HOFFMAN ESTATES, Ill.,
June 21, 2019 /PRNewswire/ -- Sears
Hometown and Outlet Stores, Inc. ("SHO," "our," "we," "us," or the
"Company") (NASDAQ: SHOS) today reported results for the quarter
ended May 4, 2019.
Overview of Unaudited Results
Results for the first fiscal quarter of 2019 compared to the
first fiscal quarter of 2018 included:
- Net loss increased $2.7 million
to $12.1 million from $9.4 million
- Loss per share increased $0.12 to
$0.53 loss per share from
$0.41 loss per share
- Comparable store sales decreased 8.9%
- Adjusted EBITDA increased $1.3
million to $4.2 million from
$2.9 million
Will Powell, Chief Executive
Officer and President, said, "For the first quarter, our adjusted
EBITDA increased by $1.3 million from
the same quarter last year. We achieved these adjusted EBITDA
results despite the significant time and other resources that we
devoted during the quarter to a potential transaction with
Transform Holdco LLC as well as advisory fees of $0.6 million related to the Sears Holdings
Corporation bankruptcy proceedings and our announced merger
transaction with Transform. These fees were reflected in our
adjusted EBITDA for the quarter. When these fees are excluded
adjusted EBITDA would have been $4.8
million for the first quarter, an increase of $1.9 million compared to the same quarter last
year taking into account the same exclusion from adjusted
EBITDA."
"Our announcement on June 3, 2019
that we had entered into a definitive merger agreement with
Transform marked a major milestone for us. We have begun
discussions with Transform about how we can, after we complete the
merger, leverage the brands, services, online capabilities and cost
synergies to improve the future profitability of the Hometown
segment."
We have also started the Outlet sale process and have been
sharing information with interested parties. We continue to
be pleased with our progress on the transformation of our Outlet
business. Adjusted EBITDA for the Outlet business increased
in the first quarter of 2019 to $9.2
million from $8.8 million in
the first quarter of 2018. An increase in the allocation rate
for corporate expenses due to Outlet's increasing proportion of our
overall business resulted in a negative impact of $1.2 million on Outlet's Adjusted EBITDA.
The increase in Adjusted EBITDA was achieved despite other unique
items, including:
- Business disruption associated with the migration to new
POS/ERP systems in 76 Outlet stores and 8 Outlet repair and
distribution centers. This also impacted as-is appliance shipments
in the quarter as the migration required inbound shipments to be
suspended for a week.
- KENMORE® branded merchandise availability from Transform
continues to be a challenge and impacts our Outlet new-in-box sales
and margin. While we expect merchandise availability to improve
over time, we believe this will have a negative impact in the
second quarter given that availability has yet to recover to more
normal levels.
Our positive outlook for our Outlet business is supported by our
significant progress during the first quarter on key strategic
initiatives that we believe will continue to grow the operating
income of this business:
- Changes to our as-is appliance sourcing as well as lower
promotional markdowns from price optimization led to margin
improvement in the quarter of 230 basis points compared to the
first quarter of 2018.
- Lease to own sales grew to 14.7% share of Outlet's sales in the
first quarter, up 300 basis points compared to the first quarter of
2018. Comparable leasing sales grew 18.2%.
- Outlet's commercial sales increased by 38.5% in the first
quarter compared to the first quarter of 2018.
- Outlet protection agreement revenue and margin rebounded to
historical levels compared to the negative impact in the fourth
quarter of 2018 during which we temporarily lost the ability to
sell protection agreements in 24 states and Puerto Rico as a result of the Sears Holdings
bankruptcy proceedings.
- Continued improvement of our customer satisfaction scores for
the business, particularly our strong and improving online customer
review ratings for Outlet.
- We completed the transition of Sears Outlet.com to a
state-of-the-art, open-source platform using Amazon Web Services,
which is significantly improving shopability and performance of the
website.
- We expanded our local self-delivery pilot, with 47 Outlet
stores now participating and achieving lower total delivery costs
and significantly improved delivery customer-satisfaction
scores.
Our implementation of our strategic initiatives is ongoing:
- In the second quarter, we launched a new Outlet TV advertising
campaign in 26 of our 49 markets, which highlights the powerful
customer value proposition of the Outlet business model.
