Revisiting Sears Spin-offs

I have written a couple of articles on the two Sears (SHLD) spin-offs, Orchard Supply Hardware (OSH) and Sears Hometown and Outlet (SHOS). I have received a lot of inquiry on what I thought of both of these companies after third quarter results came out. So, here is my analysis.

Orchard Supply Hardware

I am still short OSH. It has been one of my profitable investments this year. I shorted a little below $14 and covered around $8.50 before the third quarter results came out. Then I shorted again after the results at $7.30.

My original thesis still remains intact:

  • Small fish in a very competitive marketplace.
  • Still struggling to maintain financial covenants.
  • Unprofitable.

Third quarter results were horrible. Same store sales were essentially flat. However, margins were horrible even if you excluded the $72 million impairment charge. The company is not in compliance with its financial convenants and will not be in February, the next measurement date. 

The company is trying to turn it around by remodeling existing stores. However, this process is slow and a majority of the stores are still old.

The only thing that can save this company is the life in the housing economy. But as the third quarter results showed, this help has not been enough.

I plan to keep this short because I don’t believe this company has a future.

Sears Hometown and Outlet

I have a small short position in SHOS, but I am not as confident about this short as OSH. There are some good things about this company.

  • It is profitable.
  • It trades at a decent valuation. Around 10 times this years earnings.

The main reason for my short is that I still have not seen top line growth. As I mentioned in my previous article, the profitability improvement is due to margin improvements by cutting costs and converting to franchise stores. That can only last for so long.  

I don’t have much hope for Sears Hometown, but Sears Outlet is the wild card. It has seen strong same store sales growth over the last couple of years and has a unique business model. However, in the third quarter it was Sears Hometown with strong same store sales numbers and Sears Outlet with negative same store sales numbers.

I am curious to see how the numbers compare in the first quarter of 2013 before I decided to close my short or increase it.

I will keep you guys updated.

Disclosure: I am short OSH and SHOS

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