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Repositioning K-Mart to improve the ROA of
              Sears Holdings




            Devendranadh Anumolu
             ...
How can we reposition K-Mart to improve
        ROA of Sears Holdings?

    Divest
    underperforming
    K-Mart stores

...
ROA of Sears Holdings lags behind its
                                        competitors

                               ...
Revenue/Sq. ft of K-Mart is way below that
                                of Sears Holdings

                            ...
Customer satisfaction for K-Mart is the
                                 lowest among competitors

                       ...
K-Mart needs spend more to improve its
                                        stores

                                   ...
The four key assets of K-Mart


                                                  Upgrade
                Upgrade


      ...
Divest some real estate to upgrade existing
                       K-Mart stores

                Sell off the non value a...
Criteria for selling off some Kmart stores

                   Criteria to            Criteria to
                  divest...
K-Mart will increase its ROA by 50% by
                    divesting 20% of the stores




                               ...
Investing part of the proceeds to modify
                    existing K-Mart stores



                                   ...
Online retail business is growing at a fast rate


                                                 Transactions per custo...
K-Mart lags behind its competitors in
                       online shopping experience




Source: store.org


          ...
Upgrade online shopping experience of our
                         customers


                                           ...
Implementation timeline


    May            Nov            May           Nov          May             Nov          May
  ...
By 2015, enhanced customer experience will
                           add maximum value in retail




Source: Retailing 20...
Risk & Mitigation Strategies



          Risk               Area           Rating               Mitigation
              ...
Other options considered



               Options                                    Reason for not taking

             ...
Conclusion

Premium
                                                    Kohl’s

                                          ...
QUESTIONS
References


Divesture Assumptions            Mission of K-Mart and Sears
K-Mart was third largest         Profit pool
Fin...
Divesture Assumptions


  When we     • Revenue will go down by
  divest the    15%.
lowest 20% of • COGS and SG&A will go...
K-Mart was the third largest retail store
                              behind Wal-Mart and Target
                       ...
Traditional retail value curve




Source: Retailing 2015 PwC Report
                                                     ...
RBV analysis for K-Mart


           Competitive Inimita   Durability   Appropria   Substitutabi Action
           Superio...
The GE Business Screen
                                                            for K-Mart

                           ...
Addressing the problem

              Online           Real estate        Brand equity     Channels
Positioning   Y       ...
No. of stores

                        Retailer               No of stores
                        J. C. Penny            ...
Store level data



                                   Parameter         K-Mart          Sears Holdings


                ...
Kmart had a mix of Off- Mall Stores and
                                        Superstores


                            ...
Mission

 To grow our business by
providing quality products
and services at great value
   when and where our
     custom...
Key Financial Ratios

      D/E Ratio                  .28
      Gross margin               27.74%
      Net Profit margin...
Historic financial ratios




30.00%


25.00%


20.00%                               12 months data ending Jan 2008

     ...
Competitive Performance

               Parameter                 Sears Holdings       Target             Wal-Mart
       ...
Profit Pool


                                      35.0%

                                      30.0%

                  ...
Porter's 5 Forces Analysis

Threat of New Entrants - While the barriers to start up a store are not impossible to overcome...
Value Chain Analysis



                         Firm Infrastructure

                  Human Resource Management

       ...
STEEP Analysis


• SOCIAL
  – Shoppers more geared toward strip malls, suburban
    villages
• TECHNOLOGICAL
  – Inventory...
STEEP Analysis


• Social
Shoppers more geared toward strip malls, suburban
  villages
So what?
Sears’ real estate has mos...
STEEP Analysis


• Technological
Inventory management now being driven by
  technology
So what?
Sears inventory turnover i...
STEEP Analysis


• Economic
Retail is one of first industries to be hit by an economic
  downturn
So what?
With the econom...
STEEP Analysis


• Ecological
“Green culture” not an ally of big box retailers
So what?
Sears has implemented new environm...
STEEP Analysis


• Political/Legal
Future tax changes of hedge funds could affect
  future goals of Chairman Edward Lamper...
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Strategy recommendation for Sears

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An academic project on what should be the strategy of Sears. Presented in the Spring of 2008 to a class as part of the MBA program.