- In the second quarter, we anticipate completing the launch of
our new POS and ERP systems in the Outlet business in the remaining
52 stores and 6 Outlet repair and distribution centers. With this
completion our IT systems for Outlet will be free of any reliance
on Transform for IT systems and support. While we have learned from
our experiences in the first quarter and believe we can reduce the
temporary business impacts associated with the conversion of the
remaining stores, we expect, given the scope of the launch, that
there will be some unavoidable disruption that will moderately
impact second quarter results for the impacted stores.
- We plan to open five new Outlet stores in 2019 and expect them
to open in the second and third quarters. We also recently
converted a former Sears Hardware location to the Outlet format,
and this was an incremental addition beyond our planned five
stores.
We remain concerned with the performance of the Hometown
segment, as it continues to face inventory availability issues for
Kenmore and CRAFTSMAN® product
sourced by Transform. We do not have the ability to source
this product directly, and these brands combined represented 62%
and 56% of the Hometown segment's fiscal 2018 and first quarter
2019 sales, respectively. We believe inventory availability
will continue to significantly impact the Hometown segment in the
second quarter, but we expect that the availability of Kenmore and Craftsman product sourced by
Transform will improve as the year progresses.
In the first quarter we continued to make progress on improving
the Company's profitability and to make the most productive use of
the Company's capital. During the quarter we permitted the
closing, or the start of closing, by dealers and franchisees of 45
under-performing stores in the segment. We had inventory
investments in these stores of $30.0
million at the beginning of their inventory-liquidation
process. As of the end of the first quarter, inventory
liquidation was complete in 12 of these stores while 33 stores had
initiated inventory liquidations that will be completed by June
2019. These store closings resulted in a one-time charge of
$5.6 million in the first quarter,
but they advanced our efforts to reduce the growing losses in our
Hometown segment and strengthen our balance sheet.
During the quarter we experienced significant supply-chain cost
increases compared to the first quarter of last year as well as
Craftsman and Kenmore merchandise
availability issues that had a disproportionately adverse impact on
the Hometown segment. We believe that the Hometown segment
likely will continue to experience operating losses during our 2019
fiscal year. We also believe that reuniting our Hometown
segment stores with Transform's Sears full-line stores as a direct
result of the merger likely will result in a more consistent
customer experience across Sears-branded storefronts, generate
higher total revenues, and leverage efficiencies of scale to
improve costs and margins, all of which could lead to improved
profitability for the Hometown segment's dealers and
franchisees. The Company has begun planning to ensure that,
post-merger, our dealer network is in a position to leverage the
best of Transform's unique brands, services, and online
capabilities to bring additional value to customers of the Hometown
segment.
Merger Agreement with Transform
The Company announced on June 3,
2019 that it, Transform (an affiliate of Edward S. Lampert ("ESL")), and Transform Merger
Corporation, a wholly owned subsidiary of Transform ("Merger
Subsidiary"), had entered into an Agreement and Plan of Merger
dated as of June 1, 2019 (the "Merger
Agreement") pursuant to which Merger Subsidiary will merge with and
into the Company (the "Merger") after first giving the Company an
opportunity for a specified period of time to sell the Company's
Sears Outlet and Buddy's Home Furnishing Stores businesses
(together, the "Outlet Segment") to a third party. At the
completion of the Merger, each share of the Company's outstanding
common stock not owned by ESL and his affiliates will be converted
into the right to receive an amount in cash equal to $2.25 per share (the "Base Merger
Consideration"), subject to an upward adjustment if a sale of the
Outlet Segment (an "Outlet Sale") has occurred that satisfies
criteria specified in the Merger Agreement (the "Sale
Criteria").
The Sale Criteria include that (i) the Outlet Sale will result
in net proceeds (after taking account of specified deductions,
including transaction fees, expenses and taxes incurred by the
Company in connection with the sale, and any excess net working
capital transferred to the buyer of the Outlet Segment) to the
Company of not less than $97.5
million (the "Outlet Sale Minimum Proceeds"), (ii) an Outlet
Sale agreement is entered into with a third party buyer not later
than August 24, 2019 (extendable by
ten days in specified circumstances) and (iii) the Outlet Sale has
been completed by October 23, 2019
(extendable by fifteen days in specified circumstances). The per
share upward adjustment to the Base Merger Consideration, if any,
will be calculated by dividing (i) the excess, if any, of the net
proceeds received by the Company as a result of the Outlet Sale
over the Outlet Sale Minimum Proceeds by (ii) the aggregate number
of shares of Company common stock and unvested Company restricted
stock units issued and outstanding as of the closing of the
Merger. Under the terms of the Merger Agreement, Transform
will have the opportunity to match the economic terms of any
proposed Outlet Sale to a third party that is expected to result in
net proceeds to the Company of less than $120 million. The Merger is expected to
close in the Company's third fiscal quarter of 2019, subject to the
satisfaction of specified closing conditions.
