SEARS HOMETOWN & OUTLET STORES, INC. - FORM 10-Q/A - September 7, 2017

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EX-32 - EXHIBIT 32 - SEARS HOMETOWN & OUTLET STORES, INC.shos-072917xex32xa.htm
EX-31.2 - EXHIBIT 31.2 - SEARS HOMETOWN & OUTLET STORES, INC.shos-072917xex312xa.htm
EX-31.1 - EXHIBIT 31.1 - SEARS HOMETOWN & OUTLET STORES, INC.shos-072917xex311xa.htm
EX-10.4 - EXHIBIT 10.4 - SEARS HOMETOWN & OUTLET STORES, INC.shos-072917xex104.htm
EX-10.3 - EXHIBIT 10.3 - SEARS HOMETOWN & OUTLET STORES, INC.shos-072917xex103.htm
EX-10.2 - EXHIBIT 10.2 - SEARS HOMETOWN & OUTLET STORES, INC.shos-072917xex102.htm
EX-10.1 - EXHIBIT 10.1 - SEARS HOMETOWN & OUTLET STORES, INC.shos-072917xex101.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
_______________________________________________
FORM 10-Q/A
(Amendment No. 1)
_______________________________________________ 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED JULY 29, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-35641 
_______________________________________________
SEARS HOMETOWN AND OUTLET STORES, INC.
(Exact Name of Registrant as Specified in Its Charter)
_______________________________________________
DELAWARE
 
80-0808358
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
5500 TRILLIUM BOULEVARD, SUITE 501 HOFFMAN ESTATES, ILLINOIS
 
60192
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (847) 286-7000 
_______________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
¨ 
  
Accelerated filer
 
ý
 
 
 
 
Non-accelerated filer (Do not check if a smaller reporting company)
 
                     ¨ 

  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨




If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of September 7, 2017 the registrant had 22,702,132 shares of common stock, par value $0.01 per share, outstanding.
 


EXPLANATORY NOTE

This Form 10-Q/A (Amendment No. 1) (this "Amended Report") is being filed to correct a formulaic error in the Company's Quarterly Report on Form 10-Q for the period ended July 29, 2017 filed with the Securities and Exchange Commission on September 6, 2017 (the "Original Report").

In the Original Report, Part I, Item 1, Note 12 - STORE CLOSING CHARGES to the Condensed Consolidated Financial Statements included a rollforward table of closed store reserves for the first and second quarters of 2017. The Company has determined that the ending balances of the closed store reserves as of April 28, 2017 and July 29, 2017 as detailed in the table were incorrect due to a formulaic error. As a result, Note 12 - STORE CLOSING CHARGES has been revised (and follows below) to correct the ending balances of the closed store reserves as of April 28, 2017 and July 29, 2017. The Company does not believe that the Company’s Condensed Consolidated Financial Statements included in the Original Report were materially misstated as a result of the formulaic error.

In accordance with Rule 12b-15 of the Securities and Exchange Commission this Amended Report contains only the following: (1) the cover page; (2) Item 1 of Part I, of which only Note 12 is being amended; and (3) Item 6 of Part II to reflect updated Exhibits 31.1, 31.2, and 32 to this Amended Report. This Amended Report does not reflect events occurring after the filing of the Original Report and does not modify or update the disclosures therein other than the changes as noted above. Accordingly, this Amended Report should be read in conjunction with the Original Report.




SEARS HOMETOWN AND OUTLET STORES, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 and 26 Weeks Ended July 29, 2017 and July 30, 2016



SEARS HOMETOWN AND OUTLET STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
 
 
 
13 Weeks Ended
 
26 Weeks Ended
Thousands, except per share amounts
 
July 29, 2017
 
July 30, 2016
 
July 29, 2017
 
July 30, 2016
NET SALES
 
$
489,985

 
$
556,388

 
$
938,218

 
$
1,093,369

COSTS AND EXPENSES
 
 
 
 
 
 
 
 
Cost of sales and occupancy
 
397,637

 
441,508

 
752,115

 
862,298

Selling and administrative
 
115,208

 
118,808

 
226,089

 
236,800

Depreciation and amortization
 
4,704

 
3,293

 
6,908

 
6,550

Gain on sale of assets
 
—

 
(25,269
)
 
—

 
(25,269
)
Total costs and expenses
 
517,549

 
538,340

 
985,112

 
1,080,379

Operating (loss) income
 
(27,564
)
 
18,048

 
(46,894
)
 
12,990

Interest expense
 
(1,874
)
 
(886
)
 
(3,465
)
 
(1,652
)
Other income
 
231

 
378

 
550

 
775

(Loss) earnings before income taxes
 
(29,207
)
 
17,540

 
(49,809
)
 
12,113

Income tax expense
 
(239
)
 
(6,898
)
 
(1,071
)
 
(5,042
)
NET (LOSS) INCOME
 
$
(29,446
)
 
$
10,642

 
$
(50,880
)
 
$
7,071

 
 
 
 
 
 
 
 
 
NET (LOSS) INCOME PER COMMON SHARE ATTRIBUTABLE TO STOCKHOLDERS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic:
 
$
(1.30
)
 
$
0.47

 
$
(2.24
)
 
$
0.31

Diluted:
 
$
(1.30
)
 
$
0.47

 
$
(2.24
)
 
$
0.31

 
 
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
 
22,702

 
22,696

 
22,702

 
22,681

Diluted weighted average common shares outstanding
 
22,702

 
22,699

 
22,702

 
22,682

See Notes to Condensed Consolidated Financial Statements.


1

SEARS HOMETOWN AND OUTLET STORES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

Thousands
 
July 29, 2017
 
July 30, 2016
 
January 28, 2017
ASSETS
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 
$
18,287

 
$
18,690

 
$
14,104

Accounts and franchisee receivables, net
 
10,920

 
17,017

 
11,448

Merchandise inventories
 
356,893

 
427,234

 
373,815

Prepaid expenses and other current assets
 
9,995

 
18,562

 
9,370

Total current assets
 
396,095

 
481,503

 
408,737

PROPERTY AND EQUIPMENT, net
 
39,236

 
50,898

 
40,935

LONG-TERM DEFERRED TAXES
 
—

 
74,984

 
—

OTHER ASSETS, net
 
11,112

 
15,493

 
18,754

TOTAL ASSETS
 
$
446,443

 
$
622,878

 
$
468,426

LIABILITIES
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
 
Short-term borrowings
 
$
112,400

 
$
70,400

 
$
26,800

Payable to Sears Holdings Corporation
 
24,764

 
34,868

 
80,724

Accounts payable
 
11,408

 
38,418

 
17,853

Other current liabilities
 
75,777

 
66,667

 
70,377

Total current liabilities
 
224,349

 
210,353

 
195,754

OTHER LONG-TERM LIABILITIES
 
2,378

 
2,868

 
1,973

TOTAL LIABILITIES
 
226,727

 
213,221

 
197,727

COMMITMENTS AND CONTINGENCIES (Note 9)
 

 

 

STOCKHOLDERS' EQUITY
 
 
 
 
 
 
TOTAL STOCKHOLDERS' EQUITY
 
219,716

 
409,657

 
270,699

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
446,443

 
$
622,878

 
$
468,426

See Notes to Condensed Consolidated Financial Statements.


2

SEARS HOMETOWN AND OUTLET STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
26 Weeks Ended
Thousands
 
July 29, 2017
 
July 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net (loss) income
 
$
(50,880
)
 
$
7,071

Adjustments to reconcile net (loss) income to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
6,908

 
6,550

Share-based compensation
 
(103
)
 
77

Deferred income taxes
 
—

 
4,158

Gain on sale of assets
 
—

 
(25,269
)
Provision for losses on franchisee receivables
 
5,701

 
(483
)
Change in operating assets and liabilities:
 
 
 
 
Accounts and franchisee receivables
 
676

 
(4,165
)
Merchandise inventories
 
16,922

 
7,612

Payable to Sears Holdings Corporation
 
(55,960
)
 
(19,258
)
Accounts payable
 
(6,445
)
 
(1,344
)
Closing store accrual
 
1,714

 
105

Other operating assets and liabilities, net
 
4,781

 
3,725

Net cash used in operating activities
 
(76,686
)
 
(21,221
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Proceeds from the sale of assets
 
—

 
26,073

Purchases of property and equipment
 
(4,641
)
 
(6,838
)
Net cash (used in) provided by investing activities
 
(4,641
)
 
19,235

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Net short-term borrowings
 
85,600

 
2,100

Net (payments) borrowings of capital lease obligations
 
(90
)
 
332

Net cash provided by financing activities
 
85,510

 
2,432

NET CHANGE IN CASH AND CASH EQUIVALENTS
 
4,183

 
446

CASH AND CASH EQUIVALENTS—Beginning of period
 
14,104

 
18,244

CASH AND CASH EQUIVALENTS—End of period
 
$
18,287

 
$
18,690

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
 
Cash paid for interest
 
$
3,480

 
$
1,678

Cash paid (refunded) for income taxes
 
$
572

 
$
(1,845
)
See Notes to Condensed Consolidated Financial Statements.


3

SEARS HOMETOWN AND OUTLET STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
 
Thousands
Number of Shares of Common Stock
 
Common Stock/Par Value
 
Capital in Excess of Par Value
 
Accumulated Deficit
 
Total Stockholders' Equity
Balance at January 30, 2016
22,722

 
$
227

 
$
555,372

 
$
(153,090
)
 
$
402,509

Net income
—

 
—

 
—

 
7,071

 
7,071

Share-based compensation
(6
)
 
—

 
77

 
—

 
77

Balance at July 30, 2016
22,716

 
$
227

 
$
555,449

 
$
(146,019
)
 
$
409,657

 
 
 
 
 
 
 
 
 
 
Balance at January 28, 2017
22,716

 
$
227

 
$
555,481

 
$
(285,009
)
 
$
270,699

Net loss
—

 
—

 
—

 
(50,880
)
 
(50,880
)
Share-based compensation
(14
)
 
—

 
(103
)
 
—

 
(103
)
Balance at July 29, 2017
22,702

 
$
227

 
$
555,378

 
$
(335,889
)
 
$
219,716

See Notes to Condensed Consolidated Financial Statements.



4
SEARS HOMETOWN AND OUTLET STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1—BACKGROUND AND BASIS OF PRESENTATION
Background
Sears Hometown and Outlet Stores, Inc. is a national retailer primarily focused on selling home appliances, lawn and garden equipment, and tools. As of July 29, 2017 the Company or its dealers and franchisees operated a total of 932 stores across all 50 states and in Puerto Rico and Bermuda. In these notes and elsewhere in this Quarterly Report on Form 10-Q the terms “we,” “us,” “our,” “SHO,” and the “Company” refer to Sears Hometown and Outlet Stores, Inc. and its subsidiaries.
Our common stock trades on the NASDAQ Stock Market under the trading symbol “SHOS.”
The Separation
The Company separated from Sears Holdings Corporation (“Sears Holdings”) in October 2012 (the “Separation”). To our knowledge Sears Holdings does not own any shares of our common stock. The Company has specified rights to use the "Sears" name under a license agreement from Sears Holdings.
Basis of Presentation

These unaudited Condensed Consolidated Financial Statements include the accounts of Sears Hometown and Outlet Stores, Inc. and its subsidiaries, all of which are wholly owned. These unaudited Condensed Consolidated Financial Statements do not include all of the information and footnotes required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the 13 and 26 weeks ended July 29, 2017 are not necessarily indicative of the results that may be expected for the full fiscal year. These financial statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017 (the "2016 10-K").
We operate through two segments--our Sears Hometown segment ("Hometown") and our Sears Outlet segment ("Outlet").
Our second fiscal-quarter end is the Saturday closest to July 31 each year.  Our fiscal-year end is the Saturday closest to January 31 each year.
Reclassifications- certain amounts have been reclassified in order to conform to the current period presentation.
Variable Interest Entities and Consolidation
The Financial Accounting Standards Board ("FASB") has issued guidance on variable interest entities and consolidation for determining whether an entity is a variable interest entity ("VIE") as well as the methods permitted for determining the primary beneficiary of a variable interest entity. In addition, this guidance requires ongoing reassessments as to whether a reporting company is the primary beneficiary of a variable interest entity and disclosures regarding the reporting company’s involvement with a variable interest entity.
On an ongoing basis the Company evaluates its business relationships, such as those with its independent dealers, independent franchisees, and suppliers, to identify potential variable interest entities. Generally, these businesses either qualify for a scope exception under the consolidation guidance or, where a variable interest exists, the Company does not possess the power to direct the activities that most significantly impact the economic performance of these businesses. The Company has not consolidated any of such entities in the periods presented.
Fair Value of Financial Instruments
We determine the fair value of financial instruments in accordance with standards pertaining to fair value measurements. Such standards define fair value and establish a framework for measuring fair value under GAAP. Under fair value measurement accounting standards, fair value is considered to be the exchange price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. We report the fair value of financial assets and liabilities based on the fair value hierarchy prescribed by accounting standards for fair value measurements, which prioritizes the inputs to valuation techniques used to measure fair value into three levels, as follows:
Level 1 inputs—unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide ongoing pricing information.

5
SEARS HOMETOWN AND OUTLET STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Level 2 inputs—inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable for the asset or liability, such as interest-rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risks, and default rates.
Level 3 inputs—unobservable inputs for the asset or liability.
Cash and cash equivalents, merchandise payables, accrued expenses (level 1), accounts and franchisee notes receivable, and short-term debt (level 2) are reflected in the Condensed Consolidated Balance Sheets at cost, which approximates fair value due to the short-term nature of these instruments. For short-term debt, the variable interest rates are a significant input in our fair value assessments. The carrying value of long-term notes receivable approximates fair value.
We measure certain non-financial assets and liabilities, including long-lived assets, at fair value on a nonrecurring basis.
    
The Company was not required to measure any other significant non-financial asset or liability at fair value as of July 29, 2017.
Recent Accounting Pronouncements
ASU 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of Business"
In January 2017, the FASB issued ASU No. 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of Business". This ASU is meant to clarify the definition of a business to add guidance when determining when an acquisition or disposal should be accounted for as a sale of assets or business. This ASU provides a more robust framework to use in determining when a set of assets or activities should be classified as a business, providing more consistency in accounting for business or asset acquisitions. This ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those periods. The ASU will be applied prospectively.

ASU 2016-15 "Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments"
In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments". This ASU reduces the diversity in reporting of eight specific cash flow issues due to accounting guidance that is unclear or does not exist. The eight issues relate to certain debt activities, business combination activities, insurance settlements and other various activities. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted and is to be applied retrospectively using a transition method for each period presented. An entity that elects early adoption of the amendment under this ASU must adopt all aspects of the amendment in the same period. This guidance is not expected to have a material impact on our consolidated financial statements.

ASU 2016-02 "Leases (Topic 842)"
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". This amendment created a new Topic under the accounting standards codification to account for the provisions of the ASU. This amendment is meant to provide transparency and to improve comparability between entities. The ASU requires companies to record an asset and liability on the balance sheet for leases that were formerly designated as operating leases as well as leases designated as financing leases. The provisions of the ASU predominately change the recognition of leases for lessees, but the provisions do not substantially change the accounting for lessors. This ASU will supersede the provisions of Topic 840 Leases.

The liability recorded for a lease is generally intended to recognize the present value of lease payments and the asset as a right to use the underlying asset for the lease, including optional periods if it is reasonably certain the option will be exercised. If a lease term is less than twelve months, a company is allowed to elect not to record the asset and liability. Expense related to these leases are to be amortized straight-line over the expected term of the lease.

Additionally, the provisions of this ASU provide additional guidance on separating lease terms from maintenance and other type of provisions that provide a good or service, accounting for sale-leaseback provisions, and leveraged leases.

These updates are required to be applied under a modified retrospective approach from the beginning of the earlier period presented. The modified approach provides optional practical expedients that may be elected, which will allow companies to continue to account for leases under the previous guidance for leases that commenced prior to the effective date. Reporting in the cash flow statement remains virtually unchanged. Additional qualitative and quantitative disclosures are required.


6
SEARS HOMETOWN AND OUTLET STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The provisions of this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those periods. Early adoption is allowed. We have just commenced the process for evaluating the impact of this ASU on our financial statements, and therefore it's impact has not yet been determined. However, upon adoption, we expect that the right of use asset and the lease liability will be recognized in the balance sheets in amounts that will be material.

ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)"
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The new revenue recognition guidance more closely aligns U.S. GAAP with International Financial Reporting Standards ("IFRS"). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

In August 2015, the FASB issued ASU 2015-14: Accounting for Revenue from Contracts with Customers (Topic 606)" The amended guidance deferred the effective date of ASU 2014-9 to annual periods beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2016 and interim periods within those fiscal years. In addition, four other ASUs have been issued amending and clarifying ASU 2014-09 and must be adopted concurrently.

•
ASU 2016-08 "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
•
ASU 2016-10 "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing"
•
ASU 2016-12 "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients"
•
ASU 2016-20 "Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements"

This update can either be applied under a cumulative effect or retrospective method. We are in the process of reviewing customer contracts and agreements to determine the potential effects of the standard based on our revenue streams and current revenue recognition practices. Following review of customer contracts and agreements, we will summarize contract terms, reference the findings to the applicable new guidance, determine the financial statement impact, and then update policies and controls to ensure application of the new provisions will be applied consistently throughout the Company. As we are still in the process of completing our full assessment of the impact expected from adoption of this standard, we have not yet determined the materiality of the resulting differences in the timing of revenue recognition. The Company expects to adopt the provisions of this standard using the modified retrospective approach, which requires a cumulative effect adjustment to the opening balance of retained earnings on the date of adoption. The Company will adopt ASU 2014-09 effective February 4, 2018.


7
SEARS HOMETOWN AND OUTLET STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 2—ACCOUNTS AND FRANCHISEE RECEIVABLES AND OTHER ASSETS
Accounts and franchisee receivables and other assets consist of the following:
 
Thousands
 
July 29, 2017
 
July 30, 2016
 
January 28, 2017
Short-term franchisee receivables
 
$
1,584

 
$
2,262

 
$
1,920

Miscellaneous receivables
 
10,363

 
16,018

 
10,475

Long-term franchisee receivables
 
11,260

 
20,971

 
18,406

Other assets
 
5,851

 
3,822

 
7,643

Allowance for losses on short-term franchisee receivables (1)
 
(1,027
)
 
(1,263
)
 
(947
)
Allowance for losses on long-term franchisee receivables (1)
 
(5,999
)
 
(9,300
)
 
(7,295
)
Net accounts and franchisee receivables and other assets
 
$
22,032

 
$
32,510

 
$
30,202


(1) The Company recognizes an allowance for losses on franchisee receivables (which consist primarily of franchisee promissory notes) in an amount equal to estimated probable losses net of recoveries. The allowance is based on an analysis of expected future write-offs and existing economic conditions and an assessment of specific identifiable franchisee promissory notes and other franchisee receivables considered at risk or uncollectible. The expense associated with the allowance for losses on franchisee receivables is recognized as selling and administrative expense. Most of our franchisee promissory notes authorize us to deduct debt service from our commissions otherwise due and payable to the franchisees, and we routinely make those deductions to the extent of available commissions payable.
NOTE 3—ALLOWANCE FOR LOSSES ON FRANCHISEE RECEIVABLES
The allowance for losses on franchisee receivables consists of the following as of:  
 
26 Weeks Ended
Thousands
July 29, 2017
 
July 30, 2016
Allowance for losses on franchisee receivables, beginning of period
$
8,242

 
$
12,141

Provisions (recoveries) during the period
5,701

 
(483
)
Write off of franchisee receivables against the allowance
(6,917
)
 
(1,220
)
Other
—

 
125

Allowance for losses on franchisee receivables, end of period
$
7,026

 
$
10,563


During the 13 weeks ended July 29, 2017, the Company and a franchisee entered into agreements that terminated all of the franchisee's franchise agreements and sublease arrangements for 14 franchised locations (except with respect to one location as to which the Company would either assume the lease or enter into a lease directly with the landlord). The agreements provided that the franchisee transferred ownership of all assets, management of stores, and certain rights to property leases (in one instance pursuant to an Occupancy Agreement). The assets the Company purchased included all store furniture, fixtures, and equipment. As of the transaction date, the franchisee was the obligor on promissory notes to the Company with a total carrying value, net of reserves, of $5.5 million. As part of the transaction, the Company waived the remaining unpaid principal on these promissory notes and received a new promissory note from the franchisee in the amount of $1.5 million, which is payable in installments through December 11, 2022. During the 13 weeks ended July 29, 2017, the Company recognized a loss of $5.5 million on the transaction.


8
SEARS HOMETOWN AND OUTLET STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 4—OTHER CURRENT AND LONG-TERM LIABILITIES
Other current and long-term liabilities consist of the following:
 
Thousands
July 29, 2017
 
July 30, 2016
 
January 28, 2017
Customer deposits
$
19,645

 
$
25,350

 
$
19,943

Sales and other taxes
11,256

 
11,753

 
11,380

Accrued expenses
30,923

 
26,335

 
27,602

Payroll and related items
6,958

 
5,203

 
5,766

Store closing costs
9,373

 
894

 
7,659

Total Other current and long-term liabilities
$
78,155

 
$
69,535

 
$
72,350

NOTE 5—INCOME TAXES
SHO and Sears Holdings entered into a Tax Sharing Agreement that governs the rights and obligations of the parties with respect to pre-Separation and post-Separation tax matters. Under the Tax Sharing Agreement, Sears Holdings generally is responsible for any federal, state, or foreign income tax liability relating to tax periods ending on or before the Separation. For all periods after the Separation, the Company generally is responsible for any federal, state, or foreign tax liability. Current income taxes payable for any federal, state, or foreign income tax returns is reported in the period incurred.
We account for uncertainties in income taxes according to accounting standards for uncertain tax positions. The Company is present in a large number of taxable jurisdictions and, at any point in time, can have tax audits underway at various stages of completion in one or more of these jurisdictions. We evaluate our tax positions and establish liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable. Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law, and closings of statutes of limitation. Such adjustments are reflected in the tax provision as appropriate. For the 13 and 26 Weeks ended July 29, 2017 and July 30, 2016, no unrecognized tax benefits have been identified and reflected in the Condensed Consolidated Financial Statements.
 
We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of income tax expense. As no unrecognized tax benefits have been identified and reflected in the Condensed Consolidated Financial Statements, no interest or penalties related to unrecognized tax benefits are reflected in the Condensed Consolidated Balance Sheets or Statements of Operations.

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to realize the benefit of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss for the three years ended January 28, 2017. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future income. On the basis of this analysis, management has established a full valuation allowance to offset the net deferred tax assets that are not expected to be realized. Management will continue to evaluate objective and subjective evidence for changes in circumstances that cause a change in judgment about the realizability of the deferred tax assets.

We file federal, state, and city income tax returns in the United States and foreign tax returns in Puerto Rico. The U.S. Internal Revenue Service has commenced an audit of the Company's federal income tax return for the year ended January 30, 2016. SHO was also a part of the Sears Holdings' combined state returns for the years ended February 2, 2013 and February 1, 2014. Currently, the Company is under audit in one state for the years ended February 2, 2013 and February 1, 2014 as part of the Sears Holdings' combined return audits.

9
SEARS HOMETOWN AND OUTLET STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 6—RELATED-PARTY AGREEMENTS AND TRANSACTIONS

According to publicly available information ESL Investments, Inc. and investment affiliates including Edward S. Lampert (collectively, "ESL") beneficially own approximately 57% of our outstanding shares of common stock and approximately 49% of Sears Holdings' outstanding shares of common stock (the latter percentage amount excludes shares that may be acquired within 60 days upon the exercise of warrants to purchase shares). Mr. Lampert is the Chairman of the Board and Chief Executive Officer of Sears Holdings.
SHO and Sears Holdings (and in some circumstances, its subsidiaries) have entered into various agreements (as amended, the "SHO-Sears Holdings Agreements") that, among other things, (1) govern specified aspects of our relationship with Sears Holdings, (2) establish terms under which subsidiaries of Sears Holdings provide services to us, and (3) establish terms pursuant to which subsidiaries of Sears Holdings obtain merchandise inventories for us. The terms of the SHO-Sears Holdings Agreements were agreed to prior to the Separation (except for amendments entered into after the Separation that were approved by the Audit Committee of SHO's Board of Directors) in the context of a parent-subsidiary relationship and in the overall context of the Separation. The costs and allocations charged to the Company by Sears Holdings do not necessarily reflect the costs of obtaining the services from unaffiliated third parties or of the Company itself providing the applicable services. The Company has engaged in frequent discussions, and has resolved disputes, with Sears Holdings about the terms and conditions of the SHO-Sears Holdings Agreements, the business relationships that are reflected in the SHO-Sears Holdings Agreements, and the details of these business relationships, many of which details had not been addressed by the terms and conditions of the SHO-Sears Holdings Agreements or, if addressed, in the past were, and in the future could be, in dispute as to their meaning or application in the context of the existing business relationships. Many of these discussions have resulted in adjustments to the relationships that the Company believes together are in Company's best interests. On May 11, 2016, SHO and Sears Holdings entered into amendments to most of the SHO-Sears Holdings Agreements. The amendments are referred to in our Current Report on Form 8-K (File No. 001-35641) filed with the Securities and Exchange Commission on May 17, 2016. We also filed a Current Report on Form 8-K (File No. 001-35641) with the Securities and Exchange Commission on March 9, 2017 regarding the Amendment to Amended and Restated Merchandising Agreement dated as of March 8, 2017 among the Company, Sears Holdings, and Stanley Black & Decker. Inc.
The following is a summary of the nature of the related-party transactions between SHO and Sears Holdings:

