Sears Hometown And Outlet Stores, Inc. Reports Preliminary Fourth Quarter And Full Year 2012 Results

Sears Hometown And Outlet Stores, Inc. Reports Preliminary Fourth Quarter And
                            Full Year 2012 Results

PR Newswire

HOFFMAN ESTATES, Ill., March 12, 2013

HOFFMAN ESTATES, Ill., March 12, 2013 /PRNewswire/ -- Sears Hometown and
Outlet Stores, Inc. (NASDAQ: SHOS) today reported preliminary, unaudited
results for its fourth fiscal quarter and fiscal year ended February 2, 2013.

Results for the fourth quarter included:

  o Operating income increased 40.2% to $17.3 million
  o EPS increased 23.5% to $0.42
  o Adjusted EBITDA decreased 23.3% to $19.9 million
  o Comparable store sales decreased 0.5%

Results for the full year included:

  o Operating income increased 80.1% to $99.5 million
  o EPS increased 81.8% to $2.60
  o Adjusted EBITDA increased 35.7% to $109.8 million
  o Comparable store sales increased 0.6%

The fiscal year for SHO ends on the Saturday nearest the end of January;
therefore, fourth quarter and fiscal year 2012 included an extra week (the
53rd week) compared to 2011.  The 53rd week is not included in comparable
store sales calculations.  We operate through two segments--our Sears Hometown
and Hardware segment ("Hometown") and our Sears Outlet segment ("Outlet").

Bruce Johnson, Chief Executive Officer and President, said, "The holiday
season is traditionally less meaningful for our company than it is for many
retailers as the majority of the types of products we sell are not typically
thought of as holiday gifts.  Nevertheless, we were pleased with our November
and December results.  We did, however, see some softening of the business in
January.  In the quarter, we made substantial progress toward the planned exit
of consumer electronics in an additional 589 stores.  Space freed up from this
initiative will be reallocated to more productive merchandise categories
during the current quarter.  Excluding consumer electronics, comparable store
sales increased 1.1%, led by appliances and mattresses.  We opened 16 stores
and closed 8.  As described below, there were a number of one time items, both
positive and negative, in the fourth quarters of 2011 and 2012.  These items,
in addition to the ongoing costs of operating as a standalone company
following our separation from Sears Holdings Corporation in October 2012,
which costs were not incurred in 2011, should be considered when comparing
year-on-year operating performance."

Fourth Quarter Results

Net sales in the fourth quarter of 2012 increased $40.1 million, or 6.8%, to
$631.2 million from the fourth quarter of 2011.  This increase was primarily
due to sales of $36.5 million in the 53rd week.  Comparable store sales
declined 0.5% in the fourth quarter of 2012 compared to the fourth quarter of
2011 with a 0.8% increase in Hometown and a 4.8% decrease in Outlet. 
Excluding consumer electronics, comparable stores sales increased by 1.1%
overall and increased 2.6% in Hometown.  Comparable store sales in Outlet were
negatively impacted in the quarter by the level and mix of inventories in
appliances, especially in the high value refrigeration product lines.

Gross margin was $156.3 million, or 24.8% of net sales, in the fourth quarter
of 2012, compared to $138.2 million, or 23.4% of net sales, in the fourth
quarter of 2011. The 140 basis point increase in gross margin rate was
primarily driven by  $8.9 million of fourth quarter 2011 store closing and
severance charges, lower occupancy costs resulting from the conversion of
company-operated stores to franchisee-operated stores and improved delivery
margins.  Gross margin in the fourth quarter of 2012 was also impacted
favorably by approximately $1.5 million due to a change in the timing of
recognition of warranty expenses. This resulted from an arrangement regarding
the costs of warranty services provided by Sears Holdings that was negotiated
in conjunction with the company's separation from Sears Holdings ("the
Separation"), and was different than the arrangement that was in effect for
the fourth quarter of 2011.  These increases were partially offset by a $5.1
million favorable change in estimate for warranty reserves in the fourth
quarter of 2011, a 44 basis point unfavorable impact from consumer electronics
clearance activity in the fourth quarter of 2012, and a $2.6 million decline
in initial franchise revenues in the fourth quarter of 2012.  Outlet gross
margins were negatively impacted by the level and mix of inventories in
appliances, especially in the high value refrigeration product lines.  In
addition, gross margins were unfavorably impacted by $1.2 million primarily
due to additional occupancy costs as a result of operating as an independent
public company since the Separation.

