United States
Securities And Exchange Commission
Washington, D.C. 20549

FORM 10-K

For Annual and Transition Reports pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934

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, 2005, the Registrant had 217,638,851 common shares outstanding. The aggregate market value (based on the closing price of the Registrant’s common shares as reported in a summary of composite transactions in The Wall Street Journal for stocks listed on the New York Stock Exchange) 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 the Registrant’s common shares), as of July 2, 2004 was approximately $5.2 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.

Yes          þ                    No          o

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

Yes          þ                    No          o

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.þ

Table of Contents

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 and is among the largest retailers in North America. In addition, through its Credit and Financial Products businesses, the Company had offered its customers various credit, financial and related insurance products.

On November 3, 2003, the Company sold its domestic Credit and Financial Products business, including its clubs and services business, to Citigroup, a global financial services holding company. The sale resulted in the transfer of responsibility and control of all credit underwriting and funding risk, as well as processing and customer support activities for the products, to Citigroup and its affiliates. With the sale, the Company became a more focused retailer and used the proceeds generated from the sale to strengthen its balance sheet and return value to its shareholders. As a result of the sale, the Company’s financial reporting segments for fiscal 2004 were changed to reflect two operating segments — a Domestic segment and a Sears Canada segment.

On November 17, 2004, Sears and Kmart Holding Corporation (“Kmart”) announced that they had signed a definitive merger agreement (the “Merger Agreement”) that will combine Sears and Kmart into a major new retail company named Sears Holdings Corporation (“Holdings”). Holdings is expected to be the nation’s third largest retailer, initially with approximately $55 billion in annual revenues and 2,350 full-line and off-mall stores, and 1,100 specialty retail stores in the United States. Sears and Kmart will become wholly owned subsidiaries of Holdings.

Under the terms of the Merger Agreement, Kmart shareholders will receive one share of Holdings common stock for each Kmart share and Sears shareholders have the right to elect $50 in cash or 0.5 of a share of Holdings for each share of Sears common stock. Sears shareholder elections will be prorated to ensure that, in the aggregate and with certain limited exceptions, 55% of Sears shares are converted into Holdings shares and 45% of Sears shares are converted to cash. As a result of the merger, the former shareholders of Kmart are expected to have an approximate 63% interest in Holdings and the former shareholders of Sears are expected to have an approximate 37% interest in Holdings.

The merger, which is expected to close in March 2005, has received regulatory approval and is subject to approval by Kmart and Sears stockholders and the satisfaction or waiver of other customary closing conditions. Special meetings of stockholders of Sears and Kmart to consider adoption of the Merger Agreement are scheduled to be held on March 24, 2005.

The merger will be treated as a purchase business combination for accounting purposes, with Sears being acquired by Kmart. Sears assets acquired and liabilities assumed will be recorded at their fair value on the balance sheet of Holdings. This report discusses Sears’ business and its results of operations and financial condition without taking into consideration the pending business combination with Kmart.

For more information pertaining to the pending transaction with Kmart, please refer to Holdings’ Registration Statement on Form S-4 (Registration No. 333-120954), which is available at http://www.sec.gov. The information contained in that Registration Statement is not part of this document.

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 amendments to such reports are available, free of charge, on the Corporate Governance section of the Investor Relations portion of the Company’s internet website, www.sears.com. These reports are available as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission.

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The Corporate Governance Guidelines of the Company’s Board of Directors, the charters of the Audit, Compensation and Nominating and Governance Committees of the Board of Directors and the Company’s Core Values and Code of Conduct are also available on the Corporate Governance Section of the Investor Relations portion of www.sears.com, and will be provided, free of charge, to any shareholder who requests a copy by calling 1-800-SEARS80. References to the Company’s website address do 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:

Domestic - consisting of:

Full-line Stores - 873 Full-line Stores, averaging 91,000 net selling square feet, located primarily in shopping malls across the nation and offering:

	•	Home Group - A full assortment of products for the home, including appliances, consumer electronics, home fashion and home improvement products, such as tools, fitness and lawn and garden equipment; products range from leading national brands to proprietary Company brands including Kenmore and Craftsman.
	•	Apparel/Accessories - A complete selection of fashionable, quality apparel, footwear and accessories for the whole family and fine jewelry at accessible prices; includes leading national brands, exclusive products from leading suppliers, as well as proprietary Company brands such as Lands’ End, Covington, Canyon River Blues, Apostrophe, Structure and TKS Basics.
	•	Sears Auto Centers - A leading retailer of tires, car batteries, and certain automotive services, including the sale of major national brands of tires and batteries, as well as the Company’s proprietary DieHard branded products.
	•	sears.com — Sears’ extension of its product selection through internet channels offering a more limited assortment of home, apparel, and accessory merchandise and providing customers the option of buying through the internet and picking up their merchandise in Full-line Stores.
	•	Store Acquisitions - In September 2004, the Company completed the acquisition of ownership or leasehold interest of 50 stores from Kmart for $576 million plus the assumption of existing real estate leases. Thirty percent of the purchase price has been paid and the balance will be paid upon taking possession of the stores in 2005. The Company expects to take possession of the stores in spring 2005, and a majority of the stores are expected to be converted to Sears nameplates by the fourth quarter of 2005. This acquisition represents another step in the Company’s strategic goal to grow its store base and the Sears brand off-mall.
		In February 2005, primarily as a result of the Kmart store acquisition, the Company announced the launch of a new, mid-sized off-mall format — Sears Essentials — to offer the Company’s products that are integral to home and family life, such as appliances, lawn and garden, tools, home electronics, apparel and home fashions along with convenience items such as health and beauty, pantry, household and paper products, pet supplies and toys. The first 25 Sears Essentials stores, all of which are being acquired from Kmart, are scheduled to open in spring 2005. The stores are primarily located in large, densely populated markets with demographics that are attractive to the Company. They will be on one level, utilize an open racetrack design with exit cashiering and a centralized customer service center — a common off-mall layout similar to that of the Sears Grand stores.
		The Company also agreed during 2004 to sublease six off-mall locations from Wal-Mart. The Company has already taken possession of two of those locations and expects to take possession of two additional locations in each of 2005 and 2006, respectively.

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Specialty Stores - Approximately 1,100 Specialty Stores, located primarily in free-standing, off-the-mall locations or high-traffic neighborhood shopping centers.

	•	Dealer Stores — 818 primarily independently-owned stores, predominately located in smaller communities and averaging 5,700 net selling square feet, offering home goods, including appliances, consumer electronics, lawn and garden merchandise, hardware and automotive batteries. Dealer Stores carry proprietary Company brands, such as Craftsman, Kenmore and DieHard, as well as a wide assortment of national brands.
	•	Hardware Stores — 245 neighborhood Hardware Stores under the Sears Hardware and Orchard Supply Hardware brands averaging 21,000 and 41,000 net selling square feet, respectively, that carry Craftsman tools and lawn and garden equipment, a wide assortment of national brands and other home improvement products. Approximately 90 Sears Hardware Stores, doing business under the Sears Hardware & Appliance name, and six Orchard Supply Hardware stores also offer a limited selection of home appliances.
	•	The Great Indoors (“TGI”) — 17 stores specializing in home decorating and remodeling, averaging 98,000 net selling square feet, dedicated to the four main rooms of the house: kitchen, bedroom, bathroom and great room.
	•	Sears Outlet Stores - 51 stores, averaging 26,000 net selling square feet, offering overstock and/or distressed appliances, consumer electronics and lawn and garden merchandise at a discount.
	•	Commercial Sales - This business primarily targets home builders, remodelers and property managers for appliance purchases.
	•	National Tire & Battery (“NTB”) — These stores offer major national brands of tires, batteries and related services. This business was sold to TBC Corporation (“TBC”) on November 29, 2003. The results of operations for this business are included in the Company’s financial statements through November 28, 2003.

Direct to Customer - The Direct to Customer business includes the direct merchant business of Lands’ End, Inc. (“Lands’ End”), which was acquired by the Company in June 2002. Lands’ End is a leading direct merchant of traditionally-styled casual clothing, accessories and footwear for men, women and children, as well as home products and soft luggage. These products are offered through multiple selling channels consisting of regular monthly mailings of its catalogs as well as through the internet, international businesses and 17 retail stores. These retail stores, averaging 6,100 net selling square feet, also offer traditionally-styled casual clothing for men, women and children primarily from overstocks of the catalog and internet channels. Direct to Customer also includes direct marketing of Sears goods through specialty catalogs as well as other impulse and continuity merchandise.

Home Services - Product Repair Services, the nation’s largest product repair service provider, is a key element in the Company’s active relationship with more than 48 million households. With over 10,000 service technicians making over 14 million service calls annually, this business delivers a broad range of retail-related residential and commercial services in all 50 states of the United States and Puerto Rico under the Sears Parts & Repair Services and A&E Factory Service brand names. Commercial and residential customers can obtain parts and repair services for all major brands of products such as home appliances, lawn and garden equipment, consumer electronics, floorcare products, and heating and cooling systems. Smaller items for repair can be brought into Sears Parts & Repair Centers located throughout the United States or to any Sears Full-line Store. Customers can also purchase protection agreements, product installation services and Kenmore and Carrier residential heating and cooling systems. This business also includes home improvement services (primarily siding, windows, cabinet refacing, kitchen remodeling and carpet cleaning provided through Sears Home Improvement Services).