•
SHO receives commissions from Sears Holdings for specified online sales, sales of extended service contracts, and sales of delivery and handling services, and commissions relating to the use in our stores of credit cards branded with the Sears name. For specified transactions SHO pays commissions to Sears Holdings.
•
We obtain a significant amount of our merchandise inventories from Sears Holdings.
•
We pay royalties related to our sale of products branded with the KENMORE®, CRAFTSMAN®, and DIEHARD® marks (which marks are owned by, or licensed to, subsidiaries of Sears Holdings, together the "KCD Marks"). The royalty rates vary but none exceeds 6%.
•
We pay fees for participation in Sears Holdings' SHOP YOUR WAY REWARDS® program.
•
We pay fees to Sears Holdings for logistics, handling, warehouse, and transportation services, which fees are based generally on merchandise inventory units.
•
Sears Holdings provides the Company with specified corporate services. These services include accounting and finance, and information technology, among other services. Sears Holdings charges the Company for these corporate services based on actual usage or pro rata charges based upon sales or other measurements.
•
Sears Holdings leases stores and distribution/repair facilities to the Company, for which the Company pays rent and related occupancy charges to Sears Holdings.
 
The following table summarizes the results of the transactions with Sears Holdings reflected in the Company’s Condensed Consolidated Financial Statements: 
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
July 29, 2017
 
July 30, 2016
 
July 29, 2017
 
July 30, 2016
Thousands
 
 
 
 
 
 
 
 
Net Commissions from Sears Holdings
 
$
18,448

 
$
22,818

 
$
35,485

 
$
44,392

Purchases related to cost of sales and occupancy
 
268,584

 
302,554

 
533,114

 
616,088

Services included in selling and administrative expense
 
17,370

 
18,864

 
33,903

 
40,312



10
SEARS HOMETOWN AND OUTLET STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


We incur payables to Sears Holdings for merchandise inventory purchases and service and occupancy charges (net of commissions) based on the SHO-Sears Holdings Agreements.  Amounts due to or from Sears Holdings are non-interest bearing and, except as provided in the following sentences of this paragraph, are settled on a net basis and have payment terms of 10 days after the invoice date. In accordance with the SHO–Sears Holdings Agreements and at the request of Sears Holdings, the Company can pay invoices on two or three-day terms and receive a deduction on invoices for early–payment discounts of 37 to 43 basis points, respectively. The Company can, in its sole discretion, revert to ten–day, no–discount payment terms at any time upon notice to Sears Holdings. The discount received for payments made on accelerated terms, net of incremental interest expense, results in a net financial benefit to the Company. During 2017, the Company paid most invoices on either two or three–day terms and received discounts of $1.4 million and $2.0 million, for the 13 and 26 weeks ended July 29, 2017, respectively, which is reflected in the Condensed Consolidated Statements of Operations. During 2016, the Company began paying invoices on accelerated terms on May 1, 2016 and received discounts of $1.0 million during both the 13 and 26 weeks ended July 30, 2016, which is reflected in the Condensed Consolidated Statements of Operations.

We recorded real estate occupancy payments of $0.3 million and $0.6 million for the 13 and 26 weeks ended July 29, 2017, respectively, and $0.2 million and $0.4 million for the 13 and 26 weeks ended July 30, 2016, respectively, to Seritage Growth Properties, a real estate investment trust. Edward S. Lampert is the Chairman of the Board of Trustees of Seritage.
NOTE 7—FINANCING ARRANGEMENTS

In October 2012 the Company entered into a Credit Agreement with a syndicate of lenders, including Bank of America, N.A., as administrative agent, which provided (subject to availability under a borrowing base) for aggregate maximum borrowings of $250 million (the “Prior Facility”). Under the Prior Facility the Company initially borrowed $100 million which was used to pay a cash dividend to Sears Holdings prior to the Separation.
  
On November 1, 2016 the Company and its primary operating subsidiaries, entered into an Amended and Restated Credit Agreement with a syndicate of lenders, including Bank of America, N.A., as administrative agent and collateral agent, which provides (subject to availability under a borrowing base) for aggregate maximum borrowings of $250 million (the “Senior ABL Facility”). The Senior ABL Facility, which amended and restated the Prior Facility in its entirety, provides for extended revolving credit commitments in an aggregate amount equal to $170 million (the “Extended Revolving Credit Commitments”) and non-extended revolving credit commitments in an aggregate amount equal to $80 million (the “Non-Extended Revolving Credit Commitments”). The Extended Revolving Credit Commitments will mature on the earlier of (1) February 29, 2020 and (2) six months prior to the expiration of specified agreements entered into with Sears Holdings and its subsidiaries in connection with the Separation (the “Subject Agreements”) unless they are extended to a date later than February 29, 2020 or terminated on a basis reasonably satisfactory to the administrative agent under the Senior ABL Facility. The Non-Extended Revolving Credit Commitments will mature on the earlier of (1) October 11, 2017 and (2) six months prior to the expiration of the Subject Agreements unless they are extended to a date later than October 11, 2017 or terminated on a basis reasonably satisfactory to the administrative agent under the Senior ABL Facility. Costs related to and incurred for the November 1, 2016 refinancing totaled approximately $5.4 million, of which $4.4 million is remaining and is included in Prepaid and Other current assets on the Condensed Consolidated Balance Sheet as of July 29, 2017 and is being amortized over the remaining term of the Senior ABL Facility.

As of July 29, 2017 we had $112.4 million outstanding under the Senior ABL Facility, which approximated the fair value of these borrowings. Up to $75 million of the Senior ABL Facility is available for the issuance of letters of credit and up to $25 million is available for swingline loans. The Senior ABL Facility permits us to request commitment increases in an aggregate principal amount of up to $100 million. Availability under the Senior ABL Facility as of July 29, 2017 was $86.8 million, with $6.1 million of letters of credit outstanding under the facility. If the Non-Extended Revolving Credit Commitments had matured prior to the end of the second quarter of 2017, our availability under the Senior ABL Facility would have been approximately $52 million as of July 29, 2017.

