Item 1. Financial Statements (Debtor-in-Possession)

⁽²⁾ Includes revenue from Lands' End, Inc. ("Lands' End") for retail services and rent for Lands' End Shops at owned Sears locations, participation in the Shop Your Way ^® program and corporate shared services of $8 million and $12 million for the 13 weeks ended November 3, 2018 and October 28, 2017 , respectively, and $24 million and $36 million for the 39 weeks ended November 3, 2018 and October 28, 2017 , respectively.

⁽³⁾ Includes rent expense (consisting of straight-line rent expense offset by amortization of a deferred gain on sale-leaseback) of $11 million and $17 million for the 13 weeks ended November 3, 2018 and October 28, 2017 , respectively, and $38 million and $55 million for the 39 weeks ended November 3, 2018 and October 28, 2017 , respectively, pursuant to the master lease with Seritage Growth Properties ("Seritage"). Also includes installment expenses of $8 million and $10 million for the 13 weeks ended November 3, 2018 and October 28, 2017 , respectively, and $26 million and $34 million for the 39 weeks ended November 3, 2018 and October 28, 2017 , respectively, pursuant to the master leases with Seritage.

See accompanying notes.

See accompanying notes.

⁽²⁾ Includes $4 million and $6 million prepaid rent to Seritage at November 3, 2018 and February 3, 2018 , respectively.

⁽³⁾ Includes balances held by related parties of $553 million and $645 million at October 28, 2017 and February 3, 2018 , respectively, related to our Line of Credit Loans and Incremental Loans at October 28, 2017 and February 3, 2018 , and unsecured commercial paper at October 28, 2017 . See Note 3 for defined terms and Notes 3 and 12 for further information.

⁽⁴⁾ Includes balances held by related parties of $513 million at November 3, 2018 related to our Mezzanine Loan and Additional Mezzanine Loans and $199 million and $146 million at October 28, 2017 and February 3, 2018 , respectively, related to our 2016 Secured Loan Facility and our Old Senior Secured Notes for both periods. See Note 3 for defined terms and Notes 3 and 12 for further information.

⁽⁵⁾ Includes $2 million of amounts payable to Lands' End at November 3, 2018 .

See accompanying notes.

See accompanying notes.

⁽¹⁾ Reorganization items, net includes cash flows from financing activities of $10 million for debtor-in-possession credit facility debt issuance costs.

⁽²⁾ Proceeds in 2017 include $63 million from JPP, LLC and JPP II, LLC, entities affiliated with ESL (as defined in Note 1), for the sale of receivables.

⁽³⁾ Proceeds in 2018 include $928 million from related parties in connection with the Consolidated Secured Loan Facility, FILO Loan, Mezzanine Loan, Additional Mezzanine Loans, Line of Credit Loans and additional borrowings from the 2017 Secured Loan Facility. Proceeds in 2017 include $553 million from related parties in connection with the Line of Credit Loans and Incremental Loans. See Notes 3 and 12 for further information.

⁽⁴⁾ Repayments in 2018 include $67 million to related parties in connection with the Term Loan Facility, 2017 Secured Loan Facility, Incremental Loans and 2016 Secured Loan Facility. Repayments in 2017 include $299 million to related parties in connection with the 2017 Secured Loan Facility, 2016 Secured Loan Facility, Incremental Loans, 2016 Term Loan and Line of Credit Loans. See Notes 3 and 12 for further information.

⁽⁵⁾ Includes fees related to our borrowings of $13 million paid to related parties during the 39 weeks ended November 3, 2018 . Includes a one-time extension fee equal to $4 million to JPP, LLC and JPP II, LLC, entities affiliated with ESL (as defined in Note 1) during the 39 weeks ended October 28, 2017 . See Note 3 for further information.

⁽⁶⁾ Cash interest paid includes $140 million and $114 million interest paid to related parties related to our borrowings during the 39 weeks ended November 3, 2018 and October 28, 2017 , respectively. See Notes 3 and 12 for further information.

See accompanying notes.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

Sears Holdings Corporation ("Holdings") is the parent company of Kmart Holding Corporation ("Kmart") and Sears, Roebuck and Co. ("Sears"). Holdings (together with its subsidiaries, "we," "us," "our," or the "Company") was formed as a Delaware corporation in 2004 in connection with the merger of Kmart and Sears (the "Merger"), on March 24, 2005. We are an integrated retailer with 766 full-line and specialty retail stores as of November 3, 2018 in the United States, operating through Kmart and Sears. As previously announced, an additional 241 stores will close during the fourth quarter of 2018. We operate under two reportable segments: Kmart and Sears Domestic.

