##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q/A (Amendment No. 1) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED APRIL 3, 2004
 OR o
    
    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
(State of Incorporation)
    
    36-1750680
(I.R.S. Employer Identification No.)3333 Beverly Road, Hoffman Estates, Illinois
(Address of principal executive offices)
    
    60179
(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 May 1, 2004, the
Registrant had 212,786,603 common shares, $.75 par value, outstanding.




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SEARS, ROEBUCK AND CO.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 Weeks Ended April, 3, 2004 Explanatory Note This Form 10-Q/A is being
filed 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 April 3, 2004 in its entirety. 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 the restatement of
Note 10. 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.   
 PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Statements of Operations (Unaudited)
13 Weeks Ended April 3, 2004 and March 29, 2003
    
    
    1Condensed Consolidated Balance Sheets April 3, 2004 (Unaudited) ,
March 29, 2003 (Unaudited) and January 3, 2004
    
    
    2Condensed Consolidated Statements of Cash Flows (Unaudited)
13 Weeks Ended April 3, 2004 and March 29, 2003
    
    
    3Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    4Report of Independent Registered Public Accounting Firm
    
    
    16Item 2.
    
    Managements Discussion and Analysis of Operations, Financial
Condition and Liquidity
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 4.
    
    Controls and Procedures
    
    
    28PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    29Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
    
    
    30Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    30Acknowledgement of Awareness from Deloitte & Touche LLPCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive Officer and Chief Financial Officer




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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 EndedApril 3,
    
    March 29,2004
    
    2003REVENUESMerchandise sales and services
    
    $
    7,703
    
    
    $
    7,474Credit and financial products revenues
    
    
    91
    
    
    
    1,406Total revenues
    
    
    7,794
    
    
    
    8,880COSTS AND EXPENSESCost of sales, buying and occupancy
    
    
    5,621
    
    
    
    5,474Selling and administrative
    
    
    1,894
    
    
    
    2,110Provision for uncollectible accounts
    
    
    16
    
    
    
    483Depreciation and amortization
    
    
    228
    
    
    
    225Interest, net
    
    
    76
    
    
    
    279Total costs and expenses
    
    
    7,835
    
    
    
    8,571Operating (loss)/income
    
    
    (41
    )
    
    
    309Other income, net
    
    
    16
    
    
    
    1(Loss)/income before income taxes, minority interest and cumulative effect of change in accounting principle
    
    
    (25
    )
    
    
    310Income tax benefit/(expense)
    
    
    9
    
    
    
    (115
    )Minority interest
    
    
    (4
    )
    
    
    (3
    )(Loss)/income before cumulative effect of change in accounting principle
    
    
    (20
    )
    
    
    192Cumulative effect of change in accounting principle
    
    
    (839
    )
    
    
    NET (LOSS)/INCOME
    
    $
    (859
    )
    
    $
    192(LOSS)/EARNINGS PER COMMON SHAREBASIC(Loss)/earnings per share before cumulative effect of change in accounting principle
    
    $
    (0.09
    )
    
    $
    0.60Cumulative effect of change in accounting principle
    
    
    (3.81
    )
    
    
    (Loss)/earnings per share
    
    $
    (3.90
    )
    
    $
    0.60DILUTED(Loss)/earnings per share before cumulative effect of change in accounting principle
    
    $
    (0.09
    )
    
    $
    0.60Cumulative effect of change in accounting principle
    
    
    (3.81
    )
    
    
    (Loss)/earnings per share
    
    $
    (3.90
    )
    
    $
    0.60Cash dividends declared per common share
    
    $
    0.23
    
    
    $
    0.23Average common equivalent shares outstanding
    
    
    220.4
    
    
    
    318.1
 See accompanying notes. 1




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SEARS, ROEBUCK AND CO.
Condensed Consolidated Balance Sheets millions
    
    (Unaudited)April 3,
    
    March 29,
    
    January 3,2004
    
    2003
    
    2004ASSETSCurrent assetsCash and cash equivalents
    
    $
    4,235
    
    
    $
    3,846
    
    
    $
    9,057Domestic credit card receivables
    
    
    
    
    
    
    29,558
    
    
    
    Sears Canada credit card receivables
    
    
    1,897
    
    
    
    1,719
    
    
    
    1,998Less allowance for uncollectible accounts
    
    
    40
    
    
    
    1,843
    
    
    
    42Net credit card receivables
    
    
    1,857
    
    
    
    29,434
    
    
    
    1,956Other receivables
    
    
    489
    
    
    
    716
    
    
    
    733Merchandise inventories, net
    
    
    5,609
    
    
    
    5,730
    
    
    
    5,335Prepaid expenses, deferred charges and other current assets
    
    
    774
    
    
    
    708
    
    
    
    407Deferred income taxes
    
    
    689
    
    
    
    790
    
    
    
    708Total current assets
    
    
    13,653
    
    
    
    41,224
    
    
    
    18,196Property and equipment, net
    
    
    6,603
    
    
    
    6,794
    
    
    
    6,788Deferred income taxes
    
    
    256
    
    
    
    621
    
    
    
    378Goodwill
    
    
    943
    
    
    
    942
    
    
    
    943Tradenames and other intangible assets
    
    
    709
    
    
    
    703
    
    
    
    710Other assets
    
    
    555
    
    
    
    1,124
    
    
    
    708TOTAL ASSETS
    
    $
    22,719
    
    
    $
    51,408
    
    
    $
    27,723LIABILITIESCurrent liabilitiesShort-term borrowings, primarily 90 days or less
    
    $
    864
    
    
    $
    6,775
    
    
    $
    1,033Current portion of long-term debt and capitalized lease obligations
    
    
    1,225
    
    
    
    3,909
    
    
    
    2,950Merchandise payables
    
    
    2,864
    
    
    
    2,898
    
    
    
    3,106Income taxes payable
    
    
    569
    
    
    
    554
    
    
    
    1,867Other liabilities
    
    
    2,362
    
    
    
    3,003
    
    
    
    2,950Unearned revenues
    
    
    1,270
    
    
    
    1,209
    
    
    
    1,244Other taxes
    
    
    485
    
    
    
    445
    
    
    
    609Total current liabilities
    
    
    9,639
    
    
    
    18,793
    
    
    
    13,759Long-term debt and capitalized lease obligations
    
    
    4,372
    
    
    
    22,021
    
    
    
    4,218Pension and postretirement benefits
    
    
    1,656
    
    
    
    2,414
    
    
    
    1,956Minority interest and other liabilities
    
    
    1,374
    
    
    
    1,246
    
    
    
    1,389Total Liabilities
    
    
    17,041
    
    
    
    44,474
    
    
    
    21,322COMMITMENTS AND CONTINGENT LIABILITIESSHAREHOLDERS EQUITYCommon shares
    
    
    323
    
    
    
    323
    
    
    
    323Capital in excess of par value
    
    
    3,518
    
    
    
    3,503
    
    
    
    3,519Retained earnings
    
    
    10,728
    
    
    
    8,617
    
    
    
    11,636Treasury stock  at cost
    
    
    (8,759
    )
    
    
    (4,458
    )
    
    
    (7,945
    )Deferred ESOP expense
    
    
    (19
    )
    
    
    (41
    )
    
    
    (26
    )Accumulated other comprehensive loss
    
    
    (113
    )
    
    
    (1,010
    )
    
    
    (1,106
    )Total Shareholders Equity
    
    
    5,678
    
    
    
    6,934
    
    
    
    6,401TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    22,719
    
    
    $
    51,408
    
    
    $
    27,723Total common shares outstanding
    
    
    212.7
    
    
    
    317.1
    
    
    
    230.4
 See accompanying notes. 2




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SEARS, ROEBUCK AND CO.
Condensed Consolidated Statements of Cash Flows
(Unaudited) 13 Weeks Endedmillions
    
    April 3,
    
    March 29,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIESNet (loss)/income
    
    $
    (859
    )
    
    $
    192Adjustments to reconcile net (loss)/income to net cash (used in) provided by
operating activitiesDepreciation and amortization
    
    
    228
    
    
    
    225Cumulative effect of change in accounting principle
    
    
    839
    
    
    
    Provision for uncollectible accounts
    
    
    16
    
    
    
    483Gain on sales of property and investments
    
    
    (13
    )
    
    
    Income tax (expense)/benefit on nonqualified stock options
    
    
    (3
    )
    
    
    1Change in:Deferred income taxes
    
    
    (437
    )
    
    
    83Credit card receivables
    
    
    59
    
    
    
    960Merchandise inventories
    
    
    (281
    )
    
    
    (580
    )Other operating assets
    
    
    368
    
    
    
    7Other operating liabilities (1)
    
    
    (1,778
    )
    
    
    (1,338
    )Net cash (used in) provided by operating activities
    
    
    (1,861
    )
    
    
    33CASH FLOWS FROM INVESTING ACTIVITIESProceeds from sales of property and investments
    
    
    36
    
    
    
    5Purchases of property and equipment
    
    
    (88
    )
    
    
    (93
    )Purchases of investments
    
    
    (321
    )
    
    
    (15
    )Net cash used in investing activities
    
    
    (373
    )
    
    
    (103
    )CASH FLOWS FROM FINANCING ACTIVITIESProceeds from long-term debt
    
    
    285
    
    
    
    1,780Repayments of long-term debt
    
    
    (1,844
    )
    
    
    (2,014
    )(Decrease)/increase in short term borrowings, primarily 90 days or less
    
    
    (165
    )
    
    
    2,241Common shares repurchased
    
    
    (852
    )
    
    
    Common shares issued for employee stock plans
    
    
    39
    
    
    
    14Dividends paid to shareholders
    
    
    (50
    )
    
    
    (73
    )Net cash (used in) provided by financing activities
    
    
    (2,587
    )
    
    
    1,948Effect of exchange rate changes on cash and cash equivalents
    
    
    (1
    )
    
    
    6NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (4,822
    )
    
    
    1,884BALANCE AT BEGINNING OF YEAR
    
    
    9,057
    
    
    
    1,962BALANCE AT END OF PERIOD
    
    $
    4,235
    
    
    $
    3,846
   (1)
    
    The Company paid income taxes of $1,250 million and $298 million in the first quarter of 2004 and 2003, 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 April 3, 2004 and March 29,
2003, the related Condensed Consolidated Statements of Operations for the 13
weeks ended April 3, 2004 and March 29, 2003, and the Condensed Consolidated
Statements of Cash Flows for the 13 weeks ended April 3, 2004 and March 29,
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. (the Company or Sears) 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, 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-week period ended March 29, 2003: 13 Weeks Ended March 29, 2003As
    
    Divestedmillions, except per share data
    
    Reported
    
    Businesses
    
    Pro formaRevenues
    
    $
    8,880
    
    
    $
    1,407
    
    
    $
    7,473Net income/(loss)
    
    
    192
    
    
    
    201
    
    
    
    (9
    )Diluted earnings/(loss) per share
    
    
    0.60
    
    
    
    0.61
    
    
    
    (0.01
    )
 NOTE 3  SECURITIZED ASSETS A summary of the Companys securitized assets at April 3, 2004, March 29, 2003
and January 3, 2004 is as follows: millions
    
    April 3,
    
    March 29,
    
    January 3,2004
    
    2003
    
    2004Credit card receivablesDomestic
    
    $
    
    
    
    $
    24,000
    
    
    $
    Sears Canada
    
    
    1,204
    
    
    
    999
    
    
    
    1,093Total credit card receivables
    
    
    1,204
    
    
    
    24,999
    
    
    
    1,093Property and equipment
    
    
    500
    
    
    
    
    
    
    
    500Total securitized assets
    
    $
    1,704
    
    
    $
    24,999
    
    
    $
    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 receivable-backed notes. 4




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) The trusts related to the domestic receivables securitized the receivable
balances by issuing certificates representing undivided interests in the
trusts receivables to both outside investors and to the Company. These
certificates entitled the holder to a series of scheduled cash flows under
preset terms and conditions, the receipt of which was dependent upon cash flows
generated by the related trusts assets. The Company accounts for credit card
securitizations as secured borrowings. Certain real estate assets were transferred to a wholly-owned consolidated
subsidiary of Sears and segregated into a trust owned by the consolidated
subsidiary. These assets are related to an inter-company loan agreement. NOTE 4  INVESTMENTS millions
    
    April 3, 2004Cost
    
    Fair ValueAvailable-for-sale securities:U.S. treasury and federal agencies
obligations
    
    $
    30
    
    
    $
    30State and political subdivisions obligations
    
    
    291
    
    
    
    291Total available-for-sale securities
    
    $
    321
    
    
    $
    321
 The fair value of the available-for-sale securities as of April 3, 2004 include
unrealized losses of $0.1 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
    
    April 3, 2004Cost
    
    Fair ValueAvailable-for-sale securities:Due in one year or less
    
    $
    279
    
    
    $
    279Due after one year through five years
    
    
    42
    
    
    
    42Total available-for-sale securities
    
    $
    321
    
    
    $
    321
 The $279 million of available-for-sale securities due in one year or less are
classified within prepaid expenses, deferred charges and other current assets
on the balance sheet. The $42 million of available-for-sale securities due
after one year are classified within other assets on the balance sheet. The Company did not have available-for-sale securities with maturities greater
than 90 days for either the quarter ended March 29, 2003 or the year ended
January 3, 2004. 5




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) NOTE 5  BORROWINGS Total borrowings outstanding at April 3, 2004, March 29, 2003 and January 3,
2004 were $6.4 billion, $32.1 billion and $8.1 billion, respectively. Total
borrowings are presented on the balance sheet as follows: April 3,
    
    March 29,
    
    January 3,millions
    
    2004
    
    2003
    
    2004Short-term borrowings:Unsecured commercial paper
    
    $
    864
    
    
    $
    3,050
    
    
    $
    1,033Asset-backed commercial paper
    
    
    
    
    
    
    2,250
    
    
    
    Asset-backed facility
    
    
    
    
    
    
    1,400
    
    
    
    Bank loans
    
    
    
    
    
    
    75
    
    
    
    864
    
    
    
    6,775
    
    
    
    1,033Long-term debt(1):Notes and debentures outstanding
    
    
    3,980
    
    
    
    12,687
    
    
    
    5,825Securitizations
    
    
    1,028
    
    
    
    12,208
    
    
    
    756Capital lease obligations
    
    
    488
    
    
    
    461
    
    
    
    497Total borrowings
    
    $
    6,360
    
    
    $
    32,131
    
    
    $
    8,111SFAS No. 133 Hedge Accounting Adjustment
    
    
    101
    
    
    
    574
    
    
    
