HOFFMAN ESTATES, Ill.,
Sept. 19, 2019 /PRNewswire/
-- Sears Hometown and Outlet Stores, Inc. ("SHO," "our," "we,"
or the "Company") (NASDAQ: SHOS) today reported results for the
quarter ended August 3, 2019.
Overview of Unaudited Results
Results for the second quarter of fiscal 2019 compared to the
second quarter of fiscal 2018 included:
- Net loss from continuing operations decreased $0.2 million to $18.0
million from $18.2
million
- Loss per share from continuing operations was unchanged at
$0.80
- Comparable store sales decreased 21.7%
- Adjusted EBITDA increased $1.7
million to $(1.9) million from
$(3.7) million
Will Powell, Chief Executive
Officer and President, said, "Our announcement on June 3, 2019 that we had entered into a
definitive merger agreement with Transform Holdco LLC was the first
of two major milestones for the Company.
The second major milestone for the Company was the August 27, 2019 announcement that we had entered
into a definitive agreement with Liberty Tax, Inc. to sell our
Sears Outlet segment and our Buddy's Home Furnishing Stores as
authorized by our merger agreement with Transform. This
announcement followed an extensive process to market and seek to
sell these businesses to a wide array of potential interested
parties. We are currently estimating that, as a result of the
sale of the Outlet/Buddy's businesses, the Net Proceeds (as defined
in the Transform merger agreement) from the Outlet/Buddy's sale
will be approximately $121
million. We are also currently estimating that as a
result of the Outlet/Buddy's sale the merger consideration payable
by Transform in the merger for the Company's outstanding shares not
owned by ESL Investments, Inc. and its affiliates will be
approximately $3.25 per share in
cash, which would be an increase of approximately $1.00, or approximately 44.4%, from the
previously announced base merger consideration of $2.25 per share. The actual increase, if
any, in the per share base merger consideration payable in the
merger transaction with Transform will depend on the actual amount
of Net Proceeds realized by the Company from the Outlet/Buddy's
sale, which may be lower than the current estimate."
Merger Agreement with Transform
The Company announced on June 3,
2019 that it, Transform Holdco LLC ("Transform," which is an
affiliate of ESL Investments, Inc and its affiliates including
Edward S. Lampert (together "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 segment and
Buddy's Home Furnishing Stores (together, the "Outlet Segment" or
"Outlet") to a third party. At the completion of the Merger,
each share of the Company's outstanding common stock not owned by
ESL 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 (as defined in the Merger Agreement) 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 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.
According to publicly available information, ESL owns more than
54% 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 (consisting of a director who was
independent and disinterested) of the Company's Board of Directors
and approved by the Board of Directors.
Equity and Asset Purchase Agreement with Liberty Tax,
Inc.
On August, 27, 2019 the Company entered into an Equity and Asset
Purchase Agreement (the "Liberty Purchase Agreement") with
Franchise Group Newco S, LLC (the "Outlet Purchaser") and, solely
for purposes of a performance and payment guarantee on behalf of
the Outlet Purchaser, Liberty Tax, Inc. ("Liberty"), to effect the
sale of the Company's Sears Outlet segment and Buddy's Home
Furnishing Stores to the Outlet Purchaser (the "Liberty Sale") for
aggregate consideration (the "Liberty Purchase Price") equal to the
sum of $121 million in cash, subject
to a customary working capital adjustment, plus an additional
amount of up to $11.9 million (the
"Cap") to reimburse the Company for certain costs it incurs in
connection with the Liberty Sale ("Liberty Sale Costs") that, if
not reimbursed by the Outlet Purchaser, would otherwise reduce the
calculation under the Merger Agreement of Net Proceeds received by
the Company as a result of the Liberty Sale. If the Liberty
Sale is consummated prior to the closing of the Merger, it is
currently estimated to result in Net Proceeds to the Company of
approximately $121 million and,
pursuant to the Merger Agreement, a corresponding increase in the
Base Merger Consideration of approximately $1.00 per share of the Company's common stock
(being the quotient of (i) Net Proceeds of $121 million minus Outlet Sale Minimum Proceeds
of $97.5 million, divided by (ii) the
sum of 22,702,132 shares of the Company's common stock and 781,618
stock units expected to be issued and outstanding as of the closing
date of the Merger), resulting in Merger Consideration of
approximately $3.25 per share of the
Company's common stock, although such amount could be lower under
certain circumstances. Under no circumstances can the Liberty
Sale result in Net Proceeds of more than $121 million or Merger Consideration of more than
$3.25 per share of the Company's
common stock.
