Investor Information

Sears Holdings Corporation, the publicly traded (NASDAQ: SHLD) parent of Kmart and Sears, Roebuck and Co., is the nation's fourth 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.

Message from the Chairman

February 28, 2008

To Our Shareholders:

I would like to start off this letter in a rather unconventional way by congratulating the New York Giants, led by their young quarterback Eli Manning and by head coach Tom Coughlin, for winning the Super Bowl earlier this month.  This was quite an upset victory.  Throughout the regular season, fans and the media were quick to criticize Manning every time he had a bad game, and to question his leadership.  As recently as late November, after a particularly disappointing loss to Minnesota in which Manning threw four interceptions, many pundits were declaring him a bust.  Manning, however, did not give up or lose heart.  He remained focused, continued to work hard on his game and on improving his skills, ultimately leading the Giants to the NFL Championship and being named the Super Bowl MVP. 

I mention this not because I am a Giants fan (I am actually a lifelong fan of the New York Jets) but rather because the Giants’ story reminds me of what we went through a few years ago with Kmart.  When I first became involved with Kmart in 2002, during its bankruptcy, the company had been given up for dead by most industry analysts and media commentators.  Kmart was like an undrafted free agent who nobody thought had a chance to play in the big leagues.  Its more than 150,000 employees and its investors had an uncertain future.  Despite intense criticism of and skepticism about the company and its prospects, we were able to rally Kmart’s various constituents and turn an unprofitable, failing company into a profitable company with hope for the future.  Like Eli Manning, we know what it’s like to be underestimated and questioned, but we intend to keep working on our game to achieve our full potential.

I would be the first to tell you that I never expected it to be easy, and it certainly hasn’t been.  But it has been rewarding – rewarding to those investors in Kmart who stuck with the company after it emerged from bankruptcy, to the vendors who continued doing business with Kmart, to the associates who remained with Kmart, and to the customers and communities who continued to support the company.

In late 2004, Kmart was on its way to earning almost $1 billion in Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), had built up almost $4 billion in cash, and had virtually no debt.  In November 2004, we believed that the company’s prospects could be enhanced by a partner who could help improve the productivity of Kmart’s almost 1,500 stores.  Sears had been challenged for many years and found itself seeking a way to grow outside of the mall.  Expanding by building a large number of stores was a risky strategy.  By merging, the combined company would have the scale, time, and capabilities to compete more effectively against many of its more profitable rivals.

Again, at the announcement of the merger there were skeptics in the industry, in the media, and in the financial community.  Many of the issues raised were valid.  However, the sensationalist tone masked the real debate.  How would Kmart compete against the more profitable and better capitalized Wal-Mart and Target?  How would Sears compete with Home Depot and Lowe’s as well as Best Buy, Kohl’s and JC Penney?  Why would we believe that we could do something that so many others had tried with mixed results?

All of these are legitimate questions.  What we have tried to do is improve our operations in the near term while positioning ourselves for long-term success.  After the merger, we initially worked to improve our operations by focusing on the basics, like markdown disciplines and expense management.  At the same time, we have been prioritizing our resources to rebuild many of the company’s systems and processes by taking a longer-term view than most investors and business managers. 

Looking forward, I continue to be excited about the prospects for Sears Holdings.  In 2008, we need to reverse much of the profit erosion we experienced in 2007.  It won’t be easy, especially if the economy stays soft.  The environment surrounding U.S. retail has been very difficult; we were not alone in experiencing disappointing performance this past year.  Many retail companies lost significant market value.  As illustrated in the table below, while the recent correction has brought Sears Holdings’ stock price down from an increase of nearly 20 times since Kmart emerged from bankruptcy to around ten times, it remains one of the top-performing retail stocks over the past five years.  In addition, it is not clear that heavy expenditures of capital guarantee either short or long term success.  Like any investment of capital, the return on that capital over time will determine its wisdom.

Retail Companies with Market Capitalization Greater than $5 billion
($ in millions, except per share data; sorted by Return Since 5/6/2003)

Notes:
All pricing data sourced directly from Bloomberg; stock prices have been dividend-adjusted.
All company financial data sourced directly from Capital IQ on February 27, 2008, except where otherwise noted and except for all Sears Holdings data
(a) Company financial data from latest press release.
(b) Assumes $10.00 Kmart plan participant price on 5/6/03
(c) LTM is last twelve months

For a company like Sears Holdings, which has been in a rebuilding phase, the macroeconomic issues compound the difficulty of the rebuilding effort.  Earning over $2.5 billion in Adjusted EBITDA in 2007, however, provides us with capital to be in a position to take advantage of future opportunities to invest in our business and create value for shareholders.  We also have a strong balance sheet, as we ended the year with $1.6 billion in cash and a reduced debt load while some retail companies have increased their debt over time as shown below. 

Retail Companies with Market Capitalization Greater than $5 billion
($ in millions; sorted by Return Since 5/6/2003)

Notes:
All pricing data sourced directly from Bloomberg; stock prices have been dividend-adjusted.
All company financial data sourced directly from Capital IQ on February 27, 2008, except where otherwise noted and except for all Sears Holdings data.
(a) Company financial data from latest press release.
(c) LTM is last twelve months
(d) MRQ is most recent quarter
(e) In FY05 and FY04, Sears Holdings debt represents Sears Roebuck (including Sears Canada) plus Kmart debt

Sears Holdings remains one of the largest retailers in the United States in terms of revenues, market capitalization, and employees.  However, our profit margins continue to lag our competitors.  We intend to manage the company’s expenses and our inventory position more tightly in 2008 in order to improve our productivity on both fronts.  We will continue to work to improve our game and work on our skills in the short term, and aim to put this company on a winning trajectory over the medium and long term.

*    *    *    *

In the remainder of this year’s letter, I will review our performance in 2007 and analyze how we have performed both in the context of the economic environment and also over a longer time horizon.  I will focus in particular on the company’s cash generation since the merger and on how we have used the cash over the past three years.  I will also describe some of Sears Holdings’ unique assets, including our brands, services, online businesses, real estate, and people.  Finally, I will discuss the current changes we are making at the company in terms of both organizational structure and management in order to maximize the value of these resources.

2007 and Fourth Quarter Financial Performance

The 2007 fiscal year was our third year as a combined company.  In our first two years of operations, 2005 and 2006, we generated substantial profit increases.  In 2007, however, we gave back those profit improvements and returned to the 2004 profit level.  But while 2007 was difficult, we cannot lose sight of the opportunities ahead of us and the resources we have at our disposal. 

For the 2007 fiscal year we reported net income of $826 million.  On a per-share basis, earnings were $5.70 in 2007.  For the fourth quarter of 2007, net income was $426 million ($3.17 per share), as compared to $811 million ($5.27 per share) in the fourth quarter of 2006.

Because GAAP (Generally Accepted Accounting Principles) net income includes more than just operating results (it also includes financing and investing results), we use an Adjusted EBITDA measure internally to evaluate operating performance.  It is called “Adjusted” EBITDA because we also exclude certain transactions (like gains from asset sales) that we believe are not reflective of ongoing operating performance.  For the 2007 fiscal year our Adjusted EBITDA declined to $2.55 billion, which is below 2006 and 2005 and comparable to the 2004 level.

Please see our earnings release issued today for