Introduction

Costco and Kmart are in the same industry but the financial and business position of Kmart is not good. Hence Costco is looking to acquire the Kmart, which is a business division of Sears Holding Corporation. A review of financial statements is necessary to decide whether it is worthwhile to go for acquisition of Kmart as far as financial analysis is concerned.

Analysis

The operating income of Kmart has shown a declining trend. Year 2014 and 2013 was loss making years for the company and obviously this is the reason that Kmart is receiving acquisition bids from Costco. Not only the sales revenue of Kmart has declined there is decline in the gross margin also. There is a high decline in operating income. The operating income was 5 million in the year 2012 which turned out to be a loss of 422 million in the year 2014. It may be noted that though there is a declining trend in sales yet the sales expense and administrative expense has shown increasing trend. This is not an ideal situation for Kmart. It may be noted that the number of Kmart stores has decline in the past three years. There were 1,221 Kmart stores in the year 2012 which declined to 979 Kmart stores in year 2014.

Kmart also sold some of its assets in order to arrange for the funds, but it appears that this strategy did not help it much as it made loss on the sales of existing assets. However as the balance of fixed assets declined it resulted in a decline in the depreciation expense. The depreciation expense was 147 million in the year 2012 which declined to 95 million in the year 2014.

The inventory turnover rate for Costco is 11.35, which the same ratio for Kmart is 4.02. The inventory turnover ratio indicates the ability and frequency of the company to turn its inventory in to sales. A high ratio is always required and indicates fast moving inventory. Thus if Costco acquires Kmart it can be safely assumed that the inventory of Kmart will be sold in a quick manner as Costco has a higher inventory turnover ratio.

Conclusion

The Kmart business of Sears Holding has turned out to be a loss making unit and thus Sears Holdings better of selling it to Costco. The Costco can revive the Kmart business as it can turn the lacunas of Kmart in to strengths.

What is the intrinsic value of Kmart?

What is the market value of Kmart?