Sears Hometown and Outlet Stores, Inc. Reports Third Quarter 2012 Results PR Newswire HOFFMAN ESTATES, Ill., Nov. 30, 2012 HOFFMAN ESTATES, Ill., Nov. 30, 2012 /PRNewswire/ -- Sears Hometown and Outlet Stores, Inc. (NASDAQ: SHOS) today reported results for its third fiscal quarter ended October 27, 2012. Highlights for the quarter included: oOperating income increased 27% to $14.1 million compared to $11.1 million in the prior year oNet income attributable to stockholders increased 29% to $8.8 million ($0.38 earnings per diluted share) compared to $6.8 million ($0.29 earnings per diluted share) in the prior year oAdjusted EBITDA increased 19% to $16.4 million compared to $13.8 million in the prior year oComparable store sales increased 3.1% over the prior year For the year-to-date period, through three quarters, net income doubled to $50.4 million from $25.2 million in the prior year, and Adjusted EBITDA increased 64% to $89.9 million from $54.9 million in the prior year, on a 4.0% increase in overall sales. Bruce Johnson, Chief Executive Officer and President, said, "In the third quarter, we completed our separation from Sears Holdings Corporation, added nine net stores and delivered improved year-on-year operating results. Comparable store sales increased by 3.1%. The Company saw double-digit percentage increases in total sales of appliances, mattresses and apparel. Multi-channel sales (online, store-to-home, web-to-store and mobile) increased by 28%. Sales of power lawn and garden and consumer electronics declined. The decline of more than 30% in consumer electronics sales is consistent with our strategy to de-emphasize this low-margin business in favor of the aforementioned categories. We are pleased with the year-on-year improvements in Adjusted EBITDA and Net Income and with our strong cash generation, in what is typically our seasonally softest quarter. I'd like to thank our dealers, franchisees and associates for their focus on our SHOP YOUR WAY^SM members and our other customers, and for their many contributions to these results." Third Quarter Net Sales and Comparable Store Sales We operate through two segments--our Sears Hometown and Hardware segment ("Hometown") and our Sears Outlet segment ("Outlet"). Net sales in the third quarter of 2012 increased $17.9 million, or 3.3%, to $556.9 million from the third quarter of 2011. This increase was driven primarily by the 3.1% increase in comparable store sales. New Outlet stores, apparel liquidation revenues and delivery revenues also contributed to sales growth, partially offset by lower initial franchise revenues and closed stores in Hometown. The comparable store sales increase of 3.1% was comprised of a 4.4% increase in Hometown and a 0.8% decrease in Outlet. The 3.1% increase was primarily driven by higher sales of home appliances in Hometown due to pricing, promotion and margin optimization strategies, and improved assortments. Also contributing to the increase in comparable store sales were increased sales of tools and mattresses in both Hometown and Outlet that resulted from assortment expansion in those categories. Partially offsetting these increases were declines in lawn and garden due to drought conditions experienced in large portions of the U.S. and in consumer electronics resulting from our strategy to de-emphasize the category. Third Quarter Operating Income Operating income was $14.1 million and $11.1 million for the quarters ended October 27, 2012 and October 29, 2011, respectively. The $3.0 million increase was driven by the increase in net sales and an increase in gross margin rate, partially offset by an increase in selling and administrative expenses. Gross margin was $138.4 million, or 24.9% of net sales, in the third quarter of 2012, as compared to $123.5 million, or 22.9% of net sales, in the third quarter of 2011. The 200 basis point increase in gross margin rate was primarily driven by improved delivery income and lower occupancy costs resulting from the conversion of company-operated stores to franchisee-operated stores, partially offset by lower initial franchise revenue. Selling and administrative expenses increased to $122.1 million, or 21.9% of net sales, in the third quarter of 2012 from $110.2 million, or 20.4% of net sales, in the prior year quarter. The increase was primarily due to higher owner commissions in Hometown mainly related to the conversion of company-operated stores to franchisee-operated stores. This increase was partially offset by a decrease in payroll and benefits which also