Losses Swell on Hometown segment Store Closures and Inventory Shrink
Home appliances retailer Sears Hometown and Outlet Stores Inc. (NASDAQ: SHOS) announced its Q1 FY16 financial results on June 3rd, 2016. The Company operates in two segments: Sears Hometown and Hardware, and Sears Outlet. The Sears Hometown and Hardware segment operates Sears Hometown Stores, Sears Hardware Stores, and Sears Home Appliance Showrooms. The Sears Outlet segment provides in-store and online sales of home appliances. As of January 30th, 2016, the Company operated 1,160 stores in 50 states in the U.S., as well as in Puerto Rico and Bermuda. Read more about SHOS financial performance below.
Resonating with the overall dismal trend witnessed in the retail sector, Sears Hometown and Outlet Stores’ net sales fell 7.9% to $537 million in Q1 FY16 as compared to the year-ago period, mainly due to store closures and a 2.8% fall in comparable store sales.
During Q1 FY16, comparable store sales declined 2.6% in Hometown and 3.1% in Outlet. As a result, the Company’s consolidated comparable store sales fell by 2.8%, mainly due to lower Hometown home appliances sales, sales decline in Outlet’s stores, a fall in Hometown lawn and garden sales, and lower Outlet apparel and mattress sales. On the brighter side, higher sales in Hometown tools and in Outlet’s home furnishings helped partially offset lower comps.
The Company’s gross margin fell to $116.2 million, or 21.6% of net sales, in Q1 FY16 compared to $140.4 million, or 24.1% of net sales, in the year-ago quarter. The decline in gross margin rate is attributed to higher contraction driven by a $3.4 million physical inventory charge to Outlet in Q1 FY16 and a $2.5 million physical inventory gain in Hometown in Q1 FY15. Gross margins also fell on account of higher occupancy costs, lower margins on merchandise sales, lower online commissions from Sears Holdings, and higher distribution center and product repair costs in Outlet. These declines were partially offset by a $2.8 million net benefit from the May 2016 amendment to the Merchandising Agreement with Sears Holdings.
The Company incurred lower selling and administrative expenses of $118.0 million, or 22% of net sales, in Q1 FY16 from $135.7 million, or 23.3% of net sales, in the prior-year comparable quarter. The lower expenses were primarily due to lesser commissions paid, lower expenses due to store closure, and $1.4 million of executive transition costs incurred in Q1 FY15. On the other hand, higher payroll costs and $3.2 million of IT transformation costs offset lower expenses. As a result, the Company swung to losses of $5.1 million in Q1 FY16 compared to profits of $2.8 million in Q1 FY15. Loss per share increased $0.22 to $(0.16) from $0.06 income per share in the year-ago quarter.
Total merchandise inventories were $430.4 million as of April 30th, 2016. Merchandise inventories declined $21.9 million in Hometown and increased $13.4 million in Outlet as compared to the year-ago period.
Store conversion under AAE program
The Company converted another 78 Hometown stores under its America’s Appliance Experts (AAE) program in Q1 FY16. From a customer service perspective, AAE locations provide better customer service since they have improved store displays and new technology features. At the end of Q1 FY16, the Company had 255 AAE locations, with plans to convert over 200 additional locations in FY16.
The general slump in consumer spending and the dull retail outlook in the U.S. had an adverse impact on the Hometown segment, which closed down 17 under-performing stores and opened 2 new stores during the quarter under review. These closures would help the Company to reduce expenses, improve profits, and free up net working capital of over $9 million in the coming quarters.
Separation from Sears Holdings
While Sears Hometown and Outlet Stores separated from Sears Holdings in 2012, both companies executed and delivered to each other amendments to the agreements entered in connection with the separation on May 11th, 2016. This included an amendment to the Company’s Merchandising Agreement with Sears Holdings.