Executive Summary . 3-4
History .. 4-5
Strategic Elements 5-6
Critical Events .. 6-7
Leadership 7-8
Mission and Vision Statement . 8-9
External Assessment 9-13
Analysis of Competitive Position 13
Internal Assessment . 13-17
Current Strategy 18
SWOT Analysis 18-21
BCG Matrix . 21-23
IE Matrix .. 24-25
Possible Strategic Alternatives 25-26
Evaluation of Current Organizational Structure .. 25
Recommendation Changes .. 25-26
Situational Analysis . 26-29
New Turnaround Objective .. 29
Proposed Measures . 29-31
Funding this Turnaround Effort 32-33
Financial Projections 33-34
Conclusion 34
References 35-36
Sears Holdings Corporation
Executive Summary
Sears Holdings is a major brick-and-mortar retailer in both the United States and Canada. As such, it sells a wide variety of products, including appliances, consumer electronics, apparel, tools, sporting equipment and groceries in more than 4000 stores across North America. Just over 3800 of these stores are directly owned by Sears Holdings, while the remainder are independent. Sears Holdings has only existed since 2005 and came into being when the venerable Sears Corporation merged with Kmart. Both of these companies had been a part of the American retail scene for generations. In spite of this longevity, both Kmart and Sears had recently begun to experience significant declines in their sales and overall performance during the previous 10 years. In part this was because of a more difficult economic environment, but it was also because competition for retail stores was becoming much more heated.
However, this merger failed to solve the problems these two companies face separately. Over last few years, sales and profits of Sears Holdings have dropped significantly, while those of its competitors have risen. Many of the problems that Sears Holdings currently faces can be attributed to poorly thought out merchandising and slowly deteriorating stores. Between 2012 and 2015, Sears Holdings lost over $7 billion. In the face of these difficulties, the company’s management has proven fairly ineffectual. Several attempted at turnarounds have largely proven failures.
Following examines Sears Holdings current situation and evaluates it in light of current trends, opportunities and challenges in the retail industry. After this, the financial and operational status of the company will be considered, with the goal of determining the underlying cause of these problems and how they might be addressed. The result from this analysis is then used to propose an alternative turnaround plan that will (in all likelihood) improve the company’s current operations and place it on a course toward sustainability and longevity.
History
Sears, Roebuck and Company commonly known as Sears is a U.S company that was established in 1886 by Richard Sears and Alvah Roebuck. It became a subsidiary of Sears Holding Corporation in 2005 after a merger with Kmart Corporation. Contemporarily, the company is domiciled at Hoffman Estates in Illinois. The company majorly deals with clothing, electrical appliances, home products and services, automotive repair tools and products and other hardware. It has around 1700 operational stores across the US. It had approximately 300,000 employees in 2011. The company also operates in Mexico and Canada. In Canada, it carries its operations through the Sears Canada Incorporation. Sears Holdings operates through its three major subsidiaries namely; Kmart, Roebuck and Sears (About Sears, 2016).
The company grew tremendously since it was founded in 1886. In the 1960s, the company was expanding exponentially and as an attestation to the growth, almost a third of Americans had a credit card from Sears. It incorporated new trends such as mail-orders when America was still considered rural. Quite a significant percentage of Americans were positively affected by the presence of the company especially those living in Chicago where it was initially domiciled (Blaszczyk, 2009). As the automobile industry grew, the retailer saw the need of moving even closer to the people and making its presence and impact in the business world across the U.S. It thus opened stores rapidly across shopping malls across the United States. Sears currently has stores in 49 states in the U.S (Blaszczyk, 2009).
The company majors in the manufacturing and distribution business since it was founded almost 130 years ago. Some of the products the company retails in entail: home appliances and consumer electronics. In fact, the company has been ranked as the leading retailer in the US when it comes to home appliances, their installation, and servicing (Sears, 2011). The company is also among the leading producers of gardening and lawn maintenance tools. Other key products from the company include; apparels, fitness equipment and automotive products such as tools that are used to carry out repairs. The company has its own brands which include; Kenmore Home Appliances, Craftsman Tools, Diehard Batteries and apparels trading like Lands’ End and Joe Boxer among others (About Sears, 2015).
