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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

OR

Commission file number 1-416

SEARS, ROEBUCK AND CO.

Registrant’s telephone number, including area code: (847) 286-2500

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:       None

On January 31, 2003, the Registrant had 316,815,592 common shares outstanding. The aggregate market value (based on the closing price of the Registrant’s common share as reported in a summary of composite transactions in The Wall Street Journal for stocks listed on the New York Stock Exchange on June 28, 2002) of the Registrant’s common shares owned by non-affiliates (which are assumed to be shareholders other than (i) directors and executive officers of the Registrant and (ii) any person known by the Registrant to beneficially own five percent or more of Registrant’s common shares), as of June 28, 2002 was approximately $13.2 billion.

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.

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Documents Incorporated By Reference

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PART I

Item 1. Business

Sears, Roebuck and Co. (“Sears”, and together with its consolidated subsidiaries, the “Company”) originated from an enterprise established in 1886 and incorporated under the laws of New York in 1906. Its principal executive offices are located at 3333 Beverly Road, Hoffman Estates, Illinois. The Company is a multi-line retailer that offers a wide array of merchandise and related services. In addition, through its Credit and Financial Products businesses, the Company offers its customers various credit, financial and related insurance products. The Company is organized into four principal business segments – Retail and Related Services, Credit and Financial Products, Corporate and Other, and Sears Canada. The Company is among the largest retailers of merchandise in North America.

In June 2002, the Company acquired Lands’ End, Inc. (“Lands’ End”). Headquartered in Dodgeville, Wisconsin, Lands’ End is a leading direct merchant of traditionally-styled casual clothing for men, women and children, accessories, footwear, home products and soft luggage.

The Company’s Annual Reports on Form 10-K, including this Form 10-K, as well as the Company’s Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports are available, free of charge, on the Company’s internet website, sears.com. These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. The reference to the Company’s website address does not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.

The Company’s business segments are defined as follows:

Retail and Related Services - consisting of:

Full-line Stores - 872 Full-line Stores, averaging approximately 90,000 net selling square feet, located primarily in shopping malls across the nation and offering:

	•		Hardlines - A full assortment of appliances, electronics and home improvement products, including tools, fitness and lawn and garden equipment; products range from major national brands to exclusive Sears brands such as Kenmore, Craftsman and WeatherBeater.
	•		Softlines - A complete selection of fashionable, quality apparel and accessories for the whole family, fine jewelry and home fashions at value prices; includes leading national brands as well as exclusive Sears brands such as Lands’ End, Covington, Canyon River Blues, Apostrophe and TKS Basics.
	•		Sears Auto Centers - Offer major national brands of tires, Sears exclusive DieHard brand and other brands of batteries and related automotive services.
	•		sears.com - Sears online presence; offers a limited assortment of hardlines and softlines merchandise and provides customers the option of buying online and picking up their merchandise in Full-line Stores.

Specialty Stores - Approximately 1,300 Specialty Stores, located primarily in free-standing, off-the-mall locations or high-traffic neighborhood shopping centers.

•

Dealer Stores - 767 primarily independently-owned stores, predominately located in smaller communities and averaging 5,300 net selling square feet, that offer appliances, electronics, lawn and garden merchandise, hardware and automobile batteries. Dealer Stores carry exclusive Sears brands such as Craftsman, Kenmore and DieHard as well as a wide assortment of national brands.

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	•		Hardware Stores - 249 neighborhood Hardware Stores under the Sears Hardware and Orchard Supply Hardware brands, ranging, on average, from 21,000 to 41,000 net selling square feet, that carry Craftsman tools and lawn and garden equipment, a wide assortment of national brands and other home improvement products.
	•		National Tire & Battery (NTB) - 225 stores that offer major national brands of tires, DieHard and other brands of batteries and related services.
	•		The Great Indoors - 20 stores specializing in home decorating and remodeling, averaging approximately 100,000 net selling square feet, dedicated to the four main rooms of the house: kitchen, bedroom, bathroom and great room.
	•		Commercial Sales - Primarily targets home builders, remodelers and property managers for appliance purchases as well as vocational schools, factory maintenance and service companies for industrial tool purchases.
	•		Sears Outlet Stores - 38 stores averaging 28,000 net selling square feet that offer appliances, electronics and lawn and garden merchandise at a discount.

