iBooyah.com Investment Matters

Prior to merging with Sears, the mission of Kmart was to “Become the discount store of choice for middle-income families with children by satisfying their routine and seasonal shopping needs as well as or better than the competition” (Kmart.com, 2004).  Interestingly, the current mission statement of Sears Holdings Corporation is shorter, but effective as it is easy to understand and contains no ambiguity.  The mission of Sears Holding is to “Build customer relationships, Make more money and Improve on every day” (Kmart.com, 2006).  The new mission statement underscores the current focus of the company, which is providing better relationship and increasing shareholder value.

The purpose of this paper is to identify and analyze some key challenges facing Kmart in the fiercely competitive discount retail space.

EVALUATION OF PRESENT SITUATION AND CHALLENGES

In order to craft the proper strategy for Kmart, it is important to identify the company’s strengths, weaknesses, opportunities and threats (SWOT) (Thompson, Strickland, Gamble, 2005).  Through SWOT analysis, the following factors were identified:

Strength

Upon examination of Kmart’s strength, the most obvious strengths include the current CEO, Eddie Lampert and their current restructuring plan. Lampert has demonstrated himself to be of great value to Kmart thus far. While in bankruptcy, Lampert played an instrumental role in bringing Kmart out of Chapter 11. Through his ESL Hedge Fund, Lampert was able to gain controlling interest in Kmart.  Under his leadership, the company drastically cut cost, selling real estate assets of poorly performing stores, and ending Kmart’s practice of drastic price cutting.  These efforts have produced a remarkable turn-around for Kmart in a short period of time (Birnbaum, 2004). As a self proclaimed student of Warren Buffet, Lampert has proven he is ready to take Kmart to the next level.  His mission to build rebuild Kmart and make it a long sustainable business (Robert, Ruthledge, 2006).

Weaknesses

Kmart’s internal weaknesses include price disadvantage, especially when it comes to competing with industry leaders such as Wal-Mart.  The company’s poor customer service is also evident.  Whether it is fair or not, the image Kmart has created over the years as a store that sell “cheap” products has in many ways hurt the company. Kmart also has a history of poor relationship with its suppliers. Although Kmart has been able to repair some of the broken relationship since emerging from bankruptcy, the stigma remains (Wolverton, 2003).  On a bright note, there are evidences to suggest this is starting to change for the better as Kmart bond ratings have improved.  However, Kmart must continue to repair old relationships and foster new one if it is to provide customers with relevant products (Worden, 2006).

Opportunities

The opportunities for Kmart are the private-label merchandises, which has improved in both quality and value. These include the Martha Stewart, Jaclyn Smith and Jordace product lines which has been a success.  Although Kmart has recently pulled out of some global markets and ventures, the company has continued to maintain presence in others.   Overseas expansion in emerging markets such as India and China appears to be another excellent opportunity.  Having recently emerged from bankruptcy, the company also has the opportunity to remake itself through fresh approaches. For instance, the newly designed Kmart.com site has won awards for “excellent design, thus raising the company’s e-commerce profile.  The recent merger with Sears also represents an excellent opportunity for future growth as the combinations of these two companies have increased the breath of product offerings.  Another possible opportunity is to expand into “Warehouse Style” retailing similar to Sam’s Club or Costco. Albeit, this should be done with extreme precaution given the intense competition in this space.

Threats

One of the most obvious threats includes competitive pricing strategy; especially against Wal-Mart. Part of Wal-Mart’s success is tied to their integration with suppliers.  In turn, this has allowed Wal-Mart to reduced cost and increased the time to market.  The end result is pricing advantage over rivals (Thompson, Strickland, Gamble, 2005).  The success of other retailers such as Kohl’s and Target remains a formidable threat.  Another immediate threat includes the popularity of e-commerce. Large numbers of shoppers are now choosing to do their shopping online where comparing prices of several stores is accomplished with only a few clicks of the mouse. Technology has put retailers at the mercy of the consumer’s demand and preferences.  All in all, Kmart must not only compete with brick and mortar, but virtual stores around the globe that is able to compete solely on price.

CONCLUSION

So should you buy Sears Holding Corporation at the current stock price? As of today, the stock is trading at $141 a share. This represents about 21 times the expected earning (P/E).  In comparison to with Wal-Mart, which is trading at around 16 times the expected earning, I would say this stock is quite expensive, especially for a company that has yet to consistently prove itself.  Recommendation is to wait and pick for a drop before buying. In my opinion, a fair entry price of SHLD is $110/share.

References 

Thompson, A., Strickland A. J., Gamble, J. Crafting and Executing Strategy: The

Quest for Competitive Advantage, (14th. Ed.). Mc-Graw Hill. 2005.

Kmart Corporate Time Line (n.d). Kmart.com. Retrieved on July 16, 2006 from http://www.kmartcorp.com/corp/story/general/Corp_timeline.stm

Ready or not, Kmart makes it comeback. St. Petersburg Times. May 2003.  Retrieved on July 16, 2006 from http://www.sptimes.com/2003/05/07/Business/Ready_or_not__Kmart_m.shtml

Kmart-Sears joining forces. CBSnews.com. November 2004.  Retrieved on July 17, 2006 from http://www.cbsnews.com/stories/2004/11/17/national/main656127.shtml

Wolverton, Troy. Out of Bankruptcy but Not Out of the Woods at Kmart. May 2003. Retrieved on July 18, 2006 from http://www.thestreet.com/pf/stocks/troywolverton/10085634.html

Worden, Nat. Sears Heals the Faithful.  March 2006. Retrieved on July 18, 2006 from http://www.thestreet.com/_yahoo/stocks/retail/10273700.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

Birnbaum, Bill.  Kmart to Acquire Sears. Goodbye, Kmart. November 2004. Retrieved on July 19, 2006 from http://www.birnbaumassociates.com/strategy-in-the-news/Kmart-to-Acquire-Sears.htm

Berner, Robert & Ruthledge, Susann.  The next buffet? Story on Eddie Lampert.  November 2004.  Retrieved on July 19, 2006 from http://www.businessweek.com/magazine/content/04_47/b3909001_mz001.htm