According to Adam Hartung, the company had an intangible value of around $11 billion when it merged with Kmart in November 2004 under the chairmanship of Edward Lampert. However, it is disheartening to note that the company’s value has shrunk to a mere 1.6 billion a decrease in value of around 85%. Hurtung (2016) further indicates that the share value of the company had taken a nose dive from $92 when it merged with Kmart to a paltry $15 in 2015. Despite the new strategies that the company has come up with, the future of the company seems bleak and business experts such as Melich Greg (2014) who works with Evercore ISI indicate that the value of the company has been damaged utterly and that Sears is on the verge of bankruptcy (Cochman, 2016).
Strategic Elements
For a long time, those in management have felt that the company has not had a clear strategy on what it seeks to achieve (Sweeney, 2012). Business analyst Panos Mourdkoutous (2015) opines that, it is the lack of a clear business strategy which has landed the giant retail company into much financial trouble. The first one was during the 1980s when the company engaged in an aggressive expansion strategy into real estate and financial services. This new venture was not in line with its core business of retailing and thus it spelled doom for the company. The other big strategy mistake was in 2006 when the company restructured its operations which meant the newly created units were to be under the management of unqualified people who lacked requisite experience (Mourdkoutous, 2015).
Additionally, the company adopted another strategy of selling some of its leading brands and company stores as a way of generating more income for its expansion. This was due to the fluctuating revenue and the ever widening debt margin which faces the company (Hartung, 2016).The strategy had a negative impact in that it lost the scale advantage and brand diversity it previously enjoyed. The strategies implemented since the 1980s have worked against the company in that instead of realizing more growth, the company has been losing a lot of money and customers (Blaszczyk, 2009).
Currently, the strategies of Sears according to its spokeswoman Kimberly Freely include working towards the restoration of its profitability. By putting more focus on its loyal customers and profitable stores, focusing on the most sought after products which are mainly home appliances and other home-based services, as well as the generation of more funds through increased sales and disposal of assets owned by its stores. The solicitation of more funds from the investors as a way of reinforcing its financial flexibility has also been identified as another viable strategy. The strategy is bound to help the company to regain the competitive edge it once enjoyed as a leading retailer (Sears, 2015).
Critical Events
One critical event of Sears, Roebuck and Company was its Merger with Kmart in 2005 to create the current Sears Holding Corporation, which is the holding company of Sears and Kmart (Blaszczyk, 2009). The other critical event was the diversification of its business portfolio in the 1980s to incorporate real estate and financial services. Another critical event was the selling of its long -standing brand of Lands’ End. Some of its competitors include Wal-Mart, Ark, Dillard’s, Best Buy, Amazon, and the Gap.
Leadership
Regarding leadership, the company has been on the spot for poor management by its top echelon management. The company is currently headed by Edward S. Lampert, who doubles as the chairman of the Board of Directors and Chief Executive Officer. Others in the top management include Robert Schriesheim, who is currently the Executive Vice President and doubles as the Chief Financial Officer. The Chief Administrative Officer in charge of the day to day running of the company is James Andrew, who fills in the position of the CEO in absentia.
Sears has come under much criticism from all quarters because of its poor performance which has largely been attributed to its poor management. In 2014, the current CEO was ranked the second worst CEO in America by Forbes largely because of the poor strategies and policies he has enacted to no fruition. The poor performance which now eminently threatens the survival of the giant company has been attributed to the micromanagement and segregation of the low and middle management and employees by the high ranking management when it comes to decision making. In particular, Chairman Edward Lampert has been cited as being authoritarian and leaving no room for diverse opinions. His style of leadership has been through issuance of strict orders which have to be followed to the latter. Any employee or even manager who dares challenge his perceptions about the company will mostly than not be sent packing.
Mission and Vision Statement
The mission statement of Sears reads, “To grow our business by providing quality products and services at great value when and where our customers want them, and by building positive, lasting relationships with our customers" (Sears, 2015). The vision statement of Sears is, “to be the preferred and most trusted resource for the products and services that enhance home and family life” (Sears, 2015). The essence of a mission statement is to express the purpose of an organization. An effective mission statement has to capture the following elements of an organization: the products and services available, the target markets, the emphasis on values espoused by the organization and its major priorities for subsistence (Macnamara, 2014). The author further avers that a mission statement should be unique and concise and it needs to give the employees a sense of direction and prioritization in their work.
