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Sears Reports Higher Net, But Lower Quarterly Sales

Hoffman Estates, Ill. – Sears Holdings Corp. reported net income of $294 million, for the second quarter ended July 29, an increase of $133 million over the same time last year.

The second quarter results include a $36 million pre-tax gain representing the Sears’ portion of proceeds related to the settlement of Visa/MasterCard antitrust litigation. Excluding the impact of this gain, second quarter net income was $272 million.

In addition, the prior year second quarter results included $42 million in merger-related restructuring charges at Kmart, or $26 million net of taxes. Excluding the impact of these charges, prior year second quarter net income was $187 million.

The improvement in second quarter earnings reflects improved profitability at both Kmart and Sears Domestic, largely due to reduced expenses and an increase of 120 basis points in gross margin rate from 27.2 percent in 2005 to 28.4 percent in 2006.

“Sears Holdings’ resolve to improve the profitability of this business remains strong and is borne out in the company’s second quarter results,” said Aylwin Lewis, Sears Holdings’ president/CEO.

For the quarter, domestic comparable stores sales declined 3.8 percent in the aggregate, with Sears Domestic comparable store sales declining 6.3 percent and Kmart comparable store sales declining 0.6 percent. The comparable store sales declines at both Kmart and Sears Domestic reflect the impact of increased competition and lower transaction volumes.

At Kmart, comparable store sales declines in home goods were partially offset by increased sales within a number of merchandise categories. At Sears Domestic, comparable store sales declined across most categories and formats.

Total revenues declined $400 million billion to $12.8 billion for the 13 weeks ended July 29, 2006, as compared to total revenues of $13.2 billion for the same period last year. Sears revenues were $8.3 billion for the 13 weeks ended July 29 as compared to $8.6 billion for the same period last year primarily reflecting the impact of comparable store sales declines, partially offset by an increase in the total number of Sears Full-line stores in operation, resulting mainly due to conversions from the Kmart format.

Total revenues at Kmart declined $100 million as compared to the prior year period, primarily reflecting a reduction in the total number of Kmart stores in operation.