SEARS HOLDINGS CORPORATION COMPANY PROFILE by jennyyingdi

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									SEARS HOLDINGS CORPORATION
COMPANY PROFILE

MACROECONOMIC CONDITIONS

         FINANCIAL ANALYSIS

            RECOMMENDATIONS
COMPANY PROFILE
SHCL - Overview
                    Description                                                       Recent Events
•   Formed in 2004 Sears Holdings Corporation is the                •   19 Nov 2008: Sears and Yahoo! Launch 'Good News
    parent company of Kmart Holding Corporation and                     Now' to promote uplifting stories during downturn
    Sears, Roebuck and Co.                                          •   13 Oct 2008: Michael D. Collins joined the company
•   United nation's fourth largest broad line retailer with             as senior vice president, finance
    over $50 billion in annual revenues                             •   4 Sept 2008: SHCL earned the top rating of 100
•   Leading home appliance retailer in North America .                  percent in the 2009 Corporate Equality Index (CEI)
•   Operates 2,317 full-line and 1,150 specialty retail             •   29 May 2008: Announced repurchase of up to an
    stores in the United States                                         additional $500 million of the Company's common
•   Sears Canada, a consolidated, 70%-owned                             shares
    subsidiary of Sears, operates a total of 121 full-line          •   30 Apr 2008: Opened a new 1mn sq. ft. direct delivery
    stores & 259 specialty stores                                       centre in Gouldsboro, PA to expand appliance
•   Listed on the NASDAQ with a market cap of $4.22bn                   distribution capabilities

                    Brief History                                                  Brands & Business
                 • Company divested itself of many non-retail            Brands              Business
1980-1990        entities
                                                                         Kenmore             Retail
                 • Sears stopped production of its general               Craftsman           Dealer Stores
    1993         merchandise catalogue because of sinking                Diehard             Full-line stores
                 sales and profits
                                                                         Lands end           K-Mart
                 • Sears sold its retail credit card operation to                            The great Indoors
    2003         Citibank                                                                    Sears Grand
                 • Kmart purchased Sears. and changed its                                    Sears Essential
    2004         name to Sears Holdings Corporation.                                         Orchard supply hardware
 SCHL - Key Personnel & Segments
                Segment Revenue Spread                                                               Key Personnel
                                                                                         Name                             Title
                                 10%                                          Edward S. Lampert                     Chairman of BOD
                                                                              William C. Crowley           Exec. VP, Chief administration Officer
               35%                                           55%              W. Bruce Johnson                        CEO/President
                                                                              Karen A. Austin               Exec VP, Chief Information officer
                                                                              J. Miles Reidy                               CFO
                                                                              Richard Gerstein                     Sen. VP, Marketing
                                                                              Kevin R. Holt                     Exec. VP, Store Operations
                                                                              James P. Mixon               Senior VP, Supply Chain Operations
                     Sears Domestic    Kmart     Sears Canada                 William K. Phelan             Senior VP, Controller/ Treasurer

                      Summary Financials                                                          Competitor Companies
Jan y/e                                                              04A-7A    •     Target Corporation
(US$m)               FY04A       FY05E   FY06E              FY07A    CAGR      •     Wal-Mart
Revenue              19,843      49,124  53,012             50,703   26.71%
% Growth                        247.56% 107.91%             95.64%             •     Kohl’s Corporation
EBITDA                1,848       3,065   3,672              2,635   12.55%    •     Home Depot
% Margin             9.31%       6.24%   6.93%               5.20%             •     JC Penney
Net Income            1,106        858    1,490               826    9.27%
                                                                               •     Best Buy
% Margin             5.57%       1.75%   2.81%               1.63%
Capex                  230         552     508                570    35.33%
% Margin             -1.16%      -1.12%  -0.96%             -1.12%
FCF(1)               1,618       2,513         3,164        2,065    8.47%
% Margin             8.15%       5.12%         5.97%        4.07%
 Source: Company data; : FCF is defined as EBITDA - Capex
MACROECONOMIC CONDITION
Economic Trends
                     US Economic Trends                                     Current Retail Industry Trends
•      Economic slowdown & retail slows growth down                  •   Wholesalers are still playing a vital part in the
•      Unemployment ends year at 5%                                      economy, especially in supplying the retail industry
         –      Up from 4.6% in 2006                                 •   Retail sales in the US and Canada increased by
•      Housing market declines affecting job growth                      4.01% and 0.61% each during the first quarter of 2008
•      High oil prices                                               •   During the three months of 2008, wholesale
                                                                         inventories in the US grew to US$1.18 trillion
•      Federal Reserve cutting interest rates
                                                                     •   On the other hand, retail employment dwindled in the
•      Fears of inflation
                                                                         US, down by 22% during the period
•      Fear of recession
•      Commodity prices higher                                       •   Overall retail is growing at a slower pace



