SEARS HOLDINGS CORP (Form: 10-Q, Received: 05/21/2010 06:02:47)

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U NITED S TATES

S ECURITIES A ND E XCHANGE C OMMISSION

W ASHINGTON , D.C. 20549

FORM 10-Q

x	Q UARTERLY R EPORT P URSUANT TO S ECTION 13 O R 15(d) O F T HE S ECURITIES E XCHANGE A CT O F 1934 F OR T HE Q UARTERLY P ERIOD E NDED M AY 1, 2010

O R

¨	T RANSITION R EPORT P URSUANT T O S ECTION 13 O R 15(d) O F T HE S ECURITIES E XCHANGE A CT O F 1934

Commission file number 000-51217

SEARS HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)


D ELAWARE		20-1920798
(State of Incorporation)		(I.R.S. Employer Identification No.)

3333 B EVERLY R OAD , H OFFMAN E STATES , I LLINOIS		60179
(Address of principal executive offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: (847) 286-2500

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

As of May 14, 2010, the registrant had 114,865,048 common shares, $0.01 par value, outstanding.

SEARS HOLDINGS CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

13 Weeks Ended May 1, 2010 and May 2, 2009


		Page
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Statements of Income (Unaudited) for the 13 Weeks Ended May 1, 2010 and May 2, 2009	1

	Condensed Consolidated Balance Sheets (Unaudited) as of May 1, 2010, May 2, 2009 and January 30, 2010	2

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the 13 Weeks Ended May 1, 2010 and May 2, 2009	3

	Condensed Consolidated Statements of Equity (Unaudited) for the 13 Weeks Ended May 1, 2010 and May 2, 2009	4

	Notes to Condensed Consolidated Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30

Item 4.	Controls and Procedures	30

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 6.	Exhibits	33

SEARS HOLDINGS CORPORATION

Condensed Consolidated Statements of Income

(Unaudited)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements


	13 Weeks Ended
millions, except per share data	May 1, 2010			May 2, 2009
REVENUES
Merchandise sales and services	$	10,046		$	10,055

COSTS AND EXPENSES
Cost of sales, buying and occupancy		7,216			7,182
Selling and administrative		2,555			2,573
Depreciation and amortization		221			226
Gain on sales of assets		(44	)		(54	)

Total costs and expenses		9,948			9,927

Operating income		98			128
Interest expense		(67	)		(59	)
Interest and investment income		15			5
Other loss		(14	)		(16	)

Income before income taxes		32			58
Income tax expense		(15	)		(24	)

Net income		17			34
Income attributable to noncontrolling interests		(1	)		(8	)

NET INCOME ATTRIBUTABLE TO HOLDINGS’ SHAREHOLDERS	$	16		$	26

INCOME PER COMMON SHARE ATTRIBUTABLE TO HOLDINGS’ SHAREHOLDERS
Basic earnings per share	$	0.14		$	0.22
Diluted earnings per share	$	0.14		$	0.21
Basic weighted average common shares outstanding		114.6			120.8
Diluted weighted average common shares outstanding		114.7			121.0

See accompanying notes.

SEARS HOLDINGS CORPORATION

Condensed Consolidated Balance Sheets


	(Unaudited)
millions	May 1, 2010		May 2, 2009		January 30, 2010
ASSETS
Current assets
Cash and cash equivalents	$	1,744	$	1,141	$	1,689
Restricted cash		19		108		11
Accounts receivable		716		813		652
Merchandise inventories		9,316		9,462		8,705
Prepaid expenses and other current assets		382		441		351
Deferred income taxes		28		28		30

Total current assets		12,205		11,993		11,438
Property and equipment, net		7,591		7,959		7,709
Goodwill		1,392		1,392		1,392
Trade names and other intangible assets		3,191		3,264		3,208
Other assets		1,038		1,140		1,061

TOTAL ASSETS	$	25,417	$	25,748	$	24,808

LIABILITIES
Current liabilities
Short-term borrowings	$	1,069	$	839	$	325
Current portion of long-term debt and capitalized lease obligations		789		91		482
Merchandise payables		3,734		3,467		3,335
Accrued expenses and other current liabilities		3,110		3,126		3,098
Unearned revenues		1,002		1,056		1,012
Other taxes		525		427		534

Total current liabilities		10,229		9,006		8,786

Long-term debt and capitalized lease obligations		1,391		2,114		1,698
Pension and post-retirement benefits		2,216		2,044		2,271
Other long-term liabilities		2,638		2,854		2,618

Total Liabilities		16,474		16,018		15,373

EQUITY
Total Equity		8,943		9,730		9,435

TOTAL LIABILITIES AND EQUITY	$	25,417	$	25,748	$	24,808

See accompanying notes.

SEARS HOLDINGS CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	13 Weeks Ended
millions	May 1, 2010			May 2, 2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	17		$	34
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		221			226
Gain on sales of assets		(44	)		(54	)
Pension and post-retirement plan contributions		(62	)		(52	)
Change in operating assets and liabilities (net of acquisitions and dispositions):
Merchandise inventories		(572	)		(642	)
Merchandise payables		377			448
Deferred income taxes		46			1
Income and other taxes		(75	)		(22	)
Mark-to-market adjustments and settlements on Sears Canada U.S. dollar option contracts		7			23
Other operating assets		—			29
Other operating liabilities		3			(81	)

Net cash used in operating activities		(82	)		(90	)

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of property and investments		8			6
Decrease (increase) in investments and restricted cash		(8	)		42
Purchases of property and equipment		(95	)		(76	)

Net cash used in investing activities		(95	)		(28	)

CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt		(16	)		(285	)
Increase in short-term borrowings, primarily 90 days or less		744			396
Additional purchase of noncontrolling interest		(560	)		(7	)
Purchase of treasury stock		(1	)		(40	)

Net cash provided by financing activities		167			64

Effect of exchange rate changes on cash and cash equivalents		65			22

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		55			(32	)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		1,689			1,173

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	1,744		$	1,141

SUPPLEMENTAL CASH FLOW DATA:
Income taxes paid, net of refunds	$	67		$	47
Cash interest paid		50			55

See accompanying notes.

SEARS HOLDINGS CORPORATION

Condensed Consolidated Statements of Equity

(Unaudited)


	Equity Attributable to Holdings’ Shareholders
millions	Number of Shares		Common Stock		Capital in Excess of Par Value			Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests			Total
Balance at January 31, 2009	122		$	1	$	10,441		$	4,562	$	(5,012	)	$	(612	)	$	319		$	9,699
Comprehensive income
Net income	—			—		—			26		—			—			8			34
Pension and postretirement adjustments, net of tax	—			—		—			—		—			16			—			16
Cumulative translation adjustment	—			—		—			—		—			21			5			26

Total Comprehensive Income																				76
Sears Canada shares purchased	—			—		(2	)		—		—			—			(5	)		(7	)
Shares repurchased	(1	)		—		—			—		(40	)		—			—			(40	)
Other	—			—		35			—		(33	)		—						2

Balance at May 2, 2009	121		$	1	$	10,474		$	4,588	$	(5,085	)	$	(575	)	$	327		$	9,730

Balance at January 30, 2010	115		$	1	$	10,465		$	4,797	$	(5,446	)	$	(721	)	$	339		$	9,435
Comprehensive income
Net income	—			—		—			16		—			—			1			17
Pension and postretirement adjustments, net of tax	—			—		—			—		—			12			—			12
Deferred gain on derivatives	—			—		—			—		—			(9	)		—			(9	)
Cumulative translation adjustment	—			—		—			—		—			35			14			49

Total Comprehensive Income																				69
Stock awards	—			—		(3	)		—		3			—			—			—
Sears Canada shares purchased	—			—		(269	)		—		—			(76	)		(215	)		(560	)
Shares repurchased	—			—		—			—		(1	)		—			—			(1	)
Associate stock purchase	—			—		—			—		1			—			—			1
Other	—			—		—			—		—			—			(1	)		(1	)

Balance at May 1, 2010	115		$	1	$	10,193		$	4,813	$	(5,443	)	$	(759	)	$	138		$	8,943

See accompanying notes.

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

Sears Holdings Corporation (“Holdings,” “we,” “us,” “our” or the “Company”) is the parent company of Kmart Holding Corporation (“Kmart”) and Sears, Roebuck and Co. (“Sears”). Holdings was formed as a Delaware corporation in 2004 in connection with the merger of Kmart and Sears (the “Merger”), which was completed on March 24, 2005. We are a broadline retailer with 2,227 full-line and 1,322 specialty retail stores in the United States, operating through Kmart and Sears, and 416 full-line and specialty retail stores in Canada operating through Sears Canada Inc. (“Sears Canada”), a 90%-owned subsidiary.

These interim unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation have been included. Certain prior period amounts have been reclassified to conform to the current interim period presentation. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full fiscal year. The retail business is seasonal in nature, and we generate a high proportion of our revenues and operating cash flows during the fourth quarter of our fiscal year, which includes the holiday season. These interim financial statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 30, 2010.

NOTE 2 – BORROWINGS

Total borrowings were as follows:


millions	May 1, 2010		May 2, 2009		January 30, 2010
Short-term borrowings:
Unsecured commercial paper	$	498	$	3	$	206
Secured borrowings		571		836		119
Long-term debt, including current portion:
Notes and debentures outstanding		1,554		1,543		1,545
Capitalized lease obligations		626		662		635

Total borrowings	$	3,249	$	3,044	$	2,505

The fair value of long-term debt was $1.6 billion at May 1, 2010, $1.4 billion at May 2, 2009 and $1.4 billion at January 30, 2010. The fair value of our debt was estimated based on quoted market prices for the same or similar issues or on current rates offered to us for debt of the same remaining maturities.

Unsecured Commercial Paper

We borrow through the commercial paper markets. At May 1, 2010, we had outstanding commercial paper borrowings of $498 million, of which $200 million and $100 million were held by ESL and Edward S. Lampert, respectively. See Note 14 for further discussion of these borrowings.

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

Credit Agreement

During the second quarter of 2009, we extended the maturity date of our credit agreement (“Original Credit Agreement”) by entering into an amended credit agreement (the “Amended Credit Agreement”) which has an expiration date of June 22, 2012. The Amended Credit Agreement is an asset based revolving credit facility under which Sears Roebuck Acceptance Corp. (“SRAC”) and Kmart Corporation are the borrowers.

The Amended Credit Agreement provided for a bifurcation of the then existing $4.1 billion credit facility into a $2.4 billion tranche with a maturity date of June 22, 2012, bearing an interest rate of the London Interbank Offered Rate (“LIBOR”) plus 4.00%, with a LIBOR floor of 1.75%, and a $1.7 billion tranche which matured on March 24, 2010, bearing an initial interest rate of LIBOR plus 0.875%. The bifurcation into the Extended Tranche provides Holdings and its subsidiaries more than adequate liquidity for standby letters of credit and working capital needs. The Amended Credit Agreement also gives us the flexibility, subject to certain terms and conditions, to increase the size of the credit facility or add a term loan tranche to the Amended Credit Agreement in an aggregate amount of up to $1.0 billion. It imposes various requirements, including a requirement that, if availability under the credit facility is beneath a certain threshold, the fixed charge ratio as of the last day of any fiscal quarter be not less than 1.0 to 1.0, a cash dominion requirement if excess availability on the revolver falls below designated levels, and limitations on our ability to make restricted payments, including dividends and share repurchases. In connection with the Amended Credit Agreement, the Company agreed to limit the amount of cash accumulated when borrowings are outstanding under the credit facility. The Amended Credit Agreement has a $1.5 billion letter of credit sub-limit, is secured by a first lien on most of our domestic inventory and credit card and pharmacy receivables, and determines availability pursuant to a borrowing base formula.

At May 1, 2010, we had $571 million of borrowings and $638 million of letters of credit outstanding under the Amended Credit Agreement. Our availability under the agreement, given total outstanding borrowings and letters of credit of $1.2 billion, was $1.2 billion at May 1, 2010. The majority of the letters of credit outstanding are used to provide collateral for our insurance programs.

Orchard Supply Hardware LLC (“OSH LLC”) Credit Agreement

In November 2005, OSH LLC entered into a five-year, $130 million senior secured revolving credit facility (the “OSH LLC Facility”), which includes a $25 million letter of credit sublimit. The OSH LLC Facility was amended and extended in January 2010 and, as a result, available capacity was bifurcated into a $100 million tranche maturing December 2013 and a $20 million tranche maturing December 2011. The OSH LLC Facility continues to have a $25 million letter of credit sublimit. The OSH LLC Facility is available for OSH LLC’s general corporate purposes and is secured by a first lien on substantially all of OSH LLC’s non-real estate assets. Availability under the OSH LLC Facility is determined pursuant to a borrowing base formula based on inventory and account and credit card receivables, subject to certain limitations. As of May 1, 2010, there were no borrowings outstanding under the OSH LLC Facility and $8 million in outstanding letters of credit.

NOTE 3 – DERIVATIVE FINANCIAL INSTRUMENTS

We primarily use derivatives as a risk management tool to decrease our exposure to fluctuations in the foreign currency market. We are exposed to fluctuations in foreign currency exchange rates as a result of our net investment in Sears Canada. Further, Sears Canada is exposed to fluctuations in foreign currency exchange rates due to inventory purchase contracts denominated in U.S. dollars.

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

Earnings Effects of Derivatives on the Statements of Income

For derivatives that were designated as hedges of our net investment in Sears Canada, we assess effectiveness based on changes in spot currency exchange rates. Changes in spot rates on the derivatives are recorded in the currency translation adjustments line in Accumulated Other Comprehensive Income (Loss) and will remain there until we substantially liquidate or sell our holdings in Sears Canada.

Changes in the fair value of any derivatives that are not designated as hedges are recorded in earnings each period. Sears Canada mitigates the risk of currency fluctuations on offshore merchandise purchases denominated in U.S. currency by purchasing U.S. dollar denominated option contracts for a portion of its expected requirements. Since Holdings’ functional currency is the U.S. dollar, we are not directly exposed to the risk of exchange rate changes due to Sears Canada’s merchandise purchases, and therefore we do not account for these instruments as a hedge of our foreign currency exposure risk.

Sears Canada Hedges of Merchandise Purchases

At May 1, 2010, Sears Canada had entered into foreign currency option contracts with a total notional value of $563 million. As discussed previously, these option contracts are used to hedge Sears Canada’s purchase of inventory under U.S. dollar denominated contracts. We record mark-to-market adjustments based on the total notional value of these outstanding option contracts at the end of each quarter. We recorded a mark-to-market liability related to the foreign currency option contracts of $4 million at May 1, 2010 and mark-to-market assets of $51 million at May 2, 2009 and $9 million at January 30, 2010.

We record the earnings impact of mark-to-market and settlement adjustments for foreign currency option contracts in other income (loss) at the end of each quarter. We recorded mark-to-market and settlement losses on these contracts of $15 million and $23 million in other income (loss) for the 13-week periods ended May 1, 2010 and May 2, 2009, respectively.

Sears Canada’s above noted foreign currency options contracts were entered into as a hedge of merchandise purchase contracts denominated in U.S. currency. We also record mark-to-market adjustments for the value of the merchandise purchase contracts (considered to be embedded derivatives under relevant accounting rules) at the end of each quarter. We recorded assets of $3 million at both May 1, 2010 and May 2, 2009 related to these embedded derivatives. These embedded derivatives had a zero fair value at January 30, 2010.

We record the earnings impact of mark-to-market and settlement adjustments related to the embedded derivative in the merchandise purchase contracts in other income (loss) at the end of each quarter. We recorded mark-to-market and settlement gains of $1 million and $5 million for the 13-week periods ended May 1, 2010 and May 2, 2009, respectively.

At May 1, 2010, we had a mark-to-market asset of $3 million and a mark-to-market liability of $4 million related to the embedded derivative and option contracts, respectively. At May 2, 2009, we had mark-to-market assets of $3 million and $51 million related to the embedded derivative and option contracts, respectively. We recorded total mark-to-market and settlement losses of $14 million and $18 million in other income (loss) for the 13-week periods ended May 1, 2010 and May 2, 2009, respectively. See Note 4 for further information regarding fair value of these option and merchandise purchase contracts and the respective balance sheet classifications as of May 1, 2010 and May 2, 2009.

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

Hedges of Net Investment in Sears Canada

As of May 1, 2010, we had a series of foreign currency forward contracts outstanding with a total Canadian notional value of $1.1 billion and with a weighted-average remaining life of 0.2 years. These contracts were designated and qualified as hedges of the foreign currency exposure of our net investment in Sears Canada. Accordingly, the aggregate fair value of the forward contracts as of May 1, 2010 of $3 million was recorded as an asset on our consolidated balance sheet. The change in fair value of $12 million related to these forward contracts, net of tax, was recorded as a component of other comprehensive income for the 13-week period ended May 1, 2010. Certain of our currency forward contracts require collateral be posted in the event our liability under such contracts reaches a predetermined threshold. Cash collateral posted under these contracts is recorded as part of our accounts receivable balance. We had $8 million of cash collateral posted under these contracts as of May 1, 2010. We had an asset related to these contracts of $15 million recorded as of January 30, 2010. We had no such foreign currency forward contracts outstanding as of May 2, 2009.

Counterparty Credit Risk

We actively manage the risk of nonpayment by our derivative counterparties by limiting our exposure to individual counterparties based on credit ratings, value at risk and maturities. The counterparties to these instruments are major financial institutions with credit ratings of single-A or better as of May 1, 2010.

NOTE 4 – FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

We determine fair value of financial assets and liabilities based on the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels:

Level 1 inputs – unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occur with sufficient frequency and volume to provide ongoing pricing information.

Level 2 inputs – inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted market prices that are observable for the asset or liability, such as interest rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risk and default rates.

Level 3 inputs – unobservable inputs for the asset or liability.

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

Cash, accounts receivable, merchandise payables, credit facility borrowings and accrued liabilities are reflected in the Condensed Consolidated Balance Sheets at cost, which approximates fair value due to the short-term nature of these instruments. Sears Canada invests its cash in short-term treasury bills and bank term deposits which are marked to fair value. The fair value of our debt is disclosed in Note 2 to the Condensed Consolidated Financial Statements. The following table provides the fair value measurement amounts for other financial assets and liabilities recorded on our Condensed Consolidated Balance Sheets at fair value as of May 1, 2010, May 2, 2009 and January 30, 2010:


millions	Total Fair Value Amounts at May 1, 2010			Level 1		Level 2			Level 3
Cash equivalents ⁽¹⁾	$	1,250		$	1,250	$	—		$	—
Restricted cash ⁽²⁾		19			19		—			—
Foreign currency derivative assets ⁽³⁾		6			—		6			—
Foreign currency derivative liabilities ⁽⁴⁾		(4	)		—		(4	)		—

Total	$	1,271		$	1,269	$	2		$	—


millions	Total Fair Value Amounts at May 2, 2009			Level 1		Level 2			Level 3
Cash equivalents ⁽¹⁾	$	626		$	626	$	—		$	—
Restricted cash ⁽²⁾		108			108		—			—
Short-term investments ⁽³⁾		16			—		16			—
Foreign currency derivative assets ⁽³⁾		54			—		54			—

Total	$	804		$	734	$	70		$	—


millions	Total Fair Value Amounts at January 30, 2010			Level 1		Level 2			Level 3
Cash equivalents ⁽¹⁾	$	1,291		$	1,291	$	—		$	—
Restricted cash ⁽²⁾		11			11		—			—
Foreign currency derivative assets ⁽³⁾		24			—		24			—

Total	$	1,326		$	1,302	$	24		$	—

(1)	Included within Cash and cash equivalents in our Condensed Consolidated Balance Sheets.

(2)	Included within Restricted cash in our Condensed Consolidated Balance Sheets.

(3)	Included within Prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets.

(4)	Included within Accrued expenses and other current liabilities in our Condensed Consolidated Balance Sheets.

