Sears Holdings Reports First Quarter Results

Sears Holdings Corporation ("Holdings," "we," "us," "our" or the "Company") (NASDAQ: SHLD) today reported net income of $216 million, or $1.40 per diluted share, for the first quarter ended May 5, 2007, compared with net income of $180 million, or $1.14 per diluted share, for the first quarter ended April 29, 2006. Our quarterly results included the net favorable impact of certain significant items as described in the "Significant Items" section below. Excluding these items, earnings per diluted share were $1.10 for the first quarter of fiscal 2007, as compared to $1.11 per diluted share for the first quarter of fiscal 2006. For the quarter, improved operating results at Sears Canada and lower expenses at Sears Domestic were offset by reduced operating results at Kmart, where a decline in sales resulted in reduced gross margin dollars.

"In part, our domestic operating results reflect the impact of some of the same challenges being faced by our customers, such as rising energy costs and a slower housing market," said Aylwin Lewis, Sears Holdings' chief executive officer and president. "However, as an organization, we need to overcome these factors by better controlling costs and developing innovative solutions that better meet our customers' needs and allow us to generate a more reasonable level of profitability even in the face of such challenges."

A reconciliation of earnings per share excluding the above-noted significant items (a non-GAAP measure) to GAAP diluted earnings per share is set forth below. In addition, earnings per diluted share for the quarter benefited from lower average diluted shares outstanding during the current year quarter as compared with the first quarter of fiscal 2006.

First Quarter Revenues and Comparable Store Sales

Domestic comparable store sales declined 3.9% during the first quarter of fiscal 2007. Sears Domestic comparable store sales declined 3.4% for the quarter, while Kmart comparable store sales declined 4.4%. We believe these declines reflect both increased competition and the impact of external factors such as rising energy costs, a slower housing market and poor weather conditions during the latter part of the first quarter of fiscal 2007. Kmart experienced lower transaction volumes across most merchandise categories, most notably within home goods, health and beauty products, and food and consumables. Similarly, Sears Domestic recorded comparable store sales declines across most merchandise categories and formats, with a notable decline in home appliance sales, which we believe reflects both a slower U.S. housing market and the impact of increased competition.

Our fiscal 2007 first quarter was comprised of the 13-week period ended May 5, 2007, while our fiscal 2006 first quarter was comprised of the 13-week period ended April 29, 2006. This week shift in sales, while having a somewhat favorable impact on total revenues recorded during the first quarter of fiscal 2007 as compared to the first quarter of fiscal 2006, had no impact on the comparable store sales results reported herein. This is due to the fact that, for purposes of reporting comparable sales for the first quarter, weeks 1 through 13 of fiscal 2007 have been compared to weeks 2 through 14 of fiscal 2006, thereby eliminating the impact of the week shift.

For the quarter, total revenues declined $0.3 billion, or 2.5%, to $11.7 billion in fiscal 2007, as compared to $12.0 billion for the first quarter of fiscal 2006. This decline reflects the above-noted impact of lower comparable store sales partially offset by sales increases within both our Lands' End and home services businesses. In addition, the week shift in reporting as detailed above had a favorable impact on total revenues for the first quarter of fiscal 2007, by approximately 0.5%. The largest sales decline for the quarter was recorded at Kmart, where revenues declined $239 million, or 5.6%, primarily as a result of the above-noted comparable store sales declines, as well as a decrease in the total number of Kmart stores in operation.

Operating Income

For the quarter, our operating income increased $62 million to $393 million in fiscal 2007, as compared to $331 million in the first quarter of fiscal 2006. This increase primarily reflects: 1) a gain of $30 million for a legal settlement reached in connection with a contractual dispute, 2) a $27 million curtailment gain recorded for amendments made by Sears Canada to its post-retirement benefit plans, and 3) a $15 million gain for insurance recoveries received on claims filed for certain of our property damaged by hurricanes during fiscal 2005. The favorable impact of these items, as well as improved operating results at Sears Canada and lower expenses at Sears Domestic, were partly offset by lower operating income at Kmart.

