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Sears Holdings (NASDAQ: SHLD) is the fourth largest retail company in the United States, generating over $46 billion in sales in 2008 from 2,297 full-line and 1,233 specialty retail stores in the United States and 388 full-line and specialty retail stores in Canada. SHLD operates 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 over 54% 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.
[edit] Company History
Sears, 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 In the 1980's and 1990's, Kmart stores were considered outdated, causing Kmart began focusing its attention on its other subsidiaries, such as The Sports Authority and Waldenbooks (both companies were divested before the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.
- Kmart's $17.2 billion of sales, down over 7% from $18.6 billion in sales in 2006, represented 34% of total revenue in 2007.[1] At the end of Q1 FY08 the company operated 1,382, as SHLD closed 6 Kmart stores on net during 2007 and that number remained unchanged through the first three months of fiscal 2008. Kmarts are discount and super center general merchandise and discount stores that compete directly with Wal-Mart, Target, and other mass merchant stores. Kmart has the lowest profit margins out of SHLD's segments with a 23.5% gross margin and a 2.3% operating margin in 2007.[2]
- Sears Domestic stores generated over $27.8 billion in sales during 2007, down 4.5% from 2006, and the segment accounted for 55% of SHLD's total revenue.[3] The Sears Domestic segment is comprised of full line department stores, specialty stores (i.e. Sears Hardware), Direct-to-Consumer Land’s End operations, and Home Services stores. During 2007 SHLD added 55 Sears Domestic stores on net for a 2007 year end total of 935 full-line stores and 1,150 specialty stores for a total of 2,085 stores.[4] Through the first quarter of fiscal 2008 Sears Domestic added 16 specialty stores and closed 2 full-line stores for a total of 2,099 U.S. stores. Sears Domestic was barely more profitable than Kmart in 2007, with a gross margin of 31% and an operating margin of only 2.3%.[5]
- Sears Canada was the only segment of SHLD to experience sales growth, of nearly 8%, during 2007 as the segment generated over $5.6 billion of sales in 2007, representing 11% of SHLD's total revenue.[6] The Sears Canada segment continued to experience growth in the first quarter of fiscal 2008, as sales grew 15% compared with the same period of 2007.[7] The Sears Canada segment is composed both full-line and specialty Sears-brand stores similar to the Sears Domestic stores. During 2007 SHLD added 7 Sears Canada stores on net for year end totals of 121 full-line stores and 259 specialty stores for a total store count of 380.[8] However, in Q1 FY08 the company opened one full-line store and closed two specialty stores for a total of 379 locations open as of May 2008.[9] Sears Canada was the most profitable segment of SHLD in 2007, with a gross margin of 31% and an operating margin of 7.1%, up from 4.9% in 2006.
[edit] Current State
Sears 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
- Craftsman
- Kenmore
- Diehard
- Lands' End
- Jaclyn Smith
- Joe Boxer
- Apostrophe
- Covington brands
SHLD has securitized the Kenmore, Craftsman, and Diehard brands into KCD IP (Kenmore Craftsman DieHard intellectual property), a wholly owned, bankruptcy-remote subsidiary.
