Business

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

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