Sears

Sears Holdings Corp (SHLD) Bankrupt By 2020 – The Short Case

Sprott School of Business’s The Economist Case Competition – Submission on Sears Holdings

Members:

Asmerom (Peter) Tewolde

Geng Pei

Kyle Stolys

Sears: The Economist Case Competition – Introduction

Objective

The objective of this report is to show why Sears Holdings Corporation will be bankrupt by 2020. We will cover the history of Sears, its current operations and business model, current industry trends, the company?s financial situation, and various models that sum up our argument for Sears’ inevitable bankruptcy.

Background

Sears Holding Corporation (Sears) is the parent company of Kmart Holding Corporation and Sears, Roebuck and Co. which together create an integrated retailer offering an assortment of apparel, appliances, electronics, and automotive parts, among several other categories. The history of the two company?s begins in 1893 when Sears, Roebuck and Co. was founded. The company began as a mail order business with their famous catalog, and later began operating retail stores that were largely successful and led to a rapid expansion of the business. Kmart began in 1899 with 1 store, selling all products for 5 and 10 cents built on the business philosophy of “offer customer?s products they need at prices they can afford”. In 2002 Kmart filed for Chapter 11 and while in bankruptcy ESL Investments, managed by Edward S. Lampert purchased the majority of the company?s debt and later listed it on the NASDAQ, retaining an ownership of over 50%. In 2004 Kmart announced that it would be purchasing Sears, Roebuck and Co. The newly formed company became Sears Holding Corporation and Edward S. Lampert remains a 50% shareholder today.

The business can be split into three segments, Kmart, Sears Domestic, and Sears Canada..

Kmart

Kmart operates 1050 stores as of November 1, 2014 throughout the U.S. Most Kmart stores are one-floor, free-standing units that offer a wide array of products including consumer electronics, outdoor living, toys, lawn and garden equipment, appliances, food and consumables, and apparel. In 2013, the Kmart segment had $13.2B in revenues, and -$351M in operating income. Comparable store sales also declined 3.6%.

Sears Domestic

Sears Domestic operates 781 stores as of November 1, 2014 across the U.S. These stores are primarily mall based and offer a wide array of products including appliances, consumer electronics, tools, sporting goods, outdoor living, lawn and garden equipment, automotive services and products, apparel, and home fashion. Sears also operates approximately 690 Auto Centers in Sears? stores and 34 free standing stores. In 2013, the Sears Domestic segment had $19.2B in revenues, and -$940M operating income. Comparable store sales also declined 4.1%.

Sears Canada

Sears Canada operates 418 stores as of November 1, 2014 and conducts retail operations similar to Sears Domestic, with greater emphasis on apparel, footwear, and accessories. In 2013, the Sears Canada segment had $3.8B in revenues, and $538M in operating income. Comparable sales declined 2.7%. As of November 1, 2014 this segment was de-consolidated from Sears as the company completed a rights offering of 40 million Sears Canada shares, bringing their stake in the company down to approximately 10% from 51%.

Industry

The retail industry has undergone drastic change since the turn of the century. The rise of the internet has resulted in greater competition in an already cut-throat retail market. Consumers can now purchase products on any device from almost any retailer around the globe calling into question the traditional retail model and particularly department stores. U.S. Department stores have performed poorly in recent years growing revenues at rates below the pace of the overall retail channel (Bloomberg). PwC expects this trend to continue projecting department stores to be the second worst performing channel in retail growing at a CAGR of 1.6% from 2015-2020. By 2020 PwC expects non-store retail to play an increasingly larger role in the retail channel accounting for 12% of the retail marketplace by 2020.

Sears

See full PDF below.

Comments (11)

  • Frank

    Poppycock.

    May 20, 2015 at 9:00 pm
  • sr

    sounds good to me

    May 20, 2015 at 9:26 pm
  • Sam

    I was beginning to worry. I haven’t seen any articles predicting Sears or Penney’s demise for several months.

    May 20, 2015 at 10:49 pm
  • Seaguy

    Kmarts are all old and in need of a remodel, as are most Sears I would be surprised if they make it that long.

    May 21, 2015 at 12:42 am
  • Jay

    Can someone please tell me…do these writers own stock in walmart, target or macys? It’s amazing to see so many “demise” articles over one company.

    May 21, 2015 at 7:19 am
    • Mister Oh

      I’m wondering if Fast Eddie is actually a WalMart plant!

      August 12, 2015 at 1:15 pm
  • mbnick

    The real issue is that CEO Lampert is a retail moron. Why the Board is not being investigated for letting him continue is a mystery.

    May 21, 2015 at 7:33 am
  • drichards1953

    I do not see Sears Holdings making it through 2016, and maybe 2015. “Fast” Eddie Lampert will continue to liquidate assets, the few that are left, but at some point the cash will being to run very short. Suppliers are likely to increasingly demand payment with order, and no longer extend Sears Holdings and the affiliates credit. The suppliers cutting Sears and K-Mart off from credit is what will likely bring about a bankruptcy filing.

    May 21, 2015 at 10:16 am
    • Jon Wright

      I don’t know about increasing payments to get product. The Kmart by my house is actually way over filled with merchandise. There is so much stuff packed into this store it makes it hard to actually get around the building. Everyday they keep bringing more and more stuff out to the sales floor, but one problem is customers. As much stuff as this store has in it there is no one buying.

      May 21, 2015 at 10:37 am
      • drichards1953

        There are only a couple of K-Marts left here in the Knoxville metro market area and the same is true with Sears stores. There has been an uptick in the inventory in the stores, but that is clearly filling the stores with anything in the warehouse. Also, Lampert dumped a bunch of cash into Sears Holdings a few weeks ago in order to buy inventory. What I have seen in the “new” inventory it appears to be not what the few customers Sears and K-Mart have left are buying. Unless this inventory turns very quickly and at a profit, Sears Holdings will be deeper in trouble. Christmas inventory orders will have to be placed very shortly.

        May 21, 2015 at 10:46 am
  • Mech Shop

    Sears has been bleeding out for years and it will at some point run out of money. Look at how long it took Radio Shack to fully bleed out. Now Sears core business is liquidation of itself, keeping its most profitable sales items and discard the rest.

    June 16, 2015 at 4:18 am

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