Credit and Financial Products - The Credit and Financial Products business included the domestic credit card receivables portfolio, consisting 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

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balances. Sears Card receivables were generated primarily from purchases of merchandise and services from the Company’s domestic operations. The MasterCard credit card receivables were generated from purchases from the Company and other merchants, balance transfers and the use of convenience checks and cash advances. The MasterCard products are widely accepted by merchants outside the Company. This business also sold related financial products such as credit protection and insurance products. This business was sold on November 3, 2003. The results of operations for this business are included in the Company’s financial statements through November 2, 2003.

The Company and Citibank (USA) N.A. have entered into a long-term marketing and servicing alliance with an initial term of 10 years, with an option to renew. Under the long-term marketing and servicing alliance, Citibank (USA) N.A. provides credit and customer service benefits to the Company’s proprietary and Gold MasterCard holders. In addition, Citibank (USA) N.A. supports the Company’s current zero-percent financing program.

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 domestic businesses.

Sears Canada

The Company conducts similar retail, credit and corporate operations in Canada through Sears Canada, Inc. (“Sears Canada”), a consolidated, 54.3% owned subsidiary of Sears. As of January 1, 2005, Sears Canada conducted retail operations through 121 department stores, 49 furniture and appliance stores, 153 dealer stores operated under independent local ownership, 13 outlet stores, 50 floor covering centers, 6 specialty off-mall stores, approximately 2,300 catalog pick-up locations, 112 travel offices and over the internet through sears.ca.

The 2003 and 2002 segment information has been presented on the 2004 basis — Domestic and Sears Canada. In addition, the Company has provided, for 2003 and 2002, information on the operating segments comprising the Domestic segment in 2003 and 2002.

Information regarding revenues, operating income, total assets and capital expenditures of the Company’s business segments for each of the three fiscal years ended January 1, 2005, January 3, 2004 and December 28, 2002 is contained in Note 15 of the Notes to Consolidated Financial Statements. Information on the components of revenue is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Seasonality and Inflation

Due to consumer 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 its annual operating income in the fourth quarter.

The moderate rate of inflation over the past three years has not had a significant effect on the Company’s revenues and profitability.

Trademarks and Trade Names

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

The Company sells proprietary branded 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 proprietary brands in retailing. These marks are the subject of numerous United States

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and foreign trademark registrations. Other important and well-recognized Company trademarks and service marks include THE GREAT INDOORS®, OSH®, CANYON RIVER BLUES®, APOSTROPHE®, TKS BASICS®, COVINGTON®, STRUCTURE®, A&E FACTORY SERVICE®, WISHBOOK® and SEARS. GOOD LIFE. GREAT PRICE.^TM The Company’s right to use its trade name and marks continues so long as it uses them.

Competition

The domestic retail business is highly competitive. The Company competes with other national and local department stores, specialty stores, discount stores, consumer electronics retailers, automotive retailers, home improvement retailers and national and local product and auto repair specialists. The Company also competes with other internet and catalog businesses which carry similar merchandise offerings.

The principal factors that differentiate retail competitors include convenience of shopping facilities, quality of merchandise, competitive prices, brand names and availability of retail-related services, such as access to credit, product delivery, repair and installation. The Company believes its business model and the strength of its proprietary brands enables it to compete effectively despite strong competitive pressures in recent years.

Employees

The Company employs approximately 203,000 people in the United States and Puerto Rico, and 44,000 people in Canada, including part-time employees.

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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 segment.

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In addition, at January 1, 2005, there were 735 supply chain distribution facilities, store warehouses, customer call centers, and sales and service facilities most of which are leased for terms ranging from one to 10 years or are part of other Sears facilities included in the table above.

As of January 1, 2005, Sears Canada operated 121 department stores, 49 furniture and appliance stores, 153 dealer stores operated under independent local ownership, 13 outlet stores, 50 floor covering centers, 6 specialty off-mall stores, approximately 2,300 catalog pick-up locations and 112 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 and after October 18, 2002, several actions were filed in the United States District Court for the Northern District of Illinois against the Company and certain current and former officers alleging that certain public announcements by the Company concerning its credit card business violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Court has consolidated the actions and certified the consolidated action as a class action. Discovery is underway. The trial is scheduled to begin in April 2006.

•

On and after November 15, 2002, several actions were filed in the United States District Court for the Northern District of Illinois against the Company, certain officers and directors, and alleged fiduciaries of Sears’ 401(k) Savings Plan (the “Plan”), seeking damages and equitable relief under the Employee Retirement Income Security Act of 1974 (“ERISA”). The plaintiffs purport to represent participants in the Plan, and allege breaches of fiduciary duties under ERISA in connection with the Plan’s investment in the Company’s common shares and alleged communications made to Plan participants regarding the Company’s financial condition. These actions have been consolidated into a single action. Discovery is underway. No trial date has been set.

•

On October 23, 2002, a purported derivative suit was filed in the Supreme Court of the State of New York (the “New York Court”) 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. Two similar suits were subsequently filed in the Circuit Court of Cook County, Illinois (the “Illinois State Court”), and a third was filed in the United States District Court for the Northern District of Illinois. The New York Court derivative suit was dismissed on June 21, 2004 and the plaintiff has filed a notice of appeal. The two Illinois State Court derivative suits were dismissed on September 30, 2004. The order of dismissal became final on December 1, 2004, and the time to appeal has expired. The Illinois federal court suit has been stayed pending resolution of the New York Court derivative action.

•

On June 17, 2003, an action was filed in the Northern District of Illinois against the Company and certain officers, purportedly on behalf of a class of all persons who, between June 21, 2002 and October 17, 2002, purchased the 7% notes that the Company’s domestic wholly-owned financing subsidiary, Sears Roebuck Acceptance Corp. (“SRAC”), issued on June 21, 2002. An amended complaint has been filed, naming as additional defendants certain former officers, SRAC and several investment banking firms who acted as underwriters for SRAC’s March 18, May 21 and June 21, 2002 notes offerings. The amended complaint alleges that the defendants made misrepresentations or omissions concerning its credit business during the class period and in the registration statements and prospectuses relating to the offerings. The amended complaint alleges that these misrepresentations and omissions violated Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder, and Sections 11, 12 and 15 of the Securities Act of 1933 and purports to be brought on behalf of a class of all persons who purchased any security of

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SRAC between October 24, 2001 and October 17, 2002, inclusive. The defendants filed motions to dismiss the action. On September 24, 2004, the court granted these motions in part, and denied them in part. The court dismissed the claims related to the March 18 and May 21, 2002 note offerings because the plaintiff did not purchase notes in those offerings. The court dismissed the Section 10(b) and Rule 10b-5 claims against several of the individual defendants because the plaintiff failed to adequately plead such claims. The court sustained the remaining claims. By leave of court, the plaintiffs filed a second amended complaint on November 15, 2004. Defendants (other than one of the underwriter defendants) filed motions to partially dismiss the second amended complaint on January 10, 2005. The defendant that did not move to partially dismiss filed an answer to the second amended complaint on January 28, 2005, denying all liability.

Following the announcement on November 17, 2004 of the pending business combination transaction with Kmart, several actions have been filed purporting to challenge the transaction. These lawsuits are in their preliminary stages, and defendants have not yet been required to respond to certain of the complaints. The Company believes that all of these claims lack merit and intends to defend against them vigorously.

•

Three actions have been filed in the Circuit Court of Cook County, Illinois. These actions assert claims on behalf of a purported class of the Company’s stockholders against the Company and certain of its officers and directors, together with Kmart, Edward S. Lampert and other affiliated entities, alleging breach of fiduciary duty in connection with the mergers. The plaintiffs allege that the mergers favor interested defendants by awarding them disproportionate benefits, and that the defendants failed to take appropriate steps to maximize the value of a merger transaction for the Company’s stockholders. The actions have been consolidated, and an amended complaint was filed in early January 2005. The amended complaint asserts similar breach-of-fiduciary duty claims, as well as alleging that defendants have made insufficient and misleading disclosures in connection with the mergers, and seeks injunctive relief. The plaintiffs have moved for expedited discovery. On February 1, 2005, the court granted the defendants’ motion to stay or dismiss these actions in favor of the pending New York actions discussed below. Accordingly, these actions are stayed pending resolution of the New York actions. Plaintiffs have filed a notice of appeal of the stay order to the Appellate Court of Illinois-First District.