Direct to Customer - The Direct to Customer business includes Lands’ End online and catalog operations as well as results of operations for Lands’ End’s 15 retail stores effective June 17, 2002. These stores, averaging 7,000 net selling square feet, offer traditionally-styled casual clothing for men, women and children primarily from overstock catalog and online offerings. Direct to Customer also includes direct marketing of goods and services memberships, merchandise through specialty catalogs and impulse and continuity merchandise.

Product Repair Services - Product repair, service contract protection and installation services are provided for all major brands of home products through a national network of approximately 10,000 service technicians. This business also sells and services residential cooling and heating systems.

Credit and Financial Products

This segment manages the Company’s domestic portfolio of credit card receivables. The domestic credit card receivables portfolio consists primarily of the proprietary Sears Card and Sears ChargePlus (collectively, “Sears Card”) and Sears Gold MasterCard and The Great Indoors Gold MasterCard (collectively, “MasterCard”) account balances. Sears Card receivables are generated primarily from purchases of merchandise and services from the Company’s domestic operations. The MasterCard products are widely accepted by merchants outside the Company. The MasterCard credit card receivables are generated from purchases from the Company and other merchants, balance transfers, convenience checks and cash advances. This segment also sells related financial products such as credit protection and insurance products.

Sears National Bank (the “Bank”), a wholly-owned subsidiary of Sears based in Arizona, is a limited purpose credit card bank engaging in credit card operations, originating credit accounts in all 50 states. The Bank is subject to certain restrictions under federal law applicable to credit card banks as well as to Arizona credit card lending guidelines.

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Corporate and Other

Corporate and Other operations include activities that are of an overall holding company nature, primarily consisting of administrative activities, the costs of which are not allocated to the Company’s businesses. This segment also includes home improvement services (primarily siding and windows through Sears Home Improvement Services) and Sears Termite and Pest Control which are not related to the Company’s retail operations. During 2001, the Company sold the Sears Termite and Pest Control business.

Sears Canada

The Company conducts similar retail, credit and corporate operations in Canada through Sears Canada Inc. (“Sears Canada”), a consolidated, 54.4% owned subsidiary of Sears. Sears Canada retail operations are conducted through 123 department stores, 42 furniture and appliance stores, 141 dealer stores, 15 outlet stores, 52 automotive centers, approximately 2,200 catalog pick-up locations, 110 travel offices and online through sears.ca.

Information regarding revenues, operating income, total assets and capital expenditures of the Company’s business segments for each of the three fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000 is contained in Note 16 of the Notes to Consolidated Financial Statements. Information on the components of revenues is included in “Management’s Discussion and Analysis”.

Seasonality

Due to holiday buying patterns, merchandise sales traditionally are higher in the fourth quarter than in the other quarterly periods, and the Company typically earns a disproportionate share of operating income in the fourth quarter.

Trademarks and Tradenames

The trade name “SEARS” is used by the Company. The name is the subject of numerous United States and foreign trademark registrations. This trademark is material to the Company’s domestic operations and other related businesses.

Sears sells private label merchandise under a number of brand names which are important to its domestic operations. The Company’s LANDS’ END®, KENMORE®, CRAFTSMAN® and DIEHARD® brands are among the most recognized private label brands in retailing. These names are the subject of numerous United States and foreign trademark registrations. Other important and well-recognized Company trademarks and service marks include THE GREAT INDOORS®, NTB®, OSH ORCHARD SUPPLY HARDWARE®, CANYON RIVER BLUES®, APOSTROPHE®, TKS BASICS®, COVINGTON™, A&E FACTORY SERVICE™ and SEARS. WHERE ELSE?^SM. The Company’s right to use all of its trade names continues so long as it uses the names.

Competition

The domestic retail and credit businesses are highly competitive. The principal factors that differentiate retail competitors include convenience of shopping facilities, quality of merchandise, competitive prices, brand names and availability of ancillary services such as credit, product delivery, repair and installation. The principal competitive factors that affect the Company’s credit business are new product offerings, interest rates and credit and payment terms. The Company believes its business model enables it to compete effectively despite strong competitive pressures in recent years.

