It’s an old story – when will Edward S. Lampert, genius hedge fund manager, finally figure out how to create value out of the cobbled together pile of assets known as Sears Holdings (SHLD)? Recently, Lampert has gone from lackadaisical to peripatetic, spinning off Orchard Supply (OSH), Sears Hometown And Outlets (SHOS), and part of [...]
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Shareholders of Sears Holdings(SHLD) have been once again reminded that entropy is inexorably increasing, at least in their brokerage accounts. Less than a year ago they had only Sears, but since then, they have received in three separate transactions, Orchard Supply Hardware common (OSH) and preferred (OSHSP), warrants to buy Sears Hometown and Outlets (SHOS), [...]
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It’s been a few quarters since Orchard Supply Hardware(OSH) was spun off from Sears Holdings(SHLD). The stock continues to trade at similar levels to where we felt it was a reasonable buy soon after its spinoff. Yesterday, the company issued a brief press release which contained three critical pieces of information.
Comparable Store Sales were up 0.9% – kind of: The company “reported an increase in comparable store sales(1) for the second quarter ended July 28, 2012 of 0.9%. Preliminary net sales were $194.0 million compared to $196.4 million in the second quarter of fiscal 2011.” Wait! What’s that little ’1′ next to comparable store sales. Oh, a footnote! Let’s see what it says.
Comparable store sales are calculated using sales of stores open at least twelve months and exclude E-commerce. Additionally, and because of an agreement the Company entered into with Sears Holdings Corporation on October 26, 2011 whereby the Company now sells appliances on a consignment basis and receives commission income for sales of such appliances and related protection agreements, comparable store sales also exclude approximately $4.5 million of net sales of Sears branded appliances in the second quarter of fiscal 2011 and approximately $0.5 million of commission income in the second quarter of fiscal 2012.
There we go. Excludes internet sales and appliance sales. It’s good that the company was able to reverse the trend of sales declines by adjusting the bar a bit, but what else did they have to do to show this very modest improvement?
Margins were compressed in the second quarter: Oh, here we are. CEO Mark Baker tells us how he grew comp store sales that paltry 0.9%, “the environment remains challenging and our business was more promotional than anticipated, which will likely impact margins in the second quarter.” No word on how big the margin impact is, but don’t expect record earnings this quarter.
More real estate sales: Buried deep in the press release the company shares the most material piece. They have sold six store properties to a REIT and leased them back, in a deal that closed on July 27. They received $43 million for these, plus the new landlord has given an undisclosed amount of allowances for improving the properties. $33 million of the proceeds have been used to pay down other debt and the company did not say what will be done with the remaining $10 million. Orchard has been a serial seller of real estate, but the amount of monetizable real estate is dwindling. Going forward the company will have to create positive cash flow from its operating business – something it has not yet demonstrated it can do consistently.
We continue to hold this stock, but are increasingly dissatisfied with management’s performance.
Disclosure: The author owns shares of OSH and SHLD
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The Mercury News interviewed Marc Baker, CEO of Orchard Supply Hardware(OSH), which was recently spun off
from Sears Holdings(SHLD). There’s nothing really new here, but it’s always interesting to see how a CEO views and spins his company. Some highlights:
Q Where does Orchard fall in terms of the hardware store landscape?
A We think of ourselves as a big small box rather than a small big box. The distinction is we don’t carry all the (lumber, dry wall and other commodity building materials) found in big-box stores, but we are very deep in all the repair products.
Q Do you have a person you see as your typical customer?
A We see a lot of customers, whether they are young or middle-aged, they are looking for a part they need. They have a faucet that leaks. They have a hinge that doesn’t work. They are coming here seeking answers and products.
Q What area do like to open new stores in?
A We like higher-density areas with modest homes that need repair.
Q What is the average time a worker has been with the company?
A Well over 10 years. It’s very impressive. There is a culture at Orchard that goes back. It started here in San Jose and it’s the only home center, big hardware store, that exists like it does today. And it’s because of the people. A lot of the experience, we think, is the service you get in our store, where you can want that one little item and somebody knows what that one little item is.
