As I had promised, here is the rest of the story on Sears Holdings. In short, the biggest culprit is high operating costs across the board including extremely poor inventory turns.
Let me explain with the help of the data below. The first set of data compares SHLD with JCP and Macy’s. Most numbers look comparable, in fact, the S&A seem to be well under control for Sears Holdings, however here is what stands out:
- The anemic cash-flow from the operations,
- Fast-disappearing net-income, and
- The shrinking revenues,
- Though COGS and Gross Margins look worse than JCP and Macy’s, I am going to ignore these numbers for a minute and explain later.
Just hold your thoughts while I present another set of data points, this time, comparing with Wal-mart and Target. Again, notice the highlights:
- ROA trending from 9.67% to barely positive 0.46% in three years flat, and
- An inventory turnover less than 4, when Wal-mart’s inventory turnover is touching almost 9 and Target’s above 6.5!
The reason for presenting the second set of data and ignoring the COGS and Gross Margin numbers, are as follows:
- While SHLD’s COGS of around 70% is way higher than JCP or Macy’s, it is really not of much concern when compared with Wal-mart or Target. That is why I ignored from the first set of comparison highlights. SHLD’s assortment draws from JCP and Macy’s, but also from Wal-mart and Target. Therefore, a broader comparison makes sense.
- Similar reasoning exists for gross margins. While SHLD’s gross margins look poor compared to JCP or Macy’s, they are actually very much in line with the broader comparison with Wal-mart and Target.
Ok, with the numbers behind us, there seems to be two big problems that SHLD seems to be facing:
- Excessive inventory, and
- Excessive operational expenses.
Both of these underlying reasons do explain all the symptoms that we have seen in their financials: low ROA, low cash from operating activities, low inventory turnover, and finally the net income that is barely positive at 0.11%. Let us also not forget SHLD’s low capital investments in technology that I wrote about. These probably are a direct result of low net-income, however, they will continue to weigh heavily against their efforts to reverse the situation.
Next time: what should SHLD do? Can supply chain be the answer to their woes?
© Vivek Sehgal, 2010, All Rights Reserved.
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