Employees

The Company employs approximately 241,000 people in the United States and Puerto Rico, and 48,000 people in Canada, including part-time employees.

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Item 1A. Executive Officers of the Registrant

The following table sets forth the names of the executive officers of the Company, their current positions and offices with the Company, the date they first became officers of the Company and their current ages:

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Messrs. Lacy, Heidemann and Pagonis and Ms. Conway have held the positions set forth in the above tables for at least the last five years or have served the Company in various executive or administrative capacities for at least that length of time. The remaining executive officers have held the following positions for such five-year period:

Ms. Bousquette joined Sears as Executive Vice President, Chief Customer and Marketing Officer, in October 2002. Prior to joining Sears, she was Chief Marketing Officer and Executive Vice President of eToys Inc., a Web-based retailer, from 1999 to 2001. From 1995 to 1999, she was Vice President, Marketing with Pepsi-Cola Division of PepsiCo, Inc., a snack and beverage manufacturer and distributor, serving as Vice President of Marketing for Trademark Pepsi Brands from 1997 to 1999.

Ms. Bufano joined Sears as Executive Vice President, Softlines in January 2002. Prior to joining Sears, she was President and Chief Merchandising Officer of The Dress Barn, Inc., a women’s apparel retailer, since 2001. Prior to joining The Dress Barn, Inc., she was Executive Vice President, Women’s Apparel of Macy’s East, a department store chain, since 1995.

Mr. Cook joined Sears in 1996 and was named Vice President and Deputy General Counsel - Transactions and Securities in 1999. He became Vice President - Deputy General Counsel and Acting General Counsel in January 2003. Prior to joining Sears, Mr. Cook practiced law at Skadden, Arps, Slate, Meagher & Flom (Illinois) and Affiliates from 1985 to 1996.

Mr. Cosby joined Sears as Executive Vice President, Sears, Roebuck and Co. and President, Full-line Stores in November 2002. Prior to joining Sears, he was Chief Operating Officer, KFC of TRICON Global Restaurants, Inc. (now Yum! Brands, Inc.), a restaurant operating company, from 2001 to November 2002 and Chief Development Officer from 1997 to 2001.

Mr. Dyer joined Sears as President and Chief Executive Officer, Lands’ End and Executive Vice President and General Manager, Customer Direct, Sears, in June 2002 following the acquisition of Lands’ End. In December 2002, he also became responsible for the activities of The Great Indoors. Prior to the acquisition, he served as President and Chief Executive Officer of Lands’ End since 1998. Mr. Dyer was an independent catalog/retail consultant for the Texas Pacific Group, an investment firm, and the J. Crew Group, a clothing retailer, from 1997-1998.

Mr. Good joined Sears in 1997. He was appointed Executive Vice President/General Manager, Product Repair Services in 2002. Prior to that, he was President, Product Repair Services from 1999 to 2002, Vice President & General Manager, Parts & Carry-In Service from 1998 to 1999 and Vice President & General Manager, Parts from 1997 to 1998.

Mr. Kelly joined Sears as Senior Vice President and Chief Information Officer in October 2002. Prior to joining Sears, he was Senior Vice President - Logistics, Information Systems and Technology at Payless Shoesource, Inc., a footwear retailer, from 1996 to 2001.

Ms. LaPorta joined Sears as Senior Vice President, Strategy in December 2002. Prior to joining Sears, she was Vice President of The Boston Consulting Group, an international strategy and general management consulting firm, from 1986 to 2002.

Mr. Lee joined Sears as Senior Vice President, Human Resources in January 2001. Prior to joining Sears, he was Senior Vice President, Human Resources of Whirlpool Corporation, a manufacturer of major home appliances, since June 1998. Prior to joining Whirlpool, Mr. Lee served in the same capacity for The St. Paul Companies, a property and casualty insurance company.

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Mr. Liska joined Sears as Executive Vice President and Chief Financial Officer in 2001. He became Executive Vice President and President, Credit and Financial Products in October 2002. Prior to joining Sears, Mr. Liska was Executive Vice President and Chief Financial Officer of The St. Paul Companies since 1997, and President and Chief Executive Officer of Specialty Foods Corporation, a manufacturer of bread and bakery products, from 1994 until 1997.