If the Liberty Sale is not consummated prior to the closing of
the Merger or if the Liberty Sale is consummated prior to the
closing of the Merger but the Net Proceeds are less than or equal
to $97.5 million, the Base Merger
Consideration of $2.25 per share of
the Company's common stock will not be increased.
The Liberty Purchase Agreement includes customary
representations, warranties and covenants, including the agreement
of the Company to conduct the business of the Outlet Segment in the
ordinary course between the execution of the Liberty Purchase
Agreement and the closing of the Liberty Sale. The Liberty
Purchase Agreement provides that, except in the case of fraud or
under certain ancillary agreements entered into in connection with
the Liberty Sale, the Company will have no liability after the
closing of the Liberty Sale with respect to any of its
representations and warranties, or covenants to be performed prior
to the closing of the Liberty Sale.
The Merger and Liberty Sale are expected to close concurrently
in October 2019. See the Company's Information Statement that
accompanies the Company's Schedule 14C filed with the Securities
and Exchange Commission on September 13,
2019 (the "Information Statement") for additional,
more-detailed information regarding the Merger, the Merger
Agreement, the Liberty Sale, and the Liberty Purchase
Agreement. The Merger Agreement and the Liberty Purchase
Agreement are summarized in, and included as Annexes to, the
Information Statement.
Will Powell said, "I would like
to take this opportunity to thank all of the associates, dealers
and franchisees who have worked so diligently over the nearly seven
years that we have been a separate public company. Your
entrepreneurial spirit and dedication have been sources of
inspiration to me as we have worked together to bring the Company
through this difficult time."
Second Quarter Performance Highlights
Due to the expected disposition of the Company's Outlet Segment
resulting from the Liberty Sale (which is subject to closing
conditions included in the Liberty Purchase Agreement), the Outlet
Segment is presented as a discontinued operation in the statement
of operations below and the associated assets and liabilities are
presented as held for sale in the balance sheet below.
Accordingly, the results discussed below relate only to the
Company's continuing operations (the "Hometown segment" or
"Hometown").
Comparable store sales decreased 21.7% in the second quarter of
2019. Gross margin was $31.7
million, or 18.8% of net sales, in the second quarter of
2019 compared to $56.4 million, or
18.6% of net sales, in the second quarter of 2018.
Accelerated store closing costs increased to $8.1 million in the second quarter of 2019 from
$6.6 million in the second quarter of
2018. The impact of accelerated store closing costs on the
gross margin rate was a decrease of 480 basis points in the second
quarter of 2019 and a reduction of 218 basis points in the second
quarter of 2018.
Selling and administrative expenses decreased 34.8% to
$46.6 million, or 27.7% of net sales,
in the second quarter of 2019 from $71.6
million, or 23.6% 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, reduced IT
transformation investments, and lower payroll and benefits.
IT transformation investments were $2.0
million, or 1.2% of sales, in the second quarter of 2019
compared to $4.5 million, or 1.5% of
sales, in the second quarter of 2018.
We recorded operating losses of $16.0
million and $17.2 million in
the second quarters of 2019 and 2018, respectively. The decrease in
operating loss was due to lower selling and administrative expenses
partially offset by lower sales volume.
We recorded a net loss from continuing operations of
$18.0 million for the second quarter
of 2019 compared to a net loss from continuing operations of
$18.2 million for the prior-year
comparable quarter. The decrease in our net loss was
primarily attributable to the factors discussed above as well as
lower interest expense.
Adjusted EBITDA increased $1.7
million to $(1.9) million in
the second quarter of 2019 from $(3.7)
million in the second quarter of 2018.
Financial Position
We had cash and cash equivalents of $10.9
million as of August 3, 2019
and $11.1 million as of August 4, 2018. Unused borrowing capacity
as of August 3, 2019 under the Company's Amended and Restated
Credit Agreement (the "Senior ABL Facility") was $22.8 million with $73.0
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 second quarter of 2019, we funded
ongoing operations with cash provided by operating
activities. Our primary needs for liquidity are to fund
inventory purchases, IT transformation investments, capital
expenditures, and other general corporate needs.
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.
