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ý
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2019
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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D
ELAWARE
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80-0808358
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.)
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5500 TRILLIUM BOULEVARD, SUITE 501 HOFFMAN ESTATES, ILLINOIS
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60192
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(Address of Principal Executive Offices)
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(Zip Code)
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Title of Each Class
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Name of Exchange on Which Registered
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Common Stock, par value $0.01 per share
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The NASDAQ Stock Market
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Large accelerated filer
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¨
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Accelerated filer
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¨
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Non-accelerated filer
(Do not check if a smaller reporting company)
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¨
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Smaller reporting company
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ý
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Page
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PART I
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Item 1.
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Item 1A.
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Item 1B.
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Item 2.
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Item 3.
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Item 4.
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PART II
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Item 5.
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Item 6.
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Item 7.
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Item 7A.
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Item 8.
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Item 9.
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Item 9A.
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PART III
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Item 10.
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Item 11.
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Item 12.
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Item 13.
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Item 14.
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PART IV
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Item 15.
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Item 16.
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•
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Hometown Stores
. Our Hometown Stores and website offer products and services across a wide selection of merchandise categories, including home appliances, lawn and garden equipment, tools, sporting goods, and household goods, with the majority of business driven by big-ticket home appliance and lawn and garden sales. Most of our Hometown Stores carry Sears-branded products, including products branded with the KENMORE
®
, CRAFTSMAN
®
, and DIEHARD
®
marks (the "KCD Marks"), and an assortment of other national brands. Primarily independently operated, predominantly located in smaller communities and averaging approximately 8,500 square feet, Hometown Stores are designed to serve trade areas that may not support a full-service big-box retailer. As of
February 2, 2019
, there were
499
Hometown Stores in 49 states, Puerto Rico and Bermuda. Hometown Stores also sell products and services through our website www.SearsHometownStores.com. When a dealer exits a location, the Company may take over the operation of a store, generally on an interim basis, until the location can be transferred to another dealer. At any given time the Company is generally operating a number of stores that are in transition from one dealer to another dealer. Transition stores are not included in our count of Company-operated locations due to the expected short-term nature of transition operation. Dealers operated
497
, and we operated
two
, Hometown stores.
|
•
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Hardware Stores
. Our Hardware Stores and website offer products and services across a wide selection of merchandise categories with sales primarily driven by home appliances, lawn and garden equipment, tools, and other home improvement products including products typically found in local hardware stores, such as fasteners, electrical supplies, and plumbing supplies. Our Hardware stores average approximately 23,000 square feet in size, are primarily located in suburban trade areas and are positioned as local stores designed to appeal to convenience-oriented customers These stores carry Craftsman brand tools and lawn and garden equipment, and a wide assortment of other national brands and other home improvement products. As of
February 2, 2019
, there were
15
Hardware Stores in ten states, all of which carry a selection of Kenmore and other national brands of home appliances. Hardware Stores also sell products and services through our website www.SearsHardwareStores.com. Franchisees operated
seven
, and we operated
eight
, of these stores.
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•
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Home Appliance Showrooms
. Our Home Appliance Showrooms and website offer home appliances and related services in stores primarily located in strip malls and lifestyle centers in metropolitan areas. Averaging 5,000 square feet with a simple, primarily appliance-showroom design, our Home Appliance Showrooms offer quality-focused customers a unique store shopping experience. Home Appliance Showroom sales are primarily driven by home appliances as well as, in certain stores, mattresses. These stores carry Kenmore and other national brands of home appliances. As of
February 2, 2019
, there were
27
Home Appliance Showrooms in eight states. Home Appliance Showrooms also sell products and services through our website www.SearsHomeApplianceShowroom.com. Franchisees operated
11
of these stores, and we operated
16
stores.
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•
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Buddy's Home Furnishings Stores.
Our Buddy's Home Furnishings Stores, where we are a franchisee, enable us to benefit from Buddy's expertise and systems infrastructure in the rent-to-own business in which we own the inventory that we rent to our customers. As of
February 2, 2019
, there were
eight
Buddy's Home Furnishings Stores in two states, all of which were operated by the Company.
