Sears Case Study


Abstract

The pace and frequency of the change in the retail sector continues to increase rapidly in all markets around the world. There are many examples that even a giant like Sears, who cannot capture this speed, is collapsing. Emerging customer trends with technology at the heart of our lives; it has made it necessary to adapt the strains of the market, expectations, business models, capacities and products to developing and changing conditions. Retailers who do not comply with these requirements will be weakly molded, Considering these data, it is foreseen that Turkish companies will more frequently use mergers and acquisitions, alternative partnerships such as establishing foreign partnerships, public offering through public offering or project / investment financing. By implementing a holistic, proactive methodology that helps reduce the financial risks that may be encountered in any type of transformation or growth initiative, we help many customers in the consumer products and retail industry achieve all the benefits they expect from their change efforts. Our experience and approach focuses on developing financial solutions to support our customers' unique needs, cultures and strategic goals. Besfin Financial Services and Consultancy, with its experienced managers and dynamic team, provides support to companies on corporate finance, project finance and mergers and acquisitions, enabling companies to work with the most suitable capital structure for them and to reach low-cost funding paths..


Doğaç Özdemir Corporate Finance Analyst,

Retail Industry Specialist

dogac.ozdemir@besfin.com



132 aged rootedretail giant Sears has been planningto declare bankruptcy dueto financial instability in the company. Sears stated that they filed for bankruptcy because the firm could not pay the debt installment of 134 million USD due as of October 15, 2018. In recent years, retail chains such as Toys "R" Us, RadioShack and Sports Authority in the United States have been withdrew from the market by explaining their bankruptcy.


❖ Sears, described as the Amazon of the 1930s, based in the US, was a retail chain with half a shopping stop in the US in the past.

❖ Sears specializes in home appliance, home and garden products and automotive repair products.

❖ With Sears filed for bankruptcy, 1002 stores and 68,000 employees are in danger of closing and losing their jobs.


The difficult situation of Sears can be examined under three main subjects.




I. Failure to Create a Correct Business Plan and Errors in Financial Planning

The decrease in the market share of Sears since 2000s and the inability of the company to announce profits forced the company to make radical decisions. The company's total loss has been $ 10 billion since 2010.


Eddie Lampert, a former investment banker who appointed to general manager of the company, tried to solve the difficult situation of Sears gradually by closing the store, selling valuable assets and cutting operational costs.


The fact that Lampert believed that it would reduce the debt by cutting the cost, caused the company to lose its market share and the sales to a worse point. In 2018/06, Walmart spent 227 million on advertising shares, while Target spent 164 million USD, while Sears' spending was limited to 67 million.


As a result of Sears’ wrong policy, the number of visitors has decreased significantly. In September, which is one of the most vibrant months of the American retail sector, only 8% of the total US households had bought product from Sears. This number is over 63% in Walmart and Amazon.



Sears Operational Profit (Million USD)

Sears Total Store Number

Sears Revenue Change (Billion USD)




I. Failure to Create a Correct Business Plan and Errors in Financial Planning

As a result of continuous loss for years, the size of the debt increased and the shareholders' equity decreased to negative position.

Profitability has also been forced to finance debts due to negative margins

The main reason why the company falls behind its competitors in profitability margins is its rapid shrinkage policy and inadequate management of sales channels.

5

Source: Reuters, Besfin Analysis Source: Reuters, Besfin Analysis

In the retail sector, the current average gross margin is 36.2%, while the EBITDA margin is 10.3% and the Net Profit Margin is 3.8%, while profability ratios of Sears are very low.




Sears Capital Structure (million USD) (graphic 1)

Sears Profitability Margins (graphic 2)





II.Wrong Business Mergers and Disposal of Valuable Brands


Since the beginning of the 2000s, as a result of the deterioration of the margins of Sears against both discount and online retailers, the managers of the company have tried to reach the growth path by merging with another company.

