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 JULY 4, 1998 				 				 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 June 30, 1998 the Registrant had 392,358,505 common shares, $.75 par value, outstanding. 			 Sears, Roebuck and Co. 		 Index to Quarterly Report on Form 10-Q 		 13 and 26 Weeks Ended July 4, 1998 		 									 Page Part I - Financial Information. Item 1. Financial Statements. 	 	 Condensed Consolidated Statements of Income (Unaudited) - 	 13 and 26 Weeks Ended July 4, 1998 and June 28, 1997. 1 	 	 Condensed Consolidated Balance Sheets - 	 July 4, 1998 (Unaudited), June 28, 1997 (Unaudited) 	 and January 3, 1998. 2 	 	 Condensed Consolidated Statements of Cash Flows (Unaudited) - 	 26 Weeks Ended July 4, 1998 and June 28, 1997. 3 	 	 Notes to Condensed Consolidated Financial Statements 	 (Unaudited). 4 	 	 Independent Accountants' Review Report. 8 	 Item 2. Management's Discussion and Analysis of 	 Results of Operations, Financial Condition and Liquidity. 9 	 Part II - Other Information. Item 1. Legal Proceedings. 16 Item 4. Submission of Matters to a Vote of Security-Holders. 17 								 Item 6. Exhibits and Reports on Form 8-K. 18 				 -1- 				 		 PART I. FINANCIAL INFORMATION 		 ITEM I. FINANCIAL STATEMENTS 			 SEARS, ROEBUCK AND CO. 	 CONDENSED CONSOLIDATED STATEMENTS OF INCOME 			 (Unaudited) 					 13 Weeks Ended 26 Weeks Ended (millions, except per share data) July 4, June 28, July 4, June 28, 					 1998 1997 1998 1997 Revenues Merchandise and services $ 9,061 $ 8,547 $ 17,016 $ 16,090 Credit revenues 1,186 1,153 2,394 2,342 Total revenues 10,247 9,700 19,410 18,432 Costs and expenses Cost of sales, buying and occupancy 6,700 6,278 12,734 11,969 Selling and administrative 2,054 1,997 3,983 3,892 Depreciation and amortization 211 201 419 383 Provision for uncollectible accounts 355 287 749 542 Interest 361 341 737 693 Reaffirmation charge - 475 - 475 Total costs and expenses 9,681 9,579 18,622 17,954 Operating income 566 121 788 478 Other income, net 3 147 9 136 Income before income taxes and minority interest 569 268 797 614 Income taxes (223) (143) (315) (308) 					 Minority interest (10) (8) (13) (7) Net income $ 336 $ 117 $ 469 $ 299 Net income (loss) consists of: Domestic operations $ 327 $ 113 $ 460 $ 340 International operations 9 4 9 (41) Net income $ 336 $ 117 $ 469 $ 299 Earnings per share: Basic $ 0.86 $ 0.30 $ 1.20 $ 0.76 Diluted $ 0.85 $ 0.29 $ 1.19 $ 0.75 Cash dividends declared per share $ 0.23 $ 0.23 $ 0.46 $ 0.46 Average common and common equivalent shares outstanding 395.4 397.7 394.9 398.1 <FN> See accompanying notes. </FN> 											 				 -2- 		 SEARS, ROEBUCK AND CO. 	 CONDENSED CONSOLIDATED BALANCE SHEETS 					(Unaudited) (millions) July 4, June 28, Jan. 3, 				 1998 1997 1998 Assets Current assets Cash and cash equivalents $ 450 $ 247 $ 358 Retained interest in transferred credit card receivables 4,302 2,088 3,316 Credit card receivables, net 17,160 19,337 19,843 Other receivables 293 264 335 Merchandise inventories 5,146 4,954 5,044 Prepaid expenses and deferred charges 521 398 518 Deferred income taxes 759 991 830 Total current assets 28,631 28,279 30,244 Property and equipment, net 6,503 5,889 6,414 Deferred income taxes 649 893 666 Other assets 1,388 955 1,376 Total assets $ 37,171 $ 36,016 $ 38,700 Liabilities Current liabilities Short-term borrowings $ 3,588 $ 3,334 $ 5,208 Current portion of long-term debt and capitalized leases 2,865 2,383 2,561 Accounts payable and other liabilities 6,107 7,019 6,637 Unearned revenues 844 888 830 Other taxes 412 501 554 Total current liabilities 13,816 14,125 15,790 Long-term debt and capitalized leases 13,257 12,661 13,071 Postretirement benefits 2,479 2,700 2,564 Minority interest and other liabilities 1,434 1,392 1,413 Total liabilities 30,986 30,878 32,838 Commitments and Contingent Liabilities (note 5) Shareholders' Equity Common shares 323 323 323 Capital in excess of par value 3,586 3,600 3,598 Retained income (note 2) 4,447 3,449 4,158 Treasury stock - at cost (1,655) (1,657) (1,702) Minimum pension liability (217) (277) (217) Deferred ESOP expense (192) (220) (204) Cumulative translation adjustments (107) (80) (94) Total shareholders' equity 6,185 5,138 5,862 Total liabilities and shareholders' equity $ 37,171 $ 36,016 $ 38,700 Total common shares outstanding 392.3 391.6 390.9 									 <FN> See accompanying notes. </FN> 				 -3- 			 SEARS, ROEBUCK AND CO. 	 