Published in: Business, Economy & Finance
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Transcript of "Strategy recommendation for Sears"

  1. 1. Repositioning K-Mart to improve the ROA of Sears Holdings Devendranadh Anumolu Lokesh Bisht Tony Koschmann Gargi Kulkarni Jason Varey
  2. 2. How can we reposition K-Mart to improve ROA of Sears Holdings? Divest underperforming K-Mart stores Upgrade K-Mart stores in strategic locations Upgrade online shopping Leverage Real Upgrade Online Conclusion 2 Estate
  3. 3. ROA of Sears Holdings lags behind its competitors 11.51% ROA for major retailers 12.00% 10.09% 9.37% 10.00% 8.80% 8.71% 8.05% 8.00% 6.00% 4.54% 3.38% 4.00% 2.00% 0.00% Source: Company Annual Reports Leverage Real Upgrade Online Conclusion 3 Estate
  4. 4. Revenue/Sq. ft of K-Mart is way below that of Sears Holdings $160 $157 $155 K-Mart $150 $145 $140 K-Mart $135 $131 $130 Sears Holdings $125 $120 Sears $115 Revenue/Sq. ft Source: Company Annual Reports Leverage Real Upgrade Online Conclusion 4 Estate
  5. 5. Customer satisfaction for K-Mart is the lowest among competitors Satisfaction scores in 2006 82 80 80 78 78 77 76 74 73 72 72 70 70 68 66 64 Kohl's J. C. Penney Target Sears Wal-Mart K-Mart Source: ACSI website Leverage Real Upgrade Online Conclusion 5 Estate
  6. 6. K-Mart needs spend more to improve its stores CapEx as % revenues Wal-Mart 3.6% Kohl's 9.1% Target 6.9% JC Penney 6.3% Sears Holdings 1.1% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% Source: Company Annual Reports Leverage Real Upgrade Online Conclusion 6 Estate
  7. 7. The four key assets of K-Mart Upgrade Upgrade Brand Online Equity Real Channels Estate Leverage Upgrade Upgrade Online Conclusion Conclusion 7 Introduction Introduction
  8. 8. Divest some real estate to upgrade existing K-Mart stores Sell off the non value adding real estate Identify the stores that are underperforming and sell the real estate Upgrade the existing stores Identify the sustainable stores and upgrade them to improve the brand image and channels Upgrade Online Conclusion Conclusion 8 Introduction Introduction
  9. 9. Criteria for selling off some Kmart stores Criteria to Criteria to divest stores retain stores Upgrade Online Conclusion 9 Introduction
  10. 10. K-Mart will increase its ROA by 50% by divesting 20% of the stores Increase in ROA Increase in • The return Net Income on assets • Sears will go up Holdings Net from 3.4% Sell off assets Income will go to 5.1% up from $826 • Sell off 20% of the store space at mm to $1.3 $60/sq. ft bn generating $1.6 bn Upgrade Online Conclusion 10 Introduction
  11. 11. Investing part of the proceeds to modify existing K-Mart stores Low growth in assets and Reinvest Net Income high growth 80% of the will grow at in Net proceeds 10% a year Income ($1.3 b) results in a ROA of 7.3% Upgrade Online Conclusion 11 Introduction
  12. 12. Online retail business is growing at a fast rate Transactions per customer and number of customers are increasing. Online retail is growing at a rate of 26% per year. Source: comScore Networks Leverage Real Conclusion 12 Introduction Estate
  13. 13. K-Mart lags behind its competitors in online shopping experience Source: store.org Leverage Real Conclusion 13 Introduction Estate
  14. 14. Upgrade online shopping experience of our customers Trendy Delivery Forum Improved Customer Experience Leverage Real Conclusion 14 Introduction Estate
  15. 15. Implementation timeline May Nov May Nov May Nov May 2008 2008 2009 2009 2010 2010 2011 Divest 10% Store up Online Upgrade- stores gradation- Phase 2 Phase 1 Divest 10% of Begin Online Store up Store up lowest Upgrade gradation- gradation- performing Phase 1 Phase 2 Phase 3 stores Leverage Real Upgrade Online 15 Introduction Estate
  16. 16. By 2015, enhanced customer experience will add maximum value in retail Source: Retailing 2015 PwC Report Leverage Real Upgrade Online 16 Estate
  17. 17. Risk & Mitigation Strategies Risk Area Rating Mitigation Affected Customers may not Demand Get customer feedback and work X perceive the on improving stores accordingly. anticipated value We may sell the Costs Do store specific ROA analysis X profitable stores as before divesting part of this program Improper metrics for Measuring Set up a separate process for X measuring impact Results setting up measurable metrics for each proposal Leverage Real Upgrade Online 17 Introduction Estate