Short-term investments are typically valued at the closing price in the principal active market as of the last business day of the quarter. Short-term investments at May 2, 2009 included $16 million on deposit with The Reserve Primary Fund, a money market fund that temporarily restricted withdrawals while it liquidated its holdings to generate cash to distribute. The fair value of this investment was determined by using estimates based on the values of similar assets and information obtained from The Reserve Primary Fund.

The fair values of derivative assets and liabilities traded in the over-the-counter market are determined using quantitative models that require the use of multiple inputs including interest rates, prices and indices to generate pricing and volatility factors. The predominance of market inputs are actively quoted and can be validated

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

through external sources, including brokers, market transactions and third-party pricing services. Our derivative instruments are valued using Level 2 measurements.

NOTE 5 – ACQUISITION OF NONCONTROLLING INTEREST IN SEARS CANADA

During the first quarter of fiscal 2010, we increased our controlling interest in Sears Canada to 90%, from 73%, by acquiring approximately 19 million additional common shares. We paid a total of $560 million for the additional shares and accounted for the acquisition of additional interest in Sears Canada as an equity transaction in accordance with accounting standards on noncontrolling interests. Accordingly, we reclassified an accumulated other comprehensive loss from noncontrolling interest to controlling interest in the Condensed Consolidated Statement of Equity at May 1, 2010.

During the first quarter of fiscal 2009, we acquired approximately 0.5 million common shares in open market transactions. We paid a total of $7 million for the additional shares and accounted for the acquisition of additional interest in Sears Canada as an equity transaction in accordance with accounting standards on noncontrolling interests.

Subsequent Events

On May 18, 2010, Sears Canada announced that its Board of Directors declared a cash dividend of C$3.50 per common share, or approximately C$377 million, which will be paid on June 4, 2010 to shareholders of record at the close of business on May 31, 2010. Sears Canada’s Board of Directors also approved a plan on May 18, 2010 to purchase for cancellation up to 5% of its issued and outstanding common shares, which represents approximately 5 million of its current outstanding shares.

NOTE 6 – STORE CLOSINGS

We made the decision to close three underperforming stores during the first quarter of fiscal 2010. The store closures included closures within both of our Kmart and Sears Domestic segments. We recorded charges related to these store closings of $3 million in the first quarter of 2010. The charges include $2 million recorded in cost of sales for inventory markdowns and $1 million recorded in selling and administrative expenses for store closing and severance costs.

In accordance with accounting standards governing costs associated with exit or disposal activities, expenses related to future rent payments for which the Company no longer intends to receive any economic benefit are accrued for when the Company ceases to use the leased space. We expect to record a charge of approximately $7 million during the second quarter of 2010 as we complete operations at the stores we announced would close during the fourth quarter of fiscal 2009.

NOTE 7 – EQUITY

Share Repurchase Program

During the 13-week period ended May 1, 2010, we repurchased common shares at a total cost of $1 million under our share repurchase program. Our repurchases for the 13-week period ended May 1, 2010 were made at average prices of $88.76 per share. As of May 1, 2010, we had remaining authorization to repurchase $581 million of common shares under the share repurchase program. The share repurchase program, authorized by our Board of Directors, has no stated expiration date and share repurchases may be implemented using a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, the purchase of call options, the sale of put options or otherwise, or by any combination of such methods.

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

Accumulated Other Comprehensive Income (Loss)

The following table displays the components of accumulated other comprehensive income (loss):


millions	May 1, 2010			May 2, 2009			January 30, 2010
Pension and postretirement adjustments (net of tax of $(477), $(314) and $(451), respectively)	$	(726	)	$	(473	)	$	(686	)
Cumulative unrealized derivative gain (net of tax of $-, $2 and $6, respectively)		—			3			9
Currency translation adjustments (net of tax of $(23), $(70) and $(29), respectively)		(33	)		(105	)		(44	)

Accumulated other comprehensive income (loss)	$	(759	)	$	(575	)	$	(721	)

Pension and postretirement adjustments relate to the net actuarial gain or loss on our pension and postretirement plans recognized as a component of accumulated other comprehensive income. Accumulated other comprehensive loss attributable to noncontrolling interests at May 1, 2010, May 2, 2009 and January 30, 2010 was $42 million, $93 million and $132 million, respectively.

NOTE 8 – BENEFIT PLANS

Pension and Post-retirement Benefit Plans

We provide benefits to certain associates who are eligible under various defined benefit pension plans, contributory defined benefit pension plans and other post-retirement plans, primarily retiree medical benefits. The following table summarizes the components of total net periodic benefit expense for our retirement plans:


	13 Weeks Ended
millions	May 1, 2010			May 2, 2009
Components of net periodic expense:
Benefits earned during the period	$	3		$	4
Interest costs		101			104
Expected return on plan assets		(88	)		(71	)
Amortization of experience gains/losses		19			15

Net periodic expense	$	35		$	52

Contributions

During the 13-week period ended May 1, 2010, we made total contributions of $62 million to our pension and post-retirement plans. During the 13-week period ended May 2, 2009, we made total contributions of $52 million to our pension and post-retirement plans. We anticipate making aggregate contributions to our domestic and Canadian defined benefit plans of approximately $247 million over the remainder of fiscal 2010.

NOTE 9 – INCOME TAXES

At May 1, 2010, we had gross unrecognized tax benefits of $310 million. Of this amount, $117 million would, if recognized, impact our effective tax rate, with the remaining amount being comprised of unrecognized tax benefits related to gross temporary differences or any other indirect benefits. During the 13-week period ended May 1, 2010, gross unrecognized tax benefits were unchanged. We expect that our unrecognized tax benefits

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

could decrease up to $140 million over the next 12 months for federal and state settlements and for federal and state tax positions related to prior business dispositions due to both the expiration of the statute of limitations for certain jurisdictions, as well as expected related settlements.

We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of income tax expense. At May 1, 2010, the total amount of interest and penalties recognized on our Condensed Consolidated Balance Sheet was $76 million ($49 million net of federal benefit). The total amount of net interest expense recognized in our Condensed Consolidated Statements of Income for the 13-week period ended May 1, 2010 was $3 million (net of federal tax benefit).

We file income tax returns in the United States, as well as various foreign jurisdictions. The U.S. Internal Revenue Service (“IRS”) is currently auditing the Holdings’ federal income tax returns for the fiscal years 2006 and 2007. The IRS has completed its examination of Sears’ federal income tax returns for the fiscal years 2002 – 2005 and Holdings’ federal income tax return for the fiscal year 2005. We have resolved with the IRS all matters arising from these exams. In addition, Holdings and Sears are under examination by various state, local and foreign income tax jurisdictions for the fiscal years 2001 – 2008, and Kmart is under examination by such jurisdictions for the fiscal years 2003 – 2008.

At May 1, 2010, we had Federal net operating loss (“NOL”) carryforwards from the Predecessor Company of approximately $269 million generating deferred tax assets of approximately $94 million. Such NOL carryforwards are no longer subject to an annual section 382 limitation. The federal NOL carryforwards will expire in 2021, 2022, 2023, and 2028. We also have credit carryforwards of $156 million, which will expire between 2015 and 2029.

At the end of fiscal 2009, we had a state NOL deferred tax asset of $212 million and a valuation allowance of $131 million. In the first quarter of fiscal 2010, there were no adjustments to the state NOL deferred tax asset and valuation allowance. The state NOLs will predominantly expire between 2017 and 2029.

NOTE 10 – SUMMARY OF SEGMENT DATA

We evaluate segment financial performance based on operating income, as presented in the Condensed Consolidated Statements of Income. We have three reportable segments: Kmart, Sears Domestic and Sears Canada.


	For the 13 Weeks Ended
	May 1, 2010
millions	Kmart			Sears Domestic			Sears Canada		Sears Holdings
Merchandise sales and services	$	3,583		$	5,435		$	1,028	$	10,046

Costs and expenses
Cost of sales, buying and occupancy		2,711			3,789			716		7,216
Selling and administrative		782			1,508			265		2,555
Depreciation and amortization		36			160			25		221
Gain on sales of assets		(5	)		(39	)		—		(44	)

Total costs and expenses		3,524			5,418			1,006		9,948

Operating income	$	59		$	17		$	22	$	98

Total assets	$	5,878		$	15,829		$	3,710	$	25,417

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)


	For the 13 Weeks Ended
	May 2, 2009
millions	Kmart			Sears Domestic			Sears Canada			Sears Holdings
Merchandise sales and services	$	3,593		$	5,572		$	890		$	10,055

Costs and expenses
Cost of sales, buying and occupancy		2,735			3,825			622			7,182
Selling and administrative		814			1,528			231			2,573
Depreciation and amortization		36			166			24			226
Gain on sales of assets		(9	)		(1	)		(44	)		(54	)

Total costs and expenses		3,576			5,518			833			9,927

Operating income	$	17		$	54		$	57		$	128

Total assets	$	6,124		$	16,311		$	3,313		$	25,748

NOTE 11 – SUPPLEMENTAL FINANCIAL INFORMATION

Other long-term liabilities as of May 1, 2010, May 2, 2009 and January 30, 2010 consisted of the following:


millions	May 1, 2010		May 2, 2009		January 30, 2010
Unearned revenues	$	820	$	867	$	829
Self-insurance reserves		821		812		801
Other		997		1,175		988

Total	$	2,638	$	2,854	$	2,618

NOTE 12 – LEGAL PROCEEDINGS

Maurice Levie, individually and on behalf of all others similarly situated v. Sears, Roebuck & Co., et al. – Following the announcement of the Merger on November 17, 2004, a lawsuit was filed in the United States District Court for the Northern District of Illinois relating to the transaction. This suit asserts claims under the federal securities laws on behalf of a class of former Sears’ stockholders against Sears, Alan J. Lacy, Edward S. Lampert and ESL Partners, L.P. for allegedly failing to make timely disclosure of merger discussions during the period September 9 through November 16, 2004, and seeks damages. On July 17, 2007, the Court granted in part and denied in part plaintiffs’ motion for class certification, certifying a class of Sears’ stockholders who sold shares of Sears’ stock between September 9, 2004 and November 16, 2004, excluding short sellers who covered their positions during the class period. On December 18, 2009, the Court entered an order granting defendants’ motions for summary judgment. Plaintiffs filed a Notice of Appeal on January 15, 2010. In their opening appellate brief, plaintiffs withdrew their appeal from the portion of the Court’s Order granting summary judgment to Sears and Mr. Lacy. Plaintiffs then entered into an agreement with ESL Partners and Mr. Lampert to settle their remaining appeal. Plaintiffs, ESL Partners and Mr. Lampert will seek approval of the settlement from the Court. The proposed settlement does not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

In re: Sears Holdings Corporation Securities Litigation – In May and July 2006, two class action lawsuits, which each name as defendants Sears Holdings Corporation and Edward S. Lampert, were filed in United States District Court for the Southern District of New York, purportedly on behalf of a class of persons that sold shares of Kmart Holding Corporation stock on or after May 6, 2003 through June 4, 2004. The plaintiffs in each case

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

allege that Kmart’s Plan of Reorganization and Disclosure Statement filed on January 24, 2003 and amended on February 25, 2003 misrepresented Kmart’s assets, particularly its real estate holdings, as evidenced by the prices at which Kmart subsequently sold certain of its stores in June 2004 to Home Depot and Sears. Plaintiffs seek damages for alleged misrepresentations. On December 19, 2006, the Court consolidated the actions and plaintiffs filed their Consolidated Complaint. On July 21, 2009, the Court granted defendants’ second Motion to Dismiss and entered a Final Order of Dismissal. Plaintiffs filed a Notice of Appeal on August 20, 2009. On April 6, 2010, the Appellate Court affirmed the District Court’s Order dismissing the case.

Robert F. Booth Trust, derivatively v. William C. Crowley, et al. – In August 2009, a shareholder derivative lawsuit was filed in United States District Court for the Northern District of Illinois against current and former directors William C. Crowley, Edward S. Lampert, Steven T. Mnuchin, Richard C. Perry, Ann N. Reese, Kevin B. Rollins, Emily Scott and Thomas Tisch, and nominally Sears Holdings Corporation. Plaintiff alleged that by nominating for re-election to the Sears Holdings Corporation board Mr. Crowley and Ms. Reese while they were also members of the boards of AutoNation, Inc. (Crowley), AutoZone, Inc. (Crowley), and Jones Apparel Group, Inc. (Reese), defendants violated Section 8 of the Clayton Act prohibiting “interlocking directorships” and breached their fiduciary duty to the Company. Plaintiff sought injunctive relief and recovery of its costs, including reasonable attorney fees. The parties have settled the matter and the Court has preliminarily approved the settlement. In agreeing to the settlement, defendants did not admit any wrongdoing and denied committing any violation of law. Defendants agreed to the settlement solely to eliminate the uncertainties, burden and expense of further protracted litigation. The settlement does not have a material adverse effect on our annual results of operations, financial position, liquidity or capital resources.

We are a defendant in several lawsuits containing class-action allegations in which the plaintiffs are current and former hourly and salaried associates who allege various wage and hour violations and unlawful termination practices. The complaints generally seek unspecified monetary damages, injunctive relief, or both. Further, certain of these proceedings are in jurisdictions with reputations for aggressive application of laws and procedures against corporate defendants.

We are subject to various other legal and governmental proceedings, many involving litigation incidental to our businesses. Some matters contain class action allegations, environmental and asbestos exposure allegations and other consumer-based claims, each of which may seek compensatory, punitive or treble damage claims (potentially in large amounts), as well as other types of relief.

In accordance with accounting standards regarding loss contingencies, we accrue an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated and we do not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote. Because litigation outcomes are inherently unpredictable, these assessments often involve a series of complex assessments by management about future events and can rely heavily on estimates and assumptions. While the consequences of certain unresolved proceedings are not presently determinable, an adverse outcome from certain matters could have a material adverse effect on our earnings in any given reporting period. However, in the opinion of our management, 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 our financial position, liquidity or capital resources.

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

NOTE 13 – RECENT ACCOUNTING PRONOUNCEMENTS

Disclosures about Fair Value Measurements

In January 2010, the FASB issued an accounting standards update to improve disclosures about fair value measurements. The update amends existing accounting rules regarding fair value measurements and disclosures to add new requirements for disclosures related to transfers into and out of investment Levels 1 and 2, and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 investment measurements. It also clarifies existing fair value disclosures about the level of disaggregation, as well as inputs and valuation techniques used to measure fair value. The update is effective for the first reporting period beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010. As this update only relates to financial statement disclosures, it did not have an impact on our results of operations, cash flows or financial position.

NOTE 14 – RELATED PARTY DISCLOSURE

Our Board of Directors has delegated authority to direct investment of our surplus cash to Edward S. Lampert, subject to various limitations that have been or may be from time to time adopted by the Board of Directors and/or the Finance Committee of the Board of Directors. Mr. Lampert is Chairman of our Board of Directors and Finance Committee and is the Chairman and Chief Executive Officer of ESL. Neither Mr. Lampert nor ESL will receive compensation for any such investment activities undertaken on our behalf. ESL beneficially owned 57% of our outstanding common stock as of May 1, 2010.

Further, to clarify the expectations that the Board of Directors has with respect to the investment of our surplus cash, the Board has renounced, in accordance with Delaware law, any interest or expectancy of the Company associated with any investment opportunities in securities that may come to the attention of Mr. Lampert or any employee, officer, director or advisor to ESL and its affiliated investment entities who also serves as an officer or director of the Company (each, a “Covered Party”) other than (a) investment opportunities that come to such Covered Party’s attention directly and exclusively in such Covered Party’s capacity as a director, officer or employee of the Company, (b) control investments in companies in the mass merchandising, retailing, commercial appliance distribution, product protection agreements, residential and commercial product installation and repair services and automotive repair and maintenance industries and (c) investment opportunities in companies or assets with a significant role in our retailing business, including investment in real estate currently leased by the Company or in suppliers for which the Company is a substantial customer representing over 10% of such companies’ revenues, but excluding investments of ESL as of May 23, 2005.

Holdings, through its subsidiaries, engages in commercial transactions with AutoZone, Inc. (“AutoZone”) in the ordinary course of business. In the first quarter of fiscal 2010, we paid AutoZone approximately $6 million for automotive parts, accessories and other services. ESL owns approximately 40.5% of the outstanding common stock of AutoZone (based on publicly available data as of March 9, 2010), and William C. Crowley, our Executive Vice President and Chief Administrative Officer, serves as a director of AutoZone.

In fiscal 2009, the Audit Committee reviewed and pre-approved sales of commercial paper issued by Sears Roebuck Acceptance Corp. (an indirect wholly owned subsidiary of Sears Holdings) to ESL, including Edward S. Lampert, from time to time, subject to certain conditions. As of May 1, 2010, ESL and Edward S. Lampert held $200,000,000 and $100,000,000, respectively, in principal amount of 30-day unsecured commercial paper issued by Sears Roebuck Acceptance Corp. under its commercial paper program. The commercial paper held by

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

ESL and Mr. Lampert bears interest at a rate of 1.9% per annum, and the commercial paper purchases were made in the ordinary course of business on substantially the same terms, including the interest rate, as terms prevailing for comparable transactions with other persons, and did not present features unfavorable to the Company.

Holdings employs certain employees of ESL. Mr. Crowley serves as President and Chief Operating Officer of ESL and our Senior Vice President of Real Estate is also employed by ESL.

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 1, 2010 and May 2, 2009

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with Part II, Item 7 of our Annual Report on Form 10-K for the year ended January 30, 2010.

OVERVIEW OF HOLDINGS

Holdings, the parent company of Kmart and Sears, was formed in connection with the March 24, 2005 Merger of these two companies. We are a broadline retailer with 2,227 full-line and 1,322 specialty retail stores in the United States, operating through Kmart and Sears, and 416 full-line and specialty retail stores in Canada operating through Sears Canada Inc. (“Sears Canada”), a 90%-owned subsidiary. We conduct our operations in three business segments: Kmart, Sears Domestic and Sears Canada. The nature of operations conducted within each of these segments is discussed within the “Business Segments” section of Part I, Item 1 of our Annual Report on Form 10-K for the year ended January 30, 2010.

CONSOLIDATED RESULTS OF OPERATIONS


	13 Weeks Ended
millions, except per share data	May 1, 2010			May 2, 2009
REVENUES
Merchandise sales and services	$	10,046		$	10,055

COSTS AND EXPENSES
Cost of sales, buying and occupancy		7,216			7,182
Gross margin dollars		2,830			2,873
Gross margin rate		28.2	%		28.6	%
Selling and administrative		2,555			2,573
Selling and administrative expense as a percentage of total revenues		25.4	%		25.6	%
Depreciation and amortization		221			226
Gain on sales of assets		(44	)		(54	)

Total costs and expenses		9,948			9,927

Operating income		98			128
Interest expense		(67	)		(59	)
Interest and investment income		15			5
Other loss		(14	)		(16	)

Income before income taxes		32			58
Income tax expense		(15	)		(24	)

Net income		17			34
Income attributable to noncontrolling interests		(1	)		(8	)

NET INCOME ATTRIBUTABLE TO HOLDINGS’ SHAREHOLDERS	$	16		$	26

INCOME PER COMMON SHARE ATTRIBUTABLE TO HOLDINGS’ SHAREHOLDERS
Diluted income per share	$	0.14		$	0.21
Diluted weighted average common shares outstanding		114.7			121.0

References to comparable store sales amounts within the following discussion include sales for all stores operating for a period of at least 12 full months, including remodeled and expanded stores, but excluding store relocations and format changes.

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 1, 2010 and May 2, 2009

Net Income Attributable to Holdings’ Shareholders and Income per Share Summary

We recorded net income attributable to Holdings’ shareholders for the first quarter of 2010 of $16 million, or $0.14 per diluted share, as compared to a net income attributable to Holdings’ shareholders of $26 million, or $0.21 per diluted share, in the first quarter of 2009.

In addition to net income determined in accordance with GAAP, we use certain non-GAAP measures in assessing our operating performance. We believe GAAP measures “As Adjusted” serve as appropriate measures to be used in evaluating the performance of our business and we adjust incentive compensation metrics for our executive management team for these same items. Furthermore, we believe our use of GAAP measures “As Adjusted,” including Diluted Income per Share “As Adjusted,” provides an appropriate measure to use in assessing our performance across periods, given that this measure provides an adjustment for certain significant items, the magnitude of which may vary significantly from period to period and, thereby, have a disproportionate effect on the earnings we report for a given period. Accordingly, we consider the aggregate impact of these items, along with reported results, in reviewing and evaluating our financial performance. However, we do not, and do not recommend that you solely use GAAP measures “As Adjusted” to assess our financial performance or to formulate investment decisions, as the measures may exclude a number of important cash and non-cash recurring items. The following tables set forth results of operations on a GAAP and “As Adjusted” basis, as well as the impact each significant item had on specific income and expense amounts reported in our Condensed Consolidated Statements of Income during the first quarter of fiscal 2010 and the first quarter of fiscal 2009.


	Quarter Ended May 1, 2010
millions, except per share data	GAAP			Domestic Pension Expense			Mark-to- Market Losses			Closed Store Reserve and Severance			Gain on Sales of Real Estate			As Adjusted
Cost of sales, buying and occupancy impact	$	7,216		$	—		$	—		$	(2	)	$	—		$	7,214
Selling and administrative impact		2,555			(26	)		—			(1	)		—			2,528
Gain on sales of assets impact		(44	)		—			—			—			35			(9	)
Operating income impact		98			26			—			3			(35	)		92
Other loss impact		(14	)		—			10			—			—			(4	)
Income tax expense impact		(15	)		(10	)		(3	)		(1	)		13			(16	)
Noncontrolling interest impact		(1	)		—			(1	)		—			—			(2	)
After tax and noncontrolling interest impact		16			16			6			2			(22	)		18
Diluted income per share impact	$	0.14		$	0.14		$	0.05		$	0.02		$	(0.19	)	$	0.16


	Quarter Ended May 2, 2009
millions, except per share data	GAAP			Domestic Pension Expense			Mark-to- Market Losses			Closed Store Reserve and Severance			Gain on Sales of Real Estate			As Adjusted
Selling and administrative impact	$	2,573		$	(42	)	$	—		$	(17	)	$	—		$	2,514
Gain on sales of assets impact		(54	)		—			—			—			44			(10	)
Operating income impact		128			42			—			17			(44	)		143
Other loss impact		(16	)		—			14			—			—			(2	)
Income tax expense impact		(24	)		(17	)		(4	)		(6	)		13			(38	)
Noncontrolling interest impact		(8	)		—			(4	)		(2	)		12			(2	)
After tax and noncontrolling interest impact		26			25			6			9			(19	)		47
Diluted income per share impact	$	0.21		$	0.20		$	0.05		$	0.08		$	(0.16	)	$	0.38

As we previously reported, the Company has a legacy pension obligation for past service performed by Kmart and Sears, Roebuck and Co. associates. The annual pension expense included in our financial statements related to these legacy domestic pension plans was relatively minimal in recent years. However, due to the severe

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 1, 2010 and May 2, 2009

decline in the capital markets that occurred in the latter part of 2008 our annual domestic pension expense increased to $170 million in 2009 and is expected to be approximately $105 million in fiscal 2010.

13-week period ended May 1, 2010 compared to the 13-week period ended May 2, 2009

Total Revenues and Comparable Store Sales

Total revenues for the quarter of $10 billion in 2010 were flat compared to 2009. Total revenue for the quarter benefited from an increase of $187 million due to changes in the Canadian foreign exchange rate and a 1.5% increase in domestic comparable store sales. These increases were offset by the effect of having 63 fewer Kmart and Sears Full-line stores in operation and an increase in deferred revenue related to undelivered sales (as revenue is not recognized on items which require delivery, such as appliances, until the items are physically delivered to customers). The revenue deferral increased this quarter as we saw significant appliance sales volume growth at the end of April as a result of our participation in the Cash for Appliances Program .

The domestic comparable store sales increase included an increase at Kmart of 1.7% and an increase at Sears Domestic of 1.2%. The Kmart quarterly increase in comparable store sales was primarily driven by increases in the apparel, home and toys categories, partially offset by a decline in the food and consumables category. Increases in sales for the quarter at Sears Domestic were primarily driven by the home appliance category, partially offset by declines in the tools and home electronics categories. See further discussion in the “Segment Operations” section below regarding changes in revenue in each of our segments.

Gross Margin

For the quarter, we generated gross margin of $2.8 billion in fiscal 2010 and $2.9 billion last year. The total decline in gross margin dollars of $43 million includes an increase of $56 million related to the impact of foreign currency exchange rates on gross margin at Sears Canada and charges of $2 million for markdowns recorded in connection with store closings announced during the quarter. The decline in gross margin dollars was primarily driven by a decrease in gross margin rate at Sears Domestic. Sears Domestic’s gross margin rate declined 110 basis points mainly due to reduced margins in our home appliance category, driven primarily by increased promotional markdowns, as well as reduced margins in the home electronics category, reflecting an earlier transition to newer electronics products in 2010. The decline in Sears Domestic’s gross margin rate was partially offset by an increase in gross margin rate of 40 basis points at Kmart and an increase of 30 basis points at Sears Canada.

Selling and Administrative Expenses

For the quarter, our selling and administrative expenses decreased $18 million as compared to the first quarter in fiscal 2009. Selling and administrative expenses include an increase of $49 million related to the impact of foreign currency exchange rates at Sears Canada, as well as incremental expenses of $36 million related to our continued investment in our multi-channel capabilities and ShopYourWay rewards program. Selling and administrative expenses declined mainly as the result of a $22 million reduction in payroll and benefits expense, a $15 million reduction in insurance expense, as well as reductions in various other expense categories. Selling and administrative expenses for the first quarter of 2010 were also impacted by domestic pension plan expense of $26 million and store closing costs and severance of $1 million. Selling and administrative expenses for the first quarter of 2009 were impacted by domestic pension plan expense of $42 million and store closing costs and severance of $17 million.

Our selling and administrative expenses as a percentage of total revenues (“selling and administrative expense rate”) was 25.4% for the first quarter of fiscal 2010, as compared to 25.6% for the first quarter of fiscal 2009. The decrease in our selling and administrative expense rate is primarily the result of reductions in payroll and insurance expenses described previously.

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 1, 2010 and May 2, 2009

Gains on Sales of Assets

We recorded total gains on sales of assets for the quarter of $44 million in fiscal 2010 and $54 million in fiscal 2009. Gains on sales of assets for the first quarter in each of fiscal 2010 and 2009 were impacted by the recognition of previously deferred gains on sales of assets.

We sold a Sears Auto Center in October 2006, at which time we leased back the property for a period of time. Given the terms of the contract, for accounting purposes, the excess of proceeds received over the carrying value of the associated property was deferred. We closed our operations at this location during the first quarter of 2010 and, as a result, recognized a gain of $35 million on this sale at that time.

Sears Canada sold its headquarters office building and adjacent land in Toronto, Ontario in August 2007. Sears Canada leased back the property under a leaseback agreement through March 2009, at which time it finished its relocation of all head office operations to previously underutilized space in the Toronto Eaton Centre, Ontario. Given the terms of the leaseback, for accounting purposes, the excess of proceeds received over the carrying value of the associated property was deferred. The resulting gain of $44 million was recognized when Sears Canada vacated this property in the first quarter of fiscal 2009.

Operating Income

We reported operating income for the quarter of $98 million in fiscal 2010 and $128 million in 2009. The decrease in our operating income was primarily the result of a decline in gross margin dollars, driven by an overall decline in our gross margin rate, partially offset by reductions in selling and administrative expenses. Holdings’ operating income for the first quarter of 2010 includes above-noted expenses of $29 million related to domestic pension plans and store closings and severance. Our operating income for the first quarter of 2009 included above-noted expenses of $59 million related to domestic pension plans and store closings and severance.

Interest and Investment Income

For the quarter, we earned $15 million in interest and investment income in fiscal 2010 and $5 million in fiscal 2009. The increase in interest and investment income in the first quarter of fiscal 2010 is mainly due to a pre-tax dividend of $6 million received in connection with our investment in Sears Mexico.

Other Loss

Other loss is primarily comprised of mark-to-market and settlement losses on Sears Canada hedge transactions (see Notes 3 and 4 to the Condensed Consolidated Financial Statements for further information regarding these transactions). Total net mark-to-market and settlement losses of $14 million were recorded on these transactions in the first quarter of fiscal 2010. Total net mark-to-market and settlement losses of $18 million were recorded on these transactions in the first quarter of fiscal 2009.

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 1, 2010 and May 2, 2009

SEGMENT OPERATIONS

The following discussion of our business segment results is organized into three reportable segments: Kmart, Sears Domestic and Sears Canada.

Kmart

Kmart results and key statistics were as follows:


	13 Weeks Ended
millions, except number of stores	May 1, 2010			May 2, 2009
Merchandise sales and services	$	3,583		$	3,593

Cost of sales, buying and occupancy		2,711			2,735
Gross margin dollars		872			858
Gross margin rate		24.3	%		23.9	%
Selling and administrative		782			814
Selling and administrative expense as a percentage of total revenues		21.8	%		22.7	%
Depreciation and amortization		36			36
Gain on sales of assets		(5	)		(9	)

Total costs and expenses		3,524			3,576

Operating income	$	59		$	17

Number of stores		1,320			1,364

13-week period ended May 1, 2010 compared to the 13-week period ended May 2, 2009

Total Revenues and Comparable Store Sales

For the quarter, Kmart’s total sales decreased by $10 million, while comparable store sales increased 1.7%. The decline in revenue is mainly due to the impact of Kmart having 44 fewer stores in operation during the first quarter of fiscal 2010. The 1.7% increase in comparable store sales was driven by increases in the apparel, home and toys categories, partially offset by a decline in the food and consumables category.

Gross Margin

For the quarter, Kmart generated $872 million in gross margin in fiscal 2010 and $858 million in fiscal 2009. Kmart’s gross margin includes charges of $1 million for markdowns recorded in connection with store closings announced during the first quarter of 2010. The increase in Kmart’s gross margin is primarily due to an increase in its gross margin rate of 40 basis points. Kmart’s gross margin rate for the quarter was 24.3% in fiscal 2010 and 23.9% in fiscal 2009 and increased primarily as a result of an increase in sales of higher margin categories such as apparel, home and outdoor living, as well as a reduction in clearance markdowns.

Selling and Administrative Expenses

For the quarter, Kmart’s selling and administrative expenses decreased $32 million as compared to the first quarter in fiscal 2009. The decline in selling and administrative expenses primarily reflects a reduction in payroll and benefits expense of $17 million, a reduction in advertising expenses of $11 million, as well as reductions in various other expense categories. Selling and administrative expenses for the first quarter of 2009 were also impacted by store closing costs and severance of $4 million. Kmart’s selling and administrative expense rate for

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 1, 2010 and May 2, 2009

the quarter was 21.8% in fiscal 2010 and 22.7% in fiscal 2009, and decreased primarily as a result of the expense reductions noted previously.

Operating Income

For the quarter, Kmart recorded operating income of $59 million in 2010 and $17 million in fiscal 2009. The increase in Kmart’s operating income was primarily the result of increased gross margin dollars, driven by an increase in gross margin rate, as well as a decrease in selling and administrative expenses. Kmart’s operating income for the first quarter of 2010 includes expenses of $1 million related to store closings and severance. Kmart’s operating income for the first quarter of 2009 included expenses of $4 million related to store closings and severance.

Sears Domestic

Sears Domestic results and key statistics were as follows:


	13 Weeks Ended
millions, except number of stores	May 1, 2010			May 2, 2009
Merchandise sales and services	$	5,435		$	5,572

Cost of sales, buying and occupancy		3,789			3,825
Gross margin dollars		1,646			1,747
Gross margin rate		30.3	%		31.4	%
Selling and administrative		1,508			1,528
Selling and administrative expense as a percentage of total revenues		27.7	%		27.4	%
Depreciation and amortization		160			166
Gain on sales of assets		(39	)		(1	)

Total costs and expenses		5,418			5,518

Operating income	$	17		$	54

Number of :
Full-line Stores ⁽¹⁾		907			926
Specialty Stores		1,322			1,274

Total Domestic Sears Stores		2,229			2,200

⁽¹⁾	The period ended May 1, 2010 includes 848 Full-line stores and 59 Sears Essentials/Grand stores;

The period ended May 2, 2009 includes 856 Full-line stores and 70 Sears Essentials/Grand stores

13-week period ended May 1, 2010 compared to the 13-week period ended May 2, 2009

Total Revenues and Comparable Store Sales

For the quarter, Sears Domestic’s total sales decreased by $137 million, while comparable store sales increased 1.2%. The decline in revenue is mainly due to an increase in deferred revenue related to undelivered sales (as revenue is not recognized on items which require delivery, such as appliances, until the items are physically delivered to customers) and the impact of having 19 fewer Sears Full-line stores in operation. The revenue deferral increased this quarter as we saw significant appliance sales volume growth at the end of April as a result of our participation in the Cash for Appliances Program . The 1.2% increase in comparable store sales was driven by an increase in the home appliance category, partially offset by declines in the tools and home electronics categories.

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 1, 2010 and May 2, 2009

Gross Margin

For the quarter, Sears Domestic generated $1.6 billion in gross margin dollars in 2010 and $1.7 billion in 2009. The decrease of $101 million includes charges of $1 million taken to markdown inventory in connection with store closings and was mainly a result of a decline in Sears Domestic’s gross margin rate during the first quarter of 2010. Sears Domestic’s gross margin rate during the first quarter was 30.3% in 2010 and 31.4% in 2009. The decline of 110 basis points is primarily due to reduced margins in our home appliance category, driven primarily by increased promotional markdowns, as well as reduced margins in the home electronics category, reflecting an earlier transition to newer electronics products in 2010.

Selling and Administrative Expenses

For the quarter, Sears Domestic’s selling and administrative expenses decreased $20 million. The decrease in selling and administrative expenses includes a $15 million reduction in insurance expense, partially offset by an increase in advertising expenses of $7 million. Selling and administrative expenses for the first quarter of 2010 were also impacted by domestic pension plan expense of $26 million and store closing costs and severance of $1 million. Selling and administrative expenses for the first quarter of 2009 were impacted by domestic pension plan expense of $42 million and a charge incurred for store closing costs of $5 million.

Sears Domestic’s selling and administrative expense rate for the quarter was 27.7% in fiscal 2010 and 27.4% in fiscal 2009. The increase in our selling and administrative expense rate is primarily the result of lower expense leverage given lower overall sales.

Gains on Sales of Assets

Sears Domestic recorded total gains on sales of assets for the quarter of $39 million in 2010 and $1 million in 2009. The increase in gains on sales of assets in the first quarter of fiscal 2010 is due to the recognition of a previously deferred gain from the October 2006 sale of one of our Sears Auto Centers. At the time of the sale, we leased back the property for a period of time. Given the terms of the contract, for accounting purposes, the excess of proceeds received over the carrying value of the associated property was deferred. We closed our operations at this location during the first quarter of 2010 and, as a result, recognized a gain of $35 million on this sale at that time.

Operating Income

For the quarter, Sears Domestic reported operating income of $17 million in fiscal 2010 and $54 million in fiscal 2009. The decrease in Sears Domestic’s operating income was primarily the result of a decline in sales and gross margin rate, partially offset by reductions in selling and administrative expenses and an increase in gains on sales of assets. Sears Domestic’s operating income for the first quarter of 2010 includes expenses of $28 million related to domestic pension plans and store closings and severance. Operating income for the first quarter of 2009 included expenses of $47 million related to domestic pension plans and store closings and severance.

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 1, 2010 and May 2, 2009

Sears Canada

Sears Canada, a consolidated, 90%-owned subsidiary of Sears, conducts similar retail operations as Sears Domestic. Sears Canada results and key statistics were as follows:


	13 Weeks Ended
millions, except number of stores	May 1, 2010			May 2, 2009
Merchandise sales and services	$	1,028		$	890

Cost of sales, buying and occupancy		716			622
Gross margin dollars		312			268
Gross margin rate		30.4	%		30.1	%
Selling and administrative		265			231
Selling and administrative expense as a percentage of total revenues		25.8	%		26.0	%
Depreciation and amortization		25			24
Gain on sales of assets		—			(44	)

Total costs and expenses		1,006			833

Operating income	$	22		$	57

Number of :
Full-line Stores		122			122
Specialty Stores		294			269

Total Sears Canada Stores		416			391

13-week period ended May 1, 2010 compared to the 13-week period ended May 2, 2009

Total Revenues

Sears Canada’s total revenues increased 15.5% for the first quarter of fiscal 2010 as compared to the same period last year. The increase in total revenues of $138 million includes a $187 million increase due to the impact of exchange rates during the quarter. On a Canadian dollar basis, revenues decreased by $49 million, reflecting lower comparable stores sales across most major categories. We believe the decline in comparable store sales is mainly the result of a continued tightening in consumer discretionary spending resulting from falling consumer confidence levels and high unemployment rates, as well as increased cross-border shopping due to the effect of a strong Canadian dollar relative to the U.S. dollar.

Gross Margin

Total gross margin dollars for the first quarter increased $44 million in 2010 and include a $56 million increase due to the impact of exchange rates during the quarter. Gross margin decreased $12 million on a Canadian dollar basis as a result of lower overall sales. For the quarter, Sears Canada’s gross margin rate increased to 30.4% from 30.1% in 2009, primarily as a result of improved inventory management.

Selling and Administrative Expenses

For the first quarter of fiscal 2010, Sears Canada’s selling and administrative expenses increased $34 million, and include an increase of $49 million due to the impact of exchange rates. On a Canadian dollar basis, selling and administrative expenses decreased by $15 million primarily due to a reduction in payroll and advertising expenditures. Selling and administrative expenses for the first quarter of 2009 included severance expense of $8 million. Sears Canada’s selling and administrative expense rate for the quarter was 25.8% in 2010 and 26.0% in 2009, and decreased primarily as a result of the reduction in expenses noted previously.

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 1, 2010 and May 2, 2009

Gains on Sales of Assets

Sears Domestic recorded total gains on sales of assets for the first quarter of fiscal 2009 of $44 million. Sears Canada did not record any gains on sales of assets in the first quarter of fiscal 2010. Sears Canada recorded gains on sales of assets in the first quarter of fiscal 2009 due to the recognition of a previously deferred gain from the sale of its headquarters office building, and adjacent land, in Toronto, Ontario in August 2007. Sears Canada leased back the property under a leaseback agreement through March 2009, at which time it finished its relocation of all head office operations to previously underutilized space in the Toronto Eaton Centre, Ontario. Given the terms of the leaseback, for accounting purposes, the excess of proceeds received over the carrying value of the associated property was deferred. The resulting gain of $44 million was recognized when Sears Canada vacated this property in the first quarter of fiscal 2009.

Operating Income

Sears Canada’s operating income decreased $35 million in the first quarter of fiscal 2010. The decrease in operating income includes a $13 million increase due to the impact of foreign currency exchange rates and primarily reflects the above noted declines in sales, gross margin and gains on sales of assets, partially offset by a decrease in selling and administrative expenses.

ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION

Cash Balances

Our cash and cash equivalents include all highly liquid investments with original maturities of three months or less at the date of purchase. Our cash balances as of May 1, 2010, May 2, 2009 and January 30, 2010 are detailed in the following table.


millions	May 1, 2010		May 2, 2009		January 30, 2010
Domestic
Cash and equivalents	$	263	$	309	$	221
Cash posted as collateral		9		12		9
Credit card deposits in transit		222		194		168

Total domestic cash and cash equivalents		494		515		398
Sears Canada		1,250		626		1,291

Total cash and cash equivalents		1,744		1,141		1,689
Restricted cash		19		108		11

Total cash balances	$	1,763	$	1,249	$	1,700

We had total cash balances of $1.8 billion at May 1, 2010 as compared to $1.2 billion at May 2, 2009 and $1.7 billion at January 30, 2010. Primary uses of cash during the first quarter of fiscal 2010 include the $560 million purchase of additional interest in Sears Canada, capital expenditures of $95 million, and contributions to our pension and post-retirement benefit plans of $62 million. These uses of cash were funded in part by an increase in short-term borrowings of $744 million.

