##### Table of Contents



United StatesSecurities And Exchange Commission Washington, D.C. 20549
 FORM 10-Q/A (Amendment No. 2)
 x
    
    Quarterly Report Pursuant To Section 13 Or 15(D) Of TheSecurities Exchange Act Of 1934 For TheQuarterly Period Ended October 2, 2004Or
 o
    
    Transition Report Pursuant To Section 13 Or 15(D) Of TheSecurities Exchange Act Of 1934
 Commission file number 1-416 SEARS, ROEBUCK AND CO.  New York
    
    36-1750680(State of Incorporation)
    
    (I.R.S. Employer Identification No.)3333 Beverly Road, Hoffman Estates, Illinois
    
    60179(Address of principal executive offices)
    
    (Zip Code)
 Registrants Telephone Number, Including Area Code: (847) 286-2500 Indicate by check mark whether the 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 o
 Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x
    
    No o
 As of October 30, 2004, the Registrant had 206,814,704 common shares, $.75 par value, outstanding.




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SEARS, ROEBUCK AND CO.  Explanatory Note This Form 10-Q/A is being filed to correct an error in the consolidated statements of cash flows
related to the classification of cash flows generated in connection with the Companys domestic
credit card portfolio which was divested in November 2003. The domestic credit card receivable
portfolio consisted primarily of the proprietary Sears Card and Sears Gold MasterCard
(MasterCard). Historically, the Company presented the aggregate cash flows generated from both
the Sears Card and MasterCard as cash flows from operating activities
in the condensed consolidated
statements of cash flows. The Company has changed its classification
of cash flows from the MasterCard portfolio
from operating to investing activities within the condensed consolidated statements of cash flows, as the
loans generated were predominately related to activities external to Sears merchandise and
services. As such, the Company has restated its condensed consolidated statement of cash flows for the
39-weeks ended September 27, 2003. See Note 14 to the condensed consolidated financial statements.
The change does not affect the results of operations, net income, financial condition,
or net changes in cash and cash equivalents for any of the periods presented. In addition, the
Company has revised its discussion within the Analysis of Financial Condition included in Item 2,
Managements Discussion and Analysis of Financial Condition and Results of Operations. On December 1, 2004, the Company filed Amendment No. 1 to its Quarterly Report on Form 10-Q for the
quarter ended October 2, 2004, to correct a computational error in the pro forma disclosure of
stock-based compensation contained in Note 10 of the Notes to the Condensed Consolidated Financial
Statements. For ease of reference, this Form 10-Q/A restates the Form 10-Q for the fiscal quarter ended October
2, 2004 in its entirety, except for the exhibits. The exhibits required to be filed with this Form
10-Q/A are included herewith. In order to preserve the nature and character of the disclosures set
forth in such items as originally filed, no attempt has been made in this amendment to modify or
update the disclosures in the original Quarterly Report on Form 10-Q except to give effect to the
restatements discussed in Note 10 and Note 14 and the discussion within the Analysis of
Consolidated Financial Condition section included in Item 2, Managements Discussion and Analysis
of Financial Condition and Results of Operations. As a result, this Quarterly Report on Form
10-Q/A contains forward-looking information which has not been updated for events subsequent to the
date of the original filing, and the Company directs you to its SEC filings made subsequent to the
original filing date for additional information.




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SEARS, ROEBUCK AND CO.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 weeks and 39 Weeks Ended October 2, 2004  PagePART I  FINANCIAL INFORMATIONItem 1.
    Financial StatementsCondensed Consolidated Statements of Operations (Unaudited)13 and 39 Weeks Ended October 2, 2004 and September 27, 2003
    
    
    1Condensed Consolidated Balance Sheets October 2, 2004 (Unaudited),September 27, 2003 (Unaudited) and January 3, 2004
    
    
    2Condensed Consolidated Statements of Cash Flows (Unaudited)39 Weeks Ended October 2, 2004 and September 27, 2003
    
    
    3Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    4Report of Independent Registered Public Accounting Firm
    
    
    18Item 2.
    Management's Discussion and Analysis of Financial Condition
    
    
    19and Results of OperationsItem 3.
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4.
    Controls and Procedures
    
    
    31PART II  OTHER INFORMATIONItem 1.
    Legal Proceedings
    
    
    32Item 2.
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    33Item 5.
    Other Information
    
    
    33Item 6.
    Exhibits
    
    
    33Acknowledgement of Awareness from Deloitte & Touche LLP302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of CEO and CFO




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SEARS, ROEBUCK AND CO.
Condensed Consolidated Statements of Operations
(Unaudited) 
 PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements millions, except per common share data
    
    13 Weeks Ended
    
    39 Weeks EndedOctober 2,
    
    
    September 27,
    
    
    October 2,
    
    
    September 27,2004
    
    2003
    
    2004
    
    2003Merchandise sales and services
    
    $
    8,210
    
    
    $
    8,409
    
    
    $
    24,613
    
    
    $
    24,734Credit and financial products revenues
    
    
    85
    
    
    
    1,385
    
    
    
    257
    
    
    
    4,136Total revenues
    
    
    8,295
    
    
    
    9,794
    
    
    
    24,870
    
    
    
    28,870COSTS AND EXPENSESCost of sales, buying and occupancy
    
    
    6,062
    
    
    
    6,137
    
    
    
    17,965
    
    
    
    18,013Selling and administrative
    
    
    2,009
    
    
    
    2,229
    
    
    
    5,967
    
    
    
    6,638Provision for uncollectible accounts
    
    
    16
    
    
    
    567
    
    
    
    43
    
    
    
    1,511Depreciation and amortization
    
    
    227
    
    
    
    226
    
    
    
    717
    
    
    
    681Interest, net
    
    
    66
    
    
    
    281
    
    
    
    210
    
    
    
    847Special charges and impairments
    
    
    --
    
    
    
    112
    
    
    
    41
    
    
    
    140Total costs and expenses
    
    
    8,380
    
    
    
    9,552
    
    
    
    24,943
    
    
    
    27,830Operating (loss)/income
    
    
    (85
    )
    
    
    242
    
    
    
    (73
    )
    
    
    1,040Other income, net
    
    
    6
    
    
    
    2
    
    
    
    58
    
    
    
    16(Loss)/income before income taxes, minority interest and cumulative
effect of change in accounting principle
    
    
    (79
    )
    
    
    244
    
    
    
    (15
    )
    
    
    1,056Income tax benefit/(expense)
    
    
    25
    
    
    
    (91
    )
    
    
    2
    
    
    
    (392
    )Minority interest
    
    
    (7
    )
    
    
    (6
    )
    
    
    (15
    )
    
    
    (16
    )(Loss)/income before cumulative effect of change in accounting
principle
    
    
    (61
    )
    
    
    147
    
    
    
    (28
    )
    
    
    648Cumulative effect of change in accounting principle
    
    
    --
    
    
    
    --
    
    
    
    (839
    )
    
    
    --NET (LOSS)/INCOME
    
    $
    (61
    )
    
    $
    147
    
    
    $
    (867
    )
    
    $
    648(LOSS)/EARNINGS PER COMMON SHAREBASIC(Loss)/earnings per share before cumulative effect of change in
accounting principle
    
    $
    (0.29
    )
    
    $
    0.53
    
    
    $
    (0.13
    )
    
    $
    2.18Cumulative effect of change in accounting principle
    
    
    --
    
    
    
    --
    
    
    
    (3.90
    )
    
    
    --(Loss)/earnings per share
    
    $
    (0.29
    )
    
    $
    0.53
    
    
    $
    (4.03
    )
    
    $
    2.18DILUTED(Loss)/earnings per share before cumulative effect of change in
accounting principle
    
    $
    (0.29
    )
    
    $
    0.52
    
    
    $
    (0.13
    )
    
    $
    2.17Cumulative effect of change in accounting principle
    
    
    --
    
    
    
    --
    
    
    
    (3.90
    )
    
    
    --(Loss)/earnings per share
    
    $
    (0.29
    )
    
    $
    0.52
    
    
    $
    (4.03
    )
    
    $
    2.17Cash dividends declared per common share
    
    $
    0.23
    
    
    $
    0.23
    
    
    $
    0.69
    
    
    $
    0.69Average common equivalent shares outstanding
    
    
    210.7
    
    
    
    281.0
    
    
    
    215.0
    
    
    
    298.7
 See accompanying notes. 1




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SEARS, ROEBUCK AND CO.
Condensed Consolidated Balance Sheets (Unaudited)millions
    
    October 2,
    
    
    September 27,
    
    
    January 3,2004
    
    2003
    
    2004ASSETSCurrent assetsCash and cash equivalents
    
    $
    2,734
    
    
    $
    1,546
    
    
    $
    9,057Credit card receivables (net of allowance for uncollectible accounts of
$33, $54, and $42, respectively)
    
    
    1,896
    
    
    
    1,920
    
    
    
    1,956Other receivables
    
    
    567
    
    
    
    600
    
    
    
    733Merchandise inventories, net
    
    
    6,400
    
    
    
    6,243
    
    
    
    5,335Prepaid expenses, deferred charges and other current assets
    
    
    645
    
    
    
    517
    
    
    
    407Deferred income taxes
    
    
    674
    
    
    
    818
    
    
    
    708Assets held for sale
    
    
    --
    
    
    
    27,818
    
    
    
    --Total current assets
    
    
    12,916
    
    
    
    39,462
    
    
    
    18,196Property and equipment, net
    
    
    6,632
    
    
    
    6,660
    
    
    
    6,788Deferred income taxes
    
    
    295
    
    
    
    443
    
    
    
    378Goodwill
    
    
    956
    
    
    
    945
    
    
    
    943Tradenames and other intangible assets
    
    
    709
    
    
    
    710
    
    
    
    710Other assets
    
    
    1,144
    
    
    
    870
    
    
    
    708TOTAL ASSETS
    
    $
    22,652
    
    
    $
    49,090
    
    
    $
    27,723LIABILITIESCurrent liabilitiesShort-term borrowings, primarily 90 days or less
    
    $
    823
    
    
    $
    6,179
    
    
    $
    1,033Current portion of long-term debt and capitalized lease
obligations
    
    
    786
    
    
    
    2,595
    
    
    
    2,950Merchandise payables
    
    
    3,123
    
    
    
    3,305
    
    
    
    3,106Income taxes payable
    
    
    558
    
    
    
    607
    
    
    
    1,867Other liabilities
    
    
    3,075
    
    
    
    3,146
    
    
    
    2,950Unearned revenues
    
    
    1,262
    
    
    
    1,245
    
    
    
    1,244Other taxes
    
    
    487
    
    
    
    472
    
    
    
    609Liabilities held for sale
    
    
    --
    
    
    
    10,602
    
    
    
    --Total current liabilities
    
    
    10,114
    
    
    
    28,151
    
    
    
    13,759Long-term debt and capitalized lease obligations
    
    
    4,070
    
    
    
    12,121
    
    
    
    4,218Pension and postretirement benefits
    
    
    1,619
    
    
    
    2,010
    
    
    
    1,956Minority interest and other liabilities
    
    
    1,431
    
    
    
    1,319
    
    
    
    1,389Total Liabilities
    
    
    17,234
    
    
    
    43,601
    
    
    
    21,322COMMITMENTS AND CONTINGENT LIABILITIESSHAREHOLDERS EQUITYCommon shares
    
    
    323
    
    
    
    323
    
    
    
    323Capital in excess of par value
    
    
    3,502
    
    
    
    3,503
    
    
    
    3,519Retained earnings
    
    
    10,623
    
    
    
    8,945
    
    
    
    11,636Treasury stock  at cost
    
    
    (8,942
    )
    
    
    (6,306
    )
    
    
    (7,945
    )Deferred ESOP expense
    
    
    (6
    )
    
    
    (27
    )
    
    
    (26
    )Accumulated other comprehensive loss
    
    
    (82
    )
    
    
    (949
    )
    
    
    (1,106
    )Total Shareholders Equity
    
    
    5,418
    
    
    
    5,489
    
    
    
    6,401TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    22,652
    
    
    $
    49,090
    
    
    $
    27,723Total common shares outstanding
    
    
    207.6
    
    
    
    263.3
    
    
    
    230.4
 See accompanying notes. 2




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SEARS, ROEBUCK AND CO.
Condensed Consolidated Statements of Cash Flows
(Unaudited) 39 Weeks Endedmillions
    
    
    
    
    September 27,2003October 2,2004
    
    (As restated - See Note 14)CASH FLOWS FROM OPERATING ACTIVITIESNet (loss)/income
    
    $
    (867
    )
    
    $
    648Adjustments to reconcile net (loss)/income to net cash (used in) provided
by operating activitiesDepreciation and amortization
    
    
    717
    
    
    
    681Cumulative effect of change in accounting principle
    
    
    839
    
    
    
    --Provision for uncollectible accounts
    
    
    43
    
    
    
    1,511Gain on sales of property and investments
    
    
    (37
    )
    
    
    (4
    )Income tax benefit on nonqualified stock options
    
    
    5
    
    
    
    5Change in:Deferred income taxes
    
    
    (454
    )
    
    
    254Sears Credit card receivables
    
    
    65
    
    
    
    1,794Merchandise inventories
    
    
    (1,031
    )
    
    
    (1,088
    )Other operating assets
    
    
    208
    
    
    
    (52
    )Other operating liabilities(1)
    
    
    (1,292
    )
    
    
    (793
    )Net cash (used in) provided by operating activities
    
    
    (1,804
    )
    
    
    2,956CASH FLOWS FROM INVESTING ACTIVITIESAcquisitions of businesses, net of cash acquired
    
    
    (17
    )
    
    
    --Acquisition of leasehold interest
    
    
    (172
    )
    
    
    --Change in Sears MasterCard credit card receivables
    
    
    --
    
    
    
    (1,267
    )Purchases of property and equipment
    
    
    (570
    )
    
    
    (567
    )Proceeds from sales of property and investments
    
    
    1,246
    
    
    
    24Purchases of investments
    
    
    (1,303
    )
    
    
    (25
    )Net cash used in investing activities
    
    
    (816
    )
    
    
    (1,835
    )CASH FLOWS FROM FINANCING ACTIVITIESProceeds from long-term debt
    
    
    297
    
    
    
    2,932Repayments of long-term debt
    
    
    (2,617
    )
    
    
    (4,073
    )(Decrease)/increase in short term borrowings, primarily 90 days or less
    
    
    (219
    )
    
    
    1,633Repayments from ESOP notes receivable
    
    
    --
    
    
    
    2Common shares repurchased
    
    
    (1,077
    )
    
    
    (1,911
    )Common shares issued for employee stock plans
    
    
    58
    
    
    
    72Dividends paid to shareholders
    
    
    (147
    )
    
    
    (210
    )Net cash used in financing activities
    
    
    (3,705
    )
    
    
    (1,555
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    2
    
    
    
    18NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (6,323
    )
    
    
    (416
    )BALANCE AT BEGINNING OF YEAR
    
    
    9,057
    
    
    
    1,962BALANCE AT END OF PERIOD
    
    $
    2,734
    
    
    $
    1,546
 (1)
    
    For the 39 weeks ended October 2, 2004 and September 27, 2003, the Company paid income taxes of $1.3 billion and $0.4 billion, respectively.
  See accompanying notes. 3




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) NOTE 1  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Condensed Consolidated Balance Sheets as of October 2, 2004 and September
27, 2003, the related Condensed Consolidated Statements of Operations for the
13 and 39 weeks ended October 2, 2004 and September 27, 2003, and the Condensed
Consolidated Statements of Cash Flows for the 39 weeks ended October 2, 2004
and September 27, 2003, are unaudited. The interim financial statements
reflect all adjustments (consisting only of normal recurring accruals) which
are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented. The condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Sears, Roebuck and Co.
(Sears, and together with its consolidated subsidiaries, the Company) 2003
Annual Report on Form 10-K. The results of operations for the interim periods
should not be considered indicative of results to be expected for the full
year. The Company typically earns a disproportionate share of its operating
income in the fourth quarter due to seasonal customer buying patterns. Certain reclassifications have been made to the 2003 financial statements to
conform with the current year presentation. NOTE 2  ACQUISITIONS/DISPOSITIONS On September 29, 2004, the Company closed the acquisition of ownership or
leasehold interest in 50 off-mall stores from Kmart Holding Corporation for
$575.9 million plus the assumption of existing real estate leases. As of
October 2, 2004, the Company has paid 30 percent ($171.8 million) of the
purchase price and will pay the remaining 70 percent ($404.1 million) upon
taking possession of the stores in 2005. A liability for the remaining 70
percent is reported within other liabilities on the balance sheet. The
acquisitions include real estate and Kmart store fixtures, but exclude
inventory and liabilities not related to leases. The Company will take
possession of the stores in the spring of 2005 and expects to convert the
stores to Sears nameplates by the fourth quarter of 2005. ESL Partners, L.P.,
and certain affiliated entities combined own greater than ten percent of both
the Company and Kmart Holding Corporation. During the third quarter of 2004, the Company agreed to sublease six stores
from Wal-Mart Stores, Inc. Sears has taken possession of two stores and is
targeting to take possession of two stores in 2005 and two stores in 2006. On July 10, 2004, the Company acquired Standards of Excellence, a San
Diego-based supplier of premium appliances, designer fixtures and decorative
hardware. The Company paid $17 million in cash. The acquisition has been
accounted for using the purchase method in accordance with Statement of
Financial Accounting Standards No. 141, Business Combinations. Accordingly,
the total purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair values at acquisition. On November 3, 2003, the Company completed the sale of its domestic Credit and
Financial Products business, including its clubs and services business
(Credit), to Citigroup. On November 29, 2003, the Company sold National Tire
& Battery (NTB) to TBC Corporation. The following table illustrates the
impact the estimated results of the divested businesses had on the reported
results for the 13- and 39-week periods ended September 27, 2003: 13 Weeks Ended September 27, 2003
    
    39 Weeks Ended September 27, 2003millions, except per share data
    
    As
    
    Divested
    
    
    
    
    
    As
    
    DivestedReported
    
    Businesses
    
    Pro forma
    
    Reported
    
    Businesses
    
    Pro formaRevenues
    
    $
    9,794
    
    
    $
    1,430
    
    
    $
    8,364
    
    
    $
    28,870
    
    
    $
    4,249
    
    
    $
    24,621Net income
    
    
    147
    
    
    
    171
    
    
    
    (24
    )
    
    
    648
    
    
    
    539
    
    
    
    109Diluted earnings per share
    
    
    0.52
    
    
    
    0.61
    
    
    
    (0.09
    )
    
    
    2.17
    
    
    
    1.80
    
    
    
    0.37
 4




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) NOTE 3  SECURITIZED ASSETS A summary of the Companys securitized assets at October 2, 2004, September 27,
2003 and January 3, 2004 is as follows: October 2,
    
    September 27,
    
    January 3,millions
    
    2004
    
    2003
    
    2004Credit card receivablesDomestic(1)
    
    $
    --
    
    
    $
    22,815
    
    
    $
    --Sears Canada
    
    
    1,015
    
    
    
    1,053
    
    
    
    1,093Total credit card receivables
    
    
    1,015
    
    
    
    23,868
    
    
    
    1,093Property and equipment, net
    
    
    489
    
    
    
    --
    
    
    
    500Total securitized assets
    
    $
    1,504
    
    
    $
    23,868
    
    
    $
    1,593
   (1)
  The Company securitizes certain of its credit card receivables through master
trusts (trusts). Under the Sears Canada securitization program, trusts
purchase undivided interests in the receivable balances, funded by issuing
short-term and long-term debt, primarily commercial paper and senior and
subordinated receivables-backed notes. The trusts related to the domestic
receivables securitized the receivable balances by issuing certificates
representing undivided interests in the trusts receivables both to outside
investors and to the Company. These certificates entitled the holder to a
series of scheduled cash flows under preset terms and conditions, the receipt
of which was dependent upon cash flows generated by the related trusts assets.
The Company accounts for credit card securitizations as secured borrowings. Certain real estate assets were transferred to a wholly-owned consolidated
subsidiary of Sears and segregated into a trust owned by the consolidated
subsidiary. These assets are related to an inter-company loan agreement. NOTE 4  INVESTMENTS millions
    
    October 2, 2004Cost
    
    Fair ValueAvailable-for-sale securities:State and political subdivisions obligations
    
    $
    118
    
    
    $
    118U.S. treasury and federal agencies obligations
    
    
    20
    
    
    
    20Total available-for-sale securities
    
    $
    138
    
    
    $
    138
 The available-for-sale securities of $138 million are due within one year and
are reported within prepaid expenses, deferred charges and other current assets
on the balance sheet. The Company did not have available-for-sale securities with maturities greater
than 90 days during any period in 2003. NOTE 5  BORROWINGS Total borrowings outstanding at October 2, 2004, September 27, 2003 and January
3, 2004 were $5.6 billion, $30.8 billion and $8.1 billion, respectively. Total
borrowings are presented on the balance sheet as follows: 5




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


October 2,
    
    September 27,
    
    January 3,millions
    
    2004
    
    2003
    
    2004Short-term borrowings:Unsecured commercial paper
    
    $
    754
    
    
    $
    3,249
    
    
    $
    719Asset-backed commercial paper
    
    
    69
    
    
    
    1,475
    
    
    
    314Asset-backed facility
    
    
    --
    
    
    
    1,400
    
    
    
    --Bank loans
    
    
    --
    
    
    
    55
    
    
    
    --Total short-term borrowings
    
    
    823
    
    
    
    6,179
    
    
    
    1,033Long-term debt(1):Notes and debentures outstanding
    
    
    3,373
    
    
    
    12,856
    
    
    
    5,825Securitizations(2)
    
    
    923
    
    
    
    11,240
    
    
    
    756Capital lease obligations
    
    
    480
    
    
    
    511
    
    
    
    497Total borrowings
    
    $
    5,599
    
    
    $
    30,786
    
    
    $
    8,111SFAS No. 133 Hedge Accounting Adjustment
    
    
    80
    
    
    
    510
    
    
    
    90Total debt
    
    $
    5,679
    
    
    $
    31,296
    
    
    $
    8,201Memo: Sears Canada debt
    
    $
    1,634
    
    
    $
    1,632
    
    
    $
    1,701




---

(1)


(2)


---

The Company maintains committed credit facilities to support its commercial
paper borrowings. The Companys domestic wholly-owned financing subsidiary,
Sears Roebuck Acceptance Corp. (SRAC), has an unsecured, three-year revolving
credit facility in the amount of $2.0 billion. This facility and other debt
agreements require SRAC to maintain specified fixed charge coverage ratios, and
the credit facility requires the Companys domestic segment to maintain a
minimum level of tangible net worth and a minimum interest coverage ratio. SRAC
and the Company were in compliance with these covenants at October 2, 2004. In
addition, Sears Canada has a $0.5 billion committed credit facility.

During the 13- and 39-week periods ended October 2, 2004, the Company retired
approximately $23 million and $2.5 billion of domestic term debt, respectively.

NOTE 6  SPECIAL CHARGES AND IMPAIRMENTS

During the second quarter of 2004, the Company recorded a pretax charge of $41
million for the estimated costs of severance associated with the termination of
approximately 3,300 associates related to the streamlining of the Companys
headquarters organization as well as other productivity initiatives identified
in its field operations. The identified associates will be terminated by the
end of 2004 and the related severance paid out by the end of 2005.

Following is a summary of the activity in the 2004 reserve established for
employee termination costs:

Balance,
    
    
    
    
    
    
    
    
    
    Balance,Beginning
    
    2004
    
    Cash
    
    October 2,millions
    
    of Year
    
    Charge
    
    Payments
    
    20042004 employee termination costs
    
    $
    --
    
    
    $
    41
    
    
    $
    (12
    )
    
    $
    29


6



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##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) NOTE 7  SHAREHOLDERS EQUITY Dividend Payments Under an agreement pursuant to which the Company has provided a credit facility
in support of certain tax increment revenue bonds issued by the Village of
Hoffman Estates, Illinois, in connection with the construction of its
headquarters facility, the Company cannot take specified actions, including the
declaration of cash dividends, that would cause its unencumbered assets, as
defined, to fall below 150% of its liabilities, as defined. At October 2,
2004, approximately $4.1 billion could be paid in dividends to shareholders
under this covenant. Share Repurchase Program The Company repurchased 6 million common shares at a cost of $225 million and
25 million common shares at a cost of $1.1 billion, during the 13- and 39-week
periods ended October 2, 2004 under a common share repurchase program approved
by the Board of Directors. As of October 2, 2004, the Company had remaining
authorization under the existing share repurchase program to repurchase up to
$501 million of shares by December 31, 2006. Comprehensive (Loss)/Income and Accumulated Other Comprehensive Loss The following table shows the computation of comprehensive (loss)/income: 13 Weeks Ended
    
    39 Weeks EndedOctober 2,
    
    September 27,
    
    October 2,
    
    September 27,millions
    
    2004
    
    2003
    
    2004
    
    2003Net (loss)/income
    
    $
    (61
    )
    
    $
    147
    
    
    $
    (867
    )
    
    $
    648Other comprehensive (loss)/income:Minimum pension liability (1)
    
    
    --
    
    
    
    --
    
    
    
    999
    
    
    
    --Amounts amortized into interest expense from OCI
    
    
    (2
    )
    
    
    4
    
    
    
    4
    
    
    
    12Change in fair value of cash flow hedges
    
    
    --
    
    
    
    (2
    )
    
    
    --
    
    
    
    (1
    )Foreign currency translation adjustments
    
    
    37
    
    
    
    5
    
    
    
    21
    
    
    
    96Total other comprehensive income
    
    
    35
    
    
    
    7
    
    
    
    1,024
    
    
    
    107Total comprehensive (loss)/income
    
    $
    (26
    )
    
    $
    154
    
    
    $
    157
    
    
    $
    755
 The following table displays the components of accumulated other comprehensive
loss: October 2,
    
    September 27,
    
    January 3,millions
    
    2004
    
    2003
    
    2004Accumulated derivative loss
    
    $
    (5
    )
    
    $
    (190
    )
    
    $
    (9
    )Currency translation adjustments
    
    
    2
    
    
    
    (48
    )
    
    
    (19
    )Minimum pension liability, net of tax (1)
    
    
    (79
    )
    
    
    (711
    )
    
    
    (1,078
    )Accumulated other comprehensive loss
    
    $
    (82
    )
    
    $
    (949
    )
    
    $
    (1,106
    )
   (1)
  7




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##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) NOTE 8  (LOSS)/EARNINGS PER SHARE The following table sets forth the computations of basic and diluted
(loss)/earnings per share: 13 Weeks Ended
    
    39 Weeks EndedOctober 2,
    
    September 27,
    
    October 2,
    
    September 27,millions, except per share data
    
    2004
    
    2003
    
    2004
    
    2003Net (loss)/income (1)
    
    $
    (61
    )
    
    $
    147
    
    
    $
    (867
    )
    
    $
    648Average common shares outstanding
    
    
    210.7
    
    
    
    277.1
    
    
    
    215.0
    
    
    
    297.1Dilutive effect of stock options
    
    
    --
    
    
    
    3.9
    
    
    
    --
    
    
    
    1.6Average common equivalent shares outstanding
    
    
    210.7
    
    
    
    281.0
    
    
    
    215.0
    
    
    
    298.7(Loss)/earnings per shareBasic
    
    $
    (0.29
    )
    
    $
    0.53
    
    
    $
    (4.03
    )
    
    $
    2.18Diluted
    
    $
    (0.29
    )
    
    $
    0.52
    
    
    $
    (4.03
    )
    
    $
    2.17
   (1)
  In each period, certain options were excluded from the computation of diluted
earnings per share because they would have been anti-dilutive. Due to the net
loss recognized for the 13- and 39-week periods ended October 2, 2004, all
options to purchase 32.4 and 31.5 million common shares were excluded from the
13- and 39-week 2004 calculations, respectively. At September 27, 2003,
options to purchase 5.2 million common shares at prices ranging from $41 to $64
per share, and 19.1 million common shares at prices ranging from $32 to $64 per
share, were excluded from the 13- and 39-week 2003 calculations, respectively. The following table sets forth the computations of basic and diluted earnings
per share before the cumulative effect of the change in accounting principle: 39 Weeks Endedmillions, except per share data
    
    October 2,
    
    September 27,2004
    
    2003(Loss)/income before cumulative effect of change in accounting
principle (1)
    
    $
    (28
    )
    
    $
    648Average common shares outstanding
    
    
    215.0
    
    
    
    297.1Dilutive effect of stock options
    
    
    --
    
    
    
    1.6Average common and common equivalent shares outstanding
    
    
    215.0
    
    
    
    298.7Earnings per shareBasic
    
    $
    (0.13
    )
    
    $
    2.18Diluted
    
    $
    (0.13
    )
    
    $
    2.17
   (1)
  NOTE 9  RETIREMENT BENEFIT PLANS Certain domestic full-time and part-time employees are eligible to participate
in noncontributory defined benefit plans after meeting age and service
requirements. Substantially all full-time Canadian employees as well as some
part-time employees are eligible to participate in contributory defined benefit
plans. Pension benefits are based on length of service, compensation and, in
certain plans, social security or other benefits. Funding for the various
plans is determined using various actuarial cost methods. 8




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##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) In addition to providing pension benefits, the Company provides domestic and
Canadian employees certain medical and life insurance benefits for retired
employees. Employees may become eligible for medical benefits if they retire
in accordance with the Companys established retirement policy and are
continuously insured under the Companys group medical plans or other approved
plans for 10 or more years immediately prior to retirement. The Company shares
the cost of the retiree medical benefits with retirees based on years of
service. Generally, the Companys share of these benefit costs will be capped
at the Company contribution calculated during the year of retirement. The
Companys postretirement benefit plans are not funded. The Company has the
right to modify or terminate these plans. The Company does not expect to
contribute to the domestic pension plan in 2004. The components of net periodic benefit cost/(benefit) are as follows: 13 Weeks Ended
    
    39 Weeks EndedPension
    
    Postretirement
    
    Pension
    
    Postretirementmillions
    
    Benefits
    
    Benefits
    
    Benefits
    
    BenefitsOct. 2,
    
    Sept. 27,
    
    Oct. 2,
    
    Sept. 27,
    
    Oct. 2,
    
    Sept. 27,
    
    Oct. 2,
    
    Sept. 27,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Components of net periodic benefit
cost/(benefit):Benefits earned during the period
    
    $
    26
    
    
    $
    23
    
    
    $
    1
    
    
    $
    2
    
    
    $
    78
    
    
    $
    69
    
    
    $
    3
    
    
    $
    4Interest cost
    
    
    59
    
    
    
    49
    
    
    
    13
    
    
    
    12
    
    
    
    177
    
    
    
    147
    
    
    
    39
    
    
    
    35Expected return on plan assets
    
    
    (63
    )
    
    
    (53
    )
    
    
    (1
    )
    
    
    --
    
    
    
    (189
    )
    
    
    (159
    )
    
    
    (3
    )
    
    
    --Amortization of unrecognized net prior
service benefit
    
    
    (2
    )
    
    
    (1
    )
    
    
    (19
    )
    
    
    (24
    )
    
    
    (6
    )
    
    
    (3
    )
    
    
    (57
    )
    
    
    (72
    )Recognized net (gain)/loss
    
    
    (1
    )
    
    
    21
    
    
    
    1
    
    
    
    (5
    )
    
    
    (3
    )
    
    
    63
    
    
    
    3
    
    
    
    (15
    )Other
    
    
    1
    
    
    
    (2
    )
    
    
    --
    
    
    
    --
    
    
    
    --
    
    
    
    (6
    )
    
    
    (30
    )(1)
    
    
    --Net periodic benefit cost/(benefit)
    
    $
    20
    
    
    $
    37
    
    
    $
    (5
    )
    
    $
    (15
    )
    
    $
    57
    
    
    $
    111
    
    
    $
    (45
    )
    
    $
    (48
    )
   (1)
  Accounting Change Subsequent to the sale of Credit, the Company initiated a project to review its
domestic employee retirement benefits cost structure and programs. The Company
assessed its retirement benefits programs in the context of comparable programs
in the retail industry. As a result of this review, in January 2004, the
Company announced a series of benefit plan changes which included the
enhancement of the Companys 401(k) defined contribution plan and the phasing
out of participation in its domestic pension plan. Associates hired in 2004
and those under the age of 40 as of December 31, 2004, will receive an
increased Company-matching contribution to the 401(k) plan of 110%, but will no
longer earn additional pension benefits effective January 1, 2005. Pension
benefits continue to accrue for associates age 40 and older as of December 31,
2004, unless they elect to participate in the enhanced 401(k) defined
contribution plan. In addition, the Company eliminated its domestic retiree medical insurance
contribution for associates hired in 2004 and those under the age of 40 as of
December 31, 2004, and capped the contribution at the 2004 level for associates
age 40 and older. A curtailment gain of $30 million is included within selling
and administrative costs for the 39-week period ended October 2, 2004 as a
result of the change in the domestic retiree medical benefit. In connection with the domestic pension and postretirement plan changes
discussed above, the Company believed it was preferable to change its
accounting methods, which under SFAS Nos. 87 and 106 delay recognition of past
events. Therefore, in the first quarter of 2004, the Company changed its
method for determining the market-related value of plan assets used in
determining the expected return-on-assets component of annual net pension costs
and its method for recognizing gains and losses for both its domestic pension
and postretirement benefit 9




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##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) plans. Under the previous accounting method, the market-related value of the
domestic pension plan assets was determined by averaging the value of equity
assets over a five-year period. The new method recognizes equity assets at
fair value. Further, under its previous accounting method, all unrecognized
gains and losses in excess of the 10% corridor were amortized over the expected
working lifetime of active employees (approximately 10 years). Under the new
methodology, the portion of the total gain or loss outside the 10% corridor
will be immediately recognized. As a result of this accounting change, the
Company recorded an after-tax charge of $839 million in the first quarter of
2004 for the cumulative effect of the change in accounting principle. The
charge represents the recognition of unamortized experience losses at the
beginning of 2004 in accordance with the new methods. The new method of determining market-related value of plan assets and
recognizing gains and losses is preferable because it produces results that
more closely match the current economic position of the Companys domestic
retirement benefit plans by not delaying the recognition of past events. The cumulative effect of the accounting changes related to fiscal 2004 is
presented in the following table: 2004millions, except per share data
    
    Pretax
    
    After-taxDomestic Pension
    
    $
    1,574
    
    
    $
    999Domestic Postretirement
    
    
    (253
    )
    
    
    (160
    )Total
    
    $
    1,321
    
    
    $
    839Loss per share
    
    
    
    
    
    $
    (3.90
    )
 Presented below is pro forma net income and earnings per share for the quarters
ended March 29, 2003, June 28, 2003, September 27, 2003 and January 3, 2004 and
for the full-year ended January 3, 2004 showing the estimated effects as if the
accounting change were applied retroactively: 2003First
    
    Second
    
    Third
    
    Fourthmillions, except per share data
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    YearNet income  as reported
    
    $
    192
    
    
    $
    309
    
    
    $
    147
    
    
    $
    2,749
    
    
    $
    3,397Impact of change in accounting for domestic
retirement plans
    
    
    10
    
    
    
    11
    
    
    
    11
    
    
    
    (373
    )
    
    
    (341
    )Net income  pro forma
    
    $
    202
    
    
    $
    320
    
    
    $
    158
    
    
    $
    2,376
    
    
    $
    3,056Earnings per share  basic:As reported
    
    $
    0.60
    
    
    $
    1.04
    
    
    $
    0.53
    
    
    $
    11.06
    
    
    $
    11.95Pro forma
    
    $
    0.63
    
    
    $
    1.08
    
    
    $
    0.57
    
    
    $
    9.56
    
    
    $
    10.75Earnings per share  diluted:As reported
    
    $
    0.60
    
    
    $
    1.04
    
    
    $
    0.52
    
    
    $
    10.84
    
    
    $
    11.86Pro forma
    
    $
    0.63
    
    
    $
    1.08
    
    
    $
    0.56
    
    
    $
    9.37
    
    
    $
    10.67
 The Company uses October 31 as the measurement date for determining retirement
plan assets, obligations and experience gains or losses. Under the new
accounting method for domestic plans, the Company will recognize the portion of
experience gain or loss in excess of the 10% corridor at the measurement date,
which falls in the fourth quarter of the fiscal year. Had the Company used
this accounting method in 2003, an experience loss would have been recognized
in the fourth quarter of 2003 which would have reduced net income by $373
million. 10




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##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) NOTE 10  STOCK-BASED COMPENSATION The Company has various stock-based employee compensation plans which are
described more fully in Note 10 of the Notes to Consolidated Financial
Statements in the Companys 2003 Annual Report on Form 10-K. The Company
accounts for those plans in accordance with Accounting Principles Board Opinion
No. 25, Accounting For Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net
income/(loss), as no options granted under those plans had an exercise price
less than the market value of the underlying common stock on the date of grant. Subsequent to the issuance of its
condensed consolidated financial statements for the 13 and 39 weeks ended October 2, 2004, the Company determined it had used an incorrect
vesting period for certain stock options granted in 2004 in the
calculation of its pro forma stock-based employee compensation
expense determined under the fair value based method.
As a result, the following pro forma information has been restated to increase the pro forma stock-based employee compensation expense determined under the
fair value method and pro forma net loss by $20 million ($0.09 per share  basic and diluted) and $54 million ($0.25 per share  basic and diluted) for the 13 and 39 weeks ended
October 2, 2004, respectively, from the amounts previously reported. 13 Weeks Ended
    
    39 Weeks EndedOctober 2,
    
    
    September 27,
    
    
    October 2,
    
    
    September 27,millions, except per share data
    
    2004
    
    2003
    
    2004
    
    2003Net (loss)/income  as reported
    
    $
    (61
    )
    
    $
    147
    
    
    $
    (867
    )
    
    $
    648Less: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related taxes
    
    
    34
    
    
    
    10
    
    
    
    97
    
    
    
    33Net (loss)/income  pro forma
    
    $
    (95
    )
    
    $
    137
    
    
    $
    (964
    )
    
    $
    615(Loss)/earnings per share  basicAs reported
    
    $
    (0.29
    )
    
    $
    0.53
    
    
    $
    (4.03
    )
    
    $
    2.18Pro forma
    
    
    (0.45
    )
    
    
    0.49
    
    
    
    (4.48
    )
    
    
    2.07(Loss)/earnings per share  dilutedAs reported
    
    $
    (0.29
    )
    
    $
    0.52
    
    
    $
    (4.03
    )
    
    $
    2.17Pro forma
    
    
    (0.45
    )
    
    
    0.49
    
    
    
    (4.48
    )
    
    
    2.06
 NOTE 11  LEGAL PROCEEDINGS Pending against the Company and certain of its officers and directors are a
number of lawsuits that relate to the credit card business and public
statements about it. The Company believes that all of these claims lack merit
and is defending against them vigorously.  
    
    On and after October 18, 2002, several actions were filed in the
United States District Court for the Northern District of Illinois
against the Company and certain current and former officers alleging
that certain public announcements by the Company concerning its credit
card business violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Court
has consolidated the actions and certified the consolidated action as
a class action. Discovery is underway. Trial is scheduled to begin
on August 8, 2005.
    
