Eddie Lampert 2016 letter to Sears investors

Also see 2016 Hedge Fund Letters

To Our Associates:

Sears
By DR04 (Own work) [CC BY 3.0], via Wikimedia Commons
Following our year-end financial results announcement this morning, I wanted to reflect on the progress we made over the past year and emphasize key elements of our strategy going forward.

As many of you know, 2016 proved to be another challenging year for most “bricks and mortar” retailers. Our company was not immune to these headwinds. Regardless, as a result of the strategic actions we have taken, we delivered Adjusted EBITDA1 improvements in the fourth quarter, increased our financial flexibility, and are moving forward with positive momentum.

Before I discuss the key drivers of our performance in more detail, I would like to re-emphasize an important point I made during our recent Town Hall meeting, so that, as a team, we can focus on driving our future success with a clear understanding on where our company stands today and the opportunity ahead of us.

Sears Holdings is built on a strong foundation that will continue to provide us competitive advantages, as we drive our strategic transformation to become a more innovative and agile retailer.

We have very valuable brands among our assets, including some of the most iconic American brands. We have a large store footprint, dedicated associates and tens of millions of Shop Your Way members actively shopping with us. We saw the disruption of retail coming more than a decade ago and built a differentiated online shopping and membership platform – Shop Your Way – to ensure our participation in the next wave of retail. All of these assets – whether inherited, acquired or built – are our core strengths. They’re what makes us a competitive retailer today and will continue to do so.

Importantly, we also have what it takes to move us forward. We are in a financial position to continue to fund our operating needs and meet our financial obligations. We also have untapped opportunities to maximize the value of our existing assets, create additional financial flexibility and expand our Shop Your Way ecosystem to drive our future growth.

Further, we are taking decisive action. We are continuously working to better position our company in a competitive retail environment. This past year and the beginning of 2017 were clearly defined by the progress we made against this commitment. I will discuss some of the key highlights.

2016 IN REVIEW

Shop Your Way Members. We have tens of millions of active members accounting for more than 70 percent of our sales today and they are at the heart of everything we do. While, as associates, you are responsible for delivering them the best services and experiences, you are also our members. And as our members, we want to you to engage more in Shop Your Way and provide you with greater benefits from your purchases. In bringing this to life, we enhanced our Associate Discount Program this year to deliver Shop Your Way points back on purchases in addition to new increased benefit for purchases of hardlines goods, and any other Shop Your Way program points and perks. This new program, which is available for all active Sears Holdings associates, spouses and eligible dependents, enhances the benefits you and your family can receive using our Shop Your Way ecosystem. Please make sure to sign up for the program to take advantage of its benefits and share with us your feedback as member of Shop Your Way.

Shop Your Way Partners. In 2016, we expanded our Shop Your Way network to include more partners and deepen our relationships to make Shop Your Way ‘the’ go-to rewards destination:

  • We launched new Sears Mastercard with an industry-leading 5-3-2-1 Shop Your Way rewards offer that allows members to earn Shop Your Way points everywhere they shop;
  • We also announced a strategic partnership with Activehours to integrate the Shop Your Way rewards program into the Activehours mobile application to allow them to access their paychecks on demand;
  • We broadened our Uber Technologies partnership rider rewards program to 25 new markets, building on the successful launch in New York City and Chicago; and
  • We expanded our Shop Your Way dining program to over 30,000 restaurants, including Burger King, Popeye’s, Shoney’s and Restaurant.com, with unique rewards.

Our Transformation. The materials we provided today include significant financial details, but I want to highlight the Adjusted EBITDA improvement we delivered in the fourth quarter. This reflects our focus on returning to profitability as we manage through the challenging retail environment.

Over the course of the year, we also undertook a series of financial transactions that enhanced our liquidity and financial flexibility. One of the highlights was the agreement we reached with Stanley, Black & Decker to sell our Craftsman brand. The transaction delivered significant value for Sears Holdings, while facilitating the future growth of the Craftsman brand in and outside of our shopping platforms. Let me be clear though, we will continue to offer Craftsman-branded products in our stores and online platforms. In addition, we increased our borrowing capacity and started a process to market certain real estate properties with a goal of raising at least $1 billion in the upcoming months.

These initiatives created substantial additional liquidity for Sears Holdings and provided us the confidence to set a target of reducing our outstanding debt and pension obligations by a substantial amount in 2017.

LOOKING TOWARDS 2017

As we move forward, we are excited about the opportunities the new retail landscape offers for us in engaging with our members. Last month, we outlined a comprehensive plan that will define the next phase of our transformation, which includes a restructuring of our operations to help us become a more agile, cost-efficient and competitive retailer. We look forward to sharing progress on this plan as more details become available. Meanwhile, please share your questions, concerns and feedback in the SHC Communications Pebble group.

We will continue to take actions to help ensure our competiveness as we pursue our vision of an integrated retailer anchored around member value, convenience, and services. This strategy is clearly embodied in our ongoing investment in and focus on our Shop Your Way platform which, without a doubt, remains a key priority for us. As we pursue the growth of Shop Your Way in 2017, we will focus on:

  • Increasing awareness of our Shop Your Way offerings to attract more members and increase member engagement;
  • Getting members to use more aspects of our integrated retail offerings;
  • Growing our partnership and affiliate network;
  • Signing up more members and prospective members for Shop Your Way Mastercard;
  • Expanding Relay and other exclusive Shop Your Way services to more stores and markets; and
  • As a result, attracting more shoppers and spending – whether earned points or actual dollars – to our stores and online platforms.

I encourage you to take an active role in these efforts – take full advantage of the many Shop Your Way benefits as a member, use our apps and services, link your membership to earn points with our partners, consider the benefits of getting the new Sears Mastercard with Shop

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