Orchard Supply Hardware Stores Corporation Reports Third Quarter Fiscal 2012 Financial Results

  Orchard Supply Hardware Stores Corporation Reports Third Quarter Fiscal 2012
  Financial Results

Business Wire

SAN JOSE, Calif. -- December 10, 2012

Orchard Supply Hardware Stores Corporation (Nasdaq:OSH), which operates
neighborhood hardware and garden stores focused on paint, repair and the
backyard, today announced financial results for the third quarter of fiscal
2012 ended October 27, 2012.

Third Quarter Fiscal 2012 Financial Results

  *Third quarter net sales were $155.2 million compared to $158.7 million in
    the prior year period. Comparable store sales^(1) for the quarter were
    essentially flat, decreasing 0.1%.
  *Net loss in the third quarter of fiscal 2012 was $53.6 million compared to
    net loss of $10.1 million in the third quarter of fiscal 2011. Net loss in
    the 2012 quarterly period includes $65.1 million of non-cash charges
    comprised of $60.3 million for impairment of trade names and $4.8 million
    for impairment of store assets, as well as $1.1 million of charges related
    to litigation and financial advisory fees related to the Company’s
    financing efforts.
  *Non-GAAP Adjusted EBITDA for the quarter was $1.7 million compared to $9.3
    million in the third quarter of fiscal 2011. Gross margin in the third
    quarter was impacted largely by increased promotional activity versus a
    year ago to help drive sales and clear inventory. Adjusted EBITDA for the
    quarterly period also includes approximately $0.9 million of incremental
    costs associated with the effect of having transitioned to a publicly
    traded company independent from Sears Holdings Corporation and
    approximately $0.7 million of rent associated with sale-leaseback
    properties owned by the Company in the prior year period and for which the
    Company did not pay rent (see “Non-GAAP Financial Measures” below for a
    discussion of this non-GAAP measure and reconciliation to its most
    directly comparable GAAP financial measure and further information on its
    uses and limitations).
  *As of October 27, 2012, total long-term debt was $173.7 million, all of
    which was classified as current. Total long-term debt plus capital leases
    was $228.4 million compared to $320.0 million at October 29, 2011. During
    the period, Orchard successfully refinanced its Senior Secured Credit
    Facility, providing the Company with increased borrowing capacity at a
    lower cost. At the close of the third quarter, the Company had
    approximately $66.5 million of available cash and credit.

Mark Baker, President and Chief Executive Officer, stated, “At the beginning
of fiscal 2012, we outlined five strategic priorities, which included our
plans to transform Orchard’s store portfolio to our productive new
neighborhood format. Thus far in 2012, we opened two new stores and remodeled
four existing locations, three of which were completed during the third
quarter, and we’re seeing increased customer traffic and engagement at those
locations. While comparable store sales were flat in the third quarter, the
combination of stronger sales of seasonal merchandise and contributions from
the newly remodeled stores drove an improvement in comp store trends
throughout the period. However, our margins were pressured as we increased our
promotional activity to help drive traffic and sales.”

“We remain confident in and committed to our real estate strategy,” added
Baker. “We are pleased with the results to-date of our new and remodeled
stores and plan to continue our roll-out of the concept in fiscal 2013. This
is only one part of our plan to reposition the Company and the Orchard brand;
we are also focused on strengthening our financial position and driving
improvement in other key areas of the business, including merchandising,
marketing and store operations, which we believe will provide the foundation
for improved sales and profitability over the long-term.”

Balance Sheet and Cash Flow

As of October 27, 2012, inventories totaled $173.8 million compared to $161.2
million at October 29, 2011. The increase of 7.8% reflects lower than expected
sales, as well as seasonal merchandise the Company began selling on a
year-round basis in fiscal 2012. Cash and cash equivalents at the end of the
third quarter were $10.5 million. As of quarter-end, total debt and capital
lease obligations were $228.4 million.

