Sears Hometown and Outlet Stores Inc. (SHOS, Financial) is the result of a spin-off from Sears Holdings back in 2012. Seventy percent of the company’s sales come from Hometown Stores and 30% from Sears Outlet Stores
Edward Lampert (Trades, Portfolio), Francis Chou (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Murray Stahl (Trades, Portfolio) all own shares. Lampert has the majority stake with 4.77 million shares, good for 21% of the company. There’s also a 2.17 million share stake by Nantahala Capital out of Stamford, Connecticut, a $2.2 billion fund run by Wilmont Harkey and Daniel Mack that was started in 2004. They are wo gentlemen to watch out for in the future.
A reason all these money managers have piled in is net current asset value. It has $131 million in net assets, with an already reduced inventory rate. The market capitalization is $52 million. It generates over $1.5 billion in sales and has a plan in place to survive as a stand-alone business, one of which is by spending $60 million on IT systems over the last three years, and two by reducing store count to eventually regain profitability.
Financials
$368 million in current assets
$237 million in total liabilities
$131 million in net current assets
$52 million market capitalization
$1.7 billion in sales
$95 million net loss
$7.73 book value
$2.30 price (as of 10:30am EST)
Read the latest earnings release.
Another reason is location and footprint. The average Hometown store takes up just 9,000 square feet with a higher percentage for selling versus 140,000 square feet at a full Sears store. The company has been rebranding Hometown stores to the "America's Appliance Experts" (AAE), with completion slated for 2018, because AAE locations achieve better comparable store sales and a higher margin rate in appliances than non-AAE locations.
Outlet Stores have become a dominant player for bruised, damaged, returned, reconditioned, overstocked and "nearly new" appliances across the entire U.S. appliance industry's with an estimated 60% market share. In fact, 72% of the company's revenue in 2016 was appliances, including brands from every major manufacturer.
Another reason is business model. Like Ace Hardware, Sears Hometown operates on a franchise model. The company allows independent dealers to open a freestanding "Sears Hometown" store and consigns merchandise to these stores, while retaining title to the merchandise. The owner/operator retains the real estate and operating risk, while Sears simply supplies the merchandise and pays a commission on its sale to the dealer. It takes between $60,000 and $85,000 to open, 98% are owner operated and the company has over 800 stores around the U.S.
As more big box Sears stores close, these smaller stores will open. Through April, Sears Hometown has opened 14 new stores nationwide. And, while Sears Holdings lost a key supplier in Whirlpool, Sears Hometown and Outlet stores still have them and have inked new deals with GE and Samsung to add to the product lineup.
The Sears platform is evolving and while Eddie Lampert had, arguably, the worst year of 2017, don’t count him out yet. In the end, Sears Holdings is likely to file bankruptcy and it may come out stronger as a result, but no way should you own equity in Sears right now. Sears Hometown and Outlet will be a better retail trade, just like Seritage Growth Properties (SRG, Financial) will likely be a better real estate trade than the former parent company. With that in mind, Sears Hometown does need to get back to profitability, yet investors can jump in now with a pretty significant margin of safety.
Disclosure: I am long Sears Hometown and Outlet.
