Company history
Sears Holdings Corporation is a multinational company headquartered in America, Hoffman Estates, Illinois. The company is a product of a merger agreement dating back to 2005 between Sears (in Hoffman Estates) and Kmart (based in Michigan). Sears Holdings Corporation operates retail chains all over the world. According to financial ratings, the corporation is the 10th largest retail store in the United States of America. Sears Holdings Corporation has over 4,000 outlets and tags behind Wal-Mart, Best Buy, Lowe’s, Costco, Walgreens, The Home Depot, Kroger, Target, and CVS Caremark (Sears Holdings Corporation sears holdings to announce earnings, 2009). This paper seeks to delineate a synopsis of the company’s performance through a conclusive financial analysis.
The formation of the retail outlet dates back to 1916 with a recent redesign in November 2004 when Kmart Holding declared the intention to purchase Sears, Roebuck, and Company. Throughout the negotiation talks, the company outlined that both brands would remain relevant to honor the prevalent market demands. It is worth noting that the merger agreement would increase the market share of the proprietary brands of both companies.
Corporate governance
Sears Holdings Corporation has a board of directors that represent the two formative companies. The board of directors bears the oversight mandate to regulate various committees, including the finance committee, the audit committee, and the compensation committee. Once the merger legal formalities were through, the shareholders of Kmart each received a share in the new company (Sears Holdings Names financial chief, 2008). Sears and Roebuck’s shareholders had the option to receive cash ($50/ per share) or receive shares in the new company in a redefined ratio.
Company financials
Liquidity ratio
Current ratio: Current Assets/ Current Liabilities: 19,340,000/ 16,168,000 = 1.19
The company’s current ratio indicates a stable position because it is greater than one. It is noteworthy to indicate that, in some instances, the liquidity ratio is misleading, hence requiring critical judgment.
Quick ratio, or acid test: Current Assets – Inventory/ Current Liabilities =19,340,000-7,558,000/16,168,000 = 0.72
The acid test is a ratio that indicates whether an organization is capable to meet the due or immediate obligations without disposing of inventory. If the quick ratio is lower than the working capital ratio, it would imply that such an organization relies on inventory to clear current pending obligations. In case Sears Holdings Corp receives debtor’s monies in time, the company will clear the current liabilities without disposing of inventory.
Asset management
Inventory turnover: Cost of Goods Sold/ Inventory = 6,296 / 7,558 = 0.83.
Asset management-related ratios seek to reveal how an organization is managing its assets. The inventory turnover ratio is an estimate of how much stock is recycled through the company. This implies that the ratio intends to investigate how much stock the company sells and restocks in a given year. The Sears Holdings Corp inventory ratio is relatively low compared to several competitors in the same industry.
Days Sales Outstanding (DSO): Accounts Receivable/ [Annual Sales/ 360] = 608,000 / 10,660,000/360 = 2.05.
The day sales outstanding also known as the average collection period indicates how timely an organization collects credit sales. This ratio depicts how long Sears Holdings Corp needs to wait before receiving payment on a cash sale. Sears Holdings Corp has an outstanding average collection period indicating stringent credit terms.
Fixed Assets Turnover: Sales/ Net Fixed Assets = 10,660,000/6,053,000= 1.76 times.
The fixed assets turnover ratio seeks to assess how effective an organization is in utilizing the available plant and equipment to generate revenue. Sears Holdings Corp uses its plant and equipment to generate sales income 1.75 times the value of the asset. This implies that Sears and Holdings Corp. is effectively utilizing available fixed assets to generate revenue.
Total assets turnover: Sales/ Total Assets =10,660,000 / 19,340,000 = 0.55 times.
The total asset turnover ratio indicates the total turnover on all Sears Corp assets. The ratio indicates that Sears Holdings Corp has a 0.55 business volume through utilizing the total investment in assets.
Debt Management Debt to Total Assets: Total Liabilities/ Total Assets = 16,585,000/ 19,340,000= 0.85.
TIE: 354,000/ 534,000 = 0.66.
This ratio seeks to unveil the percentage of the company’s assets financed through debt. Sears Holdings Corp’s debt ratio stands at 85 percent. (Kmart and sears complete merger to form sears holdings corporation, 2005).
Profitability Ratios
Net Profit Margin = Net Profits/ Sales = 10,514,000/10,660,000 = 0.98.
The net profit margin ratio indicates the level of profit margin per dollar sales. Sears Holdings Corp has a high net profit margin. This implies that a decline in sales level hardly affects the profit margin.
Return on total assets: (ROA): Net Income/ Total Assets= (930,000) / 21,381,000= -0.04.
This ratio assesses the firm’s effectiveness in utilizing total assets. A negative ratio indicates that Sears Holdings Corp has trouble in utilizing total assets.
Return on Equity (ROE): Net Income Available to Common Stockholders/ Common Equity = 930,000 /4,281,000 = 0.21.
This is a rate of return on the stockholder’s investment. Sears Holdings indicates a high return on equity ratio.
Market Value
Price/Earnings Ratio (P/E): Market Price per share/ Earnings per Share =: 48.13/ -13.20 = -3.64.
The price-earnings ratio depicts the shareholder’s growth rate expected shortly. Sears Holdings Corp has a low price-earnings ratio.
Market/Book Ratio (M/B): Market Price per Share/ Book Value per Share = 48.13 / 2.04= 23.59.
This ratio depicts the value of the company, and potential investors rely on it while evaluating a worthy investment opportunity. Sears Holdings Corp has a high market book ratio, indicating that it is very lucrative to a potential investor (Mammarella, 2009).
Financial analysis
In the recent past, there have been several crucial financial calamities. The global financial crisis of 2008 had a severe impact on the global economy. Sears Holdings Corp was no exception, bearing in mind that the company specializes in luxurious commodities. This recession period coupled with inflation reduced the company’s share price from $100 to 50 dollars per share. Sears Holdings Corp is yet to revive its operation as it is still grappling with a dire recession. This is evidenced by numerous closures of the company’s stores resonating from lower sales. Investors barely believe that the company will restore its operations shortly (Research and Markets: Financial analysis – sears holdings, 2010).
In conclusion, Sears Holdings is a result of a merger between two companies. The merger efforts have foreseen huge losses in market share and sales. Brand recognition is the only bargaining chip that Sears Holdings has remaining, and the management requires inculcating upbeat critical thinking antics to avert a further downturn. Currently, the company’s share price is dwindling amid reduced prices and the prevalent recession that might affect the company in the long run.
References
Kmart and sears complete merger to form sears holdings corporation. (2005). PR Newswire.
Mammarella, J. (2009). Sears holdings hurt by sears. Home Textiles Today, 30(6), 6-11.
Stephanie, C. (2010). A Tough Sell at Sears. The New York Times.
Research and markets: Financial analysis – sears holdings. (2010). M2 Presswire.
Sears holdings corporation; sears holdings to announce earnings. (2009). Mergers & Acquisitions Business, 913.
Sears holdings names financial chief. (2008). Home Textiles Today, 29(27), 27.