HOFFMAN ESTATES, Ill.,
Dec. 7, 2018 /PRNewswire/
-- Sears Hometown and Outlet Stores, Inc. ("SHO," "our," "we,"
or the "Company") (NASDAQ: SHOS) today reported results for the
quarter ended November 3, 2018.
Overview of Unaudited Results
Results for the third quarter of fiscal 2018 compared to the
third quarter of fiscal 2017 included:
- Net loss decreased $6.4 million
to $4.5 million from $10.9 million
- Loss per share decreased $0.28 to
$0.20 loss per share from
$0.48 loss per share
- Comparable store sales decreased 0.2%
- Adjusted EBITDA increased $3.6
million to $7.4 million from
$3.8 million
Will Powell, Chief Executive
Officer and President, said, "The $7.4
million in adjusted EBITDA we posted for the third quarter
represented our best third quarter adjusted EBITDA results since
our separation from Sears Holdings Corporation ("Sears Holdings")
in 2012. The quarter was also our third consecutive quarter,
and our fifth in the last six quarters, with positive and improved
adjusted EBITDA compared to the same period in the prior
year. We were able to post these positive adjusted EBITDA
results despite the distractions and headwinds associated with
Sears Holdings Corporation's Chapter 11 bankruptcy filing on
October 15, which had a negative
impact on our results. Specific negative impacts detailed
below totaling $1.7 million were
included in our reported adjusted EBITDA for the quarter. Our
comparable store sales were positive for the quarter through
September but turned negative in October as product availability in
our Hometown segment was significantly below normal levels leading
up to and following the Sears Holdings bankruptcy filing. In
addition, bankruptcy-related issues with some of Sears Holdings's
transportation providers delayed getting product to
customers. Since the initial impact from the Sears Holdings
bankruptcy filing, transportation of product has returned to normal
and inventory availability has improved but remains below normal
levels. These improvements resulted from both Sears
Holdings's post-filing efforts and our activities."
"We also saw a negative impact from claims that are considered
to be prepetition claims in the Sears Holdings bankruptcy
proceedings. Those claims primarily arose for funds due us at
the time of the bankruptcy filing that were not subsequently paid
to us. We have recorded a receivable of $1.2 million related to these claims. The
receivable has been fully reserved due to the uncertain recovery of
unsecured prepetition claims in the Sears Holdings bankruptcy
proceedings."
"Sears Holdings's protection agreement issues also negatively
impacted our third quarter results. Sears Holdings issues the
protection agreements that we sell. Thirty-three states and
Puerto Rico suspended sales of
Sears Holdings's protection agreements by the end of October.
With no protection agreements to sell in these jurisdictions, our
third quarter adjusted EBITDA results were negatively impacted by
approximately $0.5 million, net of
commissions paid to dealers and franchisees. Sears Holdings
has launched a third-party replacement program enabling us to
resume protection agreement sales in some jurisdictions and their
efforts are ongoing to have the replacement program authorized in
the remaining jurisdictions. Based on management's best
estimate of the timing for resumption of protection agreement sales
in the remaining jurisdictions, we estimate the total negative
impact to our fourth quarter adjusted EBITDA results attributable
to our inability to sell protection agreements in various
jurisdictions for portions of the quarter will be approximately
$4.0 million, net of commissions paid
to dealers and franchisees."
"We increased our borrowings late in the third quarter before
Sears Holdings's anticipated bankruptcy filing to enhance our
financial flexibility to deal with possible disruptions to our
business that might be caused by the filing. To date, there
have been no material disruptions to our normal operational cash
flows. We ended the quarter with $43.2
million in cash and cash equivalents, including $34.3 million in additional borrowings that we
could have repaid to reduce borrowings under our Senior ABL
Facility."
"Year-to-date, our adjusted EBITDA has improved by $23.6 million from last year. This
improvement has been driven by our Outlet segment. Consistent
with prior quarters, the improvement in Outlet has been driven by
changes to our as-is appliance sourcing as well as lower
promotional markdowns resulting from the pricing strategy change we
made for as-is appliances in July 2017. For the third quarter
of 2018, the first full quarter after the anniversary of the
change, the Outlet business posted positive comparable store sales
of 5.7%."
We continue to implement our strategic plan to transform our
business. Measurable progress is evident across many of our
initiatives that serve to enable this change. Examples
include:
- Changes to our as-is appliance sourcing as well as lower
promotional markdowns led to margin improvement of 620 basis points
in our Outlet segment. Additionally, the Outlet segment has
had positive comparable store sales each month since July when we
anniversaried the impact of the change in our pricing
strategy. Due to the ongoing improvement in our Outlet
business, we opened two new Outlet stores through the third
quarter.
- In the third quarter 2018 lease-to-own comparable sales
increased 41.1% and leasing's share of total sales increased to
9.4%, up 281 basis points compared to the third quarter 2017.
- We opened two additional Buddy's Home Furnishings stores,
bringing total openings to eight since January 2018. We
opened all of these rent-to-own stores as a franchisee, enabling us
to benefit from Buddy's extensive expertise and systems
infrastructure in this business in which we own the inventory that
we rent to our customers. Buddy's Home Furnishings is the
third largest rent-to-own operator in the
United States with over 330 locations nationwide.
- SearsHometown.com and SearsOutlet.com sales were up 115% and
47%, respectively, compared to third quarter 2017.
SearsHometown.com balance of sales grew nearly 200 basis points
compared to the third quarter 2017. SearsOutlet.com balance
of sales grew nearly 300 basis points compared to the third quarter
2017.
- Commercial sales increased 26.4% compared to third quarter
2017. Our margin on commercial sales increased 28.4% as the
margin rate improved by 28 basis points compared to third quarter
2017. Nearly 64% of stores are participating in this program
in 2018, versus less than 47% last year.