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Two actions have been filed in the Supreme Court of the State of New York, New York County, asserting substantially similar claims against the Company and certain of its officers and directors. The parties have agreed to consolidate these two actions. Pending consolidation, the defendants moved to dismiss the complaint in both actions for lack of standing and failure to state a cause of action. On February 15, 2005, the Court ordered that the two cases be consolidated as a single action. On February 16, 2005, the plaintiffs filed a superceding consolidated amended class action complaint. The amended complaint asserts claims on behalf of a purported class of the Company's stockholders against the Company and certain of its officers and directors for breach of fiduciary duty in connection with the mergers on the grounds that defendants allegedly failed to take proper steps to maximize the value of a merger transaction for the Company's stockholders. Additionally, the plaintiffs claim that the defendants made insufficient and misleading disclosures in connection with the mergers. The amended complaint also names Kmart, Edward S. Lampert, and ESL, Inc. as defendants on the grounds that they aided and abetted the alleged breaches of fiduciary duty. The amended complaint seeks provisional and permanent injunctive relief, as well as damages. Also on February 16, 2005, the plaintiffs filed an order to show cause seeking expedited discovery about the appraisal of the Company's real estate. A briefing schedule on the motion has not been set.

•

One action has been filed in the United States District Court for the Northern District of Illinois. This action asserts claims under the federal securities laws on behalf of a purported class of the Company’s stockholders against the Company and Alan J. Lacy, for allegedly failing to make timely disclosure of merger discussions with Kmart during the period November 8 through 16, 2004, and seeks damages. The court has appointed a lead plaintiff and lead counsel, and an amended complaint is due to be filed by March 11, 2005.

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

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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 the Certificate of Incorporation, which is incorporated in this Annual Report on Form 10-K as to Exhibit 3.1 and incorporated in this Item 5 by reference.

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 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 preemptive, 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, except for restrictions imposed by the Merger Agreement. Those restrictions limit repurchases to open market transactions to satisfy obligations under the Sears 401(k) Savings Plan, the Lands’ End Retirement Plan and the Sears Puerto Rico Savings Plan and prohibit redemptions. The Company has suspended its share repurchase program as a result of the pending business combination with Kmart. The Merger Agreement permits payment of cash dividends consistent with past practices.

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.

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

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on the following exchanges: Chicago; Pacific, San Francisco; London, England; Amsterdam, the Netherlands; Swiss EBS; and Düsseldorf, Germany.

The number of registered common shareholders as of January 31, 2005 was 141,216.

Equity Compensation Plan Information

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 January 1, 2005.

Issuer Purchases of Equity Securities ⁽¹⁾

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Item 6. Selected Financial Data

Five-Year Summary of Consolidated Financial Data

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 four sections: Overview and Consolidated Operations, Segment Operations, Analysis of Consolidated Financial Condition and Critical Accounting Estimates. 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.

Unless otherwise noted, 2004 and 2002 results reflect a 52-week period while 2003 results reflect a 53-week period. All references to earnings per share relate to diluted earnings per common share.

OVERVIEW AND CONSOLIDATED OPERATIONS

Sears, Roebuck and Co. is one of the largest retailers in the United States and Canada with a 119-year history of providing high quality merchandise and related services to a broad array of customers. The Company was founded on the concept of “satisfaction guaranteed or your money back”. This fundamental concept, executed daily by over 200,000 associates, has contributed to the Company’s significant brand recognition and equity. The Company’s vision is to be the preferred and most trusted resource for products and services that enhance its customers’ homes and family life. The Company will be differentiated from most competitors by offering customers high quality national brands similar to other retailers, as well as the Company’s proprietary brands which enjoy high levels of consumer awareness, trust and integrity. Sears is the only retailer where consumers can find each of the Kenmore, Craftsman, DieHard and Lands’ End brands. The Company also offers customers an extensive level of retail-related services, such as delivery, installation, product repair, product warranty and protection services. These products and services are provided to the customer through a wide network reaching the consumer through multiple channels, including over 2,400 Sears-brand and affiliated stores in the United States and Canada, a product repair and home services system with over 10,000 technicians, leading internet channels of sears.com, sears.ca and landsend.com, and direct to customer catalog programs.

Fundamentally, the Company’s business model is to offer a compelling customer value proposition through the combination of high quality products and services at competitive prices. The Company seeks to deliver a high level of profitability and cash flow by:

§

maximizing the effectiveness of its retail product pricing through a combination of everyday low pricing and promotional activity;

§

minimizing its product and service costs through economies of scale as one of the nation’s largest retailers and related services providers while leveraging its centralized overhead expense structure;

	§	reinvesting operating cash flows into capital projects that create future revenues, realize cost savings or improve product quality in its proprietary brands; and
	§	returning profits to shareholders through dividends, share repurchases and increased share price.

The retail industry is highly competitive. The industry continuously faces market driven challenges as new and existing competitors seek areas of growth to expand their businesses. The Company has succeeded in the retail industry due to its proprietary brands and the importance of its related product and service offerings to customers. An important challenge for the Company is to identify new growth vehicles to extend the reach of its product and service offerings. Historically, the Company has shown innovation in new products and services and new distribution channels to reach its customers. In the recent past, the Company’s efforts to grow have become more challenging as its primary retail stores are within a mall-based format, which has seen a reduced preference to the consumer versus other formats. The Company is further challenged by competitors that specialize in certain types of consumer goods and are focused on being the lowest cost provider in those categories.

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The Company has responded to these challenges by launching several strategic initiatives which are expected to return the Company to a more profitable growth path, including:

§

strengthening product assortments by:

	Ø	introducing a number of innovative products within home appliances and home improvement that offer both high-performance and high-efficiency, and
	Ø	increasing the fashion content within its apparel offering, including the introduction of two new proprietary brands — Structure and A|Line;

§

focusing on improved gross margin performance by:

	Ø	better leveraging its preferred vendor relationships,
	Ø	increasing the amount of product that is sourced directly,
	Ø	introducing Profit Logic, a system that provides innovative pricing analytics, to certain parts of the apparel business, and
	Ø	over time, transitioning to an allocation process allowing us to better assort product to store-specific demographics as well as more effectively replenish product during the selling season based upon rate of sale; and

§

identifying ways to reduce the level of capital invested in store remodels to improve overall efficiency of the Company’s capital expenditures .

Another important component of improving the Company’s long-term performance is to provide better access to its products. The Company has aggressively focused on increasing its presence outside of the traditional mall-based formats. In 2004, the Company expanded its off-mall presence by:

§

acquiring ownership or leasehold interest in 50 off-mall stores in key Sears markets from Kmart for $576 million. Sears expects to take possession of the stores in the Spring of 2005 and is targeting to open the stores under Sears nameplates by the end of 2005;

§

subleasing six stores from Wal-Mart Stores, Inc. Sears opened two stores in 2004 and is targeting to take possession of two stores in 2005 and two stores in 2006; and

§

developing the new Sears Grand format which had four locations at the end of 2004.

The acquired stores are a unique opportunity to rapidly enter attractive markets for the Company. The newly acquired stores will offer a relevant subset of traditional categories, including apparel, home appliances, consumer electronics, home improvement and home fashions, plus consumables and transactional items. Where possible, the floor design of the new stores will be on one level, utilizing a common layout similar to the open-racetrack design of existing Sears Grand stores, with exit cashiering near the front entrance/exit.

These strategic initiatives are necessary as the Company’s most successful competitors enjoy lower operating cost structures outside of the mall, or higher gross margins within the mall from a more specialized merchandise mix. The Company believes it can succeed by further differentiating its products and services, lowering its operating and sourcing costs and investing in new growth vehicles.

Sears’ combination with Kmart, which will result in the formation of a new holding company called Sears Holdings Corporation, is anticipated to dramatically accelerate the Company’s off-mall growth strategy. The merger, if approved, is expected to create the third largest U.S. retailer, with initially approximately $55 billion in annual revenues and 2,350 full-line and off-mall stores, and 1,100 specialty retail stores in the United States. The advantages and efficiencies that are expected to come from increased scale should allow the combined company to grow at a pace that exceeds what could be accomplished by Sears on its own.

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The following discussion addresses Sears’ results of operations and financial condition without taking into consideration the pending merger.

Overall, the Company’s operating results for 2004 reflect the challenging retail environment and a restrained level of consumer spending early in the year. A summary of consolidated results of operations is as follows:

Effective January 4, 2004, the Company changed its method for recognizing gains and losses for both its domestic pension and postretirement benefit plans. The Company began recognizing experience gains and losses on a more current basis, while under its previous methods, the Company amortized experience gains and losses over future service periods. As a result of this accounting change, the Company recorded an after-tax charge of $839 million, or $3.81 per share, in the first quarter of 2004 for the cumulative effect of change in accounting principle. The charge represents the recognition of unamortized experience gains and losses at the beginning of 2004 in accordance with the new accounting methods.

The results of operations for the 53-week period ended January 3, 2004 include the results of operations for the divested businesses, Credit and Financial Products and NTB.

