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Long Sears Hometown and Outlet Stores
Long Sears Hometown and Outlet Stores
Long Sears Hometown and Outlet Stores
Long Sears Hometown and Outlet Stores
Long Sears Hometown and Outlet Stores
Long Sears Hometown and Outlet Stores
Long Sears Hometown and Outlet Stores
Long Sears Hometown and Outlet Stores
Long Sears Hometown and Outlet Stores
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Long Sears Hometown and Outlet Stores

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  • 1. 1 Long Sears Hometown and Outlet Stores (SHOS) March 30th 2014 Tianyou Gu Sagehen Capital Management
  • 2. 2 Sears Hometown & Outlet Stores Overview  SHOS, traded at Nasdaq, $23.6, Market Cap $537 Million  Spinoff from Sears Holdings Corporation in late 2012  Sells hardware, home appliances, lawn and garden equipment – 4th largest retailer of home appliances, 1,200 stores across 50 US states – 2013 Revenue of $2.45 Billion
  • 3. 3 Why Buy SHOS?  Cheap and Undercovered Spinoff – No analyst coverage – Valuation in the Range of $32 - $48 – Has declined 60% from its high – Insiders purchased at much higher prices  Core Strengths and Superior Business Model – Keeps the core strength of hardware and appliance brands from Sears – Expands in a “capital-light” franchise operating model  Favorable Tailwinds – Benefactor of Sears Holdings store closings – US housing recovery, online platform expansion  Shareholder Friendly – Created specifically to unlock value from Sears Holdings by hedge fund manager Eddie Lampert, who’s currently the chairman – Share buybacks
  • 4. 4 Superior Operating Model  Dealer/Franchise Model – SHOS collects a royalty for the use of the Sears trademarks meanwhile offloading the capital-intensive parts of managing a retail operation to its dealers/ franchisees – The inventory is provided by Sears Holdings and SHOS receives a percentage of profit from sold goods  Benefits from Franchise Model – Capital light; high margin royalty income – Effective than centralized model – Asymmetric risk/reward  Profitable and growing online business platforms  Favorable Alliance with Sears Holdings – Rapidly expanding membership rewards program operated by Sears Holdings Corporation – SHOP YOUR WAY™ – Delivery, installation and product service capabilities through alliance with Sears Holdings
  • 5. 5 Competition  Competitors: Home Depot, Lowe’s, BestBuy, Kohl’s, Walmart, Amazon  Safe from competitive threats due to different product and geographic focus – Locate stores in more rural settings and smaller markets, generally in areas that are too small to attract the Home Depot and Lowe’s – SHOS is isolated from competition from Amazon and Wal-Mart given the types of items it sells: consumer durables, tools and lawn & garden equipment
  • 6. 6 Valuation  $23 is at bottom of 52-Week Range (between $20.5 and $57.5)  Comparable Implies $32 – $42 – Using Implied EV/EBITDA of 7.5x – 8.5x and P/E of 15x – 18x  DCF Implies $36 - $48, under Conservative Assumptions – 25% - 28% gross margins (LTM 24.5%) and 4 - 5% net profit margins (LTM 3.2%) – These net profit margins are less than the 4 and 6% generated by Lowe's and Home Depot, respectively – Growth rate 2.5% (historically 1.5%) in next 5 years, then 1.5% terminal growth rate – Stable capital structure  Insider’s Buying at $30 – 40 in Past Twelve Months EV/Revenues EV/EBITDA EV/EBIT Forward P/E Growth Gross Margin EBITDA Margin Net Income Margin SHOS 0.2x 7.0x 7.9x 13.0x 3.20% 25.35% 2.82% 1.47% BestBuy 0.2x 4.0x 6.5x 16.8x 1.20% 22.90% 3.25% 1.30% Lowe's 1.1x 10.6x 10.2x 15.40x 2.50% 32.44% 10.69% 4.28% Home Depot 1.6x 11.4x 13.6x 21.20x 5.40% 32.70% 13.90% 6.80% Valuation Multiples Operating Ratios
  • 7. 7 Tailwinds/Catalysts  Benefactor of Sears Holdings store closings – As Sears executes its transition plan (closing department stores and switching channels to online and SHOS), more retail flow will be directed to SHOS – This creates significant, long-term revenue growth opportunity  Improving 2014 financials – Fiscal 2013 results were significantly below expectation, caused by unusually severe winter weather in many of trade areas and disappointing holiday sales of important Kenmore appliances and Craftsman tools – Positions favorably for 2014 as SHOS opened 30 stores last year, with half of those openings occurring in January – Double-digit year-on-year growth in both online and multichannel sales – Product mix shifts towards high-margin tools from home electronics  Real estate market recovery  Rural market expansion, Online platform growth  Share buyback plans
  • 8. 8 Risks  The U.S. real estate market reverses its upward trend – Clean balance sheet protects the company from severe hits  Continued lack of coverage from the investment industry; stays undervalued in the near term – Tailwinds – Already at bottom of trading range, very little downside risk  New franchises may expand at a slower speed  Bottom line: majority shareholder is a hedge fund manager (Eddie Lambert), who will maximize shareholder value
  • 9. 9 Recommendation  Buy 1000 Shares of SHOS worth $2,3600  Adjust position based on earnings calls (Q1, 2014 comes out in three months)

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