- In the third quarter we completed the planned sale of our
Newington, CT property, which
generated proceeds of $2.8 million,
net of closing costs and we recorded a gain on sale of
approximately $1.3 million during the
third quarter of fiscal 2018.
- In the fourth quarter we intend to make further progress on our
store portfolio-optimization initiative by closing, or seeking the
closure by dealers of, 80 to 100 stores in our Hometown segment. We
have inventory investments in these stores of $28.0 million to $35.0
million and anticipate using proceeds from the liquidation
of this inventory to pay down borrowings under our Senior ABL
Facility. We believe these store closings will result in a one-time
charge of between $4.5 million and
$6.0 million in the fourth quarter,
but will advance our efforts to reduce the growing losses in our
Hometown segment and strengthen our balance sheet. A group of
stores in our Hometown segment continue to provide an insufficient
return for the capital we have invested in these stores and these
stores, as a group, continue to generate negative adjusted
EBITDA. Despite our efforts to improve the performance of
these unproductive stores through our business-improvement
initiatives, these stores have not achieved the level of progress
that many of our more profitable stores have achieved. We
will continue to actively seek to work with the dealers operating
these unproductive stores to exit the business should they
determine that is also in their best interests. Underlying
these unproductive Hometown segment stores is a base of more
productive locations that are achieving significantly higher
average store sales and adjusted EBITDA.
Third Quarter Performance Highlights
Consolidated comparable store sales decreased 0.2% in the third
quarter of 2018. The lawn and garden category achieved a positive
comp and outperformed the average comparable store sales.
Tools, home appliances and mattress categories underperformed the
average.
- Hometown segment comparable store sales decreased 3.4% in the
third quarter of 2018. The lawn and garden category
outperformed the average comparable store sales, posting positive
comparable store sales for the quarter. Tools outperformed
the average, and the home appliances and mattress categories
underperformed the average.
- Outlet segment comparable store sales increased 5.7% in the
third quarter of 2018. The home appliances, tools, mattress, and
furniture categories outperformed the average comparable store
sales. The lawn and garden category underperformed the
average.
Consolidated gross margin was $84.8
million, or 25.0% of net sales, in the third quarter of 2018
compared to $86.7 million, or 22.5%
of net sales, in the third quarter of 2017. The gross margin
rate improvement of 250 basis points mostly offset the
volume-related decrease in gross margin. Closing store costs
positively impacted gross margin by 29 basis points in the third
quarter of 2018, compared to negatively impacting gross margin by
63 basis points in the third quarter of 2017.
- Hometown gross margin decreased $9.8
million, or 17.1%, to $47.6
million in the third quarter of 2018. Hometown gross
margin rate improved by 30 basis points to 22.4%. The decline
in gross margin dollars was driven by sales volume decreases.
The increase in gross margin rate was primarily driven by reduced
store closing costs, shrink favorability and lower occupancy
costs. These increases were mostly offset by a reduction in
gross margin on merchandise sales due to lower shared merchandise
subsidies and cash discounts collected by Sears Holdings. The
impact of closing store costs, shrink, and occupancy costs on the
gross margin rate was a 44 basis points increase in the third
quarter of 2018 compared to a 258 basis points decrease in the
third quarter of 2017.
- Outlet gross margin increased $8.0
million, or 27.3%, to $37.2
million in the third quarter of 2018. Outlet gross
margin rate improved by 620 basis points to 29.4% driven by higher
margins on merchandise sales and lower occupancy costs.
Consolidated selling and administrative expenses decreased to
$85.4 million, or 25.2% of net sales,
in the third quarter of 2018 from $93.1
million, or 24.1% of net sales, in the prior-year comparable
quarter. The dollar decrease was primarily due to lower
expenses from stores closed (net of new store openings), lower
commissions paid to dealers and franchisees on lower sales volume,
and lower IT transformation investments. These reductions
were partially offset by higher provisions related to
franchisee notes receivables ($2.9
million in the third quarter of 2018 compared to
$0.1 million in the third quarter of
2017), higher payroll and benefits due to a higher proportion of
Company-operated stores, and higher marketing costs. IT
transformation investments were $6.1
million, or 1.8% of sales, in the third quarter of 2018
compared to $7.8 million, or 2.0% of
sales, in the third quarter of 2017.
We recorded operating losses of $1.6
million and $9.4 million in
the third quarters of 2018 and 2017, respectively. The
decrease in operating loss was due to lower selling and
administrative expenses and a higher gross margin rate, partially
offset by lower volume from closed stores.
We recorded a net loss of $4.5
million for the third quarter of 2018 compared to a net loss
of $10.9 million for the prior-year
comparable quarter. The decrease in our net loss was
primarily attributable to the factors discussed above, partially
offset by higher interest expense.
Consolidated adjusted EBITDA improved $3.6 million to $7.4
million in the third quarter of 2018 from $3.8 million in the third quarter of 2017.
- Hometown adjusted EBITDA decreased $5.1
million to a $4.4 million loss
in the third quarter of 2018 from $0.8
million in the third quarter of 2017. The decrease was
driven by lower volume related to closed stores, partially offset
by a higher gross margin rate and lower selling and administrative
expenses.
- Outlet adjusted EBITDA increased $8.7
million in the third quarter of 2018 to $11.8 million from $3.0
million in the third quarter of 2017. The improvement
was driven by an improved gross margin rate on higher volume and
lower selling and administrative expenses.
