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Category: Stock Market and Sears Hometown & outlet
Date: 30 September 2019 Stock Price: $3.81 We take a look at the 2nd quarter earnings release of their 2019 fiscal year of Sears Hometown and Outlet stores a national retailer focused on selling home appliances, hardware tools and garden equipment
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About Sears Hometown and Outlet stores
Sears Hometown and Outlet Stores, Inc., is a publicly traded (NASDAQ:SHOS) national retailer primarily focused on selling home appliances, hardware, tools and lawn and garden equipment. We operate through two segments—the Sears Hometown and Hardware segment and the Sears Outlet segment.
On June 3rd, 2019 we announced that we and Transform Holdco LLC (“Transform” or “the new Sears”), a leading integrated retailer and home to Sears and Kmart Transform Holdco LLC (“Transform”), entered into a definitive merger agreement whereby Transform will acquire the outstanding shares of Sears Hometown not owned by ESL Investments, Inc. and its affiliates after first affording 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
On June 3rd, 2019 we announced that we and Transform Holdco LLC (“Transform” or “the new Sears”), a leading integrated retailer and home to Sears and Kmart Transform Holdco LLC (“Transform”), entered into a definitive merger agreement whereby Transform will acquire the outstanding shares of Sears Hometown not owned by ESL Investments, Inc. and its affiliates after first affording 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
Overview of Sears Hometown's latest earnings report
The numbers we are interested in (for the quarter):
- Revenue: $168.594 million (down from $302.938 million from the same quarter of the previous year)
- Revenue decreased by -44.3% over the last 12 months
- Total costs and expenses: $184.689 million (down from $320.127 million for the same quarter of the previous year)
- Total costs and expenses decreased by -42.3% over the last 12 months
- Net loss: -$11 million (increased loss from -$9.32 million for the same quarter of the previous year)
- Diluted loss per share: -$0.48 (increased loss from -$0.41 for the same quarter of the previous year)
- Diluted weighted-average shares outstanding: 22.702 million (up from 22.702 million for the same quarter of the previous year)
- Cash and cash equivalents: $10.855 million
- Cash and cash equivalents per share: $0.47
- Cash and cash equivalents makes up 12.5% of Sears Hometown's market capital
- Cash and cash equivalents makes up 2.69% of Sears Hometown's total assets
- Inventories: $139.671 million
- Inventories makes up 34.65% of Sears Hometown's total assets
- Stockholders equity of Sears Hometown: $94.455 million
- Stockholders equity per share: $4.16
- Sears Hometown is trading at 2.1 times its stockholders equity which is within the expected range of between 2 and 4 which most companies tend to trade at.
Sears Hometown's management commentary on the results and earnings guidance
HOFFMAN ESTATES, Ill. - Sears Hometown and Outlet Stores, Inc. ("SHO," "our," "we," or the "Company") (NASDAQ: SHOS) today reported results for the quarter ended August 3, 2019.
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, ESLowns 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.
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, ESLowns 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.
Sears Hometown (NASDAQ: SHOS) stock price history
The image below, obtained from Google, shows the stock price history of Sears Hometown (NASDAQ: SHOS) over the last 5 years. And its not been a great time for the group. 5 years ago Sears Hometown stock was trading around $16 a stock, and they are currently trading at $3.81 This is a negative return of -76% over the last 5 years. The stock recently saw a uptick in its price after merger details were announced. But this will be little solice to investors who bought the stock 5 years ao.
Sears Hometown (NASDAQ: SHOS) latest stock valuation
So based on the earnings report of Sears Hometown's (NASDAQ: SHOS) what do we value Sears Hometown (SHOS) stock at? Based on their earnings and the news of the pending merger what do we value Sears Hometown stock at? It is very hard to value a loss making firm. A base case we use to value a company that makes a loss is the stockholders equity per share. This shows what each stockholder will get if the company sells all its assets, pays all its liabilities and distributes the rest to stockholders. We therefore value Sears Hometown at $4.16. We therefore believe Sears Hometown's is undervalued.
While they are undervalued we would not recommend buying into the company at this point. Rather sit on the sidelines and what the corporate activities taking place play out first before committing into Sears Hometown. Another reason we would hold off on buying is the strong decline in their top line (revenue) and the fact that the US economy is slowing down, and this group's fortunes are directly linked to those of US consumers looking to buy semi-durabe and durable goods.
While they are undervalued we would not recommend buying into the company at this point. Rather sit on the sidelines and what the corporate activities taking place play out first before committing into Sears Hometown. Another reason we would hold off on buying is the strong decline in their top line (revenue) and the fact that the US economy is slowing down, and this group's fortunes are directly linked to those of US consumers looking to buy semi-durabe and durable goods.