Selling and administrative expenses increased to $136.4 million, or 21.6% of
net sales, in the fourth quarter of 2012 from $123.1 million, or 20.8% of net
sales, in the prior year quarter. The increase in expenses was primarily due
to higher owner commissions in Hometown related to the conversion of
company-operated stores to franchisee-operated stores, additional selling and
administrative expenses for the 53rd week, approximately $2.9 million in
incremental cost related to operating as an independent public company and
additional marketing investments.  These increases were partially offset by
lower payroll and benefits, which resulted from the franchise conversions. 
Also, prior year expenses included $2.0 million in expense for store closing
and severance charges.

Operating income increased to $17.3 million in the fourth quarter of 2012
compared to $12.3 million in the fourth quarter of 2011.  The $5.0 million
increase was primarily due to higher sales and a higher gross margin rate
partially offset by higher selling and administrative expenses, as noted
above.  The estimated impact of the 53rd week on operating income was $3.1
million.

Full Year Results

Net sales for fiscal year 2012 increased $109.4 million, or 4.7%, to $2.5
billion from fiscal year 2011.  This increase in sales was driven by the
impact of the 53rd week, a 0.6% increase in comparable store sales, new stores
and an increase in delivery revenues.  The comparable store sales increase was
driven by a 1.0% increase in Hometown and a 0.8% decrease in Outlet.

Gross margin was $613.4 million or 25.0% of sales in 2012, compared to $523.7
million or 22.3% of sales in 2011.  The 270  basis point increase in gross
margin primarily resulted from $12.1 million of store closing reserve charges
in 2011, lower occupancy costs due to franchising company operated stores,
improved delivery margins, and higher income from outlet merchandise
liquidated via a third party.  The 270 basis point increase also reflected
approximately $3.8 million in warranty expense timing benefit in the third and
fourth quarters of 2012, and $3.7 million in benefit in the first and second
quarters of 2012 from the impact of store closing reserves established in
2011.  These favorable impacts were partially offset by $7.2 million of
warranty reserve estimate changes, which resulted from a $5.1 million
reduction in reserves in the fourth quarter of 2011 and a $2.1 million
increase in reserves in 2012.  In addition, gross margins were unfavorably
impacted by $1.4 million primarily due to additional occupancy costs as a
result of operating as an independent public company since the Separation. 
For the full fiscal years, initial franchise revenues added $11.2 million to
gross margin in 2012 and $11.6 million in 2011.

Selling and administrative costs increased to $504.4 million, or 20.6% of
sales, in 2012 as compared to $458.6 million, or 19.6% of sales in 2011.  This
increase primarily resulted from higher owner commissions in Hometown related
to the conversion of company-operated stores to franchisee-operated stores,
the 53rd week, additional marketing investments and an estimated $3.6 million
in higher costs from operating as an independent public company since the
Separation.  These increases were partially offset by a decrease in payroll
and benefits, which also resulted from the franchise conversions.  Additional
offsets to the increase include $0.8 million in store closing and severance
costs in 2012 compared to $3.8 million in 2011. 

Full year operating income increased to $99.5 million in 2012 compared to
$55.3 million in 2011.  The $44.2 million increase is primarily due to the
higher sales and the higher gross margin rate partially offset by higher
selling and administrative expenses as noted above.  A portion of the higher
gross margin rate and the increased selling and administrative expenses
resulted from the sale of additional stores to franchisees.  When a company
operated store is sold to a franchisee it reduces the company's cost of
occupancy, which is reflected in cost of sales and occupancy, and increases
the company's commission payments, which are reflected in selling and
administrative expense.