…
Q What was it like coming to Orchard from Home Depot?
A It’s been 10 years since I left Home Depot, but I can tell you that the cultures are not that different. They are both companies that care about the success of the business and their relationships with the customers.
FIVE facts
ABOUT MARK BAKER
1. Flies a Cessna Caravan to visit Orchard stores.
2. Owns a Harley-Davidson Road King motorcycle.
3. Does his own home repair jobs, and has built three homes from the ground up.
4. Last book: “Steve Jobs.”
5. Last movie: “Mission Impossible.”
Disclosure: Author owns shares on OSH, OSHSP and SHLD
Local Paper Interviews Marc Baker, CEO of Orchard Supply Hardware is a post from Stock Spinoffs – Finding Value in Special Situations. All Rights Reserved.
We’ve written before about the puzzle of Orchard Supply Hardware Preferred(OSHSP). This preferred issue was spun off from Sears Holdings(SHLD) together with Orchard Supply Common(OSH). While we’re still not sure how to value them, thanks to Laurie Frederiksen, COO of bivio.com for pointing out some tricky tax treatment for their distribution.
It seems that unlike most spinoffs which are tax-free- Rouse(RSE) is another recent exception – the preferred shares are subject to “Section 306″ and are treated as dividends. The fair market value of the preferred stock on the day of distribution(with some latitude here as the stock moved quite a bit) is treated as dividend income and adjusts cost basis on the preferred downward. Subsequent sales can be subject to an additional capital gain, though no losses may be taken. Investors are likely to have had some of this stock sold and received cash in lieu of fractional shares- this will trigger complex tax issues for an insignificant amount of money. Unfortunately, the IRS considers all income to be material, resulting in high overhead for small investors struggling to figure this all out.
Disclosure: Author owns OSH, SHLD and OSHSP
Tricky Tax Treatment For Orchard Supply Preferred Shares is a post from Stock Spinoffs – Finding Value in Special Situations. All Rights Reserved.
In a short clip, without giving much detail, Austin Smith mentions he likes the prospects of Orchard Supply(OSH), recently spun off of Sears Holdings(SHLD). Smith likes management, feels that they’re not competing with Home
Depot(HD) and Lowes(LOW) and that Sears may go bankrupt. Like many Fool articles, there’s not a lot of content here, and it seems largely designed to promote the “free” report below.
Disclosure: The author owns share in OSH and SHLD
Motley Fool’s Austin Smith Likes Orchard Supply is a post from Stock Spinoffs – Finding Value in Special Situations. All Rights Reserved.
It’s been a pretty bad first week for Orchard Supply(OSH). Since beginning trading on Tuesday following its spin off from Sears Holdings(SHLD) at $25 with a quick rise to $60, the stock has moved almost straight down to its current price of $15.62. Yesterday, the company released some preliminary numbers which show some encouraging trends, but still couldn’t stop the bleeding as it’s down over 6% today. The company is basically break-even on a cashflow basis, is showing positive comp sales, is opening and remodeling stores, and trades for under 3 8(UPDATE: Larry pointed out we inadvertently used market cap rather than enterprise value) times EBITDA. The company also posted a presentation which provides more detail and before/after pictures of store remodels. We found the presentation to be informative and it gave us confidence in the company’s plan. We found the graph of same store sales comparisons informative- the company has arrested and reversed a long pattern of declines. We believe many Sears holders are selling small lots because this does not fit with their original investment and thus driving the price down. We are looking to buy more ourselves in the coming days at these prices or lower. From the press release:
SAN JOSE, Calif.–(BUSINESS WIRE)– Orchard Supply Hardware Stores Corporation, a specialty retailer focused on the consumer segment of the home improvement market, today announced expected financial results for the fiscal year ending January 28, 2012. The Company expects to report final financial results for the period in April 2012. On January 3, 2012, the Company began trading on the Nasdaq Capital Market following its spin-off from Sears Holdings Corporation on December 30, 2011.