IT Transformation and Operational Independence
We made progress toward the completion and implementation of our
fully independent information technology and operating systems
platforms. At the end of the quarter, system architecture,
coding and testing were substantially complete, and a large portion
of the functionality had been put into production. As
expected, we successfully launched a small scale pilot of our new
POS and ERP systems in a single Outlet distribution facility and
the associated network of stores that are serviced by this
facility. We are working to finalize a larger-scale deployment
which we anticipate will continue throughout the remainder of this
fiscal year. During the quarter, we continued to expand our
direct sourcing capabilities and completed several additional
merchandise supply agreements with key suppliers. We also
entered into several non-merchandise agreements with various
service providers that previously supported our business through
our Services Agreement with Sears Holdings. Selling and
administrative expenses included $6.1
million of IT transformation investments in the third
quarter of 2018 compared to $7.8
million in the third quarter of 2017. We do not expect
significant IT build fees or systems development costs after the
first quarter of our 2019 fiscal year.
Financial Position
We had cash and cash equivalents of $43.2
million as of November 3, 2018 and $14.0 million as of October 28, 2017.
Unused borrowing capacity as of November 3, 2018 under the
Senior ABL Facility was $32.0 million
with $107.0 million drawn and
$7.2 million of letters of credit
outstanding. On February 16,
2018, the Company entered into a $40
million Term Loan Credit Agreement with Gordon Brothers
Finance Company (the "Term Loan Agreement"). The Term Loan
Agreement is secured by a second lien security interest
(subordinate only to the liens securing the Senior ABL Facility) on
substantially all the assets of the Company and its subsidiaries
(the same assets as the assets securing the Senior ABL
Facility). The proceeds of the $40
million loan under the Term Loan Agreement were used
primarily to reduce borrowings under the Senior ABL Facility.
For the third quarter of 2018, we funded ongoing operations with
cash provided by operating activities. Our primary needs for
liquidity are to fund inventory purchases, IT transformation
investments, capital expenditures, and other general corporate
needs including providing financial flexibility to deal with
disruptions in our business caused by the Sears Holdings Chapter 11
bankruptcy proceedings.
In the third quarter of 2018 and until the Sears Holdings
Chapter 11 bankruptcy filing, we continued our agreement with Sears
Holdings whereby SHO paid Sears Holdings's invoices for merchandise
and services on accelerated terms in exchange for cash
discounts. The discounts we received for the accelerated
payments, less incremental interest expense, resulted in a net
financial benefit to the Company. Shortly before the
bankruptcy filing, we reverted to our normal ten-day, no-discount
payment terms and the Senior ABL Facility borrowings did not
increase as of November 3, 2018 as a
result of accelerated payments.
Total merchandise inventories were $297.6
million at November 3, 2018 compared to $354.8 million at October 28, 2017.
Merchandise inventories declined $37.1
million and $20.1 million in
Hometown and Outlet, respectively, from October 28,
2017. The decrease in Hometown was primarily due to store
closures, in addition to efforts to reduce non-productive
inventory. Outlet's decrease was primarily driven by new
sourcing contracts that allow for improved flow of inventory of
as-is appliances to match forecasted sales.
Comparable Store Sales
Comparable store sales include merchandise sales for all stores
operating for a period of at least 12 full months, including
remodeled and expanded stores but excluding store relocations and
stores that have undergone format changes. Comparable store
sales include online transactions fulfilled and recorded by SHO and
give effect to the change in the unshipped sales reserves recorded
at the end of each reporting period.
Adjusted EBITDA
In addition to our net loss determined in accordance with
generally accepted accounting principles ("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 and
discussed 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, we believe it
is an important indicator of operating performance for investors
because:
- EBITDA excludes the effects of financing and investing
activities by eliminating the effects of interest and depreciation
and amortization costs; and
- 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. These items may also include cash charges
such as severance and IT transformation investments that make it
difficult for investors to assess the Company's core operating
performance.
The Company has undertaken an initiative on a limited number of
occasions to accelerate the closing of under-performing stores in
an effort to improve profitability and make the most productive use
of capital. Under-performing stores are typically closed
during the normal course of business at the termination of a lease
or expiration of a franchise or dealer agreement and, as a result,
do not have significant future lease, severance, or other
non-recurring store-closing costs. When we close a significant
number of stores or close them on an accelerated basis (closing
prior to lease termination or expiration), the Company excludes the
associated costs of the closings from adjusted EBITDA.
The following table presents a reconciliation of consolidated
adjusted EBITDA to consolidated net loss, the most comparable GAAP
measure, for each of the periods indicated:
|
|
13 Weeks
Ended
|
|
39 Weeks
Ended
|
Thousands
|
|
November 3,
2018
|
|
October 28,
2017
|
|
November 3,
2018
|
|
October 28,
2017
|
Net loss
|
|
$
|
(4,500)
|
|
|
$
|
(10,933)
|
|
|
$
|
(23,195)
|
|
|
$
|
(61,813)
|
|
Income tax (benefit)
expense
|
|
(594)
|
|
|
(437)
|
|
|
(140)
|
|
|
634
|
|
Other
income
|
|
(93)
|
|
|
(194)
|
|
|
(349)
|
|
|
(744)
|
|
Interest
expense
|
|
3,601
|
|
|
2,149
|
|
|
10,657
|
|
|
5,614
|
|
Operating
loss
|
|
(1,586)
|
|
|
(9,415)
|
|
|
(13,027)
|
|
|
(56,309)
|
|
Depreciation and
amortization
|
|
2,399
|
|
|
3,002
|
|
|
8,786
|
|
|
9,910
|
|
Gain on sale of
assets
|
|
(1,358)
|
|
|
—
|
|
