Sears Hometown Ends Its First Year on a Rough Note

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Spun-off last year from the increasingly polarizing Sears Holdings , Sears Hometown and Outlets isn't giving its investors much to be positive about. The stores, which are more and more serving as the outlets for Sears' remaining strong brands, struggled yet again this past quarter in the challenging retail environment. At this point, the stock has given up nearly 100% of its gains since its spin-off late last year and is leaving investors scared that Sears Hometown may be too much like its former parent. Let's take a look and see if that's the case.

Everyday struggle
Nearly every metric, for both the company's recently completed quarter and year-to-date, shows shrinking year-over-year numbers. In Sears Hometown and Outlets' fiscal third quarter, operating income declined 7% to $13.2 million, while adjusted EBITDA plummeted down 16%. Same-store sales dragged down a not-too-horrendous 2%, and the bottom line came in at just $0.33 per share -- five cents lower than the prior year's number.

Year-to-date, things looked even worse. Operating income and adjusted EBITDA were both down 35%, while net income has shrunk by 37%. Same-store sales are just down just under the 2% mark.

The one positive figure, as has often been the case, was home appliance sales. Lawn and garden, apparel, and consumer electronics declined further. Consumer electronics, it should be pointed out, is a segment that management had previously decided to leave, so the declines are only to be expected. In the long run, the unappealing (and soon to be defunct) consumer electronics business is a good thing to put in the rearview as the company focuses more on appliances, mattresses, tools, and even some furniture.

Management noted that the current quarter should be the last of material negative comparable sales figures as the company exits consumer electronics at nearly all of its Hometown stores. This should allow the more favorable segments to shine a little brighter on the income statements, starting in the first quarter of next year.

Not so sure
Investors don't love anything with the name "Sears" right now, despite continued support from professional money managers. For Sears Holdings, investors want improvement in the retail operations, even though it's not the future moneymaker for the company. At Sears Hometown and Outlets, fewer people are paying attention, and many don't know it's a separate company.

The fundamentals behind the company remain strong, but there needs to be quick and substantial improvement in sales figures for investors and analysts to regain lost confidence.

Sears Hometown and Outlet's capital-light franchise model will certainly help gross margins and create a more steady stream of cash flow for the company, but store-level performance remains crucial. For investors, its time to look forward to the first and second quarters of 2014 -- don't expect any great news before then.

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The article Sears Hometown Ends Its First Year on a Rough Note originally appeared on

Fool contributor Michael Lewis owns shares of Sears Hometown and Outlet Stores and Sears Holdings. The Motley Fool owns shares of Sears Hometown and Outlet Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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