ESL, together with his affiliates, owns more than 58% of the
outstanding shares of the Company's common stock. The Merger
Agreement was negotiated on behalf of the Company, and approved by,
a special committee of the Company's Board of Directors consisting
of a director who is independent and disinterested.
First Quarter Performance Highlights
Consolidated comparable store sales were down 8.9% in the first
quarter of 2019. Hometown segment and Outlet segment
comparable store sales declined 13.2% and 2.0%, respectively, in
the first quarter of 2019.
Consolidated gross margin was $62.0
million, or 21.3% of net sales, in the first quarter of 2019
compared to $87.5 million, or 22.9%
of net sales, in the first quarter of 2018. The gross margin
rate decrease of 160 basis points was driven by a $5.1 million increase in closing store
costs. Adjusting for store closing costs, the Hometown gross
margin rate decreased 203 basis points to 16.6%. The Outlet
gross margin rate increased 230 basis points to 27.8%.
Consolidated selling and administrative expenses decreased 25.3%
to $67.5 million, or 23.2% of net
sales, in the first quarter of 2019 from $90.5 million, or 23.7% of net sales, in the
comparable quarter last year. 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, lower marketing expense, and lower IT
transformation investments. IT transformation investments were
$4.2 million, or 1.5% of sales, in
the first quarter of 2019 compared to $5.7
million, or 1.5% of sales, in the first quarter of 2018.
We recorded operating losses of $7.8
million and $5.6 million the
first quarters of 2019 and 2018, respectively. The increase
in operating loss was due to lower volume and a lower gross margin
rate (including the impact of accelerated store closing costs),
partially offset by lower selling and administrative expenses.
We recorded a net loss of $12.1
million for the first quarter of 2019 compared to a net loss
of $9.4 million for the prior-year
comparable quarter. The increase in our net loss was
primarily attributable to the factors discussed above.
Consolidated adjusted EBITDA increased $1.3 million to $4.2
million in the first quarter of 2019 from $2.9 million in the first quarter of 2018.
Hometown adjusted EBITDA increased $0.9
million to a $5.0 million loss
in the first quarter of 2019 from a $5.9
million loss in the first quarter of 2018. Outlet
adjusted EBITDA increased $0.4
million to $9.2 million in the
first quarter of 2019 compared to $8.8
million in the first quarter of 2018.
Financial Position
We had cash and cash equivalents of $16.3
million as of May 4, 2019 and
$14.3 million as of May 5, 2018. Unused borrowing capacity as
of May 4, 2019 under our Amended and
Restated Credit Agreement dated as of November 1, 2016 (the "Senior ABL Facility") was
$21.9 million with $94.6 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 specified with respect to 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 first quarter of 2019, we funded ongoing operations with
cash provided by financing activities. Our primary needs for
liquidity are to fund inventory purchases, IT transformation
investments, capital expenditures and for general corporate
purposes.
On May 3, 2019 the Company entered
into (i) a Waiver, Consent and First Amendment to Amended and
Restated Credit Agreement (the "ABL Amendment"), among Sears
Authorized Hometown Stores, LLC, as the Lead Borrower, Sears Home
Appliance Showrooms, LLC and Sears Outlet Stores, L.L.C., as
borrowers , the Company, as parent, Bank of America, N.A., as
administrative agent and collateral agent, and the ABL lenders
party thereto, amending the Senior ABL Facility, and (ii) Waiver,
Consent and First Amendment to Term Loan Credit Agreement (the
"Term Loan Amendment"), among the Borrowers, the Company, as
parent, Gordon Brothers Finance Company, as administrative agent
and collateral agent, and the Term lenders party thereto, amending
the Term Loan Agreement. We filed the ABL Amendment and
the Term Loan Amendment together as an exhibit to the 2018
10-K.