The Company believes that an understanding of its reported results and its ongoing financial performance is not complete without considering the impact the following items had on the results of operations for the fiscal years 2004, 2003 and 2002, respectively. These items relate to the change in accounting related to construction allowances on certain Sears Canada properties, the deconsolidation of Sears Canada’s securitized receivables, costs associated with the pending merger with Kmart, the Company’s refinement of its business strategy, and the results of operations of divested businesses. Items like these affect the Company’s results from time to time. However, the amounts of these types of items may vary significantly from period to period and have a disproportionate effect on the periods presented, which affects the comparability of the Company’s financial performance. Management considers the total impact of these items, along with reported results, when they review and evaluate the Company’s financial performance.

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§

Total revenues decreased 12.2% from 2003, which in turn were 0.6% lower than 2002. The decrease in 2004 reflects the decline in credit and financial products revenues, of $4,752 million, as a result of the sale of the domestic Credit and Financial Products business, the sale of NTB, which had revenues of $400 million in 2003, domestic comparable store sales declines and the additional fiscal week in 2003. The 53rd week favorably impacted 2003 merchandise sales and services revenues by approximately $560 million.

The decrease in 2003 reflects the decline in credit and financial products revenues as a result of the sale of the domestic Credit and Financial Products business, partially offset by an increase in merchandise sales and services due to the inclusion of Lands’ End for the full year of 2003 as well as the additional fiscal week in 2003. The 53rd week favorably impacted merchandise sales and services revenues by approximately $560 million.

§	The decline in 2004 gross margin rate compared with 2003 results from higher levels of clearance activity coupled with the need to take deeper markdowns in order to clear seasonal and slower moving inventory as a result of weak sales trends.

	The decline in 2003 gross margin rate compared with 2002 is reflective of inventory clearance activities and a highly competitive retail environment, which resulted in a significant increase in promotional activity.

§	Overall, selling and administrative expenses as a percentage of total revenues increased in 2004 primarily due to a reduction in expense leverage resulting from the divestiture of the domestic Credit and Financial Products and NTB businesses coupled with lower overall sales.

The decrease in selling and administrative expenses in 2003 compared to 2002 is primarily due to lower expenses for the domestic Credit and Financial Products business. Savings realized from productivity improvements were more than offset by higher expenses in Sears Canada due to the stronger Canadian dollar

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§

The increase in depreciation and amortization in 2004 compared to 2003 is due to $39 million of additional depreciation expense related to shortening the estimated remaining useful life for assets sold to Computer Sciences Corporation and $51 million of additional depreciation expense recorded as a result of a revision in the Company’s accounting for construction allowances. Previously landlord construction allowances were amortized as a reduction of depreciation expense over the estimated useful life of the property. The Company will now record construction allowances as deferred credits, which will be amortized as a reduction of rent expense over the lease term. The cumulative effect of this correction resulted in the Company recording $51 million of additional depreciation expense in the fourth quarter of 2004.

§

Special charges and impairments reflect costs incurred from strategic actions implemented by the Company to restructure its operations and charges for asset impairments. Such charges amounted to $41 million in 2004, $140 million in 2003 and $111 million in 2002. The actions taken over the past three years are as follows:

Ø

During 2004, the Company completed a review of its headquarters and field support structure to identify opportunities to streamline its operations to improve profitability and allow the Company to focus its efforts on retail operations. As a result, the Company recorded a pretax charge of $41 million related to employee termination costs.

Ø

During 2003, the Company announced a refinement of the business strategy for TGI, which included its decision to close three TGI stores and cease development of four future locations. In addition, the carrying value of the long-lived assets for the remaining eighteen locations were reviewed for recoverability. As a result, the Company recorded a pretax charge of $141 million. Of the $141 million charge, $112 million was recorded in special charges and impairments and $29 million in cost of sales, buying and occupancy. In addition, the Company recorded a $28 million pretax charge for severance costs associated with the Company’s productivity improvement initiatives.

Ø

During 2002, Sears Canada converted its seven stores operating under the Eaton’s banner to Sears Canada stores, resulting in a restructuring charge of $111 million for severance, asset impairment and other exit costs. Financial performance of the Eaton’s stores had not met expectations, and the customer base was smaller than anticipated. The restructuring was principally designed to improve the Sears Canada brand equity and improve sales results in these stores. While the Company anticipated better leverage of its existing buying and marketing activities, the expected cost savings to Sears from this conversion were not expected to be material.

§

In 2003, the gain on the sale of businesses consisted of a $4 billion pretax gain on the sale of the Company’s domestic Credit and Financial Products business and an $81 million pretax gain on the sale of the Company’s NTB business. See Note 2 of the Notes to Consolidated Financial Statements for further discussion.

§

In 2003, the Company recorded a pretax loss of $791 million, representing premiums paid on early retirement of debt, gains on the termination of associated derivative instruments to hedge interest rate risk, the write-off of unamortized debt discount and debt issuance costs and the loss on a previously terminated derivative contract. Of the total debt retirement loss of $791 million, $420 million represented a non-cash charge.

§

The decrease in the 2004 effective income tax rate to 31.1% from 36.8% in 2003 is primarily due to increased levels of tax exempt interest income and tax credits awarded to Sears under a U.S. federal program designed to encourage companies to make commercial investments in low-income communities across the United States.

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§

During 2002, the Company adopted Statement of Financial Accounting Standards (“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 2003. The charge reflected goodwill impairment primarily related to NTB and Orchard Supply Hardware, offset by the reversal of negative goodwill related to Sears Canada’s purchase of Eaton’s.

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SEGMENT OPERATIONS

During fiscal 2004, the Company was organized into two principal business segments — Domestic and Sears Canada. Following is a discussion of results of operations by business segment.

Domestic

Domestic results and key statistics were as follows:

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2004 Compared with 2003

Merchandise sales and services revenues decreased 3.1% from the prior year primarily due to the 53^rd week in fiscal 2003 and a reduction in revenues due to the divestiture of NTB in the fourth quarter of 2003. In addition, domestic comparable store sales declined 1.4%, excluding the 53^rd week in 2003.

Sales increases in many of the Full-Line Store hardlines businesses in a challenging competitive environment were insufficient to overcome weak apparel trends. Comparable store sales in consumer electronics increased 1.1% primarily due to positive customer response to the reset of the electronics department and a shift in focus to three core product categories: video, digital imaging, and family entertainment. Home appliance sales increased slightly in 2004 primarily due to increases in cooking and laundry. Apparel comparable sales decreased 5.2% compared to the previous year, with decreases across all categories primarily due to slow seasonal transitions, insufficient levels of fashion-oriented product and the overall decline in apparel inventory during the first half of the year as the Company overcorrected its inventory level overages faced in fiscal 2003.

Specialty Stores revenues in 2004 decreased 6.4% compared to the prior year, due to the loss of revenues from the divested NTB business and the impact of the 53^rd week in fiscal 2003. A 1.8% increase in comparable store sales was driven by growth across all business formats, led by The Great Indoors and hardware stores.

Direct to Customer revenues in 2004 declined 7.9%, primarily due to a decrease in revenues from the Lands’ End direct to customer business and the impact of the 53^rd week in fiscal 2003.

Home Services revenues in 2004 increased 2.1% compared to the prior year despite the 53^rd week reported in 2003. Revenues increased primarily due to strong growth in the Home Improvement Services business, including window installation, vinyl siding and kitchen remodeling services.

Gross margin as a percentage of merchandise sales and services revenues in 2004 decreased 60 basis points compared to 2003 due to increased markdowns taken in consumer electronics, home appliances and apparel. Within consumer electronics and home appliances, aggressive markdowns were taken in anticipation of business resets and the introduction of new products. Within apparel, a higher level of promotional markdowns coupled with a higher rate of clearance markdowns taken on slower moving inventory negatively impacted the gross margin rate.

Domestic selling and administrative expense as a percentage of domestic total revenues increased 80 basis points primarily due to a reduction in expense leverage resulting from lower comparable store sales in 2004 and the impact of the 53^rd week in 2003, as well as the effect of the sale of the domestic Credit and Financial Products business, which had a lower expense structure than the retail businesses. Also included in 2004 selling and administrative expenses was a $30 million post-retirement medical curtailment gain and $13 million of direct costs associated with the pending merger with Kmart.

Interest expense decreased in 2004 compared to the prior year, which included interest expense related to the domestic Credit and Financial Products business that was sold in November 2003. Also included in the 2003 interest expense was $791 million due to the loss on the early retirement of debt.

Special charges and impairments in 2004 included a pretax charge for severance costs of $41 million associated with the restructuring of the Company’s home office operations. In 2003, the Company recorded a $141 million charge related to the its refinement of the TGI business strategy. Of the $141 million, $112 million was recorded in special charges and impairments and $29 million was recorded in cost of sales, buying and occupancy. In addition, a $28 million pretax charge was recorded in special charges and impairments for employee termination costs associated with the Company’s productivity improvement initiatives.

The decrease in operating income in 2004 as compared to the prior year was primarily due to the loss of operating income of the divested domestic Credit and Financial Products and NTB businesses.