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•
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Inventory procurement from third-party vendors, including KCD Products and other products which collectively account for a majority of our revenue;
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•
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Logistical, supply chain, and inventory support services;
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•
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Accounting and financial reporting services;
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•
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Risk management, tax, and insurance services;
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•
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Online, computer and information technology infrastructure (including the point-of-sale system used by the Company and our dealers and franchisees) and support;
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•
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Certain of our store leases and the leases for stores that we have subleased, or in the future may sublease, to franchisees or others are leased or subleased to us by subsidiaries of Transform Holdco until their expiration at which time we will be required to renegotiate with the landlords directly;
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•
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Our stores continue to use the Sears brand name, and other intellectual property owned by Transform Holdco through our license agreements with Transform Holdco;
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•
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Our stores continue to participate in the Transform Holdco's Shop Your Way program and rely on the customer data and other information provided by the Shop Your Way program; and
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•
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Our stores continue to accept Sears-branded credit cards.
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•
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Expansion into the suburban and rural trade areas in which many of our stores operate;
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•
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Lower pricing, particularly with respect to new, in-box appliances (which, among other things, makes the pricing of our Outlet merchandise less compelling);
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•
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Expanding the offering of free delivery and installation of merchandise and other consumer benefits;
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•
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Expanding online sales;
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•
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Extension of credit to customers on terms more favorable than we offer; and
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•
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Larger store size, which may result in greater operational efficiencies, or innovative store formats, and use of disruptive technology.
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•
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Actions by our competitors, including opening of new stores in our existing trade areas or changes to the way these competitors conduct business online;
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•
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Increases to the level of discount on promotional pricing of new-in-box appliances in the industry, which could continue to adversely impact our sales of out-of-box appliances and associated margin;
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•
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The extent to which we are able to generate profitable sales of merchandise and services on our transactional ecommerce websites in the amounts we have planned to generate;
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•
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The availability on commercially reasonable terms of the various types of inventory that we need to sell for the profitable operation of our stores;
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•
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We rely on Transform Holdco to provide product protection agreements that we sell in our stores and online, and deterioration in Transform Holdco's results of operations, financial condition, and liquidity could affect its ability to offer product protection agreements;
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•
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Changes in our merchandise strategy and mix;
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•
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Real estate and maintenance costs for our existing stores;
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•
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Changes in population and other demographics;
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•
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Timing and effectiveness of our promotional events;
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•
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Weather conditions, including level of rainfall, particularly drought, level of snowfall, average temperature, major storms, and delays in, or advances to, the start of seasonal changes;
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•
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The availability of locations for new stores that can be operated profitability by the Company and by our dealers and franchisees; and
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•
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The growth of online shopping in which we may not be able to fully participate
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•
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our ability to satisfy obligations to lenders may be impaired, resulting in possible defaults on and acceleration of our indebtedness;
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•
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our ability to obtain additional financing for refinancing of existing indebtedness, working capital, capital expenditures, product and service development, acquisitions, general corporate purposes and other purposes may be impaired;
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•
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a substantial portion of our cash flow from operations could be dedicated to the payment of the principal and interest on our debt;
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•
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we may be increasingly vulnerable to economic downturns and increases in interest rates;
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•
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our flexibility in planning for and reacting to changes in our business and the retail industry may be limited; and
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•
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we may be placed at a competitive disadvantage relative to other companies in our industry.
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•
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Our business profile and market capitalization may not continue to fit the investment objectives of some stockholders and, as a result, these stockholders may sell our shares;
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•
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Actual or anticipated fluctuations in our operating results due to factors related to our business;
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•
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Our ability to decrease our reliance on products and services provided by Transform Holdco and ability to diversify our supply chain;
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Success or failure of our business strategy;
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•
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Transform Holdco's financial performance, condition, and prospects, including the risk of insolvency proceedings;
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•
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Our relationship with Transform Holdco;
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•
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Actual or anticipated changes in the U.S. economy or the retailing environment;
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Our quarterly or annual earnings, or those of other companies in our industry;
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•
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Our ability to obtain third-party financing as needed;
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•
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Announcements by us or our competitors of significant acquisitions or dispositions;
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•
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The failure of securities analysts to cover our common stock;
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•
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Changes in earnings estimates by securities analysts or our ability to meet those estimates;
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•
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The operating and stock price performance of other comparable companies;
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•
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Overall market fluctuations;
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•
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Changes in laws and regulations affecting our business;
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•
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Actual or anticipated sales or distributions of our capital stock by our officers, directors or significant stockholders;
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•
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Terrorist acts or wars; and
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•
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General economic conditions and other external factors.