Mr. Richter joined Sears as Vice President and Controller in 2000. He became Senior Vice President, Finance in 2001 and held that position until October 2002. Mr. Richter has served as Senior Vice President and Chief Financial Officer since October 2002. Prior to joining Sears, Mr. Richter was Senior Vice President and Chief Financial Officer of Dade Behring International, a manufacturer of medical testing systems, from 1998 to 2000, and Senior Vice President and Corporate Controller since 1997.

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Item 2. Properties

The Company’s principal executive offices are located on a 200-acre site owned by the Company at the Prairie Stone office park, in Hoffman Estates, Illinois. The complex consists of six interconnected office buildings totaling approximately two million gross square feet of office space.

The following table sets forth information concerning stores operated by the Company’s domestic Retail operations.

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In addition, at December 28, 2002, there were 856 other sales offices and service facilities, most of which are occupied under short-term leases or are a part of other Sears facilities included in the above table. There were also 119 distribution facilities, most of which are leased for terms ranging from one to 10 years.

Credit principally services its accounts at eight regional credit card operations centers (“RCCOCs”) in the U.S., one unit in Puerto Rico, three Credit Processing Centers, at the headquarters of the Bank in Tempe, Arizona and at the Company’s headquarters in Hoffman Estates. The Company owns one of the RCCOCs, one of the Credit Processing Centers and leases seven of the RCCOCs and two of the Credit Processing Centers. The Company leases the unit in Puerto Rico.

As of December 28, 2002, Sears Canada operated 123 department stores, 42 furniture and appliance stores, 141 dealer stores, operated under independent local ownership, 15 outlet stores, 52 automotive centers, approximately 2,200 catalog pick-up locations and 110 travel offices.

Item 3. Legal Proceedings

Pending against the Company and certain of its officers and directors are a number of lawsuits, described below, that relate to the credit card business and public statements about it. The Company believes that all of these claims lack merit and is defending against them vigorously.

•		On October 18, 2002, a lawsuit was filed in the United States District Court for the Northern District of Illinois against the Company and certain current and former officers alleging that certain public announcements by the Company concerning its credit card business violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Additional lawsuits of the same tenor followed; with one exception, which is pending in the United States District Court for the Northern District of California, these cases are pending in the Northern District of Illinois. The plaintiffs purport to represent classes of shareholders who purchased the Company’s common shares between January 17, 2002, and October 17, 2002. The Northern District of Illinois actions are being consolidated into a single class action.
•		On November 15, 2002, two lawsuits were filed in the United States District Court for the Northern District of Illinois against the Company, certain officers and directors, and alleged fiduciaries of Sears 401(k) Savings Plan (the “Plan”), seeking damages and equitable relief under the Employee Retirement Income Security Act (“ERISA”). The plaintiffs purport to represent participants and beneficiaries of the Plan, and allege breaches of fiduciary duties under ERISA in connection with the Plan’s investment in the Company’s common shares and alleged communications made to Plan participants regarding the Company’s financial condition. A third complaint was filed on December 16, 2002, making substantially the same claims. These actions have been consolidated into a single class action.
•		On October 23, 2002, a purported derivative suit was filed in the Supreme Court of the State of New York against the Company (as a nominal defendant) and certain current and former directors seeking damages on behalf of the Company. The complaint purports to allege a breach of fiduciary duty by the directors with respect to the Company’s management of its credit business. The Company’s motion to dismiss is currently pending. Two similar suits were subsequently filed in the Circuit Court of Cook County, Illinois, and a third was filed in the United States District Court for the Northern District of Illinois. Motions have been or will be made to dismiss these actions, or, in the alternative, to stay them, pending disposition of the action in New York.

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The Company is subject to various other legal and governmental proceedings, many involving litigation incidental to the businesses. Some matters contain class action allegations, environmental and asbestos exposure allegations and other consumer-based claims that involve compensatory, punitive or treble damage claims in very large amounts as well as other types of relief. The consequences of these matters are not presently determinable but, in the opinion of management of the Company after consulting with legal counsel, and taking into account insurance and reserves, the ultimate liability is not expected to have a material adverse effect on annual results of operations, financial position, liquidity or capital resources of the Company.