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 				 (Unaudited) 							 26 Weeks Ended 							 July 4, June 28, (millions) 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 469 $ 299 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, amortization and other noncash items 472 421 Provision for uncollectible accounts 749 542 Gain on sales of property and investments (6) (118) Change in (net of acquisitions): Deferred income taxes 88 (82) Retained interest in transferred credit card receivables (986) 172 Credit card receivables 1,884 (743) Merchandise inventories (108) (371) Other operating assets 50 (80) Other operating liabilities (530) (159) Net cash provided by (used in) operating activities 2,082 (119) CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired (34) (115) Net proceeds from sales of businesses -- 379 Proceeds from sales of property and investments 8 9 Purchases of property and equipment (656) (461) Net cash used in investing activities (682) (188) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 1,924 1,544 Repayments of long-term debt (1,494) (1,427) Decrease in short-term borrowings, primarily 90 days or less (1,615) (40) Repayments of ESOP note receivable 23 16 Common shares purchased (52) (77) Common shares issued for employee stock plans 87 57 Dividends paid to shareholders (180) (178) Net cash used in financing activities (1,307) (105) Effect of exchange rate on cash and invested cash (1) (1) Net increase (decrease) in cash and cash equivalents 92 (413) Balance at beginning of year 358 660 Balance at end of period $ 450 $ 247 <FN> See accompanying notes. </FN> 				 -4- 				 			 SEARS, ROEBUCK AND CO. 	 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 			 (Unaudited) 			 			 1. Condensed Consolidated Financial Statements The Condensed Consolidated Balance Sheets as of July 4, 1998 and June 28, 1997 and the related Condensed Consolidated Statements of Income for the 13 and 26 weeks ended July 4, 1998 and June 28, 1997 and the Condensed Consolidated Statements of Cash Flows for the 26 week periods ended July 4, 1998 and June 28, 1997 are unaudited. The interim financial statements reflect all adjustments (consisting only of normal recurring accruals) 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. 1997 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. Certain reclassifications have been made in the 1997 financial statements to conform with current year presentation. 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 unencumbered assets, as defined, to fall below 150% of its liabilities, as defined. At July 4, 1998 approximately $4.2 billion could be paid in dividends to shareholders under the most restrictive indentures. On February 3, 1998 the Board of Directors extended, for an additional two years, the common share repurchase program which is used to acquire shares for distribution in connection with the expected exercise of stock options, the grant of restricted shares and the exchange of deferred shares under the Company's stock plans. The program authorizes the Company to acquire up to 20 million Sears common shares on the open market. Through July 4, 1998 7.8 million common shares had been acquired under the repurchase program. 3. Earnings Per Share The following table sets forth the computations of basic and diluted earnings per share: 				 13 Weeks Ended 26 Weeks Ended (millions, except per share data) July 4, June 28, July 4, June 28, 				 1998 1997 1998 1997 Basic: Net income $ 336 $ 117 $ 469 $ 299 Average shares outstanding 391.7 391.5 391.3 391.6 Earnings per share -basic $ 0.86 $ 0.30 $ 1.20 $ 0.76 Diluted: Net income $ 336 $ 117 $ 469 $ 299 Average shares outstanding 391.7 391.5 391.3 391.6 Dilutive stock options 3.7 6.2 3.6 6.5 Average shares and equivalent shares outstanding 395.4 397.7 394.9 398.1 Earnings per share -diluted $ 0.85 $ 0.29 $ 1.19 $ 0.75 				 -5- 				 			 SEARS, ROEBUCK AND CO. 	 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 			 (Unaudited) 			 Options to purchase 1.9 million shares of stock at prices ranging from $60 to $64 per share were outstanding at July 4, 1998, and options to purchase 1.5 million shares of stock at prices ranging from $50 to $57 per share were outstanding at June 28, 1997, but not included in the computation of diluted earnings per share because they would have been antidilutive. 4. Effect of New Accounting Standards and Statements Effective January 4, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This statement requires that the Company report the change in its net assets during the period from nonowner sources. For the 13 and 26 weeks ended July 4, 1998, components of other comprehensive income (loss) include foreign currency translation adjustments related to Sears Canada. For the 26 weeks ended June 28, 1997, components of other comprehensive income primarily related to the foreign currency translation adjustment recognized on the sale of Sears Mexico. 				 