In the first quarter of 2017, we resumed our agreement with Sears Holdings whereby SHO paid Sears Holdings' invoices for merchandise and services on accelerated terms in exchange for a 37 to 43 basis-point cash discount depending on the number of days we paid before the invoice due date. The Senior ABL Facility borrowings increased by approximately $23 million as of July 29, 2017, as a result of our accelerated payments. The discounts we received for the accelerated payments, less the incremental interest expense, resulted in a net financial benefit to the Company. During 2017, the Company paid most invoices on either two or three–day terms and received discounts totaling $1.4 million and $2.0 million for the 13 and 26 weeks ended July 29, 2017, respectively, which are reflected in the Condensed Consolidated Statements of Operations. During 2016, the Company began

11
SEARS HOMETOWN AND OUTLET STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


paying invoices on accelerated terms on May 1, 2016 and received discounts totaling $1.0 million during both the 13 and 26 weeks ended July 30, 2016, which are reflected in the Condensed Consolidated Statements of Operations.

The principal terms of the Senior ABL Facility are summarized below.

Prepayments

The Senior ABL Facility is subject to mandatory prepayment in amounts equal to the amount by which the outstanding extensions of credit exceed the lesser of the borrowing base and the commitments then in effect.

Security and Guarantees

The Senior ABL Facility is secured by a first lien security interest on substantially all the assets of the Company and its subsidiaries, including, without limitation, accounts receivable, inventory, general intangibles, investment property, equipment,
cash, cash equivalents, deposit accounts and securities accounts, as well as certain other assets (other than intellectual property and fee-owned interests in real property) ancillary to any of the foregoing and all proceeds of any of the foregoing, including cash proceeds and the proceeds of applicable insurance. The Senior ABL Facility is guaranteed by the Company and each of its existing and future direct and indirect wholly owned domestic subsidiaries (other than specified immaterial subsidiaries).

Interest; Fees

The interest rates per annum applicable to the loans under the Senior ABL Facility are based on a fluctuating rate of interest measured by reference to, at the Company’s election, either (1) an adjusted London inter-bank offered rate (LIBOR) plus a borrowing margin ranging from (x) 3.50% to 4.50%, in the case of the Extended Revolving Credit Commitments or (y) 2.00% to 2.50%, in the case of the Non-Extended Revolving Credit Commitments (which the blended rate was approximately 4.52% at July 29, 2017), and in each case based on availability under the Senior ABL Facility, or (2) an alternate base rate plus a borrowing margin, ranging from (x) 2.50% to 3.50%, in the case of the Extended Revolving Credit Commitments or (y) 1.00% to 1.50%, in the case of the Non-Extended Revolving Credit Commitments (which the blended rate was approximately 6.52% at July 29, 2017), and in each case based on availability under the Senior ABL Facility.

Customary fees are payable in respect of the Senior ABL Facility, including letter of credit fees and commitment fees.

Covenants

The Senior ABL Facility includes a number of negative covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries (including the guarantors) to, subject to certain exceptions, incur additional indebtedness (including guarantees), grant liens, make investments, make prepayments on other indebtedness, and engage in mergers or change the nature of the business of the Company and its subsidiaries (including the guarantors). In addition, upon excess availability falling below a specified level (which has not occurred), the Company is required to comply with a minimum fixed charge coverage ratio. The Senior ABL Facility also limits SHO’s ability to declare and pay cash dividends and to repurchase its common stock. The Senior ABL Facility would not have permitted us to pay cash dividends or repurchase our common stock as of July 29, 2017.

The Senior ABL Facility also contains affirmative covenants, including financial and other reporting requirements. As of July 29, 2017, SHO was in compliance with all covenants under the Senior ABL Facility.

Events of Default

The Senior ABL Facility includes customary and other events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross default to other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments, change of control, failure to perform a “Material Contract” (which includes specified SHO-Sears Holdings Agreements) to the extent required to maintain it in full force and effect, failure to enforce a Material Contract in accordance with its terms, or termination by Sears Holdings of specified “Separation Agreements” (which include specified SHO-Sears Holdings Agreements).

12
SEARS HOMETOWN AND OUTLET STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 8—SUMMARY OF SEGMENT DATA

The Hometown reportable segment consists of the aggregation of our Hometown Stores, Hardware Stores, and Home Appliance Showrooms business formats described in “Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations-Executive Overview" of this Quarterly Report on Form 10-Q. The Outlet reportable segment also represents a business format. These segments are evaluated by our Chief Operating Decision Maker to make decisions about resource allocation and to assess performance. Each of these segments derives its revenues from the sale of merchandise and related services to customers, primarily in the U.S. Sales categories include appliances, lawn and garden, tools and paint, and other (which includes initial franchise revenue).
 
 
13 Weeks Ended July 29, 2017
Thousands
 
Hometown
 
Outlet
 
Total
Net sales
 
 
 
 
 
 
Appliances
 
$
222,513

 
$
116,655

 
$
339,168

Lawn and garden
 
81,237

 
5,697

 
86,934

Tools and paint
 
24,536

 
3,386

 
27,922

Other
 
19,354

 
16,607

 
35,961

Total
 
347,640

 
142,345

 
489,985

Costs and expenses
 
 
 
 
 
 
Cost of sales and occupancy
 
280,126

 
117,511

 
397,637

Selling and administrative
 
75,759

 
39,449

 
115,208

Depreciation and amortization
 
1,890

 
2,814

 
4,704

Total
 
357,775

 
159,774

 
517,549

Operating loss
 
$
(10,135
)
 
$
(17,429
)
 
$
(27,564
)
Total assets
 
$
297,553

 
$
148,890

 
$
446,443

Capital expenditures
 
$
1,096

 
$
1,469

 
$
2,565

 
 
 
13 Weeks Ended July 30, 2016
Thousands
 
Hometown
 
Outlet
 
Total
Net sales
 
 
 
 
 
 
Appliances
 
$
259,446

 
$
129,719

 
$
389,165

Lawn and garden
 
91,196

 
6,871

 
98,067

Tools and paint
 
31,369

 
4,355

 
35,724

Other
 
14,603

 
18,829

 
33,432

Total
 
396,614

 
159,774

 
556,388

Costs and expenses
 
 
 
 
 
 
Cost of sales and occupancy
 
313,231

 
128,277

 
441,508

Selling and administrative
 
83,554

 
35,254

 
118,808

Depreciation and amortization
 
1,507

 
1,786

 
3,293

Gain on sale of asset
 
—

 
(25,269
)
 