The mission statement of Sears does not mention the products and services it offers specifically. However, it does mention the value of quality by stating that it aspires to provide quality products and services to its customers. It also does not mention the clientele it is targeting. However, on the brighter side, it can be inferred that its survival strategy is through the establishment of positive and lasting relationships with the customers. The mission statement is concise and unique. It easy for an employee to discern that his or her core duty is to ensure that they provide quality services which will ultimately lead to a positive and lasting relationship with the clientele. That way the company will remain afloat and continue thriving. In my assessment, apart from the failure to specifically mention the services and products offered and the target clientele, the mission statement is relevant and fairly strong.
Macnamara (2014) describes a vision as a motivational tool which expresses the desired optimal goals and objectives the organization aspires to achieve through the implementation of its strategic plan. The vision has to be inspirational and memorable as it guides and encourages the employees to move towards the achievement of the desired future. The vision of Sears, which states that the retailer aspires to be the preferred and most trusted resource for the products and services that enhance home and family life, is both inspirational and encouraging. The ultimate goal of any business owner is to be the most trusted source of the products and services one does offer. The vision of Sears is both robust and pertinent for such a business.
External Assessment
A critical external factor evaluation of Sears Holdings reveals the following facts regarding the opportunities; the retailer has the following; its private labels and brands have been growing, its online sales have been increasing despite facing cutthroat competition from companies such as Amazon and Best Buy. Decentralization of its operations by venturing into new markets such as Canada and Mexico and an increased spending by American citizens on health which means that Sears exercise equipment will have a broader market in the near future. These opportunities if optimized have the potentiality of spurring growth and expansion of the retail company.
Analysis of Sears using EFE tool
Where 4 means a superior response, 3 – above average response, 2 – average response and 1 – poor response.
The external threats that Sears faces include the following; Intense competition from robust competitors such as Wal-Mart, Best Buy, Amazon, Bentonville, Ark, Dillard’s, Gap among others. As the competition becomes more intensified, more companies are merging, and this will pose a huge threat to the business. Recent surveys also indicate a low consumer confidence as analysts have continued to foresee a gloomy future for the retailer shop (Melich, 2014). Such a loss in consumer confidence has the potentiality to impact the reputation of the company negatively which would further sink its fortunes. The other eminent threat is the fact that the company has been affected by the economic slow-down which means consumers has less money to spend. Finally, an alteration in the minimum wage policy has seen the cost of labor escalate. These are some of the threats which pose a detrimental impact on the overall performance and growth of the retail giant.
Competitive Profile Matrix of Sears, Wal-Mart & Target
Where 4 means a superior response, 3 – above average response, 2 – average response and 1 – poor response.
An evaluation based on the Competitive Profile Matrix indicates that Sears is still a competitive company, but its market capital has shrunk. It is the leading retailer in home appliances and electrical products, installation and maintenance services, lawn and gardening tools among others. A comparison between Sears, Wal-Mart Stores and Target indicate that the company has not been doing well regarding its Quarterly Revenue Growth, which stands at -23.30% compared to Wal-Mart, which stands at -0.10% and Target at 2.80%. Regarding its operating margin compared to the other stores, it recorded a -0.06 % while the others are at 5.0% and 6.0%. In terms of profitability, the company has not realized any profits since 2012 as opposed to the other retailers which continue raking more profits for the investors. The share value of Sears has also been on the decline and is currently trading at $15 while Wal-Mart, Amazon, Target and Industry have realized significant growth (Forbes Business, 2015).
Analysis of Competitive Position
The trends observed from the EFE and CPM analysis has the following strategic implications on Sears Holdings. For the company to stay relevant, in needs to convert the current trend of loss into profitability. Profitability will be attained through dealing with the intense competition which contemporarily prevails in the retail store market. As indicated by the current CEO Edward Lampert, more needs to be done concerning overhauling the stores to meet the current consumer trends and needs, and this will be through more capitation. The leadership of the company needs to be changed and a more autonomous, consultative and consensus-building approach should be adopted (Melich, 2014). The management team that heads the units which were created in the restructuring plan of 2006, need to be trained as a way of making them more competent. Another segment of the business that needs to be looked at is ensuring the good reputation the company has always had is not tarnished and that consumer trust and confidence is bolstered (Hartung, 2016).
