Why Sears Hometown and Outlet Shares Tumbled

Why Sears Hometown and Outlet Shares Tumbled

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Sears Hometown and Outlet Stores were hurting today, falling as much as 18% today after reporting earnings.

So what: The 2012 spinoff from Sears Holdings delivered earnings per share of $0.40, down 56% from $0.91. Estimates were unavailable, but based on the market's reaction to the news, it was clearly disappointed. There were some positive signs, though, as revenue inched up 1.9% on a 1.4% comparable sales gain, and same-store sales were particularly strong in its Outlet segment, where they grew 8.2%. Gross margin dropped 220 points, to 22.6%, due, in part, to lower prices, and gross profit actually fell by $12 million despite the increase in sales, leading to the reduced net income.

Now what: Despite the sharp drop in profits, management took the surprising step of authorizing a $25-million share buyback program, following in the misguided footsteps of its former parent. Share buybacks are generally reserved for stable, profitable companies whose shares are undervalued. Sears Hometown and Outlet, meanwhile, just saw its share price drop nearly 20%, and profits were slashed in half. The buyback program doesn't obligate the company to repurchase shares, but it seems like evidence that its mind is in the wrong place. Like its former parent, this aging retailer has enough obstacles without contributing to its own demise, as shoppers go online and visit more modern chains. Management should be spending its cash on revamping operations, not on financial shenanigans that do nothing for its long-term positioning.

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The article Why Sears Hometown and Outlet Shares Tumbled originally appeared on Fool.com.

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