PR Newswire
HOFFMAN ESTATES, Ill., Dec. 1, 2016
HOFFMAN ESTATES, Ill., Dec. 1, 2016 /PRNewswire/ -- Sears Hometown and Outlet Stores, Inc. ("SHO," "we," or the "Company") (NASDAQ: SHOS) today reported results for its fiscal quarter ended October 29, 2016.
Overview of Preliminary, Unaudited Results
Results for the third fiscal quarter of 2016 compared to the third fiscal quarter of 2015 included:
Will Powell, Chief Executive Officer and President, said, "In the third quarter, we continued to focus on our long-term, transformational initiatives. These included launching our Hometown segment transactional websites one quarter early in advance of the holiday season on October 27, 2016, converting an additional 137 stores to our America's Appliance Experts® ("AAE") program, and launching an enhanced consumer lease-to-own program including a new agreement with a third-party provider. We are also progressing with our IT transformation initiative in accordance with our previously disclosed timetable, and we expect to transition our human resources systems and a part of our finance and accounting systems in the fourth quarter of 2016. This will give us the ability to execute purchases directly from vendors on SHO purchase orders. Our associates, dealers, and franchisees continue to offer our customers exceptional service through our "Say Yes" program, as we experienced another year-over-year increase in our customer satisfaction metrics, as well as positive on-line review feedback. Finally, we amended and extended our revolving credit facility on November 1, 2016."
"Our third quarter results were impacted by three significant factors. First, we recorded a $75.6 million non-cash valuation allowance on our deferred tax assets, reducing the balance to zero. Second, we continued to experience demand headwinds in our Hometown segment due to consumers purchasing our key product categories on-line from our competitors. Until the launch of our Hometown segment transactional websites late in the third quarter, we did not have the ability to serve customers choosing to directly purchase on-line. Third, home appliances comparable sales declined 5.5% impacted by the hyper-competitive environment, with the largest portion of the decline occurring in the Outlet segment. As a result of the increase in industry promotional activity, we experienced an overall 6.0% decline in the average unit price of big-ticket major appliances."
Segment Performance Highlights
Hometown posted a comparable store sales decline of 3.2% in the third quarter of 2016, which was primarily driven by declines in the home appliance category.
Outlet comparable store sales declined 11.9% in the third quarter of 2016 largely in the home appliances category.
Other Business Highlights
America's Appliance Experts: Our AAE stores continue to outperform our non-AAE stores in home appliance and total comparable store sales. In the third quarter of 2016 we completed 137 additional AAE conversions and in total have 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 the third quarter of 2016. We intend to convert 150-200 additional stores to the AAE format in fiscal 2017.
Hometown Transactional Websites: On October 27, 2016, we expanded our capabilities as an ecommerce retailer with the launch of three new transactional ecommerce websites for our Hometown segment. As part of our larger IT transformation initiative, we launched the new websites one quarter ahead of schedule, allowing the sites to be live prior to the holiday season. We believe these new sites enable us to provide a cohesive, local omni-channel experience. 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. We believe this will improve the Company's long-term competitive position as our physical stores provide a distinct supply-chain advantage in rural America. According to Kantar Retail, approximately 73% of rural consumers are now buying online. As rural consumers have embraced shopping online, retailers are learning that fulfilling these orders comes at a higher cost. For many items, we believe we will be able to fulfill online consumer orders faster and more economically than other online retailers.
Commercial Sales Program: Our new commercial sales program continues to experience strong growth as we leverage our physical store presence in rural markets to connect to local commercial customers. We are forecasting over $25 million in commercial sales for the current fiscal year and expect sales to continue to accelerate as we increase store-owner adoption of this program.
Lease-to-Own Program: In the third quarter we increased our emphasis on our lease-to-own program and executed a new contract with our lease-to-own services provider. We anticipate this new contract will provide an incremental margin benefit to us in 2017 through higher lease-to-own sales and more favorable terms to us than our prior arrangements. We believe our lease-to-own customer experience will be superior to competitor offerings. Program revenue has grown 14.5% for the first three quarters of 2016, and this relatively new program is rapidly increasing its share of our total sales.