Financial Position Update

The Company has taken a number of steps in fiscal 2012 to strengthen its
financial position. These steps include generating proceeds and securing
tenant improvement allowances through multiple sale-leaseback transactions,
refinancing its credit facility, and reducing debt. The Company amended its
Senior Secured Credit Facility in October 2012, which increased borrowing
capacity from $100 million to $127.5 million at lower rates. In November 2012,
the Company finalized a non-binding term sheet to further amend the credit
facility, whereby total capacity would increase to $145 million through a
$17.5 million last-in-last-out term loan tranche. The Company is also pursuing
additional sales and/or sale-leaseback transactions on its remaining owned
properties.

In addition, the Company is continuing to work with Moelis & Co. to refinance
its Senior Secured Term Loan. As previously disclosed, the Company obtained a
waiver from its Senior Secured Term Loan holders in anticipation of not being
in compliance with its leverage ratio covenant at the October 27, 2012
measurement date. The Company anticipates that it will also not be in
compliance with this leverage ratio covenant at the next measurement date of
February 2, 2013, which is Orchard’s fiscal year-end. The Company is working
towards the refinancing or modification of its Senior Secured Term Loan by the
end of its fiscal year through several alternatives, including possibly
issuing new long-term debt and/or equity, although no assurances can be made
that such transactions will be consummated.

Store Opening and Remodel Plans

By the end of fiscal 2012, the Company expects to have opened a total of two
new stores and remodeled five existing Orchard locations. During the third
quarter, the Company opened one new store and completed three remodels. As of
October 27, 2012, the Company had eight stores operating in its new
neighborhood store format and anticipates having 10 stores by the end of
fiscal 2012. In fiscal 2013, Orchard expects to open at least four new stores
and remodel at least six existing locations and expects to have approximately
20 stores in the new format, representing more than 20% of the portfolio, by
fiscal year-end.

Conference Call Information

The Company will host a conference call on Monday, December 10, 2012 at 1:30
p.m. Pacific Time/4:30 p.m. Eastern Time. Mark Baker, Chief Executive Officer
and Chris Newman, Chief Financial Officer, will discuss third quarter fiscal
2012 financial results and provide a general business update, followed by a
Q&A session. To listen to the call, please dial (866) 713-8563 and provide
passcode 12994304. A telephone replay will be available from December 10, 2012
at approximately 3:30 p.m. Pacific Time/6:30 p.m. Eastern Time through
December 17, 2012. To access the replay, please dial (888) 286-8010 and enter
passcode 54986414. The call will also be broadcast live at http://ir.osh.com
and will be archived on the web site for 90 days.

Footnote

^(1) Comparable store sales are calculated using sales of stores open at least
twelve months and exclude E-commerce. Additionally, and because of an
agreement the Company entered into with Sears Holdings Corporation on
October26, 2011, whereby the Company now sells appliances on a consignment
basis and receives commission income for sales of such appliances and related
protection agreements, comparable store sales also exclude approximately $4.1
million of net sales of Sears branded appliances in the third quarter of
fiscal 2011 and approximately $0.4 million of commission income in the third
quarter of fiscal 2012.

About Orchard

Orchard Supply Hardware Stores Corporation operates neighborhood hardware and
garden stores focused on paint, repair and the backyard. The Company was
founded as a purchasing cooperative in San Jose in 1931. Today the stores
average 44,000 square feet of enclosed retail space and 8,000 square feet of
exterior nursery and garden space. As of October 27, 2012, the Company had 89
stores in California. For more information, visit http://osh.com.

Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995:

This press release (including information incorporated or deemed incorporated
by reference herein) contains “forward-looking statements” within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are those involving future events and future results that are based
on current expectations, estimates, forecasts, and projections as well as the
current beliefs and assumptions of the Company’s management. Words such as
“guidance”, “outlook”, “believes”, “expects”, “appears”, “may”, “will”,
“should”, “intend”, “target”, “projects”, “estimates”, “plans”, “forecast”,
“is likely to”, “anticipates”, or the negative thereof or comparable
terminology, are intended to identify such forward looking statements. Any
statement that is not a historical fact and other estimates, projections,
future trends and the outcome of events that have not yet occurred and are
referenced in this press release, is a forward-looking statement.
Forward-looking statements are only predictions and are subject to risks,
uncertainties and assumptions that are difficult to predict. Therefore actual
results may differ materially and adversely from those expressed in any
forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, factors discussed under the
section entitled “Risk Factors” in the Company’s reports filed with the
Securities and Exchange Commission. Many of such factors relate to events and
circumstances that are beyond the Company’s control. You should not place
undue reliance on forward-looking statements. The Company does not assume any
obligation to update the information contained in this press release.

ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE 13 AND 39 WEEK PERIODS ENDED OCTOBER 27, 2012 AND OCTOBER 29, 2011

(Unaudited, in thousands, except per share amounts)

                  13 Weeks Ended                39 Weeks Ended
                   October 27,   October 29,     October 27,   October 29,
                   2012            2011            2012            2011
NET SALES          $  155,163      $  158,688      $  504,220      $  518,893
                                                                      
COST OF SALES
AND EXPENSES:
Cost of sales
(excluding            110,152         107,174         342,674         346,411
depreciation and
amortization)
Selling and           45,476          40,836          141,120         131,092
administrative
Depreciation and      8,645           7,722           24,016          22,390
amortization
Trade name and
property and          65,100          —               72,773          —
equipment
impairment
Loss (gain) on
sale of real         —              14,310         (630)          14,310
property
Total cost of
sales and            229,373        170,042        579, 953       514,203
expenses
OPERATING (LOSS)      (74,210)        (11,354)        (75,733)        4,690
INCOME
INTEREST             3,940          5,725          18,268         16,794
EXPENSE, NET
LOSS BEFORE           (78,150)        (17,079)        (94,001)        (12,104)
INCOME TAXES
INCOME TAX           (24,579)       (6,971)        (9,194)        (4,897)
BENEFIT
NET LOSS           $  (53,571)     $  (10,108)     $  (84,807)     $  (7,207)
                                                                      
NET LOSS PER
COMMON SHARE
ATTRIBUTABLE
TO STOCKHOLDERS:
Basic and
diluted loss per   $  (8.88)       $  (1.68)       $  (14.08)      $  (1.20)
share
Basic and
diluted weighted
average common        6,033           6,009           6,022           6,010
shares
outstanding

ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF OCTOBER 27, 2012, JANUARY 28, 2012, AND OCTOBER 29, 2011

(Unaudited, in thousands)
                                                             
                                   October 27,     January 28,     October 29,
                                   2012            2012            2011
ASSETS
CURRENT ASSETS:
Cash and cash equivalents          $  10,472       $  8,148        $  32,381
Restricted cash                       —               556             556
Merchandise inventories               173,785         157,671         161,214
Deferred income taxes                 2,095           14,129          18,181
Prepaid expenses and other           25,515         13,228         14,766
current assets
Total current assets                  211,867         193,732         227,098
PROPERTY AND EQUIPMENT, NET           195,742         210,362         231,692
INTANGIBLE ASSETS                     67,118          133,916         139,401
DEFERRED FINANCING COSTS AND         10,011         8,493          4,288
OTHER LONG-TERM ASSETS
TOTAL                              $  484,738      $  546,503      $  602,479
                                                                      
LIABILITIES AND STOCKHOLDERS’
EQUITY
CURRENT LIABILITIES:
Merchandise payables               $  60,203       $  54,410       $  57,573
Accrued expenses and other            60,873          44,508          53,869
liabilities
Current portion of long-term
debt and capital lease                179,930         8,269           41,781
obligations
Deposits from sale of real           26,209         21,471         —
property
Total current liabilities             327,215         128,658         153,223
LONG-TERM DEBT AND CAPITAL LEASE      48,484          254,152         278,269
OBLIGATIONS
LONG-TERM DEPOSITS FROM SALE OF       40,479          —               —
REAL PROPERTIES
OTHER LONG-TERM LIABILITIES           39,166          29,286          21,978
DEFERRED INCOME TAXES                26,889         48,108         57,969
Total liabilities                    482,233        460,204        511,439
Total stockholders’ equity           2,505          86,299         91,040
TOTAL                              $  484,738      $  546,503      $  602,479