    90Total debt
    
    $
    6,461
    
    
    $
    32,705
    
    
    $
    8,201Memo: Sears Canada debt
    
    $
    1,842
    
    
    $
    1,539
    
    
    $
    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. In February 2003, the Companys domestic
wholly-owned financing subsidiary, Sears Roebuck Acceptance Corp. (SRAC),
through a syndicate of banks, obtained an unsecured, 364-day revolving credit
facility in the amount of $3.5 billion. Effective November 3, 2003, SRAC
amended the facility, extending the termination date to May 2004 for consenting
lenders and modifying the option to extend the repayment of any borrowings to
November 2004. Pursuant to the amendment, the commitment amount was reduced to
$2.5 billion as of December 3, 2003. SRAC is in the process of syndicating a
new $2.0 billion unsecured, three-year revolving credit facility. SRAC expects
to have the new facility in place no later than the expiration of the current
facility. During the first quarter of 2004, the Company retired $1.8 billion of domestic
term debt and incurred costs related to the debt retirement of $12 million
which are included within interest expense in the statement of operations. 6




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) NOTE 6  SPECIAL CHARGES AND IMPAIRMENTS Following is a summary of the 2004 activity in the reserve established for
employee termination and exit costs related to previously announced
restructuring initiatives: Balance,
    
    
    
    
    
    Balance,millions
    
    Beginning
    
    Cash
    
    April 3,of Year
    
    Payments
    
    2004Productivity initiatives:Employee termination costs
    
    $
    9
    
    
    $
    (5
    )
    
    $
    4The Great Indoors:Employee termination costs
    
    
    2
    
    
    
    (1
    )
    
    
    1Contractual obligations and other costs
    
    
    11
    
    
    
    (5
    )
    
    
    613
    
    
    
    (6
    )
    
    
    7$
    22
    
    
    $
    (11
    )
    
    $
    11
 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, all identified associates had been terminated and the
remaining reserve relates to severance to be paid out by the end of 2004. 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 and all related employees terminated. The
remaining employee termination reserves will be paid out by the end of the
second quarter of 2004. 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 April 3, 2004,
approximately $4.7 billion could be paid in dividends to shareholders under
this covenant. Share Repurchase Program The Company repurchased 18.6 million common shares during the first quarter of
2004 at a cost of $852 million under a common share repurchase program approved
by the Board of Directors. The Company did not repurchase any common shares
during the first quarter of 2003. As of April 3, 2004, the Company has
remaining authorization under the existing share repurchase program to
repurchase $726 million of shares by December 31, 2006. 7




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) Comprehensive Income and Accumulated Other Comprehensive Income The following table shows the computation of comprehensive income: 13 Weeks EndedApril 3,
    
    March 29,millions
    
    2004
    
    2003Net (loss)/income
    
    $
    (859
    )
    
    $
    192Other comprehensive income:Minimum pension liability (1)
    
    
    999
    
    
    
    Amounts amortized into interest expense from OCI
    
    
    4
    
    
    
    4Change in fair value of cash flow hedges
    
    
    
    
    
    
    1Foreign currency translation adjustments
    
    
    (10
    )
    
    
    41Total other comprehensive income
    
    
    993
    
    
    
    46Total comprehensive income
    
    $
    134
    
    
    $
    238
 The following table displays the components of accumulated other comprehensive
loss: April 3,
    
    March 29,
    
    January 3,millions
    
    2004
    
    2003
    
    2004Accumulated derivative loss
    
    $
    (5
    )
    
    $
    (196
    )
    
    $
    (9
    )Currency translation adjustments
    
    
    (29
    )
    
    
    (103
    )
    
    
    (19
    )Minimum pension liability, net of tax (1)
    
    
    (79
    )
    
    
    (711
    )
    
    
    (1,078
    )Accumulated other comprehensive loss
    
    $
    (113
    )
    
    $
    (1,010
    )
    
    $
    (1,106
    )
   (1)
    
    Minimum pension liability at April 3, 2004 reflects the effect of the change in accounting
for domestic retirement
benefits discussed in Note 9.  NOTE 8  (LOSS)/EARNINGS PER SHARE The following table sets forth the computations of basic and diluted
(loss)/earnings per share: 13 Weeks Endedmillions, except per share data
    
    April 3,
    
    March 29,2004
    
    2003Net (loss)/income (1)
    
    $
    (859
    )
    
    $
    192Average common shares outstanding
    
    
    220.4
    
    
    
    317.9Dilutive effect of stock options
    
    
    
    
    
    
    0.2Average common and common equivalent shares outstanding
    
    
    220.4
    
    
    
    318.1(Loss)/earnings per shareBasic
    
    $
    (3.90
    )
    
    $
    0.60Diluted
    
    $
    (3.90
    )
    
    $
    0.60
   (1)
    
    Net (loss)/income is the same for purposes of calculating basic and diluted (loss)/earnings per share.  8




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) The following table sets forth the computations of basic and diluted
(loss)/earnings per share before the cumulative effect of the change in
accounting principle: 13 Weeks Endedmillions, except per share data
    
    April 3,
    
    March 29,2004
    
    2003(Loss)/income before cumulative effect of change in accounting
principle (1)
    
    $
    (20
    )
    
    $
    192Average common shares outstanding
    
    
    220.4
    
    
    
    317.9Dilutive effect of stock options
    
    
    
    
    
    
    0.2Average common and common equivalent shares outstanding
    
    
    220.4
    
    
    
    318.1(Loss)/earnings per shareBasic
    
    $
    (0.09
    )
    
    $
    0.60Diluted
    
    $
    (0.09
    )
    
    $
    0.60
   (1)
    
    (Loss)/income before cumulative effect of change in accounting principle is the same for purposes of calculating basic and
diluted (loss)/earnings per share.  In each period, certain options were excluded from the computation of diluted
earnings per share because they would have been anti-dilutive. Due to the net
loss recognized for the 13-week period ended April 3, 2004, all options to
purchase 31.5 million common shares were excluded from the 13-week 2004
calculation. At March 29, 2003, options to purchase 26.3 million common shares
at prices ranging from $23 to $64 per share were excluded from the 13-week 2003
calculation. 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. 9




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) The components of net periodic benefit cost/(benefit) are as follows: 13 Weeks EndedPension Benefits
    
    Postretirement Benefitsmillions
    
    April 3,
    
    March 29,
    
    April 3,
    
    March 29,2004
    
    2003
    
    2004
    
    2003Components of net periodic benefit cost/(benefit):Benefits earned during the period
    
    $
    26
    
    
    $
    23
    
    
    $
    1
    
    
    $
    1Interest cost
    
    
    59
    
    
    
    49
    
    
    
    13
    
    
    
    11Expected return on plan assets
    
    
    (63
    )
    
    
    (53
    )
    
    
    (1
    )
    
    
    Amortization of unrecognized net prior service
benefit
    
    
    (2
    )
    
    
    (1
    )
    
    
    (19
    )
    
    
    (24
    )Recognized net (gain)/loss
    
    
    (1
    )
    
    
    21
    
    
    
    1
    
    
    
    (5
    )Other
    
    
    (2
    )
    
    
    (2
    )
    
    
    (30
    )(1)
    
    
    Net periodic benefit cost/(benefit)
    
    $
    17
    
    
    $
    37
    
    
    $
    (35
    )
    
    $
    (17
    )
   (1)
    
    Represents $30 million curtailment gain related to a change in retiree medical benefits. 
 The Company does not expect to contribute to the domestic pension plan in 2004. Accounting Change Subsequent to the sale of its domestic Credit and Financial Products business,
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 13-week period ended April 3, 2004 as a result
of the change in 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 Nos. 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 10




