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United StatesSecurities And Exchange Commission Washington, D.C. 20549
 FORM
10-Q/A(Amendment No. 3) x
    
    Quarterly Report Pursuant To Section 13 Or 15(D) Of The
Securities Exchange Act Of 1934 For The
Quarterly Period Ended July 3, 2004Oro
    
    Transition Report Pursuant To Section 13 Or 15(D) Of The
Securities 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. x o
 Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). x o
 As of July 31, 2004, the Registrant had 212,019,588 common shares, $.75 par value, outstanding.




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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
26-weeks ended June 28, 2003. See Note 15 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 February 4, 2005, the Company filed Amendment No. 2 to its Quarterly Report on Form 10-Q for the
period ended July 3, 2004 for the purpose of filing as Exhibit 10(c) a version the Master Services
Agreement between Sears, Roebuck and Co. and Computer Sciences Corporation, dated as of June 1,
2004, that does not have any information redacted. A version of this agreement, in which certain
information had been redacted pursuant to an application with the Commission for confidential
treatment, was previously filed with the Quarterly Report on Form 10-Q that is hereby being amended
and which version of this agreement was replaced in its entirely by Exhibit 10(c), previously
filed. On December 1, 2004, the Company filed Amendment No. 1 to its Quarterly Report on Form 10-Q for the
quarter ended July 3, 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 July 3,
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 15 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 that
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 26 Weeks Ended July 3, 2004


PART I  FINANCIAL INFORMATION
    
    PageItem 1.
    
    Financial StatementsCondensed Consolidated Statements of Operations (Unaudited)13 and 26 Weeks Ended July 3, 2004 and June 28, 2003
    
    
    1Condensed Consolidated Balance Sheets July 3, 2004 (Unaudited),June 28, 2003 (Unaudited) and January 3, 2004
    
    
    2Condensed Consolidated Statements of Cash Flows (Unaudited)26 Weeks Ended July 3, 2004 and June 28, 2003
    
    
    3Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    4Report of Independent Registered Public Accounting Firm
    
    
    18Item 2.
    
    Managements Discussion and Analysis of Financial
    
    
    19Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4.
    
    Controls and Procedures
    
    
    30PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    32Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    33Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    34Acknowledgement 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
    
    26 Weeks EndedJuly 3,
    
    
    June 28,
    
    
    July 3,
    
    
    June 28,2004
    
    2003
    
    2004
    
    2003Merchandise sales and services
    
    $
    8,700
    
    
    $
    8,851
    
    
    $
    16,403
    
    
    $
    16,325Credit and financial products revenues
    
    
    81
    
    
    
    1,345
    
    
    
    172
    
    
    
    2,751Total revenues
    
    
    8,781
    
    
    
    10,196
    
    
    
    16,575
    
    
    
    19,076COSTS AND EXPENSESCost of sales, buying and occupancy
    
    
    6,282
    
    
    
    6,402
    
    
    
    11,903
    
    
    
    11,876Selling and administrative
    
    
    2,064
    
    
    
    2,299
    
    
    
    3,958
    
    
    
    4,409Provision for uncollectible accounts
    
    
    11
    
    
    
    461
    
    
    
    27
    
    
    
    944Depreciation and amortization
    
    
    262
    
    
    
    230
    
    
    
    490
    
    
    
    455Interest, net
    
    
    68
    
    
    
    287
    
    
    
    144
    
    
    
    566Special charges
    
    
    41
    
    
    
    28
    
    
    
    41
    
    
    
    28Total costs and expenses
    
    
    8,728
    
    
    
    9,707
    
    
    
    16,563
    
    
    
    18,278Operating income
    
    
    53
    
    
    
    489
    
    
    
    12
    
    
    
    798Other income, net
    
    
    36
    
    
    
    13
    
    
    
    52
    
    
    
    14Income before income taxes, minority interest and cumulative
effect of change in accounting principle
    
    
    89
    
    
    
    502
    
    
    
    64
    
    
    
    812Income taxes
    
    
    32
    
    
    
    186
    
    
    
    23
    
    
    
    301Minority interest
    
    
    4
    
    
    
    7
    
    
    
    8
    
    
    
    10Income before cumulative effect of change in accounting
principle
    
    
    53
    
    
    
    309
    
    
    
    33
    
    
    
    501Cumulative effect of change in accounting principle
    
    
    --
    
    
    
    --
    
    
    
    (839
    )
    
    
    --NET INCOME/(LOSS)
    
    $
    53
    
    
    $
    309
    
    
    $
    (806
    )
    
    $
    501EARNINGS/(LOSS) PER COMMON SHAREBASICEarnings per share before cumulative effect of change in
accounting principle
    
    $
    0.25
    
    
    $
    1.04
    
    
    $
    0.15
    
    
    $
    1.63Cumulative effect of change in accounting principle
    
    
    --
    
    
    
    --
    
    
    
    (3.86
    )
    
    
    --Earnings/(loss) per share
    
    $
    0.25
    
    
    $
    1.04
    
    
    $
    (3.71
    )
    
    $
    1.63DILUTEDEarnings per share before cumulative effect of change in
accounting principle
    
    $
    0.24
    
    
    $
    1.04
    
    
    $
    0.15
    
    
    $
    1.63Cumulative effect of change in accounting principle
    
    
    --
    
    
    
    --
    
    
    
    (3.86
    )
    
    
    --Earnings/(loss) per share
    
    $
    0.24
    
    
    $
    1.04
    
    
    $
    (3.71
    )
    
    $
    1.63Cash dividends declared per common share
    
    $
    0.23
    
    
    $
    0.23
    
    
    $
    0.46
    
    
    $
    0.46Average common equivalent shares outstanding
    
    
    216.5
    
    
    
    298.0
    
    
    
    217.1
    
    
    
    307.9
 See accompanying notes.  1




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SEARS, ROEBUCK AND CO.
Condensed Consolidated Balance Sheets (Unaudited)millions
    
    July 3,
    
    
    June 28,
    
    
    January 3,2004
    
    2003
    
    2004ASSETSCurrent assetsCash and cash equivalents
    
    $
    3,559
    
    
    $
    2,921
    
    
    $
    9,057Domestic credit card receivables
    
    
    --
    
    
    
    29,465
    
    
    
    --Sears Canada credit card receivables
    
    
    1,813
    
    
    
    1,849
    
    
    
    1,998Less allowance for uncollectible accounts
    
    
    31
    
    
    
    1,953
    
    
    
    42Net credit card receivables
    
    
    1,782
    
    
    
    29,361
    
    
    
    1,956Other receivables
    
    
    557
    
    
    
    733
    
    
    
    733Merchandise inventories, net
    
    
    5,543
    
    
    
    5,447
    
    
    
    5,335Prepaid expenses, deferred charges and other current assets
    
    
    891
    
    
    
    620
    
    
    
    407Deferred income taxes
    
    
    588
    
    
    
    839
    
    
    
    708Total current assets
    
    
    12,920
    
    
    
    39,921
    
    
    
    18,196Property and equipment, net
    
    
    6,565
    
    
    
    6,909
    
    
    
    6,788Deferred income taxes
    
    
    245
    
    
    
    627
    
    
    
    378Goodwill
    
    
    943
    
    
    
    945
    
    
    
    943Tradenames and other intangible assets
    
    
    709
    
    
    
    703
    
    
    
    710Other assets
    
    
    545
    
    
    
    1,268
    
    
    
    708TOTAL ASSETS
    
    $
    21,927
    
    
    $
    50,373
    
    
    $
    27,723LIABILITIESCurrent liabilitiesShort-term borrowings, primarily 90 days or less
    
    $
    770
    
    
    $
    5,464
    
    
    $
    1,033Current portion of long-term debt and capitalized lease
obligations
    
    
    678
    
    
    
    5,050
    
    
    
    2,950Merchandise payables
    
    
    3,014
    
    
    
    2,879
    
    
    
    3,106Income taxes payable
    
    
    462
    
    
    
    724
    
    
    
    1,867Other liabilities
    
    
    2,408
    
    
    
    3,156
    
    
    
    2,950Unearned revenues
    
    
    1,256
    
    
    
    1,256
    
    
    
    1,244Other taxes
    
    
    496
    
    
    
    496
    
    
    
    609Total current liabilities
    
    
    9,084
    
    
    
    19,025
    
    
    
    13,759Long-term debt and capitalized lease obligations
    
    
    4,123
    
    
    
    21,462
    
    
    
    4,218Pension and postretirement benefits
    
    
    1,635
    
    
    
    2,336
    
    
    
    1,956Minority interest and other liabilities
    
    
    1,384
    
    
    
    1,318
    
    
    