13 Weeks Ended 26 Weeks Ended (millions) July 4, June 28, July 4, June 28, 				 1998 1997 1998 1997 Net income $ 336 $ 117 $ 469 $ 299 Other comprehensive income (loss) (15) -- (13) 84 Total comprehensive income $ 321 $ 117 $ 456 $ 383 Effective January 4, 1998, the Company adopted AICPA Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires certain software development costs to be capitalized. Generally, once the capitalization criteria of the SOP have been met, external direct costs of materials and services used in development of internal-use software, payroll and payroll related costs for employees directly involved in the development of internal-use software, and interest costs incurred when developing software for internal use are to be capitalized. The adoption of this SOP did not have a material effect on the Company's consolidated financial position, results of operations or cash flows for the 13 and 26 weeks ended July 4, 1998. In February 1998 the Financial Accounting Standards Board (FASB) issued SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits", which is effective for fiscal years beginning after December 15, 1997. The new statement will change disclosure requirements related to pension and other postretirement benefit obligations. The new statement will be implemented in 1998 and will not impact the Company's consolidated financial position, results of operations or cash flows. The effect of the new statement will be limited to the form and content of disclosures. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is required to be adopted in years beginning after June 15, 1999. The Company has not yet determined the effect this statement will have on the consolidated financial position or results of operations of the Company. 				 -6- 					 				SEARS, ROEBUCK AND CO. 		 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 				 (Unaudited) 5. 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. A federal civil and criminal investigation of these matters is ongoing. As previously reported, on May 7, 1998, the Supreme Court of the State of New York, County of New York, approved the settlement of consolidated shareholders' derivative actions 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. This court-approved settlement was subject to satisfactory resolution of 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 class action lawsuits alleged 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. On August 10, 1998, the Illinois court entered an order and final judgement approving the securities class action settlement. The entry of this final judgement satisfied the condition to the court approved settlement of the shareholder derivative actions referred to above. The Company recorded a pretax charge of $475 million ($320 million on an after-tax basis) in the second quarter of 1997 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 actual results could differ from this estimate. As such, it is possible that additional costs relating to the civil and criminal investigation referred to above could be incurred. However, management believes that its current reserves adequately provide for the costs relating to the matters referred to above and does not expect such costs to have a material effect on the annual results of operations, financial position, liquidity or capital resources of the Company. On July 2, 1998, a credit cardholder of the Company purporting to represent a nationwide class filed a complaint in the United States District Court for the Northern District of Illinois against the Company and Sears National Bank ("SNB"), an indirect wholly-owned subsidiary of the Company, alleging breach of contract claims, state statutory consumer fraud and federal Truth in Lending and National Bank Act violations in connection with the annual percentage rate ("APR") charged on certain credit card balances. Related cases have previously been filed in Illinois and Washington state courts against the Company alleging similar claims. The central allegation in each of these actions is that the May 1997 increase of the APR charged on balances that pre-dated the transfer of the cardholder accounts to SNB was unlawful. Each of these cases seeks injunctive and declaratory relief, unspecified damages and attorneys' fees and expenses. The Company intends to vigorously defend these cases. At this time, the effect of the resolution of these matters cannot be estimated. 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. 				 -7- 				 			 SEARS, ROEBUCK AND CO. 	 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 				(Unaudited) 6. Subsequent Events On August 16, 1998, the Company entered into an Agreement and Plan of Merger between Western Auto, a wholly owned subsidiary, and Advance Auto Parts for $175 million in cash and approximately 40% equity ownership interest in the resulting combined company. The sale is subject to antitrust clearance. The Company estimates that the transaction will result in an after-tax loss ranging from $200 million to $250 million, which will be recorded during the third quarter of 1998. The sale price and the loss on the transaction are expected to be finalized in the fourth quarter of 1998 when the transaction is expected to close. The sale will not have a material effect on the financial position or liquidity of the Company. 				 -8- 				 			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 July 4, 1998 and June 28, 1997, and the related Condensed Consolidated Statements of Income for the 13-week and 26-week periods ended July 4, 1998 and June 28, 1997, and the Condensed Consolidated Statements of Cash Flows for the 26-week periods ended July 4, 1998 and June 28, 1997. 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 January 3, 1998, 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 20, 1998, 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 January 3, 1998, 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 August 14, 1998 				 -9- 			ITEM 2. - SEARS, ROEBUCK AND CO. 	 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 		 CONDITION AND RESULTS OF OPERATIONS 	 13 AND 26 WEEKS ENDED JULY 4, 1998 AND JUNE 28, 1997 	 Operating Results Domestic operations include the Company's operations in the United States and Puerto Rico. Domestic operations are comprised of: 		 Retail - consisting of: Credit - which manages Sears Card 	 -Full-line stores operations 	 -Specialty stores (Home stores 	 and Auto stores) 					 Corporate - administrative activities Services - consisting of: of a holding company 	 -Home Services nature, the cost of which 	 -Direct Response Marketing not allocated to the 						 Company's businessess 		 International operations consist of similar retail, services and credit operations conducted in Canada through Sears Canada, Inc. ("Sears Canada"), a 54.8% owned consolidated subsidiary. International operations were also conducted through Sears, Roebuck de Mexico, S.A. de C.V. ("Sears Mexico"), a previously 75.5% owned subsidiary until March 29, 1997. At that time, the Company sold 60% of the outstanding shares of Sears Mexico to Grupo Carso S.A. de C.V. Thereafter, Sears Mexico's results are no longer included in the Company's consolidated operations. For the 13 weeks ended July 4, 1998, net income was $336 million, or $0.85 per share, as compared to $117 million, or $0.29 per share for the 13 weeks ended June 28, 1997. The second quarter of 1998 includes the positive impact of $18 million, or $0.05 per share, due to SFAS No. 125 accounting. Significant non-comparable items in the second quarter of 1997 included the reaffirmation charge, the gain on the sale of Advantis and the positive impact of SFAS No. 125 accounting, which in aggregate reduced net income by $194 million, or $0.49 per share. Excluding these items, second quarter net income was $318 million, or $0.80 per share, a 2.3% increase over net income of $311 million, or $0.78 per share for the comparable 1997 period. The increase in net income, after consideration of non-comparable items, was primarily due to the improvement in operating results from domestic retail and services businesses, which was partially offset by a decline in credit results. For the 26 week period ended July 4, 1998, net income was $469 million or $1.19 per share compared to $299 million or $0.75 per share in 1997. The increase in reported net income was due primarily to the negative impact of non-comparable items in 1997, as previously mentioned. Excluding non-comparable items, net income would have been $431 million or $1.09 per share as compared to $490 million or $1.23 per share in the comparable 1997 period. The Company's consolidated effective tax rate in the second quarter of 1998 was 39.0% as compared to 53.9% in the prior year period. The prior year tax rate was impacted by certain components of the reaffirmation charge which were not tax deductible. Excluding the impact of the reaffirmation charge, the Company's consolidated effective tax rate would have been 40.1% in the second quarter of 1997. For the six-months ended July 4, 1998 the consolidated effective tax rate was 39.3% versus 50.1% in the first half of 1997. The prior year tax rate was impacted by the reaffirmation charge and the tax expense from the first quarter sale of Sears Mexico. Excluding these significant items, the consolidated effective tax rate would have been 40.2% for the first half of 1997. 				 -10- 		 ITEM 2. - SEARS, ROEBUCK AND CO. 	 