Item 4. Submission of Matters to a Vote of Security Holders

None

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Description of Sears Common Shares

The summary contained herein of certain provisions of the Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), of Sears does not purport to be complete and is qualified in its entirety by reference to the provisions of such Certificate of Incorporation incorporated as Exhibit 3.(i) hereto and incorporated by reference herein.

The Certificate of Incorporation authorizes the issuance of 1,000,000,000 common shares, par value $0.75 per share, and 50,000,000 preferred shares, par value $1.00 per share. As of the date hereof, there are no preferred shares outstanding. Preferred shares may be issued in series with rights and privileges as authorized by the Board of Directors.

Subject to the restrictions on dividends mentioned below and the rights of the holders of any preferred shares which may hereafter be issued, each holder of common shares is entitled to one vote per share, to vote cumulatively for the election of directors, to dividends declared by the Board of Directors and, upon liquidation, to share in the assets of Sears pro rata in accordance with his, her or its holdings after payment of all liabilities and obligations. The holders of common shares have no preemption, redemption, subscription or conversion rights.

Sears’ Board of Directors is divided into three classes serving staggered three-year terms. Because the Board is classified, shareholders wishing to exercise cumulative voting rights to assure the election of one or more directors must own approximately two to three times as many shares (depending on the number of directors in the class and on the Board as a whole) as would be required if the Board were not classified. Directors may be removed only for cause upon the affirmative vote of at least 75% of the shares entitled to vote. Such a vote is also required to alter, amend or repeal, or to adopt any provision inconsistent with, Article 5 of the Certificate of Incorporation concerning directors, or to fix the number of directors by shareholder vote.

There are no restrictions on repurchases or redemption of shares by Sears which do not impair its capital, except that the indentures relating to certain of Sears long-term debt and an agreement pursuant to which Sears has provided a credit facility in support of certain tax increment revenue bonds issued by the Village of Hoffman Estates, Illinois, in connection with the construction of its headquarters facility, provide that Sears will not take certain actions, including the declaration of cash dividends and the repurchase of shares, which would cause Unencumbered Assets plus certain Capitalized Rentals to drop below 150% of Liabilities plus such Capitalized Rentals (as such terms are defined in the indentures and the agreement). The amount by which such Unencumbered Assets plus Capitalized Rentals exceeds 150% of such Liabilities plus Capitalized Rentals, as computed under certain of the indenture provisions, is set forth in Note 9 of the Notes to Consolidated Financial Statements.

Information regarding the principal market for Sears common shares, the number of shareholders and the prices of, and dividends paid on, Sears common shares is included below and under the heading “Shareholders’ Equity — Dividend Payments” contained in Note 9 of the Notes to Consolidated Financial Statements.

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Common Stock Market Information and Dividend Highlights

Stock price ranges are for the New York Stock Exchange (trading symbol - S), which is the principal market for the Company’s common stock.

In addition to the New York Stock Exchange, the Company’s common stock is listed on the following exchanges: Chicago; Pacific, San Francisco; London, England; Amsterdam, the Netherlands; Swiss EBS; and Dusseldorf, Germany.

The number of registered common shareholders at February 28, 2003 was 156,617.

Options to purchase common shares of the Company have been granted to employees and non-employee directors under various stock-based compensation plans. The following table summarizes the number of stock options issued, the weighted-average exercise price and the number of securities remaining to be issued under all outstanding equity compensation plans as of December 28, 2002.

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Item 6. Selected Financial Data

Five-Year Summary of Consolidated Financial Data

(1)		Includes results of operations of Lands’ End effective June 17, 2002, the date of acquisition. (See Note 2 of the Notes to Consolidated Financial Statements.)
(2)		During 2002, the Company adopted the provisions of Emerging Issues Task Force Issue 01-9, “Accounting for Consideration Given By A Vendor To A Customer”, resulting in the restatement of prior year revenues and cost and expenses to conform with current year presentation.
(3)		Impacted by a change in securitization accounting in 2001. The Company consolidated its securitization structure and recognized approximately $8.1 billion of debt and credit card receivables and reclassified an additional $3.9 billion to credit card receivables from retained interest in transferred credit card receivables. (See Note 3 of the Notes to Consolidated Financial Statements.)

Certain prior year information has been reclassified to conform with current year presentation.