    1,389Total Liabilities
    
    
    16,226
    
    
    
    44,141
    
    
    
    21,322COMMITMENTS AND CONTINGENT LIABILITIESSHAREHOLDERS EQUITYCommon shares
    
    
    323
    
    
    
    323
    
    
    
    323Capital in excess of par value
    
    
    3,516
    
    
    
    3,501
    
    
    
    3,519Retained earnings
    
    
    10,731
    
    
    
    8,861
    
    
    
    11,636Treasury stock  at cost
    
    
    (8,740
    )
    
    
    (5,463
    )
    
    
    (7,945
    )Deferred ESOP expense
    
    
    (12
    )
    
    
    (34
    )
    
    
    (26
    )Accumulated other comprehensive loss
    
    
    (117
    )
    
    
    (956
    )
    
    
    (1,106
    )Total Shareholders Equity
    
    
    5,701
    
    
    
    6,232
    
    
    
    6,401TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    21,927
    
    
    $
    50,373
    
    
    $
    27,723Total common shares outstanding
    
    
    213.1
    
    
    
    282.6
    
    
    
    230.4
 See accompanying notes. 2




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SEARS, ROEBUCK AND CO.
Condensed Consolidated Statements of Cash Flows
(Unaudited) 26 Weeks Endedmillions
    
    
    
    
    June 28,July
3,2004
    
    2003(As
restated -see Note 15)CASH FLOWS FROM OPERATING ACTIVITIESNet (loss)/income
    
    $
    (806
    )
    
    $
    501Adjustments to reconcile net income/(loss) to net cash (used in) provided
by operating activitiesDepreciation and amortization
    
    
    490
    
    
    
    455Cumulative effect of change in accounting principle
    
    
    839
    
    
    
    --Provision for uncollectible accounts
    
    
    27
    
    
    
    944Gain on sales of property and investments
    
    
    (37
    )
    
    
    (4
    )Income tax benefit on nonqualified stock options
    
    
    5
    
    
    
    1Change in:Deferred income taxes
    
    
    (325
    )
    
    
    46Credit card receivables
    
    
    110
    
    
    
    1,636Merchandise inventories
    
    
    (219
    )
    
    
    (256
    )Other operating assets
    
    
    169
    
    
    
    49Other operating liabilities (1)
    
    
    (1,726
    )
    
    
    (1,039
    )Net cash (used in) provided by operating activities
    
    
    (1,473
    )
    
    
    2,333CASH FLOWS FROM INVESTING ACTIVITIESProceeds from sales of property and investments
    
    
    73
    
    
    
    19Change in
Sears MasterCard credit card receivables
    
    
    --
    
    
    
    (919
    )Purchases of property and equipment
    
    
    (306
    )
    
    
    (319
    )Purchases of investments
    
    
    (321
    )
    
    
    (22
    )Net cash used in investing activities
    
    
    (554
    )
    
    
    (1,241
    )CASH FLOWS FROM FINANCING ACTIVITIESProceeds from long-term debt
    
    
    283
    
    
    
    2,920Repayments of long-term debt
    
    
    (2,594
    )
    
    
    (2,846
    )(Decrease)/increase in short term borrowings, primarily 90 days or less
    
    
    (256
    )
    
    
    919Common shares repurchased
    
    
    (852
    )
    
    
    (1,019
    )Common shares issued for employee stock plans
    
    
    50
    
    
    
    25Dividends paid to shareholders
    
    
    (99
    )
    
    
    (145
    )Net cash used in financing activities
    
    
    (3,468
    )
    
    
    (146
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (3
    )
    
    
    13NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (5,498
    )
    
    
    959BALANCE AT BEGINNING OF YEAR
    
    
    9,057
    
    
    
    1,962BALANCE AT END OF PERIOD
    
    $
    3,559
    
    
    $
    2,921(1)For the 26 weeks ended July 3, 2004 and June 28, 2003, the Company paid income taxes of $1.3 billion
and $0.3 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 July 3, 2004 and June 28, 2003,
the related Condensed Consolidated Statements of Operations for the 13 and 26
weeks ended July 3, 2004 and June 28, 2003, and the Condensed Consolidated
Statements of Cash Flows for the 26 weeks ended July 3, 2004 and June 28, 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  DISPOSITIONS 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 26-week periods ended June 28, 2003: 13 Weeks Ended June 28, 2003
    
    26 Weeks Ended June 28, 2003millions, except per share data
    
    As
    
    
    Divested
    
    
    
    
    
    As
    
    
    DivestedReported
    
    Businesses
    
    Pro forma
    
    Reported
    
    Businesses
    
    Pro formaRevenues
    
    $
    10,196
    
    
    $
    1,380
    
    
    $
    8,816
    
    
    $
    19,076
    
    
    $
    2,819
    
    
    $
    16,257Net income
    
    
    309
    
    
    
    168
    
    
    
    141
    
    
    
    501
    
    
    
    369
    
    
    
    132Diluted earnings per share
    
    
    1.04
    
    
    
    0.56
    
    
    
    0.48
    
    
    
    1.63
    
    
    
    1.20
    
    
    
    0.43
 NOTE 3  SECURITIZED ASSETS A summary of the Companys securitized assets at July 3, 2004, June 28, 2003
and January 3, 2004 is as follows: millions
    
    July 3,
    
    June 28,
    
    January 3,2004
    
    2003
    
    2004Credit card receivablesDomestic
    
    $
    --
    
    
    $
    23,545
    
    
    $
    --Sears Canada
    
    
    997
    
    
    
    976
    
    
    
    1,093Total credit card receivables
    
    
    997
    
    
    
    24,521
    
    
    
    1,093Property and equipment, net
    
    
    496
    
    
    
    --
    
    
    
    500Total securitized assets
    
    $
    1,493
    
    
    $
    24,521
    
    
    $
    1,593
 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 4




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) 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
    
    July 3, 2004Cost
    
    
    Fair ValueAvailable-for-sale securities:State and political subdivisions obligations
    
    $
    298
    
    
    $
    298U.S. treasury and federal agencies obligations
    
    
    20
    
    
    
    20Corporate debt securities
    
    
    2
    
    
    
    2Total available-for-sale securities
    
    $
    320
    
    
    $
    320
 The fair value of the available-for-sale securities as of July 3, 2004 included
unrealized losses of approximately $0.2 million. The maturity distribution of available-for-sale securities outstanding is
summarized in the following table. Actual maturities may differ from those
scheduled as a result of prepayments by issuers. millions
    
    July 3, 2004Cost
    
    
    Fair ValueAvailable-for-sale securities:Due in one year or less
    
    $
    300
    
    
    $
    300Due after one year through five years
    
    
    20
    
    
    
    20Total available-for-sale securities
    
    $
    320
    
    
    $
    320
 The available-for-sale securities due in one year or less are reported within
prepaid expenses, deferred charges and other current assets on the balance
sheet. The available-for-sale securities due after one year are reported
within other 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 July 3, 2004, June 28, 2003 and January 3, 2004
were $5.5 billion, $31.3 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) July 3,
    
    
    June 28,
    
    
    January 3,millions
    
    2004
    
    
    2003
    
    
    2004Short-term borrowings:Unsecured commercial paper
    
    $
    770
    
    
    $
    3,259
    
    
    $
    1,033Asset-backed commercial paper
    
    
    --
    
    
    
    750
    
    
    
    --Asset-backed facility
    
    
    --
    
    
    
    1,400
    
    
    
    --Bank loans
    
    
    --
    
    
    
    55
    
    
    
    --Total short-term borrowings
    
    
    770
    
    
    
    5,464
    
    
    
    1,033Long-term debt(1):Notes and debentures outstanding
    
    
    3,371
    
    
    
    14,410
    
    
    
    5,825Securitizations
    
    
    880
    
    
    
    10,892
    
    
    
    756Capital lease obligations
    
    
    481
    
    
    
    525
    
    
    
    497Total borrowings
    
    $
    5,502
    
    
    $
    31,291
    
    
    $
    8,111SFAS No. 133 Hedge Accounting Adjustment
    
    
    69
    
    
    
    685
    
    
    
    90Total debt
    
    $
    5,571
    
    
    $
    31,976
    
    
    $
    8,201Memo: Sears Canada debt
    
    $
    1,594
    
    
    $
    1,621
    
    
    $
    1,701
   (1)
    