       Relative Stock Performance Graph                                   Global Market Shares of Retailers
$150
                                                                                                  1.60%
$140
$130                                                                                      1.90%
$120
                                                                                                                8.60%
$110                                                                                   1.90%
$100
 $90                                                                                    2.70%
 $80
              2005              2006      2007             2008
                                                                                                    3.20%
             Sears Holding             S&P 500 Index
                                                                            Wallmart    Carrefour    Metro   Ahold   Tesco   Ito-Yokado
             S&P 500 Retailing Index   S&P Department Stores Index

Source: Company 10-k
Economic Trends
                     US Economy                                                      Current Retail Industry Trends




    Macro-economic factors effecting                                                      Product Differentiation
   Prices-The Consumer Price Index (CPI)                                       In an industry with very low margins, Sears Holding
     o   Inflation rate captures the changes in prices of consumer               has significant rivals in this market
         commodities
                                                                                Sears Holdings as a major retailing chain that hopes
   Consumer spending                                                            to boost its growth by implementing customer centric
     o   Increase in disposable income associated with Expectations of
         increase in demand and thus increases inventory holdings                initiatives like online shopping websites
   Cost of capital                                                             Sears Holding is a “price searcher” firm
   International rates                                                         Its primary competitive strategies are cost leadership
   State of the economy                                                         and differentiation
     o   Low levels of economic activity are associated with a decrease in      It is established by having premises of an efficient
         inventory holdings                                                      scale, and buying power with suppliers
Porter’s Forces
    Michael Porter Competitive Strategy
                                           Supplier Power
                                            Suppliers can be powerful if:
                                                  o Sellers are concentrated
                                                  o Credible forward integration
                                            Sellers are weak if:
                                                  o Competitor suppliers
                                            Buyers have very little bargaining power

Barriers to Entry                                                                       Threat of Substitutes
 Increasing trend of chain stores                                                       Tendency in retail is to specialize in a
 Absence of amount of capital required,                                                  wide range of products & services
 national presence and distribution                                                      Switching costs
 network                                                Competitor                       Price-performance trade off of
 Established brands                                                                    substitutes
 Number of resources & assets


                                       Buyer Power
                                        Sears is a price searcher firm
                                        Buyers can be powerful if:
                                             o Buyers are concentrated
                                        Buyers are weak if:
                                             o Buyers are fragmented
                                        Buyers have very little bargaining power
FINANCIAL ANALYSIS
Comparative Share Prices
                                                                                                                                     SCHL-Share Price Performance
$250                                                                                                                                                                                                                                                                                                                                                                                             35,000,000
                                                                                                                                                                                                                                                                                                                                                                                                 30,000,000
$200
                                                                                                                                                                                                                                                                                                                                                                                                 25,000,000
$150                Average $118.20                                                                                                                                                                                                                                                                                                                                                              20,000,000
$100                                                                                                                                                                                                                                                                                                                                                                                             15,000,000
                                                                                                                                                                                                                                                                                                                                                                                                 10,000,000
 $50
                                                                                                                                                                                                                                                                                                                                                                                                 5,000,000
  $0                                                                                                                                                                                                                                                                                                                                                                                             0
       28/01/2004
                    28/03/2004
                                 28/05/2004
                                              28/07/2004
                                                           28/09/2004
                                                                        28/11/2004
                                                                                     28/01/2005
                                                                                                  28/03/2005
                                                                                                               28/05/2005
                                                                                                                            28/07/2005
                                                                                                                                         28/09/2005
                                                                                                                                                      28/11/2005
                                                                                                                                                                   28/01/2006
                                                                                                                                                                                28/03/2006
                                                                                                                                                                                             28/05/2006
                                                                                                                                                                                                          28/07/2006
                                                                                                                                                                                                                       28/09/2006
                                                                                                                                                                                                                                     28/11/2006
                                                                                                                                                                                                                                                  28/01/2007
                                                                                                                                                                                                                                                               28/03/2007
                                                                                                                                                                                                                                                                            28/05/2007
                                                                                                                                                                                                                                                                                         28/07/2007
                                                                                                                                                                                                                                                                                                      28/09/2007
                                                                                                                                                                                                                                                                                                                   28/11/2007
                                                                                                                                                                                                                                                                                                                                28/01/2008
                                                                                                                                                                                                                                                                                                                                             28/03/2008
                                                                                                                                                                                                                                                                                                                                                          28/05/2008
                                                                                                                                                                                                                                                                                                                                                                       28/07/2008
                                                                                                                                                                                                                                                                                                                                                                                    28/09/2008
                                                                                                                            Wal-Mart-Share Price Performance
 $70                                                                                                                                                                                                                                                                                                                                                                                              120,000,000
                                                                                                                                                                                                                                                                                                                                                                                                  100,000,000
 $60
                                                                                                                                                                                                                                                                                                                                                                                                  80,000,000
 $50                                                                                                                                                                                                                                                                                                                                                                                              60,000,000
                        Average $49.19
                                                                                                                                                                                                                                                                                                                                                                                                  40,000,000
 $40
                                                                                                                                                                                                                                                                                                                                                                                                  20,000,000
 $30                                                                                                                                                                                                                                                                                                                                                                                              0




