UNITED STATES      SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
 
 
FORM 10-Q

 
X
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE      SECURITIES EXCHANGE ACT OF 1934 FOR THE      QUARTERLY PERIOD ENDED JUNE 29, 2002
 
 
 
 
 
 
 
 
 
 
 
 
 
OR
 
 
 
 
 
 
 
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE      SECURITIES EXCHANGE ACT OF 1934
 
       Commission filenumber 1-416

**SEARS, ROEBUCK AND CO.**(Exact name of registrant as specified in its charter)
 
              New      York                                          (State of      Incorporation)                       
36-1750680(I.R.S. Employer Identification No.)

 
              3333      Beverly Road, Hoffman Estates,                      (Address of principal executive offices)   
60179(Zip Code)
      Registrant''s telephone number, including area code: (847) 286-2500

 

      Registrant [1] has filed all reports required to be filed by Section 13 or      15(d) of the Securities Exchange Act of 1934 during the preceding 12      months and [2] has been subject to such filing requirements for the past      90 days.
                                                      Yes   X

                      No
As of July 27, 2002, the Registrant had 315,950,647 common shares, $.75      par value, outstanding.
 
**SEARS, ROEBUCK AND CO.INDEX TO QUARTERLY REPORT ON FORM 10-Q13 and 26 Weeks Ended June 29, 2002
** **
PART I - FINANCIAL INFORMATION
Page
Item 1.
Financial Statements
 
 
Condensed Consolidated Statements of Income      (Unaudited)      13 Weeks and 26 Weeks Ended June 29, 2002 and June 30, 2001
      1
 
Condensed Consolidated Balance Sheets      June 29, 2002 (Unaudited), June 30, 2001 (Unaudited)      and December 29, 2001
      2
 
Condensed Consolidated Statements of Cash Flows      (Unaudited)      13 Weeks and 26 Weeks Ended June 29, 2002 and June 30, 2001
      3
 
Notes to Condensed Consolidated Financial Statements      (Unaudited)
4
 
Independent Accountants' Report
15
 
 
 
Item 2.
Management's Discussion and Analysis of Operations,      Financial Condition      and Liquidity

16
Item 3.
Quantitative and Qualitative Disclosures about Market      Risk
25
PART II - OTHER INFORMATION

Item 1.
Legal Proceedings
26
Item 4.
Submission of Matters to a Vote of Security-Holders
27
Item 6.
Exhibits and Reports on Form 8-K
28** 

 

SEARS, ROEBUCK AND CO.Condensed Consolidated Statements of Income(Unaudited)
PART I. FINANCIAL INFORMATION

*Item 1. Financial Statements*

13 Weeks Ended

26 Weeks Ended

June 29,
June 30,
June 29,
June 30,*millions, except per common      share data
2002

2001

2002

2001
**REVENUES
Merchandise sales and services
$
8,753
$
8,834
$
16,400
$
16,588
Credit and financial products      revenues
1,389

1,349

2,779

2,452

   Total      revenues
10,142

10,183

19,179

19,040
**COSTS AND EXPENSES
Cost of sales, buying and      occupancy
6,342
6,439
11,968
12,275
Selling and administrative
2,236
2,256
4,297
4,287
Provision for uncollectible      accounts
401
361
782
552
Provision for previously      securitized receivables
--
522
--
522
Depreciation and amortization
221
225
431
440
Interest
276
404
568
716
Special charges and impairments
--

287

111

287

    Total      costs and expenses
9,476

10,494

18,157

19,079

Operating income (loss)
666
(311)
1,022
(39)
Other income, net
10

7

88

8

Income (loss) before income      taxes and minority interest
676
(304)
1,110
(31)
Income taxes
(249)
112
(397)
14
Minority interest
(7)

(5)

25

(4)

Income (loss) before cumulative      effect of accounting changes
420
(197)
738
(21)
Cumulative effect of a change      in accounting for allowance for         uncollectible accounts
--
--
(191)
--
Cumulative effect of a change      in accounting for goodwill
--

--

(208)

--
**NET INCOME (LOSS)
$
420

$
(197)

$
339

$
(21)
**EARNINGS (LOSS) PER COMMON      SHARE
    BASIC
       Earnings      (loss) per share before cumulative              effect of changes in      accounting principle
$
1.33
$
(0.60)
$
2.33
$
(0.06)
       Cumulative      effect of changes in accounting
--
--
(1.26)
--
          Earnings      (loss) per share
$
1.33

$
(0.60)

$
1.07

$
(0.06)

    DILUTED
       Earnings      (loss) per share before cumulative              effect of changes in      accounting principle
$
1.31
$
(0.60)
$
2.29
$
(0.06)
       Cumulative      effect of changes in              accounting
--

--

(1.24)

--

          Earnings      (loss) per share
$
1.31

$
(0.60)

$
1.05

$
(0.06)

Cash dividends declared per      common share
$
0.23

$
0.23

$
0.46

$
0.46

Average common and common      equivalent shares outstanding
321.1
326.6
322.5
329.2
See accompanying notes.** 

 

SEARS, ROEBUCK AND CO.Condensed Consolidated Balance Sheets**
 
(Unaudited)

 
 
 
June 29,
June 30,
December 29,*millions
2002

 
2001

 
2001

ASSETS
Current assets
 
 
 
 
 
 
 
 
   Cash and cash      equivalents
$
1,019
 
$
476
 
$
1,064
   Credit card      receivables
 
29,812
 
 
27,615
 
 
29,321
      Less      allowance for uncollectible accounts
 
1,485

 
 
1,129

 
 
1,166

      Net      credit card receivables
 
28,327
 
 
26,486
 
 
28,155
   Other      receivables
 
635
 
 
628
 
 
658
   Merchandise      inventories
 
5,396
 
 
5,596
 
 
4,912
   Prepaid      expenses and deferred charges
617
585
458
   Deferred      income taxes
 
1,010

 
 
1,170

 
 
858

   Total current      assets
 
37,004
 
 
34,941
 
 
36,105
 
 
 
 
 
 
 
 
 
Property and equipment, net
 
6,797
 
 
6,604
 
 
6,824
Deferred income taxes
 
365
 
 
232
 
 
415
Goodwill
 
936
 
 
287
 
 
294
Tradenames and Other Intangible      assets
 
725
 
 
--
 
 
--
Other assets
 
917

 
 
703

 
 
679
**   TOTAL ASSETS
$
46,744

 
$
42,767

 
$
44,317

 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
   Short-term      borrowings
$
3,981
 
$
3,326
 
$
3,557
   Current      portion of long-term debt and capitalized lease            obligations

 
4,325
 
 
3,243
 
 
3,157
   Accounts      payable and other liabilities
 
6,831
 
 
6,488
 
 
7,176
   Unearned      revenues
 
1,180
 
 
1,131
 
 
1,136
   Other taxes
 
471

 
 
475

 
 
558

   Total current      liabilities
 
16,788
 
 
14,663
 
 
15,584
 
 
 
 
 
 
 
 
 
Long-term debt and capitalized      lease obligations
 
20,348
 
 
18,870
 
 
18,921
Postretirement benefits
 
1,645
 
 
1,867
 
 
1,732
Minority interest and other      liabilities
 
1,868

 
 
1,334

 
 
1,961

   Total      Liabilities
 
40,649
 
 
36,734
 
 
38,198
 
 
 
 
 
 
 
 
 
COMMITMENTS AND CONTINGENT      LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SHAREHOLDERS' EQUITY
Common shares
 
323
 
 
323
 
 
323
Capital in excess of par value
 
3,516
 
 
3,523
 
 
3,500
Retained earnings
 
7,605
 
 
6,806
 
 
7,413
Treasury stock - at cost
 
(4,506)
 
 
(4,071)
 
 
(4,223)
Deferred ESOP expense
 
(48)
 
 
(77)
 
 
(63)
Accumulated other comprehensive      loss
 
(795)

 
 
(471)

 
 
(831)

   Total      Shareholders' Equity
 
6,095

 
 
6,033

 
 
6,119

 
 
 
 
 
 
 
 
 **   TOTAL      LIABILITIES AND SHAREHOLDERS' EQUITY
$
46,744

 
$
42,767

 
$
44,317

 
 
 
 
 
 
 
 
 
   Total common      shares outstanding
 
316.8
 
 
324.3
 
 
320.4
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes.
 
 
 
 
 
 
 
 
 
 

 
**SEARS, ROEBUCK AND CO.Condensed Consolidated Statements of Cash Flows(Unaudited)

26 Weeks Ended

June 29,
June 30,*millions
2002

2001

CASH FLOWS FROM OPERATING      ACTIVITIES
Net income (loss)
$
339
 
$
(21)
Adjustments to reconcile net      income (loss) to net cash
 
 
 
 
 
   provided by      operating activities
 
 
 
 
 
    Depreciation      and amortization
 
431
 
 
440
    Cumulative      effect of changes in accounting principle
 
399
 
 
--
    Provision      for uncollectible accounts
 
782
 
 
552
    Provision      for previously securitized receivables
 
--
 
 
522
    Special      charges and impairments
 
111
 
 
          287
    Gain on      sales of property and investments
 
(76)
 
 
(1)
    Income      tax benefit on nonqualified stock options
24
7
    Change      in (net of acquisitions):
 
 
 
 
 
      Deferred      income taxes
 
14
 
 
(313)
      Retained      interest in transferred credit card receivables
 
--
 
 
(759)
      Credit      card receivables
 
(1,161)
 
 
1,732
      Merchandise      inventories
 
(216)
 
 
11
      Other      operating assets
 
(345)
 
 
95
      Other      operating liabilities
 
(491)

 
 
(1,351)

               Net cash (used in) provided by operating activities
 
(189)

 
 
1,201

 
 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING      ACTIVITIES
 
 
 
 
 
 Acquisition of      businesses, net of cash acquired
 
(1,832)
 
 
--
  Proceeds from sales of      property and investments
 
130
 
 
40
  Purchases of property      and equipment
 
(391)
 
 
(573)
  Purchases of long-term      investments
 
(9)

 
 
(12)

          Net      cash used in investing activities
 
(2,102)

 
 
(545)

 
 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING      ACTIVITIES
 
 
 
 
 
 Proceeds from long-term      debt
 
3,974
 
 
1,787
  Repayments of long-term      debt
 
(1,715)
 
 
(1,374)
  Increase (decrease) in      short term borrowings, primarily        90 days or less
411
(950)
 Repayments of ESOP note      receivable
 
7
 
 
21
 Common shares repurchased
 
(427)
 
 
(400)
 Common shares issued for      employee stock plans
 
136
 
 
32
 Dividends paid to      shareholders
 
(147)

 
 
(152)

          Net      cash provided by (used in) financing activities
 
2,239

 
 
(1,036)

 
 
 
 
 
 
  Effect of exchange rate      changes on cash and cash equivalents
 
7

 
 
14

 
 
 
 
 

  NET DECREASE IN CASH AND      CASH EQUIVALENTS
 
(45)

 
 
(366)

 
 
 
 
 
 
  **BALANCE AT BEGINNING      OF YEAR**
 
1,064

 
 
842

 
 
 
 
 
 
  **BALANCE AT END OF      PERIOD**
$
1,019

 
$
476

 
 
 
 
 
 
 
 
 
 
 
 
 See accompanying notes.
 