(25,269
)
Total
 
398,292

 
140,048

 
538,340

Operating income (loss)
 
$
(1,678
)
 
$
19,726

 
$
18,048

Total assets
 
$
415,501

 
$
207,377

 
$
622,878

Capital expenditures
 
$
3,268

 
$
1,280

 
$
4,548




13
SEARS HOMETOWN AND OUTLET STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
 
26 Weeks Ended July 29, 2017
Thousands
 
Hometown
 
Outlet
 
Total
Net sales
 
 
 
 
 
 
Appliances
 
$
420,239

 
$
242,520

 
662,759

Lawn and garden
 
144,800

 
11,292

 
156,092

Tools and paint
 
49,823

 
7,266

 
57,089

Other
 
29,992

 
32,286

 
62,278

Total
 
644,854

 
293,364

 
938,218

Costs and expenses
 
 
 
 
 
 
Cost of sales and occupancy
 
510,000

 
242,115

 
752,115

Selling and administrative
 
150,176

 
75,913

 
226,089

Depreciation and amortization
 
2,745

 
4,163

 
6,908

Total
 
662,921

 
322,191

 
985,112

Operating loss
 
$
(18,067
)
 
$
(28,827
)
 
$
(46,894
)
Total assets
 
$
297,553

 
$
148,890

 
$
446,443

Capital expenditures
 
$
2,351

 
$
2,290

 
$
4,641


 
 
26 Weeks Ended July 30, 2016
Thousands
 
Hometown
 
Outlet
 
Total
Net sales
 
 
 
 
 
 
Appliances
 
$
490,380

 
$
271,767

 
$
762,147

Lawn and garden
 
169,613

 
11,559

 
181,172

Tools and paint
 
67,486

 
8,969

 
76,455

Other
 
35,714

 
37,881

 
73,595

Total
 
763,193

 
330,176

 
1,093,369

Costs and expenses
 
 
 
 
 
 
Cost of sales and occupancy
 
597,369

 
264,929

 
862,298

Selling and administrative
 
164,407

 
72,393

 
236,800

Depreciation and amortization
 
3,076

 
3,474

 
6,550

Gain on the sale of assets
 
—

 
(25,269
)
 
(25,269
)
Total
 
764,852

 
315,527

 
1,080,379

Operating income (loss)
 
$
(1,659
)
 
$
14,649

 
$
12,990

Total assets
 
$
415,501

 
$
207,377

 
$
622,878

Capital expenditures
 
$
4,574

 
$
2,264

 
$
6,838


NOTE 9—COMMITMENTS AND CONTINGENCIES
We are subject to various legal and governmental proceedings arising out of the ordinary course of business, the outcome of which, individually or in the aggregate, in the opinion of management would not have a material adverse effect on our business, financial position, results of operations, or cash flows.

14
SEARS HOMETOWN AND OUTLET STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 10— (LOSS) EARNINGS PER COMMON SHARE

Basic earnings per share is calculated by dividing net (loss) income by the weighted average number of common shares outstanding for each period. Diluted income per common share also includes the dilutive effect of potential common shares. In the periods where the Company records a net loss the diluted per share amount is equal to the basic per share amount.

The following table sets forth the components used to calculate basic and diluted loss per share attributable to our stockholders.
 
13 Weeks Ended
 
26 Weeks Ended
 
July 29, 2017
 
July 30, 2016
 
July 29, 2017
 
July 30, 2016
Thousands except income per common share
 
 
 
 
 
 
 
Basic weighted average shares
22,702

 
22,696

 
22,702

 
22,681

 
 
 
 
 
 
 
 
Diluted weighted average shares
22,702

 
22,699

 
22,702

 
22,682

 
 
 
 
 
 
 
 
Net (loss) income
$
(29,446
)
 
$
10,642

 
$
(50,880
)
 
$
7,071

 
 
 
 
 
 
 
 
(Loss) income per common share:
 
 
 
 
 
 
 
  Basic
$
(1.30
)
 
$
0.47

 
$
(2.24
)
 
$
0.31

  Diluted
$
(1.30
)
 
$
0.47

 
$
(2.24
)
 
$
0.31


For the 13 and 26 weeks ended July 30, 2016, 14,000 unvested shares of restricted stock were excluded from the computation of diluted earnings per share due to the anti-dilutive effect of the unvested shares.

NOTE 11—EQUITY

Stock-Based Compensation
Four million shares of the Company's common stock are reserved for issuance under the Company's Amended and Restated 2012 Stock Plan (the "Plan").

A total of 89,221 shares of restricted stock were granted under the Plan in 2013 (the "2013 Grants") to a group of eligible individuals (as defined in the Plan) and 14,000 shares of restricted stock were granted under the Plan to an eligible individual in 2015 (the "2015 Grant"). As of May 16, 2016, 52,691 shares of restricted stock comprising the 2013 Grants had been forfeited. On that date the remaining 36,530 shares of restricted stock comprising the 2013 Grants vested in accordance with the terms and conditions of the governing restricted-stock agreements and the Plan. The 14,000 shares of restricted stock comprising the 2015 Grant were forfeited in the first quarter of 2017.

In 2015 the Company granted a total of 159,475 stock units under the Plan to a group of eligible individuals, all of whom were employees of the Company at the time of the grants. As of July 29, 2017, 34,091 stock units had been forfeited. The remaining 125,384 stock units will vest, if at all, on April 13, 2018 in accordance with and subject to the terms and conditions of governing stock-unit agreements, including forfeiture conditions, and the Plan. The fair value of these awards will vary based on changes in our stock price at each reporting period.

During the first quarter of 2017 the Company granted a total of 222,788 stock units under the Plan to a group of eligible individuals, all of whom were employees of the Company at the time of the grants. As of July 29, 2017, 33,333 of these stock units had been forfeited. The remaining 189,455 stock units will vest, if at all, in three substantially equal installments on January 30 in 2018, 2019, and 2020 in accordance with and subject to the terms and conditions of governing stock unit agreements, including forfeiture conditions, and the Plan.


15
SEARS HOMETOWN AND OUTLET STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The shares of restricted stock referred to above in this Note 11 constituted outstanding shares of the Company's common stock. The recipients of the restricted stock grants had full voting and dividend rights with respect to, but were unable to transfer or pledge, their shares of restricted stock prior to the applicable vesting dates. The stock units referred to above in this Note 11, which are payable solely in cash based on the Nasdaq closing price of our common stock at the applicable vesting dates, do not constitute outstanding shares of the Company's common stock. The recipients of the stock unit grants have, with respect to their stock units, no rights to receive the Company's common stock or other securities of the Company, no rights as a stockholder of the Company, no dividend rights, and no voting rights.