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2003 Compared with 2002

On November 3, 2003, the Company sold substantially all the assets and liabilities of its domestic Credit and Financial Products business, including its clubs and services business, to Citigroup. The 2003 segment results include the results of operations of the Credit and Financial Products business through November 2, 2003, as well as a $791 million pretax loss related to the early retirement of debt.

On November 29, 2003, the Company sold its NTB business and related inventory to TBC for total cash consideration of $264 million. The Company recognized a pretax gain of $81 million. Upon completion of the transaction, substantially all of the approximately 3,900 employees of NTB became employees of TBC. Revenues for NTB were $400 million and $465 million in 2003 and 2002, respectively.

Merchandise sales and services revenues increased 1.3% over the prior year primarily due to the 53^rd week in fiscal 2003, which impacted revenues by approximately $560 million, and a full year of revenues from the Lands’ End direct to customer business, which was acquired in June 2002. These increases were partially offset by comparable store sales declines in the Full-line Stores.

While the retail environment remained highly competitive and promotionally intense throughout 2003, improvements in Full-line Store sales were seen across several key businesses. The lawn and garden business had an exceptional year, posting double-digit comparable store sales increases over the prior year. These increases were offset by declines in other Home Group categories including consumer electronics, which continued to be impacted by price deflation and competition, and home fashions. Home appliance sales showed a modest increase in 2003 with trend improvements seen in the second half of the year as a result of the Company’s home appliance relaunch initiative. Finally, notable improvements were seen in key women’s ready-to-wear categories as a result of the Company’s actions to improve its merchandise offering. These improvements were offset by weak sales in fine jewelry, men’s and intimate apparel.

Specialty Stores revenues in 2003 were relatively flat compared to the prior year, despite the benefit received from the 53^rd week and the net increase of 25 Dealer stores in 2003. A comparable store sales increase of 2.2% in Dealer Stores, which was driven by double-digit increases in lawn and garden sales and a low-single digit increase in appliance sales, was more than offset by comparable store sales declines within all other off-mall retail formats including hardware stores, outlet stores, TGI and NTB.

Direct to Customer revenues increased to $1.8 billion in 2003 compared to $1.2 billion in 2002, primarily due to 2003 benefiting from a full year of revenues from the Lands’ End direct to customer business versus six months in 2002. Lands’ End contributed approximately $1.6 billion in direct to customer revenues in 2003 compared with $1.0 billion in 2002.

Home Services revenues of $2.5 billion in 2003 were up slightly from the prior year. Increased revenues generated from service contracts and from various home improvement businesses, such as cabinet refacing and kitchen remodeling, were partially offset by decreased revenues from the cooling and heating business. The cooling and heating business was adversely affected by unseasonable temperatures in both the summer and winter of 2003.

In 2003, Credit and Financial Products revenues decreased 17.9% from the prior year primarily due to the sale of the Credit and Financial Products business.

The decline in gross margin as a percentage of merchandise sales and services revenues in 2003 as compared to 2002 occurred as a result of a significant increase in promotional markdowns and clearance activities, primarily in apparel categories. This decline was partially offset by continued improvements in vendor sourcing and the inclusion of Lands’ End, which has a higher gross margin rate.

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Selling and administrative expense savings recognized in 2003 from productivity initiatives were partially offset by the inclusion of a full year of operating expenses of the Lands’ End direct to customer business.

The decrease in the provision for uncollectible accounts was primarily attributable to reduced adjustments to the allowance for uncollectible accounts in 2003 as compared to 2002. The 2003 provision included a $110 million increase to the allowance for uncollectible accounts due to the increase in delinquencies and charge-off rates, attributable to the seasoning of the MasterCard portfolio. This provision was partially offset by a $93 million pretax gain related to the sale of approximately $2.5 billion of previously charged-off credit card receivable accounts. During 2002, the Company increased its allowance for uncollectible accounts by $665 million to reflect higher delinquency and charge-off patterns, and a refinement to its allowance methodology.

Interest expense decreased in 2003 compared to the prior year due to the Company’s use of variable rate funding in a lower interest rate environment, partially offset by higher funding levels to support receivables growth. In addition, 2003 interest expense was favorably impacted by lower levels of outstanding debt due to the early retirement of debt previously discussed.

Special charges and impairments in 2003 included costs related to asset impairment, contractual obligations and employee terminations incurred in connection with the Company’s refinement of its TGI business strategy in the third quarter of 2003. The total pretax charge associated with the refinement was $141 million. Of the $141 million, $112 million was recorded in special charges and impairments and $29 million of this charge was related to inventory clearance costs and was recorded in cost of sales, buying and occupancy. During the second quarter of 2003, the Company also recorded a $28 million pretax charge for employee termination costs associated with the Company’s productivity improvement initiatives.

In connection with the debt retirement activities related to the sale of the domestic Credit and Financial Products business, the Company recorded a pretax loss of $791 million, representing premiums paid on the early retirement of debt, gains on the termination of associated derivative instruments to hedge interest rate risk, the write-off of unamortized debt discount and debt issuance costs and the loss on a previously terminated derivative contract.

The decrease in operating income in 2003 as compared to the prior year was primarily due to the $791 million loss on early retirement of debt and the $140 million pretax charge related to the refinement of the TGI business strategy and the Company’s ongoing productivity initiatives.

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Sears Canada

Sears Canada results were as follows:

2004 Compared with 2003

Merchandise sales and services revenues increased 7.9% for the 52-week period in 2004 as compared to the 53-week period in 2003 due to a favorable foreign currency exchange rate. The increase in the foreign currency exchange rate accounted for approximately $340 million of the year over year increase. Comparable store sales, on a Canadian dollar (C$) basis, excluding the 53^rd week in 2003, increased 1.6% over the prior year. Increases in major appliances, home furnishings, footwear and menswear, were partially offset by declines in children’s apparel and housewares.

Credit revenues increased 18.0% compared to the prior year primarily due to the effects of foreign currency exchange rates and a fourth quarter 2004 amendment to the provisions of its credit card securitization program which resulted in the Company no longer consolidating the securitization trusts to which the receivables are sold. Previously, the receivables and corresponding debt related to its securitzation trusts were consolidated. The Company recognized $32 million of credit revenues as a result of these amendments in 2004. Within Sears Canada’s credit operations, the net charge-off rate decreased to 5.0% in 2004 from 5.7% in 2003.

The decline in the gross margin rate in 2004 as compared to 2003 is due to a higher mix of promotional sales, a balance of sales shift to lower margin products such as major appliances and home furnishings and aggressive markdown actions taken throughout the year to clear seasonal inventory. Inventory levels were well controlled throughout the year and remained consistent with 2003 levels.

Selling and administrative expense as a percentage of total revenues decreased in 2004 primarily due to a decrease in advertising expense, as well as a decrease in payroll and benefits expense resulting from lower headcount and reduced employee related costs. These decreases were partially offset by expenses recorded in the first quarter of 2004 related to Sears Canada’s decision to license Sears Canada Auto Centers to three auto service providers.

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The increase in depreciation and amortization in 2004 compared to 2003 is due to $51 million of additional depreciation expense recorded as a result of a revision in Sears Canada’s accounting for construction allowances. Previously landlord construction allowances were amortized as a reduction of depreciation expense over the estimated useful life of the property.

Overall, operating income for 2004 improved slightly over the prior year, with the benefits of foreign currency exchange and improved selling and administrative expense leverage being offset by the decline in gross margin rate.

2003 Compared with 2002

Merchandise sales and services revenues increased 6.3% in 2003 due to the benefit of exchange rates, partially offset by a decrease in comparable store sales. Comparable store sales, on a C$ basis, excluding the 53^rd week in 2003, decreased 4.9% in 2003. Sales in most merchandise categories declined from the previous year, including furniture, hardware, sporting goods, toys and consumer electronics. Sales in major appliances were positive compared to 2002, which is consistent with industry growth brought about by strong housing starts.

Credit revenues increased 17.0% compared to the prior year due to an increase in balances, specifically for Sears Canada MasterCard, and the effect of foreign currency exchange rates. Within Sears Canada credit operations, the net charge-off rate increased to 5.3% in 2003 from 4.5% in 2002, however, improvements in delinquency trends resulted in a reduction in the provision for uncollectible accounts in 2003.

Gross margin as a percentage of merchandise sales and services revenues was 29.8% in 2003 compared to 28.9% in 2002. The increase occurred as a result of a decline in promotional markdowns and improvements in vendor sourcing.

Selling and administrative expense as a percentage of total revenues increased 50 basis points in 2003. While Sears Canada continued to recognize expense savings from its productivity initiatives in 2003, selling and administrative expense leverage was unfavorably affected by the decline in C$ revenues.

Depreciation and amortization increased by $20 million due to the change in the exchange rate. Interest expense increased $16 million compared to the prior year as C$ based interest expense from reduced funding requirements was more than offset by the variance in the exchange rate.