 
 
 
 
 
 

**SEARS, ROEBUCK AND CO.Notes To Condensed Consolidate Financial Statements**(Unaudited)

 
**NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
The Condensed Consolidated Balance Sheets as of June 29, 2002 and June 30,2001, the related Condensed Consolidated Statements of Income for the 13 and 26weeks ended June 29, 2002 and June 30, 2001, and the Condensed ConsolidatedStatements of Cash Flows for the 26 weeks ended June 29, 2002 and June 30, 2001,are unaudited. The interim financial statements reflect all adjustments(consisting only of normal recurring accruals) which are, in the opinion ofmanagement, necessary for a fair statement of the results for the interimperiods presented. The condensed consolidated financial statements should beread in conjunction with the consolidated financial statements and notes theretoincluded in the Sears, Roebuck and Co. (the "Company" or"Sears") 2001 Annual Report on Form 10-K. The results of operationsfor the interim periods should not be considered indicative of results to beexpected for the full year.

Certain reclassifications have been made to the 2001 financial statements toconform with the current year presentation.

 

**NOTE 2 - ACQUISITION**
On June 17, 2002, the Company acquired 100 percent of the outstanding commonshares of Lands' End, Inc. ("Lands' End"). The results of Lands' End'soperations have been included in the consolidated financial statements sincethat date. Headquartered in Dodgeville, Wisconsin, Lands' End is a leadingdirect merchant of traditionally styled, casual clothing for men, women andchildren, accessories, footwear, home products, and soft luggage.

The Company acquired Lands' End for $1.8 billion in cash. The acquisitionhas been accounted for using the purchase method in accordance with Statement ofFinancial Accounting Standards No. 141, "Business Combinations".Accordingly, the total purchase price has preliminarily been allocated to theassets acquired and liabilities assumed based on their estimated fair values atacquisition as follows (amounts in millions):

Merchandise inventories
$
238
Property and equipment
177
Intangible assets (primarily      indefinite lived     tradenames)
725
Goodwill
826
Other assets
44
Accounts payable and other      liabilities
(178)

    Total
$
1,832

The amount allocated to goodwill is reflective of the benefit the Companyexpects to realize from leveraging the Lands' End brandname across its retailand credit businesses. The Company is in the process of obtaining third-partyvaluations to ascertain the fair value of assets and liabilities; therefore, theallocation of the purchase price is preliminary.

The following unaudited pro forma information presents the results ofoperations of the Company as if the Lands' End acquisition had taken place atthe beginning of each respective period. Pro forma adjustments have been made toreflect additional interest expense from the $1.8 billion in debt associatedwith the acquisition. The proforma results of operations include $18 million ofnon recurring transaction costs incurred by Lands' End for the 13 and 26 weeksended June 29, 2002, respectively.The following unaudited pro forma informationpresents the results of operations of the Company as if the Lands' Endacquisition had taken place at the beginning of each respective period. Proforma adjustments have been made to reflect additional interest expense from the$1.8 billion in debt associated with the acquisition.  The pro formaresults of operations include $18 million of nonrecurring transaction costsincurred by Lands' End for the 13 and 26 weeks ended June 29, 2002,respectively.

 

**SEARS, ROEBUCK AND CO.Notes To Condensed Consolidate Financial Statements**(Unaudited)

13 Weeks Ended

26 Weeks Ended

June 29,
June 30,
June 29,
June 30,
2002

2001

2002

2001
*millions, except per share data
(Pro Forma)

(Pro Forma)

(Pro Forma)

(Pro Forma)

Revenues
$
10,458
$
10,499
$
19,833
$
19,654
Income (loss) before cumulative      effect of accounting changes
407
(206)
721
(44)
Net income (loss)
407
(206)
322
(44)
Earnings (loss) per share:

     Basic

       Earnings      (loss) per share 

1.28
(0.65)
0.97
(0.16)
          Diluted

       Earnings      (loss) per share 

1.26
(0.65)
0.95
(0.16)
The unaudited pro forma results have been prepared for comparative purposesonly and do not purport to be indicative of the results of operations that wouldhave occurred had the Lands' End acquisition occurred at the beginning of therespective periods.
** 

NOTE 3 - SHAREHOLDERS' EQUITY

Dividend Payments**
Under terms of indentures entered into in 1981 and thereafter, the Companycannot take specified actions, including the declaration of cash dividends, thatwould cause its unencumbered assets, as defined, to fall below 150% of itsliabilities, as defined. At June 29, 2002, approximately $6.8 billion could bepaid in dividends to shareholders under the most restrictive indentures.
**Share Repurchase Program**
The Company repurchased common shares during 2002 and 2001 under common sharerepurchase programs approved by the Board of Directors. A summary of sharerepurchase activity is as follows (all amounts in millions):

Shares

Cost

First quarter 2001
4.3
$
168
Second quarter 2001
6.1

232

    Year to      date
10.4

$
400

First quarter 2002
8.2
$
427
Second quarter 2002
--

--

    Year to      date
8.2

427

As of June 29, 2002 the Company has remaining authorization to repurchase$1.25 billion of shares by December 31, 2004 under the existing share repurchaseprogram.
** 

SEARS, ROEBUCK AND CO.Notes To Condensed Consolidate Financial Statements(Unaudited)

Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss**
The following table shows the computation of comprehensive income (loss):

13 Weeks Ended

26 Weeks Ended

June 29,
June 30,
June 29,
June 30,*millions
2002

2001

2002

2001

Net income (loss)
$
420
$
(197)
$
339
$
(21)
Other comprehensive income      (loss):
After tax cumulative effect of      a change in

   accounting      for      derivatives                  
--
--
--
(262)
Amounts amortized into interest      expense from OCI
4
4
8
8
Change in fair value of cash      flow hedges
3
38
(3)
34
Unrealized gain on investments
--
3
--
5
Foreign currency translation      adjustments
29

20

30

(7)

Total other comprehensive      income (loss)
30

65

35

(222)

Total comprehensive income      (loss)
$
450

$
(132)

$
374

$
(243)
****
The following table displays the components of accumulated othercomprehensive loss:

 
June 29,
 
June 30,
 
December 29,*millions
2002

 
2001

 
2001

Accumulated derivative loss
$
(205)
$
(220)
$
(211)
Unrealized gain on securities      held, net of tax
--
6
--
Currency translation      adjustments
(125)
(125)
(155)
 
Minimum pension liability, net      of tax (1)
 
(465)

 
 
(132)

 
 
(465)

Accumulated other comprehensive      loss
$
(795)

$
(471)

$
(831)

(1)      Minimum pension liability is calculated annually in the fourth quarter.      Changes thereto are recorded at that time.** 

NOTE 4 - EARNINGS (LOSS) PER SHARE**
The following table sets forth the computations of basic and diluted earnings(loss) per share:

13 Weeks Ended

26 Weeks Ended

June 29,
June 30,
June 29,
June 30,*millions, except per share data
2002

2001

2002

2001

Net income (loss) available to      Common shareholders (1)
$
420
$
(197)
$
339
$
(21)
 
Average common shares      outstanding
 
316.1

 
 
326.6

 
 
317.5

 
 
329.2

 
Earnings (loss) per share -      basic
$
1.33
 
$
(0.60)
 
$
1.07
 
$
(0.06)
 
Dilutive effect of stock      options
 
5.0
 
 
--
 
 
5.0
 
 
--
Average common and common      equivalent shares outstanding
321.1

326.6

322.5

329.2

 
Earnings (loss) per share -      diluted
$
1.31

 
$
(0.60)

 
$
1.05

 
$
(0.06)

 
 
 
 
 
 
 
 
 
 
 
 
 

(1) Income      (loss) available to common shareholders is the same for purposes of      calculating basic and diluted EPS. ** 

 

SEARS, ROEBUCK AND CO.Notes To Condensed Consolidate Financial Statements(Unaudited)**
 

The following table sets forth the computations of basic and diluted earningsper share before cumulative effect of changes in accounting:

13 Weeks Ended

26 Weeks Ended

June 29,
June 30,
June 29,
June 30,*millions, except per share data
2002

2001

2002

2001

Income (loss) before cumulative      effect of accounting changes (1)
$
420
$
(197)
$
738
$
(21)
 
Average common shares      outstanding
 
316.1

 
 
326.6

 
 
317.5

 
 
329.2

 
Earnings (loss) per share -      basic
$
1.33
 
$
(0.60)
 
$
2.33
 
$
(0.06)
 
Dilutive effect of stock      options
 
5.0
 
 
--
 
 
5.0
 
 
--
Average common and common      equivalent shares outstanding
321.1

326.6

322.5

329.2

 
Earnings (loss) per share -      diluted
$
1.31

 
$
(0.60)

 
$
2.29

 
$
(0.06)

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Income      (loss) before cumulative effect of accounting changes is the same for      purposes of calculating basic and diluted EPS.
In each period, certain options were excluded from the computation of dilutedearnings per share because they would have been anti-dilutive. At June 29, 2002,options to purchase 3.6 million common shares at prices ranging from $54 to $64and $53 to $64 per share were excluded from the 13 and 26 week 2002calculations, respectively. As of June 30, 2001, out-of-the-money options topurchase 16.5 million shares of stock were excluded from the 13 and 26 weekcalculations. Because the Company reported a net loss during the 2001 periods,the calculations also exclude 1.6 million shares representing the anti-dilutiveeffect of in-the-money options.
******NOTE 5 - SEGMENT DISCLOSURES**
The following tables set forth operating results and total assets by segment:****For the 13 weeks ended June 29, 2002
*millions

