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Sears Holdings (SHLD)Stock (Department Stores Industry, Fashion Industry, Financial Services Industry, Retail Industry)
 Sears Holdings (NASDAQ: SHLD) is the fourth largest retail company in the United States, generating over $50 billion in sales in 2007 from 3,791 stores throughout the United States and Canada. SHLD operates department and specialty retail stores under the Sears and Kmart names in the US and Canada. Product offerings in SHLD stores include apparel, jewelry, appliances, hardware, sporting goods, car repair services, home improvement services and electronics. The company was formed in 2005 by the merger of Sears Roebuck (Sears) and Kmart Holdings. The merger was coordinated by Edward Lampert, the current Chairman, whom now holds close to 50% of the shares outstanding through his hedge fund ESL Investments. Despite strong brand recognition, Sears Holdings, as with Kmart and Sears before it, has suffered several successive years of falling sales and market share erosion. These negative trends can be largely attributed to increasing competition in the industry. Other retail giants such as Wal-Mart Stores (WMT) and Target (TGT) have been aggressively capturing ever greater amounts of customers' wallet share through expanded selections and steeper discounts. In 2007 net sales decreased 4.3% while operating income declined 36% due to high amounts of markdown activity that the retailer had to use to clear inventory and seasonal merchandise.
[edit] Company HistorySears, Roebuck, and Company was founded in Chicago, Illinois in 1886 as a mail order company that quickly evolved into the country's largest retailer. In addition to establishing the major brands listed above, it created the Allstate Insurance Company, purchased Dean Whitter and Coldwell Banker. In the 1980's and 1990's, Sears began to divest its non-retail businesses as an attempt to improve profitability. In the late 1990's, Wal-Mart stores began to steal Sears' market share. Falling profitability made Sears a takeover target for Kmart in 2005. Kmart opened its first store in 1962. In the 1980's and 1990's, Kmart stores were considered outdated, causing Kmart began focusing its attention on its other subsidiaries, such as The Sports Authority and Waldenbooks (both companies were divested before the Sears - Kmart merger in 2004). The 1990's saw many store closures leading to bankruptcy in 2002. This was when current chairman Edward Lampert decided to buy a majority stake in Kmart, citing undervalued real estate as the reason for his purchase. In late 2004, Kmart announced it intended to purchase Sears and completed the sale just months later, creating Sears Holding Corporation. [edit] Business Overview Sears Holdings is composed of three business segments: Kmart, Sears Domestic, and Sears Canada. Currently, the firm has no international presence outside of Canada. SHLD's product assortments in both Sears Department Stores as well as Kmart SuperStores and Discount Stores cover virtually all product categories: major home appliances (refrigerators, dishwashers, etc.), home improvement/home repair, auto repair services, and groceries.
[edit] Current StateSears Holdings has introduced a new structure that will separate the company into five different business units: operating businesses, support, brands, online and real estate. Each unit will have it's own leader. The leadership of each unit will have a separate, internal profit and loss statement to allow greater focus on managing the profitability of the unit, and rapid decision making to capitalize on opportunities and mitigate risks. The operating business units will consist of the company's current lines of business such as home appliances, electronics, and apparel. The support units will include the functions that provide operational and administrative support to the operating businesses including marketing, store operations, customer strategy and finance. The brand units will be responsible for growing the value of Sears Holdings brand portfolio. The real estate business unit and an online business unit will focus on increasing the sales productivity of the company's physical and virtual real estate. Edward Lampert is focused on making the most return from every dollar invested. He does not put money into projects that do not work. With a healthy balance sheet, he can leverage it if needed.
[edit] Brands
[edit] AcquisitionsIn December 2007, SHLD entered into a draft merger agreement with Restoration Hardware, a furniture retailer. SHLD originally made a bid for $6.75 a share, or about $269 million, in cash, but on February 28, 2008 revised its proposal to $4.55 a share. The next day Restoration rejected Sears' bid stating it was not superior to the one made by Catterton Partners. [edit] Trends and Forces[edit] Unseen Brand ValueEddie Lampert, the Chairman, noted in the annual letter for fiscal year 2007, "One of our most important resources is the great brands we own, in particular DieHard, Craftsman, Kenmore, and Lands' End. All four of these brands have significant equity with customers and provide tremendous opportunity for value creation. To illustrate, let me discuss one of them, DieHard, in more detail. Based on brand recognition studies, DieHard leads in customer recognition among car battery brands by a wide margin, but it lags dramatically in market share. Why? We believe it is due to fewer points of distribution. As a proprietary brand, DieHard is only available in 900 Sears Auto Centers and 1,400 Kmart stores. Yet it is competing with other batteries that are available in thousands of locations across the country. Further, a car battery purchase is a duress purchase event, in which the customer is looking for the nearest, most convenient solution. Unfortunately, it is not always us, but there is an opportunity for us to rethink our brand distribution strategy to create value." Similarly, the same licensing scenario can easily apply to Kenmore and Craftsmen. Craftsman is a great product but tool-buyers spend retail time in hardware stores and rarely make special trips to Sears/K-Mart just for an American wrench or tool box. An interesting twist on this brand-story is the fact that Sears Holding has securitized these three brands. Sears wrote $1.8 billion dollars worth of bonds backed entirely with these brands. The bonds are currently held in an offshore insurance subsidy owned by Sears. These bonds can sit and appreciate while acting like a potential $2 billion dollar insurance policy for the company. [edit] Sensitivity to domestic economyA discount retailer, Kmart’s customer base intersects a large portion of the low-income demographic. Many low-income families are more sensitive to rising energy prices, which can negatively affect Kmart’s sales revenue. Sears Domestic on the other hand caters to clientele that is generally wealthier- middle to upper middle class. Wealthier households' consumption decisions are generally less responsive to energy prices, and will remain relatively steady even in the face of high energy prices. This helps create a greater buffer for Kmart against energy prices compared to its main competitor, Wal-Mart. The U.S.'s slow housing market also affects Kmart and especially Sears. The domestic economy is experiencing the "home equity effect," where homeowners perceive their house values to be lower than anticipated, and therefore believe themselves to be relatively less wealthy. As a result, consumers spend and consume fewer goods and services in general, which results in lower sales for retailers such as Kmart. Sears Domestic, which sells large quantities of home improvement services, tools and household appliances, is especially vulnerable to changes in the US real estate market. In an economic downturn, consumers would first eliminate or minimize non-essential purchases, which would include much of Kmart and Sears' merchandise, including the designer home accents, apparel, and accessories. Kmart hedges against this risk by also selling groceries and other consumables, sales of which should remain relatively strong regardless of the economy's health. [edit] CompetitionSears' Holdings faces fierce competition in almost every segment. The retail segment is up against the likes of Wal-Mart, J.C. Penney, Macy's, and Kohl's. Home Improvement is against Lowe's and Home Depot. As seen from the chart below, Sears and Kmart have managed to achieve margins that compare well to peers, but have suffered negative sales growth over the last year. This is a trend stretching back several quarters.
 Sears Holdings2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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