|
(1,358)
|
|
|
—
|
|
Provision for
franchisee note losses, net of recoveries
|
|
2,923
|
|
|
119
|
|
|
2,911
|
|
|
5,820
|
|
IT transformation
investments
|
|
6,076
|
|
|
7,799
|
|
|
18,317
|
|
|
25,517
|
|
Accelerated closure
of under-performing stores
|
|
(1,093)
|
|
|
2,276
|
|
|
5,852
|
|
|
12,905
|
|
Adjusted
EBITDA
|
|
$
|
7,361
|
|
|
$
|
3,781
|
|
|
$
|
21,481
|
|
|
$
|
(2,157)
|
|
|
The following table presents a reconciliation of our Hometown
segment's adjusted EBITDA to operating loss, the most comparable
GAAP measure for our Hometown segment, for each of the periods
indicated:
|
|
13 Weeks
Ended
|
|
39 Weeks
Ended
|
Thousands
|
|
November 3,
2018
|
|
October 28,
2017
|
|
November 3,
2018
|
|
October 28,
2017
|
Operating
loss
|
|
$
|
(8,591)
|
|
|
$
|
(7,981)
|
|
|
$
|
(33,070)
|
|
|
$
|
(26,048)
|
|
Depreciation and
amortization
|
|
1,173
|
|
|
1,175
|
|
|
4,379
|
|
|
3,920
|
|
Provision for
franchisee note losses, net of recoveries
|
|
(38)
|
|
|
(74)
|
|
|
(149)
|
|
|
(108)
|
|
IT transformation
investments
|
|
4,207
|
|
|
5,187
|
|
|
12,683
|
|
|
16,966
|
|
Accelerated closure
of under-performing stores
|
|
(1,141)
|
|
|
2,448
|
|
|
6,111
|
|
|
5,836
|
|
Adjusted
EBITDA
|
|
$
|
(4,390)
|
|
|
$
|
755
|
|
|
$
|
(10,046)
|
|
|
$
|
566
|
|
|
The following table presents a reconciliation of our Outlet
segment's adjusted EBITDA to operating income (loss), the most
comparable GAAP measure for our Outlet segment, for each of the
periods indicated:
|
|
13 Weeks
Ended
|
|
39 Weeks
Ended
|
Thousands
|
|
November 3,
2018
|
|
October 28,
2017
|
|
November 3,
2018
|
|
October 28,
2017
|
Operating income
(loss)
|
|
$
|
7,005
|
|
|
$
|
(1,434)
|
|
|
$
|
20,043
|
|
|
$
|
(30,261)
|
|
Depreciation and
amortization
|
|
1,226
|
|
|
1,827
|
|
|
4,407
|
|
|
5,990
|
|
Gain on sale of
assets
|
|
(1,358)
|
|
|
—
|
|
|
(1,358)
|
|
|
—
|
|
Provision for
franchisee note losses, net of recoveries
|
|
2,961
|
|
|
193
|
|
|
3,060
|
|
|
5,928
|
|
IT transformation
investments
|
|
1,869
|
|
|
2,612
|
|
|
5,634
|
|
|
8,551
|
|
Accelerated closure
of under-performing stores
|
|
48
|
|
|
(172)
|
|
|
(259)
|
|
|
7,069
|
|
Adjusted
EBITDA
|
|
$
|
11,751
|
|
|
$
|
3,026
|
|
|
$
|
31,527
|
|
|
$
|
(2,723)
|
|
|
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING AND OTHER
INFORMATION
This news release contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995
(the "forward-looking statements"). Statements preceded or
followed by, or that otherwise include, the words "believes,"
"expects," "anticipates," "intends," "project," "estimates,"
"plans," "forecast," "is likely to," and similar expressions or
future or conditional verbs such as "will," "may," "would,"
"should," and "could" are generally forward-looking in nature and
not historical facts. 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. The forward-looking statements include, without
limitation, information concerning our future financial
performance, business strategies, plans, goals, beliefs,
expectations, and objectives. The forward-looking statements
are based upon the current beliefs and expectations of our
management.
The following factors, among others, could (A) cause our actual
results, performance, and achievements to differ materially from
those expressed in the forward-looking statements, and one or more
of the differences could have a material adverse effect on our
overall ability to operate our businesses (especially our Hometown
segment businesses, given their dependence on purchasing
KENMORE® and CRAFTSMAN® branded merchandise
and other merchandise from Sears Holdings in accordance with
agreements between the Company and Sears Holdings or its
subsidiaries (including all agreements between the Company and
Sears Holdings or its subsidiaries, the "SHO-Sears Holdings
Agreements")) and (B) have a material adverse effect on our results
of operations, financial condition, liquidity, and cash flows
(especially the Hometown businesses):
- The effects of the voluntary petitions of Sears Holdings and
many of its subsidiaries seeking relief under Chapter 11 of the
Bankruptcy Code (the "Sears Holdings Bankruptcy Proceedings"), and
the effects of actions taken, or not taken, in the Sears Holdings
Bankruptcy Proceedings, including the effects of the imposition of
the "automatic stay" and the effects if Sears Holdings were to seek
to reject one or more of the SHO-Sears Holdings Agreements (the
Company believes that if Sears Holdings were to liquidate on a
basis other than as a going concern the likelihood that Sears
Holdings would seek to reject some or all of the SHO-Sears Holdings
Agreements would increase);
- The willingness and ability of Sears Holdings, as a consequence
of the Sears Holdings Bankruptcy Proceedings, to fulfill its
contractual obligations to us especially if Sears Holdings's
possible bankruptcy liquidation other than on a going-concern basis
were to occur;
- As a result of the Sears Holdings Bankruptcy Proceedings, and
especially if Sears Holdings's possible bankruptcy liquidation
other than on a going-concern basis were to occur, (1) the Senior
ABL Facility provides for significant lender discretion, such as
the ability to reduce loan advance-rates (through the imposition of
reserves against the Company's borrowing base), which could reduce
the amounts that the Company could borrow or require the Company to
repay amounts already borrowed, (2) the lenders could assert that
they have no obligation to extend to the Company additional loans
on the basis that the Company has suffered a "Material Adverse
Effect," and (3) Sears Holdings's rejection or termination of the
specified "Separation Agreements" (which term is defined in the
Senior ABL Facility to include specified SHO-Sears Holdings
Agreements) would be an "Event of Default" under the Senior ABL
Facility that would permit the lenders to accelerate and
immediately call due all of the Company's outstanding loans;
- As a result of the Sears Holdings Bankruptcy Proceedings, and
especially if Sears Holdings's possible bankruptcy liquidation were
to occur other than on a going-concern basis, (1) the Term Loan
Agreement provides for significant lender discretion, such as the
ability to increase reserves with respect to the Term Loan
Agreement's borrowing base, which could require the establishment
and maintenance of a reserve under, and thereby reduce the amounts
