Sears Hometown And Outlet Stores, Inc. Reports First Quarter 2013 Results

  Sears Hometown And Outlet Stores, Inc. Reports First Quarter 2013 Results

PR Newswire

HOFFMAN ESTATES, Ill., June 7, 2013

HOFFMAN ESTATES, Ill., June 7, 2013 /PRNewswire/ --Sears Hometown and Outlet
Stores, Inc. (NASDAQ: SHOS) today reported results for its quarter ended May
4, 2013. Results for the first quarter included:

  oOperating income decreased 28% to $24.7 million compared to $34.5 million
    in the prior year
  oNet income attributable to stockholders decreased 27% to $15.0 million
    ($0.65 earnings per diluted share) compared to $20.6 million ($0.89
    earnings per diluted share) in the prior year
  oAdjusted EBITDA decreased 26% to $27.1 million compared to $36.8 million
    in the prior year
  oComparable store sales decreased 5.0% versus the prior year

First 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 first quarter of 2013 decreased $20.0 million, or 3.2%, to
$601.1 million from the first quarter of 2012. This decrease was driven
primarily by a 5.0% reduction in comparable store sales partially offset by
new store sales (net of closures), a favorable impact from a fiscal calendar
shift following the extra (53rd) week in fiscal 2012, and higher Outlet
liquidation revenues. Initial franchise revenues were $5.2 million in the
first quarter of 2013 compared to $5.0 million in the first quarter of 2012.

The comparable store sales decrease of 5.0% was comprised of a 6.9% decrease
in Hometown and a 1.2% increase in Outlet. The 5.0% decrease was primarily
driven by lower sales of lawn and garden in Hometown due to colder weather
conditions experienced in large portions of the U.S. delaying the start of the
spring/summer season. Excluding lawn and garden, the Company's comparable
store sales increased 1.4%, led by appliances and mattresses. Growth in these
categories was partially offset by lower consumer electronics sales due to our
previously announced de-emphasis of the category, and lower Outlet apparel
sales due to a narrower assortment.

Bruce Johnson, Chief Executive Officer and President, said, "Sales were below
last year due to the impact of unseasonably cool weather in February and
March. Same store sales of lawn and garden, our second largest category, were
down 45% in the first two months. We were pleased with the improvement during
the latter portion of the quarter. With generally more moderate temperatures
in April, same store sales for the category during that month were up 4.2%.
Comparable store sales for most other categories, excluding consumer
electronics, were positive during the quarter."

First Quarter Operating Income

We recorded operating income of $24.7 million and $34.5 million in the first
quarters of 2013 and 2012, respectively. The $9.8 million decrease in
operating income was driven by the decrease in sales and an increase in
selling and administrative expenses slightly offset by an improvement in gross
margin rate. Included in these impacts on year-over-year operating income
were $5.7 million of higher operating costs in the first quarter of 2013
incurred as a result of operating as an independent public company since our
separation from Sears Holdings Corporation ("Sears Holdings") in October 2012
(the "Separation") and a $2.9 million benefit in the first quarter of 2012
from the impact of store closing reserves established in 2011 (which benefit
did not recur in the first quarter of 2013).

Gross margin was $154.2 million, or 25.7% of net sales, in the first quarter
of 2013, as compared to $158.7 million, or 25.6% of net sales, in the first
quarter of 2012. The increase in gross margin rate was primarily driven by
lower occupancy costs resulting from the conversion of Company-owned stores to
franchisee-owned stores, improved delivery margin, higher Outlet
merchandise-liquidation income and the above mentioned increase in initial
franchise revenues. These were partially offset by the $2.9 million store
closing reserve benefit in the first quarter of 2012, $2.7 million of Outlet
distribution center costs that were separated from selling store costs and
were reflected in selling and administrative expense in 2012, lower margins on
merchandise sales in Outlet and $0.7 million primarily consisting of
additional occupancy costs resulting from the Separation.

