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
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