UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-416
SEARS, ROEBUCK AND CO.
(Exact name of registrant as specified in its charter)
New York 36-1750680
(State of Incorporation) (I.R.S. Employer Identification No.)
3333 Beverly Road, Hoffman Estates, Illinois 60179
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 847/286-2500
Registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
As of September 30, 1997 the Registrant had 392,001,409 common shares,
$.75 par value, outstanding.
<PAGE>
Sears, Roebuck and Co.
Index to Quarterly Report on Form 10-Q
September 27, 1997
Page
Part I - Financial Information.
Item 1. Financial Statements.
Condensed Consolidated Statements of Income (unaudited) -
Three and Nine Months Ended September 27, 1997 and
September 28, 1996. 1
Condensed Consolidated Balance Sheets -
September 27, 1997 (unaudited), September 28, 1996 (unaudited),
and December 28, 1996. 2
Condensed Consolidated Statements of Cash Flows (unaudited) -
Nine Months Ended September 27, 1997 and September 28, 1996. 3
Notes to Condensed Consolidated Financial Statements (unaudited). 4
Independent Accountants' Review Report. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 8
Part II - Other Information.
Item 1. Legal Proceedings. 16
Item 6. Exhibits and Reports on Form 8-K. 17
<PAGE>
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<TABLE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
SEARS, ROEBUCK AND CO.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
(millions, except per common share data) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues
Merchandise sales and services $ 8,545 $ 7,965 $ 24,667 $ 22,929
Credit revenues 1,283 1,102 3,654 3,265
Total revenues 9,828 9,067 28,321 26,194
Costs and expenses
Cost of sales, buying and occupancy 6,337 5,903 18,314 17,098
Selling and administrative 1,978 1,933 5,868 5,659
Depreciation and amortization 192 173 575 502
Provision for uncollectible accounts 401 286 998 794
Interest 328 326 1,021 1,013
Reaffirmation charges (note 7) - - 475 -
Total costs and expenses 9,236 8,621 27,251 25,066
Operating income 592 446 1,070 1,128
Other income (loss), net (5) 17 124 44
Income before income taxes 587 463 1,194 1,172
Income taxes 234 184 542 468
Net income $ 353 $ 279 $ 652 $ 704
Net income (loss) consists of:
Domestic operations $ 346 $ 292 $ 686 $ 745
International operations 7 (13) (34) (41)
Net income $ 353 $ 279 $ 652 $ 704
Earnings per common share, after allowing
for dividends on preferred shares $ 0.89 $ 0.68 $ 1.64 $ 1.71
Cash dividends declared per common share $ 0.23 $ 0.23 $ 0.69 $ 0.69
Average common and common
equivalent shares outstanding 398.5 398.4 398.3 399.3
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
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<TABLE>
SEARS, ROEBUCK AND CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Unaudited)
Sept. 27, Sept. 28, Dec. 28,
(millions) 1997 1996 1996
<S> <C> <C> <C>
Assets
Current assets
Cash and invested cash $ 247 $ 649 $ 660
Credit card receivables 21,519 20,189 21,563
Other receivables 287 358 335
Merchandise inventories 5,669 5,260 4,646
Prepaid expenses and deferred charges 439 386 348
Deferred income taxes 915 981 895
Total current assets 29,076 27,823 28,447
Property and equipment
Land 459 406 445
Buildings and improvements 5,245 4,776 5,080
Furniture, fixtures and equipment 4,705 4,051 4,279
Capitalized leases 448 369 433
10,857 9,602 10,237
Less accumulated depreciation 4,795 4,095 4,359
Total property and equipment, net 6,062 5,507 5,878
Deferred income taxes 798 797 905
Other assets 930 993 937
Total assets $ 36,866 $ 35,120 $ 36,167
Liabilities
Current liabilities
Short-term borrowings $ 3,987 $ 4,741 $ 3,533
Current portion of long-term debt and
capitalized leases 2,428 2,298 2,737
Accounts payable and other liabilities 7,647 6,997 7,840
Unearned revenues 874 945 840
Total current liabilities 14,936 14,981 14,950
Long-term debt and capitalized leases 12,523 11,355 12,170
Postretirement benefits 2,598 2,802 2,748
Minority interest and other liabilities 1,404 1,195 1,354
Total liabilities 31,461 30,333 31,222
Commitments and Contingent Liabilities (note 7)
Shareholders' Equity
8.88% Preferred Shares, First Series (note 3) - 325 -
Common shares 323 323 323
Capital in excess of par value 3,596 3,621 3,618
Retained income (note 2) 3,712 2,856 3,330
Treasury stock - at cost (1,653) (1,653) (1,655)
Minimum pension liability (277) (285) (277)
Deferred ESOP expense (215) (232) (230)
Cumulative translation adjustments (81) (168) (164)
Total shareholders' equity 5,405 4,787 4,945
Total liabilities and
shareholders' equity $ 36,866 $ 35,120 $ 36,167
Total common shares outstanding 392.0 391.4 391.4
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
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<TABLE>
SEARS, ROEBUCK AND CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
Sept. 27, Sept. 28,
(millions) 1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 652 $ 704
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation, amortization and other noncash items 834 689
Reaffirmation charges 475 -
Provision for uncollectible accounts 998 794
Gain on sales of property and investments (118) (34)
Change in (net of acquisitions):
Deferred income taxes 89 (16)
Credit card receivables (1,263) (941)
Merchandise inventories (1,088) (1,084)
Other operating assets (68) 3
Other operating liabilities (743) 222
Net cash (used in) provided by operating activities (232) 337
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired (115) (296)
Net proceeds from sales of businesses 379 -
Proceeds from sales of property and investments 10 37
Purchases of property and equipment, net (803) (830)
Net cash used in investing activities (529) (1,089)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 2,473 3,137
Repayments of long-term debt (2,464) (1,433)
Increase (decrease) in short-term borrowings,
primarily 90 days or less 613 (611)
Repayments of ESOP note receivable 16 21
Common shares purchased for employee stock plans (114) (139)
Common shares issued for employee stock plans 95 112
Dividends paid to shareholders (269) (292)
Net cash provided by financing activities 350 795
Effect of exchange rate changes on cash and invested cash (2) -
Net (decrease) increase in cash and invested cash (413) 43
Cash and invested cash at beginning of year 660 606
Cash and invested cash at end of period $ 247 $ 649
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
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SEARS, ROEBUCK AND CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Financial Statements
The Condensed Consolidated Balance Sheets as of September 27, 1997 and
September 28, 1996 and the related Condensed Consolidated Statements of
Income for the three- and nine-months then ended and Condensed Consolidated
Statements of Cash Flows for the nine-months then ended are unaudited.