Operating income for 2003 improved by $146 million over the prior year, due to an increase in revenues, as well as an improved margin rate. In addition, segment results for 2002 included a pretax charge of $111 million associated with the conversion of seven stores operating under the Eaton’s banner to Sears Canada stores.

ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION

The Company ended the year with approximately $4.2 billion of cash and investments, a decrease of $4.9 billion from the prior year. During 2004, the Company utilized cash and investments for working capital needs as well as to retire $2.6 billion of domestic term debt and repurchase $1.1 billion of common shares. The Company also expended cash to pay approximately $1.3 billion of taxes associated with the sale of its Credit and Financial Products business. The Company expects to retire an additional $297 million of domestic term debt in 2005.

The Company has an ongoing capital expenditure program to renovate and update its long-term assets, primarily focused on Full-line Stores. In addition, the Company has opened new Full-line and Specialty Stores. Total capital expenditures for property, plant and equipment for the past three years were as follows:

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The Company plans capital expenditures of approximately $600 million for 2005. The 2005 domestic capital plan contemplates the relocation of one Full-Line Store, opening of five Sears Grand stores, opening and relocation of five Hardware stores and the conversion of approximately 50 off-mall stores acquired from Kmart and two Wal-Mart stores. The Company may also from time to time consider selective transactions to create value and improve performance, which may include acquisitions, dispositions, restructurings, joint ventures and partnerships.

Financing Activities

The Company’s financing activities include net borrowings, off-balance sheet debt related to the securitization of credit card receivables, dividend payments and share issuances and repurchases. The Company’s total funding balances as of year-end were as follows:

The decrease in total funding from January 3, 2004 is primarily due to the retirement of $2.6 billion of domestic term debt. Effective December 31, 2004, amendments made to the Sears Canada securitization trusts classified the trusts as qualified special purpose entities and as such, they are no longer required to be consolidated within Sears. As a result, as of January 1, 2005, the securitized funding is no longer reported within the consolidated balance sheet.

The Company continues to use interest rate derivatives to synthetically convert fixed rate debt to variable rate debt. The interest rate derivatives qualify as fair value hedges in accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”, and as such are recorded on the balance sheet at market value with an offsetting entry to the underlying hedged item, which is debt.

Liquidity

The Company’s primary need for liquidity is to fund capital expenditures and the seasonal working capital requirements of its retail business. These needs generally will be funded by the Company’s liquid investment portfolio and operating cash flows.

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The Company’s total cash and available-for-sale investment portfolio as of January 1, 2005 and January 3, 2004 were as follows:

In order to ensure liquidity and provide additional capacity, the Company intends to maintain access to capital markets. The Company’s domestic wholly-owned financing subsidiary, SRAC, has an unsecured, three-year revolving credit facility in the amount of $2.0 billion. No borrowings were outstanding under this committed credit facility in 2004. This facility and other debt agreements require SRAC to maintain specified fixed charge coverage ratios, and the credit facility requires the Company’s domestic segment to maintain a minimum level of tangible net worth and a minimum interest coverage ratio. SRAC and the Company were in compliance with these covenants at January 1, 2005. This credit facility does not contain provisions that would restrict borrowings based on material adverse changes or credit ratings.

In connection with the pending merger with Kmart, SRAC and Kmart are in the process of obtaining a $4.0 billion, five-year senior secured revolving credit facility. The new facility would be guaranteed by Holdings, Sears, Kmart and certain of their respective subsidiaries, and would be secured by the inventory and credit card receivables of Sears and Kmart Corporation and certain of their respective subsidiaries. The facility is expected to be effective upon the closure of the merger and is not expected to contain provisions that would restrict borrowings based on material adverse changes or credit ratings. This credit facility would replace the $2.0 billion credit facility described above.

The ratings of the Company’s domestic debt securities as of January 1, 2005, appear in the table below:

On November 17, 2004, Moody’s Investors Services (“Moody’s”) lowered the Company’s domestic unsecured long-term debt rating from Baa1 to Baa2, keeping this rating on review for possible downgrade, and placed the Company’s domestic unsecured short-term rating on review for possible downgrade. Fitch Ratings placed the Company’s domestic unsecured debt ratings on Ratings Watch negative. These actions are primarily a result of the announcement of the Company’s proposed merger with Kmart. Standard & Poor’s Rating Services (“Standard & Poor’s”) also announced on this date that the Company’s domestic unsecured short-term and long-term debt ratings will remain on CreditWatch with negative implications where they were initially placed October 21, 2004.

A downgrade of the Company’s short-term rating by either Standard & Poor’s or Moody’s would reduce its flexibility to issue commercial paper, affecting the cost, placement term and, potentially, the amount of short-term debt available. However, the Company believes that it has cash and investments necessary to refund all commercial paper outstanding as well as to meet near-term working capital needs.

The Company does not expect that a one notch downgrade of its long-term debt by either Standard & Poor’s or Moody’s would substantially affect its ability to access the term debt capital markets. However, depending upon market conditions, the amount, timing, and pricing of new borrowings could be adversely affected. If two or more

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of the Company’s domestic long-term debt ratings are downgraded to below BBB-/Baa3, the Company’s flexibility to access the term debt capital markets would be reduced. In the event of a downgrade of the Company’s long-term debt, the cost of borrowing and fees payable under SRAC’s current credit facility could increase.

None of the Company’s borrowing arrangements have provisions that would require repayment of principal prior to maturity due to a ratings downgrade.

The Company has been advised that, upon completion of the pending merger with Kmart, Holdings’ unsecured long-term debt will be rated Ba1, BB+, and BB by Moody’s, Standard & Poor’s, and Fitch, respectively. These ratings are below these rating agencies’ investment grade ratings. In addition, the Company has been advised that its domestic long-term debt securities will be rated BB+ and BB by Standard & Poor’s and Fitch, respectively, and continues to be reviewed for possible downgrade by Moody’s. Such rating actions will reduce Holdings’ flexibility to access the term debt capital markets and increase the cost of such borrowings. In addition, the Company expects Holdings’ commercial paper ratings will no longer be investment grade, and as such, the Company would not expect Holdings to be able to access the commercial paper market following the merger.

Contractual Obligations and Off-Balance Sheet Arrangements

To facilitate an understanding of the Company’s contractual obligations and off-balance sheet arrangements, the following data is provided:

The Company has no material unconditional purchase obligations as defined by SFAS No. 47, “Disclosure of Long-Term Purchase Obligations”.

Defined benefit retirement plans

As indicated in Note 9 of the Notes to Consolidated Financial Statements, the projected benefit obligation of the Company’s defined benefit plans exceeded plan assets by $0.9 billion at the end of 2004 as compared to $0.7 billion at the end of 2003. This increase in net obligation was primarily due to the growth in plan obligations resulting from lower discount rates. The Company expects to contribute approximately $100 million to the domestic pension plan in 2005. The Critical Accounting Estimates section and Note 9 of the Notes to Consolidated Financial Statements provide a more complete description of the status of the Company’s defined benefit plans.

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CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements requires the Company to estimate the effect of various matters that are inherently uncertain as of the date of the financial statements. Each of these required estimates varies in regard to the level of judgment involved and its potential impact on the Company’s reported financial results. Estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimate are reasonably likely to occur from period to period, and would materially impact the Company’s financial condition, changes in financial condition or results of operations. The Company’s significant accounting policies are discussed in Note 1 of the Notes to Consolidated Financial Statements. Critical estimates inherent in these accounting policies are discussed in the following paragraphs.

Inventory valuation

Approximately 86% of merchandise inventories are valued at the lower of cost or market, with cost determined using the retail inventory method (“RIM”) under the last-in, first-out (“LIFO”) cost flow assumption. Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, merchandise markon, markups, markdowns, shrinkage and vendor allowances, which significantly impact the ending inventory valuation at cost as well as resulting gross margins. The methodologies used to value merchandise inventories include the development of the cost-to-retail ratios, the groupings of homogenous classes of merchandise, the development of shrinkage and obsolescence reserves, the accounting for price changes and the computations inherent in the LIFO adjustment.

Self-insurance reserves

The Company uses a combination of third-party insurance and/or self-insurance for a number of risks including workers’ compensation, asbestos and environmental, automobile, product and general liability claims. The Company’s liability reflected on the consolidated balance sheet represents an estimate of the ultimate cost of uninsured claims incurred as of the balance sheet date. In estimating this liability, the Company utilizes loss development factors prepared by independent third-party actuaries. These development factors utilize historical data to project the future development of incurred losses. Loss estimates are adjusted based upon actual claims settlements and reported claims. Although the Company does not expect the amounts ultimately paid to differ significantly from its estimates, self-insurance reserves could be affected if future claim experience differs significantly from the historical trends and the actuarial assumptions.

