HOFFMAN ESTATES, Ill. - March 29, 2019 // PRNewswire // - Sears Hometown and Outlet Stores, Inc. ("SHO," "our," "we," or the "Company") (NASDAQ: SHOS) today reported results for its fiscal year and quarter ended February 2, 2019.
Overview of Unaudited Results
Results for the fourth fiscal quarter of 2018 compared to the fourth fiscal quarter of 2017 included:
Results for the 2018 fiscal year compared to the 2017 fiscal year included:
Our fiscal years end on the Saturday nearest to the last day of January. The fourth quarter and fiscal year 2017 included an extra week (the "53rd week") compared to our 2018 fiscal year. The 53rd week is not included in comparable store sales calculations.
Will Powell, Chief Executive Officer and President, said, "The $5.5 million loss in adjusted EBITDA that we posted for the fourth quarter represented a significant improvement in adjusted EBITDA over the fourth quarter of 2017. The quarter was also our fourth consecutive quarter, and our sixth in the last seven quarters, with improved adjusted EBITDA compared to the same period in the prior year. We were able to post these improved adjusted EBITDA results despite the distractions and headwinds associated with the Sears Holdings bankruptcy proceedings, which had a direct negative impact on our results. Specific negative impacts detailed below totaling $6.8 million were included in our adjusted EBITDA for the quarter.
"Year-to-date, our adjusted EBITDA improved by $30.5 million from last year. These significantly improved adjusted EBITDA results were achieved despite specific negative impacts detailed below of $8.5 million related to the Sears Holdings bankruptcy proceedings, which negative impacts were included in our adjusted EBITDA for the year. In addition, 2017 results included an adjusted EBITDA benefit from the 53rd week of $2.3 million."
When the non-recurring factors in the table above are excluded, adjusted EBITDA would have been a positive $1.4 million for the fourth quarter and $24.5 million for the full year, representing increases for comparable items of $16.0 million and $41.3 million for the fourth quarter and full year, respectively.
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 Sears Holdings bankruptcy. We ended the quarter with $15.1 million in cash and cash equivalents, including $6.5 million in additional borrowings that we could have repaid to reduce borrowings under our Senior ABL Facility. For the year, we reduced our debt, net of cash, by $10.6 million.
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:
Fourth Quarter Performance Highlights
Consolidated comparable store sales decreased 8.5% in the fourth quarter of 2018. Comparable store sales were adversely impacted by negative effects of the Sears Holdings bankruptcy proceedings, including adverse publicity and inventory availability issues, and a deliberate change in our holiday promotional strategy to reduce promotional discounting in the quarter. Hometown segment comparable store sales decreased 13.0% in the fourth quarter of 2018. Our promotional strategy for the fourth quarter was significantly less aggressive than last year, which drove a significant portion of the negative comparable sales in the Hometown segment. The negative effects of the Sears Holdings bankruptcy proceedings had a disproportionately adverse impact on our Hometown segment during the quarter. Outlet segment comparable store sales increased 0.2% in the fourth quarter of 2018.
Consolidated gross margin was $58.9 million, or 19.7% of net sales, in the fourth quarter of 2018 compared to $75.8 million, or 19.1% of net sales, in the fourth quarter of 2017. The gross margin rate improvement of 60 basis points was primarily due to higher margin on merchandise sales in both segments partially offset by disruptions in protection agreement sales related to the Sears Holdings bankruptcy, accelerated closing store costs ($7.5 million in the fourth quarter of 2018 compared to $1.9 million in the fourth quarter of 2017), and higher occupancy costs as a percentage of sales.
Consolidated selling and administrative expenses decreased to $79.2 million, or 26.5% of net sales, in the fourth quarter of 2018 from $100.4 million, or 25.4% of net sales, in the prior-year comparable quarter. The dollar decrease was primarily due to lower commissions paid to dealers and franchisees on lower sales volume, expenses associated with the 53rd week in 2017, lower provisions related to franchisee notes receivables ($0.3 million credit in the fourth quarter of 2018 compared to a $1.5 million charge in the fourth quarter of 2017). IT transformation investments were $7.6 million, or 2.5% of sales, in the fourth quarter of 2018 compared to $8.9 million, or 2.2% of sales, in the fourth quarter of 2017.
We recorded operating losses of $26.0 million and $31.1 million in the fourth 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 and a decline in Hometown comparable store sales.
We recorded a net loss of $30.3 million for the fourth quarter of 2018 compared to a net loss of $33.2 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 $6.9 million to a $5.5 million loss in the fourth quarter of 2018 from a $12.4 million loss in the fourth quarter of 2017.
Full Year Results
Net sales for 2018 decreased $270.0 million, or 15.7%, to $1.4 billion from $1.7 billion in 2017. This decrease was driven primarily by the impact of closed stores (net of new store openings), a 4.6% decrease in comparable store sales (including a 8.5% decline in the fourth quarter) and sales of $23.4 million in the 53rd week of 2017. Comparable store sales were down 6.0% and 1.8% in Hometown and Outlet, respectively. Home appliances outperformed the average comparable store sales while tools and lawn and garden underperformed to the average.
Gross margin was $323.2 million, or 22.3% of net sales, for 2018 compared to $348.5 million, or 20.3% of net sales, for 2017. The increase in gross margin rate was primarily driven by higher margin on merchandise sales partially offset by higher occupancy costs as a percentage of sales resulting from a greater mix of Company-operated stores compared to the prior year. Accelerated store closing costs were $13.4 million for 2018 compared to $14.8 million for 2017. The total impact of occupancy costs and accelerated closing store costs reduced gross margin rate 511 basis points for 2018 compared to a 468 basis-point reduction for 2017.