The interim financial statements reflect all adjustments (consisting of
normal recurring accruals except as described in note 7) which are, in the
opinion of management, necessary for a fair statement of the results for
the interim periods presented. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Sears, Roebuck and Co. 1996
Annual Report to Shareholders and Annual Report on Form 10-K. The results
of operations for the interim periods should not be considered indicative
of results to be expected for the full year.
2. Shareholders' Equity and Dividend Restrictions
Under terms of indentures entered into in 1981 and thereafter, Sears
cannot take specified actions, including the declaration of cash dividends,
which would cause its consolidated unencumbered assets, as defined, to fall
below 150% of its consolidated liabilities, as defined. At September 27,
1997 approximately $2.7 billion could be paid in dividends to shareholders
under the most restrictive indentures.
On March 13, 1996, the Board of Directors approved a common share
repurchase program for the purpose of acquiring shares for distribution
under employee stock-based incentive plans. The Company is authorized to
acquire up to ten million Sears common shares on the open market. Through
September 27, 1997, 5.6 million common shares had been acquired under the
repurchase program.
3. Earnings Per Common Share
Earnings per common share is computed based on the weighted average number
of common and common equivalent shares (dilutive stock options) outstanding.
In 1996, earnings per common share included an adjustment for dividends of
$7 million and $22 million for the three- and nine-month periods ended
September 28, 1996, on the 8.88% Preferred Shares which were redeemed on
November 12, 1996.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." The
statement is effective for financial statements for periods ending after
Dec. 15, 1997, and changes the methodology for calculating earnings per
share. Adoption of this statement by the Company will not have a material
impact on earnings per share.
4. Accounting Change
The Company adopted Statement of Financial Accounting Standard (SFAS) No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", effective January 1, 1997. This statement
provides consistent guidance for distinguishing transfers of financial
assets (securitizations) that are sales from transfers that are secured
borrowings. SFAS No. 125 requires the Company to recognize gains on
securitizations which qualify as sales. The statement also indicates that an
allowance for uncollectible accounts should not be maintained for receivables
which are sold (securitized). The effect of this accounting change was to
increase net income by $38 million and $112 million for the three- and nine-
month periods ended September 27, 1997, respectively.
<PAGE>
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SEARS, ROEBUCK AND CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Acquisition of Businesses
During the first quarter of 1997, the Company acquired all the outstanding
stock of All America Termite and Pest Control, Inc. ("All America") and
Florida Builder Appliances, Inc. All America is a termite and pest control
business and Florida Builder Appliances is a supplier of appliances to
residential construction and remodeling contractors in the Florida market.
Additionally in the first quarter, the Company acquired the remaining 35% of
the outstanding shares it did not already own of MaxServ, Inc. These
acquisitions were recorded using the purchase method of accounting. The
results of operations from these acquired companies are not material to the
Company's consolidated results of operations.
During September 1996, the Company acquired all the outstanding stock of
Orchard Supply Hardware Stores Corporation ("Orchard") for $309 million.
Orchard is engaged in the operation of over 60 hardware stores in California.
The acquisition was recorded using the purchase method of accounting and
resulted in goodwill of approximately $220 million, which is included in
other assets. Orchard's results of operations are not material to the
Company's consolidated results of operations.
6. Disposition of Businesses
In April 1997, the Company completed the sale of 60 percent of the
outstanding shares of Sears, Roebuck de Mexico, S.A. de C.V. ("Sears Mexico")
to Grupo Carso S.A. de C.V. for cash proceeds of $103 million. The sale was
recorded in the first quarter resulting in a pretax loss of $21 million
reflected in other income and tax expense of $15 million for an after-tax
loss of $36 million, or $0.09 per share. The transaction reduced the
Company's ownership in Sears Mexico to 15.5 percent.
In June 1997, the Company sold its 30 percent equity interest in Advantis,
a joint venture between IBM and the Company, to IBM for $450 million. After
contractually required distributions to third parties, the transaction
resulted in cash proceeds of $276 million, a pretax gain of $150 million
reflected in other income and an after-tax gain of $91 million, or $0.23 per
share.
7. Legal Proceedings
On June 3, 1997, the Company entered into a settlement of the consolidated
debtor class action lawsuits filed in the United States Bankruptcy and
District Courts for the District of Massachusetts by certain current and
former credit card holders of the Company who had declared personal
bankruptcy (the "Settlement"). These lawsuits alleged that the Company had
violated the United States Bankruptcy Code and consumer protection laws in
various states through activities related to certain debt reaffirmation
agreements. During the second quarter of 1997, the Company entered into
consent decrees with Attorneys General in all fifty states and with the
Federal Trade Commission relating to these matters. The consent decrees
with the States' Attorneys General require the Company, among other things,
to establish funds aggregating $40 million to be shared among the states and
used in part for consumer education. A civil and criminal investigation of
these matters is ongoing.
On October 28, 1997, at a joint fairness hearing before the United States
Bankruptcy and the District Courts for the District of Massachusetts, the
courts approved the Settlement. The Settlement requires among other things,
the Company to pay the debtors the amounts collected pursuant to
reaffirmation agreements that were not filed with the bankruptcy courts,
including finance charges, plus 10% interest, and to undergo a review of its
credit bankruptcy reaffirmation procedures. In addition, outstanding
balances relating to unfiled debt reaffirmation agreements will be written
off. The Company will also establish a $25 million fund to be distributed
to the debtors participating in the Settlement.
<PAGE>
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SEARS, ROEBUCK AND CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Four purported shareholders derivative actions have been filed on behalf
of the Company against its directors and certain of its officers, alleging
breach of fiduciary duty for failing to prevent the improper handling of
certain of the Company's debt reaffirmation agreements. The complaints seek
unspecified damages and attorneys' fees and expenses. Two of the cases, which
were filed May 14, 1997 and June 11, 1997, have been consolidated in the
Supreme Court of the State of New York for the County of New York, one case
which was filed June 27, 1997, is pending in the United States District Court
for the Northern District of Illinois, and one case, which was filed
September 12, 1997, is pending in the United States District Court for the
Southern District of New York.
On October 9, 1997, the Company reached an agreement in principle to settle
several consolidated securities class action lawsuits against the Company and
one of its officers in the United States District Court for the Northern
District of Illinois. The amended consolidated complaint alleges violations
of the Securities Exchange Act of 1934 for failure to disclose the
bankruptcy collection practices described above in periodic filings with the
Securities and Exchange Commission prior to April 10, 1997.
The Company recorded a pretax charge of $475 million ($320 million on an
after-tax basis) in the second quarter for the estimated cost of the matters
referred to above, including other related expenses. This estimate is based
on management's assumptions as to the ultimate outcome of future events and
uncertainties. Actual results could differ from this estimate and there can
be no assurance that additional costs will not be incurred.
The Company is subject to various other legal and governmental proceedings
pending against the Company, many involving routine litigation incidental to
the businesses. Other matters contain allegations which are nonroutine and
involve compensatory, punitive or antitrust 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, the ultimate liability in
excess of reserves currently recorded is not expected to have a material
effect on annual results of operations, financial position, liquidity or
capital resources of the Company.
<PAGE>
-7-
SEARS, ROEBUCK AND CO.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Shareholders and Board of Directors
of Sears, Roebuck and Co.
We have reviewed the accompanying Condensed Consolidated Balance Sheets of
Sears, Roebuck and Co. as of September 27, 1997 and September 28, 1996, and
the related Condensed Consolidated Statements of Income for the three- and
nine-month periods ended September 27, 1997 and September 28, 1996, and the
Condensed Consolidated Statements of Cash Flows for the nine-month periods
ended September 27, 1997 and September 28, 1996. These financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the Consolidated Balance Sheet of Sears, Roebuck and Co. as of
December 28, 1996, and the related Consolidated Statements of Income,
Shareholders' Equity, and Cash Flows for the year then ended (not presented
herein); and in our report dated February 10, 1997, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying Condensed Consolidated
Balance Sheet as of December 28, 1996, is fairly stated, in all material
respects, in relation to the Consolidated Balance Sheet from which it has
been derived.
Deloitte & Touche LLP
Chicago, Illinois
October 28, 1997
<PAGE>
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ITEM 2. - SEARS, ROEBUCK AND CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
Operating Results
Operating results for the Company are reported for two business segments:
domestic operations and international operations. The domestic operations
segment includes the Company's operations in the United States and Puerto
Rico. Domestic operations include Retail Stores (comprised of Full-line
Stores, Home Stores and Auto Stores), Home Services, Direct Response Marketing
and Credit. Credit includes the results of the Company's portfolio of
receivables which arise from extending domestic customers credit to pay for
purchases of merchandise and services. International operations consist of
similar merchandising and service operations conducted in Canada through Sears
Canada Inc., a consolidated, 55.0% owned subsidiary ("Sears Canada") and
Sears, Roebuck de Mexico, S.A. de C.V. ("Sears Mexico"), a 75.5% owned
subsidiary until March 29, 1997. As of March 29, 1997 Sears Mexico is no
longer included in the consolidated balance sheet as the Company completed
the sale of its controlling interest in Sears Mexico to Grupo Carso, S.A. de
C.V.
For the three-months ended September 27, 1997 net income was $353 million,
or $0.89 per common share. Results for the quarter were affected by three
significant items which together increased net income by $52 million, or
$0.13 per common share. These items include a charge for the cost of
converting Western Auto operations to the new Parts America format; a one-time
gain for the change in current associates' post-retirement life insurance
benefits; and the positive impact of the accounting change for SFAS No. 125.