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Fiscal Year
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2018
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2017
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Beginning store count
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900
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1,020
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Store openings
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8
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7
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Store closures
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(231
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)
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(127
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)
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Ending store count
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677
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900
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Hometown
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Outlet
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Company Operated
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Dealer/Franchise
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Company Operated
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Franchise
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BR
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Bermuda
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—
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1
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—
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—
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AL
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Alabama
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—
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10
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1
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—
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AR
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Arkansas
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—
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30
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—
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—
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AZ
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Arizona
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—
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14
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|
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—
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4
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CA
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California
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1
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23
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17
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—
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CO
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Colorado
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—
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13
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|
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2
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—
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CT
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Connecticut
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—
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—
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2
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—
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DE
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Delaware
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—
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3
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|
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1
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—
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FL
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Florida
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—
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15
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|
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10
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—
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GA
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Georgia
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—
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22
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|
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4
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|
—
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HI
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Hawaii
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—
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|
1
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|
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1
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—
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IA
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Iowa
|
|
—
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|
13
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|
|
—
|
|
—
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ID
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Idaho
|
|
—
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7
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|
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—
|
|
1
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IL
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Illinois
|
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2
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|
13
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|
|
8
|
|
—
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IN
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Indiana
|
|
1
|
|
10
|
|
|
2
|
|
—
|
|
KS
|
Kansas
|
|
—
|
|
13
|
|
|
2
|
|
—
|
|
KY
|
Kentucky
|
|
—
|
|
7
|
|
|
1
|
|
—
|
|
LA
|
Louisiana
|
|
—
|
|
10
|
|
|
2
|
|
—
|
|
MA
|
Massachusetts
|
|
—
|
|
1
|
|
|
3
|
|
—
|
|
MD
|
Maryland
|
|
—
|
|
4
|
|
|
3
|
|
—
|
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ME
|
Maine
|
|
—
|
|
5
|
|
|
—
|
|
—
|
|
MI
|
Michigan
|
|
—
|
|
22
|
|
|
5
|
|
—
|
|
MN
|
Minnesota
|
|
—
|
|
13
|
|
|
1
|
|
—
|
|
MO
|
Missouri
|
|
—
|
|
19
|
|
|
2
|
|
—
|
|
MS
|
Mississippi
|
|
—
|
|
14
|
|
|
—
|
|
—
|
|
MT
|
Montana
|
|
—
|
|
8
|
|
|
—
|
|
—
|
|
NC
|
North Carolina
|
|
—
|
|
18
|
|
|
4
|
|
—
|
|
ND
|
North Dakota
|
|
—
|
|
3
|
|
|
—
|
|
—
|
|
NE
|
Nebraska
|
|
—
|
|
7
|
|
|
—
|
|
—
|
|
NH
|
New Hampshire
|
|
1
|
|
2
|
|
|
—
|
|
—
|
|
NJ
|
New Jersey
|
|
2
|
|
—
|
|
|
4
|
|
—
|
|
NM
|
New Mexico
|
|
—
|
|
7
|
|
|
—
|
|
—
|
|
NV
|
Nevada
|
|
—
|
|
5
|
|
|
3
|
|
—
|
|
NY
|
New York
|
|
—
|
|
8
|
|
|
1
|
|
—
|
|
OH
|
Ohio
|
|
1
|
|
10
|
|
|
7
|
|
—
|
|
OK
|
Oklahoma
|
|
1
|
|
14
|
|
|
—
|
|
—
|
|
OR
|
Oregon
|
|
—
|
|
20
|
|
|
2
|
|
—
|
|
PA
|
Pennsylvania
|
|
4
|
|
10
|
|
|
4
|
|
—
|
|
PR
|
Puerto Rico
|
|
—
|
|
8
|
|
|
1
|
|
—
|
|
RI
|
Rhode Island
|
|
—
|
|
1
|
|
|
—
|
|
—
|
|
SC
|
South Carolina
|
|
—
|
|
8
|
|
|
2
|
|
—
|
|
SD
|
South Dakota
|
|
—
|
|
3
|
|
|
—
|
|
—
|
|
TN
|
Tennessee
|
|
—
|
|
7
|
|
|
3
|
|
—
|
|
TX
|
Texas
|
|
21
|
|
44
|
|
|
16
|
|
—
|
|
UT
|
Utah
|
|
—
|
|
2
|
|
|
—
|
|
—
|
|
VA
|
Virginia
|
|
—
|
|
1
|
|
|
3
|
|
—
|
|
VT
|
Vermont
|
|
—
|
|
4
|
|
|
—
|
|
—
|
|
WA
|
Washington
|
|
—
|
|
13
|
|
|
3
|
|
—
|
|
WV
|
West Virginia
|
|
—
|
|
4
|
|
|
—
|
|
—
|
|
WI
|
Wisconsin
|
|
—
|
|
21
|
|
|
3
|
|
—
|
|
WY
|
Wyoming
|
|
—
|
|
4
|
|
|
—
|
|
—
|
|
Total
|
|
34
|
|
515
|
|
|
123
|
|
5
|
|
|
Hometown
|
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Outlet
|
||
Company operated stores:
|
|
|
|
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Owned
|
—
|
|
|
2
|
|
Leased
|
34
|
|
|
121
|
|
Total company operated
|
34
|
|
|
123
|
|
Independently owned and operated
|
515
|
|
|
5
|
|
Total store count as of February 2, 2019
|
549
|
|
|
128
|
|
•
|
499
Hometown Stores—Primarily independently operated stores, predominantly located in smaller communities, and offering home appliances, lawn and garden equipment, tools, sporting goods, and household goods. All of our Hometown Stores carry proprietary Sears-branded products, such as Kenmore, Craftsman, and DieHard, as well as a wide assortment of other national brands.