[edit] Acquisitions
In 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] Business Growth
[edit] Q4 FY2008 (ended January 31, 2009)
- SHLD's net income slipped 55.4% as compared with the previous-year fiscal quarter, from $426 million in Q4 2007 to $190 million in Q4 2008, due to lowered demand for discretionary consumer goods during the recession as well as a $336 million charge. During Q4 FY2008, SHLD incurred a goodwill impairment charge from its Orchard Supply Hardware subsidiary and costs for store closings and severance; after including the earnings from hedge transactions in Sears Canada, which offset the total cost amount by $9 million, these unforeseen costs come to a total reduction of $336 million in net income. Not including the effect of these unforeseen charges, net income for the FY2008 fourth quarter was $360 million, or a 15.5% decrease year-on-year. [10]
- Net sales were $13.3 billion in Q4 2008, down 11.9% from net sales of $15.1 billion in Q4 of last year. However, for the fourth quarter, adjusted EBITDA (a measure of net earnings) for the Kmart segment of SHLD showed a 18% increase. In a challenging recessionary environment, Kmart benefited from its role as a discounted department-store retailer and continued to target its customer base of price-conscious middle-class consumers as well as focus on reducing costs. [10]
- Comparable store sales for US Sears stores decreased by 11.0% during Q4 2008, while Kmart comparable store sales saw a decline of 5%. In particular, the home appliance and household goods division at Sears domestic stores were hit hard by the weak housing marke. Overall, domestic comparable store sales were down 8.3%. [10]
- Operating profit for Q4 2008 was $325 million, and operating margin was 2.4% of net sales. This is a 290 bps decrease from Q4 2007, during which operating profit was $794 million, or 5.3% of net sales. The weak operating margin reflects SHLD's unforeseen goodwill expenses that deducted $336 million from revenues during the fourth quarter. [11]
| Metric | 3Mon ended Q4 FY2008 | % Change | 3Mon ended Q4 FY2007 |
|---|---|---|---|
| Net Sales Revenue | $13,280 | -11.9% | $15,074 |
| Gross Profit | $3,653 | -12.5% | $4,174 |
| Operating Margin | 2.4% | -2.9% | 5.3% |
| Net Income | $190 | -55.4% | $426 |
| 'Sales/Store | $3.39 | -13.5% | $3.92 |
| Metric | 3Mon ended Q4 FY2008 | % Change | 3Mon ended Q4 FY2007 |
|---|---|---|---|
| Net Sales Revenue | $13,280 | -11.9% | $15,074 |
| Kmart | $4949 | -5.0% | $5210 |
| Sears Domestic | $7021 | -12.6% | $8030 |
| Sears Canada | $1310 | -28.6% | $1834 |
| Gross Profit | $3,653 | -12.5% | $4,174 |
| Kmart | $1213 | -2.6% | $1245 |
| Sears Domestic | $2027 | -12.8% | $2325 |
| Sears Canada | $413 | -31.6% | $604 |
| Operating Margin | 2.4% | -2.9% | 5.3% |
| Kmart | 5.5% | 1.0% | 4.5% |
| Sears Domestic | n/a | n/a | 4.6% |
| Sears Canada | 8.8% | -1.6% | 10.4% |
| Number of Stores | 3918 | 1.02% | 3847 |
| Kmart | 1368 | -1.0% | 1382 |
| Sears Domestic | 2162 | 3.7% | 2085 |
| Sears Canada | 388 | 2.1% | 380 |
| Sales/Store | $3.39 | -13.5% | $3.92 |
| Kmart | $3.62 | -3.7% | $3.76 |
| Sears Domestic | $3.25 | -15.6% | $3.85 |
| Sears Canada | $3.38 | -30.0% | $4.83 |
[edit] Competition
Sears' 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.
| Wal-Mart | Target | Sears Domestic | Kmart | |
|---|---|---|---|---|
| Total Sales (millions) | $226,294 | $57,878 | $29,022 | $18,481 |
| Growth from 2005 | 11.7% | 12.9% | (3.4%) | (3.2%) |
| Same Store Sales Increase | 1.9% | 4.8% | (5.2)% | (.1)% |
| Sales per Store (mm) | $65.7 | $38.9 | $14.4 | $13.4 |
| Sales per Square Foot | $421 | $316 | $216 | $138 |
[edit] References
- ↑ Sears Holdings (SHLD) Press Release, "Fourth Quarter and Full Year Results"
- ↑ Sears Holdings (SHLD) Press Release, "Fourth Quarter and Full Year Results"
- ↑ Sears Holdings (SHLD) Press Release, "Fourth Quarter and Full Year Results"
- ↑ Sears Holdings (SHLD) Press Release, "Fourth Quarter and Full Year Results"
- ↑ Sears Holdings (SHLD) Press Release, "Fourth Quarter and Full Year Results"
- ↑ Sears Holdings (SHLD) Press Release, "Fourth Quarter and Full Year Results"
- ↑ Sears Holdings (SHLD) Press Release, First Quarter Earnings Release 2008
- ↑ Sears Holdings (SHLD) Press Release, "Fourth Quarter and Full Year Results"
- ↑ Sears Holdings (SHLD) Press Release, First Quarter Earnings Release 2008
- ↑ 10.0 10.1 10.2 SHLD Q4 2008 Earnings Report Press Release
- ↑ 11.0 11.1 11.2 SHLD Q4 FY2008 Income Statement, Google Finance
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