resulted from these conversions. We completed our separation from Sears Holdings Corporation ("Sears Holdings") on October 11, 2012 (the "Separation") and as a consequence financial results for the third quarter reflect increased costs that we incurred during a portion of the quarter, which increased costs we expect that we will continue to incur post-Separation. We anticipate that our costs, relative to costs in comparable pre-Separation quarters, will be approximately $3.0 million to $5.0 million higher per quarter, including public company costs, costs of operating separately from Sears Holdings, incremental costs resulting from the Separation, and staffing and operating adjustments to support growth in our businesses. Financial Position We had cash balances of $21.8 million as of October 27, 2012, $0.7 million as of October 29, 2011 and $0.7 million as of January 28, 2012. The increase in cash over the first three quarters of 2012 primarily resulted from $93.3 million in operating cash flows due to improved net income and lower working capital requirements. The primary uses of cash were a $100 million cash dividend paid to Sears Holdings immediately prior to the Separation, $12.3 million related to the settlement of net payables due to Sears Holdings at the time of the Separation and $5.5 million of capital expenditures. In connection with the Separation we entered into an asset-based senior secured revolving credit facility (the "Senior ABL Facility") with a group of financial institutions. We drew $100 million on the Senior ABL Facility to fund the dividend to Sears Holdings. The outstanding balance on the Senior ABL Facility had been reduced to $47.1 million at the end of the quarter. The Senior ABL Facility provides (subject to availability under a borrowing base) for aggregate maximum borrowings of $250 million. Up to $75 million of the revolving credit facility is available for the issuance of letters of credit and up to $25 million is available for swingline loans. We had $3.4 million in letters of credit outstanding under the facility at October 27, 2012. Availability under the Senior ABL Facility as of October 27, 2012 was $198.0 million. Merchandise inventories were $429.4 million at October 27, 2012 and $417.9 million at October 29, 2011. The $11.5 million increase is primarily due to assortment expansion, the timing of holiday purchases and an increase in the number of Outlet stores. Adjusted EBITDA In addition to our net income determined in accordance with GAAP, for purposes of evaluating operating performance we use Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization, or "Adjusted EBITDA," which excludes certain significant items as set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our business, as well as for executive compensation metrics, for comparable periods. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items. Adjusted EBITDA should not be considered as a substitute for GAAP measurements. While Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of operating performance because: oEBITDA excludes the effects of financing and investing activities by eliminating the effects of interest and depreciation costs; and oOther significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results. The following table presents a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, for each of the periods indicated: 13 Weeks Ended 39 Weeks Ended October 27, October29, October 27, October29, Thousands 2012 2011 2012 2011 Net income $ 8,760 $ 6,814 $ 50,420 $ 25,152 Income tax expense 5,629 4,497 32,689 16,518 Other income (382) (90) (968) (227) Interest expense (income) 70 (117) 111 1,508 Operating income 14,077 11,104 82,252 42,951 Depreciation 2,282 2,277 6,815 6,958 Store closing charges and — 401 797 5,011 severance costs Adjusted EBITDA $ 16,359 $ 13,782 $ 89,864 $ 54,920 Forward-Looking Statements This press release contains forward-looking statements (the "forward looking statements"). The forward-looking statements are subject to significant risks and uncertainties that may cause our actual results, performance, and achievements in the future to be materially different from the future results, future performance, and future achievements expressed or implied by the forward-looking statements. Forward-looking statements include, without limitation, information concerning our future financial performance, business strategy, plans, goals and objectives. The forward-looking statements are based upon the current beliefs and expectations of our