Sears Hometown and Outlet Stores, Inc. Reports Second Quarter 2013 Results And Announces Stock Repurchase Program

Sears Hometown and Outlet Stores, Inc. Reports Second Quarter 2013 Results And
                      Announces Stock Repurchase Program

PR Newswire

HOFFMAN ESTATES, Ill., Aug. 30, 2013

HOFFMAN ESTATES, Ill., Aug. 30, 2013 /PRNewswire/ -- Sears Hometown and Outlet
Stores, Inc. (NASDAQ: SHOS) today reported results for its quarter ended
August 3, 2013 and announced that its Board of Directors approved a stock
repurchase program.

Results for the second quarter included:

  oOperating income decreased 54% to $15.4 million compared to $33.7 million
    in the prior year
  oNet income attributable to stockholders decreased 57% to $9.1 million
    ($0.40 income per diluted share) compared to $21.1 million ($0.91 income
    per diluted share) in the prior year
  oAdjusted EBITDA decreased 52% to $17.5 million compared to $36.7 million
    in the prior year
  oComparable store sales increased 1.4% versus the prior year

Year-to-date results through the second quarter included:

  oOperating income decreased 41% to $40.1 million compared to $68.2 million
    in the prior year
  oNet income attributable to stockholders decreased 42% to $24.1 million
    ($1.04 income per diluted share) compared to $41.7 million ($1.80 income
    per diluted share) in the prior year
  oAdjusted EBITDA decreased 39% to $44.5 million compared to $73.5 million
    in the prior year
  oComparable store sales decreased 1.8% versus the prior year

Bruce Johnson, Chief Executive Officer and President, said, "Second quarter
net sales growth of 1.9% reflected comparable store growth of 1.4%, plus the
benefit of new store openings. We saw increased sales in most categories,
including double-digit growth in lawn and garden and growth in comparable
store sales in home appliances. Margins declined, primarily due to an
unfavorable product mix in Outlet, our response to an increasingly competitive
appliance retail landscape, and lower initial franchise revenues. We are
adjusting pricing/promotional plans, enhancing Outlet sourcing capabilities,
and focusing on higher margin categories and product lines to improve
profitability. Profitability was also affected by $6.4 million of expenses
incurred as a result of operating as an independent public company, which
expenses were not incurred in the prior year."

Second Quarter Results

We operate through two segments--our Sears Hometown and Hardware segment
("Hometown") and our Sears Outlet segment ("Outlet").

Net sales in the second quarter of 2013 increased $12.4 million, or 1.9%, to
$656.9 million from the second quarter of 2012. This increase was driven
primarily by a 1.4% increase in comparable store sales and new stores (net of
closures). Partially offsetting these increases were lower initial franchise
revenues (which were $1.8 million in the second quarter of 2013 compared to
$4.6 million in the second quarter of 2012), lower Outlet apparel liquidation
revenues, and an unfavorable impact of the calendar shift due to the 53rd week
in 2012.

The comparable store sales increase of 1.4% was comprised of a 0.4% decrease
in Hometown and a 8.2% increase in Outlet. The 1.4% increase was primarily
driven by increased sales in lawn and garden and home appliances partially
offset by consumer-electronics comparable sales that were down over 50%
(following a planned exit of the business in the majority of Hometown stores),
and lower apparel sales in Outlet.

We recorded operating income of $15.4 million and $33.7 million in the second
quarters of 2013 and 2012, respectively. The $18.3 million decrease in
operating income was driven by a decrease in gross margin rate and an increase
in selling and administrative expenses partially offset by higher sales.
Included in these impacts on year-over-year operating income were an estimated
$6.4 million of higher operating costs in the second 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").

