Fitch Affirms Sears Holdings IDR at 'BB'; Outlook to Negative

Business Wire, Jan 24, 2008

NEW YORK -- Fitch Ratings has affirmed its ratings of Sears Holdings Corporation (Holdings) as follows:

Sears Holdings Corporation

--Long-term IDR 'BB';

--Senior notes 'BB';

--Secured bank facility 'BBB-'.

Sears, Roebuck and Co. (Sears)

--Long-term IDR 'BB';

--Senior notes 'BB'.

Sears Roebuck Acceptance Corp. (SRAC)

--Long-term IDR 'BB';

--Senior notes 'BB';

--Short-term IDR 'B';

--Commercial paper 'B'.

Sears DC Corp. (SDC)

--Long-term IDR 'BB';

--Senior notes 'BB'.

Kmart Holding Corporation (Kmart)

--Long-term IDR 'BB'.

The Rating Outlook is revised to Negative from Stable. Approximately $4 billion of total debt was outstanding as of Nov. 3, 2007.

The affirmations reflect Holdings' broad market presence in the moderate department store and discounter segments and solid balance sheet balanced against soft operating results and significant long-term competitive challenges. The revision in Outlook reflects the continued weak sales performance which has pressured operating profit margin and credit metrics. Fitch does not expect the weakness in top line and margins to abate in the near term, particularly in light of a challenging economic environment. In addition, the longer term retail strategy remains unclear, particularly given the recently announced changes to Holdings' organizational structure, which could lead to operational disruption in the near term.

Holdings continues to experience negative comparable store sales at both Sears and Kmart. Sears - the largest department store operator in the U.S. with latest 12 months (LTM) ended Nov. 3, 2007 sales of $28.6 billion - has posted declines in comparable store sales for the past seven years, reflecting competitive pressures and inconsistent merchandising execution. Kmart's sales - which totaled $17.9 billion in the LTM period - stabilized in 2005-2006 following three years of sharp declines, but have been on a decline again throughout 2007. Holdings' challenge will be to generate longer-term sales and earnings growth at both Sears and Kmart in the face of growing competition within the department store sector and continued share gains by discounters and big-box specialty retailers.

While Holdings' EBITDA was supported by aggressive cost cutting and reduced promotional activity in 2006, it has come under significant pressure on weak top-line execution, heightened promotional activity and increased markdowns in the past year. LTM EBITDA margin decreased to 6% from 6.7% in the year ended Feb. 2, 2007. As a result, LTM credit metrics have deteriorated with adjusted debt/EBITDAR at 2.8 times (x) versus 2.4x at the end of 2006. LTM EBITDAR/interest plus rents decreased to 3.4x from 3.6x during the same period. Fitch expects further weakening in the company's credit metrics given the company's recent outlook for the fourth quarter ending Feb. 2, 2008 and Fitch's outlook for the retail sector in 2008.

However, liquidity is solid, supported by a cash balance of $1.5 billion and $2.4 billion of availability remaining under its $4 billion Credit Agreement as of Nov. 3, 2007.

Cash balances have declined from $4 billion at the end of 2006 due to significant share repurchases amounting to approximately $2.9 billion for the 49 weeks ended Jan. 11, 2008.

The 'BBB-' rating of Holdings' $4 billion secured revolver, under which SRAC and Kmart are the borrowers, reflects a downstream guarantee from Holdings to both SRAC and Kmart and cross-guarantees between SRAC and Kmart. The facility is secured primarily by inventories, which range from $9 billion-$12 billion. The collateral can be released in the event the company achieves certain performance targets or ratings levels. If the collateral is released, leverage and asset coverage tests would become effective.

The ratings of SRAC's senior notes and commercial paper reflect a guarantee provided by Sears. In addition, Sears DC Corp. (SDC) benefits from an agreement by Sears to maintain a minimum fixed-charge coverage at SDC of 1.005x. Sears also agrees to maintain an ownership of and a positive net worth at SDC.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.