Store Activity: In the third quarter of 2016, we opened four new stores and closed 12 under-performing stores in Hometown. For the first three quarters of 2016, we opened six stores and closed 51 stores in Hometown and had no openings or closures in Outlet. The Hometown closures, which unfavorably impacted EBITDA $0.6 million during the first three quarters of 2016, are largely part of our previously disclosed intent to close the portion of our Hardware stores and Home Appliance Showrooms that have historically underperformed. We continue to take proactive steps to make the best use of capital and reduce costs. In the fourth quarter of 2016, we anticipate 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 also free up approximately $30.0 million to $40.0 million of net working capital that can be used more productively.
IT Transformation and Operational Independence: We continued to make progress with our IT transformation initiative, which will provide greater strategic and operating flexibility including improvements in our ability to assort and price merchandise, as well as the ability to source products directly from vendors. Selling and administrative expenses included $2.5 million and $2.9 million of IT transformation costs for the third quarters of 2016 and 2015, respectively. We expect that we will transition human resources and partial finance functionality before the end of the year and have the ability to begin direct vendor purchases in the first quarter of 2017.
Borrowings and Cash Flow: At the end of the third quarter of 2016, outstanding borrowings on our Senior ABL Facility were $91.9 million, and we had $152.1 million of unused borrowing capacity. As part of the amendments to our agreements with Sears Holdings Corporation, SHO paid Sears Holdings on accelerated terms in exchange for a 37-basis-point cash discount on merchandise and services delivered. This payment arrangement resulted in additional Senior ABL Facility borrowings during the quarter, but resulted in a net financial benefit to SHO. While we are continuing this payment arrangement, we can in our sole discretion revert to ten-day, no-discount payment terms at any time.
Immediately following the end of the quarter we entered into an Amended and Restated Credit Agreement, which amends and restates the Senior ABL Facility effective as of November 1, 2016. Subject to specified terms and conditions, the Amended and Restated Credit Agreement provides for $250 million in total revolving commitments until October 11, 2017 and $170 million in total extended revolving commitments until February 29, 2020. We included the Amended and Restated Credit Agreement as an exhibit to the Current Report on Form 8-K that we filed on November 7, 2016 with the Securities and Exchange Commission regarding the Amended and Restated Credit Agreement . We also discuss the Amended and Restated Credit Agreement in our Quarterly Report on Form 10-Q for the quarter ended October 29, 2016 filed with the Securities and Exchange Commission.
Third Quarter Results
Net sales in the third quarter of 2016 decreased $59.3 million, or 10.8%, to $487.8 million from the third quarter of 2015. This decrease was driven primarily by a 6.0% decrease in comparable store sales and the impact of closed stores (net of new store openings).
Comparable store sales were down 3.2% and 11.9% in Hometown and Outlet, respectively. The consolidated comparable store sales decrease of 6.0% was primarily due to lower sales in appliances resulting from an aggressive promotional environment, and lower apparel sales 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 was $95.2 million, or 19.5% of net sales, in the third quarter of 2016 compared to $117.8 million, or 21.5% of net sales, in the third quarter of 2015. The decrease in gross margin rate was primarily driven by higher occupancy costs due to a higher number of Company-operated locations, 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 the third quarter of 2016 compared to a reduction of 300 basis points in the third quarter of 2015.
Selling and administrative expenses decreased to $109.2 million, or 22.4% of net sales, in the third quarter of 2016 from $125.4 million, or 22.9% of net sales, in the prior-year 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 due to a higher number of Company-operated stores.
We recorded an operating loss of $17.1 million and $9.9 million in the third quarters of 2016 and 2015, respectively. The increase in operating loss was primarily due to lower volume and a lower gross margin rate partially offset by a decrease in selling and administrative expenses.