Retail and      Related Services

Credit and      Financial Products

Corporate and      Other

Sears Canada

Consoli-dated      GAAP

Merchandise sales and services
$
7,699
$
--
$
92
$
962
$
8,753
Credit and financial products      revenues

--

1,321

--

68

1,389

   Total      revenues
7,699
1,321
92
1,030
10,142
Costs and expenses

   Cost of      sales, buying and occupancy

5,602

--

35

705

6,342
   Selling and      administrative

1,616

264

110

246

2,236
   Provision for      uncollectible accounts

--

393

--

8

401
   Depreciation      and amortization

176

5

16

24

221
   Interest

5

247

--

24

276

     Total      costs and expenses
7,399

909

161

1,007

9,476

Operating income (loss)
$
300

$
412

$
(69)

$
23

$
666

Total assets
$
12,685

$
28,454

$
2,280

$
3,325

$
46,744
** 

SEARS, ROEBUCK AND CO.Notes To Condensed Consolidate Financial Statements(Unaudited)

For the 13 weeks ended June 30, 2001

*millions*
 
Retail and      Related Services
Credit and      Financial Products
Corporate and      Other
Sears Canada
Total
Non-      comparable items
Consoli-      dated
Merchandise sales and services
$
7,760
$
-- 
$
112
$
962
$
8,834
$
--
$
8,834
Credit and financial products      revenues
 
-- 
 
 
1,276
 
 
--
 
 
73
 
 
1,349
 
 
--
 
 
1,349
   Total      revenues
7,760
1,276
112
1,035
10,183
--
10,183
Costs and expenses
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Costs of      sales, buying and occupancy
 
5,674
 
 
--
 
 
46
 
 
719
 
 
6,439
 
 
--
 
 
6,439
   Selling and      administrative
 
1,677
 
 
212
 
 
122
 
 
245
 
 
2,256
 
 
--
 
 
2,256
   Provision for      uncollectible accounts
 
--
 
 
350
 
 
--
 
 
11
 
 
361
 
 

 
 
361
   Provision for      previously securitized            receivables
 
--
 
 
--
 
 
--
 
 
--
 
 
--
 
 
522
 
 
522
   Depreciation      and amortization
 
185
 
 
4
 
 
15
 
 
21
 
 
225
 
 
--
 
 
225
   Interest
 
11
 
 
365
 
 
--
 
 
28
 
 
404
 
 
--
 
 
404
   Special      charges and impairments
 
--

 
 
--

 
 
--

 
 
--

 
 
--

 
 
287

 
 
287

          Total      costs and expenses
7,547

931

183

1,024

9,685

809

10,494

Operating income (loss)
213

345

(71)

11

498

(809)

(311)

Goodwill amortization expense
5

--

--

(7)

(2)

--

(2)

Operating income (loss)      excluding        amortization expense
$
218

$
345

$
(71)

$
4

$
496

$
(809)

$
(313)

Total assets
$
11,245

$
25,857

$
2,273

$
3,392

$
42,767
****
 

For the 26 weeks ended June 29, 2002

*millions*

 
Retail and      Related Services

Credit and      Financial Products

Corporate and      Other

Sears Canada

Total

Non-      comparable Items

Consoli-      dated GAAP

Merchandise sales and services
$
14,467
$
--
$
150
$
1,783
$
16,400
$
--
$
16,400
Credit and financial products      revenues
 
--

 
 
2,639

 
 
--

 
 
140

 
 
2,779

 
 
--

 
 
2,779

   Total      revenues
14,467
2,639
150
1,923
19,179
--
19,179
Costs and expenses
 
 
 
 

 
 

 
 

 
 

 
 

 
 

   Cost of      sales, buying and occupancy
 
10,607
 
 
--
 
 
56
 
 
1,305
 
 
11,968
 
 
--
 
 
11,968
   Selling and      administrative
 
3,128
 
 
492
 
 
204
 
 
473
 
 
4,297
 
 
--
 
 
4,297
   Provision for      uncollectible accounts
 
--
 
 
764
 
 
--
 
 
18
 
 
782
 
 
--
 
 
782
   Depreciation      and amortization
 
344
 
 
10
 
 
28
 
 
49
 
 
431
 
 
--
 
 
431
   Interest
 
1
 
 
518
 
 
--
 
 
49
 
 
568
 
 
--
 
 
568
   Special      charges and impairments
 
--

 
 
--

 
 
--

 
 
--

 
 
--

 
 
111

 
 
111

     Total      costs and expenses
14,080

1,784

288

1,894

18,046

111

18,157

Operating income (loss)
$
387

$
855

$
(138)

$
29

$
1,133

$
(111)

$
1,022

Total assets
$
12,685

$
28,454

$
2,280

$
3,325

$
46,744

** 

SEARS, ROEBUCK AND CO.Notes To Condensed Consolidate Financial Statements(Unaudited)

 

For the 26 weeks ended June 30, 2001

*millions

 
Retail and      Related Services

Credit and      Financial Products

Corporate and      Other

Sears Canada

Total

Securi-      tization Impact

Non-      comparable Items

Consoli-      dated GAAP

Merchandise sales and services
$
14,566
$
-- 
$
196
$
1,826
$
16,588
$
--
$
--
$
16,588
Credit and financial products      revenues
 
--

 
 
2,576

 
 
--

 
 
151

 
 
2,727

 
 
(275)

 
 
--

 
 
2,452

   Total      revenues
14,566
2,576
196
1,977
19,315
(275)
--
19,040
Costs and expenses
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Costs of      sales, buying and occupancy
 
10,827
 
 
--
 
 
83
 
 
1,365
 
 
12,275
 
 
--
 
 
--
 
 
12,275
   Selling and      administrative
 
3,207
 
 
406
 
 
222
 
 
491
 
 
4,326
 
 
(39)
 
 
--
 
 
4,287
   Provision for      uncollectible accounts
 
--
 
 
684
 
 
--
 
 
21
 
 
705
 
 
(153)
 
 
--
 
 
552
   Provision for      previously securitized            receivables
 
--
 
 
--
 
 
--
 
 
--
 
 
--
 
 
--
 
 
522
 
 
522
   Depreciation      and amortization
 
361
 
 
9
 
 
29
 
 
41
 
 
440
 
 
--
 
 
--
 
 
440
   Interest
 
14
 
 
767
 
 
--
 
 
58
 
 
839
 
 
(123)
 
 
--
 
 
716
   Special      charges and impairments
 
--

 
 
--

 
 
--

 
 
--

 
 
--

 
 
--

 
 
287

 
 
287

          Total      costs and expenses
14,409

1,866

334

1,976

18,585

(315)

809

19,079

Operating income (loss)
157

710

(138)

1

730

40

(809)

(39)

Goodwill amortization expense
9

--

1

(13)

(3)

--

--

(3)

Operating income (loss)      excluding        amortization expense
$
166

$
710

$
(137)

$
(12)

$
727

$
40

$
(809)

$
(42)

Total assets
$
11,245

$
25,857

$
2,273

$
3,392

$
42,767

 
** 

NOTE 6 - SPECIAL CHARGES AND IMPAIRMENTS**
Following is a summary of the 2002 activity in the reserves established inconnection with the Company's restructuring initiatives:

*millions*

 
Ending Reserve      Balance 12/29/01

2002      Charges

Asset      Write-Downs

Cash Payments

Other      Adjustments

Ending Reserve      Balance 06/29/02
**Sears Canada        Employee termination costs
$
--
$
3
$
--
$
(2)
$
1
$
2
  Contractual      obligations and other costs
--
16
--
(5)
(1)
10
  Asset impairments
--

92

(92)

--

--

--

--
111
(92)
(7)
--
12**Productivity Initiatives        Employee termination costs
92
--
--
(47)
--
45
  Contractual      obligations and other costs
5

--

--

(1)

--

4

97
--
--
(48)
--
49**Product Category Exits
  Employee      termination costs
7
--
--
(4)
--
3
  Contractual      obligations and other costs
65

--

--

(14)

--

51

72
--
--
(18)
--
54**2000 Store Closures
  Lease and holding      costs
41

--

--

(8)

--

33

41

--

--

(8)

--

33

  Total
$
210

$
111

$
(92)

$
(81)

$
--

$
148
** 

SEARS, ROEBUCK AND CO.Notes To Condensed Consolidate Financial Statements(Unaudited)

 
**Sears Canada**
During the first quarter of 2002, Sears Canada announced a plan to convertthe existing Eaton's stores to the Sears Canada banner. In connectiontherewith, the Company recorded a charge of $111 million, before tax andminority interest, related to employee terminations, asset impairments and otherexit costs. Of the $111 million charge, $92 million is to record assetimpairments on fixtures and equipment in such facilities. The remaining $19million is comprised of $16 million for contractual obligations and holdingcosts and $3 million for employee termination costs.

