Sears Hometown and Outlet Stores, Inc. Reports Third Quarter 2012 Results

  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

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,
                            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.

Steve Barnhart,
Senior Vice President and Chief Financial Officer

Sears Hometown and Outlet Stores, Inc.
Consolidated Statements of Income
                          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
Cost of sales and         418,490      415,420      1,365,347     1,364,524
Selling and               122,054      110,167      368,031       338,743
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)
Other income              382          90           968           227
Income before income      14,389       11,311       83,109        41,670
Income tax expense        (5,629)      (4,497)      (32,689)      (16,518)
NET INCOME                $  8,760     $  6,814     $ 50,420      $ 25,152
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,
                                         2012         2011         2012
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
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
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
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
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
TOTAL STOCKHOLDERS' EQUITY               556,627      551,303      538,106
TOTAL LIABILITIES AND STOCKHOLDERS'      $  791,699   $  673,952   $  651,838

Sears Hometown and Outlet Stores, Inc.
Segment Results
                        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
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
Selling and
administrative expense  22.7      %  20.1      %  20.5        %  19.2        %
as a percentage of net
Depreciation            797          922          2,423          2,922
Total costs and         411,766      409,018      1,356,551      1,367,668
Operating income        $ 3,219      $ 1,665      $ 46,667       $ 11,110
Total Hometown stores                             1,111          1,121
                        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
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
Selling and
administrative expense  19.7      %  21.4      %  19.2        %  19.8        %
as a percentage of net
Depreciation            1,485        1,355        4,392          4,036
Total costs and         131,060      118,846      383,642        342,557
Operating income        $ 10,858     $ 9,439      $ 35,585       $ 31,841
Total Outlet stores                               126            118

SOURCE Sears Hometown and Outlet Stores, Inc.