—		—	$	229,260
Termination With Cause		—		—		—		—		—		—		—
Voluntary Termination		—		—		—		—		—		—		—
Termination due to Disability		—		—		—		—		—	$	36,018	$	36,018
Termination due to Retirement		—		—		—		—		—		—		—
Termination due to Death		—		—		—		—		—	$	36,018	$	36,018

(a) For Messrs. Powell and Robinson each the amount reported in this column represents the continuation of benefits including medical and dental for one year. The amounts for Messrs. Gray, Buckley, and Hansen each represents the continuation of medical and dental benefits for six months.

(b) For Messrs. Powell and Robinson each the amount reported in this column represents the amount that would be payable under his Cash Retention Award for a termination of his employment by the Company “without cause” or his termination of his employment for “good reason.”

(c) As a consequence of the Company’s 2015 fiscal year financial performance, no payouts under the 2015 AIP were earned by, and no payments were made to, the Named Executive Officers.

(d) For Messrs. Powell, Robinson, Gray, Buckley, and Hansen each the amount reported in this column includes the value, as of January 30, 2016, of the restricted stock award made to him. For Messrs. Gray and Buckley each the amount reported in this column also includes the value, as of January 30, 2016, of the stock-unit award made to him. If a Named Executive Officer’s employment with the Company terminates by reason of death or disability, the forfeiture conditions to which the Named Executive Officer’s restricted

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stock award and stock-unit award are subject would be deemed to have lapsed on the day immediately preceding the Named Executive Officer’s termination. As a result, for a Named Executive Officer whose employment with the Company terminated by reason of death or disability on January 30, 2016, the Named Executive Officer’s restricted stock award, if any, and stock-unit award, if any, would be deemed to have vested as of January 29, 2016. The cash value amounts reported in the “Termination due to Disability” and “Termination due to Death” columns were calculated by multiplying (1) the number of shares of common stock underlying the Named Executive Officer’s restricted stock award, or the number of stock units, by (2) the closing price of the Company’s common stock on January 29, 2016.

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COMPENSATION OF DIRECTORS

In accordance with our Director Compensation Policy, the Company provides to its non-employee directors an annual cash retainer in the amount of $100,000 for serving as a director of the Company. In addition, the Director Compensation Policy provides that (1) the Chairman of the Board receives an additional annual cash retainer of $30,000 for that service, (2) the Chair of the Audit Committee receives an additional $20,000 annual cash retainer for that service, and (3) the Chair of the Compensation Committee and the Chair of the Nominating and Corporate Governance Committee each receives an additional annual cash retainer of $10,000 for that service. Retainer payments are prorated to reflect actual service during the fiscal year. The following table shows information concerning the compensation paid with respect to our 2015 fiscal year to our directors who served on the Board during our 2015 fiscal year.

Name	Fees Earned or Paid in Cash		Total
E.J. Bird(a)	$	117,589	$	117,589
Jeffrey Flug(b)	$	81,868	$	81,868
James F. Gooch(c)	$	123,343	$	123,343
William R. Harker(d)	$	44,493	$	44,493
W. Bruce Johnson(d)		—		—
Josephine Linden	$	118,351	$	118,351
William K. Phelan(e)	$	31,781	$	31,781
Will Powell(f)		—		—
David Robbins(g)		—		—

(a) The Board of Directors elected Mr. Bird as the Chairman of the Board on July 1, 2015.

(b) Mr. Flug resigned on September 30, 2015 as a member of the Company’s Board of Directors and as Chair of the Compensation Committee.

(c) The Board of Directors appointed Mr. Gooch as the Chair of the Audit Committee on October 1, 2015.

(d) Mr. Harker did not stand for reelection to the Board of Directors at the Company’s 2015 Annual Meeting of Stockholders, and he ceased to serve as a director, and as Chairman of the Board, of the Company on May 27, 2015. Mr. Johnson did not stand for reelection to the Board of Directors at the Company’s 2015 Annual Meeting of Stockholders, and he ceased to serve as a director of the Company on May 27, 2015. Mr. Johnson, the Company’s Chief Executive Officer and President until July 1, 2015, did not receive any additional compensation for his service as a director of the Company during the 2015 fiscal year. See “Executive Compensation” of this Item 1 regarding Mr. Johnson’s compensation arrangements.

(e) The Board of Directors elected Mr. Phelan as a member of the Company’s Board of Directors on October 7, 2015.

(f) Mr. Powell, the Company’s Chief Executive Officer and President, did not receive any additional compensation for his service as a director of the Company during the 2015 fiscal year. See “Executive Compensation” of this Item 1 regarding Mr. Powell’s compensation arrangements.

(g) The Board of Directors elected Mr. Robbins as a member of the Board of Directors on March 9, 2016.

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ITEM 2. ADVISORY VOTE TO APPROVE THE COMPENSATION OF

OUR NAMED EXECUTIVE OFFICERS

Section 14A of the Securities Exchange Act of 1934 requires, among other things, that we provide our stockholders with the opportunity to vote to approve, on a nonbinding, advisory basis, the compensation of our Named Executive Officers as disclosed in this Proxy Statement in accordance with the SEC’s compensation disclosure rules.

As described under “Executive Compensation—Compensation Discussion and Analysis” in this Proxy Statement, we seek, to the extent practicable, to link the compensation of our Named Executive Officers with the Company’s performance. Our compensation programs are designed to reward our Named Executive Officers for the achievement of short-term and long-term financial goals, while minimizing excessive risk taking in the short term. We believe that our compensation programs are strongly aligned with the long-term interests of our stockholders, and we believe that our current executive-compensation programs have been effective in implementing our compensation philosophy and objectives. We note that more than 99% of the shares that voted to approve, on an advisory basis, the compensation of our Named Executive Officers as disclosed in our 2015 proxy statement voted in favor of the compensation of our Named Executive Officers. We urge you to read the Compensation Discussion and Analysis section of this Proxy Statement for additional details on our executive compensation, including our compensation philosophy and objectives and the compensation of our Named Executive Officers during our 2015 fiscal year.

The vote on this proposal is not intended to address any specific element of compensation; rather, the vote relates to the compensation of our Named Executive Officers, as described in this Proxy Statement in accordance with the compensation disclosure rules of the SEC. The vote is advisory, which means that the vote is not binding on the Company, our Board, or the Compensation Committee of the Board. However, the Board and the Compensation Committee value the opinions expressed by our stockholders in their voting on this proposal and will consider the outcome of the voting when making future compensation policies and decisions regarding our Named Executive Officers.

Accordingly, we ask our stockholders to vote on the following resolution at the Annual Meeting:

“RESOLVED, that the Company’s stockholders approve, on an advisory basis, the compensation of the Named Executive Officers, as disclosed in the Company’s Proxy Statement for the 2016 Annual Meeting of Stockholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the compensation tables, and any related material disclosed in this Proxy Statement.”

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL, ON AN ADVISORY

BASIS, OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS AS DESCRIBED IN

THIS PROXY STATEMENT.

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ITEM 3. RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

Item 3 is the ratification of the Audit Committee’s appointment of BDO USA, LLP as the independent registered public accounting firm to audit the financial statements of the Company for our 2016 fiscal year. Representatives of BDO USA, LLP will be present at the Annual Meeting. They will be available to respond to your questions and may make a statement if they so desire.

THE BOARD RECOMMENDS A VOTE “FOR” THE PROPOSAL TO RATIFY THE APPOINTMENT

OF BDO USA, LLP AS INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

FOR FISCAL YEAR 2016.

Independent Registered Public Accounting Firm Fees

The following table shows the fees paid or accrued by the Company and its subsidiaries for the audit and other services provided by BDO USA, LLP and its affiliates for the Company’s 2014 and 2015 fiscal years:

	2014 Fiscal Year		2015 Fiscal Year
Audit Fees(1)	$	1,088,577	$	1,082,495
Audit-Related Fees(2)	$	26,750	$	19,486
Tax Fees(3)	$	33,000	$	33,260
All Other Fees		—		—
Total	$	1,148,327	$	1,135,241

(1) Audit Fees represent fees for professional services provided in connection with the audit of the Company’s consolidated financial statements, review of quarterly financial statements, regulatory audits, and accounting consultations.