Significant Items

As noted above, a number of items significantly impacted our fiscal 2007 and fiscal 2006 first quarter diluted earnings per share. While these types of items periodically affect our results, they vary significantly in amount from period to period, and had a disproportionate effect on our results for the periods presented. Management considers the total impact of these items, along with reported results, when it reviews and evaluates our financial performance. The impact of these items on diluted earnings per share is shown in the following table:

                                                        13 Weeks Ended


                                                      May 5,      April 29,
                                                       2007          2006
  Earnings per diluted share                          $1.40         $1.14



  Less:

   Legal settlement gain                               0.12            --

   Sears Canada post-retirement benefit
    plans curtailment gain                             0.11            --

   Hurricane related recoveries                        0.06            --

   Dividend -- investment in Sears Mexico              0.08            --

   Total return swap losses                           (0.08)           --

   Gain on sales of assets                             0.01          0.06

   Restructuring charges                                 --         (0.03)

  Earnings per diluted share excluding above items    $1.10         $1.11


During the first quarter of fiscal 2007, we recognized: 1) a $30 million gain ($18 million after tax or $0.12 per diluted share) related to the legal settlement of a contractual dispute, 2) a curtailment gain of $27 million ($16 million after tax or $0.11 per diluted share) related to certain amendments made to Sears Canada's post-retirement benefit plans, 3) a gain of $15 million ($9 million after tax or $0.06 per diluted share) for insurance recoveries received on claims filed for certain of our property damaged by hurricanes during fiscal 2005, and 4) a $20 million ($12 million after tax or $0.08 per diluted share) dividend we received on our investment in Sears Mexico. These gains were partially offset by investment losses of $21 million ($13 million after tax or $0.08 per diluted share) incurred during the quarter on our total return swap investments. In addition, the first quarter of fiscal 2007 included $5 million ($2 million after tax or $0.01 per diluted share) of gains on sales of assets, as compared to $17 million ($10 million after tax or $0.06 per diluted share) of such gains in the first quarter of fiscal 2006. The first quarter of fiscal 2006 also included restructuring charges of $9 million ($5 million after tax or $0.03 per diluted share). There were no restructuring charges in the first quarter of fiscal 2007.

Financial Position

We had cash and cash equivalents of $3.4 billion at May 5, 2007 (of which $3.1 billion is domestic and $0.3 billion is at Sears Canada) as compared to $3.2 billion at April 29, 2006 and $4.0 billion at February 3, 2007. The decline from February 3, 2007 primarily reflects increased merchandise inventories given seasonal shifts in our inventory levels in support of the spring/summer-selling season. Additionally, we spent $113 million on capital expenditures and made debt repayments of $47 million, net of new borrowings, during the first quarter of fiscal 2007.

Merchandise inventories at May 5, 2007 were approximately $10.3 billion, as compared to $9.6 billion at April 29, 2006. The increase primarily reflects planned increases resulting from efforts aimed at improving in-stock levels and expanding product assortments this year as well as, acquisition of previously consigned pharmacy inventory at Kmart, earlier receipt of products and lower than forecast sales levels. Merchandise payables were $3.5 billion at May 5, 2007, as compared to $3.6 billion as of April 29, 2006.

Share Repurchase

During the first quarter of 2007, we did not repurchase any shares of our common stock through our share repurchase program, although we received approximately 114,000 shares of our common stock during the quarter in connection with bankruptcy-related settlements. As of May 5, 2007, we had remaining authorization to repurchase $604 million of common shares under our existing share repurchase program. The remaining shares may be purchased in the open market, through self-tender offers or through privately negotiated transactions. Timing will depend on prevailing market conditions, alternative uses of capital and other factors.

Adjusted EBITDA

For purposes of evaluating operating performance, our management uses an Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") measurement computed as operating income appearing on the statement of income less depreciation and amortization and gains/(losses) on sales of assets. In addition, it is adjusted to exclude certain nonrecurring gains and restructuring charges. Adjusted EBITDA is used by management to evaluate the operating performance of our businesses for comparable periods. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items. Management compensates for this limitation by using GAAP financial measures as well in managing our businesses.

While Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of operating performance because:

  -- EBITDA excludes the effects of financing and investing activities by
     eliminating the effects of interest and depreciation costs;
  -- Management considers gains/(losses) on the sale of assets to result
     from investing decisions rather than ongoing operations; and
  -- Restructuring activities and other significant items as described
     above, while periodically affecting our results, may vary significantly
     from period to period and have a disproportionate effect in a given
     period, which affects the comparability of results;



  Adjusted EBITDA was determined as follows:


                                                         13 Weeks Ended

  millions                                           May 5,        April 29,
                                                      2007           2006


  Operating income per statement of income            $393           $331

  Plus depreciation and amortization                   263            289

  Less gain on sale of assets                          (5)           (17)