Internal Assessment
Where 4 means a superior response, 3 – above average response, 2 – average response and 1 – poor response
An evaluation of the IFE indicates the following strengths and weaknesses. Regarding strengths, Sears has the following strongholds namely; the company has a strong retail network though it has closed some of its stores through selling the stores and their assets to generate more operation income. The other strength is the fact that the company still has brands which remain popular among its customers like Kenmore Home Appliances and Craftsman Tools. The other strength the company has, that is above average is a strong management team which has the potential to realize better results if top leadership would incorporate training to enhance its management team.
Some of the weaknesses which are apparent include the ever widening debt margin which needs to be cleared if the company is to turn its fortunes around. The company is challenged with the fluctuating revenues and inadequacy of operating capital. The company needs to bring more investors on board who will, in turn, inject more capital if the share value is to be made valuable. The employees and the middle and low tier management also need to be motivated and they need to be given more discretion to come up with more novel strategies which will remedy the ailing retail giant.
Financial Ratio Analysis of Sears
A Financial Ratio Analysis of Sears Holdings in terms of Sales, Earnings and Shareholder Equity show the following trends. In terms of sales, no growth has been realized in the last five years, and this can be attested from the operating profit margin. Sales have been declining at an average rate of around 6% annually, and the quarterly revenue has been on a downward spiral. In terms of earning, the company has been experiencing a decline in earnings which have significantly shrunk. The number of customers has also been going down which means it will become harder to reduce prices as a way of attracting more customers (Cochman, 2016). With declining sales and negative profitability, offering low item and service costs that is in line with the economy of scales is impossible.
In terms of shareholders’ equity and consequent returns, the company has recorded a negative shareholders’ equity. This essentially means that the company has more liabilities than assets to an excess of 912 million. According to Wei (2013), going by the indicators especially the negative shareholder equity, negative profitability, negative net profit margins and negative earnings per share, it can be concluded that the company is technically bankrupt.
The strategic implications of the IFE analysis is that the company needs to change its management style, it needs to stabilize its revenue, it needs to come up with new strategies, it needs to prudently use the resources it has and it needs to engage in more CSR activities as a way of ameliorating its reputation. An overhaul in the management style means more consultation when it comes to decision making and allowing employees and other members of the management to concoct new strategies of dealing with the cut-throat competition, loss of earnings and revenue. A prudent use of its resources especially those acquired from Kmart means more market presence and a reduction of the current debt while broadening profitability margins (Wei, 2015).
Internal Assessment
The SWOT Analysis, using the Internal Factors Evaluation (IFE), noted Sear’s strengths in the areas of the retail network (expansive), solid brand recognition (e.g. Kenmore Home Appliances, Craftsman Tools, etc.), and a strong management team (lots of untapped potential), among others. Conversely, its weakness was also notable: deteriorating debt margin (has exceeded its assets and capital), unreliable revenues (fluctuating), and poor management style (cause of poor strategies), among others. From 2015 to 2016, Sears experienced a slight increase in its gross profit margin (0.2%), a small improvement in its operating profit margin (from -4.83% to -3.98%), and more than one percent decline in its net profit margin. Nevertheless, its return on assets also slightly proved (from -10.67% to -9.20%).
Current strategy
Supplier and merchandise inventory management: Despite the fact that the fourth quarter only generates no more than 29 percent of its total revenues (thus only four percent higher than the average revenue shares in the first three-quarters. Sears continued to incur heavy inventory spending for this quarter using outright purchases from cash flows, supplier credit terms, and domestic debt (Sears, 2015). Consequently, overspending for revenue (net operating profit margin) increased only four percent.
Retail brand portfolio management: Sears relies primarily on its branded merchandise with apparently no tough monitoring on its sales performance strength, relative to other branded products particularly those selling in competitor stores (Sears, 2015).
Workforce management: Sears had around 178,000 employees in the United States and territories, including part-timers, without disclosing the ratio between regular and part-time employees (Sears, 2015). This rate may indicate an irrational ratio, which can contribute to driving its employee costs.