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 		 CONDITION AND RESULTS OF OPERATIONS 	 13 AND 26 WEEKS ENDED JULY 4, 1998 AND JUNE 28, 1997 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 13 and 26 weeks ended July 4, 1998 which is not necessarily indicative of performance for the balance of the year. The company makes available by phone a recorded message on the sales performance of its domestic stores. The message is updated weekly and can be heard by calling 847/286-6111. Domestic Operations Merchandise and services revenues increased 6.1% to $8.30 billion and 6.2% to $15.60 billion for the 13 and 26 weeks ended July 4, 1998, respectively, from the comparable 1997 periods. Merchandise and services revenues and related information are as follows: 							 			 13 Weeks Ended 26 Weeks Ended 			 July 4, June 28, July 4, June 28, 			 1998 1997 Change 1998 1997 Change (millions, except number of stores) Revenues: Full-line stores $ 5,561 $ 5,229 6.3% $ 10,497 $ 9,815 6.9% Specialty stores 1,956 1,821 7.4% 3,624 3,456 4.9% Total retail 7,517 7,050 6.6% 14,121 13,271 6.4% Services 786 773 1.8% 1,479 1,413 4.6% Merchandise and services $ 8,303 $ 7,823 6.1% $ 15,600 $ 14,684 6.2% Number of Full-line stores 835 824 Number of Specialty stores 2,758 2,607 Total retail stores 3,593 3,431 Comparable store sales percentage increase 2.9% 2.3% 3.8% 2.5% For the 13 week period, Full-line stores revenues increased 6.3% over the comparable 1997 period. Apparel revenues gained 4.3% during the second quarter after a 5.1% gain in 1997. Women's sportswear and special sizes, as well as girl's apparel, and cosmetics and fragrances posted strong sales increases, while boy's apparel, home fashions and fine jewelry had solid revenue gains. Men's apparel sales were slightly higher than the second quarter last year. Hardlines revenues, comprised of home electronics, home appliances, and home improvement merchandise sales, increased 7.1% in the second quarter with gains in home appliances and home improvement. Home electronics sales were below the prior year due to slow sales of home office equipment. For the 26 week period, Full-line stores revenues increased 6.9% over 1997 as apparel achieved a 4.8% increase and hardlines gained 7.1%. 				 -11- 		 ITEM 2. - SEARS, ROEBUCK AND CO. 	 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 		 CONDITION AND RESULTS OF OPERATIONS 	 13 AND 26 WEEKS ENDED JULY 4, 1998 AND JUNE 28, 1997 	 For the 13 week period, Specialty stores revenues increased 7.4% over the comparable 1997 period. Home stores revenues increased 20.3% over 1997 due to the addition of new stores and strong comparable store sales increases. Hardware and Sears Dealer stores had strong revenue increases from a year ago benefiting from 118 net new store openings. HomeLife furniture stores revenues showed a moderate increase despite having four fewer stores than a year ago. Auto stores, consisting of the Sears Tire Group and Parts Group, experienced a 4.3% decline in revenue from 1997 as the Sears Tire Group experienced weak comparable store sales and the Parts Group revenue decreased primarily as a result of a change in store format. The new Parts America format sells automotive merchandise and no longer provides repair services. Specialty stores revenues increased 4.9% for the 26 week period as compared to 1997, largely due to the new store growth and increases in comparable store sales in Hardware, HomeLife and Sears Dealer store formats. Services revenues, which are generated by the Home Services and Direct Response Marketing businesses, were up 1.8% in the second quarter of 1998 and 4.6% for the first six months of 1998 versus the comparable 1997 periods. For both the second quarter and six months ended July 4, 1998, revenue increases were solid in the product services and installation businesses, while the home improvement business had declining revenues. Domestic credit revenues increased 3.0% to $1.12 billion and 2.9% to $2.26 billion for the 13 and 26 weeks ended July 4, 1998, respectively, from the comparable prior year periods. A summary of credit information (for the managed portfolio) is as follows: 				 13 Weeks Ended 26 Weeks Ended (millions) July 4, June 28, July 4, June 28, 				 1998 1997 1998 1997 Sears Card as a % of sales 52.3% 55.5% 52.7% 55.5% Average account balance (dollars) (as of July 4, 1998 and June 28, 1997) $ 1,086 $ 1,033 $ 1,086 $ 1,033 Average managed credit card receivables (millions) $ 27,808 $ 26,634 $ 28,151 $ 26,747 The percentage of merchandise sales and services transacted with the Sears Card in the second quarter of 1998 declined to 52.3% compared to 55.5% a year ago primarily due to greater preference for the use of cash, checks and third party credit cards. Gross margin as a percentage of domestic merchandise and services revenues for the second quarter was 26.1% versus 26.5% in the comparable prior year period. Improved services gross margin was more than offset by the decline in retail gross margin which was caused primarily by increased promotional activity. For the 26 week period, 1998 domestic gross margin declined 40 basis points to 25.2%. 				 -12- 			ITEM 2. - SEARS, ROEBUCK AND CO. 		MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 		 CONDITION AND RESULTS OF OPERATIONS 	 13 AND 26 WEEKS ENDED JULY 4, 1998 AND JUNE 28, 1997 Selling and administrative expense as a percentage of total revenues for domestic operations improved to 20.0% in the second quarter of 1998 from 20.4% in the comparable prior year period. The improvement was primarily due to the leveraging of employee-related costs and business overhead costs, partially offset by additional investments in marketing. For the 26 week period, the selling and administrative expense rate for domestic operations improved 50 basis points to 20.4%. The domestic provision for uncollectible accounts and related information is as follows: 					 13 Weeks Ended 26 Weeks Ended (millions) July 4, June 28, July 4, June 28, 					 1998 1997 1998 1997 Provision for uncollectible accounts $ 348 $ 280 $ 735 $ 522 Net credit charge-offs as a percentage of average managed credit card receivables 7.37% 5.69% 7.74% 5.32% Allowance for uncollectible credit card receivables $ 1,101 $ 793 $ 1,101 $ 793 Delinquency rates for managed portfolio (as of July 4, 1998 and June 28, 1997) 6.54% 5.88% 6.54% 5.88% The provision for uncollectible accounts increased 24.7% to $348 million and 40.9% to $735 million for the 13 and 26 weeks ended July 4, 1998, respectively, from the same periods last year. The increase was primarily attributable to the higher delinquency and charge-off rates of the credit card portfolio. Domestic operations depreciation and amortization expense was $196 million in the second quarter and $388 million for the first six months of 1998, an increase of $9 million and $36 million, respectively, from the comparable 1997 periods. The increase reflects the continuation of the Full-line stores remodeling program and the growth in the number of Specialty stores in operation. Interest expense, as presented on the statements of income, is combined with the funding costs on receivables sold through securitizations to represent total funding costs as follows: 				 13 Weeks Ended 26 Weeks Ended (millions) July 4, June 28, July 4, June 28, 				 1998 1997 1998 1997 Interest expense $ 334 $ 315 $ 683 $ 626 Funding cost on securitized receivables (1) 107 105 213 213 Total funding costs $ 441 $ 420 $ 896 $ 839 <FN> (1) Funding cost on securitized receivables represents the interest paid on securitized receivables. </FN> 								 								 				 -13- 				 		 ITEM 2. - SEARS, ROEBUCK AND CO. 	 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 		 CONDITION AND RESULTS OF OPERATIONS 	 13 AND 26 WEEKS ENDED JULY 4, 1998 AND JUNE 28, 1997 Total domestic funding costs increased in the second quarter of 1998 when compared to the second quarter of 1997 and increased for the first six months of 1998 compared to the first six months of 1997. Funding costs increased due to the additional level of debt needed to support a larger managed credit card receivables portfolio, but was partially offset by lower effective funding rates. Operating income in the second quarter of 1998 was $529 million compared to $92 million in the comparable 1997 period. On a reported basis, the increase is due to the $475 million reaffirmation charge recorded in the second quarter of 1997. Excluding non-comparable items, operating income was $500 million, a 1.8% decrease from operating income of $509 million in the second quarter of 1997. The decrease is primarily due to the decline in credit results, partially offset by improved retail and services results. Operating income by business format is as follows: 			 13 Weeks Ended 26 Weeks Ended (millions) July 4, June 28, July 4, June 28, 			 1998 1997 1998 1997 Retail $ 199 $ 175 $ 139 $ 146 Services 97 89 177 156 Credit 286 (120) 538 262 Corporate (53) (52) (113) (110) Total domestic operating income $ 529 $ 92 $ 741 $ 454 International Operations International operations in 1998 include only the Company's 54.8% interest in Sears Canada. In the first quarter of 1997, the Company sold 60% of the outstanding shares of Sears Mexico to Grupo Carso S.A. de C.V. The transaction reduced the Company's ownership in Sears Mexico to 15.5 percent. International revenues for the second quarter of 1998 increased 4.2% from the same period a year ago due to the solid retail and catalog sales performance at Sears Canada. For the first six months of 1998, International revenues were $1.5 billion, which is even with prior year. The prior year includes revenues of $100 million generated by Sears Mexico before its sale in the first quarter of 1997. The overall increase in Sears Canada revenue in the first six months of 1998 offset the loss of revenue from the sale of Sears Mexico. Gross margins as a percentage of merchandise and services revenues decreased to 25.9% in the second quarter from 26.8% in 1997, reflecting higher retail promotional markdowns compared to the prior year. For the first six months of 1998, gross margin rate declined 40 basis points to 24.8%. Selling and administrative expense as a percentage of total revenues decreased to 21.1% in 1998 from 23.0% in the second quarter of 1997. The improvement was primarily due to leveraging employee-related costs and marketing expense. For the first six months of 1998, the selling and administrative expense rate improved 140 basis points to 21.7%. 	 				 -14- 			 ITEM 2. - SEARS, ROEBUCK AND CO. 		 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 			CONDITION AND RESULTS OF OPERATIONS 	 13 AND 26 WEEKS ENDED JULY 4, 1998 AND JUNE 28, 1997 Financial Condition The consolidated owned net credit card receivables balances of $17.16 billion, $19.34 billion and $19.84 billion as of July 4, 1998, June 28, 1997 and January 3, 1998, respectively, exclude credit card receivables transferred to a securitization Master Trust as follows: 					 July 4, June 28, January 3, (millions) 1998 1997 1998 Domestic: Managed credit card receivables $ 27,725 $ 26,834 $ 28,945 Securitized balances sold (6,667) (6,123) (6,404) Retained interest in transferred credit card receivables (4,302) (2,088) (3,316) Other customer receivables 202 174 161 Domestic owned credit card receivables 16,958 18,797 19,386 International credit card receivables 1,339 1,365 1,570 Consolidated credit card receivables $ 18,297 $ 20,162 $ 20,956 Less: Allowance for uncollectible accounts 1,137 825 1,113 Credit card receivables, net $ 17,160 $ 19,337 $ 19,843 Consolidated credit card receivables (before allowance for uncollectible accounts) decreased $1.87 billion when comparing the second quarter of 1998 with the second quarter of 1997. The decrease is primarily due to accounts being transferred to the securitization Master Trust to be used in future securitizations. Managed credit card receivables increased over second quarter 1997 primarily due to growth in existing account balances. Compared to 1997 year-end, consolidated credit card receivables (before allowance for uncollectible accounts) decreased $2.66 billion due to the normal seasonal nature of the retail industry as well as the aforementioned transfer of receivables to the securitization Master Trust. As of July 4, 1998, consolidated merchandise inventories on the first-in, first-out (FIFO) basis were $5.88 billion, compared with $5.71 billion at June 28, 1997 and $5.76 billion at January 3, 1998. The increase in the inventory levels reflects the additional inventory to support higher sales volume and the addition of new Full-line and Specialty stores. Domestic inventories per selling square foot declined slightly from prior year levels. Total property and equipment, net of accumulated depreciation, was $6.50 billion at July 4, 1998 compared with $5.89 billion a year earlier. The increase is primarily due to the net addition of 11 Full-line stores and 151 Specialty stores. 				 -15- 			ITEM 2. - SEARS, ROEBUCK AND CO. 		 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 			CONDITION AND RESULTS OF OPERATIONS 		 13 AND 26 WEEKS ENDED JULY 4, 1998 AND JUNE 28, 1997 Total funding for the Company at July 4, 1998 was $26.38 billion compared with $24.50 billion a year earlier. The increase in funding was used primarily to fund growth in the managed credit card receivables portfolio and to provide cash for the capital spending program. Total funding includes debt recorded on the balance sheet and investor certificates related to credit card receivables sold through securitizations as follows: (millions) July 4, June 28, January 3, 				 1998 1997 1998 Short-term borrowings $ 3,588 $ 3,334 $ 5,208 Long-term debt and capitalized lease obligations 16,122 15,044 15,632 Securitized balances sold 6,667 6,123 6,404 Total funding $ 26,377 $ 24,501 $ 27,244 During the 26 weeks ended July 4, 1998, the Company has utilized more long-term debt and less short-term borrowings in its funding mix due to favorable long-term funding rates. The Company accesses a variety of capital markets to preserve flexibility and diversify its funding sources. The primary funding sources utilized include medium term notes, securitization, senior unsecured debt and unsecured commercial paper. Liquidity Based upon the cash flow expected to be generated from future operations and the Company's ability to cost-effectively access multiple sources of funding, the Company believes sufficient resources will be available to maintain its planned level of operations, capital expenditures and dividends in the future. 				 -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. A federal civil and criminal investigation of these matters is ongoing. As previously reported, on May 7, 1998, the Supreme Court of the State of New York, County of New York, approved the settlement of consolidated shareholders' derivative actions 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. This court-approved settlement was subject to satisfactory resolution of 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 class action lawsuits alleged 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. On August 10, 1998, the Illinois court entered an order and final judgement approving the securities class action settlement. The entry of this final judgement satisfied the condition to the court approved settlement of the shareholder derivative actions referred to above. The Company recorded a pretax charge of $475 million ($320 million on an after-tax basis) in the second quarter of 1997 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 actual results could differ from this estimate. As such, it is possible that additional costs relating to the civil and criminal investigation referred to above could be incurred. However, management believes that its current reserves adequately provide for the costs relating to the matters referred to above and does not expect such costs to have a material effect on the annual results of operations, financial position, liquidity or capital resources of the Company. On July 2, 1998, a credit cardholder of the Company purporting to represent a nationwide class filed a complaint in the United States District Court for the Northern District of Illinois against the Company and Sears National Bank ("SNB"), an indirect wholly-owned subsidiary of the Company, alleging breach of contract claims, state statutory consumer fraud and federal Truth in Lending and National Bank Act violations in connection with the annual percentage rate ("APR") charged on certain credit card balances. Related cases have previously been filed in Illinois and Washington state courts against the Company alleging similar claims. The central allegation in each of these actions is that the May 1997 increase of the APR charged on balances that pre-dated the transfer of the cardholder accounts to SNB was unlawful. Each of these cases seeks injunctive and declaratory relief, unspecified damages and attorneys' fees and expenses. The Company intends to vigorously defend these cases. At this time, the effect of the resolution of these matters cannot be estimated. 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. 	 				 -17- 				 			PART II. OTHER INFORMATION 		 Item 4. Submission of Matters to a Vote of Security-Holders. On May 14, 1998, the Company held its annual meeting of shareholders at The Art Institute of Chicago in Chicago, Illinois. 1) Warren L. Batts, Arthur C. Martinez, Hugh B. Price and Clarence B. Rogers, Jr. were elected to Class A of the Board of Directors for three year terms expiring at the 2001 annual meeting of shareholders. Brenda C. Barnes was elected to Class B of the Board of Directors for a term expiring at the 1999 annual meeting of shareholders. The shareholders approved the recommendation of the Audit Committee that Deloitte & Touche LLP be appointed auditors for 1998. A shareholder proposal to declassify the Company's Board of Directors was voted on and defeated. The vote on these matters was as follows: 				 				 Directors 	Name For Withheld 	Warren L. Batts 338,250,861 4,704,427 	Arthur C. Martinez 338,250,861 5,283,549 	Hugh B. Price 338,250,861 4,888,533 	Clarence B. Rogers, Jr. 338,250,861 4,629,748 	Brenda C. Barnes 338,250,861 4,476,405 2) Approval of appointment of Deloitte & Touche LLP as auditors for 1998. 	 For Against Abstain 340,152,176 1,251,751 869,996 	 			 Shareholder Proposals 3) Declassifying the Board of Directors. 	 For Against Abstain Broker Non-Votes 144,953,258 153,886,891 5,338,009 38,095,765 				 -18- 		 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. 				 -19- 				 				 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) 						 August 17, 1998 By /s/ Jeffrey N. Boyer 							Jeffrey N. Boyer 						Vice President and Controller 					 						(Principal Accounting Officer 						 and duly authorized Officer 						 of Registrant) 				 E-1 				 				EXHIBIT INDEX 			 SEARS, ROEBUCK AND CO. 		 13 AND 26 WEEKS ENDED JULY 4, 1998 Exhibit No. 3(a). Restated Certificate of Incorporation as in effect on May 13, 1996 	 (incorporated by reference to Exhibit 3(a) to Registrant's 	 Statement No. 333-8141). 3(b). By-laws, as amended to February 3, 1998 (incorporated by reference 	 to Exhibit 3.(ii) to the Registrant's Annual Report on Form 10-K 	 for the year ended January 3, 1998). 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 January 3, 1998 and for the six- and twelve-month periods 	 ended July 4, 1998. 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 four years: 1996, 1995, 	 1994, and 1993. 15. Acknowledgment of awareness from Deloitte & Touche LLP, dated 	 August 14, 1998, concerning unaudited interim financial 	 information. 27. Financial Data Schedule.