that the Company could borrow under, the Senior ABL Facility, and
could also require the Company to make a prepayment under the Term
Loan Agreement, and (2) Sears Holdings's rejection or termination
of the Separation Agreements would be an "Event of Default" under
the Term Loan Agreement that would permit the lender to accelerate
and immediately call due the Company's outstanding loan under the
Term Loan Agreement;
- The Official Committee of Unsecured Creditors appointed in the
Sears Holdings Bankruptcy Proceedings is investigating transfers to
ESL Investments, Inc. and its investment affiliates (which, based
on publicly available information, together beneficially own 58.8%
of our outstanding shares of common stock), among others, in
connection with "Insider Transactions," including the Separation,
and the Restructuring Subcommittee of the Sears Holdings Board of
Directors is investigating "Prepetition Related-Party
Transactions," including the Separation;
- Termination of the SHO-Sears Holdings Agreements (following
rejection in the Sears Holdings Bankruptcy Proceedings or other
termination) could require us to, among other things, find
different service and product providers, possibly on short notice
and even if we are able to find replacement products and services,
these products and services may not be of the same type or quality
as those which are currently provided by Sears Holdings;
- If we are forced to enter into new contracts for replacement
products and services, the new contracts may have terms and
conditions that are less favorable to us than those to which we are
currently bound, and different products and services, especially if
lower in quality and value, and potential increased costs from less
favorable contract terms could materially and adversely affect our
ability to do business and our financial performance;
- The possible perceptions of our vendors, suppliers, lenders
under the Senior ABL Facility and the Term Loan Agreement, and
customers that, as a result of the Sears Holdings Bankruptcy
Proceedings and especially if Sears Holdings possible bankruptcy
liquidation were to occur other than on a going-concern basis, the
Company's ability to operate its businesses (especially the
Company's Hometown segment businesses) has been materially and
adversely affected;
- Our Amended and Restated Merchandising Agreement with Sears
Holdings, pursuant to which we have rights to acquire merchandise
branded with the Kenmore, Craftsman, and DIEHARD® marks (which
marks are owned by, or licensed to, subsidiaries of Sears Holdings,
together the "KCD Marks"), could be assumed by Sears Holdings in
the Sears Holdings Bankruptcy Proceedings and assigned to one or
more third parties that could decline to extend or renew, or upon
renewal or extension materially modify to our material
disadvantage, our rights under the Amended and Restated
Merchandising Agreement;
- The Amended and Restated Merchandising Agreement provides that
(1) if a third party that is not an affiliate of Sears Holdings
acquires the rights to one or more (but less than all) of the KCD
Marks Sears Holdings may terminate our rights to buy merchandise
branded with any of the acquired KCD Marks and (2) if a third party
that is not an affiliate of Sears Holdings acquires the rights to
all of the KCD Marks Sears Holdings may terminate the Amended and
Restated Merchandising Agreement in its entirety, over which events
we have no control;
- The sale by Sears Holdings and its subsidiaries to other
retailers that compete with us on major home appliances and other
products branded with one of the KCD Marks;
- Our ability to offer merchandise and services that our
customers want, including those under the KCD Marks;
- Sears Holdings announced that it would explore alternatives for
its Kenmore, Craftsman, and Diehard businesses and further expand
the presence of these brands and that it was continuing to explore
alternatives for these businesses by evaluating potential
partnerships or other transactions;
- Sears Holdings completed its sale to Stanley Black &
Decker, Inc. of Sears Holdings's Craftsman business, including the
Craftsman brand name and related intellectual property rights;
- The sale of Kenmore and Diehard products on Amazon.com;
- Our ability to successfully manage our inventory levels and
implement initiatives to improve inventory management and other
capabilities;
- 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, our
continuing reliance on Sears Holdings for most products and
services that are important to the successful operation of our
business, and our potential need to rely on Sears Holdings for some
products and services beyond the expiration, or earlier termination
by Sears Holdings, of our agreements with Sears Holdings;
- 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 willingness of Sears Holdings's appliance, lawn and garden,
tools, and other vendors to continue to supply to Sears Holdings on
terms (including vendor-payment terms for Sears Holdings's
merchandise purchases) that are acceptable to it (which
vendor-payment terms, we believe, are becoming, and in the future
could continue to become, increasingly uneconomic for Sears
Holdings) and to us;
- The willingness of Sears Holdings's appliance, lawn and garden,
tools, and other vendors to continue to pay to Sears Holdings
merchandise-related subsidies and allowances and cash discounts
(Sears Holdings is obligated to pay to a portion of these subsidies
and allowances to us, and the amounts required to be paid to us
declined significantly during the first three fiscal quarters of
2018);
- Our ability to resolve, on commercially reasonable terms,
future disputes with Sears Holdings regarding the material terms
and conditions of our agreements with Sears Holdings;
- Our ability to establish information, merchandising, logistics,
and other systems separate from Sears Holdings that would be
necessary to ensure continuity of merchandise supplies and services
for our businesses if, in connection with Sears Holdings's possible
bankruptcy liquidation or otherwise, vendors were to reduce, or
cease, their merchandise sales to Sears Holdings or provide
logistics and other services to Sears Holdings or if Sears Holdings
were to reduce, or cease, its merchandise sales to us or reduce
providing, or cease to provide, logistics and other services to
us;
