Sears Hometown and Outlet Stores: Widening Losses Spell Doom

Net loss widens to $93.2 million from $5.5 million in Q3 FY16

Source: Company's Website
Source: Company’s Website

Home appliances retailer Sears Hometown and Outlet Stores Inc. (NASDAQ: SHOS) announced its Q3 FY16 financial results on December 01st, 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 October 29th, 2016, the company operated 1,115 stores across all 50 states as well as in Puerto Rico and Bermuda. Read more about the company’s financial performance below.

Q3 FY16 financial highlights

During Q3 FY16, Sears Hometown and Outlet Stores’ net sales plunged 10.8% to $487.8 million compared to the year-ago same period, mainly due to the impact of store closures and a 6% fall in comparable store sales. Adding to its woes are the exit of two members of the top management, Jeff Balagna, formerly Sears’ Executive Vice President, and Sears’ President and Chief Member Officer, Joelle Maher, just before the results announcement.

During the reporting quarter, comparable store sales fell 3.2% and 11.9% in Hometown and Outlet, respectively. Consolidated comparable store sales fell 6.0% due to lower sales of appliances and apparel in Outlet due to a decrease in product supply from Sears Holdings. These decreases were partially offset by higher lawn and garden sales in Hometown due to warmer weather in key markets extending the fall clean-up season.

Gross margin fell to $95.2 million, or 19.5% of net sales, in Q3 FY16 compared to $117.8 million, or 21.5% of net sales, in the year-ago comparable period. The decrease in gross margin rate was primarily driven by higher occupancy costs, lower margin on merchandise sales, and $0.9 million higher shrink resulting from Outlet physical inventory. These results were partially offset by improvements in protection agreement margin. The total impact of occupancy costs and shrink reduced gross margin 440 basis points in Q3 FY16 compared to a reduction of 300 basis points in the year-ago same period.

Selling and administrative expenses decreased to $109.2 million, or 22.4% of net sales, in Q3 FY16 from $125.4 million, or 22.9% of net sales, in the prior year’s comparable quarter. The decrease was primarily due to lower commissions paid to dealers and franchisees on lower sales volume from operating a higher number of Company-operated stores in 2016 and lower expenses due to stores closed (net of new store openings) since the fourth quarter of 2015. These declines were partially offset by higher payroll and benefits from Company-operated stores. As a result, operating loss widened to $17.1 million from $9.9 million in the year-ago comparable period.

In all, the company’s net losses ballooned to $93.2 million in Q3 FY16 compared to a net loss of $5.5 million for the prior year’s comparable quarter, as the Company recorded a $75.6 million noncash valuation allowance on its deferred tax assets. Loss per share amounted to $(4.11) from $(0.24) in the prior-year same period, of which $(3.34) was associated with the deferred tax asset valuation allowance.

Segmental highlights

Hometown: This segment’s Q3 FY16 net sales declined 3.2% to $339.5 million from $379.8 million in the year-ago same period, mainly due to a fall in the home appliance category. Comp sales fell 3.2% compared to a growth of 1.1% in the year-ago period. Operating loss narrowed to $9.5 million versus loss of $10.4 million in Q3 FY15. This segment closed the reported quarter with 956 stores versus 1,011 stores in Q3 FY15.

Outlet: This segment’s Q3 FY16 net sales fell 11.9% to $148.2 million from $167.3 million in the year-ago same period, mainly due to a 48.8% comp sales decline in the apparel category. Comp sales plunged 11.9% compared to a fall of 7.7% in Q3 FY15. This segment swung to operating loss of $7.6 million versus operating profit of $0.58 million in Q3 FY15. This segment closed the quarter with 159 stores versus 161 stores in Q3 FY15.

Other highlights

Cash position: As of October 29th, 2016, cash and cash equivalents stood at $15.5 million versus $22.1 million as of October 31st, 2015, and $18.2 million as of January 30th, 2016. Unused borrowing capacity as of October 29th, 2016, under the Senior ABL Facility, was $152.1 million with $91.9 million drawn and $6.0 million of letters of credit outstanding.

Inventory position: Total merchandise inventories were $424.7 million as of October 29th, 2016, and $448.4 million as of October 31st, 2015. Merchandise inventories declined $34.7 million in Hometown and increased $11.0 million in Outlet.

Store conversion under AAE program: The Company completed 137 additional AAE conversions in Q3 FY16 and in total converted 483 stores to the AAE format since the launch of the program in 2015. Since program inception, dealer format AAE stores have outperformed non-AAE stores in home appliance comparable stores sales by 335 basis points and in total store comparable store sales by 417 basis points. AAE stores in total had positive appliance comparable store sales in Q3 FY16. The company intends to convert 150-200 additional stores to the AAE format in FY17.

s2Store update: In Q3 FY16, the company opened 4 new stores and closed 12 under-performing stores in Hometown. For the first three quarters of 2016, the company opened 6 stores and closed 51 stores in Hometown and had no openings or closures in Outlet.

In Q4 FY16, the company is anticipating closing approximately 100 locations (90 Hometown segment; 10 Outlet segment) resulting in one-time charges of $17.0 million to $19.0 million related to inventory markdowns, future rent obligations, and impairment of fixed assets. These closings will free up approximately $30.0 million to $40.0 million of net working capital that can be used more productively.

Hometown transactional websites: On October 27th, 2016, Sears launched three new transactional e-commerce websites for the Hometown segment. Consumers can view in-store pricing and availability, buy online and pick up in-store, order product to be delivered to the store for free, or have the product shipped directly to home.

Stock Performance

s3Sears Hometown and Outlet Stores’ stock ended the day at $5.85, tumbling 9.30%, at the close on Tuesday, December 06th, 2016, having vacillated between an intraday high of $6.40 and a low of $5.77 during the session. The stock’s trading volume was at 186,543 for the day. The Company’s market cap was at $132.91 million as of Tuesday’s close.

Be the first to comment

Leave a Reply

Your email address will not be published.