Valuation Allowance on Deferred Tax Assets
In the third quarter of 2016, we recorded a $75.6 million non-cash valuation allowance on our deferred tax assets, which reduced the balance to zero. We evaluate our deferred income tax assets and liabilities quarterly to determine whether a valuation allowance is necessary. The establishment of valuation allowances requires significant judgment and is impacted by various estimates. A significant piece of negative evidence that we considered was our cumulative losses in recent periods. While the Company believes positive evidence exists with regard to the realizability of these deferred tax assets, we did not consider the positive evidence sufficient to outweigh the objectively verifiable negative evidence. The significant negative evidence of our losses generated before income taxes and the unfavorable shift in our business could not be offset when considering other sources of taxable income in recent periods. The full valuation allowance will remain until there exists significant objective positive evidence, such as sustained achievement of cumulative profits. While we have recorded the valuation allowance, the underlying tax benefits are still available to the Company to the extent that taxable income is generated in future periods.
Net Loss
We recorded a net loss of $93.2 million for the third quarter of 2016 compared to a net loss of $5.5 million for the prior-year comparable quarter. The increase in our net loss was primarily attributable to a higher operating loss and an increase in income tax expense. Income tax expense of $75.6 million, comprised primarily of the valuation allowance on deferred tax assets, and a benefit of $4.2 million were recorded in the third quarters of 2016 and 2015, respectively.
Financial Position
We had cash and cash equivalents of $15.5 million as of October 29, 2016, $22.1 million as of October 31, 2015, and $18.2 million as of January 30, 2016. Unused borrowing capacity as of October 29, 2016 under the Senior ABL Facility was $152.1 million with $91.9 million drawn and $6.0 million of letters of credit outstanding. For the first three quarters of 2016 we funded ongoing operations with cash on hand, proceeds from asset sales, and cash provided by financing activities. Our primary needs for liquidity are to fund inventory purchases and our IT transformation and capital expenditures and for general corporate purposes.
Total merchandise inventories were $424.7 million at October 29, 2016 and $448.4 million at October 31, 2015. Merchandise inventories declined $34.7 million in Hometown and increased $11.0 million in Outlet. The decrease in Hometown was primarily due to store closures. Outlet's increase was primarily driven by lower-than-anticipated appliances sales in the third quarter and increased flow of out-of-box merchandise from vendors. Lawn and garden also increased due to pre-season snow thrower purchases and year-end purchases of lawn mowers. These increases were partially offset by reduced apparel receipts from Sears Holdings.
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:
The following table presents a reconciliation of adjusted EBITDA to net loss, the most comparable GAAP measure, for each of the periods indicated:
| | 13 Weeks Ended | | 39 Weeks Ended | ||||||||||||
Thousands | | October 29, | | October 31, | | October 29, | | October 31, | ||||||||
Net loss | | $ | (93,197) | | | $ | (5,543) | | | $ | (86,125) | | | $ | (4,656) | |
Income tax expense (benefit) | | 75,617 | | | (4,221) | | | 80,658 | | | (2,197) | | ||||
Other income | | (373) | | | (721) | | | (1,148) | | | (1,963) | | ||||
Interest expense | | 840 | | | 587 | | | 2,492 | | | 1,982 | | ||||
Operating loss | | (17,113) | | | (9,898) | | | (4,123) | | | (6,834) | | ||||
Depreciation and amortization | | 3,188 | | | 2,271 | | | 9,738 | | | 6,296 | | ||||
Gain on the sale of assets | | — | | | — | | | (25,269) | | | — | | ||||
Severance and executive transition costs | | — | | | — | | | — | | | 1,066 | | ||||
Initial franchise revenues net of (recoveries of) provision for losses | | (98) | | | 110 | | | (381) | | | 145 | | ||||
IT transformation investments | | 2,512 | | | 2,947 | | | 8,985 | | | 7,592 | | ||||
Adjusted EBITDA Werbung Mehr Nachrichten zur Sears Hometown And Outlet Stores Aktie kostenlos abonnieren
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