These interim unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full fiscal year. The retail business is seasonal in nature, and we generate a high proportion of our revenues and operating cash flows during the fourth quarter of our fiscal year, which includes the holiday season. These interim financial statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2018 .

On October 15, 2018 (the "Petition Date"), Holdings and certain of its subsidiaries (collectively, the "Debtors") filed voluntary petitions (the "Chapter 11 Cases") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") seeking relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"). The Chapter 11 Cases are being jointly administered under the caption "In re Sears Holdings Corporation, et al., Case No. 18-23538." Documents filed on the docket of and other information related to the Chapter 11 Cases are available free of charge online at https://restructuring.primeclerk.com/sears. Documents and other information available on such website are not part of this document and shall not be deemed incorporated by reference in this document.

The accompanying interim Unaudited Condensed Consolidated Financial Statements have been prepared assuming that Holdings will continue as a going concern and contemplates continuity of operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. Our ability to continue as a going concern is contingent upon our ability to comply with the financial and other covenants contained in the Senior and Junior debtor-in-possession ("DIP") financing described in Note 3, and our ability to successfully develop and, subject to the Bankruptcy Court's approval, implement, a restructuring plan, among other factors. We have significant indebtedness. Our level of indebtedness has adversely impacted and continues to adversely impact our financial condition. In addition, the filing of the Chapter 11 Cases constituted an event of default with respect to certain of our existing debt obligations. As a result, our financial condition and the risks and uncertainties surrounding our Chapter 11 proceedings raise substantial doubt as to our ability to continue as a going concern.

Furthermore, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in-possession under Chapter 11, the Debtors may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business and subject to restrictions of our DIP financing (see Note 3) and applicable orders of the Bankruptcy Court, for amounts other than those reflected in the accompanying Unaudited Condensed Consolidated Financial Statements. Any such actions occurring during the Chapter 11 proceedings confirmed by the Bankruptcy Court could materially impact the amounts and classifications of assets and liabilities reported in Holdings' interim Unaudited Condensed Consolidated Financial Statements. The Debtors are currently pursuing a going-concern sale process for the stores after closures (for further information on such closures see Note 4). The Debtors must obtain or find acceptable a non-contingent and fully-financed (with committed financing containing customary limited conditionality consistent with acquisition financing commitments) stalking horse bid for the sale of the go forward stores (which may be either on a going-concern or liquidation basis) that is reasonably acceptable to the administrative agent and co-collateral agents party to the Senior DIP Credit Agreement, as defined in Note 3, (a "Qualified Stalking Horse Bid") on or prior to December 15, 2018. Failure to obtain and find acceptable a Qualified

Stalking Horse bid by December 15, 2018, shall not constitute an event of default or default under the Senior DIP Credit Agreement or the Junior DIP Credit Agreement so long as the Debtors are diligently pursuing a process reasonably acceptable to the applicable administrative agents and collateral agents designed for bidding procedures and the selection of a stalking horse bid for the sale of the go forward stores by December 27, 2018.

Under the absolute priority scheme established by the Bankruptcy Code, unless our creditors agree otherwise, all of our pre-petition liabilities and post-petition liabilities must be satisfied in full before the holders of our existing common stock may receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or shareholders, if any, will not be determined until confirmation and implementation of a plan or plans of reorganization. We can give no assurance that any recovery or distribution of any amount will be made to any of our creditors or shareholders. Our plan of reorganization could result in any of the holders of our liabilities and/or securities, including our common stock, receiving no distribution on account of their interests and cancellation of their holdings. Moreover, a plan of reorganization can be confirmed, under the Bankruptcy Code, even if the holders of our common stock vote against the plan of reorganization and even if the plan of reorganization provides that the holders of our common stock receive no distribution on account of their equity interests. The accompanying Unaudited Condensed Consolidated Financial Statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern or as a consequence of the filing of the Chapter 11 Cases. Refer to Note 2 for additional information.

Citibank Amendment

In May 2018, the Company entered into an amendment to the program agreement with Citibank, N.A. (the "Citibank Amendment"), pursuant to which Citibank offers Sears proprietary and co-branded credit cards and administers the associated credit card program (the "Program"). The Citibank Amendment provides for a five -year extension (through November 2, 2025) of our 15-year co-brand and private label credit card relationship along with long-term marketing arrangements that include ongoing enhancements to the Shop Your Way MasterCard rewards program.