Defined benefit retirement plans

The fundamental components of accounting for defined benefit retirement plans consist of the compensation cost of the benefits earned, the interest cost from deferring payment of those benefits into the future and the results of investing any assets set aside to fund the obligation. Such retirement benefits are earned by associates ratably over

29

their service careers; therefore the amounts reported in the income statement for these retirement plans have historically followed the same pattern. Accordingly, changes in the obligations or the value of assets to fund it have been recognized systematically and gradually over the associate’s estimated period of service. This systematic and gradual recognition of changes has historically been accomplished by amortizing experience gains/losses in excess of the 10% corridor into expense over the associate service period and by recognizing the difference between actual and expected asset returns over a five-year period.

As discussed in Note 9 of the Notes to Consolidated Financial Statements, the Company changed its method of accounting for its domestic defined benefit plans in the first quarter of 2004 to immediately recognize any experience gains or loss in excess of the 10% corridor and to value plan assets at fair value. The Company believes that the new method is preferable in light of changes made to its domestic benefit plans to discontinue providing pension and retiree medical benefits to associates under the age of 40 as the new policy accelerates
recognition of events which have already occurred. As a result of this accounting method change, the Company recorded an after-tax charge of $839 million in the first quarter of 2004 for the cumulative effect of the change in accounting principle.

Under its new accounting method, the Company’s pension expense in future periods may be more volatile as this method accelerates recognition of actual experience. Furthermore, because the domestic pension plan’s unrecognized loss is at the 10% corridor limit at the beginning of 2005, additional pension expense will be recognized in 2005 for the full amount of any experience losses realized in 2005. The largest drivers of experience losses in recent years have been the discount rate used to determine the present value of the obligation and the actual return on pension assets.

The discount rate used to determine the present value of the obligation is adjusted annually based on prevailing interest rates as of the measurement date, which is October 31. In 2004, the Company lowered the discount rate used to determine the pension obligation from 6.00% to 5.75% based on the lower interest rate environment. A further 25 basis point change in the discount rate would generate an experience gain or loss of approximately $100 million.

Future pension expense may also be affected by the actual return on plan assets achieved. The current assumption is that pension assets will earn an average annual 8% return. Every one percentage point variance from the actual return to the assumed rate of 8% will generate an experience gain or loss of $25 million.

Valuation of long-lived assets

The Company evaluates the carrying value of long-lived assets whenever events or changes in circumstances indicate that a potential impairment has occurred. A potential impairment has occurred if the projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows includes management’s assumptions of cash inflows and outflows directly resulting from the use of that asset in operations. When a potential impairment has occurred, an impairment write-down is recorded if the carrying value of the long lived asset exceeds its fair value. Fair value is measured based on a projected discounted cash flow model using a discount rate the Company feels is commensurate with the risk inherent in the Company’s business. The Company’s impairment analyses contain estimates due to the inherently judgmental nature of forecasting long-term estimated cash flows and determining the ultimate useful lives of assets. Actual results will differ, which could materially impact the Company’s impairment assessment.

Income taxes

The Company provides deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. The tax balances and income tax expense recognized by the Company are based on management’s interpretation of the tax laws of multiple jurisdictions. Income tax expense also reflects the Company’s best estimates and assumptions regarding, among other things, the level of future taxable income, interpretation of the tax laws, and tax planning.

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Future changes in tax laws, changes in projected levels of taxable income, and tax planning could affect the effective tax rate and tax balances recorded by the Company.

Domestic and foreign tax authorities periodically audit the Company’s income tax returns. These audits include questions regarding its tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposures associated with its various tax filing positions, the Company records reserves for probable exposures. A number of years may elapse before a particular matter, for which the Company has established a reserve, is audited and fully resolved. Annual tax examinations of Sears are performed by the United States Internal Revenue Service and various state and local tax authorities. Similarly, Sears Canada is examined each tax year by the Canada Revenue Agency and various provincial tax authorities. Generally, the tax years for Sears prior to 1998 and for Sears Canada prior to 1999 are closed to examination.

Management’s estimates as of the date of the financial statements reflect its best judgment giving consideration to all currently available facts and circumstances. As such, these estimates may require adjustment in the future, as additional facts become known or as circumstances change.

The Company’s management has discussed the development and selection of these critical accounting policies with the Audit Committee of the Company’s Board of Directors and the Audit Committee has reviewed the Company’s disclosures in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements made in this Annual Report on Form 10-K and in other public announcements by the Company contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about the expected benefits of the business combination transaction with Kmart, and future financial and operating results. Such statements are based upon the current beliefs and expectations of Kmart’s and Sears’ management and are subject to significant risks and uncertainties. Actual results may differ 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: the timing of receipt of regulatory approvals in connection with the transaction; the failure of Kmart and Sears stockholders to approve the transaction; the risk that the businesses will not be integrated successfully; failure to quickly realize synergies and cost-savings from the transaction as a result of technical, logistical, competitive and other factors; disruption from the transaction making it more difficult to maintain relationships with clients, employees or suppliers; competitive conditions in retail and related services industries; changes in consumer confidence, tastes, preferences and spending; the availability and level of consumer debt; the successful execution of, and customer response to, strategic initiatives, including the full-line store strategy and the conversion and integration of the Kmart stores and other new store locations; the pace of growth in store locations, which may be higher or lower than anticipated; the possibility that new business and strategic options for one or more business segments will be identified, potentially including selective acquisitions, dispositions, restructurings, joint ventures and partnerships; trade restrictions, tariffs, and other factors potentially affecting the ability to find qualified vendors and access products in an efficient manner; the ability to successfully implement initiatives to improve inventory management capabilities; anticipated cash flow; changes in interest rates; the outcome of pending legal proceedings and bankruptcy claims; social and political conditions such as war, political unrest and terrorism or natural disasters; the possibility of negative investment returns in any pension plans; volatility in financial markets; the terms and availability of debt financing; changes in debt ratings, credit spreads and cost of funds; the possibility of interruptions in systematically accessing the public debt markets; the impact of seasonal buying patterns, which are difficult to forecast with certainty; and general economic conditions and normal business uncertainty. These forward-looking statements speak only as of the time first made, and no undertaking has been made to update or revise them as more information becomes available.

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Item 7a. Quantitative and Qualitative Disclosures About Market Risk

The primary market risk exposure faced by the Company is interest rate risk, which arises from the Company’s funding obligations and derivative financial instruments. The Company’s policy is to manage interest rate risk through the use of fixed and variable rate funding and interest rate derivatives. All debt securities and derivative instruments are considered non-trading.

At year-end 2004 and 2003, 47% and 53%, respectively, of the Company’s funding portfolio was variable rate (including fixed rate debt synthetically converted to variable rate through the use of derivative financial instruments). Based on the size of the Company’s variable rate funding portfolio at year-end 2004 and 2003, which totaled $2.5 billion and $4.3 billion, respectively, an immediate 100 basis point change in interest rates would have affected pretax funding costs by approximately $25 million and $43 million, respectively. These estimates do not take into account the effect on revenue resulting from invested cash or the returns on assets being funded. These estimates also assume that the variable rate funding portfolio remains constant for an annual period and that the interest rate change occurs at the beginning of the period.

The Company actively manages the risk of nonpayment by its derivative counterparties by limiting its 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. In certain cases, counterparty risk is also managed through the use of collateral in the form of cash or U.S. government securities. The following table summarizes notional amounts, fair values and weighted-average remaining life of the Company’s domestic derivative instruments:

Item 8. Financial Statements and Supplementary Data

The consolidated financial statements of the Company, including the notes to all such statements, and other information are included in this report beginning on page F-1.

Item 9. Changes in and Disagreements with Independent Auditors on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

The Company’s management, including Alan J. Lacy, Chairman of the Board of Directors, President and Chief Executive Officer (principal executive officer), and Glenn R. Richter, Executive Vice President and Chief Financial Officer (principal financial officer), have evaluated the effectiveness of the Company’s “disclosure controls and procedures”, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be

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disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the fiscal year ended January 1, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management believes the financial statements, which require the use of certain estimates and judgments, fairly and accurately reflect the financial position and operating results of the Company in accordance with accounting principles generally accepted in the United States of America.

Management’s report on internal control over financial reporting and the attestation report of Deloitte & Touche LLP, the Company’s independent registered public accounting firm, on management’s assessment of internal control over financial reporting is included on pages F-2 and F-3 of this report and are incorporated in this Item 9A by reference.

Mr. Lacy, the Company’s chief executive officer, has certified to the New York Stock Exchange that he is not aware of any violations by the Company of the exchange’s corporate governance listing standards.

The Audit Committee of the Board of Directors is comprised entirely of independent directors. The committee reviews audit plans, internal control reports, financial reports and related matters and meets regularly with the Company’s management, internal auditors and independent registered public accountants, and performs other duties as outlined in the Audit Committee Charter. The independent registered public accountants, the internal auditors and the Company’s chief compliance officer advise the committee of any significant matters resulting from their audits or reviews and have free access to the committee without management being present.

Item 9B. Other Information

The Company entered into a letter agreement with Glenn R. Richter on February 17, 2005. The Company has disclosed the material terms of the agreement with Mr. Richter in Item 11 of this Annual Report on Form 10-K. Mr. Richter intends to resign from the Company as of March 28, 2005.

