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CASE: A-165
DATE: 09/00 (REV’D. 05/07)
SEARS: ACCOUNTING FOR UNCOLLECTIBLE ACCOUNTS
Sarah Simons picked up the 1999 Annual Report for Sears, Roebuck and Co., which had just been delivered to her office. As an analyst for a major brokerage, she was responsible for providing investment advice regarding companies in the retail industry, including Sears. She looked over the income statement, noting that net income grew by 39 percent over the previous year, despite a slight decrease in revenues (see Exhibit 1). Before long, however, she turned her attention to the Company’s credit card receivables and allowance for uncollectible accounts (see
Exhibit 2). In recent years, Sears had suffered heavy write-offs from uncollectible credit card accounts, as well as an expensive scandal caused by illegal collections procedures. These problems had depressed Sears’ stock price substantially from its peak in mid-1998.
Had Sears overcome their credit card problems?
BACKGROUND
Sears, Roebuck and Co. was founded in 1886 as a retail mail-order business and grew rapidly by providing a wide range of products to people in rural areas who did not have access to large, well-stocked stores. The Company began to diversify into financial services in 1931, when it established Allstate Insurance Company. This diversification continued in the 1980s, as it acquired Dean Witter Reynolds and Coldwell Banker, and launched the Discover card.
By 1990, however, Sears was struggling and the investment community was critical of its business strategy, which was derisively characterized as “socks and stocks.” Shareholder discontent drove the Company to a massive restructuring to refocus on its retailing roots.
According to former CEO Edward Brennan, 1992 was a “disastrous year” in which the Company lost $3.9 billion, of which $3.1 billion was a charge related to the restructuring. By 1995, Sears had divested its financial services businesses and
CASE: A-165
DATE: 09/00 (REV’D. 05/07)
SEARS: ACCOUNTING FOR UNCOLLECTIBLE ACCOUNTS
Sarah Simons picked up the 1999 Annual Report for Sears, Roebuck and Co., which had just been delivered to her office. As an analyst for a major brokerage, she was responsible for providing investment advice regarding companies in the retail industry, including Sears. She looked over the income statement, noting that net income grew by 39 percent over the previous year, despite a slight decrease in revenues (see Exhibit 1). Before long, however, she turned her attention to the Company’s credit card receivables and allowance for uncollectible accounts (see
Exhibit 2). In recent years, Sears had suffered heavy write-offs from uncollectible credit card accounts, as well as an expensive scandal caused by illegal collections procedures. These problems had depressed Sears’ stock price substantially from its peak in mid-1998.
Had Sears overcome their credit card problems?
BACKGROUND
Sears, Roebuck and Co. was founded in 1886 as a retail mail-order business and grew rapidly by providing a wide range of products to people in rural areas who did not have access to large, well-stocked stores. The Company began to diversify into financial services in 1931, when it established Allstate Insurance Company. This diversification continued in the 1980s, as it acquired Dean Witter Reynolds and Coldwell Banker, and launched the Discover card.
By 1990, however, Sears was struggling and the investment community was critical of its business strategy, which was derisively characterized as “socks and stocks.” Shareholder discontent drove the Company to a massive restructuring to refocus on its retailing roots.
According to former CEO Edward Brennan, 1992 was a “disastrous year” in which the Company lost $3.9 billion, of which $3.1 billion was a charge related to the restructuring. By 1995, Sears had divested its financial services businesses and