At various times, we have posted cash collateral for certain outstanding letters of credit and self-insurance programs. Such cash collateral is classified within cash and cash equivalents given we have the ability to substitute letters of credit at any time for this cash collateral and it is therefore readily available to us.

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 1, 2010 and May 2, 2009

Credit card deposits in transit include deposits in-transit from banks for payments related to third-party credit card and debit card transactions.

Restricted cash consists of certain Sears Canada cash accounts, which have been pledged as collateral for letters of credit obligations issued under its offshore merchandise purchasing program and with counterparties related to outstanding derivative contracts, as well as funds held in trust in accordance with regulatory requirements governing advance ticket sales related to Sears Canada’s travel business.

Our May 2, 2009 cash balances exclude $16 million on deposit with The Reserve Primary Fund, a money market fund that temporarily restricted withdrawals while it liquidated its holdings to generate cash to distribute. As a result, we reclassified this amount from cash to the prepaid expenses and other current assets line within our Condensed Consolidated Balance Sheets at May 2, 2009.

We classify outstanding checks within other current liabilities and reduce cash and cash equivalents when these checks clear the bank on which they were drawn. Outstanding checks were $113 million, $240 million and $116 million as of May 1, 2010, May 2, 2009 and January 30, 2010, respectively.

Operating Activities

During the first quarter, Holdings used $82 million of cash in its operations in fiscal 2010 and $90 million in fiscal 2009. Our primary source of operating cash flows is the sale of goods and services to customers, while the primary use of cash in operations is the purchase of merchandise inventories. We used less cash in operations in the first quarter in 2010 than the first quarter last year mainly as a result of slightly lower working capital requirements, partially offset by reduced net income.

Merchandise inventories were $9.3 billion at May 1, 2010 and $9.5 billion at May 2, 2009. Merchandise payables were $3.7 billion at May 1, 2010 and $3.5 billion as of May 2, 2009. Domestic inventory declined from $8.7 billion at May 2, 2009 to $8.5 billion at May 1, 2010 due to improved inventory management. Inventory levels at Sears Canada increased $29 million as a result of changes in the Canadian foreign exchange rate. On a Canadian dollar basis, inventory at Sears Canada declined by $104 million, mainly because of improved inventory management.

Investing Activities

For the first quarter, we used $95 million of cash for capital expenditures in fiscal 2010 and $76 million in 2009. For the first quarter of 2010, we also used $8 million of cash as a result of changes in restricted cash requirements at Sears Canada. In the first quarter of 2009, we received $42 million of cash from investments, which reflects cash received from The Reserve Primary Fund of $22 million, as well as changes in restricted cash requirements at Sears Canada.

Financing Activities

During the 13-week period ended May 1, 2010, we repurchased common shares at a total cost of $1 million under our share repurchase program. As of May 1, 2010, we had $581 million of remaining authorization under our common share repurchase program. The share repurchase program, authorized by our Board of Directors, has no stated expiration date and share repurchases may be implemented using a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, the purchase of call options, the sale of put options or otherwise, or by any combination of such methods. During the 13-week period ended May 2, 2009, we repurchased 1.0 million of our common shares at a total cost of $40 million under our share repurchase program.

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 1, 2010 and May 2, 2009

During the first quarter of fiscal 2010, we increased our controlling interest in Sears Canada to 90%, from 73%, by acquiring approximately 19 million common shares. We paid a total of $560 million for the additional shares and accounted for the acquisition of additional interest in Sears Canada as an equity transaction in accordance with accounting standards on noncontrolling interests.

Cash provided by financing activities increased in the first quarter of 2010 mainly due to an increase in short-term borrowings during the first quarter of 2010 of $348 million. During the first quarter of fiscal 2010, we made repayments on long-term debt of $16 million. We borrowed $452 million under our Amended Credit Agreement during the first quarter of 2010 to meet seasonal working capital needs while, at the same time, continuing to invest in our stores, repurchase our stock, make payments on our term debt and complete our acquisition of additional noncontrolling interest in Sears Canada. As a result, we had $571 million in secured line of credit borrowings outstanding under the Amended Credit Agreement at May 1, 2010. The entire $571 million in Amended Credit Agreement borrowings have been classified within short-term borrowings on our Condensed Consolidated Balance Sheet as of May 1, 2010, as we expect to repay the entire amount within the next twelve months.

Total short-term borrowings at May 1, 2010 of $1.1 billion were $230 million higher than our level of borrowings at May 2, 2009 of $839 million. While we increased our total amount of short-term borrowings in the first quarter of 2010, we also altered the mix of our funding to include more borrowings in the commercial paper market, increasing our borrowings from this source to $498 million. The increased level of funding from commercial paper reduced our total borrowing costs and contributed to lower usage of our revolving credit facility during the first quarter of 2010.

Our outstanding borrowings as of May 1, 2010, May 2, 2009 and January 30, 2010 were as follows:


millions	May 1, 2010		May 2, 2009		January 30, 2010
Short-term borrowings:
Unsecured commercial paper	$	498	$	3	$	206
Secured borrowings		571		836		119
Long-term debt, including current portion:
Notes and debentures outstanding		1,554		1,543		1,545
Capitalized lease obligations		626		662		635

Total borrowings	$	3,249	$	3,044	$	2,505

Liquidity

Our primary need for liquidity is to fund seasonal working capital requirements of our retail businesses, capital expenditures and for general corporate purposes. We believe that these needs will be adequately funded by our operating cash flows, credit terms from vendors, current balances in cash and cash equivalents and borrowings under our revolving credit facilities. While we expect to use these facilities as our primary funding source, we may also access the public debt markets on an opportunistic basis. Additionally, we may from time to time consider selective strategic transactions to create value and improve performance, which may include acquisitions, dispositions, restructurings, joint ventures and partnerships. Transactions of these types may result in material proceeds or cash outlays. See our Annual Report on Form 10-K for the fiscal year ended January 30, 2010 for additional information regarding our sources of liquidity.

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 1, 2010 and May 2, 2009

Debt Ratings

The ratings of our domestic debt securities as of May 1, 2010 appear in the table below:


	Moody’s Investors Service	Standard & Poor’s Ratings Services	Fitch Ratings
Unsecured long-term debt	Ba3	BB-	BB
Unsecured commercial paper	NP	B-2	B

Credit Agreement

Orchard Supply Hardware LLC (“OSH LLC”) Credit Agreement

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 1, 2010 and May 2, 2009

Domestic Pension Plan Funding

In our Annual Report on Form 10-K for the fiscal year ended January 30, 2010 we disclosed that we expected to make contributions to our domestic pension plans of approximately $275 million in 2010 and $535 million in 2011. The large increase in expected contributions between fiscal 2010 and 2011 is due primarily to the severe decline in capital markets that occurred in the latter part of 2008, and U.S. government legislation regarding pension-funding requirements, though the ultimate amount of pension contributions could be affected by further changes in the applicable regulations, financial markets and investment performance of the plans.

Recent Accounting Pronouncements

See Part I, Item 1, “Financial Statements – Notes to Condensed Consolidated Financial Statements,” Note 14 – “Recent Accounting Pronouncements,” for information regarding new accounting pronouncements.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements made in this Quarterly Report on Form 10-Q and in other public announcements by us contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause our 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 our future financial performance, business strategy, plans, goals and objectives. Statements preceded or followed by, or that otherwise include, the words “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plans,” “forecast,” “is likely to” and similar expressions or future or conditional verbs such as “will,” “may” and “could” are generally forward-looking in nature and not historical facts. Such statements are based upon the current beliefs and expectations of Holdings’ management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements.

The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: our ability to offer merchandise and services that our customers want, including our proprietary brand products; our ability to successfully implement initiatives to improve inventory management and other capabilities; competitive conditions in the retail and related services industries; worldwide economic conditions and business uncertainty, the availability of consumer and commercial credit, changes in consumer confidence, tastes, preferences and spending, and changes in vendor relationship; the impact of seasonal buying patterns, including seasonal fluctuations due to weather conditions, which are difficult to forecast with certainty; our dependence on sources outside the United States for significant amounts of our merchandise; our extensive reliance on computer systems to process transactions, summarize results and manage our business; our reliance on third parties to provide us with services in connection with the administration of certain aspects of our business; impairment charges for goodwill and intangible assets or fixed-asset impairment for long-lived assets; our ability to attract, motivate and retain key executives and other associates; the outcome of pending and/or future legal proceedings, including product liability claims and proceedings with respect to which the parties have reached a preliminary settlement; and the timing and amount of required pension plan funding.

Certain of these and other factors are discussed in more detail in our filings with the Securities and Exchange Commission and the Annual Report on Form 10-K of Sears Holdings Corporation for the fiscal year ended January 30, 2010, which may be accessed through the Commission’s website at www.sec.gov.

While we believe that our forecasts and assumptions are reasonable, we caution that actual results may differ materially. We intend the forward-looking statements to speak only as of the time made and do not undertake to update or revise them as more information becomes available.

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 1, 2010 and May 2, 2009

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We face market risk exposure in the form of interest rate risk, foreign currency risk and equity price risk. These market risks arise from our derivative financial instruments and debt obligations.

Interest Rate Risk

We manage interest rate risk through the use of fixed and variable-rate funding and interest rate derivatives. As of May 1, 2010, we had interest rate derivatives with a notional amount of $120 million, nominal fair value and a weighted average remaining life of 0.6 years. All debt securities and interest-rate derivative instruments are considered non-trading. As of May 1, 2010, 42% of our debt portfolio was variable rate. Based on the size of this variable rate debt portfolio at May 1, 2010, which totaled approximately $1.4 billion, an immediate 100 basis point change in interest rates would have affected annual pretax funding costs by $14 million. These estimates do not take into account the effect on income 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.

Foreign Currency Risk

As of May 1, 2010, we had a series of foreign currency forward contracts outstanding, totaling $1.1 billion Canadian notional value and with a weighted average remaining life of 0.2 years, designed to hedge our net investment in Sears Canada against adverse changes in exchange rates. The aggregate fair value of the forward contracts as of May 1, 2010 was $3 million. A hypothetical 1% adverse movement in the level of the Canadian exchange rate relative to the U.S. dollar as of May 1, 2010, with all other variables held constant, would have resulted in a loss in the fair value of our foreign currency forward contracts of approximately $11 million as of May 1, 2010. Certain of our currency forward contracts require collateral be posted in the event our liability under such contracts reaches a predetermined threshold. Cash collateral posted under these contracts is recorded as part of our accounts receivable balance. We had $8 million of cash collateral posted under these contracts as of May 1, 2010.

Sears Canada mitigates the risk of currency fluctuations on offshore merchandise purchases denominated in U.S. currency by purchasing U.S. dollar denominated option contracts for a portion of its expected requirements. As of May 1, 2010, these contracts had a notional value of approximately $563 million and a weighted average remaining life of 0.6 years. We recorded a liability for the aggregate fair value of the option contracts as of May 1, 2010 of $4 million. A hypothetical 1% adverse movement in the level of the Canadian exchange rate relative to the U.S. dollar as of May 1, 2010, with all other variables held constant, would have resulted in a liability for the aggregate fair value of these contracts of approximately $8 million as of May 1, 2010, a decrease of $4 million.

Counterparties

Item 4. Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officers, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 1, 2010 and May 2, 2009

Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, the principal executive officer and principal financial officers concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

In addition, based on that evaluation, no changes in our internal control over financial reporting have occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

SEARS HOLDINGS CORPORATION

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 103 of SEC Regulation S-K requires that we disclose legal proceedings to which the Company and a governmental authority is a party and that arise under laws dealing with the discharge of materials into the environment or the protection of the environment, if the proceeding reasonably involves potential monetary sanctions of $100,000 or more. Disclosure also is required as to any such proceedings known by us to be contemplated by governmental authorities. In that connection, we note that we received a pre-filing notice from the United States Environmental Protection Agency, seeking information and documents concerning the labeling of a private brand pesticide. The parties have entered into a consent agreement that provides for a $272,800 penalty, which will be paid by the supplier of the product.

See Part I, Item 1, “Financial Statements – Notes to Condensed Consolidated Financial Statements,” Note 12 – “Legal Proceedings,” for information regarding legal proceedings, which information is incorporated herein by this reference.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information about shares of common stock we acquired during the first quarter of fiscal 2010. During the 13 weeks ended May 1, 2010, we repurchased our common shares at a total cost of $1 million under our common share repurchase program. As of May 1, 2010, we had $581 million of remaining authorization under the program.


	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program ⁽² ⁾	Average Price Paid per Share for Publicly Announced Program		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
January 31, 2010 to February 27, 2010	18,651	$	90.69	12,128	$	88.76
February 28, 2010 to April 3, 2010	580		100.24	—		—
April 4, 2010 to May 1, 2010	21,332		108.99	—		—

Total	40,563	$	100.45	12,128	$	88.76	$	581,000,000

⁽¹⁾	Includes 28,435 shares acquired from associates to meet withholding tax requirements from the vesting of restricted stock. These shares were acquired during the quarter as follows:


January 31, 2010 to February 27, 2010		6,523
February 28, 2010 to April 3, 2010		580
April 4, 2010 to May 1, 2010		21,332

Total		28,435

⁽²⁾

Our common share repurchase program was initially announced on September 14, 2005 with a total authorization by our Board of Directors of up to $500 million. Subsequently, we announced that our Board of Directors authorized the repurchase of up to an additional $500 million of common stock on each of October 14, 2005, April 5, 2006 and September 12, 2006, $1.0 billion of common stock on July 10, 2007, $1.5 billion of common stock on August 13, 2007, and $500 million of common stock on each of May 29, 2008, December 2, 2008 and December 17, 2009 for a total authorization since inception of the program of $6.0 billion. The program has no stated expiration date.

SEARS HOLDINGS CORPORATION

Our Amended Credit Agreement imposes various requirements, including a requirement that, if availability under the credit facility is beneath a certain threshold, the fixed charge ratio as of the last day of any fiscal quarter be not less than 1.0 to 1.0, a cash dominion requirement if excess availability on the revolver falls below designated levels, and limitations on our ability to make restricted payments, including dividends and share repurchases. In connection with the Amended Credit Agreement, the Company agreed to limit the amount of cash accumulated when borrowings are outstanding under the credit facility.

Item 6. Exhibits

(a) Exhibits.

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

SEARS HOLDINGS CORPORATION

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 HOLDINGS CORPORATION

EXHIBIT INDEX


3.1		Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K, dated March 24, 2005, filed on March 24, 2005 (File No. 000-51217)).

3.2		Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 to Registrant’s Current Report on Form 8-K, dated December 2, 2009, filed on December 4, 2009 (File No. 000-51217)).

*10.1		Sears Holdings Corporation Annual Incentive Plan.

*10.2		Sears Holdings Corporation 2010 Long-Term Incentive Program.

*10.3		Letter from Registrant to W. Bruce Johnson relating to employment dated April 5, 2010.

*10.4		Letter from Registrant to Michael D. Collins relating to employment dated March 17, 2010.

*10.5		Sears Holdings Corporation Director Compensation Program, as amended.

*31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*31.2		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. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith

E-1

EXHIBIT 10.1

SEARS HOLDINGS CORPORATION

ANNUAL INCENTIVE PLAN

SECTION 1

GENERAL

1.1. Purpose . The Sears Holdings Corporation Annual Incentive Plan (“AIP”) is a performance-based incentive program. The purpose of the AIP is to reward eligible employees of Sears Holdings Corporation (“Company”) and its participating subsidiaries and affiliates (collectively referred to as “Employers”), for sustained Company fiscal performance. The AIP is established under, and constitutes a part of, the Sears Holdings Corporation Umbrella Incentive Program (“UIP”), which UIP was previously approved by shareholders. Both (a) Awards (as defined in Section 9) structured to satisfy the requirements for “performance-based compensation” outlined in regulations issued under Section 162(m) of the Internal Revenue Code (“Code”), and (b) Awards not so structured, may be issued hereunder. The effective date of the AIP is April 27, 2010, which is the date the Compensation Committee (as defined in Section 9) adopted the AIP (“Effective Date”).

1.2. Operation, Administration and Definitions . The operation and administration of the AIP, including the Awards made under the AIP with respect to any Performance Period (as defined under subsection 3.3), shall be subject to the provisions of Section 7. Capitalized terms in the AIP shall be defined in the provision in which a term first appears or as set forth in Section 9.

1.3. Participating Employers . Each Employer whose eligible employee’s are covered by the AIP may be referred to herein as a “Participating Employer”. Participating Employers are listed on Appendix A .

SECTION 2

PARTICIPATION

2.1. Eligible Employee . Except as provided herein, the term “Eligible Employee” means as to any Performance Period all: (a) salaried employees and (b) “corporate hourly employees”, of any Employer, including the Company, which is a Participating Employer. “Corporate hourly employees” refer to hourly employees employed at a Support Center (as defined in Section 9). Subject to the terms and conditions of the AIP, the Senior Corporate Compensation Executive (as defined in Section 9) shall determine Eligible Employee status, except as determined by the Compensation Committee, in accordance with subsection 7.1. Eligible Employees are “Participants” in the AIP; provided, however, that an otherwise Eligible Employee shall not be a Participant in the AIP with respect to any portion of a Performance Period during which he or she is participating under any other annual incentive program that is sponsored by the Company or any subsidiary or affiliate of the Company.

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2.2. New Hires; Changes in Status; Promotions and Demotions .

(a) New Hires . The Compensation Committee, the Senior Corporate Compensation Executive, or an authorized representative of either, as applicable, shall determine whether and when an employee who is a new hire is an Eligible Employee. The terms and conditions of any Award for such an individual shall be (i) based on the Target Annual Incentive for the new hire’s incentive-eligible position and (ii) subject to a fraction, the numerator of which is the number of full days on active payroll (except as otherwise provided in Section 6.2) during the applicable Performance Period (as defined in subsection 3.3) that the Eligible Employee was a Participant in the AIP and the denominator of which is the number of full days in such Performance Period.

(b) Changes in Status . The Compensation Committee or Senior Corporate Compensation Executive, as applicable, shall determine whether and when an employee who has a change in status becomes or ceases to be an Eligible Employee during the Performance Period. The terms and conditions of any Award for such an individual shall be (i) based on the Target Annual Incentive for the incentive-eligible position and (ii) subject to a fraction, the numerator of which is the number of full days on active payroll (except as otherwise provided in Section 6.2) during the applicable Performance Period that the Eligible Employee was a Participant in the AIP and the denominator of which is the number of full days in such Performance Period.

(c) Promotion . If a Participant is promoted, the Award for such an individual shall be based on a pro-ration, whereby the Target Annual Incentive for the new position will apply to the remainder of the applicable Performance Period and the Target Annual Incentive for the immediately preceding incentive-eligible position will apply to the portion of such Performance Period immediately preceding the effective date of the promotion, subject to subsection 3.2. Notwithstanding the foregoing, in no event will positive discretion be applied to any Award that has been designated as intended to meet the requirements of Code Section 162(m) (and the regulations issued thereunder) with respect to a Performance Period or as of the payment date (as defined under subsection 5.1).

(d) Demotions . If a Participant is demoted, the Award for such an individual shall be based on a pro-ration, whereby the Target Annual Incentive for the new incentive-eligible position (if any) will apply only to the remainder of the Performance Period and the Target Annual Incentive for the immediately preceding incentive-eligible position will apply only to the portion of the Performance Period immediately preceding the effective date of the demotion, subject to subsection 3.2.