    Includes capitalized lease obligations and current portion of long-term debt. 
 The Company maintains committed credit facilities to support its unsecured
commercial paper borrowings. On May 17, 2004, the Companys domestic
wholly-owned financing subsidiary, Sears Roebuck Acceptance Corp. (SRAC),
through a syndicate of banks, obtained an unsecured, three-year revolving
credit facility in the amount of $2.0 billion. The new facility replaced a
364-day facility, which expired in May 2004. The facility and related Sears
guarantee require SRAC and the Company to maintain certain fixed charge ratios
and a specified level of tangible net worth for the Companys domestic segment.
SRAC and the Company were in compliance with these covenants at July 3, 2004. During the 13- and 26-week periods ended July 3, 2004, the Company retired
approximately $0.6 billion and $2.4 billion of domestic term debt,
respectively. NOTE 6  SPECIAL CHARGES AND IMPAIRMENTS Following is a summary of the activity in the 2004 reserve established for
employee termination and exit costs: Balance,millions
    
    Beginning
    
    
    2004
    
    
    Cash
    
    
    Balance,of Year
    
    
    Charge
    
    
    Payments
    
    
    July 3, 20042004 Employee termination costs
    
    $
    --
    
    
    $
    41
    
    
    $
    --
    
    
    $
    41
 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. During the second quarter of 2003, the Company recorded a pretax charge of $28
million for the estimated cost of severance for approximately 650 associates.
As of January 3, 2004, the remaining reserve was $9 million. As of July 3,
2004, all such severance had been paid out. 6




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) During the third quarter of 2003, the Company announced a refinement of the
business strategy for The Great Indoors (TGI) which included its decision to
close three TGI stores and cease development of four future locations.
Included within the total pretax charge of $141 million was $2 million related
to employee termination costs and $11 million related to other contractual
obligations for items such as reimbursement to licensed businesses for facility
closures, lease termination costs and other exit costs. As of January 3, 2004,
the three stores were closed, all related employees terminated, and the
remaining severance reserves were $2 million. As of July 3, 2004, the
remaining employee severance reserves were paid out. The remaining contractual
obligation and other costs will be paid out over the remaining contractual
terms. 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 July 3, 2004,
approximately $5.0 billion could be paid in dividends to shareholders under
this covenant. Share Repurchase Program The Company repurchased 18.6 million common shares, at a cost of $852 million,
during the 26 weeks ended July 3, 2004 under a common share repurchase program
approved by the Board of Directors. The Company did not repurchase any common
shares during the 13 weeks ended July 3, 2004. As of July 3, 2004, the Company
had remaining authorization under the existing share repurchase program to
repurchase up to $726 million of shares by December 31, 2006. Comprehensive Income and Accumulated Other Comprehensive Income The following table shows the computation of comprehensive income: 13 Weeks Ended
    
    26 Weeks Endedmillions
    
    July 3,
    
    
    June 28,
    
    
    July 3,
    
    
    June 28,2004
    
    2003
    
    2004
    
    2003Net income/(loss)
    
    $
    53
    
    
    $
    309
    
    
    
    (806
    )
    
    
    501Other comprehensive income/(loss):Minimum pension liability (1)
    
    
    --
    
    
    
    --
    
    
    
    999
    
    
    
    --Amounts amortized into interest expense from OCI
    
    
    2
    
    
    
    4
    
    
    
    6
    
    
    
    8Change in fair value of cash flow hedges
    
    
    --
    
    
    
    --
    
    
    
    --
    
    
    
    1Foreign currency translation adjustments
    
    
    (6
    )
    
    
    50
    
    
    
    (16
    )
    
    
    91Total other comprehensive income/(loss)
    
    
    (4
    )
    
    
    54
    
    
    
    989
    
    
    
    100Total comprehensive income
    
    $
    49
    
    
    $
    363
    
    
    
    183
    
    
    
    601
 7




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) The following table displays the components of accumulated other comprehensive
loss: millions
    
    July 3,
    
    
    June 28,
    
    
    January 3,2004
    
    2003
    
    2004Accumulated derivative loss
    
    $
    (3
    )
    
    $
    (192
    )
    
    $
    (9
    )Currency translation adjustments
    
    
    (35
    )
    
    
    (53
    )
    
    
    (19
    )Minimum pension liability, net of tax(1)
    
    
    (79
    )
    
    
    (711
    )
    
    
    (1,078
    )Accumulated other comprehensive loss
    
    $
    (117
    )
    
    $
    (956
    )
    
    $
    (1,106
    )
   (1)
    
    Minimum pension liability at July 3, 2004 reflects the effect of the change in accounting for domestic retirement benefits discussed in Note 9. 
 NOTE 8  EARNINGS/(LOSS) PER SHARE The following table sets forth the computations of basic and diluted
earnings/(loss) per share: 13 Weeks Ended
    
    26 Weeks Endedmillions, except per share data
    
    July 3,
    
    
    June 28,
    
    
    July 3,
    
    
    June 28,2004
    
    
    2003
    
    
    2004
    
    
    2003Net income/(loss)(1)
    
    $
    53
    
    
    $
    309
    
    
    $
    (806
    )
    
    $
    501Average common shares outstanding
    
    
    213.9
    
    
    
    296.4
    
    
    
    217.1
    
    
    
    307.1Dilutive effect of stock options
    
    
    2.6
    
    
    
    1.6
    
    
    
    --
    
    
    
    0.8Average common equivalent shares outstanding
    
    
    216.5
    
    
    
    298.0
    
    
    
    217.1
    
    
    
    307.9Earnings/(loss) per shareBasic
    
    $
    0.25
    
    
    $
    1.04
    
    
    $
    (3.71
    )
    
    $
    1.63Diluted
    
    $
    0.24
    
    
    $
    1.04
    
    
    $
    (3.71
    )
    
    $
    1.63
   (1)
    
    Net income/(loss) is the same for purposes of calculating basic and diluted earnings/(loss) per share. 
 In each period, certain options were excluded from the computation of diluted
earnings per share because they would have been anti-dilutive. At July 3,
2004, options to purchase 14.5 million common shares at prices ranging from $40
to $64 per share were excluded from the 13-week 2004 calculation. Due to the
net loss recognized for the 26-week period ended July 3, 2004, all options to
purchase 33.1 million common shares were excluded from the 26-week 2004
calculation. At June 28, 2003, options to purchase 23.3 million common shares
at prices ranging from $30 to $64 per share, and 23.5 million common shares at
prices ranging from $27 to $64 per share, were excluded from the 13- and
26-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:  8




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) 26 Weeks Endedmillions, except per share data
    
    July 3,
    
    
    June 28,2004
    
    2003Income before cumulative effect of change in accounting
principle(1)
    
    $
    33
    
    
    $
    501Average common shares outstanding
    
    
    217.1
    
    
    
    307.1Dilutive effect of stock options
    
    
    3.4
    
    
    
    0.8Average common and common equivalent shares outstanding
    
    
    220.5
    
    
    
    307.9Earnings per shareBasic
    
    $
    0.15
    
    
    $
    1.63Diluted
    
    $
    0.15
    
    
    $
    1.63
   (1) Income before cumulative effect of change in accounting principle is the same for purposes of calculating basic and
diluted earnings per share. 
 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. 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
    
    26 Weeks EndedPension
    
    Postretirement
    
    Pension
    
    Postretirementmillions
    
    Benefits
    
    Benefits
    
    Benefits
    
    BenefitsJuly 3,
    
    June 28,
    
    July 3,
    
    June 28,
    
    July 3,
    
    June 28,
    
    July 3,
    
    June 28,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Components of net periodic benefit
cost/(benefit):Benefits earned during the period
    
    $
    26
    
    
    $
    23
    
    
    $
    1
    
    
    $
    1
    
    
    $
    52
    
    
    $
    46
    
    
    $
    2
    
    
    $
    2Interest cost
    
    
    59
    
    
    
    49
    
    
    
    13
    
    
    
    12
    
    
    
    118
    
    
    
    98
    
    
    
    26
    
    
    
    23Expected return on plan assets
    
    
    (63
    )
    
    
    (53
    )
    
    
    (1
    )
    
    
    
    
    
    
    (126
    )
    
    
    (106
    )
    
    
    (2
    )
    
    
    Amortization of unrecognized net prior
service benefit
    
    
    (2
    )
    
    
    (1
    )
    
    
    (19
    )
    
    
    (24
    )
    
    
    (4
    )
    
    
    (2
    )
    
    
    (38
    )
    
    
    (48
    )Recognized net (gain)/loss
    
    
    (1
    )
    
    
    21
    
    
    
    1
    
    
    
    (5
    )
    
    
    (2
    )
    
    
    42
    
    
    
    2
    
    
    
    (10
    )Other
    
    
    1
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (4
    )
    
    
    (30
    )(1)
    
    
    Net periodic benefit cost/(benefit)
    
    $
    20
    
    
    $
    37
    
    
    $
    (5
    )
    
    $
    (16
    )
    