- If Sears Holdings's sales of major appliances and lawn and
garden merchandise to its retail customers decline Sears Holdings's
sales to us of outlet-value merchandise could decline;
- Our ability to maintain an effective and productive business
relationship with Sears Holdings, especially if future disputes
were to arise with respect to the terms and conditions of our
agreements with Sears Holdings;
- Most of our agreements related to the Separation and our
continuing relationship with Sears Holdings were negotiated while
we were a subsidiary of Sears Holdings (except for amendments
agreed to after the Separation), and we may have received different
terms from unaffiliated third parties (including with respect to
merchandise-vendor and service-provider indemnification and defense
for negligence claims and claims arising out of failure to comply
with contractual obligations);
- Our reliance on Sears Holdings to provide computer systems to
process transactions with our customers (including the
point-of-sale system for the stores we operate and the stores that
our independent dealers and independent franchisees operate, which
point-of-sale system captures, among other things, credit-card
information supplied by our customers) and others, quantify our
results of operations, and manage our business ("SHO's SHC-Supplied
Systems");
- SHO's SHC-Supplied Systems could be subject to disruptions and
data/security breaches (Sears Holdings announced during 2017 that
its Kmart store payment-data systems had been infected with a
malicious code and that the code had been removed and the event
contained and during April 2018 Sears Holdings announced that
one of its vendors that provides online support services to Sears
and Kmart had notified Sears Holdings that the vendor had
experienced a security incident during 2017 that involved
unauthorized access to credit card information with respect to less
than 100,000 Sears Holdings's customers), and Sears Holdings could
be unwilling or unable to indemnify and defend us against
third-party claims and other losses resulting from such disruptions
and data/security breaches, which could have one or more material
adverse effects on SHO;
- Our ability to implement our IT transformation by the end of
the first quarter of our 2019 fiscal year in accordance with our
plans, expectations, current timetable, and anticipated cost;
- Limitations and restrictions in the Senior ABL Facility and the
Term Loan Agreement and their related agreements governing our
indebtedness and our ability to service our indebtedness;
- Competitors could continue to reduce their promotional pricing
on new-in-box appliances, which could continue to adversely impact
our sales of out-of-box appliances and associated margin;
- Our ability to generate profitable sales of merchandise and
services on our transactional ecommerce websites in the amounts we
have planned to generate;
- Our ability to refinance the Senior ABL Facility (which will
mature on the earliest of the following dates: (1) February
29, 2020; (2) six months prior to the expiration of the
Separation Agreements unless they are extended to a date later than
February 29, 2020 or are terminated on a basis reasonably
satisfactory to the Senior ABL lenders; and (3) acceleration of the
maturity date following an event of default in accordance with the
Senior ABL Facility), our ability to refinance the Term Loan (which
will mature on the earliest of (1) the maturity date specified in
the Senior ABL Facility, (2) February 16,
2023, and (3) acceleration of the maturity date following an
event of default in accordance with the Term Loan), and our ability
to obtain additional financing on acceptable terms;
- Our dependence on the ability and willingness of our
independent dealers and independent franchisees to operate their
stores profitably and in a manner consistent with our concepts and
standards;
- Our ability to significantly reduce or eliminate the Hometown
segment's negative adjusted EBITDA via our efforts to close
unproductive Hometown segment stores and reduce the inventory,
marketing, promotion, supply chain, and other expenses associated
with these stores;
- Our ability to sell profitably online all of our merchandise
and services;
- Our dependence on sources outside the U.S. for significant
amounts of our merchandise inventories;
- Fixed-asset impairment for long-lived assets;
- Our ability to attract, motivate, and retain key executives and
other employees;
- Our ability to maintain effective internal controls as a
publicly held company;
- Litigation and regulatory trends challenging various aspects of
the franchisor-franchisee relationship could expand to challenge or
adversely affect our relationships with our independent dealers and
independent franchisees;
- Low trading volume of our common stock due to limited liquidity
or a lack of analyst coverage; and
- The impact on our common stock and our overall performance as a
result of our principal stockholder's ability to exert control over
us.
The foregoing factors should not be understood as exhaustive and
should be read in conjunction with "Cautionary Statements," "Risk
Factors," and other disclosures that are included in (1) our Annual
Report on Form 10-K for the fiscal year ended February 3, 2018, (2) our Quarterly Report on
Form 10-Q for the fiscal quarter ended November 3, 2018 (including without limitation
Note 1 to the Condensed Consolidated Financial Statements), and (3)
our other filings with the Securities and Exchange Commission and
other public announcements.
While we believe that our forecasts and assumptions are
reasonable, we caution that actual results may differ
materially. If one or more of the foregoing risks or other
risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results may vary
materially from what we projected. Consequently, actual events and
results may vary significantly from those included in or
contemplated or implied by our forward-looking statements.
The forward-looking statements included in this news release are
made only as of its date. We undertake no obligation to
publicly update or review any forward-looking statement made by us
or on our behalf, whether as a result of new information, future
developments, subsequent events or circumstances, or otherwise,
except as required by law.
About Sears Hometown and Outlet Stores, Inc.
Sears Hometown and Outlet Stores, Inc. is a national retailer
primarily focused on selling 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 appliances, tools, lawn and garden
equipment, sporting goods and household goods, depending on the
especially 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, reconditioned,
overstocked, and scratched and dented products across a broad
assortment of merchandise categories, including appliances, lawn
and garden equipment, apparel, mattresses, sporting goods and tools
at prices that are significantly lower than list prices. As
of November 3, 2018, we or our independent dealers and
independent franchisees operated a total of 761 stores across 49
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 OPERATIONS
(Unaudited)
|
|
|
|
13 Weeks
Ended
|
|
39 Weeks
Ended
|
Thousands, except
per share amounts
|
|
November 3,
2018
|
|
October 28,
2017
|
|
November 3,
2018
|
|
October 28,
2017
|
NET
SALES
|
|
$
|
339,115
|
|
|
$
|
385,959
|
|
|
$
|
1,151,428
|
|
|
$
|
1,324,177
|
|
COSTS AND
EXPENSES
|
|
|
|
|
|
|
|
|
Cost of sales and
occupancy
|
|
254,284
|
|
|
299,271
|
|
|
887,167
|
|
|
1,051,386
|
|
Selling and
administrative
|
|
85,376
|
|
|
93,101
|
|
|
269,860
|
|
|
319,190
|
|
Depreciation and
amortization
|
|
2,399
|
|
|
3,002
|
|
|
8,786
|
|
|
9,910
|
|
Gain on sale of
assets
|
|
(1,358)
|
|
|
—
|
|
|
(1,358)
|
|
|
—
|
|
Total costs and
expenses
|
|
340,701
|
|
|
395,374
|
|
|
1,164,455
|
|
|
1,380,486
|
|
Operating
loss
|
|
(1,586)
|
|
|
(9,415)
|
|
|
(13,027)
|
|
|
(56,309)
|
|
Interest
expense
|
|
(3,601)
|
|
|
(2,149)
|
|
|
(10,657)
|
|
|
(5,614)
|
|
Other
income
|
|
93
|
|
|
194
|
|
|
349
|
|
|
744
|
|
Loss before income
taxes
|
|
(5,094)
|
|
|
(11,370)
|
|
|
(23,335)
|
|
|
(61,179)
|
|
Income tax benefit
(expense)
|
|
594
|
|
|
437
|
|
|
140
|
|
|
(634)
|
|
NET
LOSS
|
|
$
|
(4,500)
|
|
|
$
|
(10,933)
|
|
|
$
|
(23,195)
|
|
|
$
|
(61,813)
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER
COMMON SHARE ATTRIBUTABLE TO STOCKHOLDERS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
(0.20)
|
|
|
$
|
(0.48)
|
|
|
$
|
(1.02)
|
|
|
$
|
(2.72)
|
|
Diluted:
|
|
$
|
(0.20)
|
|
|
$
|
(0.48)
|
|
|
$
|
(1.02)
|
|
|
$
|
(2.72)
|
|
|
|
|
|
|
|
|
|
|
Basic weighted
average common shares outstanding
|
|
22,702
|
|
|
22,702
|
|
|
22,702
|
|
|
22,702
|
|
Diluted weighted
average common shares outstanding
|
|
22,702
|
|
|
22,702
|
|
|
22,702
|
|
|
22,702
|
|
SEARS HOMETOWN AND
OUTLET STORES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
Thousands
|
|
November 3,
2018
|
|
October 28,
2017
|
|
February 3,
2018
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
43,150
|
|
|
$
|
13,994
|
|
|
$
|
10,402
|
|
Accounts and
franchisee receivables, net
|
|
9,663
|
|
|
13,151
|
|
|
14,672
|
|
Merchandise
inventories
|
|
297,606
|
|
|
354,825
|
|
|
336,294
|
|
Prepaid expenses and
other current assets
|
|
7,749
|
|
|
9,777
|
|
|
7,131
|
|
Total current
assets
|
|
358,168
|
|
|
391,747
|
|
|
368,499
|
|
PROPERTY AND
EQUIPMENT, net
|
|
31,149
|
|
|
39,284
|
|
|
36,049
|
|
OTHER ASSETS,
net
|
|
3,574
|
|
|
9,767
|
|
|
8,140
|
|
TOTAL
ASSETS
|
|
$
|
392,891
|
|
|
$
|
440,798
|
|
|
$
|
412,688
|
|
LIABILITIES
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$
|
107,000
|
|
|
$
|
119,200
|
|
|
$
|
137,900
|
|
Term Loan,
net
|
|
38,847
|
|
|
—
|
|
|
—
|
|
Payable to Sears
Holdings Corporation
|
|
21,706
|
|
|
26,114
|
|
|
28,082
|
|
Accounts
payable
|
|
15,553
|
|
|
23,613
|
|
|
15,741
|
|
Other current
liabilities
|
|
57,076
|
|
|
60,499
|
|
|
53,142
|
|
Total current
liabilities
|
|
240,182
|
|
|
229,426
|
|
|
234,865
|
|
OTHER LONG-TERM
LIABILITIES
|
|
2,484
|
|
|
2,589
|
|
|
2,284
|
|
TOTAL
LIABILITIES
|
|
242,666
|
|
|
232,015
|
|
|
237,149
|
|
COMMITMENTS AND
CONTINGENCIES (Note 10)
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS'
EQUITY
|
|
150,225
|
|
|
208,783
|
|
|
175,539
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
|
|
392,891
|
|
|
440,798
|
|
|
412,688
|
|
SEARS HOMETOWN AND
OUTLET STORES, INC.