SECTION 3

ANNUAL INCENTIVE AWARDS

3.1. Annual Incentive Awards . Except as provided herein, the Senior Corporate Compensation Executive shall determine, in its sole discretion, the “Target Annual Incentive” (as defined herein) for each Participant. Notwithstanding the forgoing, the Compensation Committee shall approve the Target Annual Incentives and the Awards for Executives (as defined in Section 9) under its purview.

(a) A “Target Annual Incentive” shall refer to the percentage of a Participant’s rate of base pay during a Performance Period, which may be reflected as a percentage of base pay or flat dollar amount.

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(b) The “Target Incentive Award” shall consist of a commitment by the Company to distribute, at the time specified in, and in accordance with the applicable provisions of, Section 5 below, a dollar amount based on a Participant’s Target Annual Incentive and based on actual performance of the Company and the Participant, as compared to established performance goals described in Section 4 below. The Target Incentive Award shall be subject to pro-ration (if applicable) and certification of the calculation of the final Award amount by the Compensation Committee or Senior Corporate Compensation Executive, as applicable.

(c) The “Annual Incentive Award” shall refer to the final annual portion of a Participant’s Target Incentive Award payable on the payment date (as defined in subsection 5.1 below), if any.

(d) Any Annual Incentive Award shall be satisfied by a distribution in accordance with Section 5 and subject to Sections 6 and 7.

3.2. Adjustments based on Status Changes during Performance Period . Notwithstanding anything in the AIP to the contrary, with respect to Awards that are not designated as intended to meet the requirements of “performance-based compensation” under Code Section 162(m) (and the regulations issued thereunder) and prior to the settlement of any Award, if the Target Annual Incentive for a new incentive-eligible position (including if due to promotion or demotion) is lower or higher than the Target Annual Incentive for a Participant’s immediately prior position, the Participant’s Target Incentive Award may be adjusted by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, to ensure that the overall target cash compensation (i.e., the sum of base pay and Target Annual Incentive) for the new position is comparable to the overall target cash compensation for the immediately prior position.

3.3. Performance Period . The “Performance Period” refers to the applicable Fiscal Year (as defined in Section 9) as determined by the Compensation Committee with respect to which an Award may be granted under the AIP. The amount of an Award, if any, shall be determined following completion of the applicable Performance Period in accordance with this Section 3 and Section 4.

3.4. Pro-ration .

(a) The Annual Incentive Award of a Participant who experiences a status change or position change shall be pro-rated based on the number of days worked on active payroll in each incentive-eligible position during the applicable Performance Period.

(b) The Annual Incentive Award of a Participant who experiences a demotion or promotion shall be pro-rated based on the Target Annual Incentives in effect during the applicable Performance Period, subject to Sections 2.2 and 3.2 above.

(c) The Annual Incentive Award of a Participant who experiences a disability or death, as described in subsections 6.1(b) and (c) respectively, shall be pro-rated based upon a fraction, the numerator of which is the number of days worked on active payroll in an incentive-eligible position during the applicable Performance Period and the denominator of which is the number of days in such Performance Period.

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(d) The Annual Incentive Award of a Participant who experiences an unpaid leave of absence during the applicable Performance Period shall be pro-rated in accordance with subsection 6.2(a).

3.5. Reimbursement of Excess Awards . If Company’s financial statements or approved performance measures under the AIP are the subject of a restatement due to error or misconduct, to the extent permitted by governing law, in all appropriate cases, the Company will seek reimbursement of Excess Awards paid under the AIP to Executives (and any other Participant who is determined to have known of or been involved in any such misconduct) for the relevant performance period(s). For purposes of the AIP, an “Excess Award” means the positive difference, if any, between (a) the Annual Incentive Award paid to an Executive and (b) the Annual Incentive Award that would have been paid to the Executive, had the Award been calculated based on the Company’s financial statements or performance measures as restated. The Company will not be required to award Participants, including Executives, an additional AIP payment should the restated financial statements or performance measures result in a higher Annual Incentive Award.

SECTION 4

GOALS AND PERFORMANCE

4.1. Company Goals . For each Performance Period, the Compensation Committee or Senior Corporate Compensation Executive, as applicable, shall establish in writing the financial performance goals and any particulars or components (including without limitation Targets or Thresholds) applicable to each business and, with respect to each Participant, his or her Assignment (as defined in Section 9). For Awards structured to satisfy the requirements for performance-based compensation outlined in regulations issued under Code Section 162(m), the applicable financial performance goals and any particulars or components shall be approved on or before the latest date possible that will not jeopardize the status of such Awards as “performance-based compensation”. The financial performance goals and any particulars or components will be objectively measurable. Except as otherwise approved by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, with respect to a Performance Period, the performance goals shall be based upon one or more of the following:

(a) EBITDA

(i) EBITDA . “EBITDA” shall refer to earnings before interest, taxes, depreciation and amortization for the Performance Period computed as operating income appearing on the Company’s statement of operations for the applicable reporting period, other than Sears Canada (referred to as the “Domestic Company”), less depreciation and amortization and gains/(losses) on sales of assets. In addition, it is adjusted to exclude significant litigation or claim judgments or settlements (defined as matters which are $1,000,000 or more) including the costs related thereto; the effect of purchase accounting and changes in accounting methods; gains, losses and costs associated with acquisitions, divestitures and store closures; integration costs that are disclosed as merger related; and restructuring activities. If after the Effective Date, the Domestic Company acquires assets or an entity that has associated EBITDA (measured using the same principles as those described in the preceding provisions of this paragraph (i)) in its last full fiscal year prior to the acquisition, of greater than or equal to $100,000,000, any EBITDA associated with such assets or entity (after its acquisition) and during the Performance Period shall be disregarded in determining EBITDA under this paragraph (i).

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(ii) Adjustments to Target EBITDA . The EBITDA incentive target contemplates that the Domestic Company remains approximately the same size over the Performance Period. If, after the beginning of a Performance Period, Domestic Company divests itself of assets or an entity that has associated EBITDA (measured using the same principles as those described in paragraph (i) above of this subsection 4.1(a)) in its last full fiscal year prior to the divestiture of greater than or equal to $100,000,000, Target EBITDA for the Performance Period will be decreased by actual EBITDA of such assets or entity for the portion of such assets’ or entity’s last full fiscal year prior to the divestiture corresponding to the portion of the Performance Period (in which the divestiture occurs) remaining after the divestiture occurs.

(b) Business Operating Profit . “Business Operating Profit” shall refers to earnings before interest, taxes, and depreciation for each Business Unit (as define under Section 9) as reported on the Company’s domestic internal operating statements, and generally consists of merchandise gross profit, vendor allowances/subsidy included in margin, return-to-vendor mark-outs, allocated zero percent (0%) finance promotion costs, product quality costs, inventory shrink, margin on service revenue, and business-specific expenses such as marketing, rent, logistics, IT projects, store and payroll and other intra-company expenses.

(c) Store Variable Profit Contribution . Store Variable Profit Contribution may be the financial performance goal for Participants who are under a Sears Full-Line Store, Kmart Store or any other retail unit (referred to collectively herein as “Retail Units”), as determined by the Senior Corporate Compensation Executive. “Store Variable Profit Contribution” shall refer to the “variable profit contribution” balance reported on the system-generated store Profit & Loss Statement and generally consists of store gross margin less expenses categorized as variable at a store level, such as payroll, benefits, advertising, supplies and certain operating costs. This performance goal does not apply to any Executive.”

4.2. Company Performance . For each Performance Period, the Compensation Committee or Senior Corporate Compensation Executive, as applicable, shall establish in writing the financial performance measures and any particulars or components (including without limitation payment percentages, modifier and adjustment provisions) applicable to each business and each Participant. For Awards structured to satisfy the requirements for performance-based compensation outlined in regulations issued under Code Section 162(m), the applicable financial performance measures and any particulars or components shall be approved on or before the latest date possible that will not jeopardize the status of such Awards as “performance-based compensation”. The financial performance measures and any particulars or components will be objectively measurable and any payment based upon the achievement of a specified percentage or level of performance. Except as otherwise approved by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, with respect to a Performance Period, the performance measures shall be based upon one or more of the following concepts:

(a) Achievement of Target . With respect to each Performance Period, the Compensation Committee or Senior Corporate Compensation Executive, as applicable, shall establish a target level of achievement for each performance goal (“Target”). If achieved, payout of Awards to which that performance goal applies shall be at 100%, subject to any applicable modifiers or adjustments.

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(b) Achievement of Threshold . With respect to each Performance Period, the Compensation Committee or Senior Corporate Compensation Executive, as applicable, shall establish a threshold level of achievement that must be met with respect to performance goal before any portion of an Award is payable. If achieved, payout of Awards to which that performance goal applies shall be at the Threshold percentage, subject to any applicable modifiers or adjustments.

(c) Achievement Between Threshold and Target . In the event achievement of a performance goal falls between Threshold and Target with respect to a Performance Period, the Compensation Committee or Senior Corporate Compensation Executive, as applicable, may establish a formula for determining payout levels between these two points, which payout shall be subject to any applicable modifiers or adjustments.

(d) Payout Above Target . In the event achievement of a performance goal exceeds the Target with respect to a Performance Period, Compensation Committee or Senior Corporate Compensation Executive, as applicable, may establish a formula for determining payout levels above Target, which payout shall be subject to any applicable modifiers or adjustments. Compensation Committee or Senior Corporate Compensation Executive, as applicable, also may provide for a maximum or no maximum.

4.3. Participant and Team Performance .

(a) Individual Modifier . Except as otherwise approved by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, with respect to a Performance Period or as provided in subsection (a)(ii) herein, the Compensation Committee or Senior Corporate Compensation Executive, as applicable, shall have the discretion to apply an individual performance modifier to a Participant’s Annual Incentive Award, which enables the Award to be modified, positively or negatively, based on individual Participant or team performance, subject to the following:

(i) An individual modifier may be applied to modify a Participant’s Annual Incentive Award as follows:


Performance	Annual Rating	Modifier
Exceeds Expectation	5	+ 0% to 25%
Above Average	4	+ 0% to 15%
Average	3	No adjustment
Below Average	2	- 25%
Poor Performance	1	- 100%

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(ii) The individual modifier shall not apply to the portion of an Award attributable to any portion of the Performance Period during which a Participant is an Executive (as defined in Section 9), and in no event will positive discretion be applied to any Award for a Participant who is a “covered employee” within the meaning of Code Section 162(m) (and the regulations issued thereunder) with respect to the Performance Period or as of the payment date (as defined under subsection 5.1).

(b) Location Balanced Scorecard . Except as otherwise approved by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, with respect to a Performance Period, the Senior Corporate Compensation Executive shall apply the results of the Location Balanced Scorecard to qualify or modify the Annual Incentive Award of Participants under a Sears Full-Line Store or Kmart Store, provided such units have met its applicable Threshold Store Variable Profit Contribution. The Location Balanced Scorecard results will apply to qualify or modify these Participants’ Annual Incentive Award as determined by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, with respect to a Performance Period.

(i) “Location Balanced Scorecard” refers to an internal rating scorecard which measures elements that a Sears Full-Line Store or Kmart Store team can control and for which the team can be held accountable, including getting stores to standard, executing core processes, customer relations, associate relations and managing expenses.

(ii) The Senior Corporate Compensation Executive shall have the discretion to apply an individual performance modifier described in subsection 4.3(a) above to the Annual Incentive Award of Participants under a Sears Full-Line Store or Kmart Store, which enables the Award to be modified, positively or negatively, based on individual Participant performance.

(iii) Notwithstanding the forgoing, the Award payable to any Participant under a Retail Unit shall be subject to the applicable maximum payout percentage, if any, as determined by the Senior Corporate Compensation Executive.

4.4. Other Financial Performance Metrics . In addition to the financial performance goals and measures and other particulars and components that are described above in this Section 4, other financial goals and measures may be established for certain Business Unit as well as to measure the contribution or profit of businesses other than Business Units as defined in Section 9. The applicability of any other performance measure referred to in this Section 4.4 to a Participant will depend on his or her Business Unit, business and/or Assignment as approved by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, with respect to a Performance Period.

4.5. Additional Requirements . All Annual Incentive Awards awarded under the AIP are subject to the provisions of Sections 5, 6 and 7.

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SECTION 5

DISTRIBUTION

5.1. Time of Payment . Subject to Sections 6 and 7, the Annual Incentive Awards that are payable under the AIP with respect to a Performance Period, based on the Awards and payout formulas described at Sections 3 and 4, shall be distributed immediately after the Compensation Committee has certified the attainment of the performance goals and the Compensation Committee or Senior Corporate Compensation Executive, as appropriate, has determined the amount to be paid to each Participant, which shall in no event be later than the date that is two and one-half (2 ¹ / 2 ) months after the last day of the applicable Fiscal Year. Notwithstanding anything herein to the contrary, such distributions shall be made no later than required by Code Section 409A to avoid treatment of the AIP as a deferred compensation plan under Code Section 409A. The date as of which payment is made in accordance with this subsection 5.1 is referred to herein as the “payment date.”

5.2. Form of Payment . An Annual Incentive Award shall generally be satisfied by a single, lump sum cash payment to the Participant, provided, however, that, at the discretion of the Committee, the Company may elect, by such deadline as specified under uniform and nondiscriminatory rules established by the Committee, to satisfy such Annual Incentive Award by payment of shares of Company common stock (“Stock”) in lieu of cash, or a combination of cash and shares of Stock. The number of shares of Stock shall be equal to (a) the amount of the Award to be paid in stock in accordance with this subsection 5.2, divided by (b) the Fair Market Value of a share of Stock, on the principal securities exchange or market on which the shares are then listed or admitted, on the business day immediately preceding the date of distribution or, if the Stock is not traded on that date, on the next preceding date on which Stock was traded; provided that issuance of any shares of Stock in accordance with this subsection 5.2 shall be contingent on the availability of shares of Stock under any shareholder-approved plan of the Company providing for the issuance of Stock in satisfaction of the Awards hereunder (which in no event shall be an employee stock purchase plan).

5.3. Termination of Employment and Other Provisions . All distributions are subject to the provisions of Sections 6 and 7, below.

SECTION 6

TERMINATION OF EMPLOYMENT; LEAVE OF ABSENCE; REINSTATEMENT

Any Award payable under this Section 6 shall be payable in accordance with Section 5.

6.1. Termination of Employment . If a Participant incurs a termination of employment before the payment date (as defined in Section 5.1 above) for a Performance Period, the effect of termination of employment on a Participant’s right to receive an Award under the AIP shall depend on the reason for the termination, as described in this subsection 6.1.

(a) Voluntary Termination or Involuntary Termination . In the event that prior to the payment date of an Award, a Participant (i) voluntarily terminates employment (for any reason other than due to permanent and total disability (as defined in subsection (b) immediately below)) or (ii) is involuntarily terminated for any reason (other than death) prior to the payment date of an Award, such Participant shall forfeit his or her Award, except as prohibited by law. For the avoidance of doubt, if a Participant retires prior to the payment date of an Award, such Participant shall forfeit his or her Award.

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(b) Disability . In the event that prior to the payment date of an Award, a Participant suffers a permanent and total disability (as defined in the Company’s long-term disability program, regardless of whether the Participant is covered by such program) while employed by the Company or an Employer resulting in termination or retirement, subject to Section 7 below, such Participant shall be entitled to a distribution of the Award that would otherwise be payable to the Participant under Sections 3 and 4 above, pro-rated based upon a fraction, the numerator of which is the number of full days worked on active payroll in an incentive-eligible position during the applicable Performance Period and the denominator of which is the number of days in such Performance Period (or the number of days remaining in such Performance Period after the individual is assigned to an incentive-eligible position).

(c) Death . In the event that a Participant dies while employed by a Participating Employer but prior to the payment date of his or her Award, the estate of such Participant shall be entitled to a distribution of the Award, if any, payable in cash that would otherwise be payable to the Participant under Sections 3 and 4 above, pro-rated based upon a fraction, the numerator of which is the number of full days worked on active payroll in an incentive-eligible position during the applicable Performance Period and the denominator of which is the number of full days in such Performance Period (or the number of days remaining in such Performance Period after the individual is assigned to an incentive-eligible position).

6.2. Leave of Absence .

(a) General . In the event that a Participant is on an unpaid leave of absence any time during the Performance Period or at the time of the payment date, subject to paragraphs (b) and (c) immediately below and Section 7, such Participant shall be entitled to a distribution of the Award that would otherwise be payable to the Participant under Sections 3 and 4 above, pro-rated based upon a fraction, the numerator of which is the number of full days worked on active payroll in an incentive-eligible position during the applicable Performance Period and the denominator of which is the number of days in such Performance Period.

(b) Short-Term Disability . In the event that a Participant is on a leave of absence due to short-term disability (including, for purposes of the AIP, paid maternity leave) any time during the Performance Period, subject to paragraphs (c) below and Section 7), the period of the leave of absence shall be treated as time on active payroll and will be credited toward the determination of the Participant’s Award and the Participant shall be entitled to payment of the Award in accordance with Section 5, even if the Participant is on the short-term disability leave of absence as of the payment date.

(c) Salary Continuation . In the event that a Participant is receiving salary continuation under a severance or non-compete agreement or a Company-sponsored transition pay or severance pay plan as of the payment date, such Participant shall forfeit his or her Award.

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6.3. Reinstatement . If a Participant who forfeited his or her Award with respect to a Performance Period as a result of a termination of employment is reinstated or rehired during the Performance Period, any Award attributable to the portion of such Performance Period prior to the termination of employment shall remain forfeited. Notwithstanding the foregoing, such a Participant shall be eligible for an Award based on a fraction, the numerator of which is the number of days worked on active payroll in an incentive-eligible position on or after the date of reinstatement or rehire during the Performance Period and the denominator of which is the number of days in such Performance Period.

SECTION 7

OPERATION AND ADMINISTRATION

7.1. Compensation Committee and Senior Corporate Compensation Executive .

(a) Compensation Committee . Notwithstanding paragraph (b) immediately below, the Compensation Committee :

(i) Shall approve the Target Annual Incentives and the Awards for Executives under its purview;

(ii) Notwithstanding paragraph (b) below, with respect to Executives under its purview, shall have the authority and discretion to establish the terms, conditions, restrictions, and other provisions of such Awards, including without limitation the financial performance goals and the performance measures for each such Executive’s Assignment in accordance with Section 4, and to amend, cancel, or suspend Awards (in accordance with Section 8), subject to the requirements of Code Section 162(m), if applicable;

(iii) May make additional changes to the AIP that it deems appropriate for the effective administration of the AIP; provided however, that these changes may not increase the benefits to which Participants may become entitled under the AIP nor change the pre-established measures or goals that have been approved, except as explicitly provided in the AIP; and

(iv) Shall be responsible for all other duties and responsibilities allocated to the Compensation Committee under the terms and conditions of the AIP.

(b) Senior Corporate Compensation Executive . Except as provided in paragraph (a) immediately above, the Senior Corporate Compensation Executive:

(i) Shall Determine the Target Annual Incentive for Participant other than Executives under the purview of the Compensation Committee;

(ii) Shall have the authority to control and manage the operation and administration of the AIP;

(iii) Shall be responsible for the day-to-day administration of the AIP, including without limitation the exception process described in Section 7.2 below;

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(iv) With respect to Participants other than respect to Executives under its purview of the Compensation Committee and subject to the other provisions of the AIP, shall have the authority and discretion to determine the time or times of receipt of Awards, to establish the terms, conditions, restrictions, and other provisions of such Awards, and to amend, cancel, or suspend Awards (in accordance with Section 8), subject to the requirements of Code Section 162(m), if applicable; and

(v) Shall be responsible for all other duties and responsibilities allocated to the Senior Corporate Compensation Executive under the terms and conditions of the AIP.

(c) Any determinations by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, regarding this AIP are binding on all Participants.

(d) the Compensation Committee and the Senior Corporate Compensation Executive, as appropriate, shall have the authority and discretion to interpret the AIP, to establish, amend, and rescind any rules and regulations relating to the AIP and to make all other determinations that may be necessary or advisable for the administration of the AIP.

7.2. Incentive Exceptions . The Senior Corporate Compensation Executive shall have the authority to receive and consider requests by Business Units of the Participating Employers for an exception to an established performance measures due to circumstances outside of the business unit’s control. The Senior Corporate Compensation Executive may establish a procedure for reviewing and approving or rejecting an exception. Any exception determination shall be binding. In no event will positive discretion be applied, by the Compensation Committee or Senior Corporate Compensation Executive, to any Award that has been designated as intended to meet the requirements of Code Section 162(m) (and the regulations issued thereunder) with respect to the Performance Period or as of the payment date (as defined under subsection 5.1).

7.3. Discretion . Notwithstanding Section 7.2 or anything in the AIP to the contrary, with respect to Awards that are not designated as intended to meet the requirements of “performance-based compensation” under Code Section 162(m) (and the regulations issued thereunder) and prior to the settlement of any Award, the Compensation Committee or Senior Corporate Compensation Executive, as applicable, may change the pre-established measures and goals that have been approved for such Award and increase or reduce the amount of such Award.

7.4. Tax Withholding . All distributions under the AIP are subject to withholding of all applicable taxes. In the case of Awards under the AIP that are settled in shares of Stock, if any, the Compensation Committee or Senior Corporate Compensation Executive, as applicable, may condition the delivery of any shares or other benefits under the AIP on satisfaction of the applicable withholding obligations. To the extent permitted by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, such withholding obligations may be satisfied: (a) through cash payment by the Participant; (b) through the surrender of shares of Stock which the Participant already owns (provided, however, that to the extent shares described in this paragraph (b) are used to satisfy more than the minimum statutory withholding obligation,

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as described below, then, except as otherwise provided by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, payments made with shares of Stock in accordance with this paragraph (b) shall be limited to shares held by the Participant for not less than six months prior to the payment date (or such other period of time as the Company’s accountants may require)); or (c) through the surrender of shares of Stock to which the Participant is otherwise entitled under the AIP, provided, however, that such shares under this paragraph (c) may be used to satisfy not more than the Company’s minimum statutory withholding obligation (based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income).

7.5. Source of Awards . In the case of Awards under the AIP that are settled in shares of Stock, such shares shall be distributed under a stock plan adopted by the Company and approved by the shareholders thereof that provides for the issuance of Stock in satisfaction of Awards hereunder, (which in no event shall be an employee stock purchase plan.) In the event of any conflict between this document and such stock plan, the provisions of the stock plan shall govern.

7.6. Settlement of Awards . The obligation to make payments and distributions with respect to Awards may be satisfied through cash payments, the delivery of shares of Stock, or a combination thereof, as provided under subsection 5.2, subject, in the case of settlement in shares, to the terms of the stock plan under which the Stock is issued. Satisfaction of any such obligations under an Award, which is sometimes referred to as the “settlement” of the Award, may be subject to such conditions, restrictions and contingencies as the Compensation Committee or Senior Corporate Compensation Executive, as appropriate, shall determine. Each Employer shall be liable for payment of an Award due under the AIP with respect to any Participant to the extent that such benefits are attributable to the services rendered for that Employer by the Participant. Any disputes relating to liability of an Employer for payment of an Award shall be resolved by the Compensation Committee or Senior Corporate Compensation Executive, as appropriate.

7.7. Transferability . Except as otherwise provided by the Senior Corporate Compensation Executive, Awards under the AIP are not transferable except as designated by the Participant by will or by the laws of descent and distribution.

7.8. Form and Time of Elections . Unless otherwise specified herein, any election required or permitted to be made by any Participant or other person entitled to benefits under the AIP, and any permitted modification, or revocation thereof, shall be in writing filed with the Senior Corporate Compensation Executive at such times, in such form, and subject to such restrictions and limitations, not inconsistent with the terms of the AIP, as the Senior Corporate Compensation Executive shall require.

7.9. Action by Company or Employer . Any action required or permitted to be taken under the AIP by the Company or any other Employer shall be by resolution of its board of directors, or by action of one or more members of the board of directors of such company (including a committee of the board) who are duly authorized to act for such board with respect to the applicable action, or (except to the extent prohibited by applicable law or applicable rules of any securities exchange or similar entity) by a duly authorized officer of such company.

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7.10. Gender and Number . Where the context admits, words in any gender shall include any other gender, words in the singular shall include the plural and the plural shall include the singular.

7.11. Limitation of Implied Rights .

(a) Neither a Participant nor any other person shall, by reason of participation in the AIP, acquire any right in or title to any assets, funds or property of the Company or any Employer whatsoever, including, without limitation, any specific funds, assets, or other property which the Company or any Employer, in its sole discretion, may set aside in anticipation of a liability under the AIP. A Participant shall have only a contractual right to the cash, if any, payable under the AIP, unsecured by any assets of the Company or any Employer, and nothing contained in the AIP shall constitute a guarantee that the assets of the Company or any Employer shall be sufficient to pay any benefits to any person.

(b) The AIP does not constitute a contract of employment, and status as a Participant shall not give any Eligible Employee the right to be retained in the employ of the Company or any Employer, nor any right or claim to any benefit under the AIP, unless such right or claim has specifically accrued and vested under the terms of the AIP.

7.12. Evidence . Evidence required of anyone under the AIP may be by certificate, affidavit, document or other information, which the person charged with acting on such evidence considers pertinent and reliable, and which has been signed, made or presented by the proper party or parties.

7.13. Information to be Furnished . The Company and the Participating Employers shall furnish the Compensation Committee and the Senior Corporate Compensation Executive with such data and information as it determines may be required for it to discharge its duties. The records of the Company and the Participating Employers as to an employee’s or Participant’s employment, termination of employment, leave of absence, reemployment, and compensation shall be conclusive on all persons unless determined to be incorrect. Participants and other persons entitled to benefits under the AIP must furnish the Compensation Committee or Senior Corporate Compensation Executive, as appropriate, such evidence, data or information as the Compensation Committee or Senior Corporate Compensation Executive considers desirable to carry out the terms of the AIP, subject to any applicable privacy laws.

SECTION 8

AMENDMENT AND TERMINATION

The Company may amend or terminate the AIP at any time and for any reason in its sole discretion. Notwithstanding the foregoing, no amendment may be made, without the consent of the shareholders of the Company, that would cause any Awards intended to meet the requirements of “performance-based compensation” under Code 162(m) and the regulations thereunder, to cease to be deductible under Code Section 162(m). Further, notwithstanding anything herein to the contrary, (a) no amendment shall be made that would cause the AIP not to comply with the requirements of Code Section 409A or any other applicable law or rule of any applicable securities exchange or similar entity, and (b) the AIP and any Award thereunder may be amended without Participant consent to the extent that the Compensation Committee (or its authorized representative) determines such amendment necessary to cause the AIP or Award to comply with the requirements of Code Section 409A or any other applicable law or rule of any applicable securities exchange or similar entity.

20 10 AIP

SECTION 9

DEFINED TERMS

9.1. In addition to the other definitions contained herein, the following definitions shall apply:

(a) Assignment . The term “Assignment” refers to the performance goals and measure(s) (under subsections 4.1 and 4.2) that have been assigned by the Compensation Committee or Senior Corporate Compensation Executive, as appropriate, to a Participant, based upon position, location and/or business unit. Assignment also includes the weight of each performance measure assigned to the Participant.

(b) Award . The term “Award” or “Awards” refers to any Annual Incentive Award(s) awarded under the AIP.

(c) Business Unit . The capitalized term “Business Unit” shall refer, individually, to each Operating Business Unit, the Brands Business Unit or the Online Business Unit; or collectively to all of these Business Units; provided, however, that Business Unit shall not refer to the Support Business Units.

(d) Compensation Committee . The term “Compensation Committee” refers to the Compensation Committee of the Board of Directors of Sears Holdings Corporation.

(e) Code . The term “Code” means the Internal Revenue Code of 1986, as amended from time to time (and the regulations issued thereunder). A reference to any provision of the Code shall include reference to any successor provision of the Code (and the regulations issued thereunder).

(f) Executive . The term “Executive” refers to any employee of an Employer who holds a position of senior vice president or higher of Sears Holdings Corporation (not of any subsidiary or affiliate) or any employee who is an executive officer under Section 16(b) of the Securities and Exchange Act of 1934 with respect to Sears Holdings Corporation.

(g) Fair Market Value . The term “Fair Market Value” shall mean the reported closing price of a share of Stock on the principal securities exchange or market on which the Stock is then listed or admitted to trading.

(h) Fiscal Year . The capitalized term “Fiscal Year” refers to the fiscal year of the Company.

(i) Retail Units . The term “Retail Units” refer collectively to each Sears Full-Line Store, Kmart Store and all other retail units that are not a Business Unit or Support Business Unit as defined herein.

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(j) Senior Corporate Compensation Executive . The term “Senior Corporate Compensation Executive” refers to the Senior Vice President and President, Talent and Human Capital Services (or equivalent), or if he or she has explicitly delegated his or her duties with respect to the AIP, as provided herein, then the Senior Corporate Compensation Executive shall refer to such authorized representative to whom the duties of administering the AIP have been delegated.

(k) Support Center . For purposes of determining which corporate hourly employees are Eligible Employees under the AIP, the term “Support Center” refers to business units at the following corporate locations: (i) Hoffman Estates, Illinois, (ii) Troy, Michigan, (iii) Dodgeville, Wisconsin, (iv) Tucker, Georgia, (v) Dallas, Texas, (vi) New York Design Center facilities in New York City, (vii) SHIP in Longwood, Florida, (viii) SRAC in Wilmington, Delaware and (ix) San Francisco Apparel Office in San Francisco, which cannot be tied specifically to any one Business Unit. Employees on a Support Center overhead account may, however, be further categorized as determined by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, under a Business Unit or other businesses instead of under a Support Business Unit (as defined immediately below), if they can be tied specifically to such unit.

(l) Support Business Unit . The term “Support Business Unit” shall refer to business units tied to a Support Center that service multiple business units and cannot be tied specifically to any one Business Unit or Retail Unit, as determined by the Company.

SECTION 10

EXPIRATION OF AIP

The payment obligation under the AIP with respect to a specific Performance Period shall expire, subject to earlier termination pursuant to Section 8, on the date on which all Annual Incentive Awards (if any) are paid in full or would have been payable in accordance with the provisions of the AIP with respect to such Performance Period.

* * *

IN WITNESS WHEREOF , the Compensation Committee of the Board of Directors of Sears Holdings Corporation has caused this AIP to be executed effective as of the date first stated above, by the undersigned officer of Sears Holdings Corporation on this 29th day of April, 2010.


S EARS H OLDINGS C ORPORATION

By:		/s/ J. David Works
		J. David Works

Title:		Senior Vice President and President, Talent and Human Capital Services

20 10 AIP

SEARS HOLDINGS CORPORATION

ANNUAL INCENTIVE PLAN

APPENDIX A

Participating Employers

(As of April 27, 2010)

1.	Sears Holdings Corporation

2.	Sears Holdings Management Corporation

3.	Sears, Roebuck and Company

•

Excluding Orchard Supply Hardware Stores Corporation

4.	Kmart Holding Corporation

EXHIBIT 10.2

SEARS HOLDINGS CORPORATION

2010 LONG-TERM INCENTIVE PROGRAM (LTIP)

SECTION 1

GENERAL

1.1. Purpose . The Sears Holdings Corporation 2010 Long-Term Incentive Program (“LTIP”) is a performance-based program. The LTIP is designed to motivate the executive leadership of Sears Holdings Corporation (“Company”) and the participating Subsidiaries (as defined in Section 8) to achieve significant, lasting change that successfully positions the Company for future growth. Performance goals under the LTIP align Participants’ financial incentives with the financial goals of the Company. Awards (as defined in Section 8) under the LTIP are designed to vary commensurately with achieved performance . Both (a) Awards structured to satisfy the requirements for “performance-based compensation” outlined in regulations issued under Section 162(m) of the Internal Revenue Code (“Code Section 162(m)”), and (b) Awards not so structured, may be issued hereunder. The effective date of the LTIP is April 27, 2010, which is the date the Compensation Committee (as defined in Section 8) adopted the LTIP (“Effective Date”).

1.2. Operation, Administration, and Definitions . The operation and administration of the LTIP, including the Awards made under the LTIP, shall be subject to the provisions of Section 6 (relating to operation and administration). Capitalized terms in the LTIP shall be defined as set forth in the LTIP (including as defined in Section 8). The LTIP is established under, and constitutes a part of, the Sears Holdings Corporation Umbrella Incentive Program (“UIP”).

SECTION 2

PARTICIPATION

2.1. Eligible Employee . The term “Eligible Employee” means those salaried employees of the Company or a participating Subsidiary who (a) hold a position of divisional vice president (or equivalent) or higher, as determined by the Senior Corporate Compensation Executive (as defined in Section 8), and (b) are designated as Eligible Employees by the Compensation Committee or Senior Corporate Compensation Executive, as applicable. Subject to the terms and conditions of the LTIP, the Compensation Committee or Senior Corporate Compensation Executive, as applicable, shall determine and designate, from time to time, from among the Eligible Employees, those persons who shall be granted one or more Awards under the LTIP, and thereby become “Participants” in the LTIP. The Senior Corporate Compensation Executive shall make eligibility determinations under this Section 2 with respect to all Eligible Employees other than those who are Executives for whom compensation matters are under the purview of the Compensation Committee (as defined in Section 8). Notwithstanding the foregoing, the Award of any Participant who was hired or promoted before the Effective Date but after the first day of the Performance Period (as described in subsection 3.2) shall be subject to a fraction, the numerator of which is the number of full days remaining in the Performance Period beginning with the Participant’s date of hire or promotion, as applicable, and the denominator is the number of full days in the Performance Period.

2010 LTIP

2.2. New Hires and Promotions to Eligible Employee Status . The Compensation Committee or Senior Corporate Compensation Executive, as applicable, may designate as Participants those employees whom the Compensation Committee or Senior Corporate Compensation Executive, as applicable, determines have been newly hired or promoted into the group of Eligible Employees identified in subsection 2.1(a) above, after the Effective Date, provided that the terms and conditions of Awards to such individuals shall be subject to (a) a fraction, the numerator of which is the number of full days remaining in the Performance Period beginning with the Eligible Employee’s date of hire, or promotion, as applicable, and the denominator is the number of full days in the Performance Period, and (b) if Awards to such individuals are intended to meet the requirements of Code Section 162(m), such other adjustments as the Compensation Committee deems necessary or desirable to qualify such Awards as “performance-based compensation” for purposes of Code Section 162(m). The term “performance-based compensation”, as referred to herein, shall have the meaning ascribed to it under Code Section 162(m) and the regulations thereunder.

2.3. Demotions from Eligible Employee Status . If a Participant is demoted below a position of divisional vice president (or equivalent), as of the date of such demotion, the individual will no longer be a Participant, will be deemed to have forfeited any unvested portion of his or her Award, and will receive no LTIP distribution under Section 4.

2.4. Other Changes in Status . If a Participant is promoted after the Effective Date, the Compensation Committee or Senior Corporate Compensation Executive, as applicable, may make a second Target Incentive Award (as defined in subsection 3.1) to such individual and the total amount payable to such individual shall be based on a pro-ration, whereby the Target Incentive Award for the new position will apply to the remainder of the Performance Period and the Target Incentive Award for the immediately preceding long-term incentive-eligible position, if applicable, will apply to the portion of the Performance Period immediately preceding the effective date of the promotion. Notwithstanding the foregoing, in no event will positive discretion be applied to any Award that has been designated as intended to meet the requirements of Code Section 162(m) (and the regulations issued thereunder) with respect to the Performance Period or as of the payment date (as defined in subsection 4.1). If a Participant is demoted, but is still an Eligible Employee, the Compensation Committee or Senior Corporate Compensation Executive, as applicable, may make a second Target Incentive Award to such individual and the total Award for such an individual shall be based on a pro-ration, whereby the Target Incentive for the new position will apply only to the remainder of the Performance Period and the Target Incentive for the immediately preceding position will apply only to the portion of the Performance Period immediately preceding the effective date of the promotion, and in either case an Award will only be paid if the target for the full Performance Period is met.

SECTION 3

LTIP INCENTIVE AWARDS

3.1. Target Incentive Awards . As of and after the Effective Date, the Compensation Committee or Senior Corporate Compensation Executive (at one or more meetings of the Compensation Committee), as applicable, may award “Target Incentive Awards” (as defined in subsection 3.1(a) below) to each Participant designated by the Compensation Committee or Senior Corporate Compensation Executive (at such meeting), as applicable, in an amount determined by the applicable entity in its sole discretion. In connection with such Awards, the Compensation Committee or Senior Corporate Compensation Executive, as applicable, shall establish a “Target” and “Threshold” under each of the performance plans set forth in subsection

2010 LTIP

3.3 below; provided, however, that Threshold shall be expressed as a percentage of Target. The Senior Corporate Compensation Executive shall make the determinations referred to in this Section 3 with respect to all Participants other than those who are Executives for whom compensation matters are under the purview of the Compensation Committee.

(a) A Target Incentive Award shall, at the date of grant, consist of a commitment by the Company to distribute, at the time specified in, and in accordance with the provisions of, Section 4 below, as applicable, an amount equal to the Participant’s Target Incentive Award multiplied by the applicable Award Multiple set forth in subsection 3.4 below, subject to approval of the final award amount by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, (“LITP Incentive Award”) and to the provisions of subsection 6.4.

(b) An LTIP Incentive Award shall generally be satisfied by a distribution in cash to the Participant, provided, however, that, at the discretion of the Compensation Committee, the Company may elect, by such deadline as specified under uniform and nondiscriminatory rules established by the Compensation Committee, to satisfy such LTIP Incentive Award by payment of shares of Company common stock (“Stock”) in lieu of cash, or a combination of cash and shares of Stock. The number of shares of Stock shall be equal to (i) the amount of the Award to be paid in stock in accordance with this paragraph (b), divided by (ii) the Fair Market Value of a share of Stock, on the principal securities exchange or market on which the shares are then listed or admitted, on the business day immediately preceding the date of distribution or, if the Stock is not traded on that date, on the next preceding date on which Stock was traded; provided that issuance of any shares of Stock in accordance with this subsection 3.1(b) shall be contingent on the availability of shares of Stock under any shareholder-approved plan of the Company providing for the issuance of Stock in satisfaction of the Awards hereunder (which in no event shall be an employee stock purchase plan).

3.2. Performance Period . The “Performance Period” shall be the Company’s 2010, 2011 and 2012 Fiscal Years; provided that, in the case of an employee who is newly hired or promoted into the group of Eligible Employees after the Effective Date, the Performance Period shall be such shorter period as established by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, subject to the requirements of Code Section 162(m), if applicable. The amount of the LTIP Incentive Award shall be determined at the completion of the Performance Period in accordance with subsection 3.1 above and subsection 4.1 below.

3.3. Financial Performance Goals . The financial performance goals, which are approved by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, shall include the levels of financial performance describe in this Section 3.3. The Compensation Committee or Senior Corporate Compensation Executive, as applicable, shall determine the level of financial performance for each performance plan, the performance plan to apply to each business, and which performance plan applies to each Participant.

(a) LTIP EBITDA Plan . The “LTIP EBITDA Plan” shall apply to Participants who are under a Support Business Unit and whose position cannot be tied directly, as determined by the Compensation Committee or Senior Corporate Compensation Executive (as applicable), to a Business Unit, and does not apply to any Participant specifically designated by the Compensation Committee or Senior Corporate Compensation Executive (as applicable) to another performance plan under this LTIP.