(2) Audit-related Fees represent fees for professional services provided in connection with the audit of the 401(k) Savings Plan.

(3) Tax Fees represent fees for professional services provided in connection with the preparation of the Company’s tax filings for Puerto Rico and the audit of aspects of our business in Puerto Rico, which audit was required to be undertaken with respect to the tax filings.

The Audit Committee must pre-approve all engagements of our independent registered public accounting firm as required by the Audit Committee Charter, the Pre-Approval Policy and Procedures for Auditing Services and Non-Audit Services (the “Pre-Approval Policy”) adopted by the Audit Committee, and the rules of the SEC. The Pre-Approval Policy provides the conditions and procedures under which the Audit Committee will pre-approve auditing services and non-audit services to be rendered by SHO’s external auditor in accordance with Sections 10A(g) and 10A(i) of the Securities Exchange Act of 1934, and the rules of the SEC. The Audit Committee does not delegate to management the Audit Committee’s responsibilities to pre-approve services to be performed by SHO’s external auditor. All engagements of the external auditor to perform (1) annual audits of SHO’s financial statements and (2) attestations of SHO’s internal controls are excluded from the Pre-Approval Policy, and it provides that, with respect to the excluded services, the Audit Committee must specifically approve the annual or other engagement of the external auditor, the engagement scope, terms, and fees, the form and content of the engagement letter, and all changes to the engagement scope, terms, and fees prior to the external auditor’s commencement of the engagement. The Audit Committee also will specifically approve, in advance, each other engagement of the external auditor to provide an auditing service or a non-audit service that is not among the categories of auditing services and non-audit services pre-approved pursuant to the Pre-Approval Policy.

The Pre-Approval Policy includes categories of auditing services and non-audit services that the Audit Committee pre-approves, subject to approval of the Chairman of the Audit Committee, for 12 months. At least annually the Audit Committee pursuant to the Pre-Approval Policy will review all proposed categories of

39

auditing services and non-audit services for the following fiscal year to determine that (a) the categories of services may be provided by the external auditor to SHO in accordance with applicable law and (b) the external auditor’s provision of the categories of services would not impair its independence. The Chairman of the Audit Committee is authorized to specifically pre-approve all auditing services and non-audit services that may be provided to SHO by its external auditor that are listed, and within the limits provided, in the Pre-Approval Policy.

All of the Audit Fees and Tax Fees described in the table above were pre-approved in accordance with the Audit Committee’s policies and procedures.

Report of the Audit Committee

The following is the report of the Audit Committee with respect to the Company’s audited financial statements for the fiscal year ended January 30, 2016. The information contained in this report shall not be deemed “soliciting material” or otherwise considered “filed” with the SEC, and such information shall not be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 except to the extent that the Company specifically incorporates such information by reference in such filing.

The purpose of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities by reviewing the Company’s system of internal controls, the presentation and disclosure in the Company’s financial statements, which will be provided to our stockholders and others, and the overall audit process. All members of the Audit Committee meet the criteria for independence applicable to audit committee members under Nasdaq’s Stock Market Rules, and the Audit Committee Charter complies with these rules.

Management is responsible for the financial reporting process, including the system of internal controls, and for the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”). The Company’s independent registered public accounting firm is responsible for auditing these financial statements and expressing an opinion as to their conformity to GAAP.

The Audit Committee’s responsibility is to monitor and review these processes, acting in an oversight capacity, and the Audit Committee does not certify the financial statements or guarantee the independent registered public accounting firm’s report. The Audit Committee relies, without independent verification, on the information provided to it, including representations made by management and the independent registered public accounting firm, including its audit report.

The Audit Committee has reviewed and discussed the audited financial statements of the Company for the fiscal year ended January 30, 2016 with the Company’s management and BDO USA, LLP, the Company’s independent registered public accounting firm (“BDO”). The Audit Committee also has discussed with BDO the matters required to be discussed by Auditing Standard No. 16, “Communications with Audit Committees” issued by the Public Company Accounting Oversight Board (“PCAOB”). The Audit Committee also has received and reviewed the written disclosures and the letter from BDO required by applicable requirements of the PCAOB regarding BDO’s communications with the Audit Committee concerning independence, and has discussed with BDO its independence from the Company. Based on the review and discussions noted above, the Audit Committee recommended to the Board that the audited financial statements referred to above be included in the Company’s 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission. James F. Gooch served as a member, and as the Chair, of the Audit Committee until February 1, 2016. William K. Phelan has served as a member of the Audit Committee since October 14, 2015 and as the Chair of the Audit Committee since March 9, 2016. David Robbins has served as a member of the Audit Committee since March 9, 2016.

Audit Committee

William K. Phelan, Chair

Josephine Linden

David Robbins

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CERTAIN RELATIONSHIPS AND TRANSACTIONS

Review and Approval of Transactions with Related Persons

The Company’s Audit Committee Charter and the Company’s written Related-Person Transactions Approval Policy require that the Audit Committee review and approve all related-party transactions required to be disclosed pursuant to SEC rules. The Related-Person Transactions Approval Policy requires that the Audit Committee, among other things (1) determine whether the proposed related-person transaction is on terms and conditions that, in all material respects, the Company’s management reasonably believes are no less favorable to the Company than the terms and conditions the Company could obtain in comparable arm’s-length transactions with unrelated third parties and (2) take into account relevant factors such as the nature of the related person’s interest in the transaction, the purpose, terms and conditions (including the dollar amount involved), and timing of the transaction, and whether the transaction is consistent with the best interests of the Company and its stockholders.

Related-Party Transactions

According to publicly available information ESL beneficially owns 50.7% of our outstanding shares of common stock and 57.6% of Sears Holdings’ outstanding shares of common stock, and at all times during our 2015 fiscal year beneficially owned more than 5% of the outstanding shares of each of SHO and Sears Holdings. Edward S. Lampert, Chairman, Chief Executive Officer, and Director of ESL Investments, Inc. (which is among the related entities that we refer to as “ESL” in this Proxy Statement), is the Chairman of the Board and Chief Executive Officer of Sears Holdings.

In connection with the Separation, SHO and its subsidiaries prior to the Separation entered into various agreements with Sears Holdings and its subsidiaries (the “SHO-Sears Holdings Agreements”) that, among other things, (1) govern specified aspects of SHO’s relationship with Sears Holdings following the Separation and (2) establish terms pursuant to which subsidiaries of Sears Holdings provide services and merchandise to SHO and its subsidiaries. The SHO-Sears Holdings Agreements, as amended, as well as other agreements to which SHO or its subsidiaries are party and that require disclosure as related-party transactions under the SEC’s rules, are summarized below.

In the following summaries, SHO and Sears Holdings are referred to as the parties to the agreements summarized, although their respective subsidiaries may be the sole parties, or may be additional parties, to the agreements. The SHO-Sears Holdings Agreements and the amendments thereto, summarized below in this “Certain Relationships and Transactions,” are reproduced in full as, and qualified in their entirety by the actual text of the agreements that are, exhibits to the Company’s 2015 Annual Report on Form 10-K.

Separation Agreement

Prior to the Separation SHO entered into a Separation Agreement with Sears Holdings (the “Separation Agreement”). The Separation Agreement, as amended, provides for the framework of the Separation and the ancillary agreements described below.

Pursuant to the Separation Agreement and in anticipation of the Separation, Sears Holdings transferred to SHO, through a series of intercompany transactions, specified assets and liabilities comprising the pre-Separation Sears Hometown and Hardware and Sears Outlet businesses of Sears Holdings. In the Separation Agreement, SHO and Sears Holdings agree to release each other from all pre-Separation claims (other than with respect to the agreements executed in connection with the Separation and subject to certain exceptions) and each agrees to defend and indemnify the other with respect to its post-Separation business. In addition, the Separation Agreement provides specified information and access rights relating to pre-Separation financial and compliance matters, as well as procedures for handling third-party claims and disputes between the parties. The Separation

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Agreement also provides that SHO and Sears Holdings will negotiate in good faith with respect to SHO’s proposals to conduct its franchise and dealer businesses in the Caribbean region and permits SHO, under specified conditions, to establish, acquire, and operate businesses that do not use the “Sears” name and that are not specified retailers.