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 Senior ABL
Facility 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 Senior ABL Facility
and the Term Loan Agreement under specified circumstances; and (3)
the Senior ABL Facility lenders and the Term Loan lenders consent
on a limited basis to the Loan Parties (as defined in the Senior
ABL Facility 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 Senior ABL Facility 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.
With respect to the Senior ABL Facility and the Term Loan
Agreement, the Merger Agreement requires as a closing condition
that all obligations under these agreements shall have been repaid,
all commitments of the lenders thereto shall have been terminated
and, with respect to the Senior ABL Facility, all related letters
of credit shall have been terminated or cash collateralized,
except, in each case, as waived by the applicable counterparties to
these financing agreements. Transform is, subject to
conditions, obligated in accordance with the Merger Agreement to
cause the repayment of the outstanding obligations under the
aforementioned agreements and the termination or cash
collateralization of all outstanding letters of credit under the
Senior ABL Facility. In addition, there is a condition to the
closing of the Merger that no event of default shall have occurred
and be continuing under the Senior ABL Facility or the Term Loan
Agreement, subject to exceptions.
Total merchandise inventories were $139.7
million at August 3, 2019
compared to $217.6 million at
August 4, 2018. The decrease in
merchandise inventory was primarily due to store closures.
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 from continuing operations
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
and amortization 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.
The Company has undertaken an initiative on a limited number of
occasions to accelerate the closing of 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 lease termination or expiration), the Company excludes the
associated costs of the closings from adjusted EBITDA.
The following table presents a reconciliation of consolidated
adjusted EBITDA to consolidated net loss from continuing
operations, the most comparable GAAP measure, for each of the
periods indicated:
|
13 Weeks
Ended
|
|
26 weeks
ended
|
Thousands
|
August 3,
2019
|
|
August 4,
2018
|
|
August 3,
2019
|
|
August 4,
2018
|
Net loss from
continuing operations
|
$
|
(18,049)
|
|
|
$
|
(18,245)
|
|
|
$
|
(38,877)
|
|
|
$
|
(34,428)
|
|
Income tax
benefit
|
(1,124)
|
|
|
(2,442)
|
|
|
(3,878)
|
|
|
(5,079)
|
|
Other
income
|
(6)
|
|
|
(106)
|
|
|
(15)
|
|
|
(150)
|
|
Interest
expense
|
3,154
|
|
|
3,604
|
|
|
7,124
|
|
|
7,056
|
|
Operating
loss
|
(16,025)
|
|
|
(17,189)
|
|
|
(35,646)
|
|
|
(32,601)
|
|
Depreciation and
amortization
|
1,108
|
|
|
2,049
|
|
|
2,510
|
|
|
3,545
|
|
Provision for
(recovery of) franchisee note losses, net of recoveries
|
244
|
|
|
(54)
|
|
|
204
|
|
|
(111)
|
|
IT transformation
investments
|
1,956
|
|
|
4,500
|
|
|
4,378
|
|
|
8,476
|
|
Accelerated closure
of under-performing stores
|
8,308
|
|
|
7,031
|
|
|
13,870
|
|
|
7,252
|
|
Professional fees
related to Merger
|
2,491
|
|
|
—
|
|
|
2,491
|
|
|
—
|
|
Adjusted
EBITDA
|
$
|
(1,918)
|
|
|
$
|
(3,663)
|
|
|
$
|
(12,193)
|
|
|
$
|
(13,439)
|
|
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," 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 and
the Liberty Sale 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 Company has entered into the Merger Agreement pursuant to
which Merger Subsidiary will merge with and into the Company.
In accordance with the Merger Agreement prior to completion of the
Merger, the Company has been afforded an opportunity to conduct the
Outlet Sale. The Company took advantage of that opportunity
and has entered into Liberty Purchase Agreement to effect the
Liberty Sale. The Company expects that the completion of the
Merger and the Liberty Sale will occur concurrently during
October 2019, subject to the
satisfaction of closing conditions in the Merger Agreement and in
the Liberty Purchase Agreement. If the Merger is completed
the Company will become wholly owned by Transform and ESL and the
Company will cease to be publicly held. See also the
Information Statement for additional information about the Merger,
the Merger Agreement, the Liberty Sale, and the Liberty Purchase
Agreement.