Selling and administrative expenses decreased to $349.1 million, or 24.1% of net sales, for 2018 from $419.6 million, or 24.4% of net sales, for 2017. The decrease was primarily due to: (1) lower commissions paid to dealers and franchisees on lower sales volume and lower store count, (2) lower expenses being recorded for stores closed (net of new store openings), (3) lower IT transformation costs ($25.9 million for 2018 compared to $34.4 million for 2017), (4) $4.8 million lower provision related to franchisee notes receivables, and (5) expenses associated with the 53rd week in 2017. These decreases were partially offset by higher payroll and benefits associated with annual incentive plan payouts. On a rate-to-sales basis, IT transformation costs and provisions for franchisee note receivables increased selling and administrative expenses 197 basis points for 2018 compared to 243 basis points for 2017.
During the third quarter of 2018, we completed the sale of an owned property located in Newington, Connecticut. Net proceeds from the sale were $2.8 million, and we recorded a gain on the sale of $1.4 million. We did not sell any owned property in fiscal 2017.
We recorded operating losses of $39.0 million and $87.4 million for 2018 and 2017, respectively. The decrease in operating loss was primarily due to lower selling and administrative expense, a higher gross margin rate partially offset by lower volume and a $2.3 million favorable impact from the 53rd week in 2017.
We recorded a net loss of $53.5 million for 2018 compared to a net loss of $95.1 million for 2017. The decrease in our net loss was primarily attributable to a lower operating loss partially offset by higher interest expense.
Financial Position
We had cash and cash equivalents of $15.1 million as of February 2, 2019 and $10.4 million as of February 3, 2018. Unused borrowing capacity as of February 2, 2019 under the Senior ABL Facility was $27.7 million with $93.0 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 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 full year 2018, we funded ongoing operations with cash provided by operating activities. Our primary needs for liquidity are to fund inventory purchases, our IT transformation, capital expenditures and for general corporate purposes.
In the fourth quarter of 2018, we did not make payments on accelerated terms for Sears Holdings's invoices in exchange for cash discounts. Such discounts, when received throughout the year, resulted in a net financial benefit to the Company when netted against incremental interest expense. Since during the fourth quarter we paid Sears Holdings on our normal ten-day, no-discount terms, the Senior ABL Facility borrowings did not increase as of February 2, 2019 as a result of accelerated payments.
Total merchandise inventories were $277.3 million at February 2, 2019 and $336.3 million at February 3, 2018. Merchandise inventories declined $56.6 million and $2.4 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 decrease was primarily driven by new sourcing contracts that allow for improved flow of inventory of as-is appliances to match forecasted sales.
IT Transformation and Operational Developments
We continued to make progress toward the implementation of our new information technology and operating systems. At the end of the quarter, system architecture, coding and testing were substantially complete, and the majority of the functionality had been put into production. As expected, we successfully expanded our pilot of the POS and ERP systems into an additional Outlet distribution facility and the associated network of stores that are serviced by this facility. We are working to finalize the Outlet segment deployment which we anticipate will continue throughout the remainder of the first fiscal quarter of 2019. During the quarter, we continued to expand our direct sourcing capabilities and completed several additional merchandise supply agreements with suppliers. We also entered into several non-merchandise agreements with various service providers that previously supported our business through Sears Holdings. Selling and administrative expenses included $7.6 million of IT transformation investments in the fourth quarter of 2018 compared to $8.9 million in the fourth quarter of 2017. We do not expect significant IT build fees or systems development costs after the second quarter of our 2019 fiscal year.
Comparable Store Sales
Comparable store sales include applicable 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 Company has undertaken an initiative on a limited number of occasions to accelerate the closing of under-performing locations in an effort to improve profitability and make the most productive use of capital. Under-performing locations are typically closed during the normal course of business at the termination of a lease or the 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 conduct a significant number of store closings or we close stores prior to lease termination or expiration (together, "accelerated store closings"), the Company excludes the associated costs of the accelerated store closings from adjusted EBITDA.
The following table presents a reconciliation of adjusted EBITDA and adjusted EBITDA excluding non-recurring items to net loss, the most comparable GAAP measure, for each of the periods indicated:
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:
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:
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.
Subsequent to the Company's 2012 separation from Sears Holdings (the "Separation") we have had significant business relationships with Sears Holdings and its subsidiaries, and we have relied heavily 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 Sears Holdings, 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 Holdco LLC ("Transform Holdco") 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 Holdco on or about February 11, 2019. According to publicly available information, (1) ESL Investments, Inc. and investment affiliates including Edward S. Lampert (together "ESL") control Transform Holdco and (2) ESL owns approximately 58.8% of the Company's outstanding shares of common stock.
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 Holdco, together the "KCD Marks"), and obtaining supply-chain services, in accordance with the Operative Agreements):
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 Annual Report on Form 10-K for our fiscal year ended February 3, 2018 and 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 date of this news 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.
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 February 2, 2019, we or our independent dealers and independent franchisees operated a total of 677 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.
SOURCE Sears Hometown and Outlet Stores, Inc.
Sears Hometown and Outlet Stores, Inc. (NASDAQ: SHOS) is a national retailer primarily focused on selling home appliances, lawn and garden equipment, tools and hardware.