SEGMENT
RESULTS
(Unaudited)
|
|
|
|
13 Weeks Ended
November 3, 2018
|
Thousands
|
|
Hometown
|
|
Outlet
|
|
Total
|
Net sales
|
|
|
|
|
|
|
Appliances
|
|
$
|
155,166
|
|
|
$
|
106,295
|
|
|
$
|
261,461
|
|
Lawn and
garden
|
|
33,805
|
|
|
3,564
|
|
|
37,369
|
|
Tools
|
|
15,681
|
|
|
3,221
|
|
|
18,902
|
|
Other
|
|
8,039
|
|
|
13,344
|
|
|
21,383
|
|
Total
|
|
212,691
|
|
|
126,424
|
|
|
339,115
|
|
Costs and
expenses
|
|
|
|
|
|
|
Cost of sales and
occupancy
|
|
165,049
|
|
|
89,235
|
|
|
254,284
|
|
Selling and
administrative
|
|
55,060
|
|
|
30,316
|
|
|
85,376
|
|
Depreciation and
amortization
|
|
1,173
|
|
|
1,226
|
|
|
2,399
|
|
Gain on sale of
assets
|
|
—
|
|
|
(1,358)
|
|
|
(1,358)
|
|
Total
|
|
221,282
|
|
|
119,419
|
|
|
340,701
|
|
Operating (loss)
income
|
|
$
|
(8,591)
|
|
|
$
|
7,005
|
|
|
$
|
(1,586)
|
|
Total
assets
|
|
$
|
281,048
|
|
|
$
|
111,843
|
|
|
$
|
392,891
|
|
Capital
expenditures
|
|
$
|
1,119
|
|
|
$
|
371
|
|
|
$
|
1,490
|
|
|
|
|
|
13 Weeks Ended
October 28, 2017
|
Thousands
|
|
Hometown
|
|
Outlet
|
|
Total
|
Net sales
|
|
|
|
|
|
|
Appliances
|
|
$
|
188,591
|
|
|
$
|
104,356
|
|
|
$
|
292,947
|
|
Lawn and
garden
|
|
40,315
|
|
|
4,804
|
|
|
45,119
|
|
Tools
|
|
20,575
|
|
|
3,167
|
|
|
23,742
|
|
Other
|
|
10,473
|
|
|
13,678
|
|
|
24,151
|
|
Total
|
|
259,954
|
|
|
126,005
|
|
|
385,959
|
|
Costs and
expenses
|
|
|
|
|
|
|
Cost of sales and
occupancy
|
|
202,473
|
|
|
96,798
|
|
|
299,271
|
|
Selling and
administrative
|
|
64,287
|
|
|
28,814
|
|
|
93,101
|
|
Depreciation and
amortization
|
|
1,175
|
|
|
1,827
|
|
|
3,002
|
|
Total
|
|
267,935
|
|
|
127,439
|
|
|
395,374
|
|
Operating
loss
|
|
$
|
(7,981)
|
|
|
$
|
(1,434)
|
|
|
$
|
(9,415)
|
|
Total
assets
|
|
$
|
298,859
|
|
|
$
|
141,939
|
|
|
$
|
440,798
|
|
Capital
expenditures
|
|
$
|
829
|
|
|
$
|
1,567
|
|
|
$
|
2,396
|
|
SEARS HOMETOWN AND
OUTLET STORES, INC.
SEGMENT
RESULTS
(Unaudited)
|
|
|
|
39 Weeks Ended
November 3, 2018
|
Thousands
|
|
Hometown
|
|
Outlet
|
|
Total
|
Net sales
|
|
|
|
|
|
|
Appliances
|
|
$
|
526,820
|
|
|
$
|
317,290
|
|
|
844,110
|
|
Lawn and
garden
|
|
152,804
|
|
|
14,443
|
|
|
167,247
|
|
Tools
|
|
54,392
|
|
|
9,505
|
|
|
63,897
|
|
Other
|
|
35,616
|
|
|
40,558
|
|
|
76,174
|
|
Total
|
|
769,632
|
|
|
381,796
|
|
|
1,151,428
|
|
Costs and
expenses
|
|
|
|
|
|
|
Cost of sales and
occupancy
|
|
610,408
|
|
|
276,759
|
|
|
887,167
|
|
Selling and
administrative
|
|
187,915
|
|
|
81,945
|
|
|
269,860
|
|
Depreciation and
amortization
|
|
4,379
|
|
|
4,407
|
|
|
8,786
|
|
Gain on sale of
assets
|
|
—
|
|
|
(1,358)
|
|
|
(1,358)
|
|
Total
|
|
802,702
|
|
|
361,753
|
|
|
1,164,455
|
|
Operating (loss)
income
|
|
$
|
(33,070)
|
|
|
$
|
20,043
|
|
|
$
|
(13,027)
|
|
Total
assets
|
|
$
|
281,048
|
|
|
$
|
111,843
|
|
|
$
|
392,891
|
|
Capital
expenditures
|
|
$
|
4,040
|
|
|
$
|
1,065
|
|
|
$
|
5,105
|
|
|
|
|
|
39 Weeks Ended
October 28, 2017
|
Thousands
|
|
Hometown
|
|
Outlet
|
|
Total
|
Net sales
|
|
|
|
|
|
|
Appliances
|
|
$
|
608,830
|
|
|
$
|
346,876
|
|
|
$
|
955,706
|
|
Lawn and
garden
|
|
185,115
|
|
|
16,096
|
|
|
201,211
|
|
Tools
|
|
70,398
|
|
|
10,433
|
|
|
80,831
|
|
Other
|
|
40,465
|
|
|
45,964
|
|
|
86,429
|
|
Total
|
|
904,808
|
|
|
419,369
|
|
|
1,324,177
|
|
Costs and
expenses
|
|
|
|
|
|
|
Cost of sales and
occupancy
|
|
712,473
|
|
|
338,913
|
|
|
1,051,386
|
|
Selling and
administrative
|
|
214,463
|
|
|
104,727
|
|
|
319,190
|
|
Depreciation and
amortization
|
|
3,920
|
|
|
5,990
|
|
|
9,910
|
|
Total
|
|
930,856
|
|
|
449,630
|
|
|
1,380,486
|
|
Operating
loss
|
|
$
|
(26,048)
|
|
|
$
|
(30,261)
|
|
|
$
|
(56,309)
|
|
Total
assets
|
|
$
|
298,859
|
|
|
$
|
141,939
|
|
|
$
|
440,798
|
|
Capital
expenditures
|
|
$
|
3,180
|
|
|
$
|
3,857
|
|
|
$
|
7,037
|
|
View original
content:http://www.prnewswire.com/news-releases/sears-hometown-and-outlet-stores-inc-reports-third-quarter-2018-results-300761644.html
SOURCE Sears Hometown and Outlet Stores, Inc.