Online shopping: Of the 941 Kmart stores in 49 American states and three international markets, only 697 stores has in-store pharmacies and only around 900 stores engaged in picking up services for its online shopping channels (e.g. mygofer.com; kmart.com; or shopyourway.com) (Sears, 2015).
SWOT Analyses
SWOT Matrix
Strengths Weaknesses
1. Strong presence 1. Ever-widening debt margin
(Expansive retail market) (Inadequate capitalization)
2. Strong brand recognition 2. Unreliable revenue stream
3. Strong management team 3. Inferior management style
(Untapped though) (Ignores diverse opinions)
Opportunities SO Strategies WO Strategies
1. Increased health spending 1. Increase inventory by 30% 1. Close all persistently negative
of health products in all net profit outlets (W1, O2)
outlets (S1, O1)
2. Broadening of sales 2. Maximize sales on loyal 2. Ensure dependable revenue
(Focus on loyal customers) customers and win more and profit streams from loyal
new customers (S1, O2) customers (W2, O2)
3. Expedient online shopping 3. Increase profit margin in 3. Maximize idea generation to
online shopping channels improve online sales figures
(S2, O3) by 30% (W3, S3)
Threats ST Strategies WT Strategies
1. Intense competition 1. Increase retail outlets 1. Use low interest debts in
profit performers (S1, T1) (W1, T1)
2. Economic recession 2. Expand on brands with 2. Increase profitability by ±30%
strong value propositions by focusing on high value
(S2, T2) products and space leasing
(W1, T2)
3. High labour cost 3. Rationalize labour expense 3. Improve engagement with
per outlet and per unit and participation by high
job performance (S3, T3)
BCG Matrix
BCG Matrix is a tool that is used to analyse the market growth and market share of brands/products to make strategic decisions. This model has its basis on the product life cycle that tends to determine the various priority areas within a product portfolio of a given unit of business. For purposes of creation of long-term value, the portfolio products for a given company need to contain low and high growth products (Value Based Management.net, 2016).
The high growth products will be primarily in need of inputs more so of cash. However, the low growth products will tend to generate the needed cash. The BCG Matrix has two dimensions, that is, market growth, and market share. The urge for a bigger market share is due to a need for growth of the company. The four categories are created while placing products in the BCG Matrix, namely: Stars, Cash cows, dogs, and question marks.
The stars represent high growth and high market share. The stars give an estimated net cash flow, as well as balance, and it uses a large amount of money for purposes of generating more cash for the company. The cash cows represent a higher market share, as well as low growth, and it regulates the generation of cash and profits. Besides, the cash cows act as the pillar stone for the company. The dogs represent both the low market share and low growth. They tend to minimize expensive turnaround plans and delivers liquid cash in the company. However, the category still minimizes and avoids a large number of dogs in the respective company. The category of the question marks represents both low market share, as well as high growth. Besides, they specify the worst characteristics of the cash in the company brought by low returns, as well as high demands.
According to the Boston Consulting Group Wall Mart exist in the STARS quadrant with having the high market share and higher market growth whereas Target falls in a CASH COW quadrant. It contains high market share and Low Market Growth. In contrast, Sears falls in the DOG quadrant withholding the Low Market Share and Low Market Growth. The major reason to fall in this quadrant is that Sears is unable to generate revenue to overcome expenses. Therefore, it is facing difficulty generating profit and is weaker in the market. Sears should focus on the generation of revenue rather than the hiring of unskilled people, which would help them to raise the market share and market price in the industry.
The BCG Matrix has three limitations, namely; the success factor is not represented by only high market share. The attractiveness of the market is not represented by only market growth; however, other factors can also be used to represent the attractiveness. Finally, the last limitation is that the cash cows at times earn less cash as compared to the cash earned by the dogs.
