Sears Hometown and Outlet Stores (SHOS) has certainly tested our patience over the last few months, but there are encouraging signs that management is finally executing on their plans to modernize the appliance stores and make the brand relevant in the suburbs. The new “neighborhood” concept is smaller and cheaper to run, taking a leaf from the reinvention playbook that Staples and PetSmart have been using.
It will take time to see how well it works, but I believe the critical factor here is not the plan itself but the fact that management is showing signs of engagement with operations, Wall Street and the media. This company has been too quiet for too long. I expected moves like this to start coming months ago, so these news catalysts are good.
Of course, I know it can be frustrating to wait for a turnaround to finally kick in. I certainly encourage you to consider your risk tolerance and do what is best for your portfolio when buying or selling any stock. For now, I am willing to give SHOS another month or so to release fall earnings – the quarter ends on November 2 – that will hopefully provide some insight into what management sees for the holiday season. If SHOS can’t demonstrate that the summer swoon is behind them and that the business is truly turning around, it may be time to move on to a new opportunity.
In the meantime, the underlying thesis is still intact, although it looks a little frayed now. The P/E has been beaten down to below retail average, but the balance sheet is still remarkably strong: no long-term debt and a robust cash flow. While the sentiment on SHOS may be tilted toward the worst-case scenario of bankruptcy or distress sale, those fears are overstated. The company itself is not going anywhere in the near term. If it can prove to us that the growth drivers are kicking in, I believe we may still reap the rewards.