|
•
|
15
Hardware Stores—Hardware stores that offer primarily home appliances, lawn and garden equipment, tools, and other home improvement products, and featuring Kenmore, Craftsman, and DieHard, as well as a wide assortment of other national brands.
|
•
|
27
Home Appliance Showrooms—Stores that have a simple, primarily appliance showroom design that are located in metropolitan areas.
|
•
|
8
Buddy's Home Furnishings Stores - Stores where we are a franchisee, enabling us to benefit from Buddy's expertise and system infrastructure in the rent-to-own business which we own the inventory that we rent to our customers.
|
Fiscal year
|
|
Ended
|
|
Weeks
|
2018
|
|
February 2, 2019
|
|
52
|
2017
|
|
February 3, 2018
|
|
53
|
|
|
Fiscal
|
||||||
thousands
|
|
2018
|
|
2017
|
||||
NET SALES
|
|
$
|
1,449,948
|
|
|
$
|
1,719,951
|
|
COSTS AND EXPENSES
|
|
|
|
|
||||
Cost of sales and occupancy
|
|
1,126,752
|
|
|
1,371,408
|
|
||
Gross margin
|
|
323,196
|
|
|
348,543
|
|
||
Margin rate
|
|
22.3
|
%
|
|
20.3
|
%
|
||
Selling and administrative
|
|
349,082
|
|
|
419,567
|
|
||
Selling and administrative expense as a percentage of net sales
|
|
24.1
|
%
|
|
24.4
|
%
|
||
Impairment of property and equipment
|
|
2,089
|
|
|
3,357
|
|
||
Depreciation and amortization
|
|
12,374
|
|
|
13,039
|
|
||
Gain on the sale of assets
|
|
(1,358
|
)
|
|
—
|
|
||
Total costs and expenses
|
|
1,488,939
|
|
|
1,807,371
|
|
||
Operating loss
|
|
(38,991
|
)
|
|
(87,420
|
)
|
||
Interest expense
|
|
(14,676
|
)
|
|
(8,058
|
)
|
||
Other income
|
|
367
|
|
|
925
|
|
||
Loss before income taxes
|
|
(53,300
|
)
|
|
(94,553
|
)
|
||
Income tax expense
|
|
(164
|
)
|
|
(504
|
)
|
||
NET LOSS
|
|
$
|
(53,464
|
)
|
|
$
|
(95,057
|
)
|
•
|
EBITDA excludes the effects of financing and investing activities by eliminating the effects of interest and depreciation costs; and
|
•
|
Other significant items, while periodically affecting our results, may vary significantly from period to period and may have a disproportionate effect in a given period, which affects comparability of results. These items may also include cash charges such as severance and executive transition costs and IT transformation investments that make it difficult for investors to assess the Company's core operating performance.