Subsequent to the Company's 2012 separation from Sears Holdings
(the "2012 Separation") and until mid-February 2019 the Company had significant
business relationships with the Sears Holdings Companies (which
were controlled by ESL) 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 Sears Holdings, is not
included in the bankruptcy petitions filed by Sears Holdings and
its subsidiaries, 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 Kenmore
and Craftsman branded merchandise and obtaining supply-chain
services, in accordance with the Operative Agreements):
- The Merger and the Liberty Sale or either of them may not be
consummated within the anticipated time periods including as a
result of the failure to satisfy conditions to closing specified in
the Merger Agreement and the Liberty Purchase Agreement or either
of them;
- The 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, including its obligation to
cause the repayment of the outstanding obligations under the Senior
ABL Facility and the Term Loan and the termination or cash
collateralization of all outstanding letters of credit under the
Senior ABL Facility;
- The ability of Liberty to complete the Liberty Sale and perform
all of its other obligations in accordance with the terms and
conditions of the Liberty Purchase Agreement;
- The ability of Transform to perform all of its obligations in
accordance with the terms and conditions of the Operative
Agreements;
- The willingness of the Senior ABL Facility lenders and the Term
Loan lenders to consent to the Liberty Sale and to the release of
liens on collateral to be transferred to the Purchaser as part of
the Liberty Sale;
- 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 Separation Agreements 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 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 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 one of the KENMORE®, CRAFTSMAN®,
and DIEHARD® marks (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 (one
of the Operative Agreements) with Transform (as assignee from Sears
Holdings) provides that (1) if a third party that is not an
affiliate of Transform 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 complete our IT transformation by the end of the
third 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, especially as a consequence of the announcements
of the Merger and the Liberty Sale;
- 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 "Cautionary Statement
Regarding Forward-Looking Statements" in the Information Statement,
other cautionary statements, such "Risk Factors" that is
included in the 2018 10-K, and the 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 their 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 appliances, hardware, tools and lawn
and garden equipment. Our stores are designed to provide our
customers with in-store and online access to a wide selection of
national brands of appliances, tools, lawn and garden equipment,
sporting goods and household goods, depending on the particular
format. As of August 4, 2019, we or our independent
dealers and independent franchisees operated a total of 438 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
|
|
26 Weeks
Ended
|
Thousands, except
per share amounts
|
August 3,
2019
|
|
August 4,
2018
|
|
August 3,
2019
|
|
August 4,
2018
|
NET
SALES
|
$
|
168,594
|
|
|
$
|
302,938
|
|
|
$
|
337,089
|
|
|
$
|
556,340
|
|
COSTS AND
EXPENSES
|
|
|
|
|
|
|
|
Cost of sales and
occupancy
|
136,878
|
|
|
246,522
|
|
|
277,729
|
|
|
445,140
|
|
Selling and
administrative
|
46,633
|
|
|
71,556
|
|
|
92,496
|
|
|
140,256
|
|
Depreciation and
amortization
|
1,108
|
|
|
2,049
|
|
|
2,510
|
|
|
3,545
|
|
Total costs and
expenses
|
184,619
|
|
|
320,127
|
|
|
372,735
|
|
|
588,941
|
|
Operating
loss
|
(16,025)
|
|
|
(17,189)
|
|
|
(35,646)
|
|
|
(32,601)
|
|
Interest
expense
|
(3,154)
|
|
|
(3,604)
|
|
|
(7,124)
|
|
|
(7,056)
|
|
Other
income
|
6
|
|
|
106
|
|
|
15
|
|
|
150
|
|
Loss from continuing
operations before income taxes
|
(19,173)
|
|
|
(20,687)
|
|
|
(42,755)
|
|
|
(39,507)
|
|
Income tax
benefit
|
1,124
|
|
|
2,442
|
|
|
3,878
|
|
|
5,079
|
|
NET LOSS FROM
CONTINUING OPERATIONS
|
$
|
(18,049)
|
|
|
$
|
(18,245)
|
|
|
$
|
(38,877)
|
|
|
$
|
(34,428)
|
|
Income from
discontinued operations, net of tax
|
7,043
|
|
|
8,919
|
|
|
15,817
|
|
|
15,733
|
|
NET
LOSS
|
$
|
(11,006)
|
|
|
$
|
(9,326)
|
|
|
$
|
(23,060)
|
|
|
$
|
(18,695)
|
|
NET (LOSS) INCOME
PER COMMON SHARE ATTRIBUTABLE TO STOCKHOLDERS
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
Continuing
operations
|
$
|
(0.80)
|
|
|
$
|
(0.80)
|
|
|
$
|
(1.71)
|
|
|
$
|
(1.52)
|
|
Discontinued
operations
|
$
|
0.32
|
|
|
$
|
0.39
|
|
|
$
|
0.69
|
|
|
$
|
0.70
|
|
Basic net loss per
common share
|
$
|
(0.48)
|
|
|
$
|
(0.41)
|
|
|
$
|
(1.02)
|
|
|
$
|
(0.82)
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
Continuing
operations
|
$
|
(0.80)
|
|
|
$
|
(0.80)
|
|
|
$
|
(1.71)
|
|
|
$
|
(1.52)
|
|
Discontinued
operations
|
$
|
0.32
|
|
|
$
|
0.39
|
|
|
$
|
0.69
|
|
|
$
|
0.70
|
|
Diluted net loss
per common share
|
$
|
(0.48)
|
|
|
$
|
(0.41)
|
|
|
$
|
(1.02)
|
|
|
$
|
(0.82)
|
|
|
|
|
|
|
|
|
|
Basic weighted
average common shares outstanding
|
22,702
|
|
|
22,702
|
|
|
22,702
|
|
|
22,702
|
|
Diluted weighted
average common shares outstanding
|
22,702
|
|
|
22,702
|
|
|
22,702
|
|
|
22,702
|
|
SEARS HOMETOWN AND
OUTLET STORES, INC.