 
**Productivity Initiatives**
During the fourth quarter of 2001, the Company announced a series ofstrategic initiatives designed to revitalize its Full-line Stores and reduceoperating expenses. In connection therewith, the Company recorded a pretaxcharge of $123 million related to employee termination, facility closing andother exit costs. Of the $123 million charge, $102 million was for employeetermination costs associated with the planned elimination of 5,950 associatepositions as part of this initiative. The positions to be eliminated includedstore support positions within the Company's headquarters as well as positionswithin store and field operations. The remaining $21 million of productivityrelated charges was comprised of $13 million for contractual obligations andholding costs associated with certain support facilities to be vacated as aresult of the plan, and $8 million to record asset impairments on fixtures andequipment in such facilities. As of June 29, 2002, approximately 4,700associates have been terminated as a result of this plan. The reserve balance of$49 million as of June 29, 2002 primarily represents estimated employeetermination costs.
** 

Product Category Exits**
During 2001, the Company announced its decision to exit certain productcategories within its Full-line Stores, including its skin care and colorcosmetics, installed floor covering and custom window treatments businesses. Inconnection with these exits, the Company recorded pretax charges totaling $151million during 2001. Of the $151 million charge, $106 million was recorded forthe cost of settling contractual obligations to certain vendors and contractorsand for other exit costs associated with the Company's plan to discontinuethese businesses, including incremental customer warranty claims liability to beincurred by the Company in the absence of ongoing relationships with certainproduct manufacturers. Also included within the $151 million charge were assetimpairment charges of $38 million, primarily reflecting the write-down of storefixtures within the exited businesses to their estimated fair value and $7million of employee termination costs. The reserve balance of $54 million as ofJune 29, 2002 primarily represents future incremental customer warranty costs.
** 

2000 Store Closures**
In December 2000, the Company announced the planned closure of 87under-performing stores consisting of 53 National Tire and Battery,30 Hardware and four Full-line Stores (including two Sears Auto Centers). As ofJune 29, 2002, all 87 stores have been closed. The reserve balance of $33million as of June 29, 2002 represents estimated future lease obligations andholding costs.
** 

SEARS, ROEBUCK AND CO.Notes To Condensed Consolidate Financial Statements(Unaudited)
** 

NOTE 7 - OTHER INCOME**
Consolidated other income consists of:

 
 
13 Weeks Ended

 
26 Weeks Ended

 
 
June 29,
 
June 30,
 
June 29,
 
June 30,*millions
 
2002

 
2001

 
2002

 
2001

Gain on sales      of property and investments
$
--
$
--
$
76
$
1
 
Equity income      in unconsolidated companies
 
 
5
 
 
7
 
 
7
 
 
7
 
Sears Mexico      dividend
 
 
5

 
 
--

 
 
5

 
 
--

Total
$
10

$
7

$
88

$
8

 

On March 6, 2002, as part of an Advance Auto Parts ("AAP") publicstock offering, the Company sold approximately 3.1 million of its AAP shares,which reduced the company''s ownership percentage to 24.1%. The Company realizeda pre-tax gain of $71 million ($58 million after-tax), or $0.18 per share, fromthe sale.   This transaction generated after-tax cash proceeds of$110 million.

 
**NOTE 8 - CHANGE IN ACCOUNTING POLICY AND IMPLEMENTATION OF NEW ACCOUNTINGSTANDARDS
*Change in Accounting Policy***
In the second quarter of 2002, the Company adopted a change in accountingpolicy related to its method used to determine the allowance for uncollectibleaccounts. In accordance with Accounting Principles Board Opinion No. 20,"Accounting Changes", the cumulative effect of this change inaccounting policy has been recorded as of the beginning of fiscal 2002.

The Company periodically reviews its accounting practices to ensure that itsadopted policies appropriately reflect changes in its businesses, the industriesit operates in, and the regulatory and politicalenvironments.   During the second quarter, the Company comparedits methodology for computing the allowance for uncollectible accounts to themethodologies of participants in the bank card industry. The Company felt that acomparison to bank card issuers was appropriate given the growth of the SearsGold MasterCard product (approximately $8.5 billion in balances at the endof the second quarter of 2002) and the recent changes to the Sears Card productthat are meant to provide a wider range of services to the Sears Card holder(e.g., balance transfers, convenience checks, broader acceptance, etc.) TheCompany determined that practice in the industry was diverse and evolving,particularly in the areas of providing allowances for current accounts, financecharges and credit card fees. The Company's previous policy for determining theallowance for uncollectible accounts provided an allowance for principal andfinance charges on past due accounts but not for current accounts or credit cardfees. Based on its comparison, the Company has changed its methodology toprovide an allowance for principal and finance charge balances on current andpast due accounts as well as for credit card feebalances.    The Company believes that this new methodologyfor determining its allowance is preferable, as it is consistent with moreconservative industry practices in this area.

The cumulative effect of the accounting change as of December 30, 2001 was todecrease net income for the quarter ended March 30, 2002 by $191 million, net oftax, or $0.59 per share. There was no impact on income before cumulative effectof accounting changes as a result of adopting the new methodology.

The pro forma effect of this accounting change on recent fiscal periods ispresented below.
** 

SEARS, ROEBUCK AND CO.Notes To Condensed Consolidate Financial Statements(Unaudited)

 
***Adoption of SFAS No. 142***
Effective at the beginning of 2002, the Company adopted Statement ofFinancial Accounting Standards ("SFAS") No. 141, "BusinessCombinations," and SFAS No. 142, "Goodwill and Other IntangibleAssets". The guidance in SFAS No. 141 supercedes APB Opinion No. 16,"Business Combinations". Upon adoption of SFAS No. 142, goodwillamortization ceased. Goodwill is now subject to fair-value based impairmenttests performed, at a minimum, on an annual basis. In addition, a transitionalgoodwill impairment test is required as of the adoption date. These impairmenttests are conducted on each business of the Company where goodwill is recorded,and may require two steps. The initial step is designed to identify potentialgoodwill impairment by comparing an estimate of fair value for each applicablebusiness to its respective carrying value. For those businesses where thecarrying value exceeds fair value, a second step is performed to measure theamount of goodwill impairment in existence, if any.

The Company had approximately $371 million in positive goodwill and $77million in negative goodwill recorded in its consolidated balance sheet at thebeginning of 2002. The $77 million in negative goodwill was required to bede-recognized upon adoption of the Statement. The Company completed the requiredtransitional goodwill impairment test in the first quarter of 2002 anddetermined that $261 million of goodwill recorded within the Company's Retailand Related Services segment, primarily related to NTB and Orchard SupplyHardware, was impaired under the fair value impairment test approach required bySFAS No. 142.

The fair value of these reporting units was estimated using the expectedpresent value of associated future cash flows and market values of comparablebusinesses where available. Upon adoption of the Statement, a $208 millioncharge, net of tax and minority interest, was recognized in the first quarter of2002 to record this impairment as well as the removal of negative goodwill andwas classified as a cumulative effect of a change in accounting principle.

The following table presents the pro forma effect of the change in accountingpolicy for the allowance for uncollectible accounts and the adoption of SFAS No.142 on recent fiscal periods as if the changes were applied at the beginning ofthe respective fiscal year:

**13 Weeks Ended
**Year Ended
*millions, except earnings      (loss) per common share
Dec. 29, 2001

Sept. 29, 2001

June 30, 2001

Mar. 31, 2001

Dec. 29, 2001

Dec. 30, 2000

Jan. 1, 2000

Reported net income (loss)
$
494
$
262
$
(197)
$
176
$
735
$
1,343
$
1,453
Add back:            Negative goodwill amortization

(3)
(4)
(3)
(4)
(14)
(15)
--
   Positive      goodwill amortization
5
5
5
5
20
24
24
   Impact of      change in accounting for            the allowance for uncollectible              accounts

(3)

(2)

(3)

(2)

(10)

3

7

Pro forma net income (loss)
$
493

$
261

$
(198)

$
175

$
731

$
1,355

$
1,484
**Earnings per common share
   **Basic      earnings (loss) per share:**
      Reported      net income (loss)
$
1.53
$
0.81
$
(0.60)
$
0.53
$
2.25
$
3.89
$
3.83
             Goodwill amortization
0.01
--
0.01
--
0.02
0.03
0.06
        Impact      of change in accounting for               the allowance      for                 uncollectible accounts

(0.01)

(0.01)

(0.01)

(0.01)

(0.03)

0.01

0.02

      Pro      forma net income (loss)
$
1.53

$
0.80

$
(0.60)

$
0.52

$
2.24

$
3.93

$
3.91

    **Diluted      earnings (loss) per share:**
      Reported      net income (loss)
$
1.52
$
0.80
$
(0.60)
$
0.53
$
2.24
$
3.88
$
3.81
        Goodwill      amortization
0.01
--
0.01
--
0.02
0.03
0.06
        Impact      of change in accounting for               the allowance for      uncollectible              accounts
(0.01)

(0.01)

(0.01)

(0.01)

(0.03)

0.01

0.02

      Pro      forma net income (loss)
$
1.52

$
0.79

$
(0.60)

$
0.52

$
2.23

$
3.92

$
3.89

Average common shares      outstanding
322.6
324.5
326.6
331.8
326.4
345.1
379.2
Average common and common         equivalent shares outstanding
325.5
326.9
326.6
333.5
328.5
346.3
381.0** 

SEARS, ROEBUCK AND CO.Notes To Condensed Consolidate Financial Statements(Unaudited)

 

The changes in the carrying amount of goodwill as of June 29, 2002, are asfollows:

*millions*

 
Retail and      Related Services

 

Credit and      Financial Products

 

Corporate and      Other

 

Sears Canada

 

Total

Balance as of December 29, 2001
$
291
$
2
$
61
$
(60)
$
294
   Cumulative      effect of adopting SFAS No. 142:            Impairment loss recognized

 
(261)
 
 
--
 
 
--
 
 
--
 
 
(261)
   Elimination      of negative goodwill
 
--
 
 
--
 
 
--
 
 
77
 
 
77
   Acquisition (1)
 
 826

 
 
 --

 
 
 --

 
 
 --

 
 
 826

Balance as of June 29, 2002
$
856
$
2
$
61
$
17
$
936
(1)Preliminarily      and subject to change. See Note 2.
 
**NOTE 9 - EFFECT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED**
In June 2002, the FASB issued SFAS No. 146, "Accounting for CostsAssociated with Exit or Disposal Activities." This statement changes thetiming of recognition for certain exit costs associated with restructuringactivities, so that certain exit costs would be recognized over the period inwhich the restructuring activities occur. Currently exit costs are recognizedwhen the Company commits to a restructuring plan. SFAS No. 146 is effective forexit or disposal activities initiated after December 31, 2002 and could resultin the Company recognizing the cost of future restructuring activities over aperiod of time as opposed to as a single event.

 
**NOTE 10 - DERIVATIVE FINANCIAL INSTRUMENTS AND FINANCIAL GUARANTEES**
The Company utilizes derivative financial instruments as part of an overallrisk management program designed to address certain financial exposures faced bythe Company. The only significant derivative instruments the Company currentlyholds are interest rate swaps. As of June 29, 2002, the Company had interestrate swaps with an aggregate fair value of $242 million that have been used tosynthetically convert certain of the Company's domestic fixed rate debt tovariable rate. The objective of this conversion is to achieve increased levelsof variable rate funding to reflect the growth of variable rate receivablelevels within the Company's credit card receivables portfolio. The Companychanged the finance charge on the Sears Card from fixed rate to variable rate inJuly 2002.