    On and after November 15, 2002, several actions were filed in the
United States District Court for the Northern District of Illinois
against the Company, certain officers and directors, and alleged
fiduciaries of Sears 401(k) Savings Plan (the Plan), seeking
damages and equitable relief under the Employee Retirement 11




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##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited)  Income
Security Act of 1974 (ERISA). The plaintiffs purport to represent
participants in the Plan, and allege breaches of fiduciary duties
under ERISA in connection with the Plans investment in the Companys
common shares and alleged communications made to Plan participants
regarding the Companys financial condition. These actions have been
consolidated into a single action. Discovery is underway. No trial
date has been set.  
    
    On October 23, 2002, a purported derivative action was filed in the
Supreme Court of the State of New York against the Company (as a
nominal defendant) and certain current and former directors seeking
damages on behalf of the Company. The complaint purports to allege a
breach of fiduciary duty by the directors with respect to the
Companys management of the credit card business. On June 21, 2004,
the Court dismissed the complaint because the plaintiff had filed the
suit without having demanded that the Board of Directors bring the
suit. The plaintiff has filed a notice of appeal from that ruling.
Two similar actions (the Cook County actions) were filed in the
Circuit Court of Cook County, Illinois (the Illinois state court),
and a third (the federal derivative action) was filed in the United
States District Court for the Northern District of Illinois. All
three actions were stayed pending the disposition of the action in New
York. In light of the New York courts decision, the Illinois state
court lifted the stay of the Cook County actions and reinstated a
motion to dismiss which the defendants had filed prior to the stay.
On September 30, 2004, the Illinois state court granted the
defendants motion to dismiss on the ground that the plaintiff had
filed the suit without having demanded that the Board of Directors
bring the suit. The plaintiffs in the federal derivative action
appealed the stay order in that case to the United States Court of
Appeals for the Seventh Circuit. On July 19, 2004, the Court of
Appeals affirmed the stay of the federal derivative action, and that
stay remains in effect.
    
    On June 17, 2003, an action was filed in the Northern District of
Illinois against the Company and certain officers, purportedly on
behalf of a class of all persons who, between June 21, 2002 and
October 17, 2002, purchased the 7% notes that SRAC issued on June 21,
2002. An amended complaint has been filed, naming as additional
defendants certain former officers, SRAC and several investment
banking firms who acted as underwriters for SRACs March 18, May 21
and June 21, 2002 notes offerings. The amended complaint alleges that
the defendants made misrepresentations or omissions concerning its
credit business during the class period and in the registration
statements and prospectuses relating to the offerings. The amended
complaint alleges that these misrepresentations and omissions violated
Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5
promulgated thereunder, and Sections 11, 12 and 15 of the Securities
Act of 1933 and purports to be brought on behalf of a class of all
persons who purchased any security of SRAC between October 24, 2001
and October 17, 2002, inclusive. The defendants filed motions to
dismiss the action. On September 24, 2004, the court granted these
motions in part, and denied them in part. The court dismissed the
claims related to the March 18 and May 21, 2002 note offerings because
the plaintiff did not purchase notes in those offerings. The court
dismissed the Section 10(b) and Rule 10b-5 claims against several of
the individual defendants because the plaintiff failed to adequately
plead such claims. The court sustained the remaining claims. By
invitation of the court, on October 1, 2004, defendants moved to
dismiss the Section 10(b), Rule 10b-5 and Section 20(a) claims not
dismissed in the courts ruling. On October 5, 2004, the court
granted the plaintiff leave to file a second amended complaint. The Company is subject to various other legal and governmental proceedings,
many involving litigation incidental to the businesses. Some matters contain
class action allegations, environmental and asbestos exposure allegations and
other consumer-based claims that involve compensatory, punitive or treble
damage claims in very large amounts as well as other types of relief. The
consequences of these matters are not presently determinable but, in the
opinion of management of the Company after consulting with legal counsel, and
taking into account insurance and reserves, the ultimate liability is not
expected to have a material adverse effect on annual results of operations,
financial position, liquidity or capital resources of the Company. 12




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##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) NOTE 12  FINANCIAL GUARANTEES The Company issues various types of guarantees in the normal course of
business. The Company had the following guarantees outstanding: millionsOctober 2,2004Parent guarantee of SRAC debt
    
    $
    3,604Import letters of credit
    
    
    298Standby letters of credit
    
    
    141Secondary lease obligations
    
    
    104Performance guarantee
    
    
    59
 The debt obligations of SRAC are reflected in the Companys balance sheets. As
a result of the Companys sale of Credit, Sears was required to issue a
guarantee of SRACs outstanding public debt in order to maintain SRACs
exemption from being deemed an investment company under the Investment
Company Act of 1940, as amended. Sears also guarantees any outstanding
borrowings under SRACs three-year, unsecured credit facility. As of October
2, 2004, no borrowings were outstanding under this facility. These guarantees
would require Sears to repay such debt should SRAC default in payment. The secondary lease obligations relate to certain store leases of previously
divested businesses. The Company remains secondarily liable if the primary
obligor defaults. As of October 2, 2004, the Company had an $8 million
liability recorded in other liabilities which represents the Companys current
estimate of potential obligation related to these leases. The performance guarantee relates to certain municipal bonds issued in
connection with the Companys headquarters building. This guarantee expires in
2007. NOTE 13  SEGMENT DISCLOSURES With the sale of Credit, the Companys financial reporting segments for fiscal
2004 have been changed to reflect two operating segments  a Domestic segment
and a Sears Canada segment. The Domestic segment consists of merchandise sales and related services,
including product protection agreements, delivery and product installation and
repair services. It includes all Sears selling channels, Specialty and
Full-line Stores as well as Direct to Customer operations encompassing online,
catalogs, and the Lands End online and catalog business. The results of
operations for the divested businesses, Credit and Financial Products and NTB,
are included within the Domestic segment for the 13- and 39-week periods ended
September 27, 2003. The Sears Canada segment includes retail, credit and corporate operations
conducted by Sears Canada, a 54.3% owned subsidiary. Prior to the sale of Credit, the Company organized its business into three
domestic segments: Retail and Related Services, Credit and Financial Products
and Corporate and Other; and one international segment: Sears Canada.  
    
    The Retail and Related Services segment consisted of merchandise sales
and related services, including product protection agreements, delivery
and product installation and repair services. It included all Sears
selling channels, including Specialty and Full-line Stores as well as
Direct to Customer operations which includes online, catalogs, and Lands
End online and catalog business. Beginning November 3, 2003, this 13




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##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited)  segment also included the revenues earned under the long-term marketing and
servicing alliance with Citigroup.
    
    The Credit and Financial Products segment managed the Companys
domestic portfolio of Sears Card and MasterCard receivables. This
segment also included related financial products, such as credit
protection and insurance products. The domestic Credit and Financial
Products business was sold on November 3, 2003, and thus the segment
results include its results of operations through November 2, 2003.
    
    The Corporate and Other segment included activities that are of an
overall holding company nature primarily consisting of administrative
activities supporting the Domestic operations. This segment also
included Home Improvement Services which installs siding and windows.
    
    External revenues and expenses were allocated between the applicable
segments. For zero-percent financing promotions in which customers
received free financing, Retail and Related Services reimbursed Credit
and Financial Products over the life of the financing period at a 10%
annual rate. The cost was reported as selling expense by Retail and
Related Services and an offsetting benefit was recognized by Credit
and Financial Products. With the sale of the domestic Credit and
Financial Products business, the allocation of these costs is included
in the results of operations through November 2, 2003. Under the
terms of the long-term marketing and servicing alliance with
Citigroup, Citigroup will support the Companys historical level
zero-percent receivable balances at no cost to the Company.
    
    The domestic segments participated in a centralized funding program.
Interest expense was allocated to the Credit and Financial Products
segment based on its funding requirements. Funding included unsecured
debt reflected on the balance sheet and investor certificates related
to credit card receivables transferred to trusts through
securitizations. The remainder of net domestic interest expense was
reported in the Retail and Related Services segment through November
3, 2003. Subsequent to the sale of Credit, the allocation of interest
expense was changed such that net interest expense associated with
approximately $3.8 billion of outstanding domestic term debt remaining
from the Credit and Financial Products segment, also referred to as
Credit legacy debt, was allocated to the Corporate and Other Segment.
As of October 2, 2004, approximately $1.4 billion of Credit legacy
debt remained outstanding. The 2003 segment information has been presented on the 2004 basis  Domestic
and Sears Canada. In addition, the Company has provided, for 2003, information
on the operating segments comprising the Domestic segment in 2003. 14




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##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) For the 13 weeks ended October 2, 2004 Searsmillions
    
    Domestic
    
    Canada
    
    ConsolidatedMerchandise sales and services
    
    $
    7,141
    
    
    $
    1,069
    
    
    $
    8,210Credit and financial products revenues
    
    
    --
    
    
    
    85
    
    
    
    85Total revenues
    
    
    7,141
    
    
    
    1,154
    
    
    
    8,295Costs and expensesCost of sales, buying and occupancy
    
    
    5,289
    
    
    
    773
    
    
    
    6,062Selling and administrative
    
    
    1,720
    
    
    
    289
    
    
    
    2,009Provision for uncollectible accounts
    
    
    --
    
    
    
    16
    
    
    
    16Depreciation and amortization
    
    
    199
    
    
    
    28
    
    
    
    227Interest, net
    
    
    39
    
    
    
    27
    
    
    
    66Special charges
    
    
    --
    
    
    
    --
    
    
    
    --Total costs and expenses
    
    
    7,247
    
    
    
    1,133
    
    
    
    8,380Operating (loss)/income
    
    $
    (106
    )
    
    $
    21
    
    
    $
    (85
    )Total assets
    
    $
    18,442
    
    
    $
    4,210
    
    
    $
    22,652
 For the 13 weeks ended September 27, 2003 DomesticRetail and
    
    Credit andRelated
    
    Financial
    
    Corporate
    
    
    Total
    
    
    Searsmillions
    
    Services
    
    Products
    
    and Other
    
    Domestic
    
    Canada
    
    ConsolidatedMerchandise sales and services
    
    $
    7,342
    
    
    $
    --
    
    
    $
    107
    
    
    $
    7,449
    
    
    $
    960
    
    
    $
    8,409Credit and financial products revenues
    
    
    --
    
    
    
    1,307
    
    
    
    --
    
    
    
    1,307
    
    
    
    78
    
    
    
    1,385Total revenues
    
    
    7,342
    
    
    
    1,307
    
    
    
    107
    
    
    
    8,756
    
    
    
    1,038
    
    
    
    9,794Costs and expensesCost of sales, buying and occupancy
    
    
    5,415
    
    
    
    --
    
    
    
    42
    
    
    
    5,457
    
    
    
    680
    
    
    
    6,137Selling and administrative
    
    
    1,694
    
    
    
    157
    
    
    
    111
    
    
    
    1,962
    
    
    
    267
    
    
    
    2,229Provision for uncollectible accounts
    
    
    --
    
    
    
    550
    
    
    
    --
    
    
    
    550
    
    
    
    17
    
    
    
    567Depreciation and amortization
    
    
    182
    
    
    
    4
    
    
    
    13
    
    
    
    199
    
    
    
    27
    
    
    
    226Interest, net
    
    
    24
    
    
    
    230
    
    
    
    --
    
    
    
    254
    
    
    
    27
    
    
    
    281Special charges
    
    
    112
    
    
    
    --
    
    
    
    --
    
    
    
    112
    
    
    
    --
    
    
    
    112Total costs and expenses
    
    
    7,427
    
    
    
    941
    
    
    
    166
    
    
    
    8,534
    
    
    
    1,018
    
    
    
    9,552Operating (loss)/income
    
    $
    (85
    )
    
    $
    366
    
    
    $
    (59
    )
    
    $
    222
    
    
    $
    20
    
    
    $
    242Total assets
    
    $
    13,456
    
    
    $
    29,693
    
    
    $
    1,931
    
    
    $
    45,080
    
    
    $
    4,010
    
    
    $
    49,090
 15




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##### Table of Contents



For the 39 weeks ended October 2, 2004 Searsmillions
    
    Domestic
    
    Canada
    
    ConsolidatedMerchandise sales and services
    
    $
    21,603
    
    
    $
    3,010
    
    
    $
    24,613Credit and financial products revenues
    
    
    --
    
    
    
    257
    
    
    
    257Total revenues
    
    
    21,603
    
    
    
    3,267
    
    
    
    24,870Costs and expenses
Cost of sales, buying and occupancy
    
    
    15,795
    
    
    
    2,170
    
    
    
    17,965Selling and administrative
    
    
    5,107
    
    
    
    860
    
    
    
    5,967Provision for uncollectible accounts
    
    
    --
    
    
    
    43
    
    
    
    43Depreciation and amortization
    
    
    634
    
    
    
    83
    
    
    
    717Interest, net
    
    
    129
    
    
    
    81
    
    
    
    210Special charges
    
    
    41
    
    
    
    --
    
    
    
    41Total costs and expenses
    
    
    21,706
    
    
    
    3,237
    
    
    
    24,943Operating (loss)/income
    
    $
    (103
    )
    
    $
    30
    
    
    $
    (73
    )Total assets
    
    $
    18,442
    
    
    $
    4,210
    
    
    $
    22,652
 For the 39 weeks ended September 27, 2003 DomesticRetail and
    
    Credit andRelated
    
    
    Financial
    
    
    Corporate
    
    
    Total
    
    
    Searsmillions
    
    Services
    
    Products
    
    and Other
    
    Domestic
    
    Canada
    
    ConsolidatedMerchandise sales and services
    
    $
    21,757
    
    
    $
    --
    
    
    $
    270
    
    
    $
    22,027
    
    
    $
    2,707
    
    
    $
    24,734Credit and financial products revenues
    
    
    --
    
    
    
