Analysts' Perspectives - June 2003

— June 01, 2003

How is Sears' divestiture of its credit card business going to affect its growth going foward?

"Sears is fundamentally a retail operation. All other ventures, profitable or not, tend to distract from the core business. Questions about non-retail store divestitures were raised already a dozen years ago with the termination of the Sears catalog and separation of Allstate Insurance. Now, Sears is well on the way to repositioning itself as the mall-based counterpart of Kohl's, and experimenting even with free-standing locations. It'll operate better without the sideshows."

"For Sears to exit this business is a result of mistakenly applying the concept of 'outsourcing.' Good practice demands an enterprise focus on its core competencies and outsource non-core functions to those who can provide them better/cheaper. In Sears' case it is difficult to imagine they are not extremely competent at a function they have controlled for years. This is an example of poor strategic analysis and decision-making. Others, like American Express, have become so adept at credit card processing, they are able to grow revenues and profits by providing the service to others. Sears is missing a solid growth and profit improvement opportunity by giving up rather than leveraging a key skill."

"If divesting the credit card business translates into refocusing on the core retailing business, then it has the potential to be a very good move for Sears that could result in increased growth. By redoubling efforts in supply chain management and applying 'best practices' in product sourcing and supplier relations, . logistics, inventory management, stocking and replenishment policies and related [areas], Sears certainly has the potential to significantly improve its position in the mind of the consumer."

"Divestiture of a major division of a business can have positive ramifications on the remainder of the business if executed correctly and can serve as a catalyst for the CEO change agenda. Executive time can become more focused on strategies directly related to the core business. In addition, the availability of capital for growth can become more plentiful. In short, a more focused strategy, more targeted use of a larger pool of capital and improved operational execution can make a significant divestiture lead to improved business performance and accelerate higher returns to shareholders."

 

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