We are authorized to grant stock options and to make other awards (in addition to restricted stock and stock units) to eligible participants pursuant to the Plan. The Company has made no stock-option awards under the Plan. Except for the grants of restricted stock and stock units referred to above in this Note 11, the Company has not made any grant or award under the Plan. We do not currently have a broad-based program that provides for awards under the Plan on an annual basis.

We account for stock-based compensation using the fair value method in accordance with accounting standards regarding share-based payment transactions. During the 26 weeks ended July 29, 2017, we recorded $0.1 million in total compensation income for 314,839 stock units. At July 29, 2017 we had $0.8 million in total unrecognized compensation cost related to the remaining unvested stock units, which we expect to recognize over the next approximately 2.5 years.

Changes during 2017 with respect to the 2015 Grant are noted below.
 
 
26 Weeks Ended July 29, 2017
(Shares in Thousands)
 
Shares
 
Weighted-Average Fair Value Per Share on Date of Grant
Balance at January 28, 2017
 
14

 
$
9.38

Granted
 
—

 
—

Vested
 
—

 
—

Forfeited
 
(14
)
 
9.38

Balance at July 29, 2017
 
—

 
$
—


Share Repurchase Program

During 2013 the Company's Board of Directors authorized a $25 million repurchase program for the Company's outstanding shares of common stock. The timing and amount of repurchases depend on various factors, including market conditions, the Company's capital position and internal cash generation, and other factors. The Company's repurchase program does not include specific price targets, may be executed through open-market, privately negotiated, and other transactions that may be available, and may include utilization of Rule 10b5-1 plans. The repurchase program does not obligate the Company to repurchase any dollar amount, or any number of shares, of common stock. The repurchase program does not have a termination date, and the Company may suspend or terminate the repurchase program at any time. See Note 7 to these Condensed Consolidated Financial Statements regarding the Senior ABL Facility's limits on SHO’s ability to repurchase its common stock. Shares that are repurchased by the Company pursuant to the repurchase program will be retired and resume the status of authorized and unissued shares of common stock.
No shares were repurchased during the 13 and 26 weeks ended July 29, 2017. At July 29, 2017, we had approximately $12.5 million of remaining authorization under the repurchase program.

16
SEARS HOMETOWN AND OUTLET STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 12—STORE CLOSING CHARGES

Closed Store Charges

We continue to take proactive steps to make the best use of capital by closing unprofitable stores. The Company closed 70 and 79 Hometown store locations during the 13 and 26 weeks ended July 29, 2017, respectively. In addition, the Company closed 11 and 12 Outlet store locations during the 13 and 26 weeks ended July 29, 2017, respectively.

In accordance with accounting standards governing costs associated with exit or disposal activities, expenses related to future rent payments for which we no longer expect to receive any economic benefit are accrued as of when we ceased to use the leased space and have been reduced for estimated sublease income.

Store closing costs for the 13 and 26 weeks ended July 29, 2017 were as follows:

Thousands
Lease Termination Costs (1)
 
Inventory Related (1)
 
Impairment and Accelerated Depreciation (2)
 
Other Charges (3)
 
Total Store Closing Costs
13 weeks ended July 29, 2017
$
9,397

 
$
1,796

 
$
979

 
$
386

 
$
12,558


Thousands
Lease Termination Costs (1)
 
Inventory Related (1)
 
Impairment and Accelerated Depreciation (2)
 
Other Charges (3)
 
Total Store Closing Costs
26 weeks ended July 29, 2017
$
8,447

 
$
1,796

 
$
979

 
$
386

 
$
11,608

(1)
Recorded within cost of sales and occupancy in the Condensed Consolidated Statements of Operations. Lease termination costs are net of estimated sublease income, and include the reversal of closed store reserves when a lease agreement is terminated for an amount less than the remaining reserve established for the store.
(2)
Recorded within depreciation and amortization in the Condensed Consolidated Statements of Operations.
(3)
Recorded within selling and administrative in the Condensed Consolidated Statements of Operations.


Closed Store Reserve

Store closing reserves at July 29, 2017 and January 28, 2017 are shown in the table below. Store closing reserves of $9.4 million,$0.8 million, and $7.7 million are included within other current liabilities in the Condensed Consolidated Balance Sheets at July 29, 2017, July 30, 2016 and January 28, 2017, respectively.
Thousands
 
Total
Balance at January 28, 2017
 
$
7,659

Store closing benefit
 
(950
)
Payments/utilization
 
(2,490
)
Balance at April 29, 2017
 
$
4,219

Store closing costs
 
9,783

Payments/utilization
 
(4,629
)
Balance at July 29, 2017
 
$
9,373









17

Item 6. Exhibits
The Exhibits listed in the accompanying “Exhibit Index” have been filed as part of this Quarterly Report on Form 10-Q.


18

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
Sears Hometown and Outlet Stores, Inc.
 
 
By:
 
/S/ E. J. BIRD
Name:
 
E. J. Bird
Title:
 
Senior Vice President and Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
 
Date:
 
September 7, 2017


19
SEARS HOMETOWN AND OUTLET STORES, INC.
EXHIBIT INDEX


 
 
Exhibit Number
Exhibit Description
3.1

3.2

3.3


10.1(1)
10.2(1)
10.3(1)(2)
10.4(1)
10.5
31.1(1)
31.2(1)
32(1)
101(3)
The following financial information from the Quarterly Report on Form 10-Q for the fiscal quarter ended July 29, 2017, formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Statements of Operations (Unaudited) for the 13 and 26 Weeks Ended July 29, 2017 and July 30, 2016; (ii) the Condensed Consolidated Balance Sheets (Unaudited) at July 29, 2017, July 30, 2016, and January 28, 2017; (iii) the Condensed Consolidated Statements of Cash Flows (Unaudited) for the 26 Weeks Ended July 29, 2017 and July 30, 2016; (iv) the Condensed Combined Statements of Stockholders' Equity (Unaudited) for the 26 Weeks Ended July 29, 2017 and July 30, 2016; and (v) the Notes to the Condensed Consolidated Financial Statements (Unaudited).


(1) Filed herewith.
(2) Specified terms of this Exhibit have been omitted and separately filed by the registrant with the Securities and Exchange Commission pursuant to the registrant's request for confidential treatment.
(3) Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.


20

SEARS HOMETOWN & OUTLET STORES, INC. Reports