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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How do you get under 3x EV/EBITDA? There is $40M in EBITDA and $240M in debt and a $92M market cap. Math should be $332/$40 or 8.3x. Or are you just doing Market Cap/Ebitda which I’ve never heard of using before.
Just curious – Since Orchard’s solely in California, how’s the housing market in California been over the last couple of years. If Orchard’s been able to squeak out free cash flow over the last couple of tough years (if California’s housing market was tough), it’ll be interesting what will happen once (could be a while) the housing market picks up again. However, whatever modelling that’s used I think should be really conservative. At least you seem confident in management.
When I last did some modelling, I priced them around $6-8 / share. That is, however with, assuming no growth.
BTW, thanks for sharing all this info. Your website is great. Lots of great info gathered here.
Thanks for catching this. I wrote it in a hurry. It was market cap not EV. Does the $240M in debt reflect the $50M or so they paid down after the sale-leaseback of real estate? I think the actual value is around 7 which is probably fair value. I also think we will see significant EBITDA growth in 2012; I have confidence in the new management’s ability to fix this long-ignored brand.
Glad that you find it useful. Regarding OSH, I think $6-8 seems low. I bought more here to round out a very small odd lot, will buy more at $10-$12 if it gets there. I do think that CA will start to stabilize and that OSH will benefit.
stock is going to $0
This is anecdotal, but the OSH in Santa Barbara is about 2 miles from Home Depot and has less supply and higher prices. I like the smaller feel of OSH, but when I need to buy something, I always go to home depot.
I assume contractors will favor Lowes and HD as well, so not sure if a housing turnaround really will help OSH. It seems like a dying business and at 7-8x a stretch.
Also, thanks for the work on the blog, it’s great.
Lastly, I do like the trade as a classic spinoff where you buy from non-economic sellers, but I don’t like the longer term prospects.
I believe the $240M reflects that $50M sale/lease back as on Yahoo Finance it is listed with $320M in debt and $30M in cash so $290M (or exactly $50M more). The $240M I got from the filing.
The question if you think there will be significantly more Ebitda is how much more. I would want at least 40% upside for a turnaround story since so much is on improvement and not current value. By my calculations to get that we would almost have to double the EBITDA to $75M. Then 5x that would be $375M, which less the debt would give you $135M in market cap (vs the $92M or so we have now). You may use more than a 5x EV/EBITDA goal if you like but I prefer that conservative number as a place I’m confident another buyer would want the assets.
I concur with the others that I am appreciative of you keeping this blog
I may be early, but the move down doesn’t feel like its based on valuation, it feels like it’s people dumping something they got unexpectedly or don’t want to bother with. I haven’t actually been in an OSH, living in the NE, so your color is helpful. Is the store in Santa Barbara remodeled? Based on my experience at HD and Lowes, I think I’d pay more for certain kinds of things that I wanted to get right at a smaller, less overwhelming store(i.e paint, carpet, kitchen, garden). For lumber or sheetrock, they’re never going to win, but that’s why I own USG.
I also bought some today before I read this article. There is no reason to believe that management can turn it around. However, there is no reason to believe they can’t. Net Income, over the past 5 years, has averaged 17 million and CapEx, for better or worse, has run at 20 million less than depreciation for the last 3 years (11 million). Management is experienced and the stock trades at ~5x earnings and 2-3x avg. FCF (excluding WC changes). I’m aware that last year’s numbers were worse, but it seems worth a shot to me.
P.S.
I like the site. The analysis seems intelligent. Investing is a fair amount of work.
Thanks for the update..
My concerns though, first the company is massively in debt; second it seems the only reason they have been able to pull in positive free cash flow in recent years is underspending; as you pointed out they depreciate three times as much as they spend on capex; I suspect that this would have been a result of Lampert’s starve the beast management style. New management has indicated that they would spend quite a bit so if the business does not pick up fast enough they will be start burning cash as soon as this year. So I guess it all comes down to whether the management is on the right path.
Just a quick question, isn’t the 40m is a 9m number, so the annuallized should be higher and the valuation a bit lower than 8.3x…
Quick question: does the 40 million EBITDA include the 15 million loss from sale of the distribution warehouse?
I can’t decide whether opening new stores is leading evidence that strategy is working, or a foolhardy use of limited capital.
I think the turnaround in same-store sales is at least a first sign that new management can execute.
Thanks for taking the time to work through this with me. I was a bit sloppy writing this up at first, and your questions have certainly helped me refine and clarify my thoughts. It will be difficult to get to $75 million of EBITDA without growing sales materially. Margins just don’t have that much room to grow. I plan to work through this more carefully and post an updated analysis later on this week.
I read through everything and 40m seems like a trailing 9 month EBITDA number, I have no clue what a TTM number is but its certainly higher than 40m…
40m is guidance for FY ending January 2012, so it is a full year figure.
I’d also point out that using that figure you are excluding the ~20m in incremental costs from the spin and the additional rent post the sale leasebacks.
I’m not convinced this is a good investment at this price. The valuation is fair at best at ~7x, the turnaround plan is shaky (their presentation was pretty awful and included almost no numbers…), and mgmt doesn’t seem spectacular (CEO was fired from his last job).
Also, though there is undoubtedly uneconomic selling pressure here, keep in mind a good chunk of the price drop could be related to them reporting numbers way below where expectations likely were on Thursday.
I understand that the 40M is full year guidance, but they have all ready hit 40M through the end of their 3rd qtr. Either they are expecting zero EBITDA over the last quarter or there is some sandbagging going on…guidance number does not reconcile with their expectations of better year over year sales. I agree that much of the selling was in response to the poorer than expected report. I just do not understand their guidance number .
The 40-44m range could make sense actually, even if they earned 39m thru Q3. There are spin and additional lease costs of 4m in the quarter, so something at the top end of their range is believable. Next year if you assume they can get back to 70M of Ebitda and subtract the 20m of incremental costs, you get to $50m for FY12. So at a 7x multiple, not sure I see a bargain here. That said maybe selling gets irrational from here and an opportunity opens up. Personally, I think I might buy in the 6-8 range
I’m really enjoying all of the constructive discussion here about this business. Is it fair to say Baker was fired at Scott’s? If so, why? As near as I can tell, the CEO who had promised to retire and hand over reigns to him decided to keep working.
I’m in the camp that this is not cheap, yet. That said, there’s a ton of leverage to a turn in housing at some point and the remodels (provided they get a decent return on them), could be an additional driver. I’m just curious what they cost and what the expected return would be on a remodel. My biggest concern, even if valuation gets more compelling is that they look kind of close to tripping a covenant (within a quarter turn of ebitda decline recently).
I’d buy the company near 0 and file Chapter 7 for a nice profit.
Looking forward to it!
Seems your using an exit multiple to value – 5x EV/EBITDA.
What’s your fair value of OSH currently?
“My biggest concern, even if valuation gets more compelling is that they look kind of close to tripping a covenant (within a quarter turn of ebitda decline recently).”
If that’s the case, then you have a distressed company that’s not selling at a distressed price. That introduces a great deal of investment risk into the picture. Take a look at CX; they are a distressed company close to convenant’s selling at a depressed price (owned by Longleaf Partners).If they don’t meet a convenant, is that suicide to stakeholder if they choose to exercise their rights at that point _usually_.
why not buy from osh…you like the store and they have a great selection on most things….that is what osh needs. Home depot is not giving anything away and there store is annoying.