Sears Hometown and Outlet Stores, Inc. Reports Third Quarter 2013 Results

  Sears Hometown and Outlet Stores, Inc. Reports Third Quarter 2013 Results

PR Newswire

HOFFMAN ESTATES, Ill., Dec. 6, 2013

HOFFMAN ESTATES, Ill., Dec. 6, 2013 /PRNewswire/ -- Sears Hometown and Outlet
Stores, Inc. (NASDAQ: SHOS) today reported results for its quarter ended
November 2, 2013.

Results for the third quarter included:

  oOperating income decreased 7% to $13.2 million compared to $14.1 million
    in the prior year
  oNet income attributable to stockholders decreased 12% to $7.7 million
    ($0.33 income per diluted share) compared to $8.8 million ($0.38 income
    per diluted share) in the prior year
  oAdjusted EBITDA decreased 16% to $13.8 million compared to $16.4 million
    in the prior year
  oComparable store sales decreased 2.0% versus the prior year
  o279,247 shares of stock were repurchased for $8.4 million

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

  oOperating income decreased 35% to $53.3 million compared to $82.3 million
    in the prior year
  oNet income attributable to stockholders decreased 37% to $31.8 million
    ($1.38 income per diluted share) compared to $50.4 million ($2.18 income
    per diluted share) in the prior year
  oAdjusted EBITDA decreased 35% to $58.3 million compared to $89.9 million
    in the prior year
  oComparable store sales decreased 1.8% versus the prior year

Bruce Johnson, Chief Executive Officer and President, said, "Sales of home
appliances increased during the quarter, while sales of lawn and garden,
consumer electronics, and apparel (which is only sold in Outlet Stores)
declined. The fourth quarter of 2013 will be the last quarter where we will
have a significant negative comparable store sales impact due to our exit from
consumer electronics in most stores in our Hometown segment. In our Outlet
segment, we completed the initial test of franchising and began rolling out
this model, which generated higher initial franchise revenues in the quarter
and allows us to continue our transition to an asset light, franchised
operation. We also completed a successful test of furniture sales in our
Outlet stores and have a limited selection of furniture inventory in place
across the format for the holiday season. This continues our strategy of
shifting our product mix toward higher margin categories, which began last
fall with reductions in consumer electronics and expansion in mattresses and
tools."

"October 11th marked the first anniversary of our separation from Sears
Holdings Corporation. During the past twelve months associates at all levels
have helped to establish the organizational and functional capabilities
required of an independent company, and I want to recognize them for their
efforts. For the quarter the year-over-year increase in expense incurred as a
result of operating as an independent public company totaled $5 million. This
was the last quarter that SHO appliance showrooms will operate inside of
Orchard Supply Hardware stores, based on Orchard's decision during its
bankruptcy proceedings to terminate our relationship. We closed 14 locations
during the quarter, for a total of 21 Orchard locations closed in 2013. The
impact of these closures on the third quarter was to reduce revenue by $1.2
million and EBITDA by $0.3 million."

Third Quarter Results

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

Net sales in the third quarter of 2013 increased $4.2 million, or 0.7%, to
$561.1 million from the third quarter of 2012. This increase was driven
primarily by higher initial franchise revenues (which were $7.8 million in the
third quarter of 2013 compared to $1.5 million in the third quarter of 2012)
and sales from new stores (net of closures). Partially offsetting these
increases were a 2.0% decrease in comparable store sales and an unfavorable
impact of the calendar shift due to the 53rd week in 2012.

The comparable store sales decrease of 2.0% was comprised of a 1.5% decrease
in Hometown and a 3.4% decrease in Outlet. The 2.0% decrease was primarily
driven by lower major appliance and apparel sales in Outlet, lower Hometown
lawn and garden sales, lower tools-category sales in both segments, and lower
consumer electronics sales following our planned exit from the this category
in most Hometown stores. These decreases were partially offset by higher
major appliances sales in Hometown.

Gross margin was $135.5 million, or 24.1% of net sales, in the third quarter
of 2013 compared to $138.4 million, or 24.9% of net sales, in the third
quarter of 2012. The decrease in gross margin rate was primarily driven by (1)
lower margins on merchandise sales, (2) $3.7 million of Outlet distribution
center costs that were separated from selling store costs and were reflected
in selling and administrative expense in 2012, (3) a $2.3 million warranty
expense timing benefit in 2012, (4) $0.9 million primarily consisting of
additional occupancy costs incurred as a result of operating as an independent
company since the Separation, and (5) lower Outlet merchandise-liquidation
income. These decreases were partially offset by the increase in initial
franchise revenues, a $2.1 million increase in warranty reserves in 2012, and
lower occupancy costs resulting from the conversion of Company-operated stores
to franchisee-operated stores.