Gross margin was $148.4 million, or 22.6% of net sales, in the second quarter
of 2013 compared to $160.0 million, or 24.8% of net sales, in the second
quarter of 2012. The decrease in gross margin rate was primarily driven by
(1) lower margins on merchandise sales, (2) $3.6 million of Outlet
distribution center costs that were separated from selling store costs and
were reflected in selling and administrative expense in 2012, (3) $2.8 million
of lower initial franchise revenues, (4) lower Outlet merchandise-liquidation
income, (5) an $0.8 million benefit in the second quarter of 2012 from the
impact of store closing reserves established in 2011 (which benefit did not
recur in the second quarter of 2013),and (6) $0.6 million primarily
consisting of additional occupancy costs incurred as a result of operating as
an independent company since the Separation. These decreases were partially
offset by lower occupancy costs resulting from the conversion of Company-owned
stores to franchisee-owned stores, a favorable impact on the overall gross
margin rate resulting from increased protection agreement revenues, and the
pass-through by Sears Holdings of higher cash discounts on Sears Holdings'
purchases of merchandise sold to us.

Selling and administrative expenses increased to $130.9 million, or 19.9% of
net sales, in the second quarter of 2013 from $124.1 million, or 19.3% of net
sales, in the prior year quarter. The increase was primarily due to higher
owner commissions in both Hometown and Outlet (primarily related to the
conversion of Company-owned stores to franchisee-owned stores) and an
estimated $5.8 million of higher operating costs incurred as a result of
operating as an independent company. These increases were partially offset by
(1) $3.6 million in Outlet distribution-center costs that were separated from
selling store costs and were reflected in selling and administrative expense
in the second quarter of 2012 and reflected in gross margin in the second
quarter of 2013, (2) a reduction in payroll and benefits related to the
franchise conversions, and (3) a $0.8 million store closing reserve taken in
the second quarter of 2012.

Financial Position

We had cash and cash equivalents of $23.8 million as of August 3, 2013, $0.6
million as of July 28, 2012, and $20.1 million as of February 2, 2013.
Availability as of August 3, 2013 under our Credit Agreement, dated as of
October 11, 2012, among the Company, its subsidiaries, Bank of America, N.A.,
and other lenders (the "Senior ABL Facility") was $211.7 million with $34.9
million drawn and $3.4 million of letters of credit outstanding under the
facility. Through the second 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 $445.6 million at August 3, 2013 and $404.0
million at July 28, 2012. Merchandise inventories increased primarily due to
(1) planned higher inventory in home appliances, (2) an increase in the number
of stores, (3) assortment expansion in tools and mattresses, (4) higher air
conditioner and dehumidifier inventory resulting from softer sales in the
second quarter of 2013, (5) seasonal purchases of mowers and patio furniture
along with late-season tractor receipts in lawn and garden and (6) an increase
in the cost of KENMORE® and CRAFTSMAN® merchandise purchased from Sears
Holdings resulting from a 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. The higher product cost and the warranty savings are
expected to be comparable. The inventory increases were partially offset by a
reduction in consumer electronics resulting from the exit of this category in
the majority of Hometown stores and lower apparel inventory in Outlet due to a
decline in receipts compared to the prior year.

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 August 3, 2013 and July 28, 2012 we incurred zero and $0.8
million of store closing charges and severance costs, respectively. 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                 26 Weeks Ended
Thousands                   August 3, 2013  July 28, 2012  August 3,  July 28,
                                                           2013       2012
Net income                  $    9,135      $    21,067    $  24,132  $ 41,660
Income tax expense          6,073           13,606         15,621     27,060
Other income                (431)           (988)          (846)      (1,214)
Interest expense            642             —              1,231      669
Operating income            15,419          33,685         40,138     68,175
Depreciation                2,050           2,228          4,392      4,533
Store closing charges and   —               797            —          797
severance costs
Adjusted EBITDA             $    17,469     $    36,710    $  44,530  $ 73,505

Stock Repurchase Program

The Company announced that its Board of Directors authorized a $25 million
repurchase program for the Company's outstanding common stock. The timing and
amount of repurchases will depend on various factors, including market
conditions, the Company's capital position and internal cash generation, and
other factors. The Company's repurchase program does not include specific
price targets, may be executed through open-market, privately negotiated, and
other transactions that may be available, and may include utilization of Rule
10b5-1 programs. The repurchase program does not obligate the Company to
repurchase any dollar amount, or any number of shares, of common stock. The
repurchase program does not have a termination date, and the Company may
suspend or terminate the repurchase program at any time.