Non-GAAP Financial Measures

In addition to our net income (loss) determined in accordance with GAAP, for
purposes of evaluating operating performance, the Company uses an Adjusted
Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted
EBITDA"), which is adjusted to exclude certain significant items as set forth
below. Our management uses Adjusted EBITDA to evaluate the operating
performance of our business 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:

          Adjusted EBITDA excludes the effects of financing and investing
    ● activities by eliminating the effects of interest, depreciation and
          amortization costs;
          Management considers gain/loss on the sale of assets to result from
        ● investing decisions. Asset impairments and equity compensation
          expenses are excluded as they are non-cash charges; and
          Other significant items includes certain legal reserves, financial
          advisory costs, and severance charges not in the normal course of
        ● operations that periodically affect our results and may vary
          significantly from period to period and have a disproportionate
          effect in a given period.

Reconciliation of Net Loss to Non-GAAP Adjusted EBITDA:



(Unaudited, in millions)

                       13 Weeks Ended              39 Weeks Ended
                    October 27,    October 29,    October 27,   October 29,
                    2012            2011           2012            2011
Net loss^(1)        $   (53.6   )   $   (10.1  )     $ (84.8)     $   (7.2)
Interest expense,       3.9             5.7             18.3           16.8
net
Income tax              (24.6   )       (7.0   )        (9.2)          (4.9)
benefit^(2)
Depreciation and        8.7             7.7             24.0           22.4
amortization
Impairment of
assets and net loss     65.4            14.4            73.0           14.5
on sale of real
property^(3)
Stock-based             0.5             0.1             1.0            0.3
compensation
Other significant      1.4            (1.5   )       1.9           (1.7)
items^(4)
Adjusted EBITDA^(5) $   1.7         $   9.3           $ 24.2       $   40.2
(6)

^(1) Includes gift card breakage income of $1.4 million recorded in the 13
weeks and 39 weeks ended October 27, 2012. There was no breakage income
recorded for the same periods in fiscal 2011.

^(2) The Company recorded a tax benefit of $24.6 million in the 13 weeks ended
October 27, 2012 related to the $60.3 million trade name impairment charge.

^(3) Included in impairment of assets and net loss on sale of real property in
the 13 weeks ended October 27, 2012 are a non-cash charge of $60.3 million for
trade name impairment and $4.8 million of non-cash charges related to the
write-down of store assets that were determined to be impaired. The 13 weeks
ended October 29, 2011 includes a non-cash loss of $14.3 million recorded in
connection with the sale of the distribution center in Tracy, California. The
39-week period ended October 27, 2012, in addition to the items noted above,
includes $7.7 million of non-cash charges related to the write-down of store
assets that were determined to be impaired in the first six months of fiscal
2012.

^(4) Other significant items includes $1.4 million of legal, financial
advisory fees and severance for the 13 weeks ended October 27, 2012 and
includes a $1.6 million reversal of legal accrual for the 13 weeks ended
October 27, 2011. The 39-week period ended October 27, 2012, in addition to
the items noted above, includes $0.5 million of severance recorded in the
first six months of fiscal 2012.

^(5) Adjusted EBITDA for the 13-week and 39-week periods ended October 27,
2012 includes $0.7 million and $2.1 million, respectively, of rent expense
that was not included in the comparable periods of fiscal 2011 as a result of
sale-leaseback transactions. Rent expense is included in cost of sales.

^(6) For the 13-week period ended October 27, 2012, Adjusted EBITDA includes
approximately $0.9 million of incremental costs associated with the effect of
having transitioned to a publicly traded company independent from Sears
Holdings Corporation on December 30, 2011, as compared to the same prior year
period. Approximately $0.6 million of these costs are included in selling and
administrative expenses and approximately $0.3 million of these costs are
included in cost of sales. For the 39-week period ended October 27, 2012,
Adjusted EBITDA includes approximately $4.2 million of incremental costs
associated with the effect of having transitioned to a publicly traded company
independent from Sears Holdings Corporation on December 30, 2011, as compared
to the same prior year period. Approximately $3.4 million of these costs are
included in selling and administrative expenses and approximately $0.8 million
are included in cost of sales.

Contact:

Investor Relations Contact:
Christine Greany
The Blueshirt Group
858-523-1732
christine@blueshirtgroup.com
 
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