In 2004, Sears was merged with an old retail giant, Kmart, founded in 1899 for $ 11 billion. The goal of the merger was to increase the competitiveness against companies such as Walmart, Home Depot and Target, which gained strength in the early 90s. Both Kmart and Sears were able to sell their product portfolio in common stores, thus enabling an effective supply chain and consumer price cuts. After the merger, expected synergy and company growth could not be realized. The biggest problem with the Sears and Kmart merger was that both companies had the same segment and sales strategy. Both companies had traditional retail channels, which made the company more adaptable to the changing retail sector.

One of the reasons for the failure of the merger is that the chairman and general manager of the company, Lampert, tried to reduce sales spending by merging with the existing resources of the companies. Since the retail sector has been in a very rapid transformation since the 2000s, companies that want to increase their sales have to increase their sales channels by maintaining aggressive investment policies. As Lampert, cut Sears’s Capex spending, the company was stuck in a single sales channel, so sales declined.

Sears began to sell its valuable brands to other companies on the basis of the failure to achieve the desired targets and the heavy debt burden. In 2017, Sears sold Cratfsman, one of the most popular and revenue-generating brands, to Stanley Black & Decker for USD 525 million.


















III. Failure in Digital Conversion


➢ Sears was one of the first retailers to step into ecommerce. The company's internet service is based on the beginning of 2000. ➢ The company was named as the 7th largest company in the US in 2009 in online trade sales.

➢ Especially after 2008-2009 economic crisis, Sears 'inability to disclose profits and the inevitable rise of Amazon in online sales gradually decreased Sears' share in e-commerce.

➢ With Sear’s loss since 2010, the company focused on its strategy of debt repayment, asset disposal and cost reduction. This move by Sears has reduced investment spending for e-commerce and reduced the company's market share rapidly. While the sales of the retail sector increased by 77% in the ecommerce segment in the last 5 years, the company's sales place dropped to 23rd place in 2017

with the cost reduction in Sears' online sales channels.



Sears Case Study- General Overview


Basic Findings


➢ Although the company has not been able to disclose operating profit since 2010, it has maintained its wrong cost policies for the solution.

➢ Sears management, which tries to turn its sales to a positive direction by closing the store and minimizing the marketing costs, has lost its share in the market and decreased its sales due to these policies.

➢ Sears, mergered with a traditional retail chain, Kmart instead of differentiating its sales channels by merging with an innovative retail company, also lost its chance to open up different sales channels.

➢ The sale of valuable brands such as the ‘Craftsman’ brand for the payment of debts damaged the diverse product portfolio of the firm.

➢ The change in the capital structure of the company, the loss of shareholders' equity and the financing of assets by liabilities increased the net financing costs and limited the profitability and resource utilization of the company.

➢ Although Sears In the online retail sector has entered too early, Sears cost perception of online sales has left the company behind in digital transformation.



Sears Case Study- General Overview



Lessons from the Case


➢ Producing a strategy without investing in the retail sector, where the competition is very intense, reduces the effectiveness of the players in the market.

➢ In the retail sector, where the digital transformation is the fastest, firms should increase their sales channels, either by purchasing retail companies operating in different channels or by focusing on departments that will strengthen these channels.

➢ Companies need to be cautious when reducing costs to increase operating profit, and if the cost reduction strategy is based solely on store closure and personnel removal, then the company may lose its market share later.

Besfin Comment


➢ Companies should follow the trends of the sector with utmost care and take action quickly in line with these trends. But the point that companies need to take into consideration when creating strategies is to what extent the objectives are consistent with the company's existing financial resources. If companies do not establish an effective working capital management, financial planning and resource utilization strategy, sustainable growth and profitability will be extremely difficult to access. Therefore, companies often need to review their financial status and create sector benchmarks.

➢ Retail companies need to be very careful in M & A processes. Companies' goals should be to strengthen the company's sales channels. It will be better for companies to obtain consultancy services in M & A processes.







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