Excluding these items, net income would have been $301 million, or $0.76 per
common share as compared to $279 million, or $0.68 per common share in the
third quarter of 1996. For the nine-months ended September 27, 1997 net
income was $652 million, or $1.64 per common share. Excluding the impact of
significant noncomparable items, net income would have been $791 million, or
$1.99 per common share as compared to $704 million, or $1.71 per common share
for the first nine-months of 1996.
Impact of noncomparable items is summarized as follows:
<TABLE>
<CAPTION>
3rd Quarter Nine Months
(millions, except per common share) $ EPS $ EPS
<S> <C> <C> <C> <C>
1997 Reported Net Income $ 353 $ 0.89 $ 652 $ 1.64
Noncomparable Items:
SFAS No. 125 Acctg. Change 38 0.10 112 0.28
Parts America Conversion (23) (0.06) (23) (0.06)
Post-Retirement Life Insurance 37 0.09 37 0.09
Sale of Sears Mexico - - (36) (0.09)
Sale of Advantis - - 91 0.23
Reaffirmation Charges - - (320) (0.80)
52 0.13 (139) (0.35)
1997 Adjusted Net Income $ 301 $ 0.76 $ 791 $ 1.99
1996 Net Income $ 279 $ 0.68 $ 704 $ 1.71
</TABLE>
The Company's consolidated effective tax rate for the nine-months ended
September 27, 1997 was 45.4% versus 39.9% in the prior year. The increase was
due to certain components of the reaffirmation charges which are not tax
deductible and the tax expense from the first quarter sale of Sears Mexico.
Excluding these significant items, the consolidated effective tax rate would
have been 40.4% for the first nine months of 1997.
<PAGE>
-9-
ITEM 2. - SEARS, ROEBUCK AND CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
Revenues increased 8.4% to $9.8 billion and 8.1% to $28.3 billion for the
three- and nine-month periods ended September 27, 1997, respectively, from the
comparable 1996 period.
<TABLE>
<CAPTION>
Revenues Three Months Ended Nine Months Ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
(millions, except 1997 1996 Change 1997 1996 Change
number of stores)
<S> <C> <C> <C> <C> <C> <C>
Domestic operations:
Full-line Stores $ 5,153 $ 4,934 4.4% $ 14,964 $ 14,314 4.5%
Off-the-mall stores 1,828 1,586 15.3 5,289 4,491 17.8
Service and other revenues 838 738 13.6 2,283 2,100 8.7
Merchandise sales and services 7,819 7,258 7.7 22,536 20,905 7.8
Credit revenues 1,222 1,026 19.0 3,449 3,021 14.1
Total domestic operations 9,041 8,284 9.1 25,985 23,926 8.6
International operations 787 783 0.6 2,336 2,268 3.0
Total revenues $ 9,828 $ 9,067 8.4% $ 28,321 $ 26,194 8.1%
Domestic comparable store
sales increase 2.2% 3.8% 2.4% 5.9%
Number of domestic Full-line Stores 826 812
Number of domestic off-the-mall stores 2,591 2,419
Total 3,417 3,231
</TABLE>
Due to holiday buying patterns, merchandise sales are traditionally higher
in the fourth quarter than other quarterly periods and a disproportionate
share of operating income is typically earned in the fourth quarter. This
business seasonality results in performance for the third quarter and the
first nine months of 1997 which is not necessarily indicative of performance
for the balance of the year.
<PAGE>
-10-
ITEM 2. - SEARS, ROEBUCK AND CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
Domestic Operations
For the third quarter, the Company posted a 2.2% comparable store sales
increase which came on top of a 3.8% comparable store sales increase in 1996.
Full-line Stores revenues increased 4.4% over third quarter 1996.
Apparel revenues gained 4.6% during the third quarter from the comparable
prior year period. Women's ready to wear, especially sportswear, as well
as footwear and cosmetics had strong sales increases partially offset by
decreased children's apparel sales.
Hardlines revenues, comprised of Home Electronics, Home Appliances, and
Home Improvement merchandise sales, increased 4.7% for the third quarter
versus prior year with strong gains in Home Appliances benefiting from
favorable response to promotions, partially offset by decreased Home
Improvement sales.
For the nine-month period, Full-line Stores sales grew 4.5% over 1996 as
Apparel achieved an 8.2% increase and Hardlines gained 2.8%.
Off-the-mall store revenues, consisting of Home Stores and Auto Stores,
increased 15.3% for the third quarter, which came on top of a 12.6% gain in
1996.
Home Stores revenues increased significantly over 1996 resulting primarily
from sales in the Orchard Supply Hardware Stores acquired in 1996.
Hardware and Sears Dealer stores had substantial revenue increases from a
year ago benefiting from 188 net new store openings and also achieved
comparable store sales percentage increases in the mid-single digits.
HomeLife furniture stores revenues increased modestly despite five fewer
stores, as comparable stores sales percentage increased mid-single digits
from 1996.
Auto Stores, consisting of the Sears Tire Group and Parts Group,
experienced revenue declines in the mid-single digits on a percentage
basis from the same period a year ago as comparable store sales were down
from prior year. Throughout 1997 the Auto Stores have been converting
Tire America and NTW stores into a single format, "National Tire and
Battery" (NTB) and converting Western Auto stores to the new Parts
America format. By year end, the Company will have completed the
conversion and will operate approximately 330 NTB stores and 600 domestic
Parts America stores in addition to its 790 Sears Auto Centers.
Off-the-mall store revenues increased 17.8% for the nine-month period as
compared to 1996 and benefited largely from the expansion of Home Stores.