management. The following factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements: our continued reliance on Sears Holdings for most products and services that are important to the successful operation of our business; our potential need to depend on Sears Holdings beyond the expiration or earlier termination by Sears Holdings of certain of our agreements with Sears Holdings; our ability to offer merchandise and services that our customers want, including those under the KENMORE®, CRAFTSMAN®, and DIEHARD® brands (which brands are owned by subsidiaries of Sears Holdings); the sale by Sears Holdings and its subsidiaries to other retailers that compete with us of major home appliances and other products branded with the Kenmore, Craftsman, or DieHard brands; our ability to successfully manage our inventory levels and implement initiatives to improve inventory management and other capabilities; competitive conditions in the retail industry; worldwide economic conditions and business uncertainty, the availability of consumer and commercial credit, changes in consumer confidence, tastes, preferences and spending, and changes in vendor relationships; the fact that our past performance generally, as reflected on our historical financial statements, may not be indicative of our future performance as a result of, among other things, the consolidation of Hometown and Outlet into a single business entity, the Separation, operating as a standalone business entity, and the impact of increased costs due to a decrease in our purchasing power following the Separation and other losses of benefits associated with being wholly owned by Sears Holdings and its subsidiaries; our agreements related to the rights offering and Separation transactions and our continuing relationship with Sears Holdings were negotiated while we were a subsidiary of Sears Holdings and we may have received different terms from unaffiliated third parties; anticipated limitations and restrictions in the Senior ABL Facility and related agreements governing our indebtedness and our ability to service our indebtedness; our ability to obtain additional financing on acceptable terms; our dependence on independent dealers and independent franchisees to operate their stores profitably and in a manner consistent with our concepts and standards; our dependence on sources outside the U.S. for significant amounts of our merchandise inventories; impairment charges for goodwill or fixed-asset impairment for long-lived assets; our ability to attract, motivate and retain key executives and other employees; the impact of increased costs associated with being a public company; our ability to maintain effective internal controls as a public company; our ability to realize the benefits that we expect to achieve from the Separation; low trading volume of our common stock due to limited liquidity or a lack of analyst coverage; the impact on our common stock and our overall performance as a result of our principal stockholders' ability to exert control over us; and other risks, uncertainties, and factors discussed in our most recent Quarterly Report on Form 10-Q and other filings with the Securities and Exchange Commission. We intend the forward-looking statements to speak only as of the date of this press release, and we do not undertake to update or revise the forward-looking statements as more information becomes available. About Sears Hometown and Outlet Stores, Inc. Sears Hometown and Outlet Stores, Inc. is a national retailer primarily focused on selling home appliances, hardware, tools and lawn and garden equipment. Our Hometown stores are designed to provide our customers with in-store and online access to a wide selection of national brands of home appliances, tools, lawn and garden equipment, sporting goods and household goods, depending on the particular format. Our Outlet stores are designed to provide our customers with in-store and online access to new, one-of-a-kind, out-of-carton, discontinued, obsolete, used, reconditioned, overstocked and scratched and dented products across a broad assortment of merchandise categories, including home appliances, lawn and garden equipment, apparel, mattresses, sporting goods and tools at prices that are significantly lower than manufacturers' suggested retail prices. As of October 27, 2012, we and our dealers and franchisees operated 1,237 stores across all 50 states as well as in Puerto Rico, Guam and Bermuda. Our principal executive offices are located at 5500 Trillium Boulevard, Suite 