  18. 18. Other options considered Options Reason for not taking Though K-Mart is struggling, it has Sell off the entire K-Mart chain of the brand image that Sears can stores leverage There is a fundamental difference in Convert all K-Mart stores to Sears the positioning of both of these stores retailers Brand building requires huge amount Rebrand K-Mart as a new retail chain of resources, which are not available with a new name at present Leverage Real Upgrade Online 18 Introduction Estate
  19. 19. Conclusion Premium Kohl’s J. C. Penney Target < Customer Experience> Sears Wal-Mart K-Mart Ordinary < No. of stores> Low High Leverage Real Upgrade Online 19 Introduction Estate
  20. 20. QUESTIONS
  21. 21. References Divesture Assumptions Mission of K-Mart and Sears K-Mart was third largest Profit pool Financial ratios of SHLD Porter’s 5 forces Historic Financial ratios Value Chain Analysis Competitive performance STEEP Analysis Traditional retail value curve RBV analysis for K-Mart Addressing the problem GE Business Screen No. of stores K-Mart Brands Store level data 21
  22. 22. Divesture Assumptions When we • Revenue will go down by divest the 15%. lowest 20% of • COGS and SG&A will go down by 20%. the stores After we • Net Income will grow at reinvest the 10% a year. This is a little proceeds from below the average of Wal-Mart and the sale Back to references 22
  23. 23. K-Mart was the third largest retail store behind Wal-Mart and Target Revenue in Millions 400,000.00 348,650 350,000.00 315,654 287,989 300,000.00 258,681 246,525 250,000.00 Kmart 200,000.00 Wal-Mart Target 150,000.00 100,000.00 59,490.00 52,620 48,163 46,839 43,917 50,000.00 30,762.00 23,253.00 19,701.00 19,094.00 18,647.00 0.00 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Source: Company Annual Reports Back to references 23
  24. 24. Traditional retail value curve Source: Retailing 2015 PwC Report Back to references 24
  25. 25. RBV analysis for K-Mart Competitive Inimita Durability Appropria Substitutabi Action Superiority bility bility lity Online N N Y N Y Upgrade Sales Brand N N N Y Y Upgrade Equity Real Y ? Y N ? Leverage Estate Channels N N Y Y Y Invest Back to references 25
  26. 26. The GE Business Screen for K-Mart Business Strength Factors Business Strength •Positioning – 3 High Med Low High •Operations- 4 Industry Attractiveness •Value (Quality at given price)- 6 Med Industry Attractiveness Factors •Competitive Structure - 4 •Financial - 8 Low •Economic - 5 Back to references 26
  27. 27. Addressing the problem Online Real estate Brand equity Channels Positioning Y Y Y Y Store pickups Select locations After Mass retailer Ads positioning – to re-establish Operations Y Y N Y Store pickups Strategic Leverage warehouses supplier relationships Value Y N N Y Internet savvy One stop segment shop Bulk discounts Back to references 27
  28. 28. No. of stores Retailer No of stores J. C. Penny 1,067 Target 1,381 Target stores and 210 Super Target stores. Wal-Mart 971 discount stores, 2,447 supercenters, 132 neighborhood markets, and 591 Sam's Clubs in the United States Sears 1,382 Kmart stores; 860 Full-line stores; 75 Sears Essentials/Grand stores; and 1,150 specialty stores in the United States Best Buy 822 Best Buy stores Source: Yahoo Finance Back to references 28
  29. 29. Store level data Parameter K-Mart Sears Holdings Revenue $17,256,000,000 $50,703,000,000 Total Stores 1382 3847 Rev/Store $12,486,252 $13,179,880 Rev/Square Feet $131 $157 Source: Company Annual Reports Back to references 29
  30. 30. Kmart had a mix of Off- Mall Stores and Superstores Stores types 49 Off-Mall Stores 1331 Supercenters Source: Company Annual Reports Back to references 30
  31. 31. Mission 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 • Build customer customers relationships • Make more money • Improve every day Better merchandise assortments in both price and quality, strong emphasis on national brands; An increased mix of frequently purchased, everyday basics and consumable items; Stronger and prominent exclusive private labes; Improved in-stock positions, especially on-ad goods; Cleaner, brighter, well- maintained , enjoyable stores with improved customer services. Source: Company Annual Reports Back to references 31