Service and other revenues, which are generated primarily by the Home
Services and Direct Response Marketing businesses, were up 13.6% in the third
quarter and 8.7% in the first nine months of 1997 versus the 1996 comparable
period. The increase was primarily due to strong revenue gains by Home
Services on improved service contract revenue for product repair and installed
home improvement sales.
<PAGE>
-11-
ITEM 2. - SEARS, ROEBUCK AND CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
The domestic credit card receivables portfolio contributes significantly to
domestic operations' profitability. The key components that determine
profitability of the portfolio (before administrative expenses and income
taxes) are credit revenues (gross revenues less the funding cost on
securitized receivables), interest expense and the provision for uncollectible
accounts.
On January 1, 1997 the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which changed the accounting for securitized receivables.
Implementation of SFAS No. 125 increased 1997 net income by $38 million and
$112 million for the three- and nine-month periods ended September 27, 1997,
respectively.
<TABLE>
Key Domestic Credit Information
<CAPTION>
Balances At
Sept. 27, Sept. 28, Dec. 28,
(millions) 1997 1996 1996
<S> <C> <C> <C>
Gross credit card receivables $ 26,998 $ 24,619 $ 26,731
Receivable balances sold (6,520) (5,323) (6,330)
Owned credit card receivables $ 20,478 $ 19,296 $ 20,401
Gross credit card receivables
delinquent sixty days or more 6.90% 5.25% 5.43%
Allowance for uncollectible
accounts as a percentage of
owned credit card receivables 4.01% 3.86% 3.63%
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
(millions) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Gross credit revenues $ 1,323 $ 1,115 $ 3,764 $ 3,272
Funding costs on securitized receivables (101) (89) (315) (251)
Net credit revenues $ 1,222 $ 1,026 $ 3,449 $ 3,021
Net credit charge-offs to average gross
credit card receivables 7.20% 4.60% 6.06% 4.11%
</TABLE>
The 19.0% and 14.1% growth in gross domestic credit revenues for the three-
and nine-month periods, respectively, reflected higher owned receivable
balances and increased late fees as new pricing initiatives took effect,
partially offset by the effects of SFAS No. 125. The Sears Card continues to
have the dominant market share of credit retail sales generated in both the
Full-line Stores and off-the-mall stores. Adoption of SFAS No.125 reduced
1997 gross credit revenues by $79 million and $190 million for the three- and
nine-month periods ended September 27, 1997, respectively, as the servicing
costs and provision for uncollectible accounts related to securitized
receivables are now presented as a reduction of credit revenues.
<PAGE>
-12-
ITEM 2. - SEARS, ROEBUCK AND CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
Gross margin as a percentage of domestic merchandise sales and services for
the third quarter was 25.8% versus 26.1% in the comparable prior year period.
The domestic gross margin rate decrease was principally due to the charge for
converting Western Auto to the Parts America format. Excluding the impact of
the charge for Parts America conversion, domestic gross margin declined
slightly from the comparable prior year period. For the nine-month period,
1997 domestic gross margin rose slightly to 25.8%.
Selling and administrative expense as a percentage of revenues for domestic
operations improved to 19.9% in the third quarter of 1997 from 20.9% in the
comparable prior year period. Third quarter selling and administrative
expense was favorably impacted by the one-time gain related to the elimination
of retirement life insurance benefits for active associates not retired by
December 31, 1997 and the implementation of SFAS No. 125, which were $61
million and $31 million, respectively. Third quarter also included a charge
of $17 million for the Western Auto conversion. Excluding these items,
selling and administrative expense as a percentage of revenues decreased 40
basis points resulting from solid revenue performance coupled with continued
emphasis on controlling expenses and leveraging the fixed cost base. For
the nine-month period, the selling and administrative rate for domestic
operations improved 80 basis points to 20.5%.
In connection with the elimination of retirement life insurance benefits
for active associates, the Company also announced the reduction over a 10 year
period in the death benefit for current retirees and the elimination of the
Company's subsidy for medical insurance for Medicare eligible retirees.
These benefit plan changes are expected to generate ongoing annual savings of
approximately $35 million.
Domestic operations depreciation and amortization expense was $179 million
in the third quarter and $531 million for the nine-month period, an increase
of $24 million and $80 million, respectively, from the comparable 1996
periods. The increase reflects the continuation of the Company's store
remodeling program and the off-the-mall store expansion.
The allowance for uncollectible accounts for owned domestic credit card
receivables was $821 million and $745 million at September 27, 1997 and
September 28, 1996, respectively. The domestic provision for uncollectible
accounts was $393 million in the third quarter and $970 million for the
nine-month period as compared to $272 million and $753 million in the prior
year periods. The 1997 provision for uncollectible accounts was reduced by
$110 million and $281 million for the three- and nine-month periods ended
September 27, 1997, respectively, due to the implementation of SFAS No. 125
which requires that estimated charge-offs on sold receivables be included in
the determination of the gain or loss on the sale of receivables. Excluding
the impact of SFAS No. 125, the provision would have increased 85.2% and
66.1% for the three- and nine-month periods, respectively. The increase is
primarily attributable to the 70.5% rise in net charge-offs for the third
quarter of 1997 as compared to 1996 due to the continuing trend of increased
delinquencies, higher bankruptcies, growth in the domestic credit card
receivables portfolio and a reduced rate of debt reaffirmations.
