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.

1. Repositioning K-Mart to improve the ROA of
Sears Holdings
Devendranadh Anumolu
Lokesh Bisht
Tony Koschmann
Gargi Kulkarni
Jason Varey

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. 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. 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. 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. 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. 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. 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. Criteria for selling off some Kmart stores
Criteria to Criteria to
divest stores retain stores
Upgrade Online Conclusion 9
Introduction

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. 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. 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. K-Mart lags behind its competitors in
online shopping experience
Source: store.org
Leverage Real Conclusion 13
Introduction
Estate

14. Upgrade online shopping experience of our
customers
Trendy
Delivery
Forum
Improved Customer Experience
Leverage Real
Conclusion 14
Introduction Estate

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. By 2015, enhanced customer experience will
add maximum value in retail
Source: Retailing 2015 PwC Report
Leverage Real Upgrade Online 16
Estate

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. 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. 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. QUESTIONS

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. 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
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22

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
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23

24. Traditional retail value curve
Source: Retailing 2015 PwC Report
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24

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
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25

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
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26

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
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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
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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
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29

30. Kmart had a mix of Off- Mall Stores and
Superstores
Stores types
49
Off-Mall Stores
1331
Supercenters
Source: Company Annual Reports
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30

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
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31

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
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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%
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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
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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
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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.
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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
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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
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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.
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39

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
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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.
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41

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.
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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.
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