Shares that are repurchased by the Company pursuant to the repurchase program
will be retired and resume the status of authorized and unissued shares of
common stock.

Amendment to Senior ABL Facility

The Company also announced that it has entered into an amendment (the
"Amendment") to the Senior ABL Facility. The Amendment eliminates, effective
August 29, 2013, the Company's negative covenant in Section 7.06 of the Senior
ABL Facility that provides that the Company will not, among other things,
declare any cash dividend or repurchase any of the Company's common stock, in
each case prior to October 12, 2013. The Amendment does not eliminate the
Company's other negative covenants in Section 7.06 of the Senior ABL Facility
which, among other things, state that the Company may declare and pay cash
dividends to its stockholders and may repurchase its common stock only if the
following conditions are satisfied: either (a) (i) no specified default then
exists or would arise as a result of the declaration or payment of the cash
dividend or as a result of the stock repurchase, (ii) the Company and its
subsidiaries that are also borrowers have demonstrated to the reasonable
satisfaction of the agent for the lenders that monthly availability (as
determined in accordance with the Senior ABL Facility), immediately following
the declaration and payment of the cash dividend or the stock repurchase and
as projected on a pro forma basis for the twelve months following and after
giving effect to the declaration and payment of the cash dividend or the stock
repurchase, would be at least equal to the greater of (x) 25% of the Loan Cap
(which is the lesser of (A) the aggregate commitments of the lenders and (B)
the borrowing base) and (y) $25,000,000, and (iii) after giving pro forma
effect to the declaration and payment of the cash dividend or the stock
repurchase as if it constituted a specified debt service charge, the specified
consolidated fixed charge coverage ratio, as calculated on a trailing twelve
months basis, would be equal to or greater than 1.1:1.0, or (b) (i) no
specified default then exists or would arise as a result of the declaration or
payment of the cash dividend or the stock repurchase, (ii) payment of the cash
dividend or the stock repurchase is not made with the proceeds of any credit
extension under the Senior ABL Facility, (iii) during the 120-day period prior
to declaration and payment of the cash dividend or the stock repurchase, no
credit extension was outstanding under the Senior ABL Facility, and (iv) the
Company demonstrates to the reasonable satisfaction of the agent for the
lenders that, on a pro forma and projected basis, no credit extensions would
be outstanding under the Senior ABL Facility for the 120-day period following
the declaration and payment of the cash dividend or the stock repurchase.

