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