Thursday, January 22, 2009

Income Statement Analysis- Sears

Financial Statement Analysis: Sears Holdings Corporation (SHLD)

Based on your analysis of the income statement, articles you read and industry reports write a brief analysis (1-3 pages) identifying

1. Strengths of the company you see in their financial statements based on the business intelligence you gathered and your comparison of financial numbers and ratios to competitors and the industry.


Based on the financial statement analysis it was hard to find any strengths of Sears Holding Corporation (SHLD). When SHLD is compared to other companies in their same industry, like JC Penny, they still look relatively weak. SHLD comments that they are competing with the likes of Walmart in the beginning statements of their 10k, so I also made a comparison with them which made SHLD look even worse.
SHLD has however made some significant investments into their online marketing and may be making some positive strides (1). They have created a semi automated electronics selector for their online store that allows you to enter what your preferences are on several questions. These questions are used to narrow down the choices from several thousand cameras and TV’s to 20 or so.

2. Weaknesses of the company you see in their financial statements based on the business intelligence you gathered and your comparison of the financial numbers and ratios to competitors and the industry.

Every ratio or trend analysis that we looked at showed that SHLD is doing poorly in comparison. I thought for sure that JC Penny had performed worse than SHLD when I came to percent growth of net income at -78%, but I was wrong. SHLD “beat” them by more than 15% worse at -93%.
There were a few anomalies which showed them performing better than the previous year, but I don’t believe they should be interpreted as positive. One of these anomalies was the “gain on sales of assets”. The percentage change from the previous year was positive, only because they lost more money on sales than the loss the previous year. The other was similar; the “other income” category increased by more than 500%, but again this was increasing losses over last year.
These trends were not just observed of the last year, but have been getting steadily worse each year since 2006 (the last year shown on the financials). 2009 may have been buying some time, since the expectations were much decreased. But if 2010 shapes up into a productive and even profitable year in the retail industry, SHLD will have to make some significant changes. With the poor efficiency ratios (return on assets & equity) it will be extremely difficult for SHLD to pull out of this.

3. Possible emerging issues with the company and/or industry.


I think one of the most important issues that SHLD (and their investors) should be looking at is the Goodwill estimates that have been carried over from the merger between Sears Roebuck and Kmart Holding. Their goodwill estimates are huge at around $4Billion. However, the combined company has done nothing but struggle since the merger.
The industry as a whole is struggling with the global economic environment. This is not the time to be in the retail world, unless you are a discounter. This appears to hold true for big names like Walmart and even within SHLD. When you see the different entities operating as SHLD you will notice that Kmart (the discounter) actually made a profit, while Sears Domestic was operating at a loss.

4. Based on what you have learned from the analysis of the income statement can you identify any direct relationships between decisions by the company and their financial results?


The most obvious is the merger that led Kmart Holdings to acquire Sears. This was potentially a game changer for Kmart, by expanding their offerings as well as improving the perceived quality by using the Sears name. Sears has done nothing but drag down the bottom line. Now it is arguable that the “lead weight” is the management team. It is hard to say if one or both could actually have been better off with out the other at this point.



1) http://www.prnewswire.com/news-releases/sears-blue-electronics-crew-doubles-down-with-4-brett-favre-and-offers-eight-percent-instant-savings-on-home-electronics-82253352.html