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
(Unaudited)
|
|
Thousands
|
August 3,
2019
|
|
August 4,
2018
|
|
February 2,
2019
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
10,855
|
|
|
$
|
11,128
|
|
|
$
|
12,801
|
|
Accounts and
franchisee receivables, net
|
9,062
|
|
|
9,565
|
|
|
10,275
|
|
Merchandise
inventories
|
139,671
|
|
|
217,614
|
|
|
179,047
|
|
Prepaid expenses and
other current assets
|
2,228
|
|
|
2,292
|
|
|
3,127
|
|
Assets of businesses
held for sale
|
224,916
|
|
|
126,458
|
|
|
123,411
|
|
Total current
assets
|
386,732
|
|
|
367,057
|
|
|
328,661
|
|
PROPERTY AND
EQUIPMENT, net
|
11,821
|
|
|
15,350
|
|
|
13,291
|
|
OPERATING LEASE
RIGHT-OF-USE ASSETS
|
3,207
|
|
|
—
|
|
|
—
|
|
OTHER ASSETS,
net
|
1,285
|
|
|
3,353
|
|
|
1,819
|
|
TOTAL
ASSETS
|
$
|
403,045
|
|
|
$
|
385,760
|
|
|
$
|
343,771
|
|
LIABILITIES
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Short-term
borrowings
|
$
|
72,995
|
|
|
$
|
96,300
|
|
|
$
|
93,000
|
|
Current portion of
term loan, net
|
39,362
|
|
|
—
|
|
|
39,057
|
|
Payable to related
party
|
11,342
|
|
|
17,396
|
|
|
11,433
|
|
Accounts
payable
|
4,880
|
|
|
5,013
|
|
|
3,727
|
|
Current operating
lease liabilities
|
2,284
|
|
|
—
|
|
|
—
|
|
Other current
liabilities
|
28,586
|
|
|
40,196
|
|
|
38,298
|
|
Liabilities of
businesses held for sale
|
143,487
|
|
|
32,960
|
|
|
37,655
|
|
Total current
liabilities
|
302,936
|
|
|
191,865
|
|
|
223,170
|
|
LONG-TERM OPERATING
LEASE LIABILITIES
|
3,831
|
|
|
—
|
|
|
—
|
|
LONG-TERM PORTION OF
TERM LOAN, NET
|
—
|
|
|
38,565
|
|
|
—
|
|
OTHER LONG-TERM
LIABILITIES
|
1,823
|
|
|
605
|
|
|
645
|
|
TOTAL
LIABILITIES
|
308,590
|
|
|
231,035
|
|
|
223,815
|
|
COMMITMENTS AND
CONTINGENCIES
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
TOTAL STOCKHOLDERS'
EQUITY
|
94,455
|
|
|
154,725
|
|
|
119,956
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
|
$
|
403,045
|
|
|
$
|
385,760
|
|
|
$
|
343,771
|
|
View original
content:http://www.prnewswire.com/news-releases/sears-hometown-and-outlet-stores-inc-reports-second-quarter-2019-results-300922092.html
SOURCE Sears Hometown and Outlet Stores, Inc.