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: our
continued reliance on Sears Holdings Corporation ("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 what we
believe are Sears Holdings' contractual obligations to us; our ability to
successfully resolve existing and, if any arise, future contractual disputes
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 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
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 August 3, 2013, we and our
dealers and franchisees operated 1,250 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        26 Weeks Ended
Thousands, except per share   August 3,  July 28,   August 3,    July 28, 2012
amounts                       2013       2012       2013
NET SALES                     $ 656,899  $ 644,464  $ 1,258,016  $  1,265,542
COSTS AND EXPENSES
Cost of sales and occupancy   508,502    484,478    955,370      946,857
Selling and administrative    130,928    124,073    258,116      245,977
Depreciation                  2,050      2,228      4,392        4,533
Total costs and expenses      641,480    610,779    1,217,878    1,197,367
Operating income              15,419     33,685     40,138       68,175
Interest income (expense)     (642)      —          (1,231)      (669)
Other income                  431        988        846          1,214
Income before income taxes    15,208     34,673     39,753       68,720
Income tax expense            (6,073)    (13,606)   (15,621)     (27,060)
NET INCOME                    $ 9,135    $ 21,067   $ 24,132     $  41,660
NET INCOME PER COMMON SHARE
ATTRIBUTABLE TO STOCKHOLDERS
Basic:                        $ 0.40     $ 0.91     $ 1.04       $  1.80
Diluted:                      $ 0.40     $ 0.91     $ 1.04       $  1.80
Basic weighted average
common shares outstanding     23,100     23,100     23,100       23,100
(1)
Diluted weighted average
common shares outstanding     23,106     23,100     23,102       23,100
(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, except per share amounts          August 3,  July28,   February2,
                                             2013       2012       2013
ASSETS
CURRENT ASSETS
Cash and cash equivalents                    $ 23,828   $ 564      $  20,068
Accounts receivable                          14,406     12,300     10,986
Merchandise inventories                      445,607    404,036    428,437
Prepaid expenses and other current assets    14,213     2,051      14,321
 Total current assets                  498,054    418,951    473,812
PROPERTY AND EQUIPMENT, net                  49,940     57,548     53,383
GOODWILL                                     167,000    167,000    167,000
LONG-TERM DEFERRED TAXES                     66,068     —          69,001
OTHER ASSETS                                 26,680     26,343     22,607
TOTAL ASSETS                                 $ 807,742  $ 669,842  $  785,803
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings                        $ 34,900   $ —        $  20,000
Payable to Sears Holdings Corporation        77,234     —          79,491
Accounts payable                             21,784     22,760     31,830
Other current liabilities                    75,998     78,236     83,211
Current portion of capital lease             1,230      1,711      1,463
obligations
Deferred income taxes                        —          17,595     —
 Total current liabilities             211,146    120,302    215,995
CAPITAL LEASE OBLIGATIONS                    250        1,170      769
OTHER LONG-TERM LIABILITIES                  5,652      3,809      2,752
TOTAL LIABILITIES                            217,048    125,281    219,516
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock: $.01 par value;                232        —          231
 Authorized shares: 404,000
 Issued shares: 23,189
 Outstanding shares: 23,189
Capital in excess of par value               556,849    —          556,575
Retained earnings                            33,613     —          9,481
Divisional Equity, prior to the Separation   —          544,561    —
TOTAL STOCKHOLDERS' EQUITY                   590,694    544,561    566,287
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 807,742  $ 669,842  $  785,803





Sears Hometown and Outlet Stores, Inc.

Segment Results

(Unaudited)
Hometown
                           13 Weeks Ended            26 Weeks Ended
Thousands, except for      August 3,  July 28, 2012  August 3, 2013  July 28,
number of stores           2013                                      2012
Net sales                  $ 503,934  $   508,376    $     948,737   $ 988,233
Comparable store sales %   (0.4)%     (0.7)%         (3.6)%          (0.3)%
Cost of sales and          388,505    387,321        722,389         749,907
occupancy
Gross margin dollars       115,429    121,055        226,348         238,326
Margin rate                22.9%      23.8%          23.9%           24.1%
Selling and                104,215    96,836         204,356         193,250
administrative
Selling and
administrative expense as  20.7%      19.0%          21.5%           19.6%
a percentage of net sales
Depreciation               745        791            1,611           1,626
Total costs and expenses   493,465    484,948        928,356         944,783
Operating income           $ 10,469   $   23,428     $     20,381    $ 43,450
Total Hometown stores      1,121      1,105          1,121           1,105
Outlet
                           13 Weeks Ended            26 Weeks Ended
Thousands, except for      August 3,  July 28, 2012  August 3, 2013  July 28,
number of stores           2013                                      2012
Net sales                  $ 152,965  $   136,088    $     309,279   $ 277,309
Comparable store sales %   8.2%       (3.3)%         4.7%            1.2%
Cost of sales and          119,997    97,157         232,981         196,950
occupancy
Gross margin dollars       32,968     38,931         76,298          80,359
Margin rate                21.6%      28.6%          24.7%           29.0%
Selling and                26,713     27,237         53,760          52,727
administrative
Selling and
administrative expense as  17.5%      20.0%          17.4%           19.0%
a percentage of net sales
Depreciation               1,305      1,437          2,781           2,907
Total costs and expenses   148,015    125,831        289,522         252,584
Operating income           $ 4,950    $   10,257     $     19,757    $ 24,725
Total Outlet stores        129        123            129             123



SOURCE Sears Hometown and Outlet Stores, Inc.

Contact: Investor Relations, Steven D. Barnhart, Senior Vice President and
Chief Financial Officer, 847-286-8700