  32. 32. Key Financial Ratios D/E Ratio .28 Gross margin 27.74% Net Profit margin 1.78% EPS 5.87 Market Cap 13.53 B Source: Company Annual Reports Back to references 32
  33. 33. Historic financial ratios 30.00% 25.00% 20.00% 12 months data ending Jan 2008 Most recent 5 Year Averages 15.00% 10.00% 5.00% Source: Company Annual Reports 0.00% Back to references 33
  34. 34. Competitive Performance Parameter Sears Holdings Target Wal-Mart Revenue/employee $ 160,962 $ 180,020 $ 183,500 Revenues /sq foot $ 157 $ 384 $ 645 Gross Profit Margin 28.40% 33.90% 24.20% Pre-Tax Profit Margin 3.90% 7.30% 5.40% Net Profit Margin 2.30% 4.50% 3.40% Net Profit/sq foot $ 3.61 $ 17.28 $ 21.94 Return on Equity 10.90% 18.40% 20.60% Return on Assets 4.00% 7.00% 8.00% Inventory Turnover 3.1 6.4 7.2 Source: Company Annual Reports Back to references 34
  35. 35. Profit Pool 35.0% 30.0% 25.0% Gross margins 20.0% 15.0% 10.0% 5.0% 0.0% Share of Sears Holdings Operating Revenues Source: Company Annual Reports Back to references 35
  36. 36. Porter's 5 Forces Analysis Threat of New Entrants - While the barriers to start up a store are not impossible to overcome, the ability to establish favorable supply contracts, leases, and compete is becoming virtually impossible. Their vertical structure and centralized buying gives chain stores a competitive advantage over independent retailers. Power of Suppliers - Historically retailers have tried to exploit relationships with suppliers. Generally in the retail industry suppliers have very little power. Power of Buyers - The price is set by the retailer. Individually, customers have very little bargaining power with retail stores. Threat of Substitutes - Though there are specialty retailers that offer unique products, we don’t see that there is any significant threat for big retailers like Sears as they are known for wide variety of product offering at low cost. Competitive Rivalry - Retailers always face stiff competition, the slow market growth for the retail market means that firms must fight each other for market share. More recently they have tried to reduce the cutthroat pricing competition by offering frequent flier points, memberships, and other special services to try and gain the customer's loyalty. Back to references 36
  37. 37. Value Chain Analysis Firm Infrastructure Human Resource Management Technology Development Procurement High Medium Medium Medium Low Inbound Outbound Marketing & Service Operations Logistics Logistics Sales Back to references 37
  38. 38. STEEP Analysis • SOCIAL – Shoppers more geared toward strip malls, suburban villages • TECHNOLOGICAL – Inventory management now being driven by technology • ECONOMIC – Retail is one of first industries to be hit by an economic downturn • ECOLOGICAL – “Green culture” not an ally of big box retailers • POLITICAL/LEGAL – Potential hedge fund tax changes Back to references 38
  39. 39. STEEP Analysis • Social Shoppers more geared toward strip malls, suburban villages So what? Sears’ real estate has mostly been based in shopping malls and now is looking to create and expand Sears brand name stores and K-Mart’s in off-mall sites such as strip malls and suburban villages. Back to references 39
  40. 40. STEEP Analysis • Technological Inventory management now being driven by technology So what? Sears inventory turnover is far below industry leader Wal-Mart, who has used microchips and radio tags to better manage and track inventory Back to references 40
  41. 41. STEEP Analysis • Economic Retail is one of first industries to be hit by an economic downturn So what? With the economy sliding and consumer spending down, Sears needs a strategy to remain profitable even with sales growth down. K-Mart needs to compete with Wal-Mart and Target on commodity items. Back to references 41
  42. 42. STEEP Analysis • Ecological “Green culture” not an ally of big box retailers So what? Sears has implemented new environmental policies to not only save energy and costs but also to improve their image among the emerging “green culture” customers. Back to references 42
  43. 43. STEEP Analysis • Political/Legal Future tax changes of hedge funds could affect future goals of Chairman Edward Lampert So What? Lampert could be more willing to liquidate parts of the Company to help raise cash to keep his fund’s investors happy. Back to references 43

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