After Chilly Earnings, Sears Hometown and Outlet Stores Inc (SHOS) Is Back on Sale

Sears Hometown and Outlet Stores Inc (NASDAQ:SHOS), the recent spinoff of Sears Holdings Corp (NASDAQ:SHLD) and one of my top picks for a retail play, delivered a softer-than-expected earnings report that has sent the stock down more than 18 points in five days of trading. I believe the short-term discount gives investors a little bit more time to pick up this outstanding operation at a price materially below its intrinsic value. With the recent earnings release in mind, here is what you need to know about Sears Hometown and Outlet Stores Inc (NASDAQ:SHOS).

Earnings recap
Bringing the stock down substantially after a healthy two-week run-up, Sears Hometown and Outlet Stores Inc (NASDAQ:SHOS) reported a 28% decrease ($24.7 million versus $34.5 million) in operating income when compared to the prior year’s quarter. Net income fell in line, down to $15 million, or $0.65 per share, from $20.6 million or $0.89 per share. EBITDA fell slightly less, down 26% to $27.1 million.

Same-store sales fell a tough 5% year over year.

It was the Hometown stores that led the drop, with comparable sales down nearly 7%, compared to a 1.2% drop in the Outlet division. Management attributes the big drop to the lawn and garden section, which was affected by colder weather delaying the spring and summer seasons. If you remove the lawn and garden section from the equation, same-store sales actually rose 1.4%. How could one part of the stores hurt the company so much? Lawn and garden sales dropped 45% due to the weather.

Clearly, this is a one-time event (insert global warming comment here) that the Street mispriced as a lasting effect on the health of the business.

Gross margins ticked up slightly, from 25.6% to 25.7%, as predicted, due to the ongoing conversion of company-owned stores to franchised ones. As the separation from its parent company continues to move into the rearview mirror, expect these margins to expand more materially.

Summer sale
As I have outlined in numerous articles now, Sears Hometown and Outlet Stores Inc (NASDAQ:SHOS) and Outlets is not its parent, Sears Holdings Corp (NASDAQ:SHLD). It is an attractive, growing retail operation with strong-performing (see lawn and garden excluding sales figures) segments, even amid a still-tepid retail environment.

As part of Sears Holdings CEO Eddie Lampert’s strategy to unlock shareholder value, Sears Hometown and Outlet Stores Inc (NASDAQ:SHOS) and Outlets is a collection of great brands (Kenmore, DieHard Batteries, etc.) in much more appealing store formats than the traditional department store (the Sears you know and love).