The ABL Amendment and the Term Loan Amendment generally provide
for the following, among other things: (1) the definition of
"Change of Control" is amended to provide that a Change of Control
occurs if the Permitted Holders (as defined in the ABL Credit
Agreement and the Term Loan Agreement) beneficially own more than
75.0% of the Company's common stock; (2) under specified conditions
cash in excess of $2.0 million must
be applied to pay amounts outstanding under the ABL Credit
Agreement and the Term Loan Agreement under specified
circumstances; and (3) the ABL lenders and the Term Loan lenders
consent on a limited basis to the Loan Parties (as defined in the
ABL Credit Agreement and the Term Loan Agreement) negotiating and
entering into specified acquisitions with Permitted Holders upon
compliance with specified conditions, including a requirement that
the acquisition agreement must contain a condition precedent to the
closing of the acquisition requiring payment in full in cash of all
outstanding loans under the ABL Credit Agreement and the Term Loan
Agreement. The Company's ability to complete the Outlet Sale
is subject to the consent of, or waiver by, the Senior ABL facility
lenders and the Term Loan lenders.
The May 3, 2019 report of the
Company's independent registered public accounting firm that
accompanied the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the Company's 2018 fiscal
year (the "2018 10-K") incorporated the firm's audit opinion, which
expressed "Going Concern Uncertainty" (hereinafter the "Going
Concern Uncertainty"). The Senior ABL Facility and the Term
Loan Agreement provide that the Company's inability to obtain from
the Company's independent registered public accounting firm a
report and opinion that "shall not be subject to any 'going
concern' or like qualification or exception" constitutes an event
of default, which would give the Senior ABL Facility and the Term
Loan Agreement lenders the right to accelerate the maturity of all
outstanding loans, among other actions. The ABL Amendment and
the Term Loan Amendment provide that the Senior ABL Facility
lenders and the Term Loan Agreement lenders waive through
October 31, 2019 any default
resulting from the Going Concern Uncertainty.
Total merchandise inventories were $263.0
million at May 4, 2019 and
$332.4 million at May 5, 2018. Merchandise inventories
declined $70.2 million and increased
$0.8 million in Hometown and Outlet,
respectively. The decrease in Hometown was primarily due to
store closures in addition to efforts to reduce non-productive
inventory. Outlet's increase was primarily driven by increased
availability in refrigeration and home appliances and continued
growth in furniture.
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
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.
On a limited number of occasions the Company has permitted the
accelerated closing by dealers and franchisees of their
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 termination or expiration), the
Company excludes the associated costs of the closings from adjusted
EBITDA.
The following table presents reconciliations of consolidated
adjusted EBITDA and consolidated adjusted EBITDA excluding
non-recurring items to consolidated net loss, the most comparable
GAAP measure, for each of the periods indicated:
|
|
13 Weeks
Ended
|
Thousands
|
|
May 4,
2019
|
|
May 5,
2018
|
Net loss
|
|
$
|
(12,054)
|
|
|
$
|
(9,369)
|
|
Income tax
expense
|
|
268
|
|
|
408
|
|
Other
income
|
|
(9)
|
|
|
(100)
|
|
Interest
expense
|
|
3,970
|
|
|
3,452
|
|
Operating
loss
|
|
(7,825)
|
|
|
(5,609)
|
|
Depreciation and
amortization
|
|
2,260
|
|
|
2,608
|
|
Loss on sale of
assets
|
|
52
|
|
|
—
|
|
(Recovery of)
provision for franchisee note losses, net of recoveries
|
|
(63)
|
|
|
42
|
|
IT transformation
investments
|
|
4,219
|
|
|
5,743
|
|
Accelerated closure
of under-performing stores
|
|
5,562
|
|
|
79
|
|
Adjusted
EBITDA
|
|
$
|
4,205
|
|
|
$
|
2,863
|
|
Impact from
non-recurring advisory fees related to Transform merger and Sears
Holdings bankruptcy issues
|
|
600
|
|
|
—
|
|
Adjusted EBITDA
excluding non-recurring items
|
|
$
|
4,805
|
|
|
$
|
2,863
|
|
The following table presents a reconciliation for our reporting
segments of their adjusted EBITDA to operating (loss) income, the
most comparable GAAP measure for the period indicated:
|
|
13 Weeks
Ended
|
|
|
Hometown
|
|
Outlet
|
Thousands
|
|
May 4,
2019
|
|
May 5,
2018
|
|
May 4,
2019
|
|
May 5,
2018
|
Operating (loss)
income
|
|
$
|
(14,064)
|
|
|
$
|
(11,358)
|
|
|
$
|
6,239
|
|
|
$
|
5,749
|
|
Depreciation and
amortization
|
|
1,161
|
|
|
1,324
|
|
|
1,099
|
|
|
1,284
|
|
Loss on sale of
assets
|
|
—
|
|
|
—
|
|
|
52
|
|
|
—
|
|
Provision for
franchisee note losses, net of recoveries
|
|
(41)
|
|
|
(57)
|
|
|
(22)
|
|
|
99
|
|
IT transformation
investments
|
|
2,421
|
|
|
3,976
|
|
|
1,798
|
|
|
1,767
|
|
Accelerated closure
of under-performing stores
|
|
5,562
|
|
|
221
|
|
|
—
|
|
|
(142)
|
|
Adjusted
EBITDA
|
|
$
|
(4,961)
|
|
|
$
|
(5,894)
|
|
|
$
|
9,166
|
|
|
$
|
8,757
|
|
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," "on target," 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,
including without limitation the satisfaction of the Merger closing
conditions, 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 Merger Agreement provides that the Merger can only occur
after the Company has an opportunity for a specified period of time
to market and sell the Company's Outlet Segment to a third
party. The Company expects that the completion of the Merger
will occur in the Company's third fiscal quarter of 2019, subject
to the satisfaction of specified closing conditions. If the
Merger is completed the Company will become wholly owned by
Transform, and the Company will cease to be publicly held.