                                                                                                                                                                                             Prices                                 Volume


Source: Company data; Yahoo Finance for share price data
 CAGR-Summary Valuation
                SCHL-Summary Financials                                                    Wal-Mart Summary Financials
Jan y/e                                                              04A-7A   Jan y/e                                              04A-7A
(US$m)              FY04A        FY05E   FY06E              FY07A    CAGR     (US$m)            FY04A       FY05A FY06A FY07A CAGR
Revenue             19,843       49,124  53,012             50,703   26.71%   Revenue          284,310     312,101 348,650 378,799 7.44%
% Growth                        247.56% 107.91%             95.64%            % Growth                     109.77% 111.71% 108.65%
EBITDA               1,848        3,065   3,672              2,635   12.55%   EBITDA           17,300       18,713 20,497 21,996 6.19%
% Margin            9.31%        6.24%   6.93%               5.20%            % Margin         6.08%        6.00%   5.88%   5.81%
Net Income           1,106         858    1,490               826    9.27%    Net Income       10,267       11,231  11,284 12,731 5.52%
% Margin            5.57%        1.75%   2.81%               1.63%            % Margin         3.61%        3.60%   3.24%   3.36%
Capex                 230          552     508                570    35.33%   Capex            12,803       14,530 15,666 14,937 3.93%
% Margin            -1.16%       -1.12%  -0.96%             -1.12%            % Margin         4.50%        4.66%   4.49%   3.94%
FCF(1)              1,618        2,513        3,164         2,065    8.47%    FCF(1)            4,497        4,183   4,831  7,059 11.93%
% Margin            8.15%        5.12%        5.97%         4.07%             % Margin         1.58%        1.34%   1.39%   1.86%

  Highlights:                                                                   Highlights:
   Revenue growth rate had a positive CAGR                                      Revenue growth rate had a positive CAGR
   The increase in sales (except for FY07) follow a smooth positive             The increase in sales follow a smooth positive trend
  trend                                                                          EBITDA has a positive growth rate indicating
   EBITDA has a positive growth rate indicating                                   profitability. Margins have not declined sharply
    profitability but margins have declined                                      NI has increased over the years due to margins & reduced
   NI has reduced over the years due to increased D/A &                           expenses
    expenses                                                                     Capital Expenditure has –ve CAGR. It includes
   Capital Expenditure has an increased –ve CAGR. It includes                    multiple operation acquisitions & expansions
    multiple real estate acquisitions of space used for                          FCF is increasing highly over years which is positive for
    Holdings’ retail locations/distribution centres and for                       shareholders. It is almost double as compared to SHCL
    continued investments in our information technology
   FCF is increasing over years which is positive for
    shareholders

 Source: Company data; Yahoo Finance for share price data
 Key Ratio-Comparative Valuation
                SCHL-Earnings Per Share                                        Wal-Mart Earnings Per Share
 14                                                                 3.5
                                                            12.39             3.05
 12                                                                   3
                                                                                             2.71     2.68 Average 2.71
 10                            9.58                                 2.5                                              2.41
                                           Average 8.3
  8                                                                   2

  6          5.71                                5.63               1.5

  4                                                                   1

  2                                                                 0.5

  0                                                                   0
            FY07              FY06               FY05       FY04             FY07            FY06     FY05          FY04
                          SCHL-P/E Ratio                                               Wal-Mart-P/E Ratio
30.0x                                                               25.0x                                              22.8x
              26.1x
                                                                            Average 20.32x    20.3x     20.5x
25.0x                                             23.0x             20.0x      18.0x
20.0x                          Average 17.64x
                                15.9x                               15.0x
15.0x
                                                                    10.0x
10.0x
                                                            5.6x     5.0x
 5.0x