The Company's interest rate swaps have been recorded on the balance sheet atfair value, classified as $79 million within other receivables, $175 millionwithin other assets, and $12 million within other long-termliabilities.   For accounting purposes, the swaps are designatedand qualify as fair value hedges of certain of the Company's fixed rate debtinstruments. As the terms of the swaps are designed to match those of theunderlying hedged debt, the change in fair value of the swaps is largely offsetby changes in fair value recorded on the hedged debt. Consequently, the amountof hedge ineffectiveness recorded during 2002 and 2001 in connection with thesehedges was not material and is reflected as a component of interest expense.
** 

SEARS, ROEBUCK AND CO.Notes To Condensed Consolidate Financial Statements(Unaudited)
** 

NOTE 11 - SECURITIZATIONS**
In September 2000, the FASB issued SFAS No. 140, "Accounting forTransfers and Servicing of Financial Assets and Extinguishments ofLiabilities". The guidance in SFAS No. 140 superceded SFAS No. 125. UnderSFAS No. 125, the Company's securitization transactions were accounted for assales of receivables. SFAS No. 140 established new conditions for asecuritization to be accounted for as a sale of receivables. Specifically, SFASNo. 140 changed the requirements for an entity to be a qualifying specialpurpose entity and modifiedunder what conditions atransferor has retained effective control over transferred assets. The newstandard was effective for transfers occurring after June 30, 2001.
The addition of previously uncommitted assets to the securitization trust inApril 2001 required the Company to consolidate the securitization structure forfinancial reporting purposes on a prospective basis. Accordingly, the Companyrecognized approximately $8.1 billion of previously unconsolidated securitizedcredit card receivables and related securitization borrowings in the secondquarter of 2001. In addition, approximately $3.9 billion of assets werereclassified to credit card receivables from retained interest in transferredcredit card receivables. The Company now accounts for securitizations as securedborrowings.

In connection with the consolidation of the securitization structure, theCompany recognized a non-cash, pretax charge of $522 million to establish anallowance for uncollectible accounts related to the receivables which werepreviously considered as sold or accounted for as retained interests intransferred credit card receivables.

At June 29, 2002 and June 30, 2001, $17.2 and $11.9 billion, respectively, ofdomestic credit card receivables were segregated in securitization trusts. Inaddition, $932 million and $1.1 billion, respectively, of Sears Canada creditcard receivables were segregated in securitization trusts.

 

 
**INDEPENDENT ACCOUNTANTS' REPORT**
To the Board of Directors and Shareholders ofSears, Roebuck and Co.

We have reviewed the accompanying Condensed Consolidated Balance Sheets ofSears, Roebuck and Co. as of June 29, 2002 and June 30, 2001, and the CondensedConsolidated Statements of Income for the 13-week and 26-week periods ended June29, 2002 and June 30, 2001 and the Condensed Consolidated Statements of CashFlows for the 26-week periods ended June 29, 2002 and June 30, 2001. Thesecondensed consolidated financial statements are the responsibility of theCompany's management.

We conducted our reviews in accordance with standards established by theAmerican Institute of Certified Public Accountants. A review of interimfinancial information consists principally of applying analytical procedures tofinancial data and of making inquiries of persons responsible for financial andaccounting matters. It is substantially less in scope than an audit conducted inaccordance with auditing standards generally accepted in the United States ofAmerica, the objective of which is the expression of an opinion regarding thefinancial statements taken as a whole. Accordingly, we do not express such anopinion.

Based on our reviews, we are not aware of any material modifications thatshould be made to such condensed consolidated financial statements for them tobe in conformity with accounting principles generally accepted in the UnitedStates of America.

We have previously audited, in accordance with auditing standards generallyaccepted in the United States of America, the Consolidated Balance Sheet ofSears, Roebuck and Co. as of December 29, 2001, and the related ConsolidatedStatements of Income, Shareholders' Equity, and Cash Flows for the year thenended (not presented herein); and in our report dated February 8, 2002, weexpressed an unqualified opinion on those consolidated financial statements. Inour opinion, the information set forth in the accompanying CondensedConsolidated Balance Sheet as of December 29, 2001 is fairly stated, in allmaterial respects, in relation to the Consolidated Balance Sheet from which ithas been derived.

As discussed in Note 8 to the Condensed Consolidated Financial Statements, in2002 the Company changed its method used to determine the allowance foruncollectible accounts and, as required by new accounting standards, itsaccounting for goodwill and other intangibles.

 

/s/   DELOITTE & TOUCHE LLP                       
Deloitte & Touche LLP
Chicago, Illinois      August 5, 2002** 

SEARS, ROEBUCK AND CO.13 and 26 Weeks Ended June 29, 2002 and June 30, 2001**
 
*****Item 2. Management's Discussion and Analysis ofOperations, Financial Condition and Liquidity***ANALYSIS OF OPERATIONS**
Operating results for the Company are reported for three domestic segmentsand Sears Canada. The domestic segments include the Company's operations in theUnited States and Puerto Rico. The Company's segments are defined as follows:

**Retail and      Related Services**consisting of: **Credit and      Financial Products includes domestic credit      card operations and related financial product offerings (credit protection      and insurance products).

-  Full-line    Stores (includes operations of Sears Auto Centers and        online revenues of Sears.com)
-  Specialty    Stores (Dealer Stores, Hardware Stores, National Tire        and Battery, The Great Indoors, Commercial Sales and    Outlet        stores)
-  Related    Services comprised of: **Corporate and    Other include:
-  Activities    that are of an overall holding       company nature, primarily consisting of       administrative activities, the costs of which       are not allocated to the Company's       businesses
-  Sears    Home Improvement Services       (including Sears Termite and Pest Control        for the 26 weeks ended June 30, 2001)
- Sears      Repair Services (a broad range of services        including service contracts, product installation        and repair services primarily for products sold        by the Company)
- Direct to      Customer (direct marketing of goods        and services, clubs and services memberships,         merchandise through specialty catalogs and         impulse and continuity merchandise). Includes         Lands' End results as of June 17, 2002. **Sears Canada    conducts similar retail, credit, and corporate operations in Canada through    Sears Canada Inc. ("Sears Canada"), a consolidated, 54.4% owned    subsidiary of Sears
 
**Description of Noncomparable Items**
Earnings (loss) per share for the quarter ended June 29, 2002 was $1.31compared with ($0.60) for the comparable 2001 period. Net income (loss) was $420million for the second quarter of 2002 compared to ($197) million in 2001. Forthe 26 weeks ended June 29, 2002, the Company reported net income of $339million or $1.05 per share compared to a net loss of ($21) million of or($0.06) per share. Results of operations for the 13 and 26 week periods endedJune 29, 2002 and June 30, 2001 were affected by noncomparable items. The effectof noncomparable items on net income and earnings per share are summarized inthe table below.

 
 
13 Weeks Ended

 
26 Weeks Ended
*millions, except per share
 
Net Income
 
Earnings per      Share
 
Net Income
 
Earnings per      Share
 
 
June 29,
 
June 30,
 
June 29,
 
June 30,
 
June 29,
 
June 30,
 
June 29,
 
June 30,
 
 
2002

 
2001

 
2002

 
2001

 
2002

 
2001

 
2002

 
2001

Net Income excluding      noncomparable items
$
420
$
316
$
1.31
$
0.96
$
720
$
466
$
2.23
$
1.41
Cumulative effect of a change      in accounting for goodwill
--
--
--
--
(208)
--
(0.64)
--
Cumulative effect of a change      in accounting for the allowance for doubtful accounts
--
--
--
--
(191)
--
(0.59)
--
Sears Canada - Eaton's      conversion costs
--
--
--
--
(40)
--
(0.13)
--
Advance Auto Parts gain
--
--
--
--
58
--
0.18
--
Provision for previously      securitized receivables
--
(331)
--
(1.01)
--
(331)
--
(1.00)
Securitization income
--
--
--
--
--
26
--
0.08
HomeLife closure and other
--
(129)
--
(0.39)
--
(129)
--
(0.39)
Exit of cosmetics business
--

(53)

--

(0.16)

--

(53)

--

(0.16)

Net Income as reported
$
420

$
(197)

$
1.31

$
(0.60)

$
339

$
(21)

$
1.05

$
(0.06)

**SEARS, ROEBUCK AND CO.13 and 26 Weeks Ended June 29, 2002 and June 30, 2001**

 

The Company defines noncomparable items as transactions that are one-time innature, related to the implementation of special initiatives of the Company(generally special charges and impairments); unusual or infrequent in nature(e.g. significant one-time transactions, significant gains/losses ontransactions unrelated to core operations); or related to changes in accounting.Following is a description of the noncomparable items affecting the 26 weekperiods ended June 29, 2002 and June 30, 2001.
**2002 Items:**
In the first quarter of 2002, the Company recorded a non-cash charge of  $208 million, net of tax and minority interest, or $0.64 per share, due to the  adoption of a new accounting standard, SFAS No. 142, "Goodwill and Other  Intangible Assets. " This charge was reported as a cumulative effect of  an accounting change.

In the second quarter of 2002, the Company changed its methodology for  determining the allowance for uncollectible accounts. The Company's previous  policy for determining the allowance for uncollectible accounts provided an  allowance for principal and finance charge balances on past due accounts. The  Company has changed to a more preferable methodology of providing an allowance  for principal and finance charge balances on current and past due accounts, as  well as, credit card fees balances. In accordance with Accounting Principles  Board Opinion No. 20, "Accounting Changes", the cumulative effect of  this change in accounting policy of $191 million or $0.59 per share has been  recorded as of the beginning of fiscal 2002. See Note 8 of financial  statements for further discussion.

In February 2002, Sears Canada announced its intention to convert the  remaining seven Eaton's stores to the Sears Canada banner. The conversion of  the stores was completed at the end of July 2002. This decision will enable  the Company to better leverage its buying and advertising efforts, and take  more powerful advantage of the Sears brand's equity. The Company recorded a  one-time, pre-tax charge of $111 million ($40 million after-tax and minority  interest), or $0.13 per share, in the first quarter of 2002 related to the  conversions.