<PAGE>
-13-
ITEM 2. - SEARS, ROEBUCK AND CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
Since the Company uses securitizations of credit card receivables as a
significant funding source, total domestic funding costs include interest
expense and the funding cost of securitized receivables. Total domestic
funding costs were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
(millions) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Interest expense $ 303 $ 285 $ 930 $ 880
Funding costs on securitized
receivables (1) 101 89 315 251
Total funding costs $ 404 $ 374 $ 1,245 $ 1,131
Domestic funding costs as a %
of domestic revenues 4.5% 4.5% 4.8% 4.7%
<FN>
(1) Funding costs on securitized receivables represent the interest paid on
securitized receivables and are presented as a reduction of credit revenues
in the statements of income.
</FN>
</TABLE>
Total domestic funding costs as a percentage of revenues was 4.5% in the
third quarter of 1997, unchanged from the prior year period, and increased
for the nine-month period from 4.7% in 1996 to 4.8% in 1997. The increase
in total domestic funding costs reflects higher funding requirements due to
a larger receivable portfolio and the redemption of the Preferred Shares in
the fourth quarter of 1996, partially offset by lower effective funding
rates resulting from the refinancing of long term, higher rate debt.
In the second quarter, the Company recorded a pretax charge of $475
million ($320 million after-tax) for the estimated cost of the Settlement,
including related other expenses of the reaffirmation matter. Such an
estimate is based on assumptions as to the ultimate outcome of future events
and uncertainties. Actual results could differ from the estimate.
See Note 7 for further discussion of this matter.
<PAGE>
-14-
ITEM 2. - SEARS, ROEBUCK AND CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
International Operations
International operations in the third quarter of 1997 include only the
Company's 55% interest in Sears Canada as a result of the first quarter sale
of the Company's controlling interest in Sears Mexico. International
operations posted third quarter net income of $7 million compared with a net
loss of $13 million in 1996. For the nine months ended September 27, 1997,
international operations had a net loss of $34 million compared with a net
loss of $41 million in 1996. Excluding the loss on the sale of the Company's
controlling interest in Sears Mexico, international net income would have
been $2 million for the nine months ended September 27, 1997.
International revenues for the third quarter of 1997 were comparable with
the same period a year ago despite the fact that the segment no longer
includes revenues from Sears Mexico due to the aforementioned sale. Sears
Canada revenues in the third quarter were up 13.2% on strong retail store
and catalog sales performance. For the nine-month period, international
revenues were $2.3 billion, up 3.0% from prior year.
Gross margins as a percentage of merchandise sales and services increased
to 26.4% in the third quarter from 23.5% in 1996. Sears Canada gross margin
rates improved substantially in 1997 reflecting savings realized from
merchandise sourcing initiatives. For the nine-month period, gross margins
increased to 25.6% from 22.5% in 1996.
Selling and administrative expense as a percentage of total revenues for
both international operations and Sears Canada decreased to 23.2% in 1997
from 25.7% in the third quarter of 1996. Sears Canada selling and
administrative rate improvement was due to cost containment initiatives
coupled with revenue growth and a favorable comparison to prior year which
included a restructuring charge of $17 million (before minority interest).
For the nine-month period, the selling and administrative expense as a
percentage of revenues from international operations decreased to 23.1%
from 24.5% in the prior year.
Financial Condition
As of September 27, 1997, domestic merchandise inventories on the
first-in, first-out (FIFO) basis were $5.90 billion, compared with $5.57
billion at September 28, 1996 and $4.96 billion at December 28, 1996. The
increase in the inventory levels reflects the additional inventory to
support higher volume sales and the growth in new stores, both Full-line
and off-the-mall.
Cash flows from operating activities consist primarily of net income
adjusted for certain noncash expense items including depreciation,
reaffirmation charges, and the provision for uncollectible accounts, as
well as changes in receivables, inventories and deferred taxes.
Net cash used in the Company's operating activities totaled $232 million
for the first nine months of 1997 compared to net cash provided of $337
million for the same period in 1996. The larger use of operating net cash
was primarily due to a decrease in operating liabilities and a higher
growth in owned retail customer receivables in 1997 as compared to 1996.
<PAGE>
-15-
ITEM 2. - SEARS, ROEBUCK AND CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
Net cash used in investing activities totaled $529 million for the first
nine months of 1997 compared to $1.09 billion in 1996. The decrease in net
cash used resulted from cash provided by the dispositions of the Company's
interest in Advantis and the sale of the Company's controlling interest in
Sears Mexico partially offset by a decrease in cash used for the acquisitions
of certain businesses. As part of its growth strategy, the Company may
continue to pursue selective strategic acquisitions. Cash used for property
and equipment related to the Company's Full-line Stores remodeling programs
and expansion of its store base was $782 million in the first nine months of
1997 as compared to $830 million in 1996.
Net cash provided by financing activities totaled $350 million for the
first nine months of 1997 as compared to cash provided of $795 million in
1996. The decrease in net cash provided by financing activities resulted
from a reduction in net borrowings partially attributable to the net proceeds
received from the sales of businesses.
Outlook for Domestic Operations
In light of the adverse trends in the Company's credit card business as
discussed on page 12, management believes that it is unlikely the Company
will be able to achieve its goal of mid-teens earnings growth on a percentage
basis in the fourth quarter of 1997. Management also believes that the
Company's current rate of increase in delinquencies and charge-offs appears
to be greater than increases recently reported by a number of other credit
card issuers. If the Company's delinquency and charge-off trends continue,
the resulting increases in the provision for uncollectible accounts could
have a significant adverse effect on the Company's overall operating results
in future periods. The Company is taking steps to mitigate the impact of
this trend on overall Company performance, but it is not yet possible to
predict the extent to which such actions will be successful.