  Before excluded items                                651            603



  Legal settlement gain                               (30)             --

  Sears Canada post-retirement benefit plans
   curtailment gain                                   (27)             --

  Hurricane related recoveries                        (15)             --

  Restructuring charges                                --               9

  Adjusted EBITDA as defined                          $579           $612

  % to revenues                                        4.9%           5.1%



Adjusted EBITDA for our domestic (United States operations) and Sears Canada operations are as follows:

   millions                               13 Weeks Ended
                             Adjusted EBITDA            % To Revenues
                           May 5,     April 29,      May 5,     April 29,
                            2007         2006         2007        2006
  Domestic operations       $528         $574         4.9%         5.2%
  Sears Canada                51           38         5.0%         3.6%
  Total Adjusted EBITDA     $579         $612         4.9%         5.1%


  Quarterly Report on Form 10-Q

We plan to file with the SEC our Quarterly Report on Form 10-Q for the first quarter 2007 on or about June 1, 2007.

Forward-Looking Statements

Results are preliminary and unaudited. This press release contains forward-looking statements about our expectations. Forward-looking statements are subject to risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Risks and uncertainties include the possibility that we fail to offer products and services that satisfy the desires of our customers, whose preferences may change in the future, or other factors outside the control of Holdings. Actual results may differ materially from those set forth in the forward-looking statements. We intend the forward- looking statements to speak only as of the time made and does not undertake to update or revise them as more information becomes available.

About Sears Holdings Corporation

Sears Holdings Corporation is the nation's third largest broadline retailer with over $50 billion in annual revenues and approximately 3,800 full-line and specialty retail stores in the United States and Canada. Sears Holdings is the leading home appliance retailer as well as a leader in tools, lawn and garden, home electronics and automotive repair and maintenance. Key proprietary brands include Kenmore, Craftsman and DieHard, and a broad apparel offering, including such well-known labels as Lands' End, Jaclyn Smith and Joe Boxer, as well as the Apostrophe and Covington brands. We also have Martha Stewart Everyday products, which are offered exclusively in the U.S. by Kmart and in Canada by Sears Canada. We are the nation's largest provider of home services, with more than 13 million service calls made annually. For more information, visit Sears Holdings' website at http://www.searsholdings.com/.

                        Sears Holdings Corporation
                           Statements of Income
                               (Unaudited)


    Amounts are Preliminary and Subject to Change
                                                       13 Weeks Ended
    millions, except per share data               May 5,          April 29,
                                                   2007              2006
  REVENUES
    Merchandise sales and services               $11,702           $11,998

  COSTS AND EXPENSES
    Cost of sales, buying and occupancy            8,417             8,665
    Gross margin dollars                           3,285             3,333
    Gross margin rate                               28.1%             27.8%

    Selling and administrative                     2,634             2,721
    Selling and administrative expense
     as a percentage of total revenues              22.5%             22.7%

    Depreciation and amortization                    263               289
    Gain on sales of assets                           (5)              (17)
    Restructuring charges                             --                 9
        Total costs and expenses                  11,309            11,667

  Operating income                                   393               331
  Interest and investment income                     (40)              (40)
  Interest expense                                    73                83
  Other income                                        (6)               (8)

  Income before income taxes and minority interest   366               296
  Income taxes                                       143               118
  Minority interest                                    7                (2)

  NET INCOME                                        $216              $180

  EARNINGS PER COMMON SHARE
    Diluted earnings per share                     $1.40             $1.14

    Diluted weighted average common
     shares outstanding                            153.9             158.0



                        Sears Holdings Corporation
                         Condensed Balance Sheets


  Amounts are Preliminary and Subject to Change
                                               (Unaudited)
  millions                                  May 5,     April 29, February 3,
                                             2007         2006       2007
  ASSETS
  Current assets
     Cash and cash equivalents              $3,413       $3,182      $3,968
     Receivables                               814          811         847
     Merchandise inventories                10,323        9,581       9,907
     Other current assets                      710          999         684
     Total current assets                   15,260       14,573      15,406

  Property and equipment, net                8,928        9,490       9,132
  Goodwill                                   1,714        1,797       1,692
  Tradenames and other intangible assets     3,413        3,453       3,437
  Other assets                                 375          578         399
     TOTAL ASSETS                          $29,690      $29,891     $30,066