Sears Holding Subsidiaries
Segments Revenues* ($) % Rev Profits % Profits Rel. Market Share Industry Growth (%)
1 12,074 38 (422) 28
2 17,036 55 (920) 61
3 2,088 7 (166) 11
Total 31,198 100 (1,508) 100
1-Kmart; 2-Sears Domestic; 3-Sears Canada [All $ figures in millions]
(*) As merchandise sales and services; (**) As operating income (loss) (Wei, 2015)
SPACE Matrix
WALMART
SEARS
TARGET
Strategic Position and Action Evaluation Matrix is used to make any decision and helps to take the action for making the strategic decision to make in profit and generate more revenues. Wall Mart falls in the Aggressive quadrant due to its diversified product line, backward, forward and horizontal integration strategy. Wall Mart is also doing the market penetration by developing his product for the client to accomplish their needs and also develop the new market to capture untapped customers to raise its market shares. Sears falls in the Defensive quadrant because to meet its expenses and to meet their financial needs Sears is investing in different industries and aspects of the market. They are following the strategy of liquidation by selling out the stores and land to overcome its expenses. The decision to invest in new ventures is not a right decision made by Sears. Targets fall in the Competitive quadrant due to its horizontal integration and penetrating in the market by introducing the different products and exploring the new markets to serve its clientele.
IE Matrix
The IE Matrix is used to evaluate the current business position of the company, as well as checking correlation between the internal and external components. After checking the correlation, a decision is made accordingly to ascertain whether the company is making a profit or not. To understand the internal and external matrix we make three major quadrants as per their market implication and the said strategies which are followed by them. As per the IFE and EFE matrices, Wall Mart follows a different strategy of market penetration. Wall Marts product development and market development along with the horizontal integration falls in Quadrant I. However, Targets fall in Quadrant II, following the market penetration strategy to serve the customer for making venture in profit, and attracts customers towards its products. In contrast, the weighted score of internal and external factors of Sears is too good as compared to its other ventures operated by the organization and its falls in Quadrant III. To meet its expenditures, the company is going to be invested in different markets and areas that are not related to their core business like real estate. The market shares and share value of Sears fell due to the investment of the company in different areas, as well as markets.
Possible Strategic Alternatives
The central strategic issues that Sears needs to address with priority may be grouped into four areas consistent with its current strategy. First, in its supplier and merchandise inventory management, its current strategy must be replaced with a supplier space lending for external branded merchandises to cut down on inventory expenditures all year round. No debt inventory building in the fourth quarter (to focus on historically highly saleable items at cash flow defined inventory levels), and display space rationalization between in-house brands and high performing outside brands (to provide more display spaces for highly performing self-financed merchandise inventory).
Second, in its retail brand portfolio management, Sears must adopt high selling space preferential policy both for in-house and external brands, especially in merchandises that it must spend money directly with suppliers to avoid allocating money and space on low sellers.
Third, in its workforce management, Sears should institute a performance-based employee retention policy (to retain only those with high-performance contributions to the company) and a net profit outlet policy (to cut down on employee costs in unprofitable outlets). Its failure to report the regular-part time employee ratio must indicate its failure to rationalize its employee expenditures.
Fourth, in its online shopping management, it is clear that its retail outlets have not been maximized in supporting sales from its online shopping portals, which expectedly limits the number of consumers engaged, particularly in markets where no pickup from the store or direct-to-home delivery mechanisms has been established. Moreover, free direct-to-home delivery services, which are common in online shops, is pricier than the pickup in the store mechanism.
Evaluation of Current Organizational Structure
The current organization structure should be changed due to several reasons. Sears has invested in new ventures that are not in the same industry or in line with the principal business of the company. Market diversification is not taking place properly by checking the feasibility analysis, and top management should hire the people who are fit for the job rather than people who have no experience to work in the competitive environment.
Recommendation Changes
Management of the company needs to take serious action for making few changes in their corporate structure and corporate governance. Company values should be aligned with their vision and mission statement. The current organizational structure is not following the best practices of corporate governance, which leads to a productive working environment, that generate profit in results. Top management decision should be an implication of vision and mission statement of the organization; this practice encourages the staff to work more deliberately for the company's profit maximization.
All the investment in diversified sectors should be in line with the business and company need only to invest in the businesses after complete analysis for checking the viability of new ventures. The company should have the first goal to make the business in profit and no need to sell different assets to overcome the company’s deficit (Melich, 2014). Management needs to take thoughtful action to make their businesses market leader and raise the value of their shares in the market to attract more investment and shareholders.