    $
    37
    
    
    $
    74
    
    
    $
    (40
    )
    
    $
    (33
    )
   (1) Represents $30 million curtailment gain related to a change in retiree medical benefits. 
 9




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) 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 26-week period ended July 3, 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 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
    
    Pretax
    
    
    After-taxDomestic Pension
    
    $
    1,574
    
    
    $
    999Domestic Postretirement
    
    
    (253
    )
    
    
    (160
    )Total
    
    $
    1,321
    
    
    $
    839Loss per share
    
    
    
    
    
    $
    (3.86
    )
 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: 10




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) 2003millions, except per share data
    
    FirstQuarter
    
    
    SecondQuarter
    
    
    ThirdQuarter
    
    
    FourthQuarter
    
    
    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. 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 weeks
and 26 weeks ended July 3, 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 reduce pro forma net
income by $22 million ($0.10 per share  basic and diluted)
and increase pro forma net loss by $34 million ($0.15 per share  basic and diluted) for the
13 and 26 weeks ended July 3, 2004, respectively, from the
amounts previously reported. 13 Weeks Ended
    
    26 Weeks EndedJuly 3,
    
    
    June 28,
    
    
    July 3,
    
    
    June 28,millions, except per share data
    
    2004
    
    2003
    
    2004
    
    2003Net income/(loss)  as reported
    
    $
    53
    
    
    $
    309
    
    
    $
    (806
    )
    
    $
    501Less: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related taxes
    
    
    36
    
    
    
    13
    
    
    
    63
    
    
    
    25Net income/(loss)  pro forma
    
    $
    17
    
    
    $
    296
    
    
    $
    (869
    )
    
    $
    476Earnings/(loss) per share  basicAs reported
    
    $
    0.25
    
    
    $
    1.04
    
    
    $
    (3.71
    )
    
    $
    1.63Pro forma
    
    
    0.08
    
    
    
    1.00
    
    
    
    (4.00
    )
    
    
    1.55Earnings/(loss) per share  dilutedAs reported
    
    $
    0.24
    
    
    $
    1.04
    
    
    $
    (3.71
    )
    
    $
    1.63Pro forma
    
    
    0.08
    
    
    
    0.99
    
    
    
    (4.00
    )
    
    
    1.54
 11




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) NOTE 11  LEGAL PROCEEDINGS Pending against the Company and certain of its officers and directors are a
number of lawsuits, described below, 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 has lifted the stay of the Cook County actions and has
reinstated motions to dismiss which defendants had filed prior to the
stay. The Illinois state court has ordered the parties to file
supplemental briefs concerning the effect of the New York courts
decision on the motions to dismiss the Cook County actions. 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. Motions to dismiss the amended
complaint are pending. 12




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##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) The Company is subject to various other legal and governmental proceedings,
many involving litigation incidental to its 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. NOTE 12  FINANCIAL GUARANTEES The Company issues various types of guarantees in the normal course of
business. As of July 3, 2004, the Company had the following guarantees
outstanding: millionsParent guarantee of SRAC debt
    
    $
    3,544Import letters of credit
    
    
    268Standby letters of credit
    
    
    131Secondary lease obligations
    
    
    110Performance guarantee
    
    
    60
 The debt obligations of SRAC are reflected in the Companys consolidated
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 July 3, 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 July 3, 2004, the Company had a $10 million liability
recorded in other liabilities which represents the Companys current estimate
of potential exposure related to these secondary lease obligations. The performance guarantee relates to certain municipal bonds issued in
connection with the Companys headquarters building. This guarantee expires in
2007. NOTE 13  SIGNIFICANT EVENT On June 30, 2004, the Company announced it had agreed to acquire an ownership
or leasehold interest in up to 61 off-mall stores in key Sears markets from
Kmart Holding Corporation and Wal-Mart Stores, Inc. The Company will pay a
maximum purchase price of approximately $620 million in cash for up to 54 Kmart
stores, plus the assumption of existing leases. Sears will make lease payments
to Wal-Mart under subleases for up to seven Wal-mart stores. The acquisitions
include real estate and Kmart store fixtures, but exclude inventory and
liabilities not related to leases. Sears expects to take possession of four
stores in 2004, up to 55 stores in 2005 and the remaining two stores in 2006.
The acquisitions are subject to customary closing conditions. 13




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##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) NOTE 14  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 26-week periods ended
June 28, 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 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 July 3, 2004, approximately $1.4 14




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##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited)  billion of domestic term debt related to the former Credit and Financial
Products segment 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. For the 13 weeks ended July 3, 2004 Searsmillions
    
    Domestic
    
    Canada
    
    ConsolidatedMerchandise sales and services
    
    $
    7,673
    
    
    $
    1,027
    
    
    $
    8,700Credit and financial products revenues
    
    
    --
    
    
    
    81
    
    
    
    81Total revenues
    
    
    7,673
    
    
    
    1,108
    
    
    
    8,781Costs and expensesCost of sales, buying and occupancy
    
    
    5,536
    
    
    
    746
    
    
    
    6,282Selling and administrative
    
    
    1,776
    
    
    
    288
    
    
    
    2,064Provision for uncollectible accounts
    
    
    --
    
    
    
    11
    
    
    
    11Depreciation and amortization
    
    
    237
    
    
    
    25
    
    
    
    262Interest, net
    
    
    41
    
    
    
    27
    
    
    
    68Special change
    
    
    41
    
    
    
    --
    
    
    
    41Total costs and expenses
    
    
    7,631
    
    
    
1,097
    
    
    
8,728Operating income
    
    $
    42
    
    
    $
    11
    
    
    $
    53Total assets
    
    $
    17,962
    
    
    $
    3,965
    
    
    $
    21,927
 For the 13 weeks ended June 28, 2003 DomesticRetail and
    
    Credit and Financial
    
    Corporate
    
    Total
    
    Searsmillions
    
    Related Services
    
    Products
    
    and Other
    
    Domestic
    
    Canada
    
    ConsolidatedMerchandise sales and services
    
    $
    7,771
    
    
    $
    --
    
    
    $
    100
    
    
    $
    7,871
    
    
    $
    980
    
    
    $
    8,851Credit and financial products revenues
    
    
    --
    
    
    
    1,266
    
    
    
    --
    
    
    
    1,266
    
    
    
    79
    
    
    
    1,345Total revenues
    
    
    7,771
    
    
    
    1,266
    
    
    
    100
    
    
    
    9,137
    
    
    
    1,059
    
    
    
    10,196Costs and expensesCost of sales, buying and occupancy
    
    
    5,662
    
    
    
    --
    
    
    
    41
    
    
    
    5,703
    
    
    
    699
    
    
    
    6,402Selling and administrative
    
    
    1,707
    
    
    
    215
    
    
    
    109
    
    
    
    2,031
    
    
    
    268
    
    
    
    2,299Provision for uncollectible accounts
    
    
    --
    
    
    
    446
    
    
    
    --
    
    
    
    446
    
    
    
    15
    
    
    
    461Depreciation and amortization
    
    
    187
    
    
    
    5
    
    
    
    10
    
    
    
    202
    
    
    
    28
    
    
    
    230Interest, net
    
    
    16
    
    
    
    245
    
    
    
    --
    
    
    
    261
    
    
    
    26
    
    
    
    287Special charge
    
    
    16
    
    
    
    --
    
    
    
    12
    
    
    
    28
    
    
    
    --
    
    
    
    28Total costs and expenses
    
    
    7,588
    
    
    
    911
    
    
    
    172
    
    
    
    8,671
    
    
    
    1,036
    
    
    
    9,707Operating income/(loss)
    
    $
    183
    
    
    $
    355
    
    
    $
    (72
    )
    
    $
    466
    
    
    $
    23
    
    
    $
    489Total assets
    
    $
    12,818
    
    
    $
    31,723
    
    
    $
    2,090
    
    
    $
    46,631
    
    
    $
    3,742
    
    
    $
    50,373
 15




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##### Table of Contents



SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) For the 26 weeks ended July 3, 2004 millions
    
    Domestic
    
    
    SearsCanada
    
    
    ConsolidatedMerchandise sales and services
    
    $
    14,462
    
    
    $
    1,941
    
    
    $
    16,403Credit and financial products revenues
    
    
    --
    
    
    
    172
    
    
    
    172Total revenues
    
    
    14,462
    
    
    
    2,113
    
    
    
    16,575Costs and expensesCost of sales, buying and occupancy
    
    
    10,506
    
    
    
    1,397
    
    
    
    11,903Selling and administrative
    
    
    3,387
    
    
    
    571
    
    
    
    3,958Provision for uncollectible accounts
    
    
    --
    
    
    