See "Merger Agreement with Transform" above in this news release
for additional information about the Merger Agreement and the
Merger.
Subsequent to the Company's October
2012 separation from Sears Holdings (the "2012 Separation")
and until mid-February 2019 we had
significant business relationships with Sears Holdings and its
subsidiaries, and we relied on them for merchandise and services
through various agreements among the Company, Sears Holdings and,
in some circumstances, subsidiaries of Sears Holdings (together the
"Operative Agreements"). During October
2018 Sears Holdings and many of its subsidiaries (together
the "Sears Holdings Companies") filed voluntary petitions in
the United States Bankruptcy Court
for the Southern District of New
York seeking relief under Chapter 11 of Title 11 of the
United States Code. The Company, which is not a subsidiary of any
of the Sears Holdings Companies, is not included in the bankruptcy
petitions filed by the Sears Holdings Companies, and neither the
Company nor its subsidiaries have filed a bankruptcy petition. As
part of the Sears Holdings Companies' bankruptcy proceedings
Transform acquired most of the operating assets (including Sears
stores) and related assets of the Sears Holdings Companies
(together the "Sears Assets"), and the Operative Agreements were
assigned by the Sears Holdings Companies to, and the obligations
thereunder were assumed by, Transform on or about February 11, 2019.
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
ability to operate our business and (B) have a material adverse
effect on our results of operations, financial condition,
liquidity, cash flows, and overall ability to operate our
businesses (especially the Hometown segment businesses, given their
dependence on purchasing merchandise branded with the Kenmore, Craftsman, and DIEHARD® marks (which
marks are owned by, or licensed to, subsidiaries of Transform,
together the "KCD Marks"), and obtaining supply-chain services, in
accordance with the Operative Agreements):
- The willingness and ability of Transform to complete the Merger
and perform all of its other obligations in accordance with the
terms and conditions of the Merger Agreement;
- The willingness and ability of Transform to perform all of its
obligations in accordance with the terms and conditions of the
Operative Agreements;
- Transform was formed recently, was not an operating retail
business prior to its acquisition of the Sears Assets and its
assumption of the Operative Agreements, and may continue to rely to
some extent on Sears Holdings and its subsidiaries and other third
parties to provide to Transform the merchandising and other
services that Transform is obligated to provide to the Company in
accordance with the Operative Agreements;
- The ability of Transform to resolve, on operational and
financial terms that are satisfactory to Transform, its reported
current disputes and future disputes, if any, with the Sears
Holdings Companies regarding Transform's acquisition of the Sears
Assets and the assumption of related obligations;
- Transform is a private company and is not obligated to disclose
publicly any information regarding its results of operations,
financial condition, liquidity, cash flows, or overall ability to
operate its businesses and provide merchandising and other services
to the Company in accordance with the Operative Agreements and to
meet its obligations in accordance with the terms and conditions of
the Merger Agreement;
- With respect to the Sears Holdings Companies' bankruptcy
proceedings and Transform's assumption of the Operative Agreements,
(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 and (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) the Company's
inability to enforce any of the Operative Agreements that
constitute "Separation Agreements" (as defined in the Senior ABL
Facility) could 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;
- With respect to the Sears Holdings Companies' bankruptcy
proceedings and Transform's assumption of the Operative Agreements,
(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) the Company's
inability to enforce any of the Separation Agreements could 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 report of the Company's independent registered public
accounting firm, which includes their opinion on the consolidated
financial statements included in the 2018 10-K and in which the
firm expresses "Going Concern Uncertainty," could result in adverse
reactions by the Company's vendors, customers, and associates that
would have a material adverse effect on the Company's
business;
- Sears Holdings and several of its subsidiaries, acting at the
direction of the Restructuring Sub-Committee of the Restructuring
Committee of the Board of Directors of Sears Holdings has commenced
an adversary proceeding in the the Sears Holdings Companies'
bankruptcy proceedings against ESL and other current and former
insiders of Sears Holdings alleging fraudulent transfers and
breaches of fiduciary duty and seeking against ESL and several of
the other defendants to avoid as actual fraudulent transfers the
2012 Separation-associated distribution by Sears Holdings of
subscription rights to purchase the Company's common stock; while
the Company is not a defendant in the adversary proceeding,
developments in the adversary proceeding could involve the Company,
its equity interests, or its assets, and could affect the ability
of Transform Holdco to perform the Operative Agreements and the
Merger Agreement, which could have a material adverse effect on our
business;
- The Sears Holdings Unsecured Creditors Committee is
investigating transfers to ESL and other current and former
insiders of Sears Holdings in connection with "Insider