  LIABILITIES
  Current liabilities
     Short-term borrowings and current
      portion of long-term debt               $832         $349        $707
     Merchandise payables                    3,536        3,634       3,312
     Unearned revenues                       1,091        1,053       1,073
     Other current liabilities               3,969        4,946       4,960
     Total current liabilities               9,428        9,982      10,052

  Long-term debt and capital lease
   obligations                               2,669        3,510       2,849
  Pension and postretirement benefits        1,486        2,392       1,648
  Minority interest and other
   liabilities                               3,196        2,633       2,803
     Total Liabilities                      16,779       18,517      17,352

     Total Shareholders' Equity             12,911       11,374      12,714

     TOTAL LIABILITIES AND
      SHAREHOLDERS' EQUITY                 $29,690      $29,891     $30,066


  Total common shares outstanding            153.7        156.5       153.8



                        Sears Holdings Corporation
                             Segment Results
                               (Unaudited)

  Amounts are Preliminary and Subject to Change

                                            13 Weeks Ended May 5, 2007
  millions
                                                       Sears         Sears
                                          Kmart  Domestic  Canada   Holdings
  Merchandise sales and services         $4,015   $6,660   $1,027   $11,702

  Cost of sales, buying and occupancy     3,055    4,629      733     8,417
  Gross margin dollars                      960    2,031      294     3,285
  Gross margin rate                        23.9%    30.5%    28.6%     28.1%

  Selling and administrative                840    1,578      216     2,634
  Selling and administrative expense as
   a percentage of total revenues          20.9%    23.7%    21.0%     22.5%
  Depreciation and amortization              26      206       31       263
  (Gain) loss on sales of assets             (1)       1       (5)       (5)
  Restructuring charges                      --       --       --        --
  Total costs and expenses                3,920    6,414      975    11,309
  Operating income                          $95     $246      $52      $393

  Number of:
    Kmart Stores                          1,388       --       --     1,388
    Full-Line Stores                         --      935      123     1,058
    Specialty Stores                         --    1,100      252     1,352
    Total Stores                          1,388    2,035      375     3,798



                                           13 Weeks Ended April 29, 2006
  millions
                                                        Sears        Sears
                                          Kmart  Domestic  Canada   Holdings
  Merchandise sales and services         $4,254   $6,697   $1,047   $11,998

  Cost of sales, buying and occupancy     3,241    4,661      763     8,665
  Gross margin dollars                    1,013    2,036      284     3,333
  Gross margin rate                        23.8%    30.4%    27.1%     27.8%

  Selling and administrative                855    1,620      246     2,721
  Selling and administrative expense as
   a percentage of total revenues         20.1%    24.2%    23.5%     22.7%
  Depreciation and amortization              15      240       34       289
  Gain on sales of assets                   (17)      --       --       (17)
  Restructuring charges                       4       --        5         9
  Total costs and expenses                4,098    6,521    1,048    11,667
  Operating income (loss)                  $156     $176      $(1)     $331

  Number of:
    Kmart Stores                          1,400       --       --     1,400
    Full-Line Stores                        --       935      123     1,058
    Specialty Stores                        --     1,112      254     1,366
    Total Stores                          1,400    2,047      377     3,824



                        Sears Holdings Corporation
                             Adjusted EBITDA


  Amounts are Preliminary and Subject to Change
                                         13 Weeks Ended
  millions                    May 5, 2007               April 29, 2006
                       Domestic   Sears   Sears    Domestic  Sears   Sears
                      Operations  Canada Holdings Operations Canada Holdings

  Operating income
   per statement of
   income                $341      $52     $393      $332     $(1)    $331
  Plus depreciation
   and amortization       232       31      263       255      34      289
  Less gain on sale
   of assets               --       (5)      (5)      (17)     --      (17)
  Before excluded items   573       78      651       570      33      603

  Legal settlement gain   (30)      --      (30)       --      --       --
  Sears Canada post-
   retirement benefit
   plans curtailment gain  --      (27)     (27)       --      --       --
  Hurricane related
   recoveries             (15)      --      (15)       --      --       --
  Restructuring charges    --       --       --         4       5        9
  Adjusted EBITDA as
   defined               $528      $51     $579      $574     $38     $612
  % to revenues           4.9%     5.0%     4.9%      5.2%    3.6%     5.1%

First Call Analyst:
FCMN Contact:

SOURCE: Sears Holdings Corporation

CONTACT: Sears Holdings Public Relations, +1-847-286-8371

Web site: http://www.searsholdings.com/








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