On March 6, 2002, as part of an Advance Auto Parts ("AAP") public  stock offering, the Company sold approximately 3.1 million of its AAP shares,  which reduced the company's ownership percentage to 24.1%. The Company  realized a pre-tax gain of $71 million ($58 million after-tax), or $0.18 per  share, from the sale. This transaction generated after-tax cash proceeds of  $110 million.
** 

2001 Items:**
During the second quarter of 2001, the Company recorded a non-cash, pretax  charge of $522 million ($331 million after-tax) to establish an allowance for  uncollectible accounts related to $12 billion of securitized credit card  receivables reinstated on the Company's balance sheet as a result of the  Company's adoption of Statement of Financial Accounting Standards  ("SFAS") No. 140 in April 2001 (see Note 11 of the Notes to  Consolidated Financial Statements). In addition, effective in the second  quarter of 2001, the Company's securitization transactions are accounted for  as secured borrowings and the Company ceased recording securitization income.  As such, securitization income reported in prior periods is noncomparable  subsequent to March 2001. After tax securitization income of $26 million, or  $0.08 per share, was recorded in first quarter 2001 net income.

During the second quarter of 2001, the Company also recorded a pretax  charge of $205 million ($129 million after-tax or $0.39 per share) to  recognize a loss on its formerly owned Homelife business and write-off a minor  investment. Homelife, which was sold to Citicorp Venture Capital, Ltd. in  early 1999, filed for bankruptcy on July 16, 2001. As a result of Homelife's  insolvency, the Company recognized certain obligations (primarily  related to property leases) which had been previously transferred to Homelife  and recorded a reserve for other matters related to Homelife for which Sears  incurred losses.

The Company recorded a pretax charge of $82 million ($53 million after-tax  or $0.16 per share) in the second quarter of 2001 in connection with its exit  of the skin care and color cosmetics business. The charge includes asset  write-downs and vendor cancellation payments.
**SEARS, ROEBUCK AND CO.  13 and 26 Weeks Ended June 29, 2002 and June 30, 2001

 

Basis of Presentation**
The Company has presented the following discussion of results of operationsby business segment. The Company reports its business segments' resultsexcluding the impacts of noncomparable items and securitization income. TheCompany believes this presentation facilitates the understanding of the resultsand trends affecting each segment's core operations. This presentation isconsistent with how the Company reports results internally to senior managementand the Board of Directors.

All references to earnings per share relate to diluted earnings per commonshare.

On June 17, 2002 the Company acquired all of the outstanding shares ofLands'' End, Inc. ("Lands' End") for approximately $1.8 billion. Theresults of Lands' End operations have been reflected in the consolidatedfinancial statements since that date. See Note 2 of financial statements forfurther discussion.

 
**Analysis of Consolidated Results**
For the 13 weeks ended June 29, 2002, net income excluding non-comparableitems was $420 million or $1.31 per share, as compared to $316 million or $0.96per share for the comparable 2001 period. For the 26 weeks ended June 29, 2002,net income excluding non-comparable items was $720 million or $2.23 per sharecompared to $466 million or $1.41 per share for the comparable 2001 period. Theincrease in earnings per share primarily reflects higher operating income in theRetail and Related Services and Credit and Financial Products segment as well asa reduction in shares outstanding due to the Company's share repurchase program.

Excluding non-comparable items the Company's consolidated effective tax ratefor the 13 and 26 weeks ended June 29, 2002 was 36.8% and 36.6%, respectively,compared to 36.4% and 36.3% in the comparable prior year period.

Due to holiday buying patterns, merchandise sales are traditionally higher inthe fourth quarter than other quarterly periods and a disproportionate share ofoperating income is typically earned in the fourth quarter. This businessseasonality results in performance for the 13 and 26 weeks ended June 29, 2002which is not necessarily indicative of performance for the balance of the year.
**Retail and Related ServicesRetail and Related Services revenues decreased0.8% to $7.7 billion and 0.7% to $14.5 billion for the 13 weeks and 26 weeksended June 29, 2002, from the comparable 2001 period. Retail and RelatedServices results and related information are as follows:

13 Weeks Ended

26 Weeks Ended

June 29,
June 30,
June 29,
June 30,*millions, except number of      stores
2002

2001

Change

2002

2001

Change

Full-line Stores revenues      (includes sears.com)
$
5,599
$
5,868
-4.6%
$
10,701
$
11,125
-3.8%
Specialty Stores revenues
1,440
1,294
11.3%
2,558
2,324
10.1%
Related Services revenues
660

598

10.4%
1,208

1,117

8.1%
Total Retail and Related      Services revenues
7,699

7,760

-0.8%
14,467

14,566

-0.7%
Cost of sales, buying and      occupancy
5,602
5,674
10,607
10,827
Selling and administrative
1,616
1,677
3,128
3,207
Depreciation and amortization
176
185
344
361
Interest expense
5

11

1

14

   Total costs      and expenses
7,399

7,547

14,080

14,409

Operating income
$
300

$
213

$
387

$
157

Number of Full-line Stores

870
861
Number of Specialty Stores

1,295

1,309

Total Retail stores

2,165

2,170

Comparable store sales      percentage (decrease)
-4.6%
       -0.9%
-3.8%
       -1.2%
For purposes of      determining comparable store sales, a store is considered to be comparable      at the beginning of the thirteenth month after the store isopened.
**SEARS, ROEBUCK AND CO.13 and 26 Weeks Ended June 29, 2002 and June 30, 2001**

For the 13 week period, Full-line Stores revenues decreased 4.6% from thesecond quarter of 2001, as comparable store sales decreased 5.8% and 9 net newstores were added.
- Hardlines comparable store sales decreased 1.0% in the second quarter of    2002. Solid sales increases in home appliances were more than offset by    declines in home office, home improvement and home electronics revenues. The    solid increase in home appliances revenue reflects increased sales in    virtually all home appliance divisions. The Company experienced particularly    strong sales of energy efficient laundry products. Home office revenue    declines can be attributed to declines in computer and computer accessories    sales, as lower margin product offerings were significantly edited during    2002. Home improvement revenues decreased primarily due to lower tools and    paint and sporting goods product sales offset by solid lawn and garden as    well as home fitness sales. Decreases in the tools and paint category were    due to a decline in sales for residential lighting and ceiling fans, a    category that was exited in 2001. The decrease in sporting goods is due to    decrease in bicycle sales, a category that was exited in 2001. The solid    increase in lawn and garden sales reflects increased sales in several    categories, especially lawn mowers and tractors. The decreased revenues in    home electronics reflects lower sales of non-digital products such as    camcorders and stereo equipment.
- Softlines comparable store sales decreased 15.1% in the second quarter of    2002. All apparel categories (men's, women's and children) experienced    double digit declines and non-apparel categories (home fashions, footwear,    fine jewelry) experienced low to mid single digit sales decreases. The    Company's exit of the skin care and color cosmetics, installed floor    covering and custom window treatments businesses also contributed to the    revenue declines in Softlines.
- Sears Auto Centers revenues declined 3.2% from the comparable prior year    period as prior year sales benefited from the recall of certain Firestone    tires.

For the 26 week period, Full-line store revenues decreased 3.8% over 2001 ashardlines decreased 1.7% and softlines decreased 12.0%.

For the 13 week period ended June 29, 2002, Specialty Stores revenuesincreased 11.3% from the comparable 2001 period, with comparable store salesincreasing 2.4%.   This increase is primarily due to revenueincreases at The Great Indoors, Dealer Stores, and Commercial Sales, partiallyoffset by declines in National Tire and Battery. Dealer Stores revenue increasesresulted from a strong comparable store sales increase of 7.8%. National Tireand Battery revenues decreased due to one net store closing along with acomparable storesales decline. Revenue from The Great Indoors benefited from the addition of12 stores since the second quarter of last year.
For the 26 week period ended June 29, 2002, Specialty store revenuesincreased 10.1% from the comparable 2001 period primarily due to revenueincreases in The Great Indoors, Commercial Sales, and Dealer Stores, which werepartially offset by a decline in Hardware Stores and National Tire and Battery.

Related services revenues increased for the 13 and 26 week period ended June29, 2002 primarily due to increases in Sears Repair Services. Sears RepairServices revenues benefited from a vendor product recall, an increase in repairparts sold and a recent initiative to provide branded product repair andmaintenance services to an appliance manufacturer. In addition, Direct toCustomer revenues for the 13 and 26 week period ended June 29, 2002 increaseddue to the inclusion of Lands' End revenue since the acquisition date.

Retail and Related Services gross margin as a percentage of Retail andRelated Services revenues for the second quarter of 2002 improved to 27.2%, anincrease of 30 basis points from the second quarter of 2001. The improvement isprimarily due to margin improvements within hardlines and Hardware and DealerStores.   The margin improvements are primarily due to benefitsfrom improved sourcing costs, editing assortments to reduce lower marginproducts, and a decrease in promotional markdown activity. For the 26 weekperiod, Retail and Related Services gross margin increased 100 basis points.

**SEARS, ROEBUCK AND CO.13 and 26 Weeks Ended June 29, 2002 and June 30, 2001**

 

Retail and Related Services selling and administrative expense as apercentage of Retail and Related Services revenues for the second quarter of2002 decreased 60 basis points from the second quarter of 2001. The decrease wasprimarily due to expense improvements generated from productivity initiativesoffset by lower revenues and increased investments in The Great Indoors. For the26 week period, Retail and Related Services selling and administrative expenseas a percent of revenue decreased 40 basis points.

For the 13 and 26 week periods, operating income improved by $87 million and$230 million, respectively, as lower revenues and investments in The GreatIndoors were more than offset by margin improvements and cost savings from theCompany's productivity initiatives. The inclusion of Lands' End results sincethe acquisition date was not material to the quarter or the year-to-date.
** 

Credit and Financial Products****Credit and Financial Products results and relatedinformation are as follows:

13 Weeks Ended

26 Weeks Ended

June 29,
June 30,
June 29,
June 30,*millions
2002

2001

2002

2001

Credit and financial products      revenues
$
1,321

$
1,276

$
2,639

$
2,576

Selling and administrative
264
212
492
406
Provision for uncollectible      accounts
393
350
764
684
Depreciation and amortization
5
4
10
9
Interest
247

365

518

767

    Total      costs and expenses
909

931

1,784

1,866

Operating income
$
412

$
345

$
855

$
710

Credit and Financial Products revenues increased 3.5% to $1.3billion and 2.4% to $2.6 billion, respectively, for the 13 and 26 weeks endedJune 29, 2002 from the comparable prior year period. The increase in revenues inthe second quarter was primarily attributable to higher average receivablebalances as well as an increase in interchange fees generated from the SearsGold MasterCard. The Sears Gold MasterCard portfolio has continued to grow withbalances over $8.5 billion at June 29, 2002.