Transactions," including the 2012 Separation;
- The possible perceptions of our vendors, suppliers, lenders
under the Senior ABL Facility and the Term Loan, and customers
that, as a result of the Sears Holdings bankruptcy proceedings and
Transform's assumption of the Operative Agreements, the Company's
ability to operate its businesses (especially the Company's
Hometown segment businesses) has been materially and adversely
affected;
- Transform, which has assumed the Operative Agreements, 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 (one of the Operative
Agreements), pursuant to which we have rights to acquire
merchandise branded with the KCD Marks from Transform (we do not
have rights to purchase directly from manufacturers merchandise
branded with the KCD Marks and, despite our efforts, we have been
unable to obtain those rights);
- The Company's Amended and Restated Merchandising Agreement with
Transform (as assignee from Sears Holdings) provides that (1) if a
third party that is not an affiliate of Transform (as assignee)
acquires the rights to one or more (but less than all) of the KCD
Marks Transform 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 Transform acquires the rights to all of the KCD
Marks Transform may terminate the Amended and Restated
Merchandising Agreement in its entirety, over which events we have
no control;
- The sale by Transform 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 branded with the KCD Marks;
- Transform may explore alternatives for its Kenmore, Craftsman, and Diehard businesses and
further expand the presence of these brands including by evaluating
potential partnerships or other transactions (for example,
Kenmore and Diehard products are
being sold on Amazon.com);
- 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, our reliance
on Transform for most products and services that are important to
the successful operation of our business, and our potential need to
rely on Transform for some products and services beyond the
expiration of our agreements with Transform;
- Transform is seeking to negotiate supply agreements with its
appliance, lawn and garden, tools, and other vendors, which vendors
may be willing to supply merchandise to Transform on terms
(including vendor-payment terms for Transform's merchandise
purchases) that are either unacceptable to Transform or acceptable
to Transform but would uneconomic for us;
- The willingness of Transform's appliance, lawn and garden,
tools, and other vendors to continue to pay to Transform's
merchandise-related subsidies and allowances and cash discounts
(Transform 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 2018);
- Our ability to resolve, on commercially reasonable terms,
future disputes with Transform, if any, regarding the material
terms and conditions of our agreements with Transform;
- Our ability to establish information, merchandising, logistics,
and other systems separate from Transform that would be necessary
to ensure continuity of merchandise supplies and services for our
businesses if, in connection with Transform's acquisition of the
Sears Assets, vendors were to reduce, or cease, their merchandise
sales to Transform or provide logistics and other services to
Transform or if Transform were to reduce, or cease, its merchandise
sales to us or reduce providing, or cease to provide, logistics and
other services to us;
- If Transform's sales of major appliances and lawn and garden
merchandise to its retail customers decline Transform's sales to us
of outlet-value merchandise could decline;
- Our ability to maintain an effective and productive business
relationship with Transform, especially if future disputes were to
arise with respect to the terms and conditions of the Operative
Agreements;
- Most of our agreements related to the 2012 Separation and our
continuing relationship with Sears Holdings (Transform after
mid-February 2019) were negotiated
while we were a subsidiary of Sears Holdings (except for amendments
agreed to after the 2012 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 Transform to provide access to computer systems
acquired as part of the Sears Assets 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 TH-Supplied Systems");
- SHO's TH-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
Transform 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 second 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 and the Term
Loan and 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 (1) significantly reduce or eliminate the
Hometown segment's growing operating losses (due in part to
increasing supply-chain costs and Craftsman and Kenmore merchandise availability issues that
are disproportionately affecting the Hometown segment) and (2)
close, or seek the closure of, unproductive Hometown segment stores
and to reduce the inventory, marketing, promotion, supply chain,
and other expenses associated with these stores;
- 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;
- 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 the other cautionary statements,
including "Risk Factors" that are included in the 2018 10-K and
risks described in our other filings with the Securities and
Exchange Commission and our 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 these 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 the time of its release. 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 home appliances, hardware, tools and
lawn and garden equipment. Our Hometown stores (which includes our
Hometown Stores, our Hardware Stores, and our Home Appliance
Showrooms) 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. More than 90%
of our Hometown Stores are operated by independent local dealers or
franchisees.
