Future of Kmart Sears, Research Paper Example

The Financial situation[1] of the Sears holding group in 2008 was published as follows:  Sears had cash and cash equivalents of $1.6 billion at February 2, 2008 (of which $743 million was domestic and $879 million was at Sears Canada) as compared to $3.8 billion at February 3, 2007, a decline of $2.2 billion. For the year, the significant uses of cash included $2.9 billion for share repurchases, approximately $580 million in capital expenditures, debt payments (net of new borrowings) of approximately $600 million, and approximately $220 million of contributions to pension plans.

The latest information released to the letter to the shareholders[2] signifies a significant improvement in the position illustrated in 2008.  An increase in comparable store sales at Kmart of 1.7% in the fourth quarter 2009; and  Cash balances at year end increased to $1.7 billion from $1.3 billion last year, while total debt was reduced by $414 million The Chairman indicated that K-Mart/Sears had grown significantly during the last year and equally went through one of the biggest financial restructures in the history of the firm.  This despite an unsecure financial banking world.  The Chairman went on to say that there was no room for complacency in the group and it has developed a five pillar strategy concept for moving forward in 2010 and beyond.  The pillars are based upon the following concepts:

Pillar 1 :   Lasting Customer Relationships

The firm needs to build new customer relationship initiatives that reflect both the breadth and depth of the product service offerings.  The firm needs to engage with customers more in determination of providing efficient services that directly meet customer needs.   This has included marketplace.com providing improved access to the store via the internet and access to online shipping of goods to over 90 countries world-wide.  Various other direct customer contact sites have been developed. This including online advisory services with the concept of ‘ask before you buy’.

Pillar 2 :  Improving Productivity

2009 saw the combined firm increasing its overall focus on improved productivity and better customer service.  Business transformation planning in the areas of improved supply chain initiatives, franchising, labour model optimization and improved efficiencies.  This saw the gross margin rate up by 60m points and selling and administrative expenses cut by over $400 million.

Pillar 3 :  Building our brands

The business continued to explore ways to build and improve brand image. This included the complete redesign of the Kenmore line.  More innovation to the craftsman products.  This included launching new brand images,  new footwear brands, including Protégé, and introduced a complete product line for the home with the Cannon, Jaclyn Smith and Country Living brands

Pillar 4 :  Reinvention through Technology and Innovation

The business continued to strive for better customer service and convenience by investing more in concepts of technology and innovation. This included improved point of sales systems, faster check out times, improved customer experience on the websites and the facilitation of multiple forms of payment both electronic and conventional.

Pillar 5 :  Reinforcing our values

The business has worked hard  on strengthening the community values and working with our customers in the alignment of services to social needs. In addition the firm has made significant progress on commitment to environmental responsibilities and in particular reducing the amount of paper flow production in the firm by improved technology.

Historical perspective of K Mart Sears.

K Mart acquired  Sears Roebuck for $11 billion which merged two of the oldest retail brands in North America.  The Company owns about 3,500 retail stores  and several hundred K Mart stores will be rebranded under the Sears logo. Sears had products that were as good as their competitors and equally had a relatively loyal customer base.  K Mart had more inferior goods but had the Mall presence which Sears lacked. The merger enabled the balance between product quality and retail outlet to be re-addressed. For the consumer this represents a good deal because they could still get clothing and furniture from Sears but get the  appliances and hard goods from K Mart and as such there would not be two chains competing in the same space.  The benefits could then be passed directly to the customers in improved services and quality of goods.

The objective is to enable the combined group to compete with the Wall Mart giant and it may well be that the Sears brand name ultimately loses to that of K Mart that has a discount brand name in the retail Mall outlets.  One of the key considerations will be quality of product and existing customer loyalty on the Sears brand image.  Wall Mart operates at the low end of the market in terms of cheaper goods, low on quality but appeals to a large working class client base. Sears now has to focus if it is going to survive.  Owing to the broadening of its market base, Sears should have looked at this from an opportunistic stand point and focused on more speciality goods.  Instead of moving to the soft side of its empire it might have been more prudent to move to the hard side.  It is on the hard side where Sears had its strengths.  In addition it was also the most profitable side of the business and at one stage was the USA’s leading supplier of appliances.  The 41% market share is now being eroded away by the likes of Lowe’s, Best Buy and Home Depot.  Sears plunged into the soft goods market with the acquisition of Lands End for nearly $2 billion when it good have acquired  Black and Decker and bolstered the hard side of the business.  By neglecting this side of the business it allowed others to compete in this space and grab market share from Sears.

Sears has also slipped into the Commercial Real Estate Market in a big way, further diversifying its business. ” SHC Real Estate (the real estate business unit of Sears Holdings) is one of the largest corporate real estate organizations in the world, with a portfolio of retail locations that is second to none. Together with retailers, brokers, and investors, we aim to deliver a solution that offers the greatest benefit to you”  They have also got into discount brokering in Real Estate  and tied this into the retail appliance side of the business.  This particularly works in association with new home purchase where they can offer discounts and inducements in order to lure you into the furnishings and home appliances for your new home.  The websites for this side of the business look extremely attractive and present a very friendly eco green look. Consider the North Colorado site at http://www.searsrealestate.com/

Conclusions

What is the future outlook for Sears ? Well the business analysts say prospects are improving but they still need to continue through a business transformation program refreshing the business.  The Company has been reducing costs, streamlining administration and jobs, improving marketing opportunities and cutting inventories. Will this be enough ?  It is difficult to predict with a North American economy struggling out of recession.  The firm will face huge challengers as shoppers cut back expenditures on non essentials. The Company has been quoted as saying ‘ Same-store sales fell across most categories at the company’s U.S. Kmart and Sears stores, but continued to be offset by gains in sales of consumer electronics, the company said. Same-store sales declined 6.7% at Sears, while at Kmart, same-store sales dropped 5.6% in the quarter. Especially hard hit were categories such as home appliances and tools that have been hurt by the housing slump. Sears said for the full year, it expects earnings before interest, taxes, depreciation and amortization, or EBITDA, to be comparable to, but no longer exceed, last year’s results.’

Looking forward Analysts will continue to view the group with suspicion as the group remains pressurised by unfavourable market conditions.  Sears has been riding a storm of customer service complaints  and  a once loyal customer base moving over to competitors.  K Mart fare no better with a reputation for poor customer service plus over stocking or high inventory levels with poor presentation of their goods.

[1] Retail stocks information from Todd Sullivan

[2] 2010 letter from Chairman Sears Group to the Shareholders