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In order for Costco to acquire Kmart
$ 10.00

In order for Costco to acquire Kmart, the Kmart yearly filings must be reviewed. Currently, Sears Holding Corporation is the parent company of Kmart Holding Corporation and Sears, Roebuck and Co. The following will just look at the Kmart segment of Sears Holding Corporation.

As of January 31, 2015, Kmart had a total of 979 stores across the US, Guam, Puerto Rico and US Virgin Islands. Kmart offers different payment options then Costco, such as layaway, which allows member to finance their purchases in-store and online. Kmart also offers a mobile app, where then purchases can be picked up at stores or delivered to your home. Kmart offers a variety of name brands such as Kenmore, Craftsman and Diehard. Picking up these brands could be beneficial to Costco.

Kmart’s fiscal year differs from Costco’s, which might be a bit of a challenge when merging. Kmart’s fiscal year ends on the Saturday closest to January 31. Costco is currently on a fiscal year ending in August.

The following shows Kmart’s adjusted EBITA, which as you can see has been declining over the past years, showing a total loss for 2013 and 2014.

 

Adjusted EBITDA

     
 

2014

2013

2012

Millions

Kmart

Kmart

Kmart

Operating income (loss) per statement of operations . . . . . . .

$(422.00)

$(351.00)

$5.00

Depreciation and amortization. . . . .. .

$95.00

$129.00

$147.00

(Gain) loss on sales of assets . . . . . . . .

$(103.00)

$(66.00)

$(37.00)

Before excluded items .. .

$(430.00)

$(288.00)

$115.00

Closed store reserve and severance . . .

$142.00

$89.00

$76.00

Domestic pension expense . . . . . . . . . .

     

Other expenses (1) . . . . . . .

$43.00

   

Impairment charges . . . . .

$29.00

$70.00

$10.00

Pension settlements . . . . .

 

 

 

Adjusted EBITDA . . . . . .

$(216.00)

$(129.00)

$201.00

Adjusted EBITDA as defined (2) . . . . . .

$(216.00)

$(129.00)

$201.00

(Sears Holding Corporation, 2014)

 

Also, according to Sears Holding Corp’s 10K filing, Kmart’s gross profit margin rate decreased 50 basis points, driven by a decrease in home, consumer electronics and seasonal sales. In the last year, Kmart closed 173 store and over the past two years, 242 stores total. Store closures were a result of trying to focus on and growing the most profitable stores.

 

 

 

 

 

Kmart results and key statistics:

     
       

millions, except number of stores

2014

2013

2012

Merchandise sales and services

$12,074

$13,194

$14,567

Comparable store sales %

-1.40%

-3.60%

-3.70%

Cost of sales, buying and occupancy

9513

10329

11158

Gross margin dollars

2561

2865

3409

Gross margin rate

21.20%

21.70%

23.40%

Selling and administrative

2962

3083

3284

Selling and administrative expense as a percentage of total revenue

24.50%

23.40%

22.50%

Depreciation and amortization

95

129

147

Impairment charges

29.00

70.00

10.00

Gain on sales of assets

-103

-66

-37

Total costs and expenses

12496

13545

14562

Operating Income (loss)

-422

-351

5

Adjusted EBITDA

-216

-129

201

Total Kmart stores

979

1152

1221

 

(Sears Holding Corporation, 2014)

 

 

Looking at Kmart’s key statistics for the past few years show a decline in all areas. Although, comparably, 2014 to 2013, the gross margin dollars and gross margin rates were not that far off considering there were less stores. Which indicates that the fewer stores were more profitable. I would say the strategy of closing stores to focus on their more profitable ones was a good decision.

Risk factors noted in the Sears Holding 10K filing are similar to Costco’s risk factors. Both retailers must be able to offer merchandise and services that customers want and both must be able to implement strategies for growth. Struggles for Kmart in the past have been successfully managing inventory levels, inventory management, competition throughout retail and service industries, changes in vendor relationships and vendors lack of willingness to provide acceptable payment terms (Sears Holding Corporation, 2014).

Costco have shown strength in many areas Kmart is lacking, for instance, Costco’s positive vendor relationships. Costco’s vendor base is constantly changing. Within the changes, Costco values diversity and continues to develop partnerships with minority and women owned businesses. This gives Costco fresh ideas and culture within their vendor scope and helps economic development in the community(Costco, 2015). Costco limits their product line to an average of 10,000 at a time. To efficiently find and vet new suppliers, Costco has teamed with SPS Commerce, the retail’s largest trading community with partners throughout the world (SPS Commerce, 2014). The relationship with Costco has with vendor management companies, allows Costco to save time and labor on the new vendor process.

Inventory for Costco is often purchased directly from the manufacturer, which enables them to eliminate many supply channels, this gets inventory to the warehouses more quickly and also enables Costco to offer lower prices, Costco turns inventory more quickly then most retailers, their last quarter’s turnover rate was 11.35 (Stock Analysis on Net, 2015). Sears Holding Corp’s inventory turnover was 4.02 for the last year (Nasdaq, 2015).

Since Kmart has been struggling, Costco could most likely acquire the segment of Sears Holding Corp for a relatively low price. Costco could breathe new life into Kmart, afterall, Costco has been successful in areas that Kmart needs help in.

 

Make a summary of Kmart's financial statement based on the above information

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