<PAGE>
-16-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 3, 1997, the Company entered into a settlement of the
consolidated debtor class action lawsuits filed in the United States
Bankruptcy and District Courts for the District of Massachusetts by
certain current and former credit card holders of the Company who had
declared personal bankruptcy (the "Settlement"). These lawsuits
alleged that the Company had violated the United States Bankruptcy
Code and consumer protection laws in various states through activities
related to certain debt reaffirmation agreements. During the second
quarter of 1997, the Company entered into consent decrees with
Attorneys General in all fifty states and with the Federal Trade
Commission relating to these matters. The consent decrees with the
States' Attorneys General require the Company, among other things, to
establish funds aggregating $40 million to be shared among the states
and used in part for consumer education. A civil and criminal
investigation of these matters is ongoing.
On October 28, 1997, at a joint fairness hearing before the United
States Bankruptcy and the District Courts for the District of
Massachusetts, the courts approved the Settlement. The Settlement
requires among other things, the Company to pay the debtors the
amounts collected pursuant to reaffirmation agreements that were not
filed with the bankruptcy courts, including finance charges, plus
10% interest, and to undergo a review of its credit bankruptcy
reaffirmation procedures. In addition, outstanding balances relating
to unfiled debt reaffirmation agreements will be written off. The
Company will also establish a $25 million fund to be distributed to
the debtors participating in the Settlement.
Four purported shareholders derivative actions have been filed on
behalf of the Company against its directors and certain of its
officers, alleging breach of fiduciary duty for failing to prevent
the improper handling of certain of the Company's debt reaffirmation
agreements. The complaints seek unspecified damages and attorneys'
fees and expenses. Two of the cases, which were filed May 14, 1997
and June 11, 1997, have been consolidated in the Supreme Court of
the State of New York for the County of New York, one case which was
filed June 27, 1997, is pending in the United States District Court
for the Northern District of Illinois, and one case, which was filed
September 12, 1997, is pending in the United States District Court
for the Southern District of New York.
On October 9, 1997, the Company reached an agreement in principle to
settle several consolidated securities class action lawsuits against
the Company and one of its officers in the United States District
Court for the Northern District of Illinois. The amended
consolidated complaint alleges violations of the Securities Exchange
Act of 1934 for failure to disclose the bankruptcy collection
practices described above in periodic filings with the Securities
and Exchange Commission prior to April 10, 1997.
The Company recorded a pretax charge of $475 million ($320 million on
an after-tax basis) in the second quarter for the estimated cost of
the matters referred to above, including other related expenses.
This estimate is based on management's assumptions as to the ultimate
outcome of future events and uncertainties. Actual results could
differ from this estimate and there can be no assurance that
additional costs will not be incurred.
The Company is subject to various other legal and governmental
proceedings pending against the Company, many involving routine
litigation incidental to the businesses. Other matters contain
allegations which are nonroutine and involve compensatory, punitive
or antitrust 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, the ultimate liability
in excess of reserves currently recorded is not expected to have a
material effect on annual results of operations, financial position,
liquidity or capital resources of the Company.
<PAGE>
-17-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
An Exhibit Index has been filed as part of this Report on Page E-1.
(b) Reports on Form 8-K.
None
<PAGE>
-18-
SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Sears, Roebuck and Co.
(Registrant)
October 31, 1997 By /s/ James A. Blanda
James A. Blanda
Vice President and Controller
(Principal Accounting
Officer and duly authorized
Officer of Registrant)
<PAGE>
E-1
EXHIBIT INDEX
SEARS, ROEBUCK AND CO.
THREE MONTH PERIOD ENDED SEPTEMBER 27, 1997
Exhibit No.
3.1 Restated Certificate of Incorporation as in effect on May 13, 1996
(incorporated by reference to Exhibit 3(a) to Registrant's
Registration Statement No. 333-8141).
3.2 By-laws, as amended and restated on August 13, 1997 (incorporated
by reference to Exhibit 4(b) to Registrant's Registration
Statement No. 333-38131).
4 Registrant hereby agrees to furnish the Commission, upon request,
with the instruments defining the rights of holders of each issue
of long-term debt of the Registrant and its consolidated
subsidiaries.
12 (a) Computation of ratio of income to fixed charges for Sears,
Roebuck and Co., and consolidated subsidiaries for each of the
five years ended December 28, 1996, and for the nine- and
twelve-month periods ended September 27, 1997.
12 (b) Computation of ratio of income to combined fixed charges and
preferred share dividends for Sears, Roebuck and Co. and
consolidated subsidiaries for each of the five years ended
December 28, 1996, and for the nine- and twelve-month periods
ended September 27, 1997.
15 Acknowledgment of awareness from Deloitte & Touche LLP, dated
October 28, 1997, concerning unaudited interim financial
information.