A summary of Credit information (for the managed portfolio) is as follows:

13 Weeks Ended

26 Weeks Ended

June 29,
June 30,
June 29,
June 30,*millions,      except for average account balance
2002

2001

2002

2001

Sears credit card sales as a %      of sales
44.8%
47.0%
44.3%
47.0%
Average account balance (as of      June 29, 2002 and June 30, 2001) (*dollars)*

$
1,274
$
1,174
 
Sears Card average managed      credit card receivables
$
20,125
 
$
23,962
 
$
20,904
 
$
24,525
 
Sears Gold MasterCard average      managed credit card receivables
 
7,488

 
 
1,869

 
 
6,608

 
 
1,616

   Total average      managed credit card receivables
$
27,613

$
25,831

$
27,512

$
26,141

 
Sears Card ending credit card      receivables
 
 
 
 
 
 
$
19,718
 
$
23,633
 
Sears Gold MasterCard ending      credit card receivables
 
 
 
 
 
 
 
8,528

 
 
2,333

   Total ending credit card receivables
$
28,246

$
25,966

Credit and Financial Products selling and administrative expense as apercentage of Credit and Financial Products revenues increased to 20.0%, anincrease of 340 basis points in the second quarter of 2002 from the comparable2001 period. The increase was primarily due to higher account services expenses,increased marketing and in-store credit card promotions and increased fraudlosses, experienced due to the conversion of accounts to the MasterCard product.

 

**SEARS, ROEBUCK AND CO.13 and 26 Weeks Ended June 29, 2002 and June 30, 2001**

 

The activity in the domestic allowance for uncollectible owned accounts andrelated information is as follows:

 
 
13 Weeks Ended

 
26 Weeks Ended

 
 
June 29,
 
June 30,
 
June 29,
 
June 30,*millions
 
2002

 
2001

 
2002

 
2001

Balance, beginning of period
$
1,415
$
567
$
1,115
$
649
Provision for uncollectible      accounts
393
350
764
684
   Less:      securitization adjustment
--

--

--

(153)

 
Net domestic provision for      uncollectible accounts
 
 
393
 
 
350
 
 
764
 
 
531
Cumulative effect of a change      in accounting for allowance for uncollectible accounts
--
--
300
--
Provision for previously      securitized receivables
--
522
--
522
Net charge-offs
(367)
(350)
(738)
(530)
 
Transfer to Securitization      Master Trust
 
 
--

 
 
--

 
 
--

 
 
(83)

 
Balance, end of period
 
$
1,441

 
$
1,089

 
$
1,441

 
$
1,089

Net credit charge-offs to      average managed credit card receivables
5.32%
5.42%
5.37%
5.23%
Allowance as percent of ending      owned credit card receivables

5.10%
4.19%
 
Delinquency rate at period-end (1)
 
 
 
 
 

 
 
6.87%
 
 
7.26%
 

 
 
 
(1)
The aging methodology is based on the number of completed billing      cycles during which a customer has failed to make a required payment.      Accounts are considered delinquent when a customer has failed to make a      payment in each of the last three or more billing cycles.
The domestic provision for uncollectible accounts increasedby $43 million to $393 million for the 13 weeks ended June 29, 2002 from thecomparable prior year period. Charge-offs increased by $17 million despite adecline in the net charge-off rate to 5.32% in 2002 from 5.42% in 2001 and adecline in customer bankruptcy filings. The increase in the provision andcharge-offs is primarily due to the increase in the receivables portfolio. Thedelinquency rate for 2002 decreased 39 basis points compared with 2001. At June29, 2002, the period-end allowance as a percent of receivables was 5.10%, or$1.4 billion. For the 26 weeks ended June 29, 2002, the domestic provision foruncollectible accounts increased 4.4% to $764 million from the comparable prioryear period due primarily to the securitization adjustment in 2001.

Domestic interest expense is discussed within the Credit and FinancialProducts segment since the majority of the Company's interest expense isallocated to this segment. Domestic interest expense is combined with thefunding costs on receivables sold through securitizations to represent totalfunding costs as follows:

13 Weeks Ended

26 Weeks Ended

June 29,

June 30,

June 29,

June 30,

2002

2001

2002

2001

Domestic interest expense
$
252
$
376
$
519
$
658
Funding cost on securitized      receivables(1)
--

--

--

123

Total domestic funding costs
$
252

$
376

$
519

$
781

(1) Beginning      in the second quarter of 2001, funding costs on securitized receivables      are included in the domestic segment interest expense.
Total domestic funding costs decreased by $124 million primarily due to theCompany's increased use of variable rate financing coupled with the lowerinterest rate environment. The shift to more variable rate funding is inresponse to the growth of variable rate receivables within the credit cardportfolio (primarily the Sears Gold MasterCard product) and the Company'sconversion of Sears Card finance charges from fixed rate to variable rate inJuly 2002. The increase in variable rate funding was achieved primarily by usinginterest rate swaps to synthetically convert fixed rate debt to variable rateand by issuance of variable rate debt.

For the 13 and 26 week period ended June 29, 2002, operating income fromCredit and Financial Products increased by $67 million and $145 million,respectively, as favorable funding costs and higher revenues were partiallyoffset by higher provision and selling and administration expenses.

**SEARS, ROEBUCK AND CO.13 and 26 Weeks Ended June 29, 2002 and June 30, 2001**

 
**Corporate and Other**
Revenues from the home improvement services businessesincluded in the Corporate and Other segment decreased by approximately 17.9% to$92 million and 23.5% to $150 million, respectively, for the 13 and 26 weeksended June 29, 2002 from the comparable prior year periods. The decrease is dueto the disposition of Sears Termite and Pest Control, Inc. on October 1, 2001.

The segment's operating loss is approximately flat with the prior year forboth the quarter and 26 week periods as incremental expenses incurred toimplement the Company's strategic initiatives were offset by productivityimprovements.
** 

Sears Canada**
Sears Canada revenues for the second quarter of 2002 decreased 0.5% from thesame period a year ago. This reflects a 1.0 percent decline in the value of theCanadian dollar relative to the U.S. dollar as well as a 1.6% decrease incomparable store sales. For the 26 week period, revenues decreased 2.7%.

Sears Canada gross margin as a percentage of Sears Canada merchandise salesand services revenues increased 140 basis points in the second quarter of 2002from the comparable prior year quarter. This favorability is primarily due toimproved inventory levels which resulted in less clearance activity. For the 26week period, Sears Canada margin increased 160 basis points.

Sears Canada selling and administrative expense as a percentage of totalSears Canada revenues increased 20 basis points in the second quarter of 2002from the second quarter of 2001. SG&A as a percent of revenues increaseddespite operating expense reductions in several areas, such as payroll andbenefits, because of higher performance based incentive expense and costsincurred to consolidate call centers. For the 26 week period, Sears Canadaselling and administrative rate decreased 20 basis points.

Operating income improved by $12 million and $28 million, respectively, forthe 13 and 26 week period ended June 29, 2002 due to margin rate improvementspartially offset by slightly higher expenses and decreased revenues.
** 

ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION**
The Company has significant financial capacity and flexibility due to itsaccess to the capital markets and the quality and liquidity of its assets,principally its credit card receivables. As such, the Company accesses a varietyof capital markets to preserve flexibility and diversify its funding sources.The broad access to capital markets also allows the Company to effectivelymanage liquidity and interest rate risk. Liquidity risk is the measure of theCompany's ability to fund maturities and provide for the operating needs of itsbusinesses. Interest rate risk is the effect on net income from changes ininterest rates. The Company's cost of funds is affected by a variety of generaleconomic conditions, including the level and volatility of interest rates. TheCompany's policy is to manage interest rate risk through the strategic use offixed and variable rate debt and interest rate derivatives.

 

**LIQUIDITY**
The Company's principal sources of liquidity are operating cash flows andvarious sources of capital market borrowings. Capital market borrowings are usedprimarily to support the Company's Credit business. Ongoing access to thecapital markets is critical to the Credit business.

**SEARS, ROEBUCK AND CO.13 and 26 Weeks Ended June 29, 2002 and June 30, 2001**

Operating cash flows from the Company's retail businesses are impacted by thecompetitive conditions in the retail industry, the effects of the currenteconomic climate and consumer confidence. Operating cash flows from theCompany's Credit business are directly impacted by changes in interest rates,delinquency and charge-off trends in the credit card receivables portfolio andcustomer acceptance of the Company's credit product offerings. Based on thenature of the Company's businesses, management considers the above factors to benormal business risks.

The Company has not identified any reasonably possible circumstances thatwould likely impair the Company's ability to maintain its planned level ofoperations, capital expenditures and dividends in the foreseeable future or thatwould trigger any early payment or acceleration provisions in the debtportfolio.

 
**SIGNIFICANT ASSETS**
A summary of the Company's credit card receivables at June 29, 2002 and June30, 2001, respectively, are as follows:

 
 
June 29,
 
June 30,
 
December 29,*millions
 
2002

 
2001

 
2001

Domestic:
 
 
 
 
 
 
 
 
 
Managed credit      card receivables
 
$
28,246
 
$
25,966
 
$
27,599
Other customer      receivables
 
 
32

 
 
61

 
 
40

Domestic owned      credit card receivables
 
 
28,278
 
 
26,027
 
 
27,639
Sears Canada      credit card receivables
 
 
1,534

 
 
1,588

 
 
1,682

Consolidated      owned credit card receivables
$
29,812

$
27,615

$
29,321

Domestic managed credit card receivables increased $2.3 billion and $0.6billion from the second quarter of 2001 and 2001 year-end, respectively, asgrowth from the Sears Gold MasterCard product was partially offset by lowerSears Card receivables. The Sears Gold MasterCard product, which was launched inthe second quarter of 2000, had approximately $8.5 billion in outstandingbalances at June 29, 2002 compared with $2.3 billion at June 30, 2001.

As of June 29, 2002, consolidated merchandise inventories on the first-in,first-out (FIFO) basis were $6.0 billion, compared with $6.2 billion at June 30,2001, and $5.5 billion at December 29, 2001. The decrease as compared with lastyear's second quarter primarily reflects lower domestic hardlines and softlinesinventories,partially offset by the acquired Lands' End inventory. Sears Canadainventory decreased due to continued focus on managing inventory levels as wellas the improved seasonal content of the inventory.
 
**CAPITAL RESOURCES**
Total borrowings outstanding at June 29, 2002 and June 30, 2001 were $28.7billion and $25.4 billion, respectively. The increase compared with last year'ssecond quarter is due to additional debt issuances to fund the Lands' Endacquisition and credit card receivable growth. Total borrowings are as follows:

 
 
June 29,
 
% of
 
 
June 30,
 
% of
 
December 29,
 
% of*millions
    2002

 
Total

 
    2001

 
Total

 
    2001

 
Total

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Short-term      borrowings
$
3,981
 
13.9%
 
$
3,326
 
13.1%
 
$
3,557
 
13.9%
   Long-term      debt (1)
 
24,673

 
86.1%

 
 
22,113

 
86.9%

 
 
22,078

 
86.1%

   Total      borrowings
$
28,654

100.0%

$
25,439

100.0%

$
25,635

100.0%

       (1)      Includes capitalized lease obligations and current portion of long-term      debt.
**SEARS, ROEBUCK AND CO.13 and 26 Weeks Ended June 29, 2002 and June 30, 2001**

 

The Company's short-term borrowings consist primarily of unsecured commercialpaper. The Company continues to provide support for 100% of its outstandingcommercial paper through its investment portfolio and committed creditfacilities with various banks. At June 2002, the Company had $4.8 billion incommitted credit facilities of which $4.4 billion (for Sears U.S. operations) expires in April 2003 and $0.4 billion (for Sears Canada) expires inMay 2003.

Additionally, in the first quarter of 2002, the Company contractuallyestablished access to $1.5 billion via a syndicate of multi-seller, asset-backedcommercial paper conduit programs sponsored by various banks. These purchasecommitments have an original expiration date of March 2003, but are renewable atthe mutual consent of the parties.

 

 
**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION**
Certain statements made in this Quarterly Report on Form 10-Q are"forward-looking statements" that involve risks and uncertainties thatcould cause actual results to differ materially. Such statements are based onassumptions about many important factors, including competitive conditions inthe retail industry; changes in consumer confidence and spending in the UnitedStates and Canada; interest rates; bankruptcy filings, delinquency andcharge-off trends in the credit card receivables portfolio; continued consumeracceptance of the Sears Gold MasterCard program; the successful execution of andcustomer reaction to the Company's strategic initiatives; Sears ability tointegrate and operate Lands' End successfully; anticipated cash flow; generalUnited States and Canada economic conditions and normal business uncertainty. Inaddition, the Company typically earns a disproportionate share of its operatingincome in the fourth quarter due to seasonal buying patterns, which aredifficult to forecast with certainty. While the Company believes that itsassumptions are reasonable, it cautions that it is impossible to predict theimpact of such factors which could cause actual results to differ materiallyfrom predicted results. The Company intends these forward-looking statements tospeak only at the time of this report and does not undertake to update or revisethese projections as more information becomes available.
**SEARS, ROEBUCK AND CO.***Item 3. Quantitative and Qualitative Disclosures About Market Risk*
The nature of market risks faced by the Company at June 29, 2002 aredisclosed in the Company's Form 10-K for the year ended December 29, 2001. As ofJune 29, 2002, 83% of the Company's funding portfolio was variable rate(including current maturities of fixed-rate long-term debt that will reprice inthe next 12 months and fixed-rate debt synthetically converted to variable ratethrough the use of derivative financial instruments). Based on the size of theCompany's variable rate funding portfolio as of June 29, 2002, which totaled$23.8 billion, a 100 basis point change in interest rates would affect pretaxfunding cost by approximately $238 million per annum. This estimate assumes thatthe funding portfolio remains constant for an annual period and the interestrate change occurs at the beginning of the period. This estimate also does nottake into account the effect on net interest margin of changes in revenueresulting from either changes in terms of the assets or in the index applicableto the variable rate receivables.

The Company's level of variable rate funding is in response to the growth ofvariable rate receivables within the Company's credit card portfolio (primarilythe Sears Gold MasterCard product) and the Company's conversion of Sears Card finance charges from fixed rateto variable rate in July 2002. The objective of variable rate funding is toreduce net interest margin risk by better aligning the Company's funding withits credit card assets. However, the Company is exposed to basis risk on anydifferences in the variable rate on the Company's debt, primarily LIBOR-based,and the prime-based variable rate finance charge on the Company's credit cardportfolio. Additionally, the Company's ability to increase the finance chargeyield of its variable rate credit card assets may be limited at some point bycompetitive conditions.
** 

 

SEARS, ROEBUCK AND CO.**
 

PART II. OTHER INFORMATION
*Item 1. Legal Proceedings*
There have been no material developments in any materiallegal proceedings since the Company's disclosure in its Annual Report on Form10-K for the fiscal year ended December 29, 2001.

**SEARS, ROEBUCK AND CO.**

 
*Item 4. Submission of Matters to a Vote of Security-Holders*
On May 9, 2002, the Company held its annual meeting of shareholders at the  Merchandise Review Center in Hoffman Estates, Illinois.

Brenda C. Barnes, Michael A. Miles, Dorothy A. Terrell and Raul H.  Yzaguirre, were elected to Class B of the Board of Directors for three year  terms expiring at the 2005 annual meeting of shareholders. The shareholders  approved the recommendation of the Audit Committee that Deloitte & Touche  LLP be appointed auditors for 2002. The shareholders also approved the 2002  Non-Employee Director Stock Plan. A shareholder proposal regarding vendor  standards did not receive a majority of the votes cast and was defeated.  Shareholder proposals regarding declassification of the Board and poison pills  were approved by a majority of votes cast. The votes on these matters were as  follows:
- Election of Directors

Name

 
For

 
Withheld

Brenda C. Barnes
 
272,558,643
 
5,131,926
Michael A. Miles
 
265,724,486
 
11,966,383
Dorothy A. Terrell
 
270,966,523
 
6,724,046
Raul H. Yzaguirre
 
270,445,605
 
7,245,064
 
Appointment of Deloitte & Touche LLP as auditors for 2002.

For

 
Against

 
Abstain

263,510,394
 
12,297,687
 
1,874,690
 
Approval of the 2002 Non-Employee Director Stock Plan.

For

 

Against

 

Abstain

245,864,662
 

27,810,516
 

4,013,870
Shareholder proposal regarding vendor standards.

For

 
Against

 
Abstain

 
Broker Non-Votes

21,718,978
 
210,480,712
 
13,998,493
 
31,492,686
 
Shareholder proposal regarding declassification of the Board.

For

 
Against

 
Abstain

 
Broker        Non-Votes

166,211,590
 
75,638,529
 
4,341,366
 
31,499,384
 
Shareholder proposal regarding poison pill.

For

 
Against

 
Abstain

 
Broker Non-Votes

168,854,628
 
72,228,940
 
5,107,122
 
31,500,179
 

**SEARS, ROEBUCK AND CO.**

 
*Item 6. Exhibits and Reports on Form 8-K.*
(a) Exhibits.

An Exhibit Index has been filed as part of this Report on Page E-1.

 

(b) Reports on Form 8-K.

The Registrant filed a Current Report on Form 8-K dated April 10, 2002 toreport, under Item 5, that the Registrant issued a press release (attached asExhibit 99 thereto).

The Registrant filed a Current Report on Form 8-K dated April 18, 2002 toreport, under Item 5, that the Registrant issued a press release (attached asExhibit 99 thereto).

The Registrant filed a Current Report on Form 8-K dated May 17, 2002 toreport, under Item 5, that the Registrant entered into an Acquisition Agreementand Agreement and Plan of Merger by and among the Registrant, Inlet AcquisitionCorp., and Lands'' End, Inc.

 

 
**SEARS, ROEBUCK AND CO.

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
SEARS, ROEBUCK AND CO.      (Registrant)
 

August 9, 2002
By
/s/ Thomas E.      Bergmann                      Thomas E. Bergmann      Vice President and Controller      (Principal Accounting Officer and duly authorized officer of Registrant)
 

**SEARS, ROEBUCK AND CO.****E-1EXHIBIT INDEX**

Exhibit No.
 
3(a).
Restated Certificate of Incorporation as in effect on May 13, 1996      (incorporated by reference to Exhibit 3(a) to Registrant's Statement No.      333-8141).
3(b).
By-laws, as amended to February 14, 2001 (incorporated by reference to      Exhibit 3.(ii) to Registrant's Annual Report on Form 10-K for the fiscal      year ended December 30, 2000).
4.
Registrant hereby agrees to furnish the Commission, upon request, with      the instruments defining the rights of holders of each issue of long-term      debt of the Registrant and its consolidated subsidiaries.
10(a).
Acquisition Agreement and Agreement and Plan of Merger, dated as of May      12, 2002, by and among the Registrant, Inlet Acquisition Corp. and Lands''      End, Inc. (incorporated by reference to Exhibit (d)(1) to the Schedule TO      filed by the Registrant on May 17, 2002).
10(b).
Amended and Restated Agreement, dated as of May 12, 2002, between      Lands' End, Inc. and David F. Dyer (incorporated by reference to Exhibit      (e)(4) to Schedule 14D-9 filed by Lands'' End, Inc. on May 17, 2002).
10(c).
Letter Agreement, dated May 13, 2002, by and between the Registrant and      David F. Dyer (incorporated by reference to Exhibit (d)(4) to the Schedule      TO filed by the Registrant on May 17, 2002).
*12.
Computation of ratio of income to fixed charges for Sears and      consolidated subsidiaries for each of the five years ended December 30,      2001 and for the six-month period ended June 30, 2002.
*15.
Acknowledgement of awareness from Deloitte & Touche LLP, dated      August 5, 2002, concerning unaudited interim financial information.
*99(a)
Certification of Chief Executive Officer Pursuant to Section 906 of the      Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
*99(b)
Certification of Chief Financial Officer Pursuant to Section 906 of the      Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
 
 

*Filed herewith*******************************************************************************