 0.0x                                                                0.0x
              FY07              FY06              FY05      FY04               FY07           FY06      FY05           FY04

 Source: Company data; Yahoo Finance for share price data
  Ratio-Comparative Analysis
                   SCHL- Liquidity Ratios                                                    Wal-Mart Liquidity Ratios
     Liquidity Ratios          FY07A FY06A FY05A                  FY04A         Liquidity Ratios        FY07A        FY06A       FY05A     FY04A
Current Ratio                   1.34      1.53        1.47         3.62     Current Ratio                0.81          0.90        0.90     0.90
Quick Ratio                     0.30      0.55        0.59         2.05     Quick Ratio                  0.21          0.25        0.24     0.21
 Current Ratio:                                                             Current Ratio:
        o Measure of firms ability to meet current obligations                      o Measure of firms ability to meet current obligations
        o SCHL’s liquidity is decreasing as the liabilities increases in            o Wal-Mart liquidity does not change much in recent
        comparison to current assets. This makes company more                       years
        illiquid
        o The total borrowings increases to $3.5 billion in FY08            Quick Ratio:
Quick Ratio:                                                                      o Also called Acid-Test ratio
        o Also called Acid-Test ratio                                              o Wal-Mart’s increase in debt and liabilities also make it more
        o Higher quick ratio means greater liquidity                               illiquid over the years
        o Increasing LT/ST borrowings
                     SCHL-Activity Ratios                                                     Wal-Mart-Activity Ratios
      Activity Ratios            FY07A      FY06A           FY05A   FY04A         Activity Ratios           FY07A        FY06A       FY05A       FY04A
Inventory Turnover                3.69       3.99            5.75    4.58    Inventory Turnover              8.32         8.02        7.67        7.69
Avg. Collection Period            6.88       8.44            7.34   10.52    Avg. Collection Period          3.09         2.84        2.52        1.88
Fixed Asset Turnover              5.64       5.59            9.69   84.80    Fixed Asset Turnover            4.09         4.16        4.23        4.47
Total Asset Turnover              1.76       1.75            2.50    2.70    Total Asset Turnover            2.41         2.41        2.42        2.52
 Activity Ratios:                                                            Activity Ratios:
         o Efficiency to manage and utilise assets                                    o Wal-Mart ‘s ratio indicates efficient inventory management due to
         o Slow moving inventory in recent years                                      increasing inventory and COGS and
         o Low Avg. collection period shows inefficiency in credit                    o Wal-Mart’s collection period increases from 1.88 in FY04 to 3.09 in
         management                                                                   FY07
         o FAT ratio is erratic due to distorted pattern in fixed asset               o Wal-Mart FAT ratio is also reducing over years
         o TATR of1.76 means revenue of 1.76$ for every 1$ of asset                   o Wal-Mart’s TATR also reduces to 2.41 in FY07 which at least is
                                                                                      better than Sears Holding ratio
 Source: Company data; Yahoo Finance for share price data
  Du-Pont Comparative Analysis
                      SCHL-Du-Pont Analysis                                                      Wal-Mart Du-Pont Analysis
                                 2007         2006           2005      2004                                   2007        2006        2005       2004

Net Profit AT/Sales              1.55%       2.71%          1.43%     0.81%     Net Profit AT/Sales           3.32%       3.49%       3.66%      3.69%
Sales/Total Assets              185.07%     176.32%         160.68%   229.37%   Sales/Total Assets           231.66%     230.60%    225.85%     236.62%
             ROA                 2.88%       4.78%          2.30%     1.85%                 ROA               7.69%       8.05%       8.26%      8.72%
Net Profit AT/Total Assets       2.88%       4.78%          2.30%     1.85%     Net Profit AT/Total Assets    7.69%       8.05%       8.26%      8.72%
Total Assets/Stockhldrs.                                                        Total Assets/Stockhldrs.
Equity                          256.84%     236.48%         263.31%   193.58%   Equity                       253.09%     245.55%    259.89%     243.25%

             ROE                 7.39%       11.29%         6.05%     3.58%                  ROE              19.47%      19.78%     21.46%      21.22%