Selling and administrative expenses increased to $127.2 million, or 21.2% of
net sales, in the first quarter of 2013 from $121.9 million, or 19.6% of net
sales, in the prior year quarter. The increase was primarily due to an
estimated $5.0 million of higher operating costs incurred resulting from the
Separation, higher owner commissions in both Hometown and Outlet (primarily
related to the conversion of Company-owned stores to franchisee-owned stores),
and additional marketing investments in Outlet. These increases were
partially offset by $2.7 million in Outlet distribution-center costs that were
separated from selling store costs and were reflected in selling and
administrative expense in the first quarter of 2012 and reflected in gross
margin in the first quarter of 2013 and a reduction in payroll and benefits
related to the franchise conversions.

Financial Position

We had cash and cash equivalents of $27.5 million as of May 4, 2013, $0.7
million as of April 28, 2012 and $20.1 million as of February 2, 2013.
Availability under the Senior ABL Facility as of May 4, 2013 was $199.3
million with $47.3 million drawn and $3.4 million of letters of credit
outstanding under the facility. For the first quarter of 2013, we financed
our operations and investments primarily with short-term borrowings under the
Senior ABL Facility. Our primary need for liquidity was to fund inventory
purchases and capital expenditures and for general corporate purposes.

Total merchandise inventories were $464.6 million at May 4, 2013 and $405.9
million at April 28, 2012. Merchandise inventories increased primarily due to
planned higher inventory in home appliances, assortment expansion in tools,
grills, mattresses, cooking and dishwashers, higher pre-season purchases in
lawn and garden and an increase in the cost of Kenmore and Craftsman
merchandise resulting from the post-Separation change in the treatment of
warranty costs. Post-Separation, Kenmore and Craftsman products are purchased
with warranty included, which results in a higher product cost, but eliminates
any later warranty costs to SHO. The higher product cost and the warranty
savings are expected to be comparable. These inventory increases were
partially offset by a reduction in consumer electronics resulting from the
exit of this category by 772 stores since the first quarter of 2012 and lower
apparel inventory in Outlet.

Adjusted EBITDA

In addition to our net income determined in accordance with GAAP, for purposes
of evaluating operating performance we generally use Adjusted Earnings Before
Interest, Taxes, Depreciation and Amortization, or "Adjusted EBITDA."
Following the Separation our management has used Adjusted EBITDA to evaluate
the operating performance of our business for comparable periods. While
Adjusted EBITDA is a non-GAAP measurement, management believes that it can be
an important indicator of operating performance because it excludes (1) the
effects of financing and investing activities by eliminating interest and
depreciation costs, and (2) store closing charges and severance costs that may
vary significantly from period to period and have a disproportionate effect in
a given period, which affects comparability of results. During our fiscal
quarters ended May 4, 2013 and April 28, 2012 we incurred no store closing
charges or severance costs. Adjusted EBITDA should not be used by investors
or other third parties as the sole basis for formulating investment decisions
as Adjusted EBITDA excludes a number of important cash and non-cash recurring
items. Adjusted EBITDA should not be considered as a substitute for GAAP
measurements.

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
Thousands                                  May 4, 2013  April 28, 2012
Net income                                 $  14,997    $   20,593
Income tax expense                         9,548        13,454
Other income                               (415)        (226)
Interest expense                           589          669
Operating income                           24,719       34,490
Depreciation                               2,341        2,305
Store closing charges and severance costs  —            —
Adjusted EBITDA                            $  27,060    $   36,795

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; the willingness and
ability of Sears Holdings to meet its contractual obligations to us; 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 an independent 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 May 4, 2013, we and our
dealers and franchisees operated 1,253 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)


                                                   13 Weeks Ended
Thousands, except per share amounts                May 4, 2013  April 28, 2012
NET SALES                                          $  601,117   $   621,078
COSTS AND EXPENSES
Cost of sales and occupancy                        446,869      462,379
Selling and administrative                         127,188      121,904
Depreciation                                       2,341        2,305
Total costs and expenses                           576,398      586,588
Operating income                                   24,719       34,490
Interest income (expense)                          (589)        (669)
Other income                                       415          226
Income before income taxes                         24,545       34,047
Income tax expense                                 (9,548)      (13,454)
NET INCOME                                         $  14,997    $   20,593
NET INCOME PER COMMON SHARE
ATTRIBUTABLE TO STOCKHOLDERS
Basic and diluted:                                 $  0.65      $   0.89
Basic and diluted weighted average common shares   23,100       23,100
outstanding

(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, except per share amounts        May 4,      April28,   February2,
                                           2013        2012        2013
ASSETS
CURRENT ASSETS
Cash and cash equivalents                  $ 27,465    $ 679       $  20,068
Accounts receivable                        14,105      12,548      10,986
Merchandise inventories                    464,576     405,902     428,437
Prepaid expenses and other current assets  11,013      2,216       14,321
 Total current assets                   517,159     421,345     473,812
PROPERTY AND EQUIPMENT, net                50,782      59,055      53,383
GOODWILL                                   167,000     167,000     167,000
LONG-TERM DEFERRED TAXES                   67,534      8,200       69,001
OTHER ASSETS                               25,818      14,611      22,607
TOTAL ASSETS                               $ 828,293   $ 670,211   $  785,803
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings                      $ 47,300    $ —         $  20,000
Payable to Sears Holdings Corporation      88,794      —           79,491
Accounts payable                           25,424      20,616      31,830
Other current liabilities                  80,404      84,284      83,211
Current portion of capital lease           1,257       1,980       1,463
obligations
Deferred income taxes                      —           17,609      —
 Total current liabilities              243,179     124,489     215,995
CAPITAL LEASE OBLIGATIONS                  516         1,460       769
OTHER LONG-TERM LIABILITIES                3,314       3,723       2,752
TOTAL LIABILITIES                          247,009     129,672     219,516
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock: $.01 par value;              231         —           231
Authorized shares:
400,000
 Issued shares: 23,100
Outstanding shares:
23,100
Capital in excess of par value             556,575     —           556,575
Retained earnings                          24,478      —           9,481
Divisional Equity, prior to the            —           540,539     —
Separation
TOTAL STOCKHOLDERS' EQUITY                 581,284     540,539     566,287
TOTAL LIABILITIES AND STOCKHOLDERS'        $ 828,293   $ 670,211   $  785,803
EQUITY





Sears Hometown and Outlet Stores, Inc.

Segment Results

(Unaudited)


Hometown
                                                13 Weeks Ended
Thousands, except for number of stores          May 4, 2013  April 28, 2012
Net sales                                       $  444,803   $    479,857
Comparable store sales %                        (6.9)%       0.1%
Cost of sales and occupancy                     333,884      362,586
Gross margin dollars                            110,919      117,271
Margin rate                                     24.9%        24.4%
Selling and administrative                      100,141      96,414
Selling and administrative expense as a         22.5%        20.1%
percentage of net sales
Depreciation                                    866          835
Total costs and expenses                        434,891      459,835
Operating income                                $  9,912     $    20,022
Total Hometown stores                           1,126        1,116
Outlet
                                                13 Weeks Ended
Thousands, except for number of stores          May 4, 2013  April 28, 2012
Net sales                                       $  156,314   $    141,221
Comparable store sales %                        1.2%         5.4%
Cost of sales and occupancy                     112,985      99,793
Gross margin dollars                            43,329       41,428
Margin rate                                     27.7%        29.3%
Selling and administrative                      27,047       25,490
Selling and administrative expense as a         17.3%        18.0%
percentage of net sales
Depreciation                                    1,475        1,470
Total costs and expenses                        141,507      126,753
Operating income                                $  14,807    $    14,468
Total Outlet stores                             127          122



SOURCE Sears Hometown and Outlet Stores, Inc.

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