Situational Analysis
Sears Holdings faces a number of major issues, all of which need to be addressed. Financially speaking, Sears Holdings has been unable to generate sufficient cash from its ongoing operations because of a continuing slump in sales. It has also accumulated debt at an alarming rate while experiencing significantly greater SGA (Sales/General/Administrative) expenses. Further, increased financial leverage has led to higher interest payments on its debt. From an operations perspective, Sears Holdings’s brick-and-mortar stores have rapidly deteriorated. A direct consequence of this is a dwindling customer base. Another major issue for Sears Holdings has been its poorly thought out turnaround strategy. In addition, its marketing positioning has been badly implemented. Sears Holdings is also lagging behind other retailers technologically and its managers yet to lay out a clear direction for the future of the company. The following looks at these points in greater detail.
Financial
Sales at Sears Holdings appeared to be in an almost unstoppable decline. This is clearly demonstrated by the fact that in February of this year Sears Holdings reported that its same-store sales have dropped during the fourth quarter by 7.1%, with a corresponding drop in revenue of 9.8%. With the resulting 9.3 billion in revenue for the fourth quarter, Sears Holdings reported a loss for that quarter of $580 million. The loss for the fourth quarter of the preceding year was $159 million. The overall fiscal year loss for Sears Holdings in 2015 was $1.1 billion. While this was an improvement over the preceding four years, which sought a combined fiscal year loss of over $7 billion, it was still hardly a positive outcome. Furthermore, SGA-to-Sales was entirely stagnant. Furthermore, on January 31 of this year, Sears Holdings quarterly profit margin stood at -7.94%.
Obviously, the above issues have resulted in a cash flow problem for Sears Holdings that has led to the issuance of even more debt. Sears Holdings currently has an untenable debt-to-equity ratio of -1.516. The company’s low working capital assets percentage makes it clear that the ongoing operating losses have significantly reduced working capital reserves. Under such circumstances, bankruptcy becomes a real possibility. Sears Holdings cannot continue to finance its ongoing operations with low sales and constant borrowing.
Operations
With regard to its operations, Sears Holdings is in a situation where its brick-and-mortar stores are rapidly deteriorating because of years of neglect and underinvestment. The company spends a tiny fraction of what its competitors (even the discount retailers) do on capital expenditures. Whereas Target and Walmart spend around $8 per square foot to maintain the appearance of their stores, Sears spends only approximately $1.5 per square foot. Clearly, it is impossible for Sears Holdings to maintain the appearance of its stores at the same level as its competitors when it is spending less than 20% of what they do. It’s hardly surprising that with generating stores and generally poor customer service, Sears Holdings sales have fallen through the floor. This includes both the Sears stores and Kmart (Egan 2015).
Strategy
As pointed out above, the strategies that Sears Holdings has used over the last few years toward turning the company around have largely been mistakes. These mistaken strategies were largely the brainchild of two individuals: CEO and board chairman Edward Lampert and former IBM executive Dev Mukherjee (Steele 2016). The two principal cornerstones of the turnaround strategies at Sears Holdings were the “Shop Your Way Rewards” customer loyalty program and the significant increase in the use of analytics based on collected customer data.
Another problem with the strategy employed at Sears Holdings was lacked appropriate marketing positioning. The company chose to use too wide of an approach, with no real differentiation. As a result, it was forced into direct competition with big box retailers, home-improvement outlets and even electronic stores. All of this had the effect of eroding Sears Holdings overall market share. Unfortunately, by most measurements Sears Holdings fares poorly against its principal competitors. The positioning map below makes this clear.
The management problems at Sears Holdings have been serious for a number of years. The management issues at the company include instability caused by high turnover rate, a top-heavy organizational structure, poorly designed bonus and compensation programs, an ineffective Board of Directors, frequent conflict of interests, slow introduction of modern retail technology and inconsistent adoption of customer loyalty programs.
New Turnaround Objective
Any new turnaround strategy for Sears Holdings should have the principal objective of returning the company to profitability through aggressive revision of the product-portfolio so as to increase sales and reduce operating costs in a way that will provide enhanced shareholder value.