    27
    
    
    
    27Depreciation and amortization
    
    
    435
    
    
    
    55
    
    
    
    490Interest, net
    
    
    90
    
    
    
    54
    
    
    
    144Special charge
    
    
    41
    
    
    
    --
    
    
    
    41Total costs and expenses
    
    
    14,459
    
    
    
    2,104
    
    
    
    16,563Operating income
    
    $
    3
    
    
    $
    9
    
    
    $
    12Total assets
    
    $
    17,962
    
    
    $
    3,965
    
    
    $
    21,927
 For the 26 weeks ended June 28, 2003 DomesticRetail and
    
    
    Credit andRelated
    
    
    Financial
    
    
    Corporate
    
    
    Total
    
    
    Searsmillions
    
    Services
    
    
    Products
    
    
    and Other
    
    
    Domestic
    
    
    Canada
    
    
    ConsolidatedMerchandise sales and services
    
    $
    14,415
    
    
    $
    --
    
    
    $
    163
    
    
    $
    14,578
    
    
    $
    1,747
    
    
    $
    16,325Credit and financial products revenues
    
    
    --
    
    
    
    2,596
    
    
    
    --
    
    
    
    2,596
    
    
    
    155
    
    
    
    2,751Total revenues
    
    
    14,415
    
    
    
    2,596
    
    
    
    163
    
    
    
    17,174
    
    
    
    1,902
    
    
    
    19,076Costs and expensesCost of sales, buying and occupancy
    
    
    10,576
    
    
    
    --
    
    
    
    65
    
    
    
    10,641
    
    
    
    1,235
    
    
    
    11,876Selling and administrative
    
    
    3,268
    
    
    
    433
    
    
    
    210
    
    
    
    3,911
    
    
    
    498
    
    
    
    4,409Provision for uncollectible accounts
    
    
    --
    
    
    
    917
    
    
    
    --
    
    
    
    917
    
    
    
    27
    
    
    
    944Depreciation and amortization
    
    
    370
    
    
    
    9
    
    
    
    21
    
    
    
    400
    
    
    
    55
    
    
    
    455Interest, net
    
    
    25
    
    
    
    487
    
    
    
    --
    
    
    
    512
    
    
    
    54
    
    
    
    566Special charge
    
    
    16
    
    
    
    --
    
    
    
    12
    
    
    
    28
    
    
    
    --
    
    
    
    28Total costs and expenses
    
    
    14,255
    
    
    
    1,846
    
    
    
    308
    
    
    
    16,409
    
    
    
    1,869
    
    
    
    18,278Operating income/(loss)
    
    $
    160
    
    
    $
    750
    
    
    $
    (145
    )
    
    $
    765
    
    
    $
    33
    
    
    $
    798Total assets
    
    $
    12,818
    
    
    $
    31,723
    
    
    $
    2,090
    
    
    $
    46,631
    
    
    $
    3,742
    
    
    $
    50,373
 16




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##### Table of Contents



NOTE 15  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 26-weeks ended June 28, 2003.
The impact on the respective cash flow statement line items is as follows: 26 weeks endedmillions
    
    June 28, 2003Aspreviouslyreported
    
    
    As restatedChange in credit card receivables/Sears
credit card receivables
    
    $
    717
    
    
    $
    1,636Net cash provided by operating activities
    
    
    1,414
    
    
    
    2,333Change in Sears MasterCard receivables
    
    
    --
    
    
    
    (919
    )Net cash used in investing activities
    
    $
    (322
    )
    
    $
    (1,241
    )
 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 July 3, 2004 and June 28, 2003, and the related
Condensed Consolidated Statements of Operations for the
thirteen-week and twenty-six-week periods ended July 3, 2004 and
June 28, 2003 and the condensed consolidated statements
of cash flow for the twenty-six week periods ended July 3, 2004
and June 28, 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 15, the accompanying Condensed
Consolidated Statement of Cash Flows for the twenty-six week period
ended June 28, 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 LLP  
 18




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##### Table of Contents



SEARS, ROEBUCK AND CO. 
 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. Domestic consisting of:  
    
    Full-line Stores: includes
merchandise sales as well as the
operations of Sears Auto Centers,
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 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 Canada conducts retail,
credit and corporate operations
though Sears Canada Inc. (Sears
Canada), a consolidated, 54.3% owned subsidiary of Sears
   OVERVIEW AND CONSOLIDATED OPERATIONS Sears, Roebuck and Co. 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
our 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 product repair 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 National Tire
& Battery (NTB) to TBC Corporation. The divestiture of these businesses significantly strengthened the Companys
financial position and liquidity. These divestitures, along with the beginning
of a new strategic relationship with Citigroup, have allowed the Company to
refocus its efforts as a pure-play retailer with strong proprietary and
national brands and unparalleled service offerings. 19




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##### Table of Contents



SEARS, ROEBUCK AND CO. The Companys focus in 2004 is to achieve more consistent revenue growth with
improved margins. An important component of the strategy is to provide better
access to the Companys products for its customers. The Company has
aggressively focused on increasing its presence outside of the traditional
mall-based formats. During the second quarter, the Company expanded its
off-mall presence by:  §
    
    agreeing to acquire ownership or leasehold interest in up to 61
off-mall stores in key Sears markets from Kmart Holding Corporation
and Wal-Mart Stores, Inc. for approximately $620 million. Sears
expects to take possession of four stores in 2004, up to 55 stores in
2005 and the remaining two stores in 2006; and§
    
    accelerating the development of our new Sears Grand format from two
pilot locations to up to 14 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. 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 door. The initial results of the Companys two pilot Sears Grand stores are
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 expected to be opened by the end of 2004, the Company expects to be
operating 10 to 14 Sears Grand stores by the end of 2005. The Companys ongoing efforts to improve margins and gain additional
productivity included the conclusion of two notable initiatives in the second
quarter. First, following the sale of Credit, the Company began a
comprehensive review of its headquarters and field support structure in order
to identify opportunities to create a more streamlined, focused retail company
with fewer jobs that are wider in scope and responsibility. This review
resulted in the severance of approximately 3,300 associates within the
headquarters and field organization, with a resultant pretax charge of $41
million. Second, the Company entered into a purchased services transaction with Computer
Sciences Corporation (CSC), whereby CSC will provide the Company with
information technology infrastructure support services for ten years. As part
of the transaction, the Company sold certain assets to CSC for approximately
$19 million, and CSC hired substantially all of the Sears associates who
previously managed Sears technical infrastructure. The Company recognized $39
million of additional depreciation related to shortening the estimated
remaining useful life for the assets sold to CSC. The Company anticipates that the purchased services transaction and the
reduction in the number of headquarters and field associates will generate
approximately $55 to $65 million of annual gross savings for the Company on a
going-forward basis. The Company continues to review its current processes to
identify areas of additional efficiencies. While the Company made progress in accelerating its off-mall strategy during
the second quarter, overall results for the quarter were below expectations.
Sales in key Fathers Day businesses, including Mens Apparel, Tools, Sporting
Goods and certain Lawn & Garden categories did not perform as well as expected.
In apparel, the Company lacked a sufficient amount of fashion-oriented Spring
product in what has been a strong fashion-driven season. This, coupled with
the Companys overcorrection of last years apparel inventory overage, resulted
in shortages in certain key Spring products, including Lands End apparel. 20




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##### Table of Contents



SEARS, ROEBUCK AND CO. The Company is taking aggressive actions to address the issues experienced
during the second quarter and to continue its focus on off-mall growth. Those
actions include:  §
    
    increasing the fashion content within its apparel offering, including
the introduction of two new proprietary brands  Structure and A|Line;§
    
    addressing low inventory levels in key apparel brands;§
    
    implementing a new organization with responsibility to manage the
Companys domestic supply chain, including inventory planning and
replenishment; and§
    
    expanding the merchandise offering in an additional 28 Sears Hardware
stores to include the Companys core of home appliances While management is confident that it is taking the necessary actions to
address the Companys issues, it has revised its third quarter and full-year
guidance as a result of the lower-than-anticipated results in the second
quarter, as well as a modified outlook for the second half of the year. A summary of the Companys consolidated results of operations is as follows: 13 Weeks Ended
    
    26 Weeks Endedmillions, except per share data
    
    July 3,
    
    
    June 28,
    
    
    July 3,
    
    
    June 28,2004
    
    
    2003
    
    
    2004
    
    
    2003Merchandise sales and services revenues
    
    $
    8,700
    
    
    $
    8,851
    
    
    $
    16,403
    
    
    $
    16,325Domestic comparable store sales
    
    
    -2.9
    %
    
    
    -3.5
    %
    
    
    -0.9
    %
    
    
    -5.0
    %Credit and financial products revenues
    
    
    81
    
    
    