The Citibank Amendment removes Sears' credit cards, other than Sears' proprietary cards, not enrolled in a rewards program or enrolled in the "Thank You" rewards program (the "TY/NR Portfolio") from the Program. Under a separate marketing agreement entered in conjunction with the Citibank Amendment, the Company will continue to receive payments from Citibank in respect of the TY/NR Portfolio, which payments will be determined substantially consistent with how such payments were determined under the Program prior to the Citibank Amendment through December 31, 2020 and will thereafter be based on total sales for the TY/NR Portfolio. Credit cards in the TY/NR Portfolio will continue to be accepted in Sears' sales channels. The Citibank Amendment provides for the Company to continue to receive payments from Citibank in respect of the remaining card portfolio under the Program, which payments will be determined substantially consistent with how such payments were determined under the Program prior to the Citibank Amendment through December 31, 2020 and will thereafter be based on new account spend and total sales for the credit card portfolio.

The Citibank Amendment removes the Company's right to purchase, or arrange for a third-party to purchase, Program-related assets in certain circumstances, including upon termination or expiry of the Program, except that the Company will have such right if it elects to extend the Program through November 2, 2027, subject to the satisfaction of the performance conditions, and the Program continues through such date, or in certain circumstances if Sears terminates the Program Agreement because of an uncured material breach of Citibank's obligations thereunder. Sears will have no right to purchase the TY/NR Portfolio being removed from the Program.

Pursuant to the Citibank Amendment, Citibank paid Sears $425 million , and Sears funded a reserve for the benefit of Citibank in the amount of $25 million through an irrevocable standby letter of credit from a third-party financial institution. The Company accounted for the Citibank Amendment in accordance with accounting standards applicable to revenue from contracts with customers. The Company initially deferred the $425 million received for the Citibank Amendment and will recognize the revenue over the term of the Program as we satisfy the related performance obligation over time. During the 13- and 39 - weeks ended November 3, 2018 , the Company recognized revenues of $14 million and $28 million , respectively, and expects to recognize revenue of $57 million within the next 12 months and $340 million of revenue thereafter. The Company has accordingly included these amounts within current and long-term unearned revenues, respectively.

Adoption of Accounting Standards Updates: Revenue from Contracts with Customers and Compensation - Retirement Benefits

In May 2014, the Financial Accounting Standards Board ("FASB") issued accounting standards updates which replace the current revenue recognition standards. Subsequently, the FASB has also issued accounting standards updates which clarify the guidance. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The updates may be applied retrospectively for each period presented or as a cumulative-effect adjustment at the date of adoption.

The Company adopted the update in the first quarter of 2018 using the full retrospective method, and, therefore, comparative financial statements of prior years have been adjusted to apply the new standard retrospectively. The adoption impacted the accounting for our Shop Your Way ^® program, revenues from gift cards and merchandise returns. The expense for Shop Your Way points was previously recognized as customers earned points and recorded within cost of sales. The new guidance requires the Company to allocate the transaction price to products and points on a relative standalone selling price basis, deferring the portion of revenue allocated to the points and recognizing a contract liability for unredeemed points. The change in the accounting for the Shop Your Way program reduced revenue, but had no impact to gross margin. The new guidance also changed the timing of recognition of the unredeemed portion of our gift cards, which was previously recognized using the remote method. The new guidance requires application of the proportional method. The Company reports revenues from merchandise sales net of estimated returns. The new guidance requires the Company to record both an asset and a liability for anticipated customer returns.

The Company elected the following practical expedients with respect to accounting standards for revenue from contracts with customers:

The Company has made an accounting policy election to exclude from the measurement of transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer (sales tax, value added tax, etc.).

The Company has made an accounting policy election to account for shipping and handling activities performed after a customer obtains control of the good as activities to fulfill the promise to transfer the good.

In addition, in March 2017, the FASB issued an accounting standards update which requires an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered

by the pertinent employees during the period. It also requires the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendments in the update must be applied retrospectively. The Company adopted the update in the first quarter of 2018. The adoption of the new standard reduced selling and administrative and operating loss and increased other loss in the Condensed Consolidated Statements of Operations by $248 million and $540 million for the 13- and 39 - weeks ended October 28, 2017 , respectively.

The following financial statement line items for the periods presented were affected by the adoption of these new standards. Also, retained deficit as of January 31, 2016 increased from $3,291 million , as originally reported, to $3,310 million as a result of the adoption of the new revenue standard.