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PART III

Item 10. Directors and Executive Officers of the Registrant

Directors

The Company’s Board of Directors has three classes of as nearly equal size as possible. Directors hold office for staggered terms of three years. One of the three classes is elected each year to succeed the directors whose terms are expiring. The following are the current directors of the Company and their principal employment during the past five years.

Hall Adams, Jr. — Chairman of the Board and Chief Executive Officer of Leo Burnett Company, Inc. (advertising) until his retirement in 1992. Mr. Adams is a director of McDonald’s Corporation.
Director since 1993. Age 71. Term expires at the 2006 annual meeting of shareholders.

William L. Bax — Managing Partner of PricewaterhouseCoopers’ Chicago area practice (international public accounting firm) until his retirement in 2003. Mr. Bax is a director of Big Shoulders Fund and Children’s Memorial Hospital. He is also a member of the DePaul University Board of Trustees.
Director since 2003. Age 61. Term expires at the 2007 annual meeting of shareholders.

Donald J. Carty — Chairman of the Board and Chief Executive Officer of AMR Corporation and American Airlines, Inc. (air transportation) until his retirement in 2003. He is a director of Dell, Inc., Hawaiian Holdings, CHC Helicopter Corp. and Solutions Inc.
Director since 2001. Age 58. Term expires at the 2007 annual meeting of shareholders.

W. James Farrell — Chairman of the Board and Chief Executive Officer of Illinois Tool Works Inc. (manufacturing and marketing of engineered components). Mr. Farrell is a director of Illinois Tool Works Inc., Kraft Foods, Inc., The Allstate Corporation, and UAL Corp. He is also Chairman of The Federal Reserve Bank of Chicago.
Director since 1999. Age 62. Term expires at the 2006 annual meeting of shareholders.

Alan J. Lacy — Chairman of the Board of Sears, Roebuck and Co. since December 2000 and President and Chief Executive Officer since October 2000. Mr. Lacy was President, Services, prior thereto.
Director since 2000. Age 51. Term expires at the 2007 annual meeting of shareholders.

Michael A. Miles — Chairman of the Board and Chief Executive Officer of Philip Morris Companies Inc. (consumer products) until his retirement in 1994. Mr. Miles is a Special Limited Partner of Forstmann Little & Co. (investment firm) and a member of its Advisory Board. He is a director of AMR Corp., Citadel Broadcasting, Dell, Inc., Morgan Stanley and Time Warner Inc.
Director since 1992. Age 65. Term expires at the 2005 annual meeting of shareholders.

Dorothy A. Terrell — Venture Partner with First Light Capital (venture capital company) since April 2003. Ms. Terrell served as President, Platforms and Services Group, and Senior Vice President, Worldwide Sales, of NMS Communications (telecommunications) until her retirement in 2002. She is a director of General Mills, Inc., Herman Miller, Inc. and Lightbridge, Inc.
Director since 1995. Age 59. Term expires at the 2005 annual meeting of shareholders.

Raul H. Yzaguirre — President and Chief Executive Officer of the National Council of LaRaza (social services) until his retirement effective as of January 1, 2005. He is a director of AARP Services, Inc., the Council of Better Business Bureaus, and Educate, Inc.
Director since 2001. Age 65. Term expires at the 2005 annual meeting of shareholders.

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Executive Officers

The following table and information sets forth the names of the executive officers of the Company, their current positions and offices with the Company, the date they first became executive officers of the Company, their current ages, and, with the exception of Mr. Lacy for whom such information appears above, their principal employment during the past five years.

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.

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Mr. Buley joined Sears as Senior Vice President and General Manager, Home Stores in September 2003. He was elected Executive Vice President and General Manager, Retail Store Operations in January 2005. Prior to joining Sears, he was Executive Vice President of Kohl’s Corporation, a department store retailer.

Ms. Crow became Senior Vice President, Financial Services in May 2004. Prior thereto, she was Vice President, Customer Relationship Management for Sears.

Mr. Good has been Executive Vice President and General Manager, Home Services (formerly Product Repair Services) since August 1999.

Mr. Kelly joined Sears as Senior Vice President and Chief Information Officer in October 2002. He assumed his current position in June 2004. Prior to joining Sears, he was Senior Vice President - Logistics, Information Systems and Technology at Payless Shoesource, Inc., a footwear retailer.

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.

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.

Ms. Manto joined Sears as Executive Vice President and General Manager, Apparel in February 2004. Prior to joining Sears, she was Vice Chairman/Chief Merchandising Officer of Stein Mart, an off-price specialty retailer.

Ms. Meads joined Sears as Executive Vice President and General Manager, Softlines in April 2003. Ms. Meads was named Executive Vice President, Sears, Roebuck and Co., and President and Chief Executive Officer, Lands’ End in February 2004. Prior to joining Sears, she was Executive Vice President of Merchandising and Design for Lands’ End, Inc.

Mr. O’Leary joined Sears as Senior Vice President, Public Relations and Government Affairs in July 2003. Prior to joining Sears, he was Senior Vice President, Global Communications for The Goodyear Tire and Rubber Company, a manufacturer and distributor of engineered rubber products and chemicals, from 2002 to 2003. From 2000 to 2002, Mr. O’Leary was a seed investor and board member of several startup business groups, primarily responsible for marketing, branding and communications strategy.

Mr. Padilla joined Sears as President, Merchandising in September 2004. Prior to joining Sears, Mr. Padilla was Executive Vice President, Merchandising and Chief Merchant for Marshall Field’s, a department store retailer, from 2001 to 2004. He was Senior Vice President and General Merchandise Manager, Softlines for Target Corporation, a discount store retailer, prior thereto.

Mr. Richter joined Sears as Vice President and Controller in February 2000. He was named Senior Vice President, Finance in July 2001 and became Senior Vice President and Chief Financial Officer in October 2002. He became Executive Vice President and Chief Financial Officer in April 2004.

Mr. White became Executive Vice President, Retail Store Operations Integration and Planning in January 2005. He was appointed Executive Vice President and General Manager, Store Operations-Sears Retail in April 2003 and served as Senior Vice President — Sears Automotive prior thereto.

Ms. Zopp joined Sears as Senior Vice President and General Counsel in July 2003. Prior to joining Sears, she was Vice President and Deputy General Counsel of Sara Lee Corporation, a global manufacturer and marketer of consumer products.

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The Company’s Core Values and Code of Ethics applies to the Company’s principal executive officer, principal financial officer and principal accounting officer. The Company intends to disclose on the Investor Relations portion of www.sears.com any amendment to, or waiver from, a provision of its Core Values and Code of Conduct that applies to any of those three officers of the Company.

Board and Committee Information

The Board of Directors and four committees of the Board govern Sears. Directors discharge their responsibilities throughout the year at Board and committee meetings and also through considerable telephone contact and other communications with the Chairman and other key executives, as well as with outside auditors and external advisors such as legal counsel and investment bankers. Other than Alan J. Lacy, the Chairman, President and Chief Executive Officer of the Company, the Board has determined that each Director is independent. Director independence was determined in accordance with the applicable corporate governance listing standards of the New York Stock Exchange and the Company’s independence standards set forth in the Corporate Governance Guidelines of the Company’s Board of Directors posted on the Investor Relations section of the Company’s website, www.sears.com.

The following table identifies the current membership of Board committees.

Mr. Bax, the Chairman of the Audit Committee, is an Audit Committee financial expert as defined by the Securities and Exchange Commission. The Board of Directors has not designated a Lead Director. Pursuant to the Corporate Governance Guidelines of the Company’s Board of Directors, when non-employee Directors meet in executive session the leader of the meeting is the Chair of the Committee having jurisdiction over the subject matter of the meeting. The Guidelines require the non-employee Directors to meet in executive session at least once each year. Executive sessions are generally held at each regularly scheduled Board meeting.

You may contact any Board member, the non-employee Directors or the entire Board at any time. Your communication should be sent to the Sears, Roebuck and Co. Board of Directors — Non-employee Directors, c/o Corporate Secretary, Sears, Roebuck and Co., Law Department, 3333 Beverly Road, Hoffman Estates, IL 60179. Additional information regarding the Company’s policies on communicating with the Board of Directors can be found in the Investor Relations section of the Company’s website, www.sears.com.

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Section 16(a) Beneficial Ownership Reporting Compliance

Securities and Exchange Commission rules require the Company to disclose certain late filings of stock transaction reports by its directors and executive officers. Based solely on a review of reports filed by the Company on these individuals’ behalf and written representations from them that no other reports were required, the Company believes nothing is required to be disclosed herein with respect to Section 16(a) filing requirements during fiscal 2004.

Item 11. Executive Compensation

Executive Compensation

The following Summary Compensation Table shows compensation information for Sears’ Chairman, President and Chief Executive Officer, Mr. Lacy, and the four other executive officers who were most highly compensated for 2004 (the “Named Officers”). Amounts reflect fiscal years ending January 1, 2005, January 3, 2004, and December 28, 2002.