    3,903
    
    
    
    --
    
    
    
    3,903
    
    
    
    233
    
    
    
    4,136Total revenues
    
    
    21,757
    
    
    
    3,903
    
    
    
    270
    
    
    
    25,930
    
    
    
    2,940
    
    
    
    28,870Costs and expenses
Cost of sales, buying and occupancy
    
    
    15,991
    
    
    
    --
    
    
    
    107
    
    
    
    16,098
    
    
    
    1,915
    
    
    
    18,013Selling and administrative
    
    
    4,962
    
    
    
    590
    
    
    
    321
    
    
    
    5,873
    
    
    
    765
    
    
    
    6,638Provision for uncollectible accounts
    
    
    --
    
    
    
    1,467
    
    
    
    --
    
    
    
    1,467
    
    
    
    44
    
    
    
    1,511Depreciation and amortization
    
    
    552
    
    
    
    13
    
    
    
    34
    
    
    
    599
    
    
    
    82
    
    
    
    681Interest, net
    
    
    49
    
    
    
    717
    
    
    
    --
    
    
    
    766
    
    
    
    81
    
    
    
    847Special charges
    
    
    128
    
    
    
    --
    
    
    
    12
    
    
    
    140
    
    
    
    --
    
    
    
    140Total costs and expenses
    
    
    21,682
    
    
    
    2,787
    
    
    
    474
    
    
    
    24,943
    
    
    
    2,887
    
    
    
    27,830Operating income/(loss)
    
    $
    75
    
    
    $
    1,116
    
    
    $
    (204
    )
    
    $
    987
    
    
    $
    53
    
    
    $
    1,040Total assets
    
    $
    13,456
    
    
    $
    29,693
    
    
    $
    1,931
    
    
    $
    45,080
    
    
    $
    4,010
    
    
    $
    49,090
 16




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##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) NOTE 14  RESTATEMENT OF STATEMENT OF CASH FLOWS The domestic credit card receivable portfolio consisted primarily of the proprietary Sears Card and
Sears Gold MasterCard (MasterCard). Sears Card receivables were generated primarily from
purchases of merchandise and services from the Companys domestic operations. The MasterCard
receivables were generated from purchases from the Company, as well as other merchants, balance
transfers and the use of convenience checks and cash advances. Historically, the Company presented the aggregate cash flows generated from both the Sears Card and
MasterCard as cash flows from operating activities in the condensed consolidated statements of cash flows.
The Company has changed its presentation of cash flows from the MasterCard portfolio from operating to investing
activities within the condensed consolidated statements of cash flows, as the loans generated were
predominately related to activities external to Sears merchandise and services. As such, the
Company has restated its condensed consolidated statement of cash flows for the 39-weeks ended September 27,
2003. The impact on the respective cash flow statement line items is as follows: 39 weeks endedmillions
    
    September 27, 2003As previouslyreported
    
    
    As restatedChange in credit card receivables/Sears
credit card receivables
    
    $
    527
    
    
    $
    1,794Net cash provided by operating activities
    
    
    1,689
    
    
    
    2,956Change in Sears MasterCard receivables
    
    
    
    
    
    
    (1,267
    )Net cash used in investing activities
    
    $
    (568
    )
    
    $
    (1,835
    )
 17




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of
Sears, Roebuck and Co. We have reviewed the accompanying Condensed Consolidated Balance Sheets of
Sears, Roebuck and Co. as of October 2, 2004 and September 27, 2003, and the
related Condensed Consolidated Statements of Operations for the
thirteen-week and thirty-nine-week periods ended October 2, 2004 and September
27, 2003 and the Condensed Consolidated Statements of Cash Flows for
the thirty-nine week periods ended October 2, 2004 and September 27,
2003. These interim condensed consolidated financial statements are the
responsibility of the Companys management. We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America. As discussed in Note 10, the
pro forma disclosure of stock-based compensation required by
Statement of Financial Accounting Standards No. 123 has been
restated. As discussed in Note 14, the accompanying Condensed
Consolidated Statement of Cash Flows for the thirty-nine week period
ended September 27, 2003 has been restated. We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the Consolidated Balance Sheet of
Sears, Roebuck and Co. as of January 3, 2004, and the related Consolidated
Statements of Income, Shareholders Equity, and Cash Flows for the year then
ended (not presented herein); and in our report dated March 9,
2004 (February 11, 2005 as to the effects of the restatement
discussed in Note 18), we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying Condensed
Consolidated Balance Sheet as of January 3, 2004, is fairly stated, in all
material respects, in relation to the Consolidated Balance Sheet from which it
has been derived. /s/ DELOITTE & TOUCHE LLPDELOITTE & TOUCHE LLPChicago, IllinoisNovember 8,
2004 (December 1, 2004 as to the effects of the restatement discussed
in Note 10 and February 11, 2005 as to the effects of the restatement
discussed in Note 14)
 18




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations With the sale of the domestic Credit and Financial Products business in the
fourth quarter of 2003, the Companys financial reporting segments for fiscal
2004 were changed to reflect two operating segments  a Domestic segment and a
Sears Canada segment. Domesticconsisting of:  -
    
    Full-line Stores: includes merchandise sales as well as the operations of
Sears Auto Centers and Sears Grands, and online revenues of sears.com-
    
    Specialty Stores: includes the operations of Dealer Stores, Hardware Stores,
The Great Indoors (TGI), Commercial Sales and Outlet stores. National Tire &
Battery (NTB) operations are reflected in the 2003 results through November
29, 2003-
    
    Direct to Customer: includes Lands End online, catalog and retail store
operations as well as direct marketing of goods and services through specialty
catalogs and other direct channels-
    
    Home Services: includes product repair services, product protection
agreements and installation services for all major brands of home products;
also includes home improvement services, primarily siding, windows and cabinet
refacing, carpet cleaning and the installation and servicing of residential
heating and cooling systems
 -
    
    Sears Financial Services: includes revenues earned under the long-term
marketing and servicing alliance with Citigroup-
    
    Corporate: includes activities that are of an overall holding company nature
of its Domestic operations, primarily consisting of administrative activities-
    
    Credit and Financial Products: includes the 2003 results of operations of the
domestic Credit and Financial Products business (sold on November 3, 2003)  Sears Canadaconducts retail, credit and corporate operations through Sears
Canada Inc. (Sears Canada), a consolidated, 54.3% owned subsidiary of Sears
   OVERVIEW AND CONSOLIDATED OPERATIONS Sears, Roebuck and Co., together with its consolidated subsidiaries (the
Company), is one of the largest retailers in the United States and Canada
with a 118-year history of providing high quality merchandise and related
services to a broad array of customers. The Companys vision is to be the
preferred and most trusted resource for products and services that enhance its
customers homes and family life. The Companys mission is to grow the
business by providing quality products and services at a great value. We
aspire to make these products and services available to customers through a
wide network of multiple channels, including 2,300 Sears-branded and affiliated
stores in the United States and Canada, a home services network with over
10,000 technicians, leading internet sites including sears.com, sears.ca and
landsend.com and direct to customer catalog programs. Fiscal 2003 was an important transition year for the Company. On November 3,
2003, the Company completed the sale of its domestic Credit and Financial
Products business, including its clubs and services business (Credit), to
Citigroup and entered into a long-term marketing and servicing alliance with
Citigroup. Additionally, on November 29, 2003, the Company sold NTB to TBC
Corporation. These divestitures, along with the beginning of a new strategic relationship
with Citigroup, have created a Company with a pure retail focus who can offer
strong proprietary and national brands and unparalleled services. 19




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##### Table of Contents



While the Companys focus in 2004 was to achieve more consistent revenue growth
with improved margins, results through the third quarter have been
disappointing. Third quarter results and comparisons to the prior year were negatively
impacted by a number of factors, including:  
    
    a challenging macroeconomic environment, particularly the current
year impact of fuel prices on consumer spending and the prior year
benefit to consumers from tax rebates;
    
    less than favorable weather conditions for much of the quarter;
    
    disruption caused by business resets and product transitions
completed in the current year quarter, followed by a slower than
expected ramp up of sales following the resets; and
    
    deeper than expected markdowns in order to clear seasonal and
slower moving inventory as a result of the lower than expected sales
trends. The Company is taking actions to address the below expectations profit level
and Company-specific issues experienced during the quarter. These actions,
some of which will contribute to near-term improvements, but more importantly
aimed at improving the long-term performance of the business, include:  
    
    strengthening product assortments by: -
    
    introducing a number of innovative products within home
appliances and home improvement that offer both high-performance and
high-efficiency, and-
    
    increasing the fashion content within its apparel offering,
including the introduction of two new proprietary brands  Structure
and A|Line; 
    
    focusing on improved gross margin performance by: -
    
    better leveraging its preferred vendor relationships,-
    
    increasing the amount of product that is sourced directly,-
    
    introducing Profit Logic, a system that provides innovative
inventory analytics, to certain parts of the apparel business, and-
    
    over time, transitioning to an allocation process allowing us
to better assort product to store-specific demographics as well as
more effectively replenish product during the selling season based
upon rate of sale; and 
    
    identifying ways to reduce the level of capital invested in store
remodels to improve overall efficiency of the Companys capital
expenditures. Another important component of improving the Companys long-term performance is
to provide better access to its products. The Company has aggressively focused
on increasing its presence outside of the traditional mall-based formats.
During the third quarter, the Company expanded its off-mall presence by:  
    
    acquiring ownership or leasehold interest in 50 off-mall stores in
key Sears markets from Kmart Holding Corporation for approximately $576
million. Sears expects to take possession of the stores in the Spring
of 2005 and is targeting to open the stores under Sears nameplates by
the end of 2005;
    
    subleasing six stores from Wal-Mart Stores, Inc. Sears has taken
possession of two stores and is targeting to take possession of two
stores in 2005 and two stores in 2006; and
    
    accelerating the development of its new Sears Grand format from three
locations to up to 10 locations by the end of 2005 with further growth
in 2006. The acquired stores are a unique opportunity to rapidly enter attractive
markets for the Company. The newly acquired stores will offer a relevant
subset of traditional categories, including apparel, home appliances, home
electronics, home improvement and home fashions, plus consumables and
transactional items. Where possible, the floor design of the new stores will
be on one level, utilizing a common layout similar to the open-racetrack design
of existing Sears Grand stores, with exit cashiering near the front
entrance/exit. 20




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##### Table of Contents



SEARS, ROEBUCK AND CO. The initial results of the Companys three Sears Grand stores have been
encouraging as the customer response to the new format has been favorable and
revenue levels have been above expectations. Including the four Sears Grand
stores opened as of October 31, 2004, the Company expects to be operating up to
10 Sears Grand stores by the end of 2005. While management believes it is taking the necessary actions to address the
Companys near-term issues, the Company undertook a review of its business
plans, specifically focusing on Full-line Stores, for the remainder of the
year. Based upon that review, the Company concluded it was appropriate to
lower the fourth quarter sales and gross margin assumptions and to adjust the
business plans for the upcoming holiday season. This revision, coupled with the
sales and gross margin performance over the past two quarters, resulted in the
Company lowering its full-year guidance. Overall, the Companys operating results for the 13 and 39 weeks ended October
2, 2004 reflect the challenges faced this year. A summary of the consolidated
results of operations is as follows: 13 Weeks Ended
    
    39 Weeks Endedmillions, except per share data
    
    October 2,
    
    September 27,
    
    October 2,
    
    September 27,2004
    
    2003
    
    2004
    
    2003Merchandise sales and services revenues
    
    $
    8,210
    
    
    $
    8,409
    
    
    $
    24,613
    
    
    $
    24,734Domestic comparable store sales
    
    
    -4.0
    %
    
    
    +1.2
    %
    
    
    -1.9
    %
    
    
    -2.9
    %Credit and financial products revenues
    
    
    85
    
    
    
    1,385
    
    
    
    257
    
    
    
    4,136Total revenues
    
    $
    8,295
    
    
    $
    9,794
    
    
    $
    24,870
    
    
    $
    28,870Gross margin rate
    
    
    26.2
    %
    
    
    27.0
    %
    
    
    27.0
    %
    
    
    27.2
    %Selling and administrative expense as a percentage
of total revenues
    
    
    24.2
    %
    
    
    22.8
    %
    
    
    24.0
    %
    
    
    23.0
    %Operating (loss)/income
    
    $
    (85
    )
    
    $
    242
    
    
    $
    (73
    )
    
    $
    1,040Other income, net
    
    $
    6
    
    
    $
    2
    
    
    $
    58
    
    
    $
    16(Loss)/income before income taxes, minority interest and
cumulative effect of change in accounting principle
    
    $
    (79
    )
    
    $
    244
    
    
    $
    (15
    )
    
    $
    1,056Cumulative effect of change in accounting principle
    
    $
    --
    
    
    $
    --
    
    
    $
    (839
    )
    
    $
    --Net (loss)/income
    
    $
    (61
    )
    
    $
    147
    
    
    $
    (867
    )
    
    $
    648(Loss)/earnings
per share  diluted
    
    $
    (0.29
    )
    
    $
    0.52
    
    
    $
    (4.03
    )
    
    $
    2.17(Loss)/earnings per share before cumulative effect of change
in accounting principle
    
    $
    (0.29
    )
    
    $
    0.52
    
    
    $
    (0.13
    )
    
    $
    2.17
 Effective January 4, 2004, the Company changed its method for recognizing gains
and losses for both its domestic pension and postretirement benefit plans. The
Company began recognizing experience gains and losses on a more current basis,
while under its previous methods, the Company amortized experience gains and
losses over future service periods. As a result of this accounting change, the
Company recorded an after-tax charge of $839 million, or $3.81 per share, in
the first quarter of 2004 for the cumulative effect of change in accounting
principle. The charge represents the recognition of unamortized experience
losses at the beginning of 2004 in accordance with the new accounting methods. The results of operations for the 13- and 39-week periods ended September 27,
2003 include the results of operations for the divested businesses, Credit and
NTB. 21




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##### Table of Contents



SEARS, ROEBUCK AND CO. The Company believes that an understanding of its reported results and its
ongoing financial performance is not complete without considering the impact
the following items had on the results of operations for the 13- and 39-week
periods ended October 2, 2004 and September 27, 2003. These items relate to
(i) significant divestitures, (ii) changes in accounting method, and (iii)
significant restructuring activities. Items like these affect the Companys
results from time to time. However, the amounts of these types of items may
vary significantly from period to period and have a disproportionate effect on
the periods presented, which affects the comparability of the Companys
financial performance. Management considers the total impact of these items,
along with reported results, when they review and evaluate the Companys
financial performance. 13 Weeks Ended
    
    39 Weeks Endedmillions
    
    October 2,
    
    
    September 27,
    
    
    October 2,
    
    
    September 27,2004
    
    2003
    
    2004
    
    2003Negative carry related to Credit legacy debt and related
debt retirement costs
    
    $
    14
    
    
    $
    --
    
    
    $
    71
    
    
    $
    --Curtailment gain on post-retirement medical plans
    
    
    --
    
    
    
    --
    
    
    
    (30
    )
    
    
    --Employment termination costs
    
    
    --
    
    
    
    --
    
    
    
    41
    
    
    
    28Charges associated with the refinement of TGI business
strategy
    
    
    --
    
    
    
    141
    
    
    
    --
    
    
    
    141Accelerated depreciation resulting from CSC purchased
services transaction
    
    
    --
    
    
    
    --
    
    
    
    39
    
    
    
    --Pro forma effects on the prior year:Divested businesses:Operating income
    
    
    --
    
    
    
    (375
    )
    
    
    --
    
    
    
    (1,144
    )Zero-percent financing costs
    
    
    --
    
    
    
    67
    
    
    
    --
    
    
    
    184Pro forma revenues earned under Citigroup alliance
    
    
    --
    
    
    
    39
    
    
    
    --
    
    
    
    112Total divested businesses
    
    
    --
    
    
    
    (269
    )
    
    
    --
    
    
    
    (848
    )Domestic retirement plan accounting change
    
    
    --
    
    
    
    18
    
    
    
    --
    
    
    
    51Total
    
    $
    14
    
    
    $
    (110
    )
    
    $
    121
    
    
    $
    (628
    )
  
    
    The decrease in merchandise sales and services revenues for the 13-
and 39-week periods ended October 2, 2004 was primarily due to
domestic comparable store sales declines, as well as the prior years
results including $115 and $320 million, respectively, of revenues
attributable to the divested NTB business. Third quarter domestic
revenues were unfavorably impacted by several significant factors,
including challenging weather conditions for much of the quarter,
disruption caused by business resets and product transitions and prior
year comparisons to strong consumer spending following tax rebates.
    
    Credit and Financial Products revenues were lower than the prior year
for the 13- and 39-week periods ended October 2, 2004, as a result of
the sale of Credit in the fourth quarter of 2003. Domestic revenues
generated in the 13- and 39-week periods ended September 27, 2003 were
$1.3 billion and $3.9 billion, respectively. The current year
revenues reflect solely the credit business of Sears Canada.
    
    The decline in the gross margin rates for the 13- and 39-week periods
ended October 2, 2004 is reflective of higher levels of clearance
activity coupled with the need to take deeper markdowns in order to
clear seasonal and slower moving inventory as a result of the weak
sales trends. 22




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##### Table of Contents



SEARS, ROEBUCK AND CO.  
    
    Selling and administrative expenses as a percentage of total revenues
increased for the 13- and 39-week periods ended October 2, 2004
primarily due to the divestiture of Credit and NTB, as well as lower
overall sales in its domestic retail channels. SEGMENT OPERATIONS The Company is organized into two principal business segments  Domestic and
Sears Canada. Following is a discussion of results of operations by business
segment. Domestic Domestic results and key statistics were as follows: 13 Weeks Ended
    
    39 Weeks EndedOctober 2,
    
    September 27,
    
    October 2,
    
    September 27,millions
    
    2004
    
    2003 (2)
    
    2004
    
    2003 (2)Full-line Stores
    
    $
    4,984
    
    
    $
    5,178
    
    
    $
    15,122
    
    
    $
    15,291Specialty Stores
    
    
    1,168
    
    
    
    1,268
    
    
    
    3,527
    
    
    
    3,757Direct to Customer
    
    
    314
    
    
    
    337
    
    
    
    997
    
    
    
    1,078Home Services
    
    
    675
    
    
    
    666
    
    
    
    1,957
    
    
    
    1,901Merchandise sales and services revenues
    
    
    7,141
    
    
    
    7,449
    
    
    
    21,603
    
    
    
    22,027Credit and financial products revenues
    
    
    --
    
    
    
    1,307
    
    
    
    --
    
    
    
    3,903Total Domestic revenues
    
    
    7,141
    
    
    
    8,756
    
    
    
    21,603
    
    
    
    25,930Cost of sales, buying and occupancy
    
    
    5,289
    
    
    
    5,457
    
    
    
    15,795
    
    
    
    16,098Gross margin rate
    
    
    25.9
    %
    
    
    26.7
    %
    
    
    26.9
    %
    
    
    26.9
    %Selling and administrative
    
    
    1,720
    
    
    
    1,962
    
    
    
    5,107
    
    
    
    5,873Selling and administrative expense as a percentage
of total revenues
    
    
    24.1
    %
    
    
    22.4
    %
    
    
    23.6
    %
    
    
    22.6
    %Provision for uncollectible accounts
    
    
    --
    
    
    
    550
    
    
    
    --
    
    
    
    1,467Depreciation and amortization
    
    
    199
    
    
    
    199
    
    
    
    634
    
    
    
    599Interest, net
    
    
    39
    
    
    
    254
    
    
    
    129
    
    
    
    766Special charges
    
    
    --
    
    
    
    112
    
    
    
    41
    
    
    
    140Total costs and expenses
    
    
    7,247
    
    
    
    8,534
    
    
    
    21,706
    
    
    
    24,943Operating (loss)/income
    
    $
    (106
    )
    
    $
    222
    
    
    $
    (103
    )
    
    $
    987Number of:Full-line Stores
    
    
    
    
    
    
    
    
    
    
    871
    
    
    
    869Specialty Stores
    
    
    
    
    
    
    
    
    
    
    1,115
    
    
    
    1,314Lands End Retail Stores
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    16Total Retail Stores
    
    
    
    
    
    
    
    
    
    
    2,003
    
    
    
    2,199Comparable store sales percentage increase/(decrease) (1)Home Group
    
    
    -2.9
    %
    
    
    +2.7
    %
    
    
    -0.5
    %
    
    
    -2.3
    %Apparel/accessories
    
    
    -8.1
    %
    
    
    +1.7
    %
    
    
    -6.4
    %
    
    
    -3.5
    %Full-line Stores
    
    
    -4.7
    %
    
    
    +1.4
    %
    
    
    -2.5
    %
    
    
    -3.0
    %Specialty Stores
    
    
    +0.3
    %
    
    
    +0.3
    %
    
    
    +1.2
    %
    
    
    -2.6
    %Total
    
    
    -4.0
    %
    
    
    +1.2
    %
    
    
    -1.9
    %
    
    
    -2.9
    %


(1)


(2) Includes the results of operations for the divested businesses of Credit and NTB.

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23



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SEARS, ROEBUCK AND CO. Domestic merchandise sales and services revenues decreased 4.1% and 1.9%,
respectively, in the 13 and 39 weeks ended October 2, 2004 due to domestic
comparable store sales declines and a reduction in revenues of $115 and $320
million, respectively, due to the divestiture of NTB in the fourth quarter of
2003. Full-line Stores revenues decreased 3.7% in the 13-week period ended October 2,
2004, due to declines in both the Home and Apparel businesses. Within Apparel,
sales decreases were observed in all major categories, with more significant
declines occurring in seasonal, weather-related product lines. A lower than
expected back-to-school season coupled with unseasonably warm weather in
September negatively impacted apparel sales. Within the Home Group, sales
declines were due to a number of factors, including the favorable impact to
last years revenues following tax rebates, greater than anticipated sales
disruption associated with the reset of the consumer electronics business and
cooler weather in July and August, which negatively impacted home appliance
sales. The decrease in Specialty Stores revenues for the 13- and 39-week periods ended
October 2, 2004 is due to the divestiture of NTB, which contributed $115 and
$320 million of sales, respectively, during the same periods last year. On
July 10, 2004, the Company acquired Standards of Excellence, a San Diego-based
supplier of premium appliances, designer fixtures and decorative hardware.
Standards of Excellence reported $18 million of sales during the 13 weeks ended
October 2, 2004. Comparable store sales for the 13-week period ended October
2, 2004 were flat as increases at The Great Indoors were offset by declines in
hardware and dealer stores. Direct to Customer revenues for the 13- and 39-week periods ended October 2,
2004 declined primarily due to the Lands End direct to customer business
experiencing softer customer response, versus prior year, to its Spring/Summer
catalog offerings, the continued channel shift of business to the Full-line
Stores and lower comparable levels of clearance inventory. Home Services revenues increased for the 13- and 39-week periods ended October
2, 2004 resulting from increases in product repair services, specifically
product protection agreements and parts sales, as well as increases in the
windows and kitchen remodeling categories within the Sears Home Improvement
business. The decrease in the gross margin rate for the 13-week period ended October 2,
2004 was due to increased markdowns taken in consumer electronics, home
appliances and apparel more than offsetting the $39 million of revenues earned
under the long-term alliance with Citigroup. Within consumer electronics, the
Company aggressively marked down discontinued inventory in anticipation of its
business reset. Within home appliances, clearance markdowns were taken in
advance of new product arrivals and to eliminate excess outlet store inventory.
Within apparel, the Company accelerated markdowns of in-season products to
clear slow-moving and seasonal items. The gross margin rate for the 39-week
period ended October 2, 2004 was flat as the $109 million of revenues earned
under the long-term alliance with Citigroup were offset by declines in gross
margin experienced in the third quarter. The increase in selling and administrative expense as a percentage of total
revenues for the 13 and 39 weeks ended October 2, 2004 was primarily due to the
divestitures of Credit and NTB coupled with lower overall sales. The decline in interest expense was primarily due to the prior year results
including $231 million and $717 million of interest expense associated with the
divested Credit business for the 13 and 39 weeks ended September 27, 2003,
respectively. Interest expense for the 13- and 39-week periods ended October 2,
2004 included $14 million and $71 million, respectively, related to the
negative carrying costs associated with the Credit legacy debt. Special charges and impairments for the 39-week period ended October 2, 2004
included a severance charge of $41 million associated with the termination of
3,300 associates resulting from the Companys extensive review of its
headquarters and field operations following the sale of Credit. Special
charges and impairments for the 13-week period ended September 27, 2003
included costs related to asset impairment, contractual obligations and 24




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##### Table of Contents



SEARS, ROEBUCK AND CO. employee terminations incurred in connection with the Companys refinement of
its TGI business. The total pretax charge associated with the refinement was
$141 million. $29 million of this charge was related to inventory clearance
costs and was recorded in cost of sales, buying and occupancy. During the
second quarter of 2003, the Company recorded a $28 million pretax charge for
severance costs associated with the Companys productivity improvement
initiatives. Sears Canada Sears Canada results were as follows: millions
    
    13 Weeks Ended
    
    39 Weeks EndedOctober 2,
    
    September 27,
    
    October 2,
    
    September 27,2004
    
    2003
    
    2004
    
    2003Merchandise sales and services
    
    $
    1,069
    
    
    $
    960
    
    
    $
    3,010
    
    
    $
    2,707Credit revenues
    
    
    85
    
    
    
    78
    
    
    
    257
    
    
    
    233Total revenues
    
    
    1,154
    
    
    
    1,038
    
    
    
    3,267
    
    
    
    2,940Cost of sales, buying and occupancy
    
    
    773
    
    
    
    680
    
    
    
    2,170
    
    
    
    1,915Gross margin rate
    
    
    27.7
    %
    
    
    29.2
    %
    
    
    27.9
    %
    
    
    29.3
    %Selling and administrative
    
    
    289
    
    
    
    267
    
    
    
    860
    
    
    
    765Selling and administrative expense as a percentage
of total revenues
    
    
    25.0
    %
    
    
    25.7
    %
    
    
    26.3
    %
    
    
    26.0
    %Provision for uncollectible accounts
    
    
    16
    
    
    
    17
    
    
    
    43
    
    
    
    44Depreciation and amortization
    
    
    28
    
    
    
    27
    
    
    
    83
    
    
    
    82Interest
    
    
    27
    
    
    
    27
    
    
    
    81
    
    
    
    81Total costs and expenses
    
    
    1,133
    
    
    
    1,018
    
    
    
    3,237
    
    
    
    2,887Operating income
    
    $
    21
    
    
    $
    20
    
    
    $
    30
    
    
    $
    53Foreign exchange rate (quarterly average) (US$/C$)
    
    
    0.7650
    
    
    
    0.7234
    
    
    
    0.7532
    
    
    
    0.6974
 Merchandise sales and services increased by 11.4% and 11.2%, respectively, for
the 13 and 39 weeks ended October 2, 2004 as compared to the prior year due to
the strengthening of the Canadian dollar as well as an overall increase in
local currency sales over the prior year periods. Foreign currency accounted
for approximately 6.1% and 8.2%, respectively, of the increase in merchandise
sales and services, resulting in an underlying Canadian dollar increase of 5.3%
and 3.0%, respectively. For the 13 weeks ended October 2, 2004, sales improved
in home and hardlines categories such as appliances and seasonal goods, while
sales of apparel and accessories were mixed primarily due to unseasonable
weather conditions. For the 39 weeks ended October 2, 2004, sales improved in
the home and hardlines categories, particularly, appliances and furniture, with
sales in apparel and accessories posting an overall decrease as compared to the
prior year. Credit revenues increased 9.0% and 10.3%, respectively, for the 13 and 39 weeks
ended October 2, 2004 primarily due to the strengthening of the Canadian
dollar. Within the Sears Canada credit operations, the net charge-off rate
decreased to 4.7% in the third quarter of 2004 from 6.3% in the third quarter
of 2003. For the 39-week periods ended October 2, 2004 and September 27, 2003,
the net charge-off rates were 4.9% and 5.6%, respectively. The decrease in gross margin rate for the 13 and 39 weeks ended October 2, 2004
reflects a shift in sales mix from higher margin categories, such as apparel
and catalog sales, to sales of lower margin products, such as home appliances,
in its stores. In addition, Sears Canada took additional promotional and
clearance markdowns to reduce seasonal inventories. 25




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##### Table of Contents



SEARS, ROEBUCK AND CO. The decrease in selling and administrative expenses as a percentage of total
revenues for the 13 weeks ended October 2, 2004 is primarily due to a decrease
in advertising expense in the quarter, lower headcount and stronger expense
management. These factors were partially offset by expenses related to
additional restructuring activities that occurred during the third quarter of
2004. The increase in selling and administrative expenses as a percentage of
total revenues for the 39 weeks ended October 2, 2004 was primarily due to a
$12 million pretax charge recorded in the first quarter of 2004 related to
Sears Canadas decision to license Sears Canada Auto Centers to three auto
service providers and other restructuring activities. ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION The Company ended the third quarter of 2004 with approximately $2.9 billion of
cash and available-for-sale securities, a decrease of $6.2 billion from
year-end 2003. During the 39-week period ended October 2, 2004, the Company
utilized cash proceeds from the sale of Credit for working capital needs as
well as to retire $2.5 billion of domestic term debt and repurchase $1.1
billion of common shares. The Company also used proceeds to pay approximately
$1.3 billion of taxes associated with the sale of Credit. The Company expects
to continue its share repurchase activities and to retire an additional $150
million of domestic term debt in the fourth quarter of 2004. The Company is
currently targeting, exclusive of seasonal working capital requirements,
domestic funded term debt, less cash and investments, of approximately $1.5
billion. The Company may from time to time consider selective strategic
transactions to create value and improve performance, which may include
acquisitions, dispositions, restructurings, joint ventures and partnerships. Financing Activities The Companys financing activities include net borrowings, dividend payments
and share issuances and repurchases. The Companys total debt balances as of
October 2, 2004, September 27, 2003 and January 3, 2004 were as follows: October 2, 2004
    
    September 27, 2003
    
    January 3, 2004Sears
    
    
    
    
    
    Sears
    
    
    
    
    
    Searsmillions
    
    Domestic
    
    Canada
    
    Domestic
    
    Canada
    
    Domestic
    
    CanadaShort-term borrowings
    
    $
    754
    
    
    $
    69
    
    
    $
    6,004
    
    
    $
    175
    
    
    $
    719
    
    
    $
    314Long-term debt (including current portion):Long-term borrowings
    
    
    2,870
    
    
    
    1,426
    
    
    
    22,779
    
    
    
    1,317
    
    
    
    5,336
    
    
    
    1,245Capitalized lease obligations
    
    
    341
    
    
    
    139
    
    
    
    371
    
    
    
    140
    
    
    
    355
    
    
    
    142SFAS No. 133 hedge accounting adjustment
    
    
    80
    
    
    
    --
    
    
    
    510
    
    
    
    --
    
    
    
    90
    
    
    
    --Total debt
    
    $
    4,045
    
    
    $
    1,634
    
    
    $
    29,664
    
    
    $
    1,632
    
    
    $
    6,500
    
    
    $
    1,701
 The decrease in total debt from January 3, 2004 is primarily due to the
retirement of $2.5 billion of domestic term debt. The Company continues to use interest rate derivatives to synthetically convert
fixed rate debt to variable rate debt. The interest rate derivatives qualify
as fair value hedges in accordance with SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities, and as such are recorded on the balance
sheet at market value with an offsetting entry to the underlying hedged item,
which is debt. 26




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##### Table of Contents



SEARS, ROEBUCK AND CO. Liquidity Historically, the Company has been an active borrower in various capital
markets due to the funding needs of its domestic credit card receivables
portfolio. As a result of the sale of Credit, the Companys need to access the
capital markets has been greatly reduced. The Companys primary need for
liquidity will be to fund the seasonal working capital requirements of its
retail businesses and capital expenditures. These needs will be funded
primarily with the Companys cash and investment portfolio as well as operating
cash flows. The Companys total cash and available-for-sale investment portfolio as of
October 2, 2004, September 27, 2003 and January 3, 2004 were as follows: October 2, 2004
    
    September 27, 2003
    
    January 3, 2004Sears
    
    
    
    
    
    Sears
    
    
    
    
    
    Searsmillions
    
    Domestic
    
    Canada
    
    Domestic
    
    Canada
    
    Domestic
    
    CanadaCash and cash equivalents
    
    $
    2,628
    
    
    $
    106
    
    
    $
    1,469
    
    
    $
    77
    
    
    $
    8,959
    
    
    $
    98Available-for-sale securities
    
    
    138
    
    
    
    --
    
    
    
    --
    
    
    
    --
    
    
    
    --
    
    
    
    --Total cash and available-for-sale investments
    
    $
    2,766
    
    
    $
    106
    
    
    $
    1,469
    
    
    $
    77
    
    
    $
    8,959
    
    
    $
    98
 In order to ensure liquidity and provide additional capacity, the Company
intends to maintain access to capital markets. The Companys domestic
wholly-owned financing subsidiary, Sears Roebuck Acceptance Corp. (SRAC), has
an unsecured, three-year revolving credit facility in the amount of $2.0
billion. This committed credit facility provides support for SRACs domestic
direct-issue commercial paper program and is available for other general
corporate purposes. No borrowings were outstanding under this credit facility
at the end of the third quarter of 2004. This facility and other debt
agreements require SRAC to maintain specified fixed charge coverage ratios, and
the credit facility requires the Companys domestic segment to maintain a
minimum level of tangible net worth and a minimum interest coverage ratio.
SRAC and the Company were in compliance with these covenants at October 2,
2004. This credit facility does not contain provisions that would restrict
borrowings based on material adverse changes or credit ratings. In addition,
Sears Canada has a $0.5 billion committed credit facility. The ratings of the Companys domestic debt securities are as follows: Moody's
    
    
    
    Standard &Investors
    
    Fitch
    
    Poor's RatingsService
    
    Ratings
    
    ServicesUnsecured long-term debt
    
    Baa1
    
    BBB-
    
    BBBUnsecured commercial paper
    
    P-2
    
    F3
    
    A-2
 On October 25, 2004, Fitch Ratings lowered the Companys long-term debt from
BBB and its short-term debt rating from F2, with a negative rating outlook. On
October 21, 2004, Standard & Poors Ratings Services (Standards & Poors)
placed both the Companys short- and long-term debt ratings on CreditWatch with
negative implications, and Moodys Investors Services (Moodys) placed the
Companys unsecured long-term debt rating on review for possible downgrade and
affirmed its short-term rating at P-2. The Company expects the Standard &
Poors and Moodys ratings reviews to be completed following the fourth
quarter. A downgrade of the Companys short-term rating by Standard & Poors would
reduce its flexibility to issue commercial paper, affecting the cost, placement
term and, potentially, the amount of short-term debt available. However, the
Company has cash and investments to refund all commercial paper outstanding as
well as to meet near term working capital needs. Although Moodys affirmed the
Companys short-term debt rating, a downgrade of that rating by Moodys would
have a similar effect on the Companys short-term borrowing flexibility. 27




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SEARS, ROEBUCK AND CO. The Company does not expect that a one notch downgrade of its long-term debt by
either Standard & Poors or Moodys would substantially affect its ability to
access the term debt capital markets. However, depending upon market
conditions, the amount, timing, and pricing of new borrowings could be
adversely affected. If two or more of the Companys domestic long-term debt
ratings are downgraded to below BBB-/Baa3, the Companys flexibility to access
the term debt capital markets would be reduced. In the event of a downgrade of
the Companys long-term debt, the cost of borrowing and fees payable under
SRACs credit facility could increase. None of the Companys borrowing arrangements have provisions that would require
repayment of principal prior to maturity due to a ratings downgrade. SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES The Companys significant accounting policies are discussed in the Notes to the
Consolidated Financial Statements that are included in the Companys 2003
Annual Report on Form 10-K that is filed with the Securities and Exchange
Commission. In most cases, the accounting policies utilized by the Company are
the only ones permissible under U.S. Generally Accepted Accounting Principles
for businesses in its industry. However, the application of certain of these
policies requires significant judgment or a complex estimation process that can
affect the results of operations and financial position of the Company, as well
as additional information provided in its related footnote disclosures. The
Company bases its estimates on historical experience and other assumptions that
it believes are reasonable. If actual amounts are ultimately different from
previous estimates, the revisions are included in the Companys results of
operations for the period in which the actual amounts become known. The
accounting policies and estimates that can have a significant impact on the
operating results, financial position and footnote disclosures of the Company
are described in the Management Discussion and Analysis in the Companys 2003
Annual Report on Form 10-K. Defined benefit retirement plans The fundamental components of accounting for defined benefit retirement plans
consist of the compensation cost of the benefits earned, the interest cost from
deferring payment of those benefits into the future and the results of
investing any assets set aside to fund the obligation. Such retirement
benefits are earned by associates ratably over their service careers; therefore
the amounts reported in the income statement for these retirement plans have
historically followed the same pattern. Accordingly, changes in the
obligations or the value of assets to fund it have been recognized
systematically and gradually over the associates estimated period of service.
This systematic and gradual recognition of changes has been accomplished by
amortizing experience gains/losses in excess of the 10% corridor into expense
over the associate service period and by recognizing the difference between
actual and expected asset returns over a five-year period. As discussed in Note 9 of the Notes to Condensed Consolidated Financial
Statements, the Company changed its method of accounting for its domestic
defined benefit plans to immediately recognize any experience gains or loss in
excess of the 10% corridor and to value plan assets at fair value. The Company
believes that the new method is preferable in light of changes made to its
domestic benefit plans to discontinue providing pension and retiree medical
benefits to associates under the age of 40 as the new policy accelerates
recognition of events which have already occurred. As a result of this
accounting method change, the Company recorded an after-tax charge of $839
million in the first quarter of 2004 for the cumulative effect of the change in
accounting principle. Under its new accounting method, the Companys pension expense in future
periods may be more volatile as this method accelerates recognition of actual
experience. Furthermore, because the domestic pension plans unrecognized loss
will be at the 10% corridor limit at the beginning of 2004, additional pension
expense will be 28




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##### Table of Contents



SEARS, ROEBUCK AND CO. recognized in 2004 for the full amount of any experience losses realized in
2004. The largest drivers of experience losses in recent years have been the
discount rate used to determine the present value of the obligation and the
actual return on pension assets. CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS During the 13- and 39- week periods ended October 2, 2004, the Company retired
$23 million and $2.5 billion, respectively, of domestic term debt. In
addition, the Company issued a guarantee of SRACs borrowings outstanding under
its three-year unsecured credit facility. As of October 2, 2004, there were no
outstanding borrowings under this facility. STOCK-BASED COMPENSATION As discussed in the Companys 2003 Annual Report on Form 10-K, the Company
follows Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock
Issued to Employees, which does not require recognition of expense for stock
options when the exercise price of an option equals, or exceeds, the fair
market value of the common stock on the date of grant. The Financial Accounting Standards Board has released an Exposure Draft,
Share-Based Payment  An Amendment to FASB Statements No. 123 and 95, which
revises the rules governing stock option accounting. The exposure draft
requires expense recognition of stock options and certain employee stock
purchase plans in the statements of operations. The comment period ended June
30, 2004. The effective date for this statement is expected to be third
quarter fiscal 2005. The Company will adopt any new rules required by the FASB
when they are effective. The pro forma impact on the 13- and 39- week periods
ended October 2, 2004 of expensing unvested stock options is disclosed, as
required under FASB Statement No. 123, Accounting for Stock-Based
Compensation, in Note 10 of the Notes to Condensed Consolidated Financial
Statements. OUTLOOK For the full year, the Company now expects earnings per share, before the
cumulative effect of change in accounting principle, but including $0.24 per
share related to the second quarter severance related costs and additional
depreciation, to be between $1.46 and $1.66. This outlook reflects the lower
than expected year-to-date results, assumes fourth quarter domestic comparable
store sales to be flat and lowers the projected fourth quarter gross margin
rates. This outlook also includes the negative carrying cost of approximately
$0.20 to $0.25 per share on the Companys remaining legacy debt related to
Credit. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION The above Outlook and certain other statements made in this quarterly report on
Form 10-Q and in other public announcements by the Company are forward-looking
statements that are subject to risks and uncertainties that may cause the
Companys actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by these forward-looking statements. Forward-looking statements
include information concerning the Companys future financial performance,
business strategy, plans, goals and objectives. Statements preceded by,
followed by or that otherwise include the words believes, expects,
anticipates, intends, estimates, plans, forecasts, is likely to,
projected and 29




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SEARS, ROEBUCK AND CO. similar expressions or future or conditional verbs such as
will, should, would, may and could are generally forward-looking in
nature and not historical facts. Following are some of the risks and uncertainties that could affect its
financial condition or results of operations, and could cause actual results,
performance or achievements to differ materially from the future results,
performance or achievements expressed or implied by these forward-looking
statements: competitive conditions in retail and related services industries;
changes in consumer confidence, tastes, preferences and spending; the
availability and level of consumer debt; the successful execution of, and
customer response to, the Companys strategic initiatives, including the
Full-line Store strategy and the conversion and integration of the Kmart and
Wal-Mart stores and other new store locations; the pace of growth in the
Companys store locations, which may be higher or lower than anticipated; the
possibility that the Company will identify new business and strategic options
for one or more of its business segments, potentially including selective
acquisitions, dispositions, restructurings, joint ventures and partnerships;
trade restrictions, tariffs, and other factors potentially affecting the
Companys ability to find qualified vendors and access products in an efficient
manner; the Companys ability to successfully implement its initiatives to
improve its inventory management capabilities; the outcome of pending legal
proceedings; anticipated cash flow; social and political conditions such as
war, political unrest and terrorism or natural disasters; the possibility of
negative investment returns in the Companys pension plan; changes in interest
rates; volatility in financial markets; changes in the Companys debt ratings,
credit spreads and cost of funds; the possibility of interruptions in
systematically accessing the public debt markets; general economic conditions
and normal business uncertainty. In addition, the Company typically earns a
disproportionate share of its operating income in the fourth quarter due to
seasonal buying patterns, which are difficult to forecast with certainty.
Additional discussion of these and other risks and uncertainties is contained
elsewhere in this Item 2 and in Item 3, Quantitative and Qualitative
Disclosures About Market Risk. While the Company believes that its forecasts and assumptions are reasonable,
it cautions that actual results may differ materially. The Company intends
the forward-looking statements to speak only as of the time first made and
does not undertake to update or revise them as more information becomes
available. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk The nature of market risks faced by the Company at October 2, 2004 are the same
as disclosed in the Companys Annual Report on Form 10-K for the year ended
January 3, 2004. As of October 2, 2004 and September 27, 2003, 48% and 78%,
respectively, of the Companys funding portfolio was variable rate (including
fixed rate debt synthetically converted to variable rate through the use of
derivative financial instruments). Based on the size of the Companys variable
rate funding portfolio at October 2, 2004 and September 27, 2003, which totaled
$2.7 billion and $24.1 billion, respectively, an immediate 100 basis point
change in interest rates would have affected annual pretax funding costs by
approximately $27 million and $241 million, respectively. These estimates do
not take into account the effect on revenue resulting from invested cash or the
returns on assets being funded. These estimates also assume that the variable
rate funding portfolio remains constant for an annual period and that the
interest rate change occurs at the beginning of the period. As a result of the
sale of Credit, the Companys domestic funding requirements have declined such
that it is unlikely that current maturities of domestic term debt will be
refinanced and, therefore, such current debt maturities are not considered
variable rate in the calculation above. Prior to the sale, it was assumed that
these current maturities of fixed rate term debt would be refinanced and were
considered variable rate due to the interest rate risk upon refinancing. Under
the methodology used prior to the sale, at September 27, 2003, approximately
79% of the Companys funding portfolio was variable rate debt. 30




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) 
 Item 4. Controls and Procedures The Companys management, including Alan J. Lacy, Chairman of the Board of Directors, President and
Chief Executive Officer (principal executive officer) and Glenn R. Richter, Executive Vice
President and Chief Financial Officer (principal financial officer), have evaluated the
effectiveness of the Companys disclosure controls and procedures, as such term is defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the Exchange
Act). Based upon their evaluation, the principal executive officer and principal financial
officer concluded that, as of the end of the period covered by this report, the Companys
disclosure controls and procedures were effective for the purpose of ensuring that the information
required to be disclosed in the reports that the Company files or submits under the Exchange Act
with the Securities and Exchange Commission (the SEC) (1) is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and (2) is accumulated and
communicated to the Companys management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure. As a result of the SECs review of the Companys Form 10-K for the year ended January 3, 2004, it
was determined that the Company should separately reflect the cash flows related to the domestic
MasterCard portfolio as investing activities instead of operating activities within the statement
of cash flows, as the loans generated from the MasterCard were predominately related to activities
external to Sears merchandise and services. After discussions with the SEC, the Company has agreed
to restate its financial statements. The restatement is further discussed in Explanatory Note in
the forepart of this Form 10-Q/A, and in Note 14, Restatement of Statement of Cash Flows in the
Notes to the condensed consolidated financial statements. In managements opinion, given the
nature of the restatement, such restatement did not change its
conclusion that the Companys
controls and procedures are effective. In addition, based on that evaluation, no change in the Companys internal control over financial
reporting occurred during the quarter ended October 2, 2004 that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting. 31




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SEARS, ROEBUCK AND CO. 
 PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings Pending against the Company and certain of its officers and directors are a
number of lawsuits that relate to the credit card business and public
statements about it. The Company believes that all of these claims lack merit
and is defending against them vigorously.  
    
    On and after October 18, 2002, several actions were filed in the United
States District Court for the Northern District of Illinois against the
Company and certain current and former officers alleging that certain public
announcements by the Company concerning its credit card business violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder. The Court has consolidated the actions and
certified the consolidated action as a class action. Discovery is underway.
Trial is scheduled to begin on August 8, 2005.
    
    On and after November 15, 2002, several actions were filed in the United
States District Court for the Northern District of Illinois against the
Company, certain officers and directors, and alleged fiduciaries of Sears
401(k) Savings Plan (the Plan), seeking damages and equitable relief under
the Employee Retirement Income Security Act of 1974 (ERISA). The
plaintiffs purport to represent participants in the Plan, and allege
breaches of fiduciary duties under ERISA in connection with the Plans
investment in the Companys common shares and alleged communications made to
Plan participants regarding the Companys financial condition. These
actions have been consolidated into a single action. Discovery is underway.
No trial date has been set.
    
    On October 23, 2002, a purported derivative action was filed in the Supreme
Court of the State of New York against the Company (as a nominal defendant)
and certain current and former directors
seeking damages on behalf of the Company. The complaint purports to allege
a breach of fiduciary duty by the directors with respect to the Companys
management of the credit card business. On June 21, 2004, the Court
dismissed the complaint because the plaintiff had filed the suit without
having demanded that the Board of Directors bring the suit. The plaintiff
has filed a notice of appeal from that ruling. Two similar actions (the
Cook County actions) were filed in the Circuit Court of Cook County,
Illinois (the Illinois state court), and a third (the federal derivative
action) was filed in the United States District Court for the Northern
District of Illinois. All three actions were stayed pending the disposition
of the action in New York. In light of the New York courts decision, the
Illinois state court lifted the stay of the Cook County actions and
reinstated a motion to dismiss which the defendants had filed prior to the
stay. On September 30, 2004, the Illinois state court granted the
defendants motion to dismiss on the ground that the plaintiff had filed the
suit without having demanded that the Board of Directors bring the suit.
The plaintiffs in the federal derivative action appealed the stay order in
that case to the United States Court of Appeals for the Seventh Circuit. On
July 19, 2004, the Court of Appeals affirmed the stay of the federal
derivative action, and that stay remains in effect.
    
    On June 17, 2003, an action was filed in the Northern District of Illinois
against the Company and certain officers, purportedly on behalf of a class of
all persons who, between June 21, 2002 and October 17, 2002, purchased the 7%
notes that SRAC issued on June 21, 2002. An amended complaint has been filed,
naming as additional defendants certain former officers, SRAC and several
investment banking firms who acted as underwriters for SRACs March 18, May 21
and June 21, 2002 notes offerings. The amended complaint alleges that the
defendants made misrepresentations or omissions concerning its credit business
during the class period and in the registration statements and prospectuses
relating to the offerings. The amended complaint alleges that
these misrepresentations and omissions violated Sections 10(b) and 20(a) of the
Securities Exchange Act and Rule 10b-5 promulgated thereunder, and Sections 11,
12 and 15 of the Securities Act of 1933 and purports to be brought on behalf of
a class of all persons who purchased 32




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SEARS, ROEBUCK AND CO.  any security of SRAC between October 24, 2001 and October 17, 2002,
inclusive. The defendants filed motions to dismiss the action. On
September 24, 2004, the court granted these motions in part, and denied
them in part. The court dismissed the claims related to the March 18 and
May 21, 2002 note offerings because the plaintiff did not purchase notes
in those offerings. The court dismissed the Section 10(b) and Rule 10b-5
claims against several of the individual defendants because the plaintiff
failed to adequately plead such claims. The court sustained the remaining
claims. By invitation of the court, on October 1, 2004, defendants moved
to dismiss the Section 10(b), Rule 10b-5 and Section 20(a) claims not
dismissed in the courts ruling. On October 5, 2004, the court granted
the plaintiff leave to file a second amended complaint. The Company is subject to various other legal and governmental proceedings,
many involving litigation incidental to the businesses. Some matters contain
class action allegations, environmental and asbestos exposure allegations and
other consumer-based claims that involve compensatory, punitive or treble
damage claims in very large amounts as well as other types of relief. The
consequences of these matters are not presently determinable but, in the
opinion of management of the Company after consulting with legal counsel, and
taking into account insurance and reserves, the ultimate liability is not
expected to have a material adverse effect on annual results of operations,
financial position, liquidity or capital resources of the Company. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities Issuer
Purchases of Equity Securities (1)millions (except average price paid per
    
    
    
    
    
    
    
    
    
    Total Numbershare)
    
    
    
    
    
    
    
    
    
    of Shares
    
    
    Dollar Value ofTotal
    
    
    
    
    
    
    Purchased as
    
    
    Shares that MayNumber of
    
    
    Average
    
    
    Part of Publicly
    
    
    Yet Be PurchasedShares
    
    
    Price Paid
    
    
    Announced Plan
    
    
    Under the Plan orPurchased
    
    
    per Share
    
    
    or Programs
    
    
    ProgramsJuly 4, 2004 to July 31, 2004
    
    
    1.3
    
    
    
    $ 35.53
    
    
    
    1.3
    
    
    
    $ 681August 1, 2004 to August 28, 2004
    
    
    4.4
    
    
    
    36.58
    
    
    
    4.4
    
    
    
    520August 29, 2004 to October 2, 2004
    
    
    0.4
    
    
    
    40.23
    
    
    
    0.4
    
    
    
    501As of October 2, 2004
    
    
    6.1
    
    
    
    $ 36.64
    
    
    
    6.1
    
    
    
    $ 501
   (1)
    On October 8, 2003, the Board of Directors approved a new share repurchase program giving the Company authorization to
acquire $3.0 billion of the Companys common shares by December 31, 2006.
 
 
 Item 5. Other Information  (a)
    
    Reports on Form 8-K.A Current Report on Form 8-K dated July 22, 2004 was filed with the
Securities and Exchange Commission on July 22, 2004 to report, under Item
12, the release of second quarter 2004 earnings of the Registrant. 
 Item 6. Exhibits  (a)
    
    Exhibits.An Exhibit Index has been filed as part of this Report on Page E-1. 33




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SEARS, ROEBUCK AND CO. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. SEARS, ROEBUCK AND CO.
(Registrant)February 11, 2005
    By
    /s/ Michael J. GrahamMichael J. GrahamVice President and Controller
     (Principal Accounting Officer and duly authorized
     officer of Registrant) 34




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SEARS, ROEBUCK AND CO.
E-1
EXHIBIT INDEX Exhibit No.*15.
    
    Acknowledgement of awareness
from Deloitte & Touche LLP, dated February 11, 2005, concerning unaudited interim financial information.*31(a).
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31(b).
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
   *
    
    Filed herewith 35