Selling and administrative expenses decreased to $121.7 million, or 21.7% of
net sales, in the third quarter of 2013 from $122.1 million, or 21.9% of net
sales, in the prior year quarter. The decrease was primarily due to a
reduction in payroll and benefits related to franchise conversions and $3.7
million in Outlet distribution-center costs that were separated from selling
store costs and were reflected in selling and administrative expense in the
third quarter of 2012 and reflected in gross margin in the third quarter of
2013. These decreases were partially offset by an estimated $4.1 million in
higher costs from operating as an independent company, higher owner
commissions in both Hometown and Outlet (primarily related to the conversion
of Company-operated stores to franchisee-operated stores), and higher
marketing costs in Hometown.

We recorded operating income of $13.2 million and $14.1 million in the third
quarters of 2013 and 2012, respectively. The $0.9 million decrease in
operating income was driven by a lower gross profit rate partially offset by
higher net sales, lower selling and administrative expenses, and a $1.6
million gain on the sale of an Outlet store location. Included in these
impacts on year-over-year operating income was an estimated $5.0 million of
higher operating costs in the third quarter of 2013 incurred as a result of
operating as an independent public company since our separation from Sears
Holdings Corporation in October 2012.

Financial Position

We had cash and cash equivalents of $21.5 million as of November 2, 2013,
$21.8 million as of October 27, 2012, and $20.1 million as of February 2,
2013. Availability as of November 2, 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 $158.7 million with
$87.9 million drawn and $3.4 million of letters of credit outstanding under
the facility. Through the third 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 $488.6 million at November 2, 2013 and
$429.4 million at October 27, 2012. Merchandise inventories increased
primarily due to higher inventory in home appliances from merchandise resets
in Hometown and greater flow of scratch-and-dent product along with
opportunistic buys in Outlet partially offset by a reduction in consumer
electronics inventory resulting from our exit of this category in most
Hometown stores and lower apparel inventory in Outlet due to a decline in
receipts compared to the prior year.

During the quarter the Company repurchased 279,247 shares of stock for $8.4
million at an average price of $29.97 as part of the $25 million share
repurchase program authorized by the Company's Board of Directors on August
28, 2013.

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 the 13 and 39
weeks ended November 2, 2013 and the 13 weeks ended October 27, 2012 we
incurred zero store closing and severance charges. During the 39 weeks ended
October 27, 2012 we incurred $0.8 million of store closing charges and
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            39 Weeks Ended
Thousands                   November 2,  October 27,  November 2,  October 27,
                            2013         2012         2013         2012
Net income                  $  7,695     $  8,760     $  31,826    $  50,420
Income tax expense          5,191        5,629        20,812       32,689
Other income                (460)        (382)        (1,306)      (968)
Interest expense            738          70           1,969        111
Operating income            13,164       14,077       53,301       82,252
Depreciation                2,177        2,282        6,569        6,815
Store closing charges and   —            —            —            797
severance costs
Gain on the sale of assets  (1,567)      —            (1,567)      —
Adjusted EBITDA             $  13,774    $  16,359    $  58,303    $  89,864



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 November 2, 2013, we and
our dealers and franchisees operated 1,239 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            39 Weeks Ended
Thousands, except per    November 2,  October 27,  November 2,   October 27,
share amounts            2013         2012         2013          2012
NET SALES                $  561,068   $  556,903   $ 1,819,084   $ 1,822,445
COSTS AND EXPENSES
Cost of sales and        425,596      418,490      1,380,966     1,365,347
occupancy
Selling and              121,698      122,054      379,815       368,031
administrative
Depreciation             2,177        2,282        6,569         6,815
Gain on the sale of      (1,567)      —            (1,567)       —
assets
Total costs and expenses 547,904      542,826      1,765,783     1,740,193
Operating income         13,164       14,077       53,301        82,252
Interest income          (738)        (70)         (1,969)       (111)
(expense)
Other income             460          382          1,306         968
Income before income     12,886       14,389       52,638        83,109
taxes
Income tax expense       (5,191)      (5,629)      (20,812)      (32,689)
NET INCOME               $  7,695     $  8,760     $ 31,826      $ 50,420
NET INCOME PER COMMON
SHARE ATTRIBUTABLE TO
STOCKHOLDERS
Basic:                   $  0.33      $  0.38      $ 1.38        $ 2.18
Diluted:                 $  0.33      $  0.38      $ 1.38        $ 2.18
Basic weighted average
common shares            22,999       23,100       23,066        23,100
outstanding
Diluted weighted average
common shares            22,999       23,100       23,070        23,100
outstanding



Sears Hometown and Outlet Stores, Inc.