Proposed Measures
The proposed measures in the turnaround approach being suggested here will be designed to do the following:
Increase Revenue per Square Foot
Increase Net Income
Improve the Company’s Debt-To-Equity Ratio
Improve the Company’s Inventory Holding Ratio
When considering the above, it’s important to keep in mind that there are certain areas on the above positioning map where Sears Holdings does relatively well. These include the proximity of their stores for customers, the brand names that they have available and (to a lesser extent) their perceived quality. Any turnaround strategy should play to these strengths. In particular, the company should take advantage of the fact that it still has a good reputation for tools and appliances. It also has (despite the sale or closure of some stores) a sizable retail infrastructure in both urban and suburban locations. In addition, it does possess an online sales platform. Following looks at specific proposed measures.
Measures for Both Sears and Kmart Stores
Sears Holdings Kmart and Sears stores both need to significantly reduce the number of employees currently on the payroll. Cutting these SGA costs can help get the company on much more solid footing. This can be achieved by the following means:
Reduce the Current Workforce by 40%
Slash the Top-Heavy Management (along with Their Excessive Salaries)
Adopt Laborsaving Technology (Self-Checkout Stands, Mobile Apps, Price Scanners and Information Kiosks)
Modernize the Company’s Inventory Tracking and Supply Chain Infrastructure
Repositioning Sears Stores to Increase Sales
Currently, Walmart achieves $681 of sales per square foot of store. Sears stores in the US and Canada currently only manage $197 per square foot. Thus, the principal goal for Sears Holdings should be to increase this number to at least $500 per square foot. The following product repositioning will help achieve this goal:
Terminate Menswear, Women’s Wear and Beauty Products
Focus More on Tools and Home Appliances
Become a Go-to Retailer for Home and Garden, Automotive, Home Renovation and Fitness
Close Two-Story Mall Locations
Discount Current Inventory for the Holiday Season
Repositioning Kmart Stores to Increase Sales
Kmart stores account for approximately one third of Sears Holdings revenues, but as with the Sears stores themselves these revenues have been dropping on a yearly basis. Dealing with this will require that the company:
Take Advantage of Kmart’s Strong Geographic Presence
Target Low Income Customers
Offer Basic Goods at Low Prices
Significantly Drop Prices (Which Are Currently Slightly Higher Than Walmart or Target)
Focus on Volume Sales Rather Than Margin
Close Two-Story Mall Locations
Maintain Current Supercenters
Funding this Turnaround Effort
Funding for this turnaround will be derived from a number of sources, and acquiring these funds will comprise much of the first phase of this effort, which would run from November 2016 to May 2017. The following outlines the steps involved:
At Cost Liquidation of $8.9 Billion in Inventory (3.5 billion through deep in-store discounting and 5.4 billion sold to bargain discounters)
$150 Million from Consolidations to Create Lean Management Structure (savings on offices, administration, salaries)
The second phase of the turnaround would overlap with the fundraising effort and would run from January 2017 to November 2017. In this phase, the efforts toward raising funds for the turnaround will continue. However, this phase will also see the first expenditures made toward achieving the goals of the turnaround effort. The steps of this phase are laid out below:
Closure of Low Traffic Stores (5% of All Sears and Kmart Stores) Will Generate $2.6 Billion
Layoffs (40%) and Reduced SGA Costs Saved $3.5 Billion
Introducing modern inventory tracking and supply chain, as well as analytics and big data will cost $200-$300 million
$5 per foot store renovations, with the total cost being $1.25 billion
The third phase of this turnaround effort relates to image and branding efforts and will run between August and December 2017. At this point, the company will attempt to redefine itself in the eyes of current and potential customers. It will do so in the following ways:
The Company Will Relaunch Both the K-Brand and Sears Roebuck Brands
40% of the New Branding and Customer Experience Strategy Will Be Introduced between September and November 2017
Financial Projections
Based on the above turnaround plan, the following graphs provide financial projections for revenue and net income at Sears Holdings in the 2016-2018 timeframe. They also contrast them with the same numbers seen in the 2013-2015 time frame.
As the data in above graph makes clear, Sears Holdings has been on a steep decline for long time, but that decline has accelerated over the last three years (Morningstar, Inc. 2016). In fact, Sears Holdings has no net income and is currently surviving on debt. But as the following graph indicates, the measures suggested above could potentially turn this situation around.
References
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destroyed-sears/#c6c80e41de67
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http://www.sears Holdings.com/about
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