Expected Fiscal Year 2011 Results
- Net sales for the fiscal year 2011 ending January 28, 2012 are expected to be in the range of $659.2 to $663.1 million.
- Fiscal 2011 comparable store sales(1) are expected to be in the range of negative 0.3% to negative 0.9%. The Company expects to generate positive comparable store sales for the fourth quarter of fiscal 2011, marking the second consecutive quarter of positive comparable store sales.
- Net loss for fiscal 2011 is expected to be in the range of $15.0 to $17.0 million and includes a pre-tax, non-cash loss on sale of approximately $15 million related to sale-leaseback transactions. Fiscal 2011 net loss includes increased interest expense of approximately $0.4 million from the December 2011 amendments to the Company’s financing arrangements. The expected annual increase in interest expense from the amendments to the Company’s financing arrangements is approximately $4.5 million.
- Fiscal 2011 Non-GAAP Adjusted EBITDA (see reconciliation of Non-GAAP Adjusted EBITDA to net loss, below) is expected to be in the range of $40.6 to $44.0 million. Fiscal 2011 Adjusted EBITDA includes approximately $2 million of estimated annual costs of approximately $14.0 to $18.0 million associated with the Company’s transition to an independent, publicly traded company and with the Company’s recent actions to help improve its financial position through recent sale-leaseback transactions. The estimated costs are outlined below and are also discussed in the Company’s Form 8-K filed with the Securities and Exchange Commission on December 29, 2011.
- Annual rent expense for five sale-leaseback properties is expected to be approximately $5.0 million. Projected 2011 Adjusted EBITDA includes approximately $0.5 million of rent associated with sale-leaseback properties.
- Annual operating costs associated with the Company’s transition to a publicly-traded company independent from Sears Holdings Corporation are estimated to be $5.0 to $8.0 million. Projected 2011 Adjusted EBITDA includes approximately $1.5 million of estimated transition-related expenses.
- Projected 2011 Adjusted EBITDA does not include any incentive compensation expense as performance targets were not achieved. The Company anticipates finalizing an incentive plan for fiscal 2012, which is expected to have an annual expense of $4.0 to $5.0 million.
“We are pleased with the comp store sales momentum we’re beginning to generate,” said Mark Baker, President and CEO. “Our new strategies are gaining traction, marked by effective inventory management, compelling product and merchandising, and a more cohesive and streamlined presentation in the stores.”
“In preparation for the spin-off, we incurred additional costs associated with establishing and expanding our corporate support infrastructure and in strengthening our financial position by renegotiating our financing arrangements and monetizing Company-owned store properties through sale-leaseback transactions. These initiatives have helped us start to lay the foundation to develop and evolve the Orchard brand, but have adversely affected our short-term profitability.”
Fiscal 2012 Store Opening Plans and Comparable Store Sales Expectation
The Company expects to achieve positive comparable store sales(1) for the 2012 fiscal year ending February 2, 2013. Additionally, the Company plans to open up to three new stores and remodel up to six locations. The Company’s remodel plans include three stores involved in the sale-leaseback transactions completed during the fourth quarter of fiscal 2011, which will be primarily funded by tenant improvement allowances.
Mr. Baker continued, “We’re focused on five key priorities to drive improvement in the business. These include projecting a consistent and compelling brand identity, driving sales through new merchandising and marketing initiatives, improving operational efficiency, aligning resources and talent, and continuing to strengthen our financial position. While we have made progress, we believe there is a significant opportunity to deliver long-term growth and create shareholder value as we leverage Orchard’s 80-year brand history and execute on our strategic plan.”
“We have an exceptional team in place with deep experience in the home improvement and specialty retail sectors, and look forward to keeping you updated on our progress as we begin our first year as a publicly traded company. A presentation will be posted today on our website to help our new shareholders understand more about our Company,” concluded Mr. Baker.