|
|
|
Fiscal
|
||||||
thousands
|
|
2018
|
|
2017
|
||||
Net loss
|
|
$
|
(53,464
|
)
|
|
$
|
(95,057
|
)
|
Income tax expense
|
|
164
|
|
|
504
|
|
||
Other income
|
|
(367
|
)
|
|
(925
|
)
|
||
Interest expense
|
|
14,676
|
|
|
8,058
|
|
||
Operating loss
|
|
(38,991
|
)
|
|
(87,420
|
)
|
||
Depreciation and amortization
|
|
12,374
|
|
|
13,039
|
|
||
Gain on the sale of assets
|
|
(1,358
|
)
|
|
—
|
|
||
Impairment of property and equipment
|
|
2,089
|
|
|
3,357
|
|
||
Provision for loan losses, net of franchise revenues
|
|
2,594
|
|
|
7,361
|
|
||
IT transformation investments
|
|
25,923
|
|
|
34,374
|
|
||
Costs associated with accelerated store closings
|
|
13,392
|
|
|
14,764
|
|
||
Adjusted EBITDA
|
|
$
|
16,023
|
|
|
$
|
(14,525
|
)
|
|
|
Fiscal
|
||||||
thousands, except for number of stores
|
|
2018
|
|
2017
|
||||
Net sales
|
|
$
|
958,518
|
|
|
$
|
1,177,222
|
|
Comparable store sales %
|
|
(6.0
|
)%
|
|
(8.1
|
)%
|
||
Cost of sales and occupancy
|
|
768,624
|
|
|
931,078
|
|
||
Gross margin
|
|
189,894
|
|
|
246,144
|
|
||
Margin rate
|
|
19.8
|
%
|
|
20.9
|
%
|
||
Selling and administrative
|
|
240,955
|
|
|
283,294
|
|
||
Selling and administrative expense as a percentage of net sales
|
|
25.1
|
%
|
|
24.1
|
%
|
||
Impairment of property and equipment
|
|
1,007
|
|
|
2,581
|
|
||
Depreciation and amortization
|
|
6,263
|
|
|
5,378
|
|
||
Total costs and expenses
|
|
1,016,849
|
|
|
1,222,331
|
|
||
Operating loss
|
|
$
|
(58,331
|
)
|
|
$
|
(45,109
|
)
|
Total Hometown stores
|
|
549
|
|
|
768
|
|
|
|
52 and 53 Weeks Ended
|
||||||
Thousands
|
|
February 2, 2019
|
|
February 3, 2018
|
||||
Operating loss
|
|
$
|
(58,331
|
)
|
|
$
|
(45,109
|
)
|
Depreciation and amortization
|
|
6,263
|
|
|
5,378
|
|
||
Impairment of property and equipment
|
|
1,007
|
|
|
2,581
|
|
||
Provision for franchisee note losses, net of recoveries
|
|
(245
|
)
|
|
(200
|
)
|
||
IT transformation investments
|
|
17,950
|
|
|
22,847
|
|
||
Accelerated closure of under-performing stores
|
|
13,651
|
|
|
6,952
|
|
||
Adjusted EBITDA
|
|
$
|
(19,705
|
)
|
|
$
|
(7,551
|
)
|
|
|
Fiscal
|
||||||
thousands, except for number of stores
|
|
2018
|
|
2017
|
||||
Net sales
|
|
$
|
491,430
|
|
|
$
|
542,729
|
|
Comparable store sales %
|
|
(1.8
|
)%
|
|
(9.1
|
)%
|
||
Cost of sales and occupancy
|
|
358,128
|
|
|
440,330
|
|
||
Gross margin
|
|
133,302
|
|
|
102,399
|
|
||
Margin rate
|
|
27.1
|
%
|
|
18.9
|
%
|
||
Selling and administrative
|
|
108,127
|
|
|
136,273
|
|
||
Selling and administrative expense as a percentage of net sales
|
|
22.0
|
%
|
|
25.1
|
%
|
||
Impairment of property and equipment
|
|
1,082
|
|
|
776
|
|
||
Depreciation and amortization
|
|
6,111
|
|
|
7,661
|
|
||
Gain on the sale of assets
|
|
(1,358
|
)
|
|
—
|
|
||
Total costs and expenses
|
|
472,090
|
|
|
585,040
|
|
||
Operating income (loss)
|
|
$
|
19,340
|
|
|
$
|
(42,311
|
)
|
Total Outlet stores
|
|
128
|
|
|
132
|
|
|
|
52 and 53 Weeks Ended
|
||||||
Thousands
|
|
February 2, 2019
|
|
February 3, 2018
|
||||
Operating income (loss)
|
|
$
|
19,340
|
|
|
$
|
(42,311
|
)
|
Depreciation and amortization
|
|
6,111
|
|
|
7,661
|
|
||
Impairment of property and equipment
|
|
1,082
|
|
|
776
|
|
||
Gain on sale of asset
|
|
(1,358
|
)
|
|
—
|
|
||
Provision for franchisee note losses, net of recoveries
|
|
2,839
|
|
|
7,561
|
|
||
IT transformation investments
|
|
7,973
|
|
|
11,527
|
|
||
Accelerated closure of under-performing stores
|
|
(259
|
)
|
|
7,812
|
|
||
Adjusted EBITDA
|
|
$
|
35,728
|
|
|
$
|
(6,974
|
)
|
thousands
|
|
Total
|
|
Within
1 Year |
|
1-3
Years |
|
4-5
Years |
|
After 5
Years |
||||||||||
Short-term borrowings
|
|
$
|
93,000
|
|
|
$
|
93,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Term loan
|
|
40,000
|
|
|
40,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||
Capital leases
|
|
658
|
|
|
259
|
|
|
394
|
|
|
5
|
|
|
—
|
|
|||||
Operating leases
|
|
132,378
|
|
|
39,292
|
|
|
60,189
|
|
|
28,523
|
|
|
4,374
|
|
|||||
Total Contractual Obligations
|
|
$
|
266,036
|
|
|
$
|
172,551
|
|
|
$
|
60,583
|
|
|
$
|
28,528
|
|
|
$
|
4,374
|
|
•
|
it requires assumptions to be made about matters that were highly uncertain at the time the estimate was made, and
|
•
|
changes in the estimate that are reasonably likely to occur from period to period or different estimates that could have been selected would have a material effect on our financial condition, cash flows or results of operations.
|
•
|