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 home appliances, lawn and garden equipment, apparel,
mattresses, sporting goods and tools at prices that are
significantly lower than list prices. As of May 4, 2019, we or our independent dealers and
independent franchisees operated a total of 639 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
|
Thousands, except
per share amounts
|
|
May 4,
2019
|
|
May 5,
2018
|
NET
SALES
|
|
$
|
291,072
|
|
|
$
|
381,281
|
|
COSTS AND
EXPENSES
|
|
|
|
|
Cost of sales and
occupancy
|
|
229,042
|
|
|
293,803
|
|
Selling and
administrative
|
|
67,543
|
|
|
90,479
|
|
Depreciation and
amortization
|
|
2,260
|
|
|
2,608
|
|
Loss on sale of
assets
|
|
52
|
|
|
—
|
|
Total costs and
expenses
|
|
298,897
|
|
|
386,890
|
|
Operating
loss
|
|
(7,825)
|
|
|
(5,609)
|
|
Interest
expense
|
|
(3,970)
|
|
|
(3,452)
|
|
Other
income
|
|
9
|
|
|
100
|
|
Loss before income
taxes
|
|
(11,786)
|
|
|
(8,961)
|
|
Income tax
expense
|
|
(268)
|
|
|
(408)
|
|
NET
LOSS
|
|
$
|
(12,054)
|
|
|
$
|
(9,369)
|
|
|
|
|
|
|
NET LOSS PER
COMMON SHARE ATTRIBUTABLE TO STOCKHOLDERS
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
(0.53)
|
|
|
$
|
(0.41)
|
|
Diluted:
|
|
$
|
(0.53)
|
|
|
$
|
(0.41)
|
|
|
|
|
|
|
Basic weighted
average common shares outstanding
|
|
22,702
|
|
|
22,702
|
|
Diluted weighted
average common shares outstanding
|
|
22,702
|
|
|
22,702
|
|
SEARS HOMETOWN AND
OUTLET STORES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
Thousands
|
|
May 4,
2019
|
|
May 5,
2018
|
|
February 2,
2019
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
16,260
|
|
|
$
|
14,288
|
|
|
$
|
15,110
|
|
Accounts and
franchisee receivables, net
|
|
10,803
|
|
|
12,784
|
|
|
11,916
|
|
Merchandise
inventories
|
|
262,977
|
|
|
332,449
|
|
|
277,285
|
|
Prepaid expenses and
other current assets
|
|
5,407
|
|
|
8,101
|
|
|
9,452
|
|
Total current
assets
|
|
295,447
|
|
|
367,622
|
|
|
313,763
|
|
PROPERTY AND
EQUIPMENT, net
|
|
25,038
|
|
|
35,830
|
|
|
27,731
|
|
OPERATING LEASE
RIGHT-OF-USE ASSETS
|
|
112,683
|
|
|
—
|
|
|
—
|
|
OTHER ASSETS,
net
|
|
1,972
|
|
|
7,242
|
|
|
2,277
|
|
TOTAL
ASSETS
|
|
$
|
435,140
|
|
|
$
|
410,694
|
|
|
$
|
343,771
|
|
LIABILITIES
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$
|
94,600
|
|
|
$
|
114,900
|
|
|
$
|
93,000
|
|
Current portion of
term loan, net
|
|
39,403
|
|
|
|
|
39,057
|
|
Payable to related
party
|
|
13,633
|
|
|
22,896
|
|
|
14,080
|
|
Accounts
payable
|
|
20,847
|
|
|
17,730
|
|
|
19,830
|
|
Current operating
lease liabilities
|
|
33,200
|
|
|
—
|
|
|
—
|
|
Other current
liabilities
|
|
42,623
|
|
|
50,594
|
|
|
56,009
|
|
Total current
liabilities
|
|
244,306
|
|
|
206,120
|
|
|
221,976
|
|
LONG-TERM OPERATING
LEASE LIABILITIES
|
|
83,197
|
|
|
—
|
|
|
—
|
|
OTHER LONG-TERM
LIABILITIES
|
|
2,176
|
|
|
2,111
|
|
|
1,839
|
|
TOTAL
LIABILITIES
|
|
329,679
|
|
|
246,643
|
|
|
223,815
|
|
COMMITMENTS AND
CONTINGENCIES (Note 11)
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS'
EQUITY
|
|
105,461
|
|
|
164,051
|
|
|
119,956
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
|
|
$
|
435,140
|
|
|
$
|
410,694
|
|
|
$
|
343,771
|
|
SEARS HOMETOWN AND
OUTLET STORES, INC.