    1,345
    
    
    
    172
    
    
    
    2,751Total revenues
    
    $
    8,781
    
    
    $
    10,196
    
    
    $
    16,575
    
    
    $
    19,076Gross margin rate
    
    
    27.8
    %
    
    
    27.7
    %
    
    
    27.4
    %
    
    
    27.3
    %Selling and administrative expense as a percentage
of total revenues
    
    
    23.5
    %
    
    
    22.5
    %
    
    
    23.9
    %
    
    
    23.1
    %Operating income
    
    $
    53
    
    
    $
    489
    
    
    $
    12
    
    
    $
    798Other income, net
    
    $
    36
    
    
    $
    13
    
    
    $
    52
    
    
    $
    14Income before income taxes, minority interest and
cumulative effect of change in accounting principle
    
    $
    89
    
    
    $
    502
    
    
    $
    64
    
    
    $
    812Cumulative effect of change in accounting principle
    
    $
    --
    
    
    $
    --
    
    
    $
    (839
    )
    
    $
    --Net income/(loss)
    
    $
    53
    
    
    $
    309
    
    
    $
    (806
    )
    
    $
    501Earnings/(loss) per share  diluted
    
    $
    0.24
    
    
    $
    1.04
    
    
    $
    (3.71
    )
    
    $
    1.63Earnings per share before cumulative effect of change
in accounting principle
    
    $
    0.24
    
    
    $
    1.04
    
    
    $
    0.15
    
    
    $
    1.63
 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 26-week periods ended June 28, 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 of
the divested businesses, negative carrying and debt retirement costs and
reflecting the impact of the change in accounting for domestic retirement plans
on the results of operations for the 13- and 26-week periods ended July 3, 2004
and June 28, 2003. The table below provides an understanding through this reconciliation. 13 Weeks Ended
    
    26 Weeks EndedJuly 3,
    
    
    June 28,
    
    
    July 3,
    
    
    June 28,millions
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003As reported:Income before income taxes, minority interest and
cumulative effect of change in accounting principle
    
    $
    89
    
    
    $
    502
    
    
    $
    64
    
    
    $
    812Significant items:Curtailment gain on retiree medical plans
    
    
    --
    
    
    
    --
    
    
    
    (30
    )
    
    
    --Negative carrying and debt retirement costs
    
    
    19
    
    
    
    --
    
    
    
    57
    
    
    
    --Pro forma effects on the prior year:Divested businesses:Operating income
    
    
    --
    
    
    
    (364
    )
    
    
    --
    
    
    
    (769
    )Zero-percent financing costs
    
    
    --
    
    
    
    60
    
    
    
    --
    
    
    
    116Pro forma revenues earned under Citigroup alliance
    
    
    --
    
    
    
    40
    
    
    
    --
    
    
    
    72Retirement plan accounting change
    
    
    --
    
    
    
    17
    
    
    
    --
    
    
    
    33Pro forma
    
    $
    108
    
    
    $
    255
    
    
    $
    91
    
    
    $
    264
  §
    
    The decrease in merchandise sales and services revenues for the
13-week period ended July 3, 2004 was primarily due to domestic
comparable store sales declines, as well as the prior years results
including $106 million of revenues attributable to the divested NTB
business. For the 26-week period ended July 3, 2004, merchandise
sales and services increased slightly primarily due to the
strengthening of the Canadian dollar and revenues earned under the
Companys long-term alliance with Citigroup.§
    
    Credit and Financial Products revenues were lower than the prior year
for the 13- and 26-week periods ended July 3, 2004, as a result of
the sale of Credit in the fourth quarter of 2003. Domestic revenues
generated in the 13- and 26-week periods ended June 28, 2003 were $1.3
billion and $2.6 billion, respectively. The current year revenues
reflect solely the credit business of Sears Canada.§
    
    The modest improvement in the gross margin rates for the 13- and
26-week periods ended July 3, 2004 is reflective of revenues earned
under the long-term alliance with Citigroup.§
    
    Selling and administrative expenses as a percentage of total revenues
increased for the 13- and 26-week periods ended July 3, 2004 primarily
due to a reduction in expense leverage resulting from the divestiture
of Credit and NTB, as well as lower overall sales.§
    
    The increase in other income of $23 million for the 13-week period
ended July 3, 2004 compared to the prior years quarter was primarily
related to an $18 million gain on the sale of the Companys remaining
interest in the Sears Tower. The Company also recorded an $11 million
gain in the first quarter of 2004 resulting from the sale of a Sears
Canada real estate joint venture. 22




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##### Table of Contents



SEARS, ROEBUCK AND CO. 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
    
    26 Weeks EndedJuly 3,
    
    June 28,
    
    July 3,
    
    June 28,millions
    
    2004
    
    2003 (2)
    
    2004
    
    2003 (2)Full-line Stores
    
    $
    5,322
    
    
    $
    5,462
    
    
    $
    10,137
    
    
    $
    10,113Specialty Stores
    
    
    1,317
    
    
    
    1,366
    
    
    
    2,359
    
    
    
    2,489Direct to Customer
    
    
    338
    
    
    
    373
    
    
    
    683
    
    
    
    741Home Services
    
    
    696
    
    
    
    670
    
    
    
    1,283
    
    
    
    1,235Merchandise sales and services revenues
    
    
    7,673
    
    
    
    7,871
    
    
    
    14,462
    
    
    
    14,578Credit and financial products revenues
    
    
    --
    
    
    
    1,266
    
    
    
    --
    
    
    
    2,596Total Domestic revenues
    
    
    7,673
    
    
    
    9,137
    
    
    
    14,462
    
    
    
    17,174Cost of sales, buying and occupancy
    
    
    5,536
    
    
    
    5,703
    
    
    
    10,506
    
    
    
    10,641Gross margin rate
    
    
    27.9
    %
    
    
    27.5
    %
    
    
    27.4
    %
    
    
    27.0
    %Selling and administrative
    
    
    1,776
    
    
    
    2,031
    
    
    
    3,387
    
    
    
    3,911Selling and administrative expense as a percentage
of total revenues
    
    
    23.1
    %
    
    
    22.2
    %
    
    
    23.4
    %
    
    
    22.8
    %Provision for uncollectible accounts
    
    
    --
    
    
    
    446
    
    
    
    --
    
    
    
    917Depreciation and amortization
    
    
    237
    
    
    
    202
    
    
    
    435
    
    
    
    400Interest, net
    
    
    41
    
    
    
    261
    
    
    
    90
    
    
    
    512Special charges
    
    
    41
    
    
    
    28
    
    
    
    41
    
    
    
    28Total costs and expenses
    
    
    7,631
    
    
    
    8,671
    
    
    
    14,459
    
    
    
    16,409Operating income
    
    $
    42
    
    
    $
    466
    
    
    $
    3
    
    
    $
    765Number of:Full-line Stores
    
    
    
    
    
    
    
    
    
    
    871
    
    
    
    869Specialty Stores
    
    
    
    
    
    
    
    
    
    
    1,109
    
    
    
    1,307Lands End Retail Stores
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    15Total Retail Stores
    
    
    
    
    
    
    
    
    
    
    1,996
    
    
    
    2,191Comparable store sales percentage increase/(decrease) (1)Home Group
    
    
    -1.9
    %
    
    
    -2.8
    %
    
    
    +0.7
    %
    
    
    -4.7
    %Apparel/accessories
    
    
    -8.3
    %
    
    
    -3.1
    %
    
    
    -5.5
    %
    
    
    -6.1
    %Full-line Stores
    
    
    -4.0
    %
    
    
    -3.1
    %
    
    
    -1.3
    %
    
    
    -5.2
    %Specialty Stores
    
    
    +2.7
    %
    
    
    -5.1
    %
    
    
    +1.6
    %
    
    
    -4.1
    %Total
    
    
    -2.9
    %
    
    
    -3.5
    %
    
    
    -0.9
    %
    
    
    -5.0
    %
   (1)
    
    For purposes of determining comparable store sales, a store is considered to be comparable at the beginning of the 13th month after
the store is opened.(2)
    
    Includes the results of operations for the divested businesses of Credit and NTB. 
 The Company believes that an understanding of its reported results and its
ongoing financial performance for the Domestic segment is not complete without
considering the impact of the divested businesses, negative carrying and debt
retirement costs and reflecting the impact of the change in accounting for
retirement plans on the results of operations for the 13- and 26-week periods
ended July 3, 2004 and June 28, 2003. 23




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SEARS, ROEBUCK AND CO. This reconciliation is provided below: millions
    