                                          Highlights:
                                           Du-Point analysis is representation that splits Return on
                                           Equity (ROE) into three segments:
                                          a. Financial Leverage (calculated using an equity multiplier)
                                          b. Asset use efficiency (calculated using asset turnover)
                                          c. Operating efficiency (calculated using the profit margin)

  Return on Assets:                                                               Return on Assets:
 a. Measures the returns earned on company’s assets                               a. Measures the returns earned on company’s assets
 b. SHCL increasing ROA mean more income is generated by                          b. Wal-Mart ROA is decreasing over years which indicates less
     given level of assets (except for FY07 due to operating costs)                   income generation by given level of assets

  Return on Equity:                                                               Return on Equity:
 a. Measures the returns earned by company on equity capital                      a. Measures the returns earned by company on equity capital
     including minority equity, preferred equity and common equity.                   including minority equity, preferred equity and common equity.
 b. Sears Holding ROE has been increasing over years. In FY07 it                  b. Wal-Mart’s ROE is slightly reduced over the recent years
     reduced to 7.39% due to decrease in total assets and                             but is still high then SHCL
     stockholder’s equity.
 Source: Company data; Yahoo Finance for share price data
 Cash Flow & FCF-Comparative Valuation
              SCHL-Cash Flow Statement                                             Wal-Mart Cash Flow Statement
                                 2007      2006      2005      2004                                      2007       2006      2005      2004

CF from Operating Activities $1,547       $1,428    $2,193    $1,068     CF from Operating Activities $20,354 $19,952 $18,241 $15,044

CF from Investing Activities     $437      $660      $632      $332      CF from Investing Activities $15,670 $14,463 $14,186 $12,351

CF from Financing Activities $3,439       $1,252    $1,953         $53   CF from Financing Activities $7,134       $4,839    $2,422    $2,609
Highlights (FY07):                                                       Highlights (FY07):
CFO increased to $1.5bn due to inflow of $66 million related to         CFO increased to $20.35 bn & is primarily attributable to increased
  merchandise inventories                                                  income from continuing operations
 CFI reduced to $437mn due to investment losses of $14mn                 CFI reduced to $15.6 bn due to increased capex in expansion and
  related to swaps                                                         acquisition activities
 CFF increased to $3.4bn due share repurchase ($2.9 bn, $806             CFF reduced to $7.13bn due to increased LT debt & company has
  mn and $585 mn of its common stock)                                       entered into sale/leaseback transactions involving buildings
                           SCHL-FCF                                                              Wal-Mart-FCF
                                 2007      2006      2005      2004                                       2007      2006      2005      2004
CF from Operating Activities $1,547       $1,428    $2,193     $1,068    CF from Operating Activities $20,354 $19,952 $18,241 $15,044
    Capital Expenditure          $570      $508      $552      $230          Capital Expenditure        $14,937 $15,666 $14,530 $12,351
       Free Cash Flow            $977      $920     $1,641     $838             Free Cash Flow             $5,417 $4,286 $3,711 $2,693
Highlights (FY07):                                                       Highlights (FY07):
 FCF as net cash provided by operating activities of continuing          FCF as net cash provided by operating activities of continuing
  operations in the period minus payments for PPE                          operations in the period minus payments for PPE
 FCF is increasing due to increasing CFO and capex which includes        FCF is increasing due to increasing CFO and capex which includes
  multiple real estate acquisitions & investments                          multiple real estate acquisitions & investments and increased income
                                                                           from continuing operations

 Source: Company data;
Recommendations
                                            Future Recommendations for SHCL
 Retailers should continue to focus on maintaining or increasing market share in 2009 (future also)

 Company needs to emphasize on:
      o value proposition
      o managing profitability & preserving liquidity
      o maximizing capital efficiency

 Emphasizing Value to Gain Share
      o Value oriented offerings should be the focal point
      o Companies that have a strong value perception & private and exclusive brand offerings should also
        outperform relative to their peers

 Preserving Operating Margins - Inventory and Operating Cost Management
        o Further cost cutting measures should be significant area of emphasis
        o They look to offset margin compression from heightened promotional activity
        o Increased scrutiny for Inventory management, supply chain efficiencies, labour productivity & other operating costs

 Liquidity Focus and Capital Efficiency
         o Companies should work to maximize free cash flow and maintain cash balances
         o More stress on reducing working capital needs, lowering capex & halting share repurchases

 Retail Consolidation Acceleration (Expected)
         o Another trend expected in 2009 as strong operators gain share & weaker operators get rationalized out of the market




Source: Fitch US Retail Outlook 2009
THANK YOU

								
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