501, Hoffman Estates, Illinois 60192 and our telephone number is (847) 286-7000. INVESTOR RELATIONS CONTACT: Steve Barnhart, Senior Vice President and Chief Financial Officer 847-286-8700 Sears Hometown and Outlet Stores, Inc. Consolidated Statements of Income (Unaudited) 13 Weeks Ended 39 Weeks Ended Thousands, except per October 27, October 29, October 27, October 29, share amounts 2012 2011 2012 2011 NET SALES $ 556,903 $ 538,968 $ 1,822,445 $ 1,753,176 COSTS AND EXPENSES Cost of sales and 418,490 415,420 1,365,347 1,364,524 occupancy Selling and 122,054 110,167 368,031 338,743 administrative Depreciation 2,282 2,277 6,815 6,958 Total costs and expenses 542,826 527,864 1,740,193 1,710,225 Operating income 14,077 11,104 82,252 42,951 Interest income (70) 117 (111) (1,508) (expense) Other income 382 90 968 227 Income before income 14,389 11,311 83,109 41,670 taxes Income tax expense (5,629) (4,497) (32,689) (16,518) NET INCOME $ 8,760 $ 6,814 $ 50,420 $ 25,152 NET INCOME PER COMMON SHARE ATTRIBUTABLE TO STOCKHOLDERS Basic: $ 0.38 $ 0.29 $ 2.18 $ 1.09 Diluted: $ 0.38 $ 0.29 $ 2.18 $ 1.09 Basic weighted average common shares 23,100 23,100 23,100 23,100 outstanding (1) Diluted weighted average common shares 23,100 23,100 23,100 23,100 outstanding (1) (1) 23,100,000 shares outstanding effective upon completion of the Separation are used for all periods prior to the Separation. Sears Hometown and Outlet Stores, Inc. Condensed Consolidated Balance Sheets (Unaudited) October 27, October29, January28, Thousands 2012 2011 2012 ASSETS CURRENT ASSETS Cash and cash equivalents $ 21,841 $ 724 $ 694 Accounts receivable 13,905 9,200 9,006 Merchandise inventories 429,407 417,846 393,658 Prepaid expenses and other current 12,301 4,203 2,163 assets Total current assets 477,454 431,973 405,521 PROPERTY AND EQUIPMENT, net 54,088 57,172 59,996 GOODWILL 167,000 167,000 167,000 LONG-TERM DEFERRED TAXES 70,648 8,618 8,368 OTHER ASSETS 22,509 9,189 10,953 TOTAL ASSETS $ 791,699 $ 673,952 $ 651,838 LIABILITIES CURRENT LIABILITIES Short-term borrowings $ 47,100 $ — $ — Payable to Sears Holdings Corporation 77,687 — — Accounts payable 29,228 21,669 17,156 Other current liabilities 76,265 79,069 75,235 Current portion of capital lease 1,499 2,171 2,061 obligations Deferred income taxes — 13,954 13,733 Total current liabilities 231,779 116,863 108,185 CAPITAL LEASE OBLIGATIONS 870 2,400 1,937 OTHER LONG-TERM LIABILITIES 2,423 3,386 3,610 TOTAL LIABILITIES 235,072 122,649 113,732 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock: $.01 par value; 231 — — Authorized shares: 400,000 Issued shares: 23,100 Outstanding shares: 23,100 Capital in excess of par value 556,575 — — Retained earnings (accumulated deficit) (179) — — Divisional Equity, prior to the — 551,303 538,106 Separation TOTAL STOCKHOLDERS' EQUITY 556,627 551,303 538,106 TOTAL LIABILITIES AND STOCKHOLDERS' $ 791,699 $ 673,952 $ 651,838 EQUITY Sears Hometown and Outlet Stores, Inc. Segment Results (Unaudited) Hometown 13 Weeks Ended 39 Weeks Ended Thousands, except for October 27, October29, October 27, October29, number of stores 2012 2011 2012 2011 Net sales $ 414,985 $ 410,683 $ 1,403,218 $ 1,378,778 Comparable store sales 4.4 % (4.5) % 1.0 % (5.3) % % Cost of sales and 316,820 325,408 1,066,728 1,100,179 occupancy Gross margin dollars 98,165 85,275 336,490 278,599 Margin rate 23.7 % 20.8 % 24.0 % 20.2 % Selling and 94,149 82,688 287,400 264,567 administrative Selling and administrative expense 22.7 % 20.1 % 20.5 % 19.2 % as a percentage of net sales Depreciation 797 922 2,423 2,922 Total costs and 411,766 409,018 1,356,551 1,367,668 expenses Operating income $ 3,219 $ 1,665 $ 46,667 $ 11,110 Total Hometown stores 1,111 1,121 Outlet 13 Weeks Ended 39 Weeks Ended Thousands, except for October 27, October29, October 27, October29, number of stores 2012 2011 2012 2011 Net sales $ 141,918 $ 128,285 $ 419,227 $ 374,398 Comparable store sales (0.8) % 12.2 % 0.6 % 7.3 % % Cost of sales and 101,670 90,012 298,619 264,345 occupancy Gross margin dollars 40,248 38,273 120,608 110,053 Margin rate 28.4 % 29.8 % 28.8 % 29.4 % Selling and 27,905 27,479 80,631 74,176 administrative Selling and administrative expense 19.7 % 21.4 % 19.2 % 19.8 % as a percentage of net sales Depreciation 1,485 1,355 4,392 4,036 Total costs and 131,060 118,846 383,642 342,557 expenses Operating income $ 10,858 $ 9,439 $ 35,585 $ 31,841 Total Outlet stores 126 118 SOURCE Sears Hometown and Outlet Stores, Inc.
Sears Hometown and Outlet Stores, Inc. Reports Third Quarter 2012 Results