    13 Weeks Ended
    
    26 Weeks EndedJuly 3,
    
    June 28,
    
    July 3,
    
    June 28,2004
    
    2003
    
    2004
    
    2003Operating income
    
    $
    42
    
    
    $
    466
    
    
    $
    3
    
    
    $
    765Significant Items:Curtailment gain on retiree medical plans
    
    
    --
    
    
    
    --
    
    
    
    (30
    )
    
    
    --Negative carrying and debt retirement costs
    
    
    19
    
    
    
    --
    
    
    
    57
    
    
    
    --Retirement plan accounting change
    
    
    --
    
    
    
    17
    
    
    
    --
    
    
    
    33Divested businesses
    
    
    --
    
    
    
    (264
    )
    
    
    --
    
    
    
    (581
    )Pro forma
    
    $
    61
    
    
    $
    219
    
    
    $
    30
    
    
    $
    217
 Domestic merchandise sales and services revenues decreased 2.6% in the 13 weeks
ended July 3, 2004 due to a 2.9% decrease in domestic comparable store sales
and a $106 million reduction in revenues due to the divestiture of NTB in the
fourth quarter of 2003. Domestic merchandise sales and services revenues for
the 26 weeks ended July 3, 2004 were relatively flat as compared to the prior
year as the reduction in revenues of $206 million, due to the divestiture of
NTB in the fourth quarter of 2003, was offset by approximately $70 million of
revenues earned under the Citigroup long-term alliance and slight increases
across the Specialty Store formats. Full-line Stores revenues decreased 2.6% in the 13-week period ended July 3,
2004, primarily due to significant declines in Apparel resulting from the
insufficient levels of fashion-oriented Spring product and the overall decline
in apparel inventory as the Company overcorrected its inventory level overages
faced in fiscal 2003. On a comparable store basis, Apparel revenues were down
8.3% for the 13 weeks ended July 3, 2004. Overall, the Home Group revenues, on
a comparable store basis, were down 1.9% for the 13 weeks ended July 3, 2004
due to declines in Sporting Goods, primarily treadmills, and Home Appliances,
primarily air conditioners. The decline in air conditioners was due to
unseasonably cool weather. The decrease in Specialty Stores revenues for the 13- and 26-week periods ended
July 3, 2004 is primarily due to the divestiture of NTB. Increased comparable
store sales for the 13-week period occurred for most formats within this
category with solid improvements in comparable store sales at The Great Indoors
as a result of the Companys refinement of its business strategy. Declines in Direct to Customer revenues for the 13- and 26-week periods ended
July 3, 2004 were primarily due to declines in the Lands End direct to
customer business resulting from softer customer response to Spring/Summer
catalog offerings, the establishment of state tax nexus, 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 26-week periods ended July 3,
2004 resulting from increases in product repair services, specifically product
protection agreements and parts sales, as well as increases in the cabinet
refacing and kitchen remodeling categories within the Sears Home Improvement
business. Domestic gross margin as a percentage of Domestic merchandise sales and
services revenues increased primarily due to the income from revenues earned
through our long-term alliance with Citigroup. Domestic selling and administrative expense as a percentage of Domestic total
revenues increased 90 basis points in the second quarter of 2004 compared to
the prior year. This rate increase was primarily due to a reduction in expense
leverage resulting from the divestitures of Credit and NTB, as well as the
current year including a $21 million expense associated with establishment of
additional insurance reserves resulting from the financial difficulties being
experienced by one of the Companys third party insurance providers. 24




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##### Table of Contents



SEARS, ROEBUCK AND CO. Depreciation and amortization expense for the second quarter of 2004 included
$39 million of additional depreciation related to shortening the estimated
remaining useful lives for the assets sold to CSC under the previously
discussed purchased services arrangement. As previously discussed, the Company underwent an extensive review of its
headquarters and field operations following the sale of Credit. A $41 million
pretax charge was taken in the second quarter of 2004 related to severance
associated with the termination of approximately 3,300 associates. The second
quarter of 2003 included a $28 million pretax charge for severance costs
associated with the Companys productivity improvement initiatives. The two charges taken in the second quarter of 2004 discussed above result from
the Companys ongoing initiatives to streamline its headquarters and field
operations to improve profitability and allow the Company to focus its efforts
on retail operations. The Company anticipates annual gross savings of between
$55 and $65 million resulting from these two actions. The decline in interest expense was primarily due to the prior year results
including $245 million and $487 million of interest expense associated with the
divested Credit business for the 13 and 26 weeks ended June 28, 2003,
respectively. The second quarter 2004 interest expense included $19 million
attributable to the negative carrying cost related to credit legacy debt. Sears Canada Sears Canada results were as follows: millions
    
    13 Weeks Ended
    
    26 Weeks EndedJuly 3,
    
    
    June 28,
    
    
    July 3,
    
    
    June 28,2004
    
    2003
    
    2004
    
    2003Merchandise sales and services
    
    $
    1,027
    
    
    $
    980
    
    
    $
    1,941
    
    
    $
    1,747Credit revenues
    
    
    81
    
    
    
    79
    
    
    
    172
    
    
    
    155Total revenues
    
    
    1,108
    
    
    
    1,059
    
    
    
    2,113
    
    
    
    1,902Cost of sales, buying and occupancy
    
    
    746
    
    
    
    699
    
    
    
    1,397
    
    
    
    1,235Gross margin rate
    
    
    27.4
    %
    
    
    28.7
    %
    
    
    28.0
    %
    
    
    29.3
    %Selling and administrative
    
    
    288
    
    
    
    268
    
    
    
    571
    
    
    
    498Selling and administrative expense as a percentage
of total revenues
    
    
    26.0
    %
    
    
    25.3
    %
    
    
    27.0
    %
    
    
    26.2
    %Provision for uncollectible accounts
    
    
    11
    
    
    
    15
    
    
    
    27
    
    
    
    27Depreciation and amortization
    
    
    25
    
    
    
    28
    
    
    
    55
    
    
    
    55Interest
    
    
    27
    
    
    
    26
    
    
    
    54
    
    
    
    54Total costs and expenses
    
    
    1,097
    
    
    
    1,036
    
    
    
    2,104
    
    
    
    1,869Operating income
    
    $
    11
    
    
    $
    23
    
    
    $
    9
    
    
    $
    33Comparable store sales percentage
increase/(decrease) (C$)
    
    
    1.4
    %
    
    
    -6.5
    %
    
    
    4.3
    %
    
    
    10.0
    %Foreign exchange rate (quarterly average) (US$/C$)
    
    
    0.7353
    
    
    
    0.7109
    
    
    
    0.7473
    
    
    
    0.6844
 Total revenues increased by $49 million, or 4.6%, in the second quarter of 2004
compared to the prior year quarter due to the strengthening of the Canadian
dollar as well as an overall increase in sales over the prior year quarter.
Comparable stores sales on a Canadian dollar (C$) basis increased 1.4% in the
second quarter of 2004. 25




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##### Table of Contents



SEARS, ROEBUCK AND CO. Sales performance during the second quarter varied across the various retail
formats. Full-line Store total store revenues for the second quarter of 2004
were relatively flat with the prior year quarter with comparable store sales up
0.2%. Specialty Stores revenues increased 7.7% over the prior year quarter
with comparable store sales increasing 5.7%. Sales during the quarter were
adversely affected by unseasonably cool weather, with weak sales noted in
seasonal categories such as air conditioners, patio furniture, outdoor grills
and seasonal apparel. Strong sales were noted in major appliances, furniture
and electronics. Credit revenues increased 2.5% in the second quarter of 2004 compared to the
prior year quarter primarily due to the strengthening of the Canadian dollar.
Within the Sears Canada credit operations, the net charge-off rate decreased to
5.1% in the second quarter of 2004 from 5.8% in the second quarter of 2003. The decrease in gross margin rate reflects a shift in sales mix to lower margin
products such as home appliances and furniture, as well as an increase in
promotional and clearance activity to reduce spring and summer seasonal
inventories. The increase in selling and administrative expense as a percentage of total
revenues is primarily due to an increase in employee-related costs and the
inclusion of costs associated with additional restructuring activities that
occurred during the second quarter of 2004. ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION The Company ended the second quarter of 2004 with approximately $3.6 billion of
cash and cash equivalents, a decrease of $5.5 billion from year-end 2003.
During the 26-week period ended July 3, 2004, the Company utilized cash
proceeds from the sale of Credit for working capital needs as well as to retire
$2.4 billion of debt, purchase $320 million of investments and repurchase $852
million 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 retire an additional $200 million of domestic term debt by year-end 2004.
The Company plans to target, exclusive of seasonal working capital
requirements, domestic funded term debt, less cash and investments, of
approximately $1.5 billion. The cash used in operating activities for the 26-week period ended July 3, 2004
primarily relates to the $1.3 billion of taxes paid associated with the sale of
Credit. The cash provided by operating activities for the 26 weeks ended June
28, 2003 resulted from the cash flow associated with the Sears credit
card portfolio. 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
July 3, 2004, June 28, 2003 and January 3, 2004 were as follows: July 3, 2004
    
    June 28, 2003
    
    January 3, 2004millions
    
    
    
    
    
    Sears
    
    
    
    
    
    
    Sears
    
    
    
    
    
    
    SearsDomestic
    
    Canada
    
    Domestic
    
    Canada
    
    Domestic
    
    CanadaShort-term borrowings
    
    $
    671
    
    
    $
    99
    
    
    $
    5,358
    
    
    $
    106
    
    
    $
    719
    
    
    $
    314Long-term debt (including current portion):Long-term borrowings
    
    
    2,891
    
    
    
    1,360
    
    
    
    23,929
    
    
    
    1,373
    
    
    
    5,336
    
    
    
    1,245Capitalized lease obligations
    
    
    346
    
    
    
    135
    
    
    
    382
    
    
    
    143
    
    
    
    355
    
    
    
    142SFAS No. 133 hedge accounting adjustment
    
    
    69
    
    
    
    --
    
    
    
    685
    
    
    
    --
    
    
    
    90
    
    
    
    --Total debt
    
    $
    3,977
    
    
    $
    1,594
    
    
    $
    30,354
    
    
    $
    1,622
    
    
    $
    6,500
    
    
    $
    1,701
 26




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##### Table of Contents



SEARS, ROEBUCK AND CO. The decrease in total debt from January 3, 2004 is primarily due to the
retirement of $2.4 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. 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 capital expenditures and the seasonal working capital
requirements of its retail businesses. These needs will be funded primarily
through liquidation of the Companys cash and investment portfolio as well as
operating cash flows. The Companys total cash and investment portfolio as of July 3, 2004, June 28,
2003 and January 3, 2004 were as follows: July 3, 2004
    
    June 28, 2003
    
    January 3, 2004millions
    
    
    
    
    
    Sears
    
    
    
    
    
    
    Sears
    
    
    
    
    
    
    SearsDomestic
    
    Canada
    
    Domestic
    
    Canada
    
    Domestic
    
    CanadaCash and cash equivalents
    
    $
    3,341
    
    
    $
    218
    
    
    $
    2,833
    
    
    $
    88
    
    
    $
    8,959
    
    
    $
    98Available-for-sale securities
    
    
    320
    
    
    
    --
    
    
    
    --
    
    
    
    --
    
    
    
    --
    
    
    
    --Total cash and investments
    
    $
    3,661
    
    
    $
    218
    
    
    $
    2,833
    
    
    $
    88
    
    
    $
    8,959
    
    
    $
    98
 In order to ensure liquidity and provide additional capacity, the Company
intends to maintain access to capital markets. During the second quarter of
2004, the Company, through its domestic wholly-owned financial subsidiary,
SRAC, syndicated a new $2.0 billion unsecured, three-year credit facility.
Sears guarantees any borrowings outstanding under this facility. This 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 committed credit facility at the end of the second
quarter of 2004. The facility and related Sears guarantee contain certain
financial covenants for both SRAC and the Companys domestic segment. As of
July 3, 2004, the Company and SRAC were in compliance with these covenants. In
addition, Sears Canada has a $0.5 billion committed credit facility. The ratings of the Companys domestic debt securities as of July 3, 2004,
appear in the table below: Moody's
    
    
    
    
    
    
    Standard &Investors
    
    
    Fitch
    
    
    Poor's RatingsService
    
    
    Ratings
    
    
    ServicesUnsecured long-term debt
    
    Baa1
    
    BBB
    
    BBBUnsecured commercial paper
    
    P-2
    
    
    
    F2
    
    
    
    A-2
 During the second quarter, Fitch Ratings lowered its rating of the Companys
domestic unsecured term debt from BBB+, with a negative outlook, to BBB, with a
stable outlook. The Companys short-term rating of F2 was affirmed. In July
2004, Standard & Poors revised the outlook for the Companys debt ratings from
stable to negative. 27




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##### Table of Contents



SEARS, ROEBUCK AND CO. 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 our 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 our 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 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 26- week periods ended July 3, 2004, the Company retired
$0.6 billion and $2.4 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 July 3, 2004, there were no
outstanding borrowings under this facility. 28




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SEARS, ROEBUCK AND CO. 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 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 26- week periods ended July 3,
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 The Company anticipates third quarter 2004 earnings per share to be between
$0.00 and $0.10, including $0.03 to $0.05 per share of negative carrying cost
on the Companys remaining legacy debt. The outlook assumes third quarter
domestic comparable store sales to be down low single-digits. 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 $2.66 and $2.86, reflecting the year to date results and a reduced
revenue outlook based upon first half trends. This 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 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 our
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 proposed acquisition, conversion and
integration of the Kmart and Wal-Mart stores and other new store locations; 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 29




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SEARS, ROEBUCK AND CO. 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 July 3, 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 July 3, 2004 and June 28, 2003, 47% 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 July 3, 2004 and June 28, 2003, which totaled $2.6
billion and $24.3 billion, respectively, an immediate 100 basis point change in
interest rates would have affected annual pretax funding costs by approximately
$26 million and $243 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 June 28, 2003, approximately 78% of the
Companys funding portfolio was variable rate debt. 
 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. 30




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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 15, 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 July 3, 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, described below and previously reported in the Companys
Quarterly Report on Form 10-Q for the 13 weeks ended April 3, 2004, 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 has lifted the stay of the Cook
County actions and has reinstated motions to dismiss which defendants had filed
prior to the stay. The Illinois state court has ordered the parties to file
supplemental briefs concerning the effect of the New York courts decision on
the motions to dismiss the Cook County actions. 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 32




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SEARS, ROEBUCK AND CO.  security of SRAC between October 24, 2001 and October 17, 2002, inclusive.
Motions to dismiss the amended complaint are pending. 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 4.     Submission of Matters to a Vote of Security-Holders On May 13, 2004, the Company held its annual meeting of shareholders at
the Merchandise Review Center in Hoffman Estates, Illinois. William L. Bax, Donald J. Carty, Alan J. Lacy and Hugh B. Price were
elected to Class A of the Board of Directors for three year terms
expiring at the 2007 annual meeting of shareholders. The shareholders
ratified the Audit Committees appointment of Deloitte & Touche LLP as
independent auditors for 2004. Shareholder proposals regarding
declassification of the Board of Directors and a poison pill were
approved by a majority of votes cast. A shareholder proposal regarding
a Bylaw amendment to create a Majority Vote Shareholder Committee was
defeated. The votes on these matters were as follows:  1.
    
    Election of Directors Name
    
    For
    
    WithheldWilliam L. Bax
Donald J. Carty
Alan J. Lacy
Hugh B. Price
    
    176,997,820
144,543,599
143,617,761
144,593,510
    
    11,248,249
43,702,650
44,628,487
43,652,739
  2.
    
    Appointment of Deloitte & Touche LLP as independent
auditors for 2004 For
    
    Against
    
    Abstain179,375,963
    
    6,464,014
    
    2,406,270
  3.
    
    Shareholder proposal regarding declassification of the
Board For
    
    Against
    
    Abstain
    
    Broker Non-Votes108,049,315
    
    51,282,567
    
    4,323,939
    
    24,590,428
  4.
    
    Shareholder proposal regarding a poison pill For
    
    Against
    
    Abstain
    
    Broker Non-Votes99,314,969
    
    59,706,506
    
    4,634,271
    
    24,590,503
 33




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SEARS, ROEBUCK AND CO.  5.
    
    Shareholder proposal regarding Bylaw Amendment to create a
Majority Vote Shareholder Committee For
    
    Against
    
    Abstain
    
    Broker Non-Votes43,040,003
    
    116,055,872
    
    4,559,944
    
    24,590,430
 
 Item 6. Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits.An Exhibit Index has been filed as part of this Report on Page E-1.(b)
    
    Reports on Form 8-K.A Current Report on Form 8-K dated April 21, 2004 was filed with the
Securities and Exchange Commission on April 21, 2004 to report, under Item
12, the release of first quarter 2004 earnings of the Registrant. 34




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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) 35




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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 Sarbanes-Oxley Act of 2002.*31(b).
    
    Certification of Chief Financial
Officer pursuant to Section 302 of 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 Sarbanes-Oxley Act of 2002.
   *
    
    Filed herewith 
 36