Condensed Consolidated Balance Sheets (Unaudited)
Thousands                 November 2, 2013  October 27, 2012  February2, 2013
ASSETS
CURRENT ASSETS
Cash and cash             $   21,487        $   21,841        $   20,068
equivalents
Accounts receivable       17,207            13,905            10,986
Merchandise inventories   488,626           429,407           428,437
Prepaid expenses and      8,113             12,301            14,321
other current assets
Total current assets      535,433           477,454           473,812
PROPERTY AND EQUIPMENT,   49,544            54,088            53,383
net
GOODWILL                  167,000           167,000           167,000
LONG-TERM DEFERRED TAXES  63,916            70,648            69,001
OTHER ASSETS              32,115            22,509            22,607
TOTAL ASSETS              $   848,008       $   791,699       $   785,803
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings     $   87,900        $   47,100        $   20,000
Payable to Sears          57,414            77,687            79,491
Holdings Corporation
Accounts payable          31,727            29,228            31,830
Other current             74,306            76,265            83,211
liabilities
Current portion of
capital lease             1,082             1,499             1,463
obligations
Total current             252,429           231,779           215,995
liabilities
CAPITAL LEASE             98                870               769
OBLIGATIONS
OTHER LONG-TERM           5,139             2,423             2,752
LIABILITIES
TOTAL LIABILITIES         257,666           235,072           219,516
STOCKHOLDERS' EQUITY
TOTAL STOCKHOLDERS'       590,342           556,627           566,287
EQUITY
TOTAL LIABILITIES AND     $   848,008       $   791,699       $   785,803
STOCKHOLDERS' EQUITY



Sears Hometown and Outlet Stores, Inc.

Segment Results

(Unaudited)
Hometown
                        13 Weeks Ended            39 Weeks Ended
Thousands, except for   November 2,  October 27,  November 2,    October 27,
number of stores        2013         2012         2013           2012
Net sales               $ 413,171    $ 414,985    $ 1,361,908    $ 1,403,218
Comparable store sales  (1.5)     %  4.4       %  (2.9)       %  1.0         %
%
Cost of sales and       318,362      316,820      1,040,750      1,066,728
occupancy
Gross margin dollars    94,809       98,165       321,158        336,490
Margin rate             22.9      %  23.7      %  23.6        %  24.0        %
Selling and             94,818       94,149       299,175        287,400
administrative
Selling and
administrative expense  22.9      %  22.7      %  22.0        %  20.5        %
as a percentage of net
sales
Depreciation            760          797          2,372          2,423
Total costs and         413,940      411,766      1,342,297      1,356,551
expenses
Operating income        $ (769)      $ 3,219      $ 19,611       $ 46,667
Total Hometown stores                             1,108          1,111
Outlet
                        13 Weeks Ended            39 Weeks Ended
Thousands, except for   November 2,  October 27,  November 2,    October 27,
number of stores        2013         2012         2013           2012
Net sales               $ 147,897    $ 141,918    $ 457,176      $ 419,227
Comparable store sales  (3.4)     %  (0.8)     %  1.9         %  0.6         %
%
Cost of sales and       107,234      101,670      340,216        298,619
occupancy
Gross margin dollars    40,663       40,248       116,960        120,608
Margin rate             27.5      %  28.4      %  25.6        %  28.8        %
Selling and             26,880       27,905       80,640         80,631
administrative
Selling and
administrative expense  18.2      %  19.7      %  17.6        %  19.2        %
as a percentage of net
sales
Depreciation            1,417        1,485        4,197          4,392
Gain on the sale of     (1,567)      —            (1,567)        —
assets
Total costs and         133,964      131,060      423,486        383,642
expenses
Operating income        $ 13,933     $ 10,858     $ 33,690       $ 35,585
Total Outlet stores                               131            126



SOURCE Sears Hometown and Outlet Stores, Inc.

Contact: Steven D. Barnhart, Senior Vice President and Chief Financial
Officer, 847-286-8700
 
Press spacebar to pause and continue. Press esc to stop.