The willingness and ability of Transform Holdco to perform all of its obligations in accordance with the terms and conditions of the Operative Agreements;
|
•
|
Transform Holdco was formed recently, was not an operating retail business prior to its acquisition of the Sears Assets and its assumption of the Operative Agreements, and will rely, at least initially, on Sears Holdings and its subsidiaries and other third parties to provide to Transform Holdco the merchandising and other services that Transform Holdco is obligated to provide to the Company in accordance with the Operative Agreements;
|
•
|
The ability of Transform Holdco to resolve, on operational and financial terms that are satisfactory to Transform Holdco, its reported current disputes and future disputes, if any, with the Sears Holdings Companies regarding Transform Holdco's acquisition of the Sears Assets and the assumption of related obligations;
|
•
|
Transform Holdco is a private company and is not obligated to disclose publicly any information regarding its results of operations, financial condition, liquidity, cash flows, or overall ability to operate its businesses and provide merchandising and other services to the Company in accordance with the Operative Agreements (and Transform Holdco has not given the Company any of such information);
|
•
|
With respect to the Sears Holdings Companies' bankruptcy proceedings and Transform Holdco’s assumption of the Operative Agreements, (1) the Senior ABL Facility provides for significant lender discretion, such as the ability to reduce loan advance-rates (through the imposition of reserves against the Company’s borrowing base), which could reduce the amounts that the Company could borrow or require the Company to repay amounts already borrowed and (2) the lenders could assert that they have no obligation to extend to the Company additional loans on the basis that the Company has suffered a “Material Adverse Effect” and (3) the Company’s inability to enforce any of the Separation Agreements could be an “Event of Default” under the Senior ABL Facility that would permit the lenders to accelerate and immediately call due all of the Company's outstanding loans;
|
•
|
With respect to the Sears Holdings Companies' bankruptcy proceedings and Transform Holdco’s assumption of the Operative Agreements, (1) the Term Loan Agreement provides for significant lender discretion, such as the ability to
|
•
|
The report of the Company’s independent registered public accounting firm, which includes their opinion on the consolidated financial statements included in this Annual Report on Form 10-K and in which the firm expresses “Going Concern Uncertainty,” could result in adverse reactions by the Company’s vendors, customers, and associates that would have a material adverse effect on the Company's business;
|
•
|
Sears Holdings and several of its subsidiaries, acting at the direction of the Restructuring Sub-Committee of the Restructuring Committee of the Board of Directors of Sears Holdings has commenced an adversary proceeding in the the Sears Holdings Companies' bankruptcy proceedings against ESL and other current and former insiders of Sears Holdings alleging fraudulent transfers and breaches of fiduciary duty and seeking against ESL and several of the other defendants to avoid as actual fraudulent transfers the 2012 Separation-associated distribution by Sears Holdings of subscription rights to purchase the Company's common stock; while the Company is not a defendant in the adversary proceeding, developments in the adversary proceeding could involve the Company, its equity interests, or its assets, and could affect the ability of Transform Holdco to perform the Operative Agreements, which could have a material adverse effect on our business;
|
•
|
The Sears Holdings Unsecured Creditors Committee is investigating transfers to ESL and other current and former insiders of Sears Holdings in connection with “Insider Transactions,” including the 2012 Separation;
|
•
|
The possible perceptions of our vendors, suppliers, lenders under the Senior ABL Facility and the Term Loan, and customers that, as a result of the Sears Holdings bankruptcy proceedings and Transform Holdco’s assumption of the Operative Agreements, the Company's ability to operate its businesses (especially the Company's Hometown segment businesses) has been materially and adversely affected;
|
•
|