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) 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 as 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 OPEB
    
    
    (253
    )
    
    
    (160
    )Total
    
    $
    1,321
    
    
    $
    839Loss per share
    
    
    
    
    
    $
    (3.81
    )
 Presented below is pro forma net income and earnings per share for the quarters
ended March 29, 2003, June 28, 2003, September 27, 2003, January 3, 2004 and
full-year 2003 showing the estimated effects as if the accounting change were
applied retroactively: 2003millions
    
    First
    
    Second
    
    Third
    
    Fourth
    
    2003Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    YearNet income  as reported
    
    $
    192
    
    
    $
    309
    
    
    $
    147
    
    
    $
    2,749
    
    
    $
    3,397Impact of change in accounting for domestic
retirement plans
    
    
    10
    
    
    
    11
    
    
    
    11
    
    
    
    (373
    )
    
    
    (341
    )Net income   pro forma
    
    $
    202
    
    
    $
    320
    
    
    $
    158
    
    
    $
    2,376
    
    
    $
    3,056Earnings per share  basic:As reported
    
    $
    0.60
    
    
    $
    1.04
    
    
    $
    0.53
    
    
    $
    11.06
    
    
    $
    11.95Pro forma
    
    $
    0.63
    
    
    $
    1.08
    
    
    $
    0.57
    
    
    $
    9.56
    
    
    $
    10.75Earnings per share  diluted:As reported
    
    $
    0.60
    
    
    $
    1.04
    
    
    $
    0.52
    
    
    $
    10.84
    
    
    $
    11.86Pro forma
    
    $
    0.63
    
    
    $
    1.08
    
    
    $
    0.56
    
    
    $
    9.37
    
    
    $
    10.67
 The Company uses October 31 as the measurement date for determining retirement
plan assets, obligations and experience gains or losses. Under the new
accounting method for domestic plans, the Company will recognize the portion of
experience gain or loss in excess of the 10% corridor at the measurement date,
which falls in the fourth quarter of the fiscal year. Had the Company used
this accounting method in 2003, an experience loss would have been recognized
in the fourth quarter of 2003 which would have reduced net income by $373
million. NOTE 10- STOCK BASED COMPENSATION At April 3, 2004, 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 (loss)/income, 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
ended April 3, 2004, the Company determined it had used an incorrect
vesting period for certain stock options granted in 2004 in 11




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) the calculation of its pro forma stock-based employee compensation expense determined under the fair
value based method. As a result, the following pro forma information
has been restated to increase the pro forma stock-based employee
compensation expense determined under the fair value method and pro
forma net loss by
$12 million ($0.06 per share - basic and diluted) for the 13
weeks ended April 3, 2004, from the amounts previously reported. 13 Weeks EndedApril 3,
    
    March 29,millions, except earnings per share
    
    2004
    
    2003Net (loss)/income  as reported
    
    $
    (859
    )
    
    $
    192Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related taxes
    
    
    27
    
    
    
    10Net (loss)/income  pro forma
    
    $
    (886
    )
    
    $
    182(Loss)/earnings per share  basicAs reported
    
    $
    (3.90
    )
    
    $
    0.60Pro forma
    
    
    (4.02
    )
    
    
    0.57(Loss)/earnings per share  dilutedAs reported
    
    $
    (3.90
    )
    
    $
    0.60Pro forma
    
    
    (4.02
    )
    
    
    0.57
 NOTE 11  EFFECTS OF ACCOUNTING STANDARDS NOT YET ADOPTED In March 2004, the Financial Accounting Standards Board (FASB) staff issued
FASB Staff Position 106-b, Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
Act). The Act was signed into law in December 2003. Any measures of the
accumulated projected benefit obligation or net periodic postretirement benefit
cost in the financial statements or accompanying notes do not reflect the
effects of the Act on the Companys domestic plans. While the impact of the
Medicare legislation will not be known until detailed regulations are
developed, the Company does not expect the impact to be material to the
Companys consolidated financial statements. NOTE 12  LEGAL PROCEEDINGS Pending against the Company and certain of its officers and directors are a
number of lawsuits, described below, that relate to the domestic credit card
business and public statements about the business. 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
domestic 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. The Court has scheduled trial to begin on
April 4, 2005. Discovery is underway.
    
    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 12




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited)   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 domestic credit card business. A motion
to dismiss has been and remains pending. Two similar actions were
subsequently filed in the Circuit Court of Cook County, Illinois, and
a third was filed in the United States District Court for the Northern
District of Illinois. These actions have been and remain stayed
pending disposition of the action in New York. The plaintiffs in the
Northern District of Illinois action have appealed the stay order to
the United States Court of Appeals for the Seventh Circuit. That
appeal has been briefed and argued but has not yet been decided.
    
    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
domestic credit card 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. 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. NOTE 13  FINANCIAL GUARANTEES The Company issues various types of guarantees in the normal course of
business. As of April 3, 2004, the Company had the following guarantees
outstanding: millionsParent guarantee of SRAC debt
    
    $
    4,147Import letters of credit
    
    
    179Secondary lease obligations
    
    
    80Standby letters of credit
    
    
    89Performance guarantee
    
    
    70
 The debt obligations of SRAC are reflected in the Companys consolidated
balance sheets. As a result of the Companys sale of its domestic Credit and
Financial Products business, Sears, Roebuck and Co. (Parent) 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. This guarantee would require the Parent to repay such debt should
SRAC default. 13




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited) 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 April 3, 2004, the Company had a $14 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 14  SEGMENT DISCLOSURES With the sale of the domestic Credit and Financial Products business, 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-week period ended March 29,
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 its domestic Credit and financial Products business in
November 2003, 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 the 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 are
included in the results of operation through November 2, 2003. Under the
terms of the long-term 14




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SEARS, ROEBUCK AND CO.
Notes to Condensed Consolidated Financial Statements
(Unaudited)  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 the Credit and Financial Products business, 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. 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 April 3, 2004 millions
    
    
    
    
    
    SearsDomestic
    
    Canada
    
    ConsolidatedMerchandise sales and services
    
    $
    6,789
    
    
    $
    914
    
    
    $
    7,703Credit and financial products revenues
    
    
    
    
    
    
    91
    
    
    
    91Total revenues
    
    
    6,789
    
    
    
    1,005
    
    
    
    7,794Costs and expensesCost of sales, buying and occupancy
    
    
    4,970
    
    
    
    651
    
    
    
    5,621Selling and administrative
    
    
    1,611
    
    
    
    283
    
    
    
    1,894Provision for uncollectible accounts
    
    
    
    
    
    
    16
    
    
    
    16Depreciation and amortization
    
    
    198
    
    
    
    30
    
    
    
    228Interest, net
    
    
    49
    
    
    
    27
    
    
    
    76Total costs and expenses
    
    
    6,828
    
    
    
    1,007
    
    
    
    7,835Operating loss
    
    $
    (39
    )
    
    $
    (2
    )
    
    $
    (41
    )Total assets
    
    $
    18,535
    
    
    $
    4,184
    
    
    $
    22,719
 For the 13 weeks ended March 29, 2003 Domesticmillions
    
    Retail and
    
    Credit andRelated
    
    Financial
    
    Corporate
    
    Total
    
    SearsServices
    
    Products
    
    and Other
    
    Domestic
    
    Canada
    
    ConsolidatedMerchandise sales and services
    
    $
    6,644
    
    
    $
    
    
    
    $
    63
    
    
    $
    6,707
    
    
    $
    767
    
    
    $
    7,474Credit and financial products revenues
    
    
    
    
    
    
    1,330
    
    
    
    
    
    
    
    1,330
    
    
    
    76
    
    
    
    1,406Total revenues
    
    
    6,644
    
    
    
    1,330
    
    
    
    63
    
    
    
    8,037
    
    
    
    843
    
    
    
    8,880Costs and expensesCost of sales, buying and occupancy
    
    
    4,914
    
    
    
    
    
    
    
    24
    
    
    
    4,938
    
    
    
    536
    
    
    
    5,474Selling and administrative
    
    
    1,561
    
    
    
    218
    
    
    
    101
    
    
    
    1,880
    
    
    
    230
    
    
    
    2,110Provision for uncollectible accounts
    
    
    
    
    
    
    471
    
    
    
    
    
    
    
    471
    
    
    
    12
    
    
    
    483Depreciation and amortization
    
    
    183
    
    
    
    4
    
    
    
    11
    
    
    
    198
    
    
    
    27
    
    
    
    225Interest, net
    
    
    9
    
    
    
    242
    
    
    
    
    
    
    
    251
    
    
    
    28
    
    
    
    279Total costs and expenses
    
    
    6,667
    
    
    
    935
    
    
    
    136
    
    
    
    7,738
    
    
    
    833
    
    
    
    8,571Operating (loss)/income
    
    $
    (23
    )
    
    $
    395
    
    
    $
    (73
    )
    
    $
    299
    
    
    $
    10
    
    
    $
    309Total assets
    
    $
    12,964
    
    
    $
    32,732
    
    
    $
    2,200
    
    
    $
    47,896
    
    
    $
    3,512
    
    
    $
    51,408
 15




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SEARS, ROEBUCK AND CO. 
 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 April 3, 2004 and March 29, 2003, and the related
Condensed Consolidated Statements of Operations and Cash Flows for the 13-week
periods ended April 3, 2004 and March 29, 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 of 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. 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 Operations, Shareholders Equity, and Cash Flows for the year
then ended (not presented herein); and in our report dated March 9, 2004, 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 
 
 16




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SEARS, ROEBUCK AND CO.
13 Weeks Ended April 3, 2004 and March 29, 2003 
 Item 2. Managements Discussion and Analysis of Operations, Financial Condition and Liquidity With the sale of the domestic Credit and Financial Products business in the
fourth quarter of 2003, the Companys financial reporting segments for fiscal
2004 were changed to reflect two operating segments  a Domestic segment and a
Sears Canada segment. Domesticconsisting of:  
    
    Full-line Stores: includes
merchandise sales as well as the
operations of Sears Auto Centers
and 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, primarily consisting of
administrative activities
    
    Credit and Financial Products:
includes the 2003 results of
operations of the domestic Credit
and Financial Products business
(sold on November 3, 2003) Sears Canadaconducts retail, credit and
corporate operations 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 system with
over 10,000 technicians, leading internet channels including sears.com,
sears.ca and landsend.com and direct to customer catalog programs. Fiscal 2003 was a defining 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, 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, has allowed the Company to
refocus its efforts as a pure-play retailer with strong proprietary brands and
unparalleled service offerings. 17




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SEARS, ROEBUCK AND CO.
13 Weeks Ended April 3, 2004 and March 29, 2003 The Companys focus in 2004 is to achieve more consistent revenue growth with
improved margins. In the first quarter of 2004, the Company made progress
towards achieving these objectives, including:  
    
    introducing a range of innovative products within our Home Group;
    
    reassorting our offerings in Home Fashions;
    
    introducing new brands within our apparel collection, including U.S. Polo within mens and boys wear;
    
    converting an additional 35 Sears Hardware stores to include the offerings of home appliances;
    
    announcing the expansion of sears.com to include certain apparel offerings; and
    
    entering into contract negotiations with Computer Sciences Corporation (CSC), whereby CSC will provide Sears with certain
Information Technology support services. The Company also opened its second Sears Grand, its new off-mall pilot store.
The initial results of these stores are encouraging as the customer response to
the new format has been favorable. The Company continues to believe that Sears
Grand provides the Company with a significant new retail format to grow the
business. An additional three pilot stores are expected to be opened within
the next year. During the current quarter, the Company continued to return the proceeds from
the sale of its domestic Credit and Financial Products business to its
shareholders. An additional 18.6 million shares were repurchased during the
first quarter of 2004 at a cost of $852 million. Through the end of the first
quarter of 2004, the Company had returned $3.5 billion of proceeds from the
sale of its Credit and Financial Products business to its shareholders.
Subject to market conditions, the Company expects to return the remaining $500
million to its shareholders by the end of 2004. In addition, the Company retired $1.8 billion of domestic term debt during the
first quarter of 2004, thus reducing the level of domestic term debt to $3.5
billion. An additional $800 million of domestic term debt will be retired by
the end of 2004. The Company continues to target a level of net domestic term
debt of $1.5 billion, exclusive of working capital needs. Net interest of $76 million for the first quarter of 2004 includes $38 million
of costs related to domestic term debt outstanding that is attributable to the
divested Credit and Financial Products business. These costs consist of
interest expense of $26 million, also referred to as negative carry, and costs
incurred to retire credit legacy debt of $12 million. 18




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SEARS, ROEBUCK AND CO.
13 Weeks Ended April 3, 2004 and March 29, 2003 A summary of consolidated results of operations is as follows: millions, except per share data
    
    April 3,
    
    March 29,2004
    
    2003Merchandise sales and services revenues
    
    $
    7,703
    
    
    $
    7,474Domestic comparable store sales
    
    
    1.6
    %
    
    
    -6.7
    %Credit and financial products revenues
    
    
    91
    
    
    
    1,406Total revenues
    
    $
    7,794
    
    
    $
    8,880Gross margin rate
    
    
    27.0
    %
    
    
    26.8
    %Selling and administrative expense as a percentage
of total revenues
    
    
    24.3
    %
    
    
    23.8
    %Operating (loss)/income
    
    $
    (41
    )
    
    $
    309Other income, net
    
    $
    16
    
    
    $
    1(Loss)/income before income taxes, minority interest and
cumulative effect of change in accounting principle
    
    $
    (25
    )
    
    $
    310Cumulative effect of change in accounting principle
    
    $
    (839
    )
    
    $
    Net (loss)/income
    
    $
    (859
    )
    
    $
    192(Loss)/earnings per share  diluted
    
    $
    (3.90
    )
    
    $
    0.60(Loss)/earnings per share before cumulative effect of change
in accounting principle
    
    $
    (0.09
    )
    
    $
    0.60
 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-week period ended March 29, 2003 include
the results of operations for the divested businesses, Credit and Financial
Products and NTB.  
    
    Merchandise sales and service revenues were $7.7 billion in the first
quarter of 2004, an increase of 3.1% from the prior year quarter. The
increase is due to increases in several key Full-line Store home group
categories, strengthening of the Canadian dollar and revenues earned
under the Companys long-term alliance with Citigroup. Domestic
comparable store sales for the first quarter of 2004 increased 1.6%
with strong growth in lawn and garden, tools and home electronics.
These strengths were partially offset by comparable store sales
declines in apparel.
    
    Credit and financial products revenues were lower than the prior year
quarter as a result of the sale of the Credit and Financial Products
business in the fourth quarter of 2003. Domestic revenues generated
in the prior year quarter were $1.3 billion. The current year
revenues reflect solely the credit business of Sears Canada.
    
    The modest improvement in first quarter of 2004 gross margin rate
compared with the prior year quarter is reflective of revenues earned
under the long-term alliance with Citigroup.
    
    Selling and administrative expenses as a percentage of total revenues
increased primarily due to a reduction in expense leverage resulting
from the divestiture of the Credit and Financial Products and NTB
businesses, increased domestic advertising expense and a charge
recorded in Sears Canada related to the decision to 19




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SEARS, ROEBUCK AND CO.
13 Weeks Ended April 3, 2004 and March 29, 2003  license its auto centers to three auto service providers. These increases
were partially offset by a $30 million curtailment gain attributable to the
change in retiree medical benefits offered to employees.
    
    The increase in other income of $15 million was primarily related to an
$11 million gain on the sale of a Sears Canada real estate joint venture. The Company believes that an understanding of its reported results and its
ongoing financial performance is not complete without excluding the impact of
the divested businesses, negative carry 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-week periods ended April 3, 2004 and
March 29, 2003. The table below provides an understanding through this reconciliation. 13 Weeks Endedmillions, except per share data
    
    April 3, 2004
    
    March 29, 2003Loss per
    
    
    
    
    
    Earnings perPretax
    
    share
    
    Pretax
    
    shareAs reported:(Loss)/income before income taxes, minority interest and
cumulative effect of change in accounting principle
    
    $
    (25
    )
    
    
    
    
    
    $
    310
    
    
    
    (Loss)/earnings per share
    
    
    
    
    
    $
    (3.90
    )
    
    
    
    
    
    $
    0.60Significant items:Cumulative effect of change in accounting for
retirement plans
    
    
    
    
    
    
    3.81
    
    
    
    
    
    
    
    Curtailment gain on retiree medical plans
    
    
    (30
    )
    
    
    (0.09
    )
    
    
    
    
    
    
    Negative carry and debt retirement costs
    
    
    38
    
    
    
    0.11
    
    
    
    
    
    
    
    Pro forma effects on the prior year:Divested businesses:As reported
    
    
    
    
    
    
    
    
    
    
    (405
    )
    
    
    (0.80
    )Zero-percent financing costs
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    0.12Pro forma revenues earned under Citigroup alliance
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    0.07
    
    
    
    
    
    
    
    (317
    )
    
    
    (0.61
    )Retirement plan accounting change
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    0.03Pro forma
    
    $
    (17
    )
    
    $
    (0.07
    )
    
    $
    9
    
    
    $
    0.02Average common equivalent shares outstanding
    
    
    
    
    
    
    220.4
    
    
    
    
    
    
    
    318.1
 20




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SEARS, ROEBUCK AND CO.
13 Weeks Ended April 3, 2004 and March 29, 2003 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 Endedmillions, except number of stores
    
    April 3,
    
    March 29,2004
    
    2003(2)Full-line Stores
    
    $
    4,816
    
    
    $
    4,651Specialty Stores
    
    
    1,042
    
    
    
    1,123Direct to Customer
    
    
    345
    
    
    
    368Home Services
    
    
    586
    
    
    
    565Merchandise sales and services revenues
    
    
    6,789
    
    
    
    6,707Credit and financial products revenues
    
    
    
    
    
    
    1,330Total Domestic revenues
    
    
    6,789
    
    
    
    8,037Cost of sales, buying and occupancy
    
    
    4,970
    
    
    
    4,938Gross margin rate
    
    
    26.8
    %
    
    
    26.4
    %Selling and administrative
    
    
    1,611
    
    
    
    1,880Selling and administrative expense as a percentage
of total revenues
    
    
    23.7
    %
    
    
    23.4
    %Provision for uncollectible accounts
    
    
    
    
    
    
    471Depreciation and amortization
    
    
    198
    
    
    
    198Interest, net
    
    
    49
    
    
    
    251Total costs and expenses
    
    
    6,828
    
    
    
    7,738Operating (loss)/income
    
    $
    (39
    )
    
    $
    299Number of:Full-line Stores
    
    
    872
    
    
    
    870Specialty Stores
    
    
    1,103
    
    
    
    1,304Lands End Retail Stores
    
    
    16
    
    
    
    15Total Retail Stores
    
    
    1,991
    
    
    
    2,189Comparable store sales percentage increase/(decrease)(1)Home Group
    
    
    +3.8
    %
    
    
    -6.8
    %Apparel/accessories
    
    
    -2.1
    %
    
    
    -9.6
    %Full-line Stores
    
    
    +1.9
    %
    
    
    -7.5
    %Specialty Stores
    
    
    +0.1
    %
    
    
    -2.7
    %Total
    
    
    +1.6
    %
    
    
    -6.7
    %
   (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; domestic Credit and Financial Products and NTB. 
 Domestic merchandise sales and services revenues increased 1.2% in the first
quarter of 2004 due to increases in several key Full-line Store home group
categories and approximately $33 million earned under the Companys long-term
alliance with Citigroup, which more than offset the loss of revenues due to the
divestiture of NTB. NTBs revenues for the first quarter of 2003 were
approximately $100 million. 21




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SEARS, ROEBUCK AND CO.
13 Weeks Ended April 3, 2004 and March 29, 2003 Full-line Stores revenues increased 3.5% for the first quarter of 2004 compared
with the prior year quarter as a result of increases in sears.com revenues as
well as increased Full-line Stores comparable store sales. Full-line Stores
comparable store sales increased 1.9% primarily as a result of a strong home
improvement business. Home appliances and consumer electronics performed well
in the quarter with comparable store increases in the low to mid-single digit
range. Apparel comparable stores sales declined in the first quarter of 2004
due to delayed spring product receipts and a relatively late Spring floor
transition. Specialty Stores revenues decreased 7.2% in the first quarter of 2004 compared
with the prior year quarter primarily due to the divestiture of NTB.
Comparable store sales were flat as increases in the Hardware stores were
offset by expected declines in TGI. The Company continues to refine its TGI
product offerings as a result of its previously announced strategic refinement.
Dealer store comparable store sales were relatively flat for the quarter,
however, total revenues increased due to the net addition of twenty-four Dealer
stores since the first quarter of 2003. Direct to Customer revenues for the first quarter of 2004 declined from the
comparable prior year quarter primarily due to a decline in Lands End direct
to customer revenues resulting from lower liquidation inventory levels in the
first quarter of 2004. Home Services revenues increased 3.7% in the first quarter of 2004 compared to
the prior year quarter due to increases in product repair services and the
Sears Home Improvement business. Domestic gross margin as a percentage of Domestic merchandise sales and
services increased 40 basis points as compared to the prior year 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 30 basis points in the first 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 the domestic Credit and Financial
Products business and NTB, as well as an increase in advertising expense versus
the prior year due to the earlier Easter holiday and an increase in general
brand awareness advertising. Partially offsetting the higher expenses were
productivity improvements focused on more effective staffing levels in the
stores and a $30 million curtailment gain attributable to the change in retiree
medical benefits offered to domestic employees. The decline in interest expense was primarily due to the prior year results
including $242 million of interest expense associated with the divested Credit
and Financial Products business. The first quarter 2004 interest expense
includes $26 million attributable to the negative carrying cost related to
credit legacy debt and $12 million of debt retirement costs. The Domestic segment reported an operating loss of $39 million for the first
quarter of 2004, compared with operating income of $299 million in the first
quarter of 2003. The Company believes that an understanding of its reported results and its
ongoing financial performance for the Domestic segment is not complete without
excluding the impact of the divested businesses, negative carry and debt
retirement costs and reflecting the impact of the change in accounting for
retirement plans on the results of operations for the 13-week periods ended
April 3, 2004 and March 29, 2003. 22




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SEARS, ROEBUCK AND CO.
13 Weeks Ended April 3, 2004 and March 29, 2003 This reconciliation is provided below: 13 Weeks Endedmillions
    
    April 3,
    
    March 29,2004
    
    2003Operating (loss)/income
    
    $
    (39
    )
    
    $
    299Significant Items:Curtailment gain on retiree medical plans
    
    
    (30
    )
    
    
    Negative carry and debt retirement costs
    
    
    38
    
    
    
    Divested businesses
    
    
    
    
    
    
    (317
    )Pro forma
    
    $
    (31
    )
    
    $
    (18
    )
 Sears Canada Sears Canada results were as follows: 13 Weeks EndedMillions
    
    April 3,
    
    March 29,2004
    
    2003Merchandise sales and services
    
    $
    914
    
    
    $
    767Credit revenues
    
    
    91
    
    
    
    76Total revenues
    
    
    1,005
    
    
    
    843Cost of sales, buying and occupancy
    
    
    651
    
    
    
    536Selling and administrative
    
    
    283
    
    
    
    230Provision for uncollectible accounts
    
    
    16
    
    
    
    12Depreciation and amortization
    
    
    30
    
    
    
    27Interest
    
    
    27
    
    
    
    28Total costs and expenses
    
    
    1,007
    
    
    
    833Operating (loss)/income
    
    $
    (2
    )
    
    $
    10Comparable store sales percentage increase/decrease (C$)
    
    
    8.1
    %
    
    
    -14.1
    %Foreign exchange rate (quarterly average) (US$/C$)
    
    
    0.7593
    
    
    
    0.6578
 Total revenues increased by $162 million, or 19.2%, in the first quarter of
2004 compared to the prior year quarter due to the strengthening of the
Canadian dollar as well as increased sales across most formats. The change in
the foreign currency rate contributed $133 million to the increase in total
revenues. Comparable stores sales on a Canadian dollar (C$) basis increased
8.1% in the first quarter of 2004. Full-line Store revenues for the first quarter of 2004 increased 9.2% over the
prior year quarter with comparable store sales increasing 7.0%. Specialty
store revenues increased 13.4% over the prior year quarter with comparable
store sales increasing 11.8%. Sales were particularly strong in home
appliances, furniture, cosmetics, jewelry and childrens wear. Credit revenues increased 19.7% in the first quarter of 2004 compared to the
prior year quarter primarily due to the strengthening of the Canadian dollar as
well as a higher yield for the MasterCard portfolio. Within the Sears Canada
credit operations, the net charge-off rate decreased to 4.8% in the first
quarter of 2004 from 4.9% in the first quarter of 2003. Gross margin rate as a percentage of merchandise sales and services revenues
was 28.8% in the first quarter of 2004 compared with 30.1% in the prior year
quarter. The decrease reflects an increase in promotional activity, an 23




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SEARS, ROEBUCK AND CO.
13 Weeks Ended April 3, 2004 and March 29, 2003 increase in appliance sales, which is a lower margin merchandise category and a
decrease in catalog and online sales, which have relatively higher margins. Selling and administrative expense as a percentage of total revenues was 28.2%
in the first quarter of 2004 compared to 27.3% in the first quarter of 2003.
The increase in rate is primarily due to a $12 million charge recorded in
selling and administrative expenses in the first quarter of 2004 related to
Sears Canadas decision to license Sears Canada Auto Centers to three auto
service providers and other restructuring activities. ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION The Company ended the first quarter of 2004 with approximately $4.2 billion of
cash and cash equivalents, a decrease of $4.8 billion from year-end 2003. In
the first quarter of 2004, the Company utilized cash proceeds from the sale of
the Companys domestic Credit and Financial Products business for working
capital needs as well as to retire $1.8 billion of debt, purchase $321 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 the domestic Credit and Financial Products business. The Company
expects to retire an additional $800 million of domestic term debt by year-end
2004, $600 million of which is expected in the second quarter of 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 during the first quarter of 2004 was the
result of seasonal working capital needs and taxes paid in connection with the
sale of the domestic Credit and Financial Products business. The cash provided
by operating activities in the first quarter of 2003 resulted from the seasonal
decline in the domestic credit card receivable 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
April 3, 2004, March 29, 2003 and January 3, 2004 were as follows: April 3, 2004
    
    March 29, 2003
    
    January 3, 2004millions
    
    
    
    
    
    Sears
    
    
    
    
    
    Sears
    
    
    
    
    
    SearsDomestic
    
    Canada
    
    Domestic
    
    Canada
    
    Domestic
    
    CanadaShort-term borrowings
    
    $
    670
    
    
    $
    194
    
    
    $
    6,601
    
    
    $
    174
    
    
    $
    719
    
    
    $
    314Long-term debt (including current portion):Long-term borrowings
    
    
    3,499
    
    
    
    1,509
    
    
    
    23,665
    
    
    
    1,230
    
    
    
    5,336
    
    
    
    1,245Capitalized lease obligations
    
    
    349
    
    
    
    139
    
    
    
    326
    
    
    
    135
    
    
    
    355
    
    
    
    142SFAS No. 133 hedge accounting adjustment
    
    
    101
    
    
    
    
    
    
    
    574
    
    
    
    
    
    
    
    90
    
    
    
    Total debt
    
    $
    4,619
    
    
    $
    1,842
    
    
    $
    31,166
    
    
    $
    1,539
    
    
    $
    6,500
    
    
    $
    1,701
 The decrease in total debt from January 3, 2004 is primarily due to the
retirement of $1.8 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. 24




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SEARS, ROEBUCK AND CO.
13 Weeks Ended April 3, 2004 and March 29, 2003 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 its domestic Credit and Financial
Products business, the Companys need to access capital markets for borrowings
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 business. These needs will primarily be funded through the Companys
cash and investment portfolio as well as operating cash flows. The Companys total cash and investment portfolio as of April 3, 2004, March
29, 2003 and January 3, 2004 were as follows: April 3, 2004
    
    March 29, 2003
    
    January 3, 2004millions
    
    
    
    
    
    Sears
    
    
    
    
    
    Sears
    
    
    
    
    
    SearsDomestic
    
    Canada
    
    Domestic
    
    Canada
    
    Domestic
    
    CanadaCash and cash equivalents
    
    $
    3,884
    
    
    $
    351
    
    
    $
    3,781
    
    
    $
    65
    
    
    $
    8,959
    
    
    $
    98Available-for-sale securities
    
    
    321
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total cash and investments
    
    $
    4,205
    
    
    $
    351
    
    
    $
    3,781
    
    
    $
    65
    
    
    $
    8,959
    
    
    $
    98
 In order to ensure liquidity and provide additional capacity, the Company
intends to maintain access to capital markets. Effective November 3, 2003, the
Company, through its domestic wholly-owned financial subsidiary, SRAC, amended
its $3.5 billion unsecured, 364-day revolving credit facility by extending the
termination date to May 2004 for consenting lenders and modifying the option to
extend the repayment of any borrowings to November 2004. Pursuant to the
amendment, the commitment amount under this facility was reduced to $2.5
billion as of December 3, 2003. 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 first quarter of 2004. SRAC is in
the process of syndicating a new $2.0 billion unsecured, three-year credit
facility. The Company anticipates that the new facility will be in place no
later than the expiration of the current facility. In addition, Sears Canada
has a $0.5 billion committed credit facility. 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 judgement or a
complex estimation process that can affect the results of operations and
financial position of the Company, as well as the 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. 25




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SEARS, ROEBUCK AND CO.
13 Weeks Ended April 3, 2004 and March 29, 2003 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 first quarter of 2004, the Company retired $1.8 billion of domestic
term debt. 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 ends June
30, 2004. The effective date for this statement would be fiscal 2005. The
Company will adopt any new rules required by the FASB when they are effective.
The pro forma impact on the first quarter of 2004 of expensing unvested stock
options is disclosed, as required under FASB Statement No. 123, Accounting for
Stock-Based Compensation in Note 10 to the unaudited Interim Consolidated
Financial Statements. 26




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SEARS, ROEBUCK AND CO.
13 Weeks Ended April 3, 2004 and March 29, 2003 OUTLOOK The Company anticipates second quarter 2004 earnings per share to be between
$0.78 and $0.83. This outlook assumes second quarter comparable store sales to
be flat to up slightly. For the full year, the Company remains on track with
its expectation of earnings per share, before the cumulative effect of change
in accounting principle, between $3.60 and $3.80. This includes the negative
carrying cost of approximately $0.20 to $0.25 per share on the Companys
remaining legacy debt related to its former domestic Credit and Financial
Products business. The second quarter and full year earnings per share exclude
any effects that may result from our ongoing efforts to streamline the
organization to improve efficiency and effectiveness. 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 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 and spending; the success of the Full-line Store strategy
and other strategies; 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; the Companys ability to integrate and operate
Lands End successfully; the successful integration of Sears retail
businesses with Citigroups operation of the Credit and Financial Products
business, which involves significant training and the integration of complex
systems and processes; 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, Sears 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 under Managements
Discussion and Analysis and 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. 27




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SEARS, ROEBUCK AND CO. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk The nature of market risks faced by the Company at April 3, 2004 are the same
as disclosed in the Companys Form 10-K for the year ended January 3, 2004. As
of April 3, 2004 and March 29, 2003, 47% and 79%, 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 April 3, 2004 and March 29, 2003, which totaled $3.0
billion and $25.4 billion, respectively, an immediate 100 basis point change in
interest rates would have affected annual pretax funding costs by approximately
$30 million and $254 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
the Companys Credit and Financial Products business to Citigroup on November
3, 2003, 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 March 29, 2003, approximately 80% 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. In
addition, based on that evaluation, no change in the Companys internal control
over financial reporting occurred during the quarter ended April 3, 2004 that
has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting. 28




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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, that relate to the domestic credit card
business and public statements about the business. 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
domestic 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. The Court has scheduled trial to begin on
April 4, 2005. Discovery is underway.
    
    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 domestic credit card business. A motion to
dismiss has been and remains pending. Two similar actions were
subsequently filed in the Circuit Court of Cook County, Illinois, and
a third was filed in the United States District Court for the Northern
District of Illinois. These actions have been and remain stayed
pending disposition of the action in New York. The plaintiffs in the
Northern District of Illinois action have appealed the stay order to
the United States Court of Appeals for the Seventh Circuit. That
appeal has been briefed and argued but has not yet been decided.
    
    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
domestic credit card 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. 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 29




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SEARS, ROEBUCK AND CO. into account insurance and reserves, the ultimate liability is not expected to
have a material adverse effect on annual results of operations, financial
position, liquidity or capital resources of the Company. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Issuer Purchases of Equity Securities (1)millions (except average price paid per share)Total Numberof Shares
    
    Dollar Value ofTotal
    
    
    
    
    
    Purchased as
    
    Shares that MayNumber of
    
    Average
    
    Part of Publicly
    
    Yet Be PurchasedShares
    
    Price Paid
    
    Announced Plan
    
    Under the Plan orPurchased
    
    per Share
    
    or Programs
    
    ProgramsJanuary 4, 2004 to January 31, 2004
    
    
    7.5
    
    
    $
    45.71
    
    
    
    7.5
    
    
    $
    1,232February 1, 2004 to February 28, 2004
    
    
    6.4
    
    
    
    45.55
    
    
    
    6.4
    
    
    
    942February 29, 2004 to April 3, 2004
    
    
    4.7
    
    
    
    45.86
    
    
    
    4.7
    
    
    
    726As of April 3, 2004
    
    
    18.6
    
    
    $
    45.69
    
    
    
    18.6
    
    
    $
    726
   (1)
    
    On October 8, 2003, the Board of Directors approved a new share repurchase program giving the Company authorization to
acquire $3.0 billion of the Companys common shares by December 31, 2006. 
 
 Item 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 January 29, 2004 was filed with the
Securities and Exchange Commission on January 29, 2004 to report, under Item
12, the release of fourth quarter and full-year 2003 earnings of the
Registrant. 30




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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)December 1, 2004
    
    By
    
    /s/ Michael J. GrahamMichael J. GrahamVice President and Controller(Principal Accounting Officer and dulyauthorized officer of Registrant)
 31




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SEARS, ROEBUCK AND CO. E-1
EXHIBIT INDEX Exhibit No.*3(a).
    
    Restated Certificate of Incorporation as in
effect on May 13, 1996 (incorporated by
reference to Exhibit 3(a) to Registration
Statement No. 333-8141 of the Registrant).*3(b).
    
    By-laws, as amended to February 14, 2001
(incorporated by reference to Exhibit 3.(ii) to
Registrants Annual Report on Form 10-K for
the fiscal year ended December 30, 2000).*4.
    
    Registrant hereby agrees to furnish the
Commission, upon request, with the instruments
defining the rights of holders of each issue of
long-term debt of the Registrant and its
consolidated subsidiaries.*10.
    
    Guarantee by Sears, Roebuck and Co., dated January 26, 2004 of
the $3,500,000,000 364-day Credit Agreement dated as of
February 24, 2003 among Sears Roebuck Acceptance Corp.
(SRAC), the banks, financial institutions and other
institutional lenders listed on the signature pages thereof,
Bank One, NA, as syndication agent, Barclays Bank PLC and Bank
of America, N.A., as documentation agents, Salomon Smith Barney
Inc. and Banc One Capital Markets, Inc. as joint lead arrangers
and joint bookrunners, and Citigroup, as agent for the Lenders.*12.
    
    Computation of ratio of income to fixed charges for Sears and
consolidated subsidiaries for each of the five years ended
January 3, 2004 and for the three-month period ended April 3,
2004.**15.
    
    Acknowledgement of awareness from Deloitte &
Touche LLP, dated December 1, 2004, concerning
unaudited interim financial information.*15.1
    
    Acknowledgement of awareness from Deloitte &
Touche LLP, dated May 10, 2004, concerning
unaudited interim financial information.*18.
    
    Letter regarding change in accounting principle.**31(a).
    
    Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.**31(b).
    
    Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*31(c).
    
    Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*31(d).
    
    Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.**32.
    
    Certification of Chief Executive Officer
and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted by
Section 906 of the Sarbanes-Oxley
Act of 2002.*32.1
    
    Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to 18 U.S.C.
1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002.
 *Incorporated by reference to
the similarly numbered Exhibit to Registrants Quarterly Report on
Form 10-Q for the fiscal quarter ended
  April 3, 2004
(except that Exhibit 31(c), 31(d), 15.1 and 32.1 were originally
filed as Exhibit 31(a), 31(b), 15 and 32, respectively). **Filed herewith. 32