SEGMENT
RESULTS
(Unaudited)
|
|
|
|
13 Weeks Ended May
4, 2019
|
Thousands
|
|
Hometown
|
|
Outlet
|
|
Total
|
Net sales
|
|
|
|
|
|
|
Appliances
|
|
$
|
116,554
|
|
|
$
|
98,471
|
|
|
$
|
215,025
|
|
Lawn and
garden
|
|
31,625
|
|
|
5,243
|
|
|
36,868
|
|
Tools
|
|
13,460
|
|
|
3,128
|
|
|
16,588
|
|
Other
|
|
7,837
|
|
|
14,754
|
|
|
22,591
|
|
Total
|
|
169,476
|
|
|
121,596
|
|
|
291,072
|
|
Costs and
expenses
|
|
|
|
|
|
|
Cost of sales and
occupancy
|
|
141,253
|
|
|
87,789
|
|
|
229,042
|
|
Selling and
administrative
|
|
41,126
|
|
|
26,417
|
|
|
67,543
|
|
Depreciation and
amortization
|
|
1,161
|
|
|
1,099
|
|
|
2,260
|
|
Loss on sale of
assets
|
|
—
|
|
|
52
|
|
|
52
|
|
Total
|
|
183,540
|
|
|
115,357
|
|
|
298,897
|
|
Operating (loss)
income
|
|
$
|
(14,064)
|
|
|
$
|
6,239
|
|
|
$
|
(7,825)
|
|
Total
assets
|
|
$
|
225,612
|
|
|
$
|
209,528
|
|
|
$
|
435,140
|
|
Capital
expenditures
|
|
$
|
482
|
|
|
$
|
93
|
|
|
$
|
575
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended May
5, 2018
|
Thousands
|
|
Hometown
|
|
Outlet
|
|
Total
|
Net sales
|
|
|
|
|
|
|
Appliances
|
|
$
|
172,560
|
|
|
$
|
105,375
|
|
|
$
|
277,935
|
|
Lawn and
garden
|
|
48,465
|
|
|
4,786
|
|
|
53,251
|
|
Tools
|
|
19,153
|
|
|
3,149
|
|
|
22,302
|
|
Other
|
|
13,526
|
|
|
14,267
|
|
|
27,793
|
|
Total
|
|
253,704
|
|
|
127,577
|
|
|
381,281
|
|
Costs and
expenses
|
|
|
|
|
|
|
Cost of sales and
occupancy
|
|
198,728
|
|
|
95,075
|
|
|
293,803
|
|
Selling and
administrative
|
|
65,010
|
|
|
25,469
|
|
|
90,479
|
|
Depreciation and
amortization
|
|
1,324
|
|
|
1,284
|
|
|
2,608
|
|
Total
|
|
265,062
|
|
|
121,828
|
|
|
386,890
|
|
Operating (loss)
income
|
|
$
|
(11,358)
|
|
|
$
|
5,749
|
|
|
$
|
(5,609)
|
|
Total
assets
|
|
$
|
289,035
|
|
|
$
|
121,659
|
|
|
$
|
410,694
|
|
Capital
expenditures
|
|
$
|
1,918
|
|
|
$
|
352
|
|
|
$
|
2,270
|
|
View original
content:http://www.prnewswire.com/news-releases/sears-hometown-and-outlet-stores-inc-reports-first-quarter-2019-results-300872994.html
SOURCE Sears Hometown and Outlet Stores, Inc.