2010 LTIP

(i) Performance Measure . Subject to adjustment, if any, in accordance with subsection (iv) of this subsection 3.3(a), the performance measure for the LTIP EBITDA Plan is “LTIP EBITDA”, which shall refer to earnings before interest, taxes, depreciation and amortization for the Performance Period computed as operating income appearing on the Company’s statement of operations for the applicable reporting period, other than Sears Canada (referred to as the “Domestic Company”), less depreciation and amortization and gains/(losses) on sales of assets. In addition, it is adjusted to exclude significant litigation or claim judgments or settlements (defined as matters which are $1,000,000 or more) including the costs related thereto; the effect of purchase accounting and changes in accounting methods; gains, losses and costs associated with acquisitions, divestitures and store closures; integration costs that are disclosed as merger related; and restructuring activities. If after the Effective Date, the Domestic Company acquires assets or an entity that has associated EBITDA (measured using the same principles as those described in the preceding provisions of this subsection 3.3(a)(i)) in its last full fiscal year prior to the acquisition of greater than or equal to $100,000,000, any EBITDA associated with such assets or entity (after its acquisition) and during the Performance Period shall be disregarded in determining LTIP EBITDA under this subsection 3.3(a)(i).

(ii) Target LTIP EBITDA . Subject to adjustment, if any, in paragraph (iv), “Target LTIP EBITDA” refers to the target level of LTIP EBITDA, established by the Compensation Committee in accordance with subsection 3.1 above, for the Performance Period.

(iii) Threshold LTIP EBITDA . Subject to adjustment, if any, in paragraph (iv), “Threshold LTIP EBITDA” refers to a level of LTIP EBITDA, established by the Compensation Committee for the Performance Period, which shall be equal to seventy percent (70%) of Target LTIP EBITDA and, if exactly achieved, shall generate an Award Multiple (described in subsection 3.4 below) of forty percent (40%).

(iv) Adjustments to Target LTIP EBITDA . The LTIP EBITDA incentive target contemplates that the Domestic Company does not make any significant acquisitions or divestitures over the period of the LTIP. If after the Effective Date the Domestic Company divests itself of assets or an entity that has associated EBITDA (measured using the same principles as those described in subsection 3.3(a)(i)) in its last full fiscal year prior to the divestiture of greater than or equal to $100,000,000, Target LTIP EBITDA for the Company’s fiscal year in which the divestiture occurs will be decreased by actual EBITDA of such assets or entity for the portion of such assets’ or entity’s last full fiscal year prior to the divestiture corresponding to the portion of the Company’s fiscal year (in which the divestiture occurs) remaining after the divestiture occurs; and Target LTIP EBITDA for each of the following fiscal years of the Company, if any, in the Performance Period will be decreased by the actual EBITDA of such assets or entity for such assets’ or entity’s last full fiscal year prior to the divestiture.

2010 LTIP

(b) 50% EBITDA – 50% BOP Plan . The “50% EBITDA – 50% BOP Plan” shall apply to Participants who are under a Business Unit or a Support Business Unit but whose position can be tied directly, as determined by the Compensation Committee or Senior Corporate Compensation Executive (as applicable), to a Business Unit, and does not apply to any Participant specifically designated by the Compensation Committee or Senior Corporate Compensation Executive (as applicable) to another performance plan under this LTIP.

(i) Performance Measure . The performance measure for the 50% EBITDA – 50% BOP Plan is based upon fifty percent (50%) “LTIP EBITDA (as defined in subsection (a)(i) above) and fifty percent 50% applicable “Business Operating Profit” (as defined herein). “Business Operating Profit” shall refer to earnings before interest, taxes, and depreciation for a Business Unit as reported on the Company’s domestic internal operating statements, and generally consists of merchandise gross profit, vendor allowances/subsidy included in margin, return-to-vendor mark-outs, allocated zero percent (0%) finance promotion costs, product quality costs, inventory shrink, margin on service revenue, and business-specific expenses such as marketing, rent, logistics, IT projects, store and payroll and other intra-company expenses. “Target BOP” refers

(ii) Target . “Target”, for purposes of the 50% EBITDA – 50% BOP Plan, refers to the target level of:

(1) “Target LTIP EBITDA” (as described in subsection 3.3 (a)(ii) above); and

(2) “Target BOP”, which refers to the target level of the applicable BOP, established by the Compensation Committee for the Performance Period.

These two components of Target shall have equal weight (i.e., fifty percent (50%) each) with respect to Participants under the 50% EBITDA – 50% BOP Plan.

(iii) Threshold . “Threshold”, for purposes of the 50% EBITDA – 50% BOP Plan, refers to the level of:

(1) “Threshold LTIP EBITDA” (as described in subsection 3.3 (a)(iii) above); and

(2) “Threshold BOP”, which refers to threshold level of the applicable BOP established by the Compensation Committee for the Performance Period.

These two components of Threshold shall have equal weight (i.e., fifty percent (50%) each) with respect to Participants under the 50% EBITDA – 50% BOP Plan.

(c) Apparel and Home Business Units Plan . The “Apparel and Home Business Units Plan” only shall apply to Participants specifically designate to this plan.

(i) Performance Measure . Performance measure for the Apparel and Home Business Units Plan shall refer to the Apparel and Home Business Units “Business Operating Profits”. “Business Operating Profit” (“BOP”) for this plan refers to earnings before interest, taxes, and depreciation for the Apparel and

2010 LTIP

Home Business Units as reported on the Company’s domestic internal operating statements, and generally consists of merchandise gross profit, vendor allowances/subsidy included in margin, return-to-vendor mark-outs, allocated zero percent (0%) finance promotion costs, product quality costs, inventory shrink, margin on service revenue, and business-specific expenses such as marketing, rent, logistics, IT projects, store and payroll and other intra-company expenses.

(ii) Target . “Target”, under the Apparel and Home Business Units Plan, refers to achievement of one hundred percent (100%) of the Apparel and Home Business Units BOPs that is equivalent to the fiscal year-end 2006 performance level (“2006 Target Performance Level”) by the end of the Performance Period.

(iii) Threshold . “Threshold”, under the Apparel and Home Business Units Plan, refers to a level of Apparel and Home Business Units BOP, for the Performance Period, which is equal to eighty-five percent (85%) of 2006 Target Performance Level and, if exactly achieved, shall generate an Award Multiple (described in subsection 3.4(c) below) of forty percent (40%).

(d) Kmart Apparel Business Unit Plan . The “Kmart Apparel Business Unit Plan” only shall apply to a Participants specifically designate to this plan.

(i) Performance Measure . Performance measure for the Kmart Apparel Business Unit Plan shall refer to the Kmart Apparel Business Unit Business Operating Profit. “Business Operating Profit” (“BOP”) for this plan refers to earnings before interest, taxes, and depreciation for the Kmart Apparel Business Unit as reported on the Company’s domestic internal operating statements, and generally consists of merchandise gross profit, vendor allowances/subsidy included in margin, return-to-vendor mark-outs, allocated zero percent (0%) finance promotion costs, product quality costs, inventory shrink, margin on service revenue, and business-specific expenses such as marketing, rent, logistics, IT projects, store and payroll and other intra-company expenses.

(ii) Target . “Target”, under the Kmart Apparel Business Unit Plan, refers to achievement of one hundred percent (100%) of the Kmart Apparel Business Unit BOPs that is equivalent to the fiscal year-end 2006 performance level (“2006 Target Performance Level”) by the end of the Performance Period.

(iii) Threshold . “Threshold”, under the Kmart Apparel Business Unit Plan, refers to a level of Kmart Apparel Business Unit BOP, for the Performance Period, which is equal to eighty-five percent (85%) of 2006 Target Performance Level and, if exactly achieved, shall generate an Award Multiple (described in subsection 3.4(d) below) of forty percent (40%).

2010 LTIP

3.4. Award Multiple . The Award Multiple for each plan referred to under subsection 3.3 shall be as outlined below:

(a) LTIP EBITDA Plan

(i) If LTIP EBITDA is one hundred percent (100%) of Target LTIP EBITDA, the Award Multiple shall be one hundred percent (100%).

(ii) If LTIP EBITDA is equal to Threshold LTIP EBITDA, the Award Multiple shall be forty percent (40%).

(iii) If LTIP EBITDA is greater than Threshold LTIP EBITDA, but less than Target LTIP EBITDA, the Award Multiple shall be a whole percentage between forty percent (40%) and one hundred percent (100%), determined based upon a smooth, non-linear payout curve with a steady escalation as LTIP EBITDA nears Target LTIP EBITDA (rounded down to the nearest whole percentage).

(iv) If LTIP EBITDA is less than Threshold LTIP EBITDA, the Award Multiple shall be zero (0).

(v) If LTIP EBITDA is greater than Target LTIP EBITDA, the Award Multiple shall be a percentage equal to one hundred (100%) plus two percent (2%) for each one percent (1%) by which LTIP EBITDA exceeds Target LTIP EBITDA (and rounded down to the nearest whole percentage). There is no maximum payout percentage.

(b) 50% EBITDA – 50% BOP Plan

(i) If the LTIP EBITDA and applicable Business Operating Profit are each one hundred percent (100%) of the applicable Targets, the Award Multiple shall be one hundred percent (100%).

(ii) If LTIP EBITDA is equal to Threshold LTIP EBITDA, the Award Multiple for the fifty percent (50%) of the Target Incentive Award based on LTIP EBITDA will be a forty percent (40%). If the applicable BOP is equal to the applicable Threshold BOP, the Award Multiple for the fifty percent (50%) of the Target Incentive Award based on BOP will be a whole percentage established by the Compensation Committee for the Performance Period.

(iii) If LTIP EBITDA is greater than Threshold LTIP EBITDA but less than Target LTIP EBITDA, the Award Multiple for the fifty percent (50%) of the Target Incentive Award based on LTIP EBITDA will be a whole percentage between forty percent (40%) and one hundred percent (100%), determined in accordance with subsection 3(a)(iii) above applied. If the applicable BOP is greater than the applicable Threshold BOP but less than the applicable Target BOP, the Award Multiple for the fifty percent (50%) of the Target Incentive Award based on BOP will be a whole percentage established by the Compensation Committee for the Performance Period.

2010 LTIP

(iv) If LTIP EBITDA and applicable Business Operating Profit are both less than the applicable Thresholds, the Award Multiple shall be zero (0).

(v) If LTIP EBITDA is greater than Target LTIP EBITDA, the Award Multiple for the fifty percent (50%) of the Target Incentive Award based on LTIP EBITDA will be one hundred (100%) plus two percent (2%) for each one percent (1%) by which LTIP EBITDA exceeds Target LTIP EBITDA (rounded down to the nearest whole percentage). If the applicable BOP is greater than the applicable Target BOP, the Award Multiple for the fifty percent (50%) of the Target Incentive Award based on BOP will be the Award Multiple established by the Compensation Committee for the Performance Period (rounded down to the nearest whole percentage). There is no maximum payout percentage.

(i) If Apparel and Home Business Units BOP is one hundred percent (100%) of Target for the Apparel and Home Business Units Plan (i.e., 2006 Target Performance Level), the Award Multiple shall be one hundred percent (100%).

(ii) If Apparel and Home Business Units BOP is equal to Threshold for the Apparel and Home Business Units Plan, the Award Multiple shall be forty percent (40%).

(iii) If Apparel and Home Business Units BOP is greater than Threshold, but less than Target for the Apparel and Home Business Units Plan, the Award Multiple shall be a whole percentage between forty percent (40%) and one hundred percent (100%), determined by interpolation on a straight line basis relative to such Apparel and Home Business Units BOP, Threshold and Target amounts (rounded down to the nearest whole percentage).

(iv) If Apparel and Home Business Units BOP is less than Threshold, the Award Multiple shall be zero (0).

(v) If Apparel and Home Business Units BOP is greater than Target for the Apparel and Home Business Units Plan, the Award Multiple shall be a percentage equal to one hundred (100%) plus four percent (4%) for each one percent (1%) by which Apparel and Home Business Units BOP exceeds Target (rounded down to the nearest whole percentage), with a maximum payout percentage of one hundred fifty percent (150%) of a Target Incentive Award.

(d) Kmart Apparel Business Unit Plan

(i) If Kmart Apparel Business Unit BOP is one hundred percent (100%) of Target for the Kmart Apparel Business Unit Plan (i.e., 2006 Target Performance Level), the Award Multiple shall be one hundred percent (100%).

(ii) If Kmart Apparel Business Unit BOP is equal to Threshold for the Kmart Apparel Business Unit Plan, the Award Multiple shall be forty percent (40%).

2010 LTIP

(iii) If Kmart Apparel Business Unit BOP is greater than Threshold, but less than Target for the Kmart Apparel Business Unit Plan, the Award Multiple shall be a whole percentage between forty percent (40%) and one hundred percent (100%), determined by interpolation on a straight line basis relative to such Kmart Apparel Business Unit BOP, Threshold and Target amounts (rounded down to the nearest whole percentage).

(iv) If Kmart Apparel Business Unit BOP is less than Threshold, the Award Multiple shall be zero (0).

(v) If Kmart Apparel Business Unit BOP is greater than Target for the Kmart Apparel Business Unit Plan, the Award Multiple shall be a percentage equal to one hundred (100%) plus four percent (4%) for each one percent (1%) by which Kmart Apparel Business Unit BOP exceeds Target (rounded down to the nearest whole percentage), with a maximum payout percentage of one hundred fifty percent (150%) of a Target Incentive Award.

3.5. Limitation on Individual Awards . Notwithstanding anything herein to the contrary, the total LTIP Incentive Award paid to any Participant for the Performance Period pursuant to the LTIP shall in no event exceed $15 million.

3.6. Additional Requirements. All LTIP Incentive Awards awarded under the LTIP (and any Stock or cash otherwise distributable pursuant thereto) are subject to the provisions of Sections 4, 5 and 6.

3.7. Reimbursement of Excess Awards . If Company’s financial statements or approved performance measures under the LTIP are the subject of a restatement due to error or misconduct, to the extent permitted by governing law, in all appropriate cases, the Company will seek reimbursement of Excess Awards paid under the LTIP to Executives (and any other Participant who is determined to have known of or been involved in any such misconduct) for the relevant performance period(s). For purposes of the LTIP, an “Excess Award” means the positive difference, if any, between (a) the LTIP Incentive Award paid to an Executive and (b) the LTIP Incentive Award that would have been paid to the Executive, had the Award been calculated based on the Company’s financial statements or performance measures as restated. The Company will not be required to award Participants, including Executives, an additional LTIP payment should the restated financial statements or performance measures result in a higher LTIP Incentive Award.

SECTION 4

DISTRIBUTION

4.1. General . Subject to Sections 5 and 6, the cash or shares of Stock, if any, that result from the payout formula described at Section 3 shall be distributed, in a single lump sum, as soon as practicable after the first Compensation Committee meeting occurring on or after the performance measures for each plan (as set forth in subsection 3.3) for the Performance Period are available to the Compensation Committee, which shall in no event be later than the date that is two and one-half (2 ¹ / 2 ) months after the last day of the 2012 Fiscal Year. Notwithstanding anything herein to the contrary, no distribution shall be made hereunder until after the Compensation Committee has certified the attainment of the performance goals and, with respect to Participants under its purview, approved the amount to be paid to each Participant. The Senior Corporate Compensation Executive shall be responsible for approving the amount payable to all other Participants. The date as of which payment is made in accordance with this subsection 4.1 is referred to herein as the “payment date.”

2010 LTIP

4.2. Termination of Employment and Other Provisions . All distributions are subject to the provisions of Sections 5 and 6 below.

SECTION 5

TERMINATION OF EMPLOYMENT

The effect of termination of employment on a Participant’s right to receive a LTIP Incentive Award (whether payable in cash or Stock) depends on the reason for the termination, as described below.

5.1. Termination of Employment .

(a) Voluntary Termination or Involuntary Termination. In the event that a Participant (i) voluntarily terminates employment (for any reason other than due to permanent and total disability, as defined in the Company’s long-term disability program, regardless of whether the Participant is covered by such program) or (ii) is involuntarily terminated for any reason (other than death) prior to the payment date (as defined in subsection 4.1 above) of his or her Award, such Participant shall forfeit all of his or her Award.

(b) Disability. In the event that, prior to the payment date (as defined in subsection 4.1 above) of his or her Award, a Participant suffers a permanent and total disability (as defined in the Company’s long term disability program, regardless of whether the Participant is covered by such program) while employed by the Company or a Subsidiary, resulting in termination or retirement, subject to Section 6 below, such individual shall be entitled to a distribution in an amount equal to the LTIP Incentive Award, if any, that would otherwise be payable to the Participant under subsection 3.1 above, pro-rated through the date of termination in accordance with subsection 5.2 below; provided, however, that in no event shall a Participant receive any payment hereunder unless (i) the applicable performance measure (under subsection 3.3) for the period from the inception of the Performance Period through the last completed full month that occurs on or preceding the Participant’s date of termination is equal to or greater than the Target for that performance measure, pro-rated through the date of termination in accordance with subsection 5.2 below, (ii) the applicable performance measure is equal to or greater than the applicable Target for the Performance Period, and (iii) as of his date of termination, the Participant had been employed by one or more of the Company or a Subsidiary, for at least twelve (12) months of the Performance Period applicable to such individual.

(c) Death. In the event that a Participant dies while employed by the Company or a Subsidiary and prior to the payment date for his or her Award, his or her Target Incentive Award shall be pro-rated through the date of death, in accordance with subsection 5.2 below, and, subject to Section 6 below, his or her estate shall be entitled to receive a LTIP Incentive Award, equal to his or her prorated Target Incentive Award and payable in cash; provided, however, that in no event shall a payment be made with respect to a deceased Participant hereunder unless as of his date of death, (i) the

2010 LTIP

applicable performance measure (under subsection 3.3) for the period from the inception of the Performance Period through the last completed full month that occurs on or preceding the Participant’s date of death is equal to or greater than the Target for that performance measure, prorated through the date of death in accordance with subsection 5.2 below, (ii) the applicable performance measure is equal to or greater than the Target for that performance measure for the Performance Period, and (iii) he had been employed by one or more of the Company or a Subsidiary, for at least twelve (12) months of the Performance Period applicable to such individual

5.2. Pro-rations . Any pro-ration of a LTIP Incentive Award, Target Incentive Award, or Target performance measure, as applicable, under this Section 5 shall be based on a fraction, the numerator of which is the number of full months during the Performance Period in which the Participant was a Participant in the LTIP, and the denominator of which is the full number of months in the Performance Period, as adjusted at subsections 2.1, 2.2 and 2.4, if applicable.

SECTION 6

OPERATION AND ADMINISTRATION

6.1. Compensation Committee and Senior Corporate Compensation Executive . The authority to control and manage the operation and administration of the LTIP shall be vested in the Compensation Committee and the Senior Corporate Compensation Executive, as provided herein.

(a) Compensation Committee . Notwithstanding paragraph (b) immediately below, the Compensation Committee:

(i) Shall approve the Target Incentive Award and the Awards for Participants who are Executives (as defined in Section 8);

(ii) Notwithstanding paragraph (b) below, with respect to Participants who are Executives, shall have the authority and discretion to establish the terms, conditions, restrictions, and other provisions of such Awards, and (subject to the restrictions imposed by subsection 6.4 and Section 7) to amend, cancel, or suspend Awards; provided, however (and subject to the requirements of Code Section 162(m), if applicable) that to the extent the Compensation Committee determines that the restrictions imposed by the LTIP preclude the achievement of the material purposes of the Awards in jurisdictions outside the United States, the Compensation Committee shall have the authority and discretion to modify those restrictions as the Compensation Committee determines to be necessary or appropriate to conform to applicable requirements or practices of jurisdictions outside of the United States;

(iii) May make additional changes that it deems appropriate for the effective administration of the LTIP, subject to subsection 6.4 and provided that these changes may not increase the benefits to which Participants may become entitled under the LTIP, nor change the pre-established measures or goals that have been approved; and

2010 LTIP

(iv) Shall be responsible for all other duties and responsibilities allocated to the Compensation Committee under the terms and conditions of the LTIP.

(b) Senior Corporate Compensation Executive . Except as provided in paragraph (a) immediately above, the Senior Corporate Compensation Executive:

(i) Shall Determine the Target Incentive Award and the Awards for Participants who are not Executives (as defined in Section 8);

(ii) Notwithstanding paragraph (a) above, shall have the authority and discretion to establish the terms, conditions, restrictions, and other provisions of such Awards, and (subject to the restrictions imposed by subsection 6.4 and Section 7) to amend, cancel, or suspend Awards;

(iii) Shall have the authority to control and manage the operation and administration of the LTIP with respect to all Participants, subject to the direction of the Compensation Committee with respect to Executives, except as otherwise provided in this LTIP;

(iv) Shall be responsible for the day-to-day administration of the LTIP except as otherwise provided in this LTIP; and

(v) Shall be responsible for all other duties and responsibilities allocated to the Senior Corporate Compensation Executive under the terms and conditions of the LTIP.

(c) The Compensation Committee and the Senior Corporate Compensation Executive, as appropriate, shall have the authority and discretion to interpret the LTIP, to establish, amend, and rescind any rules and regulations relating to the LTIP and to make all other determinations that may be necessary or advisable for the administration of the LTIP.

(d) Any determinations by the Compensation Committee or the Senior Corporate Compensation Executive, as applicable, regarding this LTIP are binding on the applicable Participants.

6.2. Source of Awards . In the case of Awards under the LTIP that are settled in shares of Stock, such shares shall be distributed under a stock plan adopted by the Company and approved by the shareholders thereof that provides for the issuance of Stock in satisfaction of Awards hereunder, (which in no event shall be an employee stock purchase plan.) In the event of any conflict between this document and such stock plan, the provisions of the stock plan shall govern.

6.3. Delegation by Compensation Committee . Except to the extent prohibited by applicable law or the applicable rules of a securities exchange or similar entity, or would cause Awards designated as intended to constitute performance-based compensation under Code Section 162(m) to not satisfy the requirements thereunder, the Compensation Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers to any person or persons selected by it. The Compensation Committee may revoke any such allocation or delegation at any time.

2010 LTIP

6.4. Negative Discretion. Notwithstanding anything in the LTIP to the contrary, prior to the settlement of any LTIP Incentive Award, the Compensation Committee (or the Senior Corporate Compensation Executive with respect to Participants who are not under the purview of the Compensation Committee) may (a) reduce the amount of such Award, or the number of shares of Stock or amount of cash to be delivered in connection with such Award, and (b) with respect to Awards that are not designated as intended to meet the requirements of “performance based compensation” under Code Section 162(m) and the regulations issued thereunder, may change the pre-established measures in goals that have been approved for such Award and increase the amount of such Award or the number of shares of stock or amount of cash to be delivered in connection with such Award.

6.5. General Restrictions . Delivery of shares of Stock under the LTIP, in satisfaction of a LTIP Incentive Award, shall be subject to the following:

(a) Notwithstanding any other provision of the LTIP, the Company shall have no obligation to deliver any shares of Stock or make any other distribution of benefits under the LTIP unless such delivery or distribution complies with all applicable laws (including, without limitation, the requirements of the Securities Act of 1933), and the applicable requirements of any securities exchange or similar entity.

(b) To the extent that the LTIP provides for issuance of Stock certificates to reflect the issuance of shares of Stock, the issuance may be effected on a non-certificated basis, to the extent not prohibited by applicable law or the applicable rules of any exchange or similar entity.

6.6. Tax Withholding . All distributions under the LTIP are subject to withholding of all applicable taxes. In the case of Awards under the LTIP that are settled in shares of Stock, if any, the Compensation Committee or Senior Corporate Compensation Executive, as applicable, may condition the delivery of any shares or other benefits under the LTIP on satisfaction of the applicable withholding obligations. To the extent permitted by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, such withholding obligations may be satisfied: (a) through cash payment by the Participant; (b) through the surrender of shares of Stock which the Participant already owns (provided, however, that to the extent shares described in this paragraph (b) are used to satisfy more than the minimum statutory withholding obligation, as described below, then, except as otherwise provided by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, payments made with shares of Stock in accordance with this paragraph (b) shall be limited to shares held by the Participant for not less than six months prior to the payment date (or such other period of time as the Company’s accountants may require)); or (c) through the surrender of shares of Stock to which the Participant is otherwise entitled under the LTIP, provided, however, that such shares under this paragraph (c) may be used to satisfy not more than the Company’s minimum statutory withholding obligation (based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income).

2010 LTIP

6.7. Settlement of Awards . The obligation to make payments and distributions with respect to Awards may be satisfied through cash payments, the delivery of shares of Stock, or a combination thereof, as provided under subsections 3.1(b) and 4.1), subject, in the case of settlement in shares, to the terms of the stock plan under which the Stock is issued. Satisfaction of any such obligations under an Award, which is sometimes referred to as the “settlement” of the Award, may be subject to such conditions, restrictions and contingencies as the Compensation Committee or Senior Corporate Compensation Executive, as applicable, shall determine. Each Subsidiary shall be liable for payment of an Award due under the LTIP with respect to any Participant to the extent that such benefits are attributable to the services rendered for that Subsidiary by the Participant. Any disputes relating to liability of a Subsidiary for payment of an Award shall be resolved by the Compensation Committee or Senior Corporate Compensation Executive, as applicable.

6.8. Transferability . Except as otherwise provided by the Compensation Committee, Awards under the LTIP are not transferable except as designated by the Participant by will or by the laws of descent and distribution (including Awards originally determined by the Senior Corporate Compensation Executive).

6.9. Form and Time of Elections . Unless otherwise specified herein, each election required or permitted to be made by any Participant or other person entitled to benefits under the LTIP, and any permitted modification, or revocation thereof, shall be in writing filed with the Compensation Committee or Senior Corporate Compensation Executive, as applicable, at such times, in such form, and subject to such restrictions and limitations, not inconsistent with the terms of the LTIP, as the Compensation Committee or Senior Corporate Compensation Executive, as applicable, shall require.

6.10. Agreement With Company . Any Award under the LTIP shall be subject to such terms and conditions, not inconsistent with the LTIP, as the Compensation Committee or Senior Corporate Compensation Executive, as applicable, shall, in its sole discretion, prescribe. The terms and conditions of any Award to any Participant shall be reflected in such form of written (including electronic) document as is determined by the Compensation Committee. A copy of such document shall be provided to the Participant, and the Compensation Committee or Senior Corporate Compensation Executive, as applicable, may, but need not, require that the Participant sign a copy of such document. Such document is referred to as an “Award Agreement” regardless of whether any Participant signature is required.

6.11. Action by Company or Subsidiary . Any action required or permitted to be taken under the LTIP by the Company or any Subsidiary, if any, of the foregoing shall be by resolution of its board of directors, or by action of one or more members of the board of directors of such company (including a committee of the board) who are duly authorized to act for such board with respect to the applicable action, or (except to the extent prohibited by applicable law or applicable rules of any securities exchange or similar entity) by a duly authorized officer of such company.

6.12. Gender and Number . Where the context admits, words in any gender shall include any other gender, words in the singular shall include the plural and the plural shall include the singular.

6.13. Limitation of Implied Rights .

(a) Neither a Participant nor any other person shall, by reason of participation in the LTIP, acquire any right in or title to any assets, funds or property of the Company or any Subsidiary whatsoever, including, without limitation, any specific funds, assets, or

2010 LTIP

other property which the Company or any Subsidiary, in its sole discretion, may set aside in anticipation of a liability under the LTIP. A Participant shall have only a contractual right to the cash or Stock, if any, payable under the LTIP, unsecured by any assets of the Company or any Subsidiary, and nothing contained in the LTIP shall constitute a guarantee that the assets of the Company or any Subsidiary shall be sufficient to pay any benefits to any person.

(b) The LTIP does not constitute a contract of employment, and selection as a Participant shall not give any participating employee the right to be retained in the employ of the Company or any Subsidiary, nor any right or claim to any benefit under the LTIP, unless such right or claim has specifically accrued under the terms of the LTIP. Except as otherwise provided in the LTIP, no Award under the LTIP shall confer upon the holder thereof any rights as a shareholder of the Company prior to the date on which the individual fulfills all conditions for receipt of such rights.

6.14. Evidence . Evidence required of anyone under the LTIP may be by certificate, affidavit, document or other information, which the person charged with acting on such evidence considers pertinent and reliable, and which has been signed, made or presented by the proper party or parties.

6.15. Information to be Furnished to the Compensation Committee or Senior Corporate Compensation Executive . The Company and the Subsidiaries shall furnish the Compensation Committee or Senior Corporate Compensation Executive, as applicable, with such data and information as it determines may be required for it to discharge its duties. The records of the Company and the Subsidiaries, as to an employee’s or Participant’s employment, termination of employment, leave of absence, reemployment, and compensation shall be conclusive on all persons unless determined to be incorrect. Participants and other persons entitled to benefits under the LTIP must furnish the Compensation Committee or Senior Corporate Compensation Executive, as applicable, such evidence, data or information as such entity considers desirable to carry out the terms of the LTIP, subject to any applicable privacy laws.

6.16. Corporate Transaction . In the event of a corporate transaction involving the Company (including without limitation, any Stock dividend, Stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, sale of assets or subsidiaries, combination or exchange of shares), the Compensation Committee may adjust Awards to preserve but in no event increase the benefits or potential benefits of the Awards (including Awards originally determined by the Senior Corporate Compensation Executive) ; provided, however, that no such adjustment may be made to the extent such adjustment would cause Awards that are designated as intended to constitute “performance-based compensation” under Code Section 162(m) and the regulations issued thereunder, to cease to qualify as “performance-based compensation” under Code Section 162(m). Actions permitted under the preceding sentence by the Compensation Committee may include any adjustments that the Compensation Committee determines to be equitable (which may include, without limitation, (a) replacement of Awards with other Awards which the Compensation Committee determines have comparable value and which are based on stock of a company resulting from the transaction, and (b) cancellation of the Award in return for cash payment of the current value of the Award, determined as though the Award is fully vested at the time of the payment.)

2010 LTIP

SECTION 7

AMENDMENT AND TERMINATION

The Board or Compensation Committee may, at any time, amend or terminate the LTIP, or any Award, provided that no amendment or termination may, in the absence of written consent to the change by the affected Participant (or, if the Participant is not then living, the affected beneficiary), adversely affect the rights of any Participant or beneficiary under any Award granted under the LTIP prior to the date such amendment is adopted by the Board (or the Compensation Committee, if applicable), and no amendment may be made, without the consent of the shareholders of the Company, that would cause any Awards designated as intended to meet the requirements of “performance based compensation” under Code 162(m) and the regulations thereunder, to cease to be deductible under Code Section 162(m). Notwithstanding anything herein to the contrary, (i) no amendment shall be made that would cause the LTIP not to comply with the requirements of Code Section 409A or any other applicable law or rule of any applicable securities exchange or similar entity, and (ii) the LTIP and any Award thereunder may be amended without Participant consent to the extent that the Compensation Committee determines such amendment necessary to cause the LTIP or Award to comply with the requirements of Code Section 409A or any other applicable law or rule of any applicable securities exchange or similar entity.

SECTION 8

DEFINED TERMS

8.1. In addition to the other definitions contained herein, the following definitions shall apply:

(a) Assignment . The term “Assignment” refers to the performance goal(s) (under subsections 3.3) that has been assigned by the Compensation Committee or Senior Corporate Compensation Executive, as appropriate, to a Participant, based upon position and/or business unit. Assignment also includes the weight of each performance measure assigned to the Participant.

(b) Award . The term “Award” or “Awards” means any LTIP Incentive Award(s), whether settled in cash or Stock.

(d) Code . The term “Code” means the Internal Revenue Code of 1986, as amended. A reference to any provision of the Code shall include reference to any successor provision of the Code.

(e) Compensation Committee . The term “Compensation Committee” refers to the Compensation Committee of the Board of Directors of Sears Holdings Corporation.

2010 LTIP

(h) Fiscal Year . The term “Fiscal Year” shall mean the twelve (12) month period beginning on January 30, 2010, and thereafter the twelve (12) month period beginning on the Saturday closest to January 31 of each of calendar year 2011 and 2012.

(i) Senior Corporate Compensation Executive . The term “Senior Corporate Compensation Executive” refers to the Senior Vice President and President, Talent and Human Capital Services (or equivalent), or if he or she has explicitly delegated his or her duties with respect to the LTIP, as provided herein, then the Senior Corporate Compensation Executive shall refer to such authorized representative to whom the duties of administering the LTIP have been delegated.

(j) Subsidiary . The term “Subsidiary” or “Subsidiaries” refers to any company during any period in which it is a “subsidiary corporation” (as that term is defined in Section 424(f) of the Code) with respect to the Company.

(k) Support Business Unit . The term “Support Business Unit” shall refer to business units tied to a “Support Center” (as defined herein) that service multiple business units and cannot be tied specifically to any one Business Unit, as determined by the Company. The term “Support Center” refers to business units at the following corporate locations: (i) Hoffman Estates, Illinois, (ii) Troy, Michigan, (iii) Dodgeville, Wisconsin, (iv) Tucker, Georgia, (v) Dallas, Texas, (vi) New York Design Center facilities in New York City, (vii) SHIP in Longwood, Florida, (viii) SRAC in Wilmington, Delaware and (ix) San Francisco Apparel Office in San Francisco, which cannot be tied specifically to any one Business Unit. Employees on a Support Center overhead account may, however, be further categorized as determined by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, under a Business Unit or other businesses instead of under a Support Business Unit (as defined immediately below), if they can be tied specifically to such unit.

SECTION 9

EXPIRATION OF LTIP

The LTIP shall expire, subject to earlier termination pursuant to Section 7, on the date on which all LTIP Incentive Awards (if any) are paid in full or would have been payable in accordance with the provisions of the LTIP (or, if earlier, on the date that the Compensation Committee determines that the performance measures are less than the Thresholds for the performance measures.)

* * *

2010 LTIP

IN WITNESS WHEREOF , the Compensation Committee of the Board of Directors of Sears Holdings Corporation has caused this LTIP to be executed effective as of the date first stated above, by the undersigned officer of Sears Holdings Corporation on this 29th day of April, 2010.


S EARS H OLDINGS C ORPORATION

By:		/s/ J. David Works
		J. David Works
Title:		Senior Vice President and President, Talent and Human Capital Services

EXHIBIT 10.3

[SEARS HOLDINGS LETTERHEAD]


		Edward S. Lampert
		Chairman
		Sears Holdings Corporation
		3333 Beverly Road
		Hoffman Estates, IL 60179

April 5, 2010

Mr. W. Bruce Johnson

Dear Bruce:

The purpose of this letter is to confirm our offer to make certain changes to your compensation package. Although this letter serves as confirmation of these changes, the offer is subject to the approval of the Compensation Committee of the Sears Holdings Corporation Board of Directors (“Compensation Committee”).

The changes to your compensation package are as follows:

•

Annual base salary at a rate of $1,000,000, effective April 1, 2010.

•

You will receive a grant of 40,000 shares of restricted stock under the Sears Holdings Corporation 2006 Stock Plan. The grant date will be the later of (a) the date of approval by the Compensation Committee or (b) Tuesday, April 6, 2010. The restricted stock granted will be scheduled to vest on a graduated basis, with 10,000 shares vesting on each of the next four anniversaries after the grant date, in accordance with the award agreement. However, if a new individual is named to serve as Chief Executive Officer prior to the first anniversary of the grant date and your employment is involuntarily terminated after such appointment but prior to the first anniversary of the grant date, the first 10,000 shares will be deemed to be vested as of such termination date.

•

Use of Company-furnished ground transportation for travel between your primary residence in the Chicago metropolitan area and the Company’s corporate headquarters in Hoffman Estates, Illinois, the aggregate incremental cost of which shall be imputed income to you and you will be responsible for any related taxes.

The remaining elements of your compensation and benefits package, as currently in effect, will remain unchanged.

To accept this offer and the terms provided herein, please sign below and return this letter to me.

Sincerely,


/s/ Edward S. Lampert
Chairman

Confirmed and Accepted :

/s/ W. Bruce Johnson		4/25/10
W. Bruce Johnson		Date

EXHIBIT 10.4

[SEARS HOLDINGS LETTERHEAD]

J. DAVID WORKS

Senior Vice President, Talent and Human Capital Services

March 17, 2010

Mr. Michael D. Collins

Dear Mike,

I am pleased to tell you that the Compensation Committee of Sears Holdings Board of Directors has approved the following compensation package for you as you continue in the role of Senior Vice President and Chief Financial Officer. Your new compensation package was approved retroactive to January 31, 2010, the first day of SHC’s 2010 fiscal year.

The key elements of your new compensation package are as follows:

•

Annual base salary at a rate of $700,000.

•

Participation in the Sears Holdings Corporation Annual Incentive Plan. Your annual incentive opportunity will increase to ninety percent (90%) of your base salary. Your incentive under the 2010 Annual Incentive Plan (“2010 AIP”) will be prorated based on the amount of time at each compensation level (base salary and annual incentive target) through January 29, 2011, the last day of SHC's 2010 fiscal year. Any annual incentive payable with respect to a fiscal year will be paid by April 15 of the following fiscal year, provided that you are actively employed at the payment date.

The table below summarizes the changes in your compensation


	Title	Base Salary			Target Incentive		Total Target Cash
Current	SVP and Chief Financial Officer	$	600,000		75	%	$	1,050,000
New	SVP and Chief Financial Officer	$	700,000		90	%	$	1,330,000
Increase			16.7	%				26.7	%

In addition to the above, you also received a grant of restricted stock valued at $500,000 under the Sears Holdings Corporation 2006 Stock Plan. The number of restricted shares granted (4,950) was determined using the market closing price ($101.01 per share) of Sears Holdings shares on March 9, 2010, the grant date. The restricted shares granted will be scheduled to vest in full on the third anniversary of the grant date, subject to the restrictions set forth under the 2006 Stock Plan and the Restricted Stock Award Agreement.

If you need additional information or clarification, please call. Please sign below and return this letter.

Sincerely,

/s/ J. David Works

J. David Works


Accepted:

/s/ Michael D. Collins		3/24/10
Michael D. Collins		Date

Exhibit 10.5

SEARS HOLDINGS CORPORATION

Director Compensation Program

Effective as of May 4, 2010

•

Only non-employee directors will be compensated for serving as directors of the Company

•

Each non-employee director will receive an annual cash retainer of $60,000

•

The chairperson of the Audit Committee of the Board of Directors will receive an additional annual cash retainer of $10,000

•

No other director will receive additional compensation for Board service

•

All directors will be reimbursed for out-of-pocket expenses incurred to attend meetings of the Board of Directors and committees of the Board of Directors

EXHIBIT 31.1

CERTIFICATIONS

I, W. Bruce Johnson, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Sears Holdings Corporation;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 20, 2010

/s/ W. Bruce Johnson

W. Bruce Johnson

Interim Chief Executive Officer and President

Sears Holdings Corporation

EXHIBIT 31.2

CERTIFICATIONS

I, Michael D. Collins, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Sears Holdings Corporation;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(a)

(b)

(c)

(d)

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 20, 2010

/s/ Michael D. Collins

Michael D. Collins

Senior Vice President and Chief Financial Officer

Sears Holdings Corporation

EXHIBIT 32

CERTIFICATION

Pursuant to 18 U.S.C. 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

Each of the undersigned, W. Bruce Johnson, Interim Chief Executive Officer and President of Sears Holdings Corporation (the “Company”) and Michael D. Collins, Senior Vice President and Chief Financial Officer of the Company, has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 1, 2010 (the “Report”).

Each of the undersigned hereby certifies that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

May 20, 2010

/s/ W. Bruce Johnson

W. Bruce Johnson

Interim Chief Executive Officer and President

/s/ Michael D. Collins

Michael D. Collins

Senior Vice President and Chief Financial Officer

SEARS HOLDINGS CORPORATION

(Registrant)

May 20, 2010

/ S / W ILLIAM K. P HELAN

William K. Phelan

Senior Vice President and Controller

(Principal Accounting Officer and duly

authorized officer of Registrant)