Disclosure: The author holds shares in SHLD and OSH and intends to purchase more OSH in the next 72 hours
Orchard Supply Hardware Stock, Spun Off From Sears, In Tail Spin- Time To Buy is a post from Stock Spinoffs – Finding Value in Special Situations. All Rights Reserved.
Orchard Supply Hardware Common(OSH) and preferred(OSHSP) began trading this morning, following their spinoff from Sears Holdings(SHLD). The newly independent company issued a press release to mark the occasion:
Orchard Supply Hardware Stores Corporation, a specialty retailer serving homeowners with repair, maintenance and improvement needs, announced that its spin-off from Sears Holdings Corporation was completed at 11:59 p.m. EST on December 30, 2011. Trading of Orchard’s Class A Common Stock will begin today on the Nasdaq Capital Market under the symbol “OSH”. Orchard also has Series A Preferred Stock that will be quoted on the OTCQB under the symbol “OSHSP”.
Mark Baker, President and Chief Executive Officer of Orchard commented on the spin-off, “We look forward to Orchard being an independent publicly traded company. During the past year, our team has made significant progress toward developing a differentiated home improvement retail experience. We’re implementing new customer service initiatives and merchandising strategies, and have begun transitioning our stores to a new updated and customer-friendly format that more effectively showcases our merchandise and service offerings. We believe these actions will enable us to leverage the 80-year history of the Orchard brand in order to drive long-term growth and build value for our shareholders.”
Baker continued, “We are thankful for the dedication and hard work of Orchard’s operating team, associates and store employees. We have a remarkable company culture and a talented group of people who are committed to building on Orchard’s long history of superior customer service, selection and convenience.”
In early trading, OSH has settled in near $36 after initial swings between $22.03 and $60. OSHSP is at $.47, trading in a much tighter range of $.45 to $.50. We previously spoke of the difficulty of valuing the preferred stock it appears that the market has so far accorded little value to it. OSH, on the other hand is initially trading above our expectations, though much lower than the value implied by Morningstar’s note.
Disclosure: The author owns shares in SHLD, OSH and OSHSP
Orchard Supply Hardware Common And Preferred Begin Trading Today is a post from Stock Spinoffs – Finding Value in Special Situations. All Rights Reserved.
Sears Holdings(SHLD) issued a press release this morning announcing the completion of the Orchard Supply Hardware(OSH) spinoff.
Sears Holdings Corporation (“Holdings,” “we” or “our”) today announced that it has completed its previously announced spin-off of its interest in Orchard Supply Hardware Stores Corporation (“Orchard”). Orchard is now independent from Holdings and its Class A Common Stock will begin trading on Jan. 3, 2012 on the NASDAQ Capital Market under the ticker symbol “OSH,” and Orchard’s Series A Preferred Stock will be quoted on the OTCQB. Holdings will continue to be listed on the NASDAQ Global Select Market under the symbol “SHLD.”
The spin-off was effective at 11:59 p.m. EST on Dec. 30 , 2011. Holdings’ shareholders of record as of the close of business on Dec. 16, 2011 , the record date for the spin-off, received shares of Orchard Class A Common Stock and Orchard Series A Preferred Stock, on a pro-rata basis, that were held by Holdings immediately prior to the spin-off.
Our shares have already shown up in our brokerage account under their CUSIDs, with no value attached as they haven’t traded yet. It will be interesting to see where they go when they open on Tuesday.
Disclosure: The author owns shares in SHLD, OSH and OSH preferred
Sears Holdings Completes Orchard Supply Hardware Spinoff is a post from Stock Spinoffs – Finding Value in Special Situations. All Rights Reserved.
A recent report on Sears Holdings(SHLD) by Morningstar analyst Paul Swinand lowers their fair value estimate for Sears by $10 per share due to the Orchard Supply(OSH) spinoff. Given the distribution ratio of 1 share of Orchard Supply for approximately every 22 of Sears, and Sears’ 80% ownership in Orchard Supply, this would seem to [...]