Financial Position

We had $20.1 million in cash and cash equivalents as of February 2, 2013 and
$0.7 million as of January 28, 2012. The increase in cash and cash equivalents
over January 2012 primarily resulted from $121.6 million in operating cash
flows due to improved net income and lower working capital requirements.  The
lower working capital requirements primarily resulted from more favorable
payment terms from Sears Holdings that were negotiated as part of the
Separation.  $20 million of the increase in cash and cash equivalents resulted
from borrowings under the company's credit facilities.  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 $8.1 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 that provides for maximum borrowings of $250 million. 
We drew $100 million on the Senior ABL Facility to fund the dividend to Sears
Holdings.  We reduced the outstanding balance on the Senior ABL Facility to
$20.0 million at the end of the fourth quarter.

Merchandise inventories were $428.4 million at February 2, 2013 and $393.7
million at January 28, 2012. The $34.7 million increase was principally due to
assortment expansion (primarily in mattresses, tools and cooking), an increase
in the number of Outlet stores, increased receipts of home appliances from
vendors in Outlet stores in January, and seasonal outdoor living purchases
that occurred earlier in calendar year 2013 than in 2012.

Adjusted EBITDA

In addition to our net income determined in accordance with GAAP, for purposes
of evaluating operating performance we also 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, among other factors, for evaluating 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:

  o EBITDA excludes the effects of financing and investing activities by
    eliminating the effects of interest and depreciation costs; and
  o Other significant items, while periodically affecting our results, may
    vary significantly from period to period and may 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:

 

 

                        14 Weeks Ended vs 13 Weeks  53 Weeks Ended vs 52 weeks
                        Ended                       Ended
                        February 2,    January 28,  February 2,      January
Thousands                                                            28,
                        2013           2012         2013
                                                                     2012
Net income              $   9,660      $  7,904     $   60,080       $  33,056
Income tax expense      7,211          5,209        39,900           21,727
Other income            (385)          (195)        (1,354)          (422)
Interest expense        788            (595)        899              913
(income)
Operating income        17,274         12,323       99,525           55,274
Depreciation            2,658          2,816        9,474            9,774
Store closing charges   —              10,860       797              15,871
and severance costs
Adjusted EBITDA         $   19,932     $  25,999    $   109,796      $  80,919

 

Forward-Looking Statements
This news 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: the company
has not completed preparation of its audited financial statements for the year
ended February 2, 2013 and the preliminary results reported in this news
release may be subject to adjustments and could change materially; 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; the
willingness and ability of Sears Holdings to fulfill its contractual
obligations to us; 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 prior to the Separation; our agreements related to the Separation
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; 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 news 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 February 2, 2013, we and
our dealers and franchisees operated 1,245 stores across all 50 states as well
as in Puerto Rico 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.

 

Sears Hometown and Outlet Stores, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
                        14 Weeks Ended vs 13 Weeks  53 Weeks Ended vs 52 weeks

