Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Sears Hometown and Outlets Quietly Improves

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Sears Hometown and Outlet Stores (NASDAQ: SHOS  ) has been plagued over the last several months by a variety of factors. For one, the stock shares a name with one of the most polarizing (though largely negatively viewed) public companies on the market -- Sears Holdings (NASDAQ: SHLD  ) . Sears Hometown and Outlets has also had a sluggish transformation, erasing much of the optimism that brought the stock to a near double from its spinoff price. Recent results don't show much in the way of improvement, but investors who read between the lines will see that the company's previously heralded operating advantages are indeed working. Here's what investors need to know.

The year in review
For a company whose stock shed nearly 40% of its value in the past 12 months, Sears Hometown and Outlets' business has plenty to rally behind. In the past year, sales fell slightly more than 1%. Driving that decline was a systemwide same-store sales decline of 2.2%. There are a couple of things to keep in mind here, though. For one, Sears Hometown stores has exited the consumer electronics business -- a wise move. That puts the year-over-year comps at an immediate disadvantage. Excluding consumer electronics, Sears Hometown sales declined 1.5%. Outlet sales increased 1.4%, giving a systemwide net decline of 0.8%.

For a year in which numerous retailers have struggled with a stingy consumer and extreme weather across the country, these numbers really aren't bad.

The business model is working. One of the best parts of Sears Hometown and Outlets is its franchise-based store footprint. As the stores have largely been converted to franchise-owned locations, initial franchise fees have gone from $11.2 million to $25.6 million. Major appliances, the best segment for both businesses, are performing well with positive comps.

Appliances are a great deal for the company because it has a beneficial supplier arrangement with its former parent, Sears Holdings. Sears Hometown and Outlets is able to unload its unsalable appliances (defected, damaged, etc.) back to the company at cost.

For the year, operating and net income took substantial hits. Aside from the decreased sales figures, this is due to some short-term margin pressure. Sears Hometown and Outlets' franchise conversion process costs money up front (largely offset by franchise fees but nonetheless affecting margins), but these factors should subside in coming periods. As the business transformation is completed and the transition costs go into the rearview, expect the continuing operations to shine a bit brighter.

Made for shareholders
Sears CEO Eddie Lampert has strategically placed the company's best assets into separate businesses (most recently including Lands' End) so as to allow those assets to shine, to allow investors to pick and choose which parts of Sears they like, and to give greater focus on the core Sears Holdings businesses. Sears Hometown and Outlets is one of these bright spots. The company sells a variety of high-performing brands such as Kenmore, Craftsman, and DieHard.

The business hasn't performed as strongly as expected, but the long-term fundamentals remain strong here. The stock recovered from its basement-level lows, but substantial upside exists for the long-term-oriented investor. Keep an eye on this underfollowed, unloved retailer. It may surprise you.

Three stocks to own for the rest of your life
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal "The Motley Fool's 3 Stocks to Own Forever." These picks are free today! Just click here now to uncover the three companies we love. 

Read/Post Comments (0) | Recommend This Article (6)

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.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2905382, ~/Articles/ArticleHandler.aspx, 8/27/2015 5:28:33 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...

Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

Today's Market

updated Moments ago Sponsored by:
DOW 16,654.77 369.26 2.27%
S&P 500 1,987.66 47.15 2.43%
NASD 4,812.71 115.17 2.45%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/27/2015 3:59 PM
SHLD $26.93 Up +2.93 +12.21%
Sears Holdings CAPS Rating: *
SHOS $7.21 Up +0.48 +7.13%
Sears Hometown and… CAPS Rating: **