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Item 7. Management’s Discussion and Analysis

Management’s Discussion and Analysis is designed to provide the reader of the financial statements with a narrative on the Company’s results of operations, financial position and liquidity, risk management activities, significant accounting policies and critical estimates, and the future impact of accounting standards that have been issued but are not yet effective. Management’s Discussion and Analysis is presented in five sections: Consolidated Operations, Segment Operations, Outlook, Analysis of Consolidated Financial Condition and Accounting Policies. It is useful to read Management’s Discussion and Analysis in conjunction with the Consolidated Financial Statements and related notes thereto contained elsewhere in this document.

All references to earnings per share relate to diluted earnings per common share.

Acquisition of Lands’ End

On June 17, 2002, the Company acquired all outstanding shares of Lands’ End, for approximately $1.8 billion. The results of Lands’ End operations have been reflected in the consolidated financial statements since that date. See Note 2 of the Notes to Consolidated Financial Statements for further discussion.

CONSOLIDATED OPERATIONS

Total revenues were $41.4 billion in 2002, compared with $41.0 billion in 2001 and $40.8 billion in 2000.

	•		Revenues from merchandise sales and services were $35.7 billion in 2002, a decrease of 0.2% from 2001, which in turn were 1.4% lower than 2000. Revenues in Full-line Stores were $23.0 billion, a decrease of 5.3% from 2001, which were down 2.9% from 2000. Declines in comparable store sales in both years were attributable to disruptions caused by the Full-line Store repositioning efforts, a highly competitive and promotional retail environment and the effects of a softening economy. Specialty Stores revenues were $5.1 billion in 2002, an increase of 7.6% from 2001, which were 2.9% higher than 2000. Specialty Stores revenue increases in both years were driven primarily by the expansion of The Great Indoors, as well as comparable store revenue increases in Dealer Stores. Direct to Customer revenues increased to $1.2 billion in 2002, principally due to the addition of Lands’ End which was acquired in June 2002. The revenues of Lands’ End from the date of acquisition were approximately $1.0 billion.
	•		Credit and financial products revenues were $5.7 billion in 2002, an increase of 8.3% from 2001, which in turn were 14.5% higher than 2000. During 2001, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. Prior to April 2001, domestic securitized receivables were recorded as off-balance sheet securitizations under previous accounting rules thereby reducing reported amounts of revenues, expenses, assets and liabilities. With the adoption of SFAS No. 140, all receivables are now reflected on the consolidated balance sheet. Increases in credit revenues in 2002 and 2001 were primarily due to the consolidation of the domestic securitized receivables in April 2001 and the growth of the domestic MasterCard product which was launched in June 2000.

Costs and expenses were $39.3 billion in 2002, compared with $39.8 billion in 2001 and $38.7 billion in 2000.

•

Cost of sales, buying and occupancy as a percentage of merchandise sales and services was 71.8% in 2002, compared to 73.4% in 2001 and 2000. Correspondingly, gross margin rates were 28.2% in 2002 and 26.6% in both 2001 and 2000. The improvements in retail gross margin rates have resulted from the exit of certain lower margin and unprofitable merchandise categories, improved inventory management and vendor sourcing and the inclusion of Lands’ End’s results in 2002, whose business has a higher gross margin rate.

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	•		Selling and administrative expenses as a percentage of total revenues were 22.4% in 2002, compared to 21.7% in 2001 and 21.6% in 2000. During 2001, the Company implemented a series of productivity initiatives resulting in lower corporate and store-level operating costs. The addition of Land’s End in 2002 as well as investments for expanding The Great Indoors and marketing of the MasterCard product in 2002 and 2001 more than offset these reductions.
	•		The provision for uncollectible accounts (“provision”) was $2.3 billion in 2002, compared to $1.9 billion in 2001 and $0.9 billion in 2000. The increase in the 2002 provision includes an increase of $300 million in the domestic allowance for uncollectible accounts as a result of refining the allowance methodology to include current accounts and credit card fees. In addition, the Company increased its allowance for uncollectible accounts to reflect increased delinquencies and bankruptcies resulting from weakness in the U.S. economy, the seasoning of the domestic MasterCard portfolio and an increase in domestic credit card receivable balances.
			Reported amounts were affected by the Company’s off-balance sheet accounting treatment for securitized receivables prior to April 2001. During 2001, the Company recorded a $522 million provision for previously securitized receivables to establish an allowance for uncollectible accounts related to $12 billion of securitized receivables reinstated on the Company’s balance sheet as a result of the adoption of SFAS No. 140. From April 2001 forward, the Company’s securitization transactions were accounted for as secured borrowings and the Company ceased recording securitization income, which was $40 million in 2001 and $128 million in 2000.
	•		Interest expense was $1.1 billion in 2002, compared to $1.4 billion in 2001 and $1.2 billion in 2000. Reported amounts were affected by the Company’s off-balance sheet accounting treatment for domestic securitized receivables prior to April 2001. Including interest costs on debt related to the off-balance sheet receivables, interest expense would have been $1.1 billion in 2002, $1.5 billion in 2001 and $1.7 billion in 2000. The decreases in interest expense were due to the increased use of variable rate financing in a lower interest rate environment, partially offset by additional borrowings to finance the Lands’ End acquisition and higher credit card receivables in 2002.
	•		Special charges and impairments reflect costs incurred from strategic actions implemented by the Company to restructure its operations and costs due to asset impairments. Such charges amounted to $111 million in 2002, $542 million in 2001 and $251 million in 2000. The actions taken over the past three years are as follows:

	•		During 2002, Sears Canada converted its seven stores operating under the Eatons banner to Sears Canada stores, resulting in severance, asset impairment and other exit costs amounting to $111 million. This restructuring enabled Sears Canada to better leverage its buying and advertising efforts, and Sears Canada brand equity.
	•		During 2001, special charges and impairments amounted to $542 million. Such costs consisted of $151 million for the exit of unprofitable and non-strategic Full-line Store business categories (including cosmetics, installed floor coverings and custom window treatments); $123 million for productivity initiatives designed to reduce operating costs; $205 million for impairment and other losses primarily resulting from the insolvency of Homelife (a former operating division of Sears which was sold in 1998); and $63 million for the cost of a civil legal settlement relating to selling practices in 1994 and 1995 of certain automotive batteries manufactured by Exide Technologies.
	•		During 2000, the Company recorded a special charge of $150 million related to the closing of 87 underperforming stores ($136 million recorded in special charges and impairments and $14 million in cost of sales). The Company also recorded an impairment charge of $115 million to write down the Sears Termite and Pest Control business to its fair value. This business was sold in 2001.

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Other income was $372 million in 2002, as compared to $45 million in 2001 and $36 million in 2000. The increase in 2002 consists primarily of a $336 million pretax gain on the sale of the Company’s holdings in Advance Auto Parts, Inc.

Income taxes as a percentage of income before taxes, minority interest and cumulative effect of change in accounting principle were 35.0% in 2002, 38.2% in 2001 and 37.4% in 2000. The lower effective income tax rate in 2002 was attributable to the favorable resolution of a state income tax audit and the benefit of utilizing Canadian operating loss carryforwards at higher than expected rates. The increase in 2001 from 2000 resulted from a revaluation of Sears Canada’s deferred tax asset. The Company expects its effective income tax rate to approximate 37% in 2003.

During 2002, the Company adopted SFAS No. 142 “Goodwill and Other Intangible Assets”, resulting in a charge of $208 million (net of income taxes and minority interest), representing the cumulative effect of the change in accounting for goodwill as of the beginning of 2002. The charge reflects goodwill impairment primarily related to National Tire and Battery and Orchard Supply Hardware, offset by the reversal of negative goodwill related to Sears Canada’s purchase of Eatons.

Net income was $1.4 billion in 2002, $0.7 billion in 2001, and $1.3 billion in 2000. The Company’s results of operations were affected by certain noncomparable charges and gains during those periods. The Company defines noncomparable items as transactions that are: related to the implementation of special initiatives of the Company (generally special charges and impairments); unusual or infrequent in nature (e.g., significant one-time transactions and gains/losses unrelated to core operations); or related to changes in accounting. Management believes that results excluding noncomparable items are useful indications of trends in core operations when reviewed in the context of reported results. In order to facilitate an understanding of such noncomparable items and their effect on the results of operations, the following table is provided as a reconciliation of reported earnings to earnings excluding noncomparable items: