Kmart Aquisition

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Winter 1, 2012

Professor Daniel Lagelier

Team B
Costco acquisition of Kmart from Sears Holdings Corp.

Adriana Guaderrama
Helen Hardy
Corie Hernandez
Owen Jennings
Wilner Luders
Sam Marzar


Table of Contents
2Current Financial Position - Costco1
2.1Results of Operations2
2.1.1Exhibit 12
2.1.2Exhibit 23
2.1.3Exhibit 34
2.1.4Financial Ratios4
3Performance Measure and Analysis (Sears Holdings Corp)5
3.1Asset Utilization Measurement6
3.2Breakeven Point6
3.3Goodwill to Assets Ratio7
3.4Interest Expense to Debt Ratio7
3.5Stockholder’s Equity & Investment Turnover Ratio7
3.6Profit Percentages8
3.7Expense Coverage Days Ratio8
3.8Profit per Person Ratio9
3.9Current Ratios10
3.10Quick and Cash Ratios10
3.11Inventory Ratio10
3.12Debt to Equity Ratio11
3.13Cash Flow Ratio11
3.14Earning per Share, P/E and TIE Ratio12
4Valuation of Kmart12
4.1Kmart’s Intrinsic Value12
4.2Kmart’s market Value13
4.3Kmart’s Book Value13
4.4Key Statistics – Sears Holdings Corporation14
5.1Asset Utilization15
5.1.1Table 13 – Sales to Working Capital 2008 through 201015
5.1.2Exhibit 715
5.1.3Exhibit 815
5.1.4Table 13 – Total Shareholder’s Equity 2008 through 201015
5.1.5Exhibit 915
5.2Operating Performance15
5.2.1Exhibit 1015
5.2.2Exhibit 1115
5.3Return on Equity (ROE)15
5.3.1Exhibit 1215
5.4Earnings Per Share15
5.4.1Exhibit 1315
5.5Cash Flow15
5.5.1Exhibit 1415
5.5.2Exhibit 1515
5.6Capital Structure and Solvency15
5.6.1Exhibit 1615
5.6.2Exhibit 1715
5.6.3Exhibit 1815
5.6.4Exhibit 1915
5.7Net Profit Margin15
5.7.1Exhibit 2015
5.8Operating Profit Margin15
5.8.1Exhibit 2116
5.8.2Exhibit 2216
5.9Market Performance16
5.9.1P/E Ratio16
5.9.2Exhibit 2316
5.10Capitalization Rate16
5.10.1Exhibit 2416
6.1Consolidated Financial Statements16
6.3Analysis of Financials16
6.3.1Exhibit 2516
6.5Third-Quarter Results16
6.639-Week Period Results16
6.7Financial Update16
7.1Similar Acquisitions16
7.2Combined Value16
7.3Anticipated Financial Performance16

To prepare a summary of performance test and analysis of Sears Holdings Corporation for the acquisition of there subsidiary Kmart. We will review the Current Financial position of Costco and evaluate the value of Kmart in preparation of making a recommendation of offer to the Costco Board of Directors. *

Current Financial Position - Costco
Costco is the second largest retailer in the US and seventh largest in the world thanks to their over $90 billion in annual sales. 1 They have 600 warehouses worldwide including 433 in the states. 1 While Costco has some operations worldwide, they are poised for further growth internationally especially in Asia. The current financial position is extremely optimal. The $38 billion dollar market cap company has about $5.8 billion dollars in cash and equivalents against $2.3 billion of debt or nearly 10% net cash on the balance sheet. 1 Their earnings are growing nicely and are predicted to continue that trend with an estimated 16% growth in 2012 and 13% in 2013. 1 They pay a small but growing 1% dividend and have been buying back shares at about a billion dollars per year over the past half-decade. 1 They generate around $2 billion in free cash flow which gives them a twenty times free cash flow multiple. 1 From an operational standpoint, Costco’s operating model is generally the same across our U.S., Canada, and other international segments. They believe that the most important driver of...
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