Transform Holdco, which has assumed the Operative Agreements, could decline to extend or renew, or upon renewal or extension materially modify to our material disadvantage, our rights under the Amended and Restated Merchandising Agreement, one of the Operative Agreements, pursuant to which we have rights to acquire merchandise branded with the KCD Marks from Transform Holdco (we do not have rights to purchase directly from manufacturers merchandise branded with the KCD Marks and, despite our efforts, we have been unable to obtain those rights);
|
•
|
The Amended and Restated Merchandising Agreement provides that (1) if a third party that is not an affiliate of Transform Holdco (as assignee) acquires the rights to one or more (but less than all) of the KCD Marks Transform Holdco may terminate our rights to buy merchandise branded with any of the acquired KCD Marks and (2) if a third party that is not an affiliate of Transform Holdco acquires the rights to all of the KCD Marks Transform Holdco may terminate the Amended and Restated Merchandising Agreement in its entirety, over which events we have no control;
|
•
|
The sale by Transform Holdings and its subsidiaries to other retailers that compete with us on major home appliances and other products branded with one of the KCD Marks;
|
•
|
Our ability to offer merchandise and services that our customers want, including those branded with the KCD Marks;
|
•
|
Transform Holdco may explore alternatives for its Kenmore, Craftsman, and Diehard businesses and further expand the presence of these brands including by evaluating potential partnerships or other transactions (for example, Kenmore and Diehard products are being sold on Amazon.com);
|
•
|
Our ability to successfully manage our inventory levels and implement initiatives to improve inventory management and other capabilities;
|
•
|
Competitive conditions in the retail industry;
|
•
|
Worldwide economic conditions and business uncertainty, the availability of consumer and commercial credit, changes in consumer confidence, tastes, preferences and spending, and changes in vendor relationships;
|
•
|
The fact that our past performance generally, as reflected on our historical financial statements, may not be indicative of our future performance as a result of, among other things, our reliance on Transform Holdco for most products and services that are important to the successful operation of our business, and our potential need to rely on Transform Holdco for some products and services beyond the expiration of our agreements with Transform Holdco;
|
•
|
Transform Holdco is seeking to negotiate supply agreements with its appliance, lawn and garden, tools, and other vendors, which vendors may be willing to supply merchandise to Transform Holdco on terms (including vendor-payment terms for Transform Holdco’s merchandise purchases) that are either unacceptable to Transform Holdco or acceptable to Transform Holdco but would uneconomic for us;
|
•
|
The willingness of Transform Holdco’s appliance, lawn and garden, tools, and other vendors to continue to pay to Transform Holdco’s merchandise-related subsidies and allowances and cash discounts (Transform Holdco is obligated to pay to a
|
•
|
Our ability to resolve, on commercially reasonable terms, future disputes with Transform Holdco, if any, regarding the material terms and conditions of our agreements with Transform Holdco;
|
•
|
Our ability to establish information, merchandising, logistics, and other systems separate from Transform Holdco that would be necessary to ensure continuity of merchandise supplies and services for our businesses if, in connection with Transform Holdco’s acquisition of the Sears Assets, vendors were to reduce, or cease, their merchandise sales to Transform Holdco or provide logistics and other services to Transform Holdco or if Transform Holdco were to reduce, or cease, its merchandise sales to us or reduce providing, or cease to provide, logistics and other services to us;
|
•
|
If Transform Holdco’s sales of major appliances and lawn and garden merchandise to its retail customers decline Transform Holdco’s sales to us of outlet-value merchandise could decline;
|
•
|
Our ability to maintain an effective and productive business relationship with Transform Holdco, especially if future disputes were to arise with respect to the terms and conditions of the Operative Agreements;
|
•
|
Most of our agreements related to the 2012 Separation and our continuing relationship with Sears Holdings (Transform Holdco after mid-February 2019) were negotiated while we were a subsidiary of Sears Holdings (except for amendments agreed to after the 2012 Separation), and we may have received different terms from unaffiliated third parties (including with respect to merchandise-vendor and service-provider indemnification and defense for negligence claims and claims arising out of failure to comply with contractual obligations);
|
•
|
Our reliance on Transform Holdco to provide access to computer systems acquired as part of the Sears Assets to process transactions with our customers (including the point-of-sale system for the stores we operate and the stores that our independent dealers and independent franchisees operate, which point-of-sale system captures, among other things, credit-card information supplied by our customers) and others, quantify our results of operations, and manage our business (“SHO's TH-Supplied Systems”);
|
•
|
SHO's TH-Supplied Systems could be subject to disruptions and data/security breaches (Sears Holdings announced during 2017 that its Kmart store payment-data systems had been infected with a malicious code and that the code had been removed and the event contained and during April 2018 Sears Holdings announced that one of its vendors that provides online support services to Sears and Kmart had notified Sears Holdings that the vendor had experienced a security incident during 2017 that involved unauthorized access to credit card information with respect to less than 100,000 Sears Holdings's customers), and Transform Holdco could be unwilling or unable to indemnify and defend us against third-party claims and other losses resulting from such disruptions and data/security breaches, which could have one or more material adverse effects on SHO;
|
•
|
Our ability to implement our IT transformation by the end of the second quarter of our 2019 fiscal year in accordance with our plans, expectations, current timetable, and anticipated cost;
|
•
|
Limitations and restrictions in the Senior ABL Facility and the Term Loan Agreement and their related agreements governing our indebtedness and our ability to service our indebtedness;
|
•
|
Competitors could continue to reduce their promotional pricing on new-in-box appliances, which could continue to adversely impact our sales of out-of-box appliances and associated margin;
|
•
|
Our ability to generate profitable sales of merchandise and services on our transactional ecommerce websites in the amounts we have planned to generate;
|
•
|
Our ability to refinance the Senior ABL Facility and the Term Loan and obtain additional financing on acceptable terms;
|
•
|
Our dependence on the ability and willingness of our independent dealers and independent franchisees to operate their stores profitably and in a manner consistent with our concepts and standards;
|
•
|
Our ability to (1) significantly reduce or eliminate the Hometown segment's growing operating losses (due in part to increasing supply-chain costs and Craftsman and Kenmore merchandise availability issues that are disproportionately affecting the Hometown segment) and (2) close, or seek the closure of, unproductive Hometown segment stores and to reduce the inventory, marketing, promotion, supply chain, and other expenses associated with these stores;
|
•
|
Our dependence on sources outside the U.S. for significant amounts of our merchandise inventories;
|
•
|
Fixed-asset impairment for long-lived assets;
|
•
|
Our ability to attract, motivate, and retain key executives and other employees;
|
•
|
Our ability to maintain effective internal controls as a publicly held company;
|
•
|
Low trading volume of our common stock due to limited liquidity or a lack of analyst coverage; and
|
•
|
The impact on our common stock and our overall performance as a result of our principal stockholder's ability to exert control over us.
|
|
|
Fiscal Year Ended
|
||||||
thousands, except per share amounts
|
|
February 2, 2019
|
|
February 3, 2018
|
||||
NET SALES
|
|
$
|
1,449,948
|
|
|
$
|
1,719,951
|
|
COSTS AND EXPENSES
|
|
|
|
|
||||
Cost of sales and occupancy
|
|
1,126,752
|
|
|
1,371,408
|
|
||
Selling and administrative
|
|
349,082
|
|
|
419,567
|
|
||
Impairment of property and equipment
|
|
2,089
|
|
|
3,357
|
|
||
Depreciation and amortization
|
|
12,374
|
|
|
13,039
|
|
||
Gain on the sale of assets
|
|
(1,358
|
)
|
|
—
|
|
||
Total costs and expenses
|
|
1,488,939
|
|
|
1,807,371
|
|
||
Operating loss
|
|
(38,991
|
)
|
|
(87,420
|
)
|
||
Interest expense
|
|
(14,676
|
)
|
|
(8,058
|
)
|
||
Other income
|
|
367
|
|
|
925
|
|
||
Loss before income taxes
|
|
(53,300