EMPLOYMENT AGREEMENT



         THIS AGREEMENT, made and entered into on September 3, 2003, by and

between Kmart Management Corporation, a Michigan corporation (together with its

successors and assigns permitted under this Agreement, the "Company"), and Lisa

Schultz (the "Executive").



         WHEREAS, the Company desires that the Executive become employed by the

Company and provide services to the Company and Holding Corp. (as hereinafter

defined), in the best interest of the Company and its affiliates and

constituencies;



         WHEREAS, the Executive desires to be employed by the Company as

provided herein; and



         WHEREAS, the Executive and the Company desire to enter into this

Agreement to set forth the terms and conditions of the Executive's services with

the Company;



         NOW, THEREFORE, in consideration of the premises and mutual covenants

contained herein and for other good and valuable consideration, the receipt of

which is mutually acknowledged, the Company and the Executive (individually a

"Party" and together the "Parties") agree as follows:



                  20. Definitions. The following definitions shall apply to this

Agreement in its entirety.



                           (a) "Base Salary" shall mean the salary granted to

the Executive pursuant to Section 4.



                           (b) "Board" shall mean the Board of Directors of the

Company.



                           (c) "Cause" shall mean (i) the Executive is convicted

of a felony involving moral turpitude or any other felony (other than motor

vehicle related) and, in the case of such other felony, the Executive is unable

to show that she (A) acted in good faith and in a manner she reasonably believed

to be in the best interests of the Company and its affiliates and (B) had no

reasonable cause to believe her conduct was unlawful; or (ii) the Executive

engages in conduct that constitutes willful gross neglect or willful misconduct

in carrying out her duties under this Agreement, resulting, in either case, in

material harm to the Company or its affiliates, unless the Executive believed in

good faith that such act or nonact was in, or was not opposed to, the best

interests of the Company and its affiliates.



                           (d) "Committee" shall mean the Compensation and

Incentives Committee of the Holding Corp. Board or any other committee of the

Holding Corp. Board performing similar functions.



                           (e) "Constructive Termination" by the Executive shall

mean termination, during the Term of Employment, based on the occurrence without

the Executive's express written consent of any of the following: (i) a material

diminution or adverse change in the Executive's responsibilities, duties,

authorities or any reduction in title, other than for Cause or Disability; (ii)

a reduction in the Executive's Base Salary or Target Bonus (as defined in

Section 6) other than for Cause or Disability and other than as part of an

across-the-board salary reduction generally imposed on executives of the

Company; or (iii) the failure of the Company to obtain the assumption in writing

of its obligation to perform this Agreement by





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any successor to all or substantially all of the assets of the Company on or

prior to a merger, consolidation, sale or similar transaction. The Executive

shall further be required to comply with the provisions of Section 10(d)(i) of

this Agreement with respect to a Constructive Termination.



                           (f) "Disability" shall mean the Executive's

inability, with or without a reasonable accommodation, to substantially perform

her duties and responsibilities under this Agreement by reason of any physical

or mental incapacity for a period of 180 consecutive days.



                           (g) "Effective Date" shall mean the date on which the

Executive first reports to the Company's headquarters to commence employment

with the Company. The Executive will use her best efforts to commence employment

with the Company as soon as possible, and will commence employment with the

Company by September 2, 2003.



                           (h) "Holding Corp." shall mean Kmart Holding

Corporation, a Delaware corporation and the Company's parent corporation.



                           (i) "Holding Corp. Board" shall mean the board of

directors of Holding Corp.



                  21. Term of Employment. Subject to Holding Corp. Board

approval as set forth in Section 18 and subject to termination pursuant to

Section 10, the Company shall employ the Executive, and the Executive hereby

accepts such employment, for the period commencing on the Effective Date and

ending on the third anniversary thereof (the "Term of Employment"); provided,

however, that the Term of Employment shall be automatically extended for

additional one-year periods on each subsequent annual anniversary of the

Effective Date, unless written notice of non-extension is provided by either

Party to the other Party at least 60 days prior to any such anniversary.



                  22. Position, Duties and Responsibilities.



                           (a) During the Term of Employment, the Executive

shall be employed by the Company and shall serve as Senior Vice President, Chief

Creative Officer (or such other position or positions as may be agreed upon in

writing by the Executive and Holding Corp. and/or the Company, as applicable).

The Executive shall have all authority commensurate with the position of Senior

Vice President, Chief Creative Officer, subject to the direction of the Holding

Corp. Board, the Board and/or the Chief Executive Officer ("CEO") of the

Company. The Executive shall report directly to the CEO. The Executive shall

devote substantially all of her business time, attention and skill to the

performance of such duties and responsibilities, and shall use her best efforts

to promote the interests of the Company and its affiliates. The Executive shall

not, without the prior written approval of the Holding Corp. Board, engage in

any other business activity which is in violation of policies established from

time to time by the Company or its affiliates.



                           (b) Anything herein to the contrary notwithstanding,

nothing shall preclude the Executive from (i) serving on the boards of directors

of a reasonable number of other corporations or the boards of a reasonable

number of trade associations and/or charitable organizations (subject to the

reasonable approval of the Holding Corp. Board), (ii) engaging in charitable

activities and community affairs, and (iii) managing her personal investments

and affairs, provided that such activities do not materially interfere with the

proper performance of her duties and responsibilities as an executive officer of

Holding Corp. and the Company.



                           (c) The Executive shall perform her services

hereunder primarily at a location of her choosing in New York City, NY. The

Company shall provide the Executive with office space and clerical support at

its headquarters offices to the extent necessary when the Executive does perform

services at the Company's headquarters offices.



                  23. Base Salary. During the Term of Employment, the Executive

shall be paid an annualized Base Salary, payable in accordance with the regular

payroll practices of the Company, in the



{PAGE}



amount of $500,000. The Base Salary shall be reviewed no less frequently than

annually for increase in the discretion of the Holding Corp. Board and/or the

Committee. The Base Salary, including any increase, shall not be decreased

during the Term of Employment.



                  24. Restricted Stock Equity -Grant. As an inducement material

to the Executive's agreement to enter into employment with the Company, and

subject to the approval of the Committee comprised of a majority of independent

directors or a majority of the Holding Corp.'s independent directors, within 14

days after the Effective Date, the Executive shall receive a grant of restricted

Holding Corp. stock having a fair market value of $500,000 on the date of grant

(the "Restricted Stock") which Restricted Stock may not be sold, pledged or

otherwise transferred until the Restricted Stock becomes vested, in accordance

with the provisions of this Section 5. The Restricted Stock shall vest as to

one-third (1/3) of such grant at 12:01 a.m. on the date after the end of fiscal

year 2004, as to an additional one-third (1/3) of such grant at 12:01 a.m. on

the date after the end of fiscal year 2005, and as to the final one-third (1/3)

of such grant at 12:01 a.m. on the date after the end of fiscal year 2006,

conditioned upon the Executive's continued employment with the Company as of

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