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End-stage for ‘Sears Canada’

  • Brief history of the company
  • The challenge for the industry or company?
  • Reasons for doom of Sears 

 

Sears Canada was a leading retail chain in Canada since 1953. It was a partnership between ‘Simpsons Ltd.’ and ‘Sears Roebuck’ of the USA. This alliance was dispersed after the Hudson's Bay Co. acquired Simpsons. In 1984, the company changed its name to Sears Canada. The firm commenced its catalogue business in Canada and became the first retailer for online shopping in the nation and launched its e-commerce website in 1998. Hence, the company was one of the major retail department store operators, the overall business tendency changed as it faced a stiff competition from rivals such as Hudson's Bay and online giant Amazon.

In 2017, Sears Canada faced a cash crunch and received an approval for creditor protection to liquidate all its stores and assets. The revenue decreased at a CAGR -6.11% from CAD 6,726.4 million (2001) to CAD 2,613.6 million (2016) when the company posted a net loss of CAD 321 million. While revenue of Hudson's Bay increased at a CAGR of 4.56% in the same period.

The revenue of Sears declined from 2001 to 2006 as stated above, however it increased by 6.6% in 2007 due to additional five weeks of sales related to a change in the financial year ending from December to January. A decrease in the market share and revenue was also caused by the introduction of ‘Budget Relief Price Drop Program’ 2008. This program was launched with an aim of providing goods and services to its customers at a discounted price and win the market as a discount retailer. Hence, every week prices dropped for key items, which witnessed a fall in margins and resulted in the closure of several Sears stores. Therefore, revenue deteriorated due to the closing of its stores, a decline in commission, license income and also owing to the termination of credit card marketing and servicing agreement with JPMorgan Chase (2015).  

The total Sears stores including franchises were more than that of Hudson’s, while these decreased significantly at a CAGR of -16.04% due to certain reasons like lack of capital spending, poor business strategy and incompetent approach in the product selection for different stores (the customers were finding it difficult to buy products as different stores were selling different products, a product available at a store was unavailable at another). The above chart shows a trend for the number of stores (2012-16). Further, these factors negatively impacted the revenue and resulted in the closures of underperforming stores. The total number of stores for Hudson's increased because of a sound business expansion of the company. The capital expenditure reached CAD 1,085 million (2016) from CAD 159.3 million (2012) and the number of stores increased at CAGR of 23.40%.

Moreover, the Canadian retail department industry saw a strong competition among the players. E-commerce websites attracted buyers through huge discounts and offered the comfort of purchasing goods. This online development affected the traditional retail market. Although, Sears Canada had a website to sell its products, the firm failed to transform to the needs of the online market. Hence, an increasing trend towards online shopping affected the retail industry as a whole.

Televisory believe that the major cause of the company's downfall was an inefficient use of the capital. Sears formulated a plan for the turn around by selling off its store leases for cash in 2012, the deal totalled more than CAD 360 million. But instead of reinvesting the money in the firm, the capital expenditure declined from CAD 101.6 million (2012) to CAD 70.8 million (2013) and CAD 54 million in the following year to CAD 27.4 million in 2016.

The plan devised by the company failed as the money was used in the ‘distribution of dividends’. Additionally, massive special dividends were distributed in the year 2011-12 when the firm reported an operating loss of CAD 71.8 million and CAD 187.8 million, respectively. While, the EBITDA of CAD 54.7 million (2012) turned negative to CAD-388 million (2016).

Notably, most of the money distributed as dividend went to the major shareholders ‘Sears Holding’ and ‘ESL Investment, Inc.’ which owned 11.7% and 45.3% of Sears Canada respectively. Eddie Lampert is the CEO of both the Sears Holdings in the U.S and ESL Investment. These decisions reflected sheer poor corporate governance and instead of securing long-term interests of the company led to its downfall. 

Furthermore, in March 2017, the company took a long-term secured loan of CAD 300 million to pump in the business operations with the term ending in March 2022. The firm adopted a strategy to impress its customers, modernize its stores and invest in technology with this money. But once again the company failed in its approach as it experienced challenges with the launch of its new website. The carrying amount of the loan was CAD 137.6 million as on April 29, 2017 and was the highest in the past 5 years. On the other hand, the cash position of the company deteriorated in the same period and the operating losses skyrocketed.

In addition, few analysts argued that the company's plan to turn itself into a discount retailer, provide different products for few stores and other reinvention strategies resulted in a doom for the company. Televisory believe that when the company was not making money, there was no new capital spent and there was also a pension deficit of CAD 307 million (2010) and CAD 133 million (2013), the payment for dividend was inappropriate. Further, its failure to frame an effective e-commerce business, compete with other e-commerce players and frequent management changes since 2011 made the company directionless. In Oct. 2017 after receiving an approval from a court, the firm announced its decision to close all its operations across the country. This step was taken after its inability to find a feasible solution to operate the business and left more than 12,000 of its associates unemployed.

Therefore, Televisory is of the opinion that a strong business strategy, improving customer experiences and effective corporate governance could have saved the company's fortune, which closed shutters in Canada after more than six decades of operation.