Sears & Dilliards Financial Comparison

Sears Holding Corp. (SHLD)

&

Dillard’s Inc. (DDS)

Competition within the Department Store Industry

April 29, 2008

Managerial Finance

6400:602-801

Om Samtani

Hannah Stone

Matt Quirk

Anne Stith

Executive Summary

The Department Store Industry is facing challenges in what has been characterized as a weak economic environment (). Sears Holding Corp (SHLD) maintains approximately 2,000 Sears and 1,400 Kmart stores in the United States (). In comparison, Dillard’s Inc. (DDS) holds claim to 329 stores, a difference of 3,071 locations nationwide, while remaining a fierce competitor. Consumers desire to remain fashionable by adopting new styles, sporting quality brand names, and benefiting from high-level services from select stores have contributed to SHLD and DDS continued success in the industry.

As indicated by the accompanying analysis, SHLD has higher liquidity ratios, as demonstrated by its cash as a higher percentage of the total assets. which demonstrate its advantage over DDS to meet short-term solvency obligations.

The leverage ratios also favor SHLD, showing its long-term solvency, which is also better when compared to DDS. These ratios include debt financing, EBIT to interest, and debt to equity. The EBIT to interest ratio is influenced by SHLD’s policy to not pay out dividends to its shareholders. This allows them to have a large amount of cash on hand to expand operations. These leverage ratios give the reader an insight into SHLD long-term strategy regarding their intent to capture additional market share.

The total asset turnover for SHLD is much higher than that for DDS, which exhibits its ability to operate more efficiently in its daily operations. This is reflected in the profitability ratios for SHLD, namely return on assets and return on equity, which are higher when compared to DDS.

The cost of capital for both the companies is relatively similar based on their bond ratings (BB). DDS has remained stagnant with respect to revenues generated and growth ratios. However, SHLD has evolved as a conglomerate while trying different strategies as illustrated by its fluctuating growth rates over the past four years. The merger between Sears Roebuck & Co. and Kmart in November 2004 resulted in turbulent changes in the company structure and investor’s expectations during the years 2004 to 2006. Currently, financial statements for SHLD show that it has been on the rise recently and is headed towards a stronger and financially healthy future as it continues its battle to capture market share in the department store industry.

Chapter 3 S&P

1) Find DDS and SHLD on Market Insight and examine the financial statements of each. Which firm uses more debt finance?

2004 Current Liability / Equity Total Debt / Equity Long Term debt / Assets

DDS .45 .62 .24

SHLD .47 .09 .04

2005 Current Liability / Equity Total Debt / Equity Long Term debt / Assets

DDS .49 .55 .20

SHLD .89 .35 .11

2006 Current Liability / Equity Total Debt / Equity Long Term debt / Assets

DDS .38 .42 .18

SHLD .79 .28 .09

Average Values Current Liability / Equity Total Debt / Equity Long Term debt / Assets

DDS .44 .53 .21

SHLD .72 .24 .08

DDS uses more debt financing than SHLD. This is caused by the different financial strategies of each company. DDS has issued a dividend payment to its stockholders of $.16 per share for the fiscal years of 2004, 2005 and 2006. This causes the company to have a lower amount of retained earnings. Having lower retained earnings means a company is holding on to a smaller amount of cash than a company that has a higher plowback ratio. DDS has to raise additional cash using debt financing. DDS is using less cash and more debt financing to raise capital for operations, which is causing the debt to equity ratio to rise.

SHLD