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND CASH FLOWS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> SEP-27-1997
<CASH> 247
<SECURITIES> 0
<RECEIVABLES> 22,391
<ALLOWANCES> 872
<INVENTORY> 5,669
<CURRENT-ASSETS> 29,076
<PP&E> 10,818
<DEPRECIATION> 4,777
<TOTAL-ASSETS> 36,845
<CURRENT-LIABILITIES> 14,936
<BONDS> 12,502
0
0
<COMMON> 323
<OTHER-SE> 5,082
<TOTAL-LIABILITY-AND-EQUITY> 36,845
<SALES> 24,667
<TOTAL-REVENUES> 28,321
<CGS> 18,314
<TOTAL-COSTS> 18,314
<OTHER-EXPENSES> 5,868
<LOSS-PROVISION> 998
<INTEREST-EXPENSE> 1,021
<INCOME-PRETAX> 1,194
<INCOME-TAX> 542
<INCOME-CONTINUING> 652
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 652
<EPS-PRIMARY> 1.64
<EPS-DILUTED> 0.00<F1>
<FN>
<F1>NOT APPLICABLE
</FN>
</TABLE>
<PAGE>
<TABLE>
EXHIBIT 12(a)
COMPUTATION OF RATIO OF INCOME TO FIXED CHARGES
SEARS, ROEBUCK AND CO. AND CONSOLIDATED SUBSIDIARIES
<CAPTION>
Twelve Nine
Months Months
Ended Ended
Sept. 27, Sept. 27, Year Ended
1997 1997
(millions, except ratios) (unaudited) (unaudited) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Charges
Interest and amortization of debt discount
and expense on all indebtedness $1,374 $1,021 $1,365 $1,373 $1,279 $1,318 $1,389
Add interest element implicit in rentals 127 105 121 119 114 105 165
1,501 1,126 1,486 1,492 1,393 1,423 1,554
Interest capitalized 3 3 5 4 1 3 23
Total fixed charges $1,504 $1,129 $1,491 $1,496 $1,394 $1,426 $1,577
Income (loss)
Income (loss) from continuing operations $1,219 $652 $1,271 $1,025 $857 $625 ($1,812)
Deduct undistributed net income (loss)
of unconsolidated companies 2 6 8 9 (7) 6 (4)
1,217 646 1,263 1,016 864 619 (1,808)
Add
Fixed charges (excluding interest capitalized) 1,501 1,126 1,486 1,492 1,393 1,423 1,554
Income taxes (benefit) 907 542 834 703 614 329 (1,039)
Income (loss) before fixed charges and
income taxes $3,625 $2,314 $3,583 $3,211 $2,871 $2,371 ($1,293)
Ratio of income to fixed charges 2.41 2.05 2.40 2.15 2.06 1.66 (A)
<FN>
(A) As a result of the loss for the year ended December 31, 1992, earnings did not cover fixed charges
by $2,870 million.
</FN>
</TABLE>
<PAGE>
<TABLE>
EXHIBIT 12(b)
COMPUTATION OF RATIO OF INCOME TO COMBINED FIXED CHARGES
AND PREFERRED SHARE DIVIDENDS
SEARS, ROEBUCK AND CO. AND CONSOLIDATED SUBSIDIARIES
<CAPTION>
Twelve
Months
Ended
Sept. 27, Year Ended
1997
(millions, except ratios) (unaudited) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Fixed Charges
Interest and amortization of debt discount
and expense on all indebtedness $1,374 $1,365 $1,373 $1,279 $1,318 $1,389
Add interest element implicit in rentals 127 121 119 114 105 165
1,501 1,486 1,492 1,393 1,423 1,554
Preferred dividend factor 6 41 89 234 209 120
Interest capitalized 3 5 4 1 3 23
Total fixed charges $1,510 $1,532 $1,585 $1,628 $1,635 $1,697
Income (loss)
Income (loss) from continuing operations $1,219 $1,271 $1,025 $857 $625 ($1,812)
Deduct undistributed net income (loss)
of unconsolidated companies 2 8 9 (7) 6 (4)
1,217 1,263 1,016 864 619 (1,808)
Add
Fixed charges (excluding interest capitalized
and preferred dividend factor) 1,501 1,486 1,492 1,393 1,423 1,554
Income taxes (benefit) 907 834 703 614 329 (1,039)
Income (loss) before fixed charges and
income taxes $3,625 $3,583 $3,211 $2,871 $2,371 ($1,293)
Ratio of income to combined fixed charges
and preferred share dividends 2.40 2.34 2.03 1.76 1.45 (A)
<FN>
In 1996, all the 8.88% Preferred Shares, First Series were redeemed and
therefore in 1997 the Company made no other preferred share dividend
payments.
(A) As a result of the loss for the year ended December 31, 1992, earnings did
not cover fixed charges by $2,990 million.
</FN>
</TABLE>
<PAGE>
EXHIBIT 15
To the Shareholders and Board of Directors
of Sears, Roebuck and Co.
We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited
interim financial information of Sears, Roebuck and Co. for the three-
month and nine-month periods ended September 27, 1997 and September 28,
1996, as indicated in our report dated October 28, 1997; because we did
not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the three-month period ended
September 27, 1997, is incorporated by reference in Registration Statement
Nos. 2-64879, 2-80037, 33-18081, 33-23793, 33-41485, 33-43459, 33-45479,
33-55825, 33-58139, 33-58851, 33-64345, 333-8141 and 333-38131 of Sears,
Roebuck and Co.; Registration Statement Nos. 33-64215, 333-9817 and
333-30879 of Sears, Roebuck and Co. and Sears Roebuck Acceptance Corp.;
Registration Statement Nos. 33-57205 and 333-11973 of Sears, Roebuck
and Co. and the Savings and Profit Sharing Fund of Sears Employees;
Registration Statement No. 33-44671 of Sears, Roebuck and Co. and Sears
DC Corp.; and Registration Statement Nos. 33-64775 and 333-18591 of Sears,
Roebuck and Co. and Sears, Roebuck and Co. Deferred Compensation Plan.
We are also aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act of 1933, is not considered a part of the
Registration Statement prepared or certified by an accountant, or a report
prepared or certified by an accountant, within the meaning of Sections 7
and 11 of that Act.
Deloitte & Touche LLP
Chicago, Illinois
October 28, 1997