Indemnification. SHO is required to indemnify and defend Sears Holdings from and against all liabilities suffered by Sears Holdings relating to, arising out of, or resulting from (1) each liability of SHO assumed in connection with the Separation or arising after giving effect to the Separation and the agreements specified as ancillary to the Separation Agreement (the “Ancillary Agreements”), (2) the specified business of SHO, (3) each asset owned by SHO after giving effect to the Separation and the Ancillary Agreements, (4) SHO’s breach of the Separation Agreement, and (5) SHO’s breach of an Ancillary Agreement, subject to any liability limitation contained in the Ancillary Agreement and, without duplication, taking into account SHO’s performance of its indemnification obligations in the Ancillary Agreement. SHO is further required to indemnify and defend Sears Holdings if Sears Holdings remains liable to a third party for any liability for which SHO is liable under the Separation Agreement. Sears Holdings is required to indemnify and defend SHO from and against any and all liabilities relating to, arising out of, or resulting from (1) each liability of Sears Holdings assumed in connection with the Separation or arising after giving effect to the Separation and the Ancillary Agreements, (2) the specified business of Sears Holdings, (3) each asset owned by Sears Holdings after giving effect to the Separation and the Ancillary Agreements, (4) Sears Holdings’ breach of the Separation Agreement, and (5) Sears Holdings’ breach of an Ancillary Agreement, subject to any liability limitation contained in the Ancillary Agreement and, without duplication, taking into account Sears Holdings’ performance of its indemnification obligations in the Ancillary Agreement. Sears Holdings is further required to indemnify and defend SHO if SHO remains liable to a third party for any liability for which Sears Holdings is liable under the Separation Agreement.

Limitation of Liability. With respect to each of SHO and Sears Holdings, neither party is liable to the other party for any consequential, incidental, indirect, special, or punitive damages, losses or expenses (including business interruption, lost business, lost profits, or lost savings) arising under the Separation Agreement, even if advised of the possibility of such damages, except that SHO and Sears Holdings, unless otherwise provided for in the Ancillary Agreements, each remains obligated to indemnify and defend the other party against consequential, incidental, indirect, special, or punitive damages, losses or expenses that may arise from third-party claims.

Store License Agreements

Prior to the Separation, SHO entered into Store License Agreements with Sears Holdings (the “Store License Agreements”) pursuant to which Sears Holdings has granted to SHO (1) an exclusive, royalty-free, non- transferable and terminable license to operate, and to authorize SHO’s dealers and franchisees to operate, retail stores and stores-within-a-store using the “Sears Outlet Store,” “Sears Authorized Hometown Store,” “Sears Home Appliance Showroom,” and “Sears Hardware Store” store names (the “store names”), (2) an exclusive, royalty-free, non-transferable and terminable license to use the store names to promote SHO’s products, and services related to SHO’s products, by all current and future electronic means, channels, processes and methods, including via the Internet (“digital methods”), (3) a non-exclusive, royalty-free, non-transferable and terminable license to use, and to authorize SHO’s dealers and franchisees to use, certain other trademarks to market and sell services related to SHO’s products under those trademarks, and (4) an exclusive, royalty-free, non-transferable and terminable license to use certain domain names in connection with the promotion of SHO’s stores, the marketing, distribution and sale of SHO’s products, and the marketing and offering of services related to SHO’s products. The Store License Agreements do not include licenses for the Kenmore, Craftsman, or DieHard trademarks.

Duration. The terms of the Store License Agreements will expire in 2029. The Store License Agreements may be terminated (1) by either party for cause upon a material breach either if the breaching party fails to cure such breach within 30 days following written notice of such breach or, if such breach is not curable, immediately

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upon delivery of notice of the non-breaching party’s intention to terminate, (2) immediately by Sears Holdings upon 10-days’ notice upon a change of control whereby a majority of SHO’s voting power, or a majority of the voting power of any of SHO’s subsidiaries, is acquired by specified competitors of Sears Holdings, (3) by either party upon 30-days’ notice if such party (or any of its affiliates) terminates the Separation Agreement, any other Store License Agreement, the Trademark License Agreement, the SYWR Agreement, or the Merchandising Agreement (each as defined below) as a result of the other party’s (or its affiliates’) material breach of or default under such agreement, (4) immediately by Sears Holdings upon 10-days’ notice if SHO has operated, or has authorized SHO’s dealers and franchisees to operate, any retail store or store-within-a-store using a name other than a store name specified in the Store License Agreements for twelve consecutive months, or (5) immediately by Sears Holdings upon 10-days’ notice if SHO does not extend the term of the Merchandising Agreement for either of its two renewal periods. In addition, the Store License Agreements with Sears Authorized Hometown Stores, LLC (“SAHS”) and Sears Home Appliance Showrooms, LLC or (“SHAS”) permit Sears Holdings to require SAHS and SHAS to terminate for cause any dealer or franchisee that (i) causes SAHS or SHAS to be in non-compliance with a material term of the Store License Agreements or (ii) fails to maintain the high quality and reputation of the store names, domain names, and other Sears trademarks, provided that prior to termination SAHS and SHAS are given a reasonable opportunity to cause the dealer or franchisee to cure such non-compliance or failure.

Indemnification. SHO is required to defend and indemnify Sears Holdings for all liability, even though such liability may result from false, fraudulent, or groundless claims, arising from the death of or injury to any person, damage to any property, or loss suffered by a third party related to (1) the operation of SHO’s stores, (2) any acts or omissions by SHO, its affiliates, its dealers, and its franchisees in connection with the Store License Agreements, (3) any violation by SHO, its affiliates, its dealers, and its franchisees of any anti-corruption law, (4) any actual or alleged infringement of any intellectual property, (5) any latent or patent defect in any of SHO’s products not purchased from Sears Holdings, (6) any actual or alleged failure of SHO’s stores, websites, or any of SHO’s products not purchased from Sears Holdings or its affiliates to comply with any laws, (7) SHO’s use of any licensed trademark other than in accordance with the Store License Agreements, or (8) any lack of validity or enforceability of the Store License Agreements caused by SHO. Sears Holdings is required to defend and indemnify SHO for all liability arising from the death of or injury to any person, damage to any property, or loss suffered by a third party related to (A) claims that SHO’s use of the licensed trademarks constitutes copyright infringement, (B) claims as to the lack of validity or enforceability of the registrations or ownership rights of the licensed trademarks, or (C) any lack of enforceability or validity of the Store License Agreements caused by Sears Holdings.

License to Use Sears’ Digital Methods. Sears Holdings also grants SHO the right to use the store names to sell SHO’s products by all digital methods that are owned or operated by Sears Holdings and Kmart Corporation (“Kmart”) including the website for SHO’s Sears Outlet business, provided that Sears Holdings may terminate this right upon two-years’ notice. If Sears Holdings exercises this termination right, it must grant SHO licenses to (1) market SHO’s products by all digital methods outside the United States, Puerto Rico, Bermuda and Guam (the “territories”), and (2) sell SHO’s products by all digital methods both in and outside of the territories. However, these licenses will only be granted to the extent that they do not conflict with third-party obligations of Sears Holdings that otherwise limit Sears Holdings’ and Kmart’s right to license or authorize SHO to market any of SHO’s products.

Trademark License Agreement

In connection with the Separation, SHO entered into a Trademark License Agreement with Sears Holdings (the “Trademark License Agreement”) pursuant to which Sears Holdings has granted to SHO (1) a royalty-free license to use the Sears trademark as part of SHO’s corporate name in the United States and to promote SHO’s businesses and (2) a fully paid-up license to use the searshometownandoutlet.com and ownasearsstore.com domain names solely to promote SHO’s businesses.

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Duration. The term of the Trademark License Agreement will expire in 2029. The Trademark License Agreement may be terminated (1) by either party for cause upon a material breach either if the breaching party fails to cure such breach within 30 days following written notice of such breach or, if such breach is not curable, immediately upon delivery of notice of the non-breaching party’s intention to terminate, (2) immediately by Sears Holdings upon 10-days’ notice upon a change of control whereby a majority of SHO’s voting power, or a majority of the voting power of any of SHO’s subsidiaries, is acquired by specified competitors of Sears Holdings, (3) by either party upon 30-days’ notice if such party (or any of its affiliates) terminates the Separation Agreement, any Store License Agreement, the SYWR Agreement, or the Merchandising Agreement as a result of the other party’s (or its affiliates’) material breach of or default under such agreement, (4) immediately by Sears Holdings upon 10-days’ notice if SHO has not conducted business using SHO’s corporate name specified in the Trademark License Agreement for twelve consecutive months, or (5) immediately by Sears Holdings upon 10-days’ notice if SHO does not extend the term of the Merchandising Agreement for either of its two renewal periods.

Indemnification. SHO is required to defend and indemnify Sears Holdings against third-party claims relating to any breach by SHO of the Trademark License Agreement. Sears Holdings is required to defend and indemnify SHO against third-party claims relating to any breach by Sears Holdings of the Trademark License Agreement.

Merchandising Agreement

Prior to the Separation, SHO entered into a Merchandising Agreement with Sears Holdings (the “Merchandising Agreement”) pursuant to which Sears Holdings agrees to (1) sell to SHO, with respect to certain specified product categories, Sears brand products (including Kenmore, Craftsman and DieHard brand products (the “KCD Products”) and vendor-branded products obtained from Sears Holdings’ vendors and suppliers and (2) grant SHO licenses to use the trademarks owned by Sears Holdings (the “Sears Marks”) including the Kenmore, Craftsman and Diehard trademarks (the “KCD Marks”) in connection with the marketing and sale of products sold under the Sears Marks.

Duration. The initial term of the Merchandising Agreement will expire in April 2018, subject to two three-year renewal terms with respect to the KCD Products. The Merchandising Agreement may be terminated (unless the party seeking to terminate has failed to comply with any of its material obligations in the Merchandising Agreement and the failure is continuing) (1) by either party for cause upon a material breach either if the breaching party fails to cure such breach within 30 days following written notice of such breach or, if such breach is not curable, immediately upon delivery of the non- breaching party’s notice of intention to terminate, (2) by Sears Holdings if an unaffiliated third party acquires all rights, title, and interest in and to all of the KCD Marks, (3) immediately by Sears Holdings if SHO (A) purports to assign the Merchandising Agreement without Sears Holdings’ consent, (B) is unable to pay its debts or if SHO enters into a voluntary suspension of payments or bankruptcy, (C) undergoes a change of control whereby a majority of SHO’s voting power, or a majority of the voting power of any of SHO’s subsidiaries, is acquired by specified competitors of Sears Holdings, or (D) ceases to conduct business using the Sears name, or (4) by either party upon 30-days’ notice if such party (or any of its affiliates) (A) terminates the Separation Agreement, any Store License Agreement, the Trademark License Agreement, or the SYWR Agreement as a result of the other party’s (or its affiliates’) material breach of or default under the Separation Agreement or (B) terminates any Store License Agreement or the Trademark License Agreement as a result of the other party’s (or its affiliates’) material breach of or default under such agreement. In addition, if an unaffiliated third party acquires all rights, title and interest in and to one or more (but not all) of the KCD Marks, Sears Holdings may terminate its obligation to sell to SHO KCD Products that are branded with the KCD Marks that were subject to such acquisition. Furthermore, if SHO rejects Sears Holdings’ proposed increase in the royalty rate of one or more KCD Product categories prior to the expiration of the initial term (to take effect during the first renewal period) or the first renewal term of the agreement (to take effect during the second renewal period), then Sears Holdings may terminate its obligation to sell to SHO all KCD Products in such rejected categories or terminate the Merchandising Agreement altogether.

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Pricing. SHO will determine, at its sole discretion, advertised prices, promotional prices, and retail prices for all merchandise acquired from Sears Holdings for sale in SHO’s Hometown Stores, Hardware Stores, and Home Appliance Showrooms. Sears Holdings’ vendors may from time to time adopt minimum advertised price policies (“MAP”) and unilateral pricing policies (“UPP”) that may apply to Sears Holdings and its sale of Hometown Store and Outlet Store products to SHO. The failure to comply with a vendor’s MAP or UPP could result in the imposition of financial penalties on Kmart and Sears Holdings and a vendor’s refusal to sell one or more Hometown Store and Outlet Store products to Kmart and Sears Holdings, which ultimately could result in Sears Holdings inability to sell one or more Hometown Store and Outlet Store products to SHO in accordance with the terms of the Merchandising Agreement. Furthermore, Sears Holdings may seek to implement its own MAP and UPP with respect to Hometown Store and Outlet Store products.

Fees. SHO will be invoiced for all products sold to it by Sears Holdings. Sears Holdings will provide SHO with the proportionate share of certain vendor-provided subsidies that Sears Holdings receives with respect to the merchandise sold to SHO, except to the extent that Sears Holdings’ vendors (1) do not permit the pass-through of such subsidies or (2) refuse to pay a subsidy to Sears Holdings with respect to the products sold to SHO. Sears Holdings has agreed to use commercially reasonable efforts to obtain vendor permission to share subsidies. Products that Sears Holdings obtains exclusively for resale to SHO are excluded for purposes of calculating the aforementioned pro-rata vendor allowances.

Royalties. SHO will pay, on a weekly basis, royalties determined by multiplying SHO’s net sales of KCD Products by specified fixed royalties rates for each brand’s licensed products, subject to an adjustment based on the extent to which SHO features Kenmore brand products in certain of SHO’s advertising and the extent to which SHO pays specified minimum commissions to SHO’s franchisees and Hometown Store owners.

License to Use Sears Marks. Subject to certain limitations, Sears Holdings has granted SHO (1) a non- exclusive, non-transferable and revocable right and license to use, in connection with the marketing and selling of products sold under Sears Marks (including KCD Marks), but in no event to alter, the KCD Marks and (2) a non-exclusive, non-transferable, royalty-free and revocable right and license to use, in connection with the marketing and selling of products sold under Sears Marks (including KCD Marks), but in no event to alter, all Sears Marks other than the KCD Marks.

Indemnification. SHO is required to defend and indemnify Sears Holdings against third-party claims related to (1) the use of any Sears Marks by SHO or SHO’s franchisees other than in accordance with the Merchandising Agreement, (2) the sale, display, assembly, service, repair, or installation of any given product (excluding claims related to services to be performed under the Services Agreement (as defined below) and all other services that are performed for SHO by Sears Holdings), (3) the failure by SHO to perform SHO’s obligations under the Merchandising Agreement, or (4) any other act or omission by SHO, subject to the terms and conditions of the Separation Agreement that require a sharing of liability, as applicable. Sears Holdings is required to defend and indemnify SHO against third-party claims related to (A) the violation by Sears Holdings of any intellectual property rights of third parties, (B) the failure by Sears Holdings to perform their obligations under the Merchandising Agreement, or (C) any other act or omission by Sears Holdings, subject to the terms and conditions of the Separation Agreement that require a sharing of liability, as applicable.

Services Agreement

Prior to the Separation, SHO entered into a Services Agreement with Sears Holdings (the “Services Agreement”) pursuant to which Sears Holdings provides SHO with specified tax, accounting, procurement, risk management and insurance, advertising and marketing (including online services), loss prevention, logistics and distribution, information technology (including the point-of-sale systems for all of SHO’s stores), payment clearing, and other financial, real estate management, merchandise-related, and other support services (collectively, “Services”). The Services Agreement also clarifies the parties obligations respecting specified

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Services and how margins relating to such Services are to be allocated, detailing the components of specified Services, expanding the scope of specified Services, and settling disputes between the parties relating to specified service charges.

Duration. The term of the Services Agreement will expire in April 2018. The agreement may be terminated (1) by either party for cause upon a material breach either if the breaching party fails to cure such breach within 30 days following written notice of such breach or, if such breach is not curable, immediately upon delivery of the non- breaching party’s notice of intention to terminate, (2) by Sears Holdings upon a change of control whereby a majority of SHO’s voting power, or a majority of the voting power of any of SHO’s subsidiaries, is acquired by specified competitors of Sears Holdings, or (3) by either party upon 30-days’ notice if such party (or any of its affiliates) (A) terminates the Separation Agreement, any Store License Agreement, the Trademark License Agreement, the SYWR Agreement, or the Merchandising Agreement as a result of the other party’s (or its affiliates’) material breach of or default under such agreement or (B) terminates any Store License Agreement or the Trademark License Agreement as a result of the other party’s (or its affiliates’) material breach of or default under such agreement. SHO may also terminate any individual Service upon 60-days’ notice to Sears Holdings, provided that such termination does not adversely affect Sears Holdings’ ability to perform another Service for SHO. Sears Holdings may terminate an individual Service upon 90-days’ notice if (i) an affiliate of Sears Holdings is unwilling or unable to provide the Service, (ii) an affiliate of Sears Holdings does not provide a similar Service to Sears Holdings or its other affiliates on terms that are comparable to the terms of the Services Agreement, (iii) Sears Holdings is unable to retain a replacement service provider to provide the Service on terms that are comparable to the terms of the Services Agreement, and (iv) such termination will have no effect upon the provision of other Services under the Services Agreement. Sears Holdings may also terminate an individual Service upon 90-days’ notice if (a) an unaffiliated service provider of Sears Holdings or one of its affiliates that provides a Service is unwilling or unable to allow SHO to use such Service under the existing (or comparable) terms, (b) Sears Holdings is unable to retain a replacement service provider to provide the Service on terms that are comparable to the terms of the Services Agreement, and (c) such termination will have no effect upon the provision of other Services under the Services Agreement. In addition, Sears Holdings may also terminate an individual Service upon 60-days’ notice if the parties fail to execute an amendment regarding the fees payable for one or more individual Services for the fourth or fifth years of the term, or the six-month period following the fifth year.

Fees. SHO pays fixed fees and rates for the Services for the first three years of the Services Agreement. SHO will also negotiate with Sears Holdings the fees and rates for the fourth and fifth years of the term, and the six-month period following the fifth year, on a good-faith basis. In addition, SHO is responsible for the payment of all taxes payable in connection with the Services provided under the Services Agreement, including sales, use, excise, value-added, business, service, goods and services, consumption, withholding, and other similar taxes or duties, including taxes incurred on transactions between and among Sears Holdings, its affiliates and third-party contractors, along with any related interest and penalties.

Quality of Services. The Services Agreement requires that Sears Holdings perform the Services in a manner that is consistent with Sears Holdings’ prior practice and in Good Faith without willful misconduct or gross negligence. Sears Holdings provides no other representations or warranties regarding the standard of care under which the Services will be performed and provides no warranty or representation concerning the quality of the Services. For purposes of the Services Agreement, the term “Good Faith” means honesty in fact and the observance of reasonable commercial standards of fair dealing in accordance with applicable law.

Indemnification. SHO is required to defend and indemnify Sears Holdings against third-party claims, except to the extent such claims are found by a final judgment or opinion of an arbitrator or court to be caused by (1) Sears Holdings’ breach of the Services Agreement or (2) the negligence or willful misconduct in Sears Holdings’ performance of the Services Agreement. Sears Holdings is required to defend and indemnify SHO against third-party claims that relate to (A) bodily injury or death of any person or damage to real and/or tangible personal property directly caused by the negligence or willful misconduct of Sears Holdings during the performances of the services or (B) the infringement of any copyright or trade secret misappropriation by an

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asset owned by Sears Holdings, Sears Holdings, or the subsidiaries of Sears Holdings and used by Sears Holdings in the performance of the services. However, Sears Holdings will not indemnify SHO to the extent indemnification claims are found to be caused by (i) SHO’s breach of the Services Agreement, (ii) SHO’s negligence or willful misconduct in the performance of the Services Agreement, or (iii) with respect to infringement claims arising out of (a) SHO’s use, misuse, marketing or distribution of Sears Holdings’ assets except as provided for in the Services Agreement or (b) information, direction, specification or materials provided by SHO or on SHO’s behalf. Sears Holdings is required to defend and indemnify SHO against third-party claims that relate to (A) bodily injury or death of any person or damage to real and/or tangible personal property directly caused by the negligence or willful misconduct of Sears Holdings during the performances of the Services or (B) the infringement of any copyright or trade secret misappropriation by an asset owned by Sears Holdings and used by Sears Holdings in the performance of the Services. However, Sears Holdings will not indemnify SHO to the extent indemnification claims are found by a final judgment or opinion of an arbitrator or court to be caused by (i) SHO’s breach of the Services Agreement, (ii) SHO’s negligence or willful misconduct in the performance of the Services Agreement, or (iii) with respect to infringement claims arising out of (a) SHO’s use, misuse, marketing, or distribution of Sears Holdings’ assets except as provided for in the Services Agreement or (b) information, direction, specification or materials provided by SHO or on SHO’s behalf. SHO will not to sue Sears Holdings’ associates individually, absent fraud or other intentional misconduct, with respect to the Services provided in accordance with the Services Agreement.

Limitation of Liability. With respect to each of SHO and Sears Holdings, neither party is, except for its (1) indemnity obligations and defense obligations, (2) breach of its confidentiality obligations, and (3) breach of its intellectual property non-infringement obligations under the Services Agreement, liable for any consequential, incidental, indirect, special, or punitive damages, losses or expenses (including business interruption, lost business, lost profits, or lost savings) arising under the Services Agreement, even if advised of the possibility of such damages. The sole liability of Sears Holdings for all claims relating to the Services Agreement is the payment of direct damages, limited to (for all claims in the aggregate) the total fees received by Sears Holdings under the Services Agreement.

Supplemental Agreement

SHO and Sears Holdings entered into the Supplemental Agreement that is ancillary to the Services Agreement and the other agreements executed by Sears Holdings and SHO in connection with the Separation. The Supplemental Agreement provides that each of SHO and Sears Holdings releases the other and its related persons from specified claims and defenses to claims that are described on an appendix to the Supplemental Agreement and which had arisen between SHO and Sears Holdings from the date of the Separation through October 6, 2013. A separate appendix to the Supplemental Agreement describes claims that the Company and Sears Holdings have not released and have reserved for continuing discussion.

Retail Establishment Agreement

Prior to the Separation, SHO entered into a Shop Your Way Rewards Retail Establishment Agreement with Sears Holdings (the “SYWR Agreement”) pursuant to which Sears Holdings authorizes SHO to participate in Sears Holdings’ SYWR program. Under the SYWR Agreement, Sears Holdings will issue rewards points to SYWR program members when they purchase program-eligible merchandise and services from SHO’s stores and, for each qualifying purchase, SHO will pay SYWR a fee equal to an agreed percentage of the qualifying purchase for base points issued and for bonus points issued, if any. Sears Holdings will (1) authorize SHO to redeem points for SYWR program members as part or all of the purchase prices paid by SYWR program members when they make qualifying purchases from SHO’s stores and (2) reimburse SHO for the dollar value of the points redeemed.

Duration. The term of the SYWR Agreement will expire in 2022 but may be terminated (1) by either party for cause upon a material breach either if the breaching party fails to cure such breach within 30 days following

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written notice of such breach or, if such breach is not curable, immediately upon delivery of the non-breaching party’s notice of intention to terminate, (2) by Sears Holdings upon a change in control whereby a majority of SHO’s voting power, or a majority of the voting power of any of SHO’s subsidiaries, is acquired by a competitor that operates a points-issuance/redemption business that competes in any material respect with the SYWR program or with any other rewards or points-issuance/redemption businesses operated by Sears Holdings or any of its affiliates, (3) 66 months after the effective date of the Separation by either party for convenience upon 180-days’ notice to the other party, (4) by either party upon 30-days’ notice if such party (or any of its affiliates) terminates the Separation Agreement, the Trademark License Agreement, a Store License Agreement, or the Merchandising Agreement as a result of the other party’s (or its affiliates’) material breach of or default under such agreement, or (5) by Sears Holdings if SHO fails to consent to an amendment or modification to the SYWR program that applies on a non-discriminatory basis to all of Sears Holdings’ authorized vendors and authorized providers but has a material adverse effect on SHO, provided that Sears Holdings has used commercially reasonable efforts to provide an accommodation for SHO’s consent, which consent may not be unreasonably withheld.

Indemnification. SHO is required to defend and indemnify Sears Holdings against third-party claims arising or relating to, among other things, SHO’s (1) negligence, recklessness, or willful misconduct relating to the SYWR program, (2) breach or default of the SYWR Agreement, (3) fraud, (4) non-compliance with applicable law, or (5) infringement of intellectual property. Sears Holdings is required to defend and indemnify SHO against third-party claims relating to, among other things, Sears Holdings’ (A) negligence, recklessness or willful misconduct relating to the SYWR program, (B) breach or default of the SYWR Agreement, (C) fraud, (D) infringement of intellectual property, or (E) failure to satisfy any of its obligations or liabilities to SYWR program members.

Tax Sharing Agreement

Prior to the Separation, SHO entered into a Tax Sharing Agreement with Sears Holdings regarding the sharing of federal, state, local and foreign tax liabilities, the preparation and filing of tax returns for such taxes and disputes with taxing authorities regarding such taxes. Under the terms of the Tax Sharing Agreement, Sears Holdings generally is responsible for all pre-Separation taxes that relate to SHO’s business other than non-income taxes that are accrued and unpaid as of the Separation date, for which SHO is responsible, and SHO generally is responsible for all post-Separation taxes that relate to SHO’s business. Subject to certain limitations and the agreement to cooperate in good faith with SHO, under the terms of the Tax Sharing Agreement Sears Holdings has the right to resolve any difference or disagreement on any matter that arises out of the application and interpretation of the Tax Sharing Agreement.

Employee Transition and Administrative Services Agreement

Prior to the Separation, SHO entered into an Employee Transition and Administrative Services Agreement with Sears Holdings (the “ETASA”). Under the ETASA, Sears Holdings provides SHO with transitional administrative services with respect to SHO’s employees including payroll, benefits, and other human-resource support services.

Duration. The ETASA will expire in April 2018. The ETASA may be terminated (1) by either party for cause upon a material breach either if the breaching party fails to cure such breach within 30 days following written notice of such breach, or if such breach is not curable, immediately upon delivery of the non-breaching party’s notice of intention to terminate, (2) by Sears Holdings upon a change of control whereby a majority of SHO’s voting power, or a majority of the voting power of SHO’s subsidiaries, is acquired by specified competitors of Sears Holdings, or (3) by either party upon 30-days’ notice if such party (or any of its affiliates) terminates the Separation Agreement, any Store License Agreement, the Trademark License Agreement, the SYWR Agreement, or the Merchandising Agreement as a result of the other party’s (or its affiliates’) material breach of or default under such agreement. The ETASA may also be terminated by either party on one-year’s notice.

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Fees. For the first 24 months of the ETASA, SHO will pay a per-employee fee to Sears Holdings, plus reimbursement of all payroll and other direct costs. Following the first 24 months, SHO will pay a negotiated per-employee fee based on a combination of Sears Holdings’ costs to provide the services plus a specified profit margin. SHO and Sears Holdings will negotiate in good faith to determine the applicable fees. In addition, during the term of the ETASA SHO will be responsible for the payment of all taxes payable in connection with the services provided under the ETASA, including sales, use, excise, value-added, business, service, goods and services, consumption, withholding, payroll, unemployment, and other similar taxes or duties, along with any related interest and penalties.

Indemnification. SHO is required to defend and indemnify Sears Holdings against all third-party claims that relate to or arise out of the ETASA (including claims by employees), except to the extent such claims are caused by Sears Holdings’ gross negligence or willful misconduct or willful failure in the performance of the ETASA. Sears Holdings is required to defend and indemnify SHO against any third-party claims that relate to (1) bodily injury or death of any person or damage to real and/or tangible personal property, to the extent directly caused by the negligence or willful misconduct of Sears Holdings and used by Sears Holdings in the performance of the services, or (2) specified intellectual-property infringement claims. However, Sears Holdings will not indemnify SHO to the extent indemnification claims are caused by (A) SHO’s breach of the ETASA, (B) SHO’s gross negligence or willful misconduct or willful failure in the performance of the ETASA, or (C) with respect to infringement claims arising out of (i) SHO’s use, misuse, marketing or distribution of Sears Holdings’ assets except as provided for in the ETASA or (ii) information, directions, specifications, or materials provided by SHO or on SHO’s behalf.

Statement of Work #1. SHO and Sears Holdings have entered into the Statement of Work #1 to the ETASA. The Statement of Work is required by the terms and conditions of the ETASA and provides that it replaces the Human Resources section of Appendix 101-A to the Services Agreement. The Statement of Work provides for the following human resource services to be governed by the terms and conditions of the ETASA: support center; payroll; time and attendance; human-resources reporting and analytics; unemployment; compliance; employee record keeping; learning; management/leadership development; compensation management; benefits and benefits administration; and human-resources systems.

Non-Competition and Exclusivity Arrangements Between Sears Holdings and SHO

Following the Separation, the non-competition and exclusivity arrangements between Sears Holdings and SHO are governed primarily by the terms and conditions of the Merchandising Agreement.

Sears Hometown and Hardware Stores. New Sears Hometown and Hardware stores are permitted without restriction in all Micropolitan Statistical Areas (“MicroSAs”) as defined by the U.S. Office of Management and Budget (“OMB”) (i.e., defined areas of less than 50,000 residents). New Sears Hometown and Hardware stores are permitted in Metropolitan Statistical Areas as defined by the OMB (i.e., defined areas of greater than 50,000 residents), but only if (1) such stores are located at least eight miles away from existing stores owned or operated by Sears Holdings and branded with the name “Sears” and at least two miles from specified Kmart locations (all such Kmart locations and existing Sears stores, “Sears Stores”), (2) SHO has, for those new Sears Hometown and Hardware stores located between five and eight miles from existing Sears Stores, notified Sears Holdings in advance of those stores and has received Sears Holdings’ approval (which approval will not be unreasonably withheld or delayed), and for each such store, SHO will pay to Sears Holdings on an annual basis a specified percentage of the new stores’ EBITDA for the first five years such stores are open for business, (3) such stores distribute products primarily on a rent-to-own basis or (4) Sears Holdings has already approved of such stores’ location.

Sears Outlet Stores. Existing and new Sears Outlet stores are permitted without restriction, except that on and after October 31, 2013 neither SHO nor its dealers and franchisees may sell specified “New Products” at any Sears Outlet store that is acquired or leased after that date and that is located within two miles of an operating

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Sears Store. The Merchandising Agreement also establishes an exclusive relationship, subject to certain conditions, until April 2018 between Sears Holdings and SHO with respect to the sale and purchase of specified categories of distressed and refurbished merchandise and marked-out-of-stock merchandise (including apparel). In addition, Sears Holdings will give SHO a right of first offer on all of Sears Holdings’ (1) discontinued or obsolete products, (2) overstock products and home goods and furniture that are new and still in original packaging, (3) distressed, refurbished, discontinued, and obsolete home goods and furniture, and (4) marked out-of-stock footwear except with respect to products that Sears Holdings does not sell to end-user consumers.

Sears Holdings. Sears Holdings may continue to, and may authorize others to continue to, own and operate all stores owned and operated by them on the date of the Separation. However, Sears Holdings is not able to do the following: (A) in any MicroSA open, own, or operate any new store, or authorize in any MicroSA any new specified “Authorized Store,” that is (1) branded with any Sears Mark that includes “Kenmore” or “Craftsman” or (2) a specified “Sears Store”; (B) open, own, or operate any new store, or sell specified “Prohibited Products” to any new Authorized Store, that is substantially similar to one or more of the Sears Hometown Store, Sears Home Appliance Showroom, or Sears Outlet Store formats existing on the effective date of the Separation; or (C) open, own, or operate any new store, or authorize any new Authorized Store, that markets or sells, or authorizes (via a license agreement, operating agreement, or otherwise) any natural person, business entity, or non-entity business enterprise to market or sell, any item of specified “Exclusive Merchandise” at a store physically located in any postal zip code area with respect to which, and to the extent, Sears Holdings or SHO has agreed with the owner of a Hometown Store to refrain from selling Exclusive Merchandise in the postal zip code area.

SHO. SHO may not enter into or amend any agreement (each, an “authorizing agreement”) that authorizes an unrelated third-party owner or franchisee to operate a new Sears Hometown Store, Sears Hardware Store, or Sears Home Appliance Showroom if the authorizing agreement contains product-exclusivity rights. If SHO seeks to renew or permit the assignment of an existing authorizing agreement for a Sears Hometown Store, Sears Hardware Store, or Sears Home Appliance Showroom that includes product-exclusivity rights, SHO must use commercially reasonable efforts to ensure that the renewal or assignment also eliminates the product-exclusivity rights.

Real Property Transactions

Prior to the Separation, Sears Holdings assigned or sublet to SHO Sears Holdings’ interests in the lease for each of SHO’s stores as to which Sears Holdings, and not SHO or an independent authorized dealer or a franchisee, is the tenant and either (1) the lease for the store permits assignment or subletting of the lease or (2) Sears Holdings is able to obtain landlord consent to the assignment or sublease. However, a relatively small number of the leases for SHO stores, or the “No-Consent Locations,” do not permit assignment or subletting by Sears Holdings or may require landlord consent, which may be withheld. Sears Holdings entered into a sublease with SHO for each of the No-Consent Locations. In addition, a small number of SHO stores are in locations where Sears Holdings currently operates one of its stores. In such cases SHO entered into a lease or sublease with Sears Holdings for the portion of the space in which SHO’s store operates, and SHO pays rent directly to Sears Holdings on the terms negotiated prior to the Separation.

Generally, the form of sublease from Sears Holdings to SHO with respect to SHO’s premises subleased from Sears Holdings provides for the following, among other terms and conditions: (1) the duration of the sublease and the rent payable by SHO to Sears Holdings are the same as the duration and the rent payable by Sears Holdings to its landlord; (2) the premises are subleased to SHO on an “as is” basis and that Sears Holdings, as sublandlord, makes no representation to SHO regarding the condition of the subleased premises; (3) SHO as subtenant (A) is subject to all of the easements, covenants, conditions, and restrictions of Sears Holdings’ lease from its landlord and (B) SHO will comply with and perform all of Sears Holdings’ obligations as tenant under its lease from its landlord; (4) SHO will indemnify and defend Sears Holdings from and against all claims by (A) Sears Holdings’ landlord that SHO has not performed Sears Holdings’ obligations as tenant under Sears

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Holdings’ lease from the landlord and (B) any person as a result of SHO’s use or occupancy of the subleased premises or SHO’s failure to comply with the terms of the sublease or Sears Holdings’ lease from its landlord; (5) SHO may not sublet or assign the sublease without the consent of Sears Holdings; and (6) upon specified SHO defaults (including failure by SHO to observe and perform any provision of the sublease to be performed by SHO) Sears Holdings may, among other remedies, (A) reenter the subleased premises and expel SHO and (B) recover damages from SHO.

By means of an amendment to the Separation Agreement, SHO and Sears Holdings have agreed that, with respect to leases or subleases that require Sears Holdings’ or its affiliates consent to sublease, Sears Holdings’ affiliates will not unreasonably withhold or delay their consent to subleases by SHO to its dealers and franchisees. For each such request, SHO will pay Sears Holdings a $2,500 per-sublease consent fee. Sears Holdings’ affiliates’ may not withhold their consent to a sublease due to the proximity of such location to a Sears Holdings full line store (unless such location is in violation of the proximity restrictions contained in the Merchandising Agreement).

SHO’s Senior ABL Facility

Prior to the Separation and in connection with SHO’s entry into an asset-based, senior secured revolving credit facility with a group of financial institutions (the “Senior ABL Facility”), SHO entered into an agreement with Sears Holdings and the agent under the Senior ABL Facility whereby Sears Holdings commits to (1) continue to provide services to SHO in connection with a realization on the lenders’ collateral after default under the Senior ABL Facility notwithstanding SHO’s default under the underlying agreements with Sears Holdings, and (2) provide specified notices and services to the agent for so long as any obligations remain outstanding under the Senior ABL Facility. See the Company’s 2015 Annual Report on Form 10-K for additional information regarding the Senior ABL Facility.

Hadoop Services Agreement

SHO has entered into a services agreement with Sears Holdings for the provision of technology services and equipment (the “Hadoop Services Agreement”). The Hadoop Services Agreement will terminate on April 30, 2016. Under the Hadoop Services Agreement, Sears Holdings will build a Hadoop system for SHO. Under the Hadoop Services Agreement SHO agrees to pay Sears Holdings a monthly services fee to maintain the Hadoop system and related hardware at a Sears Holdings facility.

Why Not Lease It Program

SHO has entered into a Consumer Lease Program Adherence and Indemnification Agreement (the “Leasing Agreement”) that allows SHO to continue participating in a Sears Holdings administered program whereby consumers that cannot immediately purchase SHO consumer products can instead lease them from a third party, Whynot Leasing, LLC (“WNL”). Under the Sears Holdings administered program, each SHO consumer product that is ultimately leased by a consumer is first purchased by WNL from SHO and then leased to the consumer. The Leasing Agreement requires Sears Holdings to forward to SHO 100% of the settlement funds for the products that SHO sells to WNL and clarifies that neither Sears Holdings nor WNL will receive any direct compensation from SHO for the right to participate in the leasing program. The Leasing Agreement also provides that Sears Holdings will deduct applicable sales taxes and remit them on SHO’s behalf to the appropriate taxing authority and that SHO and Sears Holdings will defend and indemnify each other from claims resulting from SHO’s or Sears Holdings’ failure to comply with the Leasing Agreement and will use commercially reasonable efforts to cause WNL, or any other third party, to assume and bear financial responsibility for claims for which that third party is responsible. The term of the Leasing Agreement continues until the earlier termination of the Services Agreement or the Leasing Agreement. Additionally, either SHO or Sears Holdings may earlier terminate the Leasing Agreement upon 30 days’ prior written notice.

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Payments from SHO to Sears Holdings and from Sears Holdings to SHO

The following table summarizes payments received by SHO from Sears Holdings and payments made by SHO to Sears Holdings during SHO’s 2015 fiscal year that are included in SHO’s financial statements with respect to the 2015 fiscal year included in the Company’s 2015 Annual Report on Form 10-K.

Net commissions received by SHO from Sears Holdings	$	91,291,000
Payments made by SHO to Sears Holdings related to cost of sales and for occupancy	$	1,386,414,000
Payments made by SHO to Sears Holdings for services performed by Sears Holdings	$	88,486,000

Seritage Growth Properties

During our 2015 fiscal year we paid Seritage Growth Properties $0.5 million for occupancy charges for three properties we lease from Seritage. Edward S. Lampert is the Chairman of the Board of Trustees of Seritage.

Additional Information

SHO’s Board of Directors Code of Conduct provides that Covered Parties (as defined below) are not prohibited from investing, and SHO has renounced all interest and expectancy, and being offered an opportunity to participate or invest, in all investment opportunities that may come to the attention of any Covered Party other than the following investments (unless they are investments of ESL) made prior to the post-Separation date of adoption of SHO’s Board of Director Code of Conduct: investment opportunities that come to the Covered Party’s attention directly and exclusively in the Covered Party’s capacity as director, officer, or employee of SHO; control investments in retailers primarily focused on selling home appliances, hardware, tools, or lawn and garden equipment that are new products or that are one-of- a-kind, out-of-carton, discontinued, obsolete, used, reconditioned, overstocked, scratched, or dented products; and investment opportunities in companies or assets that have a significant role in SHO’s business such as investment opportunities in (1) real estate currently leased by SHO or (2) suppliers of which SHO is a substantial customer representing over 10% of such companies’ revenues. “Covered Parties” means each of ESL and each employee, officer, director or advisor to ESL who may serve as an officer or director of SHO.

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OTHER INFORMATION

Other Business That May Come Before the Meeting

Our management does not intend to bring any other business before the Annual Meeting and has not been notified of any other business proposed to be brought before the Annual Meeting. However, if any other business should be properly presented, it is the intention of the persons named on the proxy card to vote in accordance with their judgment on such business.

2017 Annual Meeting of Stockholders

Procedures for Submitting Stockholder Proposals

If you want to include a stockholder proposal in the proxy statement for our 2017 Annual Meeting of Stockholders, your stockholder proposal must be delivered to the Company not later than December 24, 2016, and it must satisfy the rules and regulations of the SEC to be eligible for inclusion in the proxy statement for that meeting. However, if the date of our 2017 Annual Meeting changes by more than 30 days from the date that is the first anniversary of our 2016 Annual Meeting, then the deadline is a reasonable time before we begin to print and mail proxy materials for the 2017 Annual Meeting.

If you want to submit a stockholder proposal for our 2017 Annual Meeting and you do not require that the proposal be included in the Company’s proxy materials, you must notify the Company of such proposal not later than the close of business on February 25, 2017 and not earlier than the close of business on January 24, 2017. However, if the date of the 2017 Annual Meeting is more than 30 days before, or more than 70 days after, May 25, 2017, notice by the stockholder must be so delivered not earlier than the close of business on the 120th day prior to the 2017 Annual Meeting and not later than the close of business on the later of the 90th day prior to the 2017 Annual Meeting or the 10th day following the day on which the Company first makes a public announcement of the date of the 2017 Annual Meeting. Your notice must also include the information required by our Bylaws.

All stockholder proposals must be delivered to the Company at the following address: Sears Hometown and Outlet Stores, Inc., 5500 Trillium Boulevard, Suite 501, Hoffman Estates, Illinois 60192, Attn: General Counsel and Secretary.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended (“Section 16(a)”), requires our directors and executive officers and the beneficial holders of more than 10% of our common stock to file reports of ownership and changes in ownership with respect to our common stock with the SEC and to furnish copies of these reports to SHO. Based solely on a review of these reports and written representations from our directors and executive officers, we believe that all of our directors and executive officers filed the reports required by Section 16(a) on a timely basis during the 2015 fiscal year.

Solicitation of Proxies

The proxies are solicited by our Board of Directors. We will pay the cost to solicit proxies. Directors and officers of the Company and employees of its affiliates may solicit proxies either personally or by telephone, facsimile transmission or through the Internet.

2015 Annual Report on Form 10-K

A copy of the Company’s 2015 Annual Report on Form 10-K, including the financial statements and schedules and a list of all exhibits, will be supplied without charge to any stockholder upon written request

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sent to Sears Hometown and Outlet Stores, Inc., Law Department, 5500 Trillium Boulevard, Suite 501, Hoffman Estates, Illinois, 60192, Attn: General Counsel and Secretary. Exhibits to the Company’s 2015 Annual Report on Form 10-K are available for a reasonable fee. You may also view the Company’s 2015 Annual Report on Form 10-K and its exhibits on-line at the SEC website at www.sec.gov or on our website at www.shos.com.

IMPORTANT

The interest and cooperation of all stockholders in the affairs of SHO are considered to be of the greatest importance by SHO. Even if you expect to attend the Annual Meeting, we urgently request that, whether your share holdings are large or small, you promptly vote by telephone, through the Internet, or by mail.

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  SEARS HOMETOWN AND OUTLET STORES, INC. 5500 TRILLIUM BOULEVARD SUITE 501 HOFFMAN ESTATES, IL 60192 VOTE BY INTERNET - www.proxyvote.com Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 p.m. Eastern Time the day before the meeting date. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form.   ELECTRONIC DELIVERY OF FUTURE PROXY MATERIALS If you would like to reduce the costs incurred by our company in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access proxy materials electronically in future years.   VOTE BY PHONE - 1-800-690-6903 Use any touch-tone telephone to transmit your voting instructions up until 11:59 p.m. Eastern Time the day before the meeting date. Have your proxy card in hand when you call and then follow the instructions.   VOTE BY MAIL Mark, sign, and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717.

TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
	KEEP THIS PORTION FOR YOUR RECORDS

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DETACH AND RETURN THIS PORTION ONLY

THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.

SEARS HOMETOWN AND OUTLET STORES, INC.				For  All	Withhold  All	For All  Except	To withhold authority to vote for any individual nominee(s), mark “For All Except” and write the number(s) of the nominee(s) on the line below.
The Board of Directors recommends that you vote FOR the following:
1.	Elect the following six (6) nominees named in the Proxy Statement:			¨	¨	¨
	01)    E. J. Bird	04)    William K. Phelan
	02)    James F. Gooch	05)    Will Powell
	03)    Josephine Linden	06)     David Robbins
The Board of Directors recommends that you vote FOR the following proposals:									For	Against	Abstain
2.	Approve, on an advisory basis, the compensation of our Named Executive Officers.								¨	¨	¨
3.	Ratify the appointment by the Audit Committee of BDO USA, LLP as the Company’s independent registered public accounting firm for fiscal year 2016								¨	¨	¨
4.	Consider any other business as may properly come before the Annual Meeting or any adjournment or postponement thereof
Please indicate if you plan to attend this meeting.				Yes	No
				¨	¨
Please sign exactly as your name or names appear(s) hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee, guardian or corporate officer, give full title. Joint owners should each sign personally. All holders must sign. If a corporation or a partnership, please sign in full corporate or partnership name, by an authorized officer.
	Signature [PLEASE SIGN WITHIN BOX]		Date				Signature (Joint Owners)	Date

ADMISSION TICKET

You should present this admission ticket in order to gain admittance to the 2016 Annual Meeting of Stockholders. This ticket admits only the stockholder(s) listed on the reverse side and is not transferable. If shares are held in the name of a broker, trust, bank, or other nominee, you must bring with you a statement, proxy or letter from the broker, trustee, bank or nominee confirming the beneficial ownership of the shares as of the record date. Cameras, recording devices and other electronic devices will not be permitted at the Annual Meeting.

DIRECTIONS TO THE 2016 ANNUAL MEETING OF STOCKHOLDERS OF SEARS HOMETOWN AND OUTLET STORES, INC.

(Schedule extra time as I-90 Northwest Tollway is under construction)

Directions from Midway Airport:

Take Cicero Avenue North to I-290, Eisenhower Expressway, West and exit on I-90, Northwest Tollway, West, towards Rockford. Stay on I-90 West to the exit at Beverly Road and proceed North (right). You will see the Sears Holdings entrance on the right. Turn right into the Sears complex and follow the signs to the Elm Building. Proceed to the Elm Building’s main entrance.

Directions from the Loop or O’Hare Airport:

Take I-90/94 West and stay on I-90, Northwest Tollway, West, towards Rockford. Exit at Beverly Road and proceed North (right). You will see the Sears Holdings entrance on the right. Turn right into the Sears complex and follow the signs to the Elm Building. Proceed to the Elm Building’s main entrance.

Directions from West to Route 59:

Take I-90, Northwest Tollway, East to Rt. 59 (first exit after Rt. 25). Exit at Rt. 59 and proceed North. At Higgins Road (Rt. 72) turn left. Proceed West on Higgins Road to Beverly Road. At Beverly Road, turn left and proceed South. You will see the Sears Holdings entrance on the left. Turn left into the Sears complex and follow the signs to the Elm Building. Proceed to the Elm Building’s main entrance.

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting:

The Notice and Proxy Statement and Form 10-K are available at www.proxyvote.com.

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SEARS HOMETOWN AND OUTLET STORES, INC. Annual Meeting of Stockholders May 25, 2016 9:00 AM This proxy is solicited on behalf of the Board of Directors
	The undersigned, revoking any proxy previously given, hereby appoint(s) Michael A. Gray, Charles J. Hansen, and Ryan D. Robinson, all of whom are officers of Sears Hometown and Outlet Stores, Inc., and each of them, as proxies with full powers of substitution, to vote, as directed on the reverse side of this card, all shares the undersigned is entitled to vote at the 2016 Annual Meeting of Stockholders of Sears Hometown and Outlet Stores, Inc. to be held on May 25, 2016 and at any adjournment or postponement of the Annual Meeting, and authorizes each proxy to vote at his discretion on any other matter that may properly come before the Annual Meeting, or at any adjournment or postponement of the Annual Meeting INCLUDING WITHOUT LIMITATION TO VOTE ON THE ELECTION OF SUCH SUBSTITUTE NOMINEES FOR DIRECTOR AS SUCH PROXIES MAY SELECT IN THE EVENT THAT ANY NOMINEE(S) NAMED ON THIS PROXY CARD BECOME(S) UNABLE TO SERVE AS A DIRECTOR. This proxy, when properly executed, will be voted in the manner directed herein and in the discretion of the proxy holders on all other matters properly coming before the Annual Meeting. If no direction is made, this proxy will be voted FOR all of the Board of Directors’ nominees for election to the Board of Directors, FOR proposal 2, and FOR proposal 3.
		Address change/comments:
(If you noted any Address changes/comments above, please mark corresponding box on the reverse side.) Continued and to be signed on reverse side