                         Ended                       Ended
Thousands, except per   February 2,    January 28,  February 2,    January 28,
share amounts
                        2013           2012         2013            2012
NET SALES               $   631,161    $  591,023   $  2,453,606   $ 2,344,199
COSTS AND EXPENSES
Cost of sales and       474,860        452,822      1,840,207      1,820,516
occupancy
Selling and             136,369        123,062      504,400        458,635
administrative
Depreciation            2,658          2,816        9,474          9,774
Total costs and         613,887        578,700      2,354,081      2,288,925
expenses
Operating income        17,274         12,323       99,525         55,274
Interest income         (788)          595          (899)          (913)
(expense)
Other income            385            195          1,354          422
Income before income    16,871         13,113       99,980         54,783
taxes
Income tax expense      (7,211)        (5,209)      (39,900)       (21,727)
NET INCOME              $   9,660      $  7,904     $  60,080      $ 33,056
NET INCOME PER COMMON
SHARE ATTRIBUTABLE TO
STOCKHOLDERS
Basic:                  $   0.42       $  0.34      $  2.60        $ 1.43
Diluted:                $   0.42       $  0.34      $  2.60        $ 1.43
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)
Thousands                                  February 2, 2013  January 28, 2012
ASSETS
CURRENT ASSETS
Cash and cash equivalents                  $     20,068      $     694
Accounts receivable                        10,986            9,006
Merchandise inventories                    428,437           393,658
Prepaid expenses and other current assets  14,321            2,163
Total current assets                       473,812           405,521
PROPERTY AND EQUIPMENT, net                53,383            59,996
GOODWILL                                   167,000           167,000
LONG-TERM DEFERRED TAXES                   69,001            8,368
OTHER ASSETS                               22,607            10,953
TOTAL ASSETS                               $     785,803     $     651,838
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings                      $     20,000      $     —
Payable to Sears Holdings Corporation      79,491            —
Accounts payable                           31,830            17,156
Other current liabilities                  83,211            75,235
Current portion of capital lease           1,463             2,061
obligations
Deferred income taxes                      —                 13,733
Total current liabilities                  215,995           108,185
CAPITAL LEASE OBLIGATIONS                  769               1,937
OTHER LONG-TERM LIABILITIES                2,752             3,610
TOTAL LIABILITIES                          219,516           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                          9,481             —
Divisional Equity, prior to the            —                 538,106
Separation
TOTAL STOCKHOLDERS' EQUITY                 566,287           538,106
TOTAL LIABILITIES AND STOCKHOLDERS'        $     785,803     $     651,838
EQUITY

 

Sears Hometown and Outlet Stores, Inc.
Segment Results
(Unaudited)
Hometown
                                                  
                       14 Weeks Ended vs 13
                       Weeks Ended               53 Weeks Ended vs 52 weeks
                                                 Ended
Thousands, except for  February 2,  January 28,  February 2,   January 28,
number of stores       2013
                                    2012         2013          2012
Net sales              $  486,046   $  460,020   $  1,889,263  $ 1,838,797
Comparable store       0.8%         (7.1)%       1.0%          (6.1)%
sales %
Cost of sales and      367,152      360,288      1,433,880     1,463,636
occupancy
Gross margin           118,894      99,732       455,383       375,161
Margin rate            24.5%        21.7%        24.1%         20.4%
Selling and            106,936      94,953       394,335       356,351
administrative
Selling and
administrative
expense as a           22.0%        20.6%        20.9%         19.4%
percentage of net
sales
Depreciation           1,235        1,161        3,658         4,083
Total costs and        475,323      456,402      1,831,873     1,824,070
expenses
Operating income       $  10,723    $  3,618     $  57,390     $ 14,727
Total Hometown stores                            1,118         1,158
Outlet
                                                  
                       14 Weeks Ended vs 13
                       Weeks Ended               53 Weeks Ended vs 52 weeks
                                                 Ended
Thousands, except for  February 2,  January 28,  February 2,   January 28,
number of stores
                       2013         2012         2013          2012
Net sales              $  145,115   $  131,003   $  564,343    $ 505,402
Comparable store       (4.8)%       13.1%        (0.8)%        8.7%
sales %
Cost of sales and      107,708      92,534       406,327       356,879
occupancy
Gross margin           37,407       38,469       158,016       148,523
Margin rate            25.8%        29.4%        28.0%         29.4%
Selling and            29,433       28,109       110,065       102,285
administrative
Selling and
administrative
expense as a           20.3%        21.5%        19.5%         20.2%
percentage of net
sales
Depreciation           1,423        1,655        5,816         5,691
Total costs and        138,564      122,298      522,208       464,855
expenses
Operating income       $  6,551     $  8,705     $  42,135     $ 40,547
Total Outlet stores                              127           116

 

SOURCE Sears Hometown and Outlet Stores, Inc.

Contact: Steve Barnhart, Senior Vice President and Chief Financial Officer,
+1-847-286-8700