Can Sears Hometown Outperform Sears Holdings and Best Buy?

Sears Hometown and Outlet Stores (NASDAQ: SHOS  ) will release its quarterly report on Friday. Investors have been disheartened to see the appliance and home-furnishings retailer's stock fall back to its IPO levels after a big run higher earlier in the year. With former parent Sears Holdings (NASDAQ: SHLD  ) having seen its stock largely hold its own, and with Best Buy (NYSE: BBY  ) soaring on rebound hopes, the question for Sears Hometown is whether it can get earnings moving back in the right direction.

Sears Hometown represents one of many initiatives from Sears Holdings to spin off assets it hoped would be more valuable as separate entities. It sells appliances, lawn and garden equipment, and other home improvement products, with associated services to help customers with installation and service needs. Yet even though the company has been able to keep revenue up, its net income has shrunk badly as competition from larger retailers, including both its former parent and Best Buy, weigh on its ability to produce profits. Let's take an early look at what's been happening with Sears Hometown and Outlet Stores over the past quarter and what we're likely to see in its report.

Stats on Sears Hometown

Most Recent Quarterly EPS

$0.40

Change From Year-Ago EPS

(57%)

Most Recent Quarterly Revenue

$1.16 billion

Change From Year-Ago Revenue

1.9%

Source: Yahoo! Finance.

How did Sears Hometown perform this quarter?
Sears Hometown doesn't have enough of an analyst following to have a consensus earnings forecast, but during all four of the most recent quarters, the company has posted lower earnings per share than it did in the previous year. Investors believe that's a troubling trend, and they've bid shares down another 7% since early September in response.

Sears Hometown suffered a huge setback in late August when it reported its July quarter earnings. Even though the company produced same-store sales gains of 1.4%, none of its revenue growth made it to Sears Hometown's bottom line, with net income falling by more than half. Looking beyond the headline numbers, the company's Outlet division actually posted strong comps of more than 8%, but its Hometown stores saw a small decline in same-store sales, weighing down the rest of the company. Sales in home and garden did well, and even appliance sales held up, even with full-service Sears stores and Best Buy competing hard in that segment.

Despite its poor earnings trends, Sears Hometown has some positives that could help it recover. With a supply agreement with Sears Holdings, Sears Hometown can ensure its ability to return unsold inventory to Sears Holdings at cost, taking away the risk of having to discount unwanted Sears merchandise in order to get it off the showroom floor. At the same time, franchising arrangements for its hardware-focused stores could help provide regular cash flows without the full risk that company-owned stores present, especially if its newer small-store neighborhood format becomes popular.

Some of the negative sentiment about Sears Hometown might come from other failed spinoffs from Sears Holdings. Orchard Supply Hardware ended up filing for bankruptcy after being overwhelmed by massive debt and its inability to compete against home-improvement giants. By contrast, Sears Hometown has almost no debt, putting it in a much better position to thrive if it can handle its competitors.

In the Sears Hometown earnings report, watch to see if the company can finally get its net income aligned better with its revenue. With so much promise, Sears Hometown could actually end up benefiting from the challenges that its former parent has had on the retail front, winning its lucrative appliance business almost by default and thereby putting it in a much better position against Best Buy and other competitors..

Is smaller better in retail?
Sears Hometown hopes that the move to smaller formats will help it compete better against some of its rivals. But other stores are making more dramatic moves. To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Click here to add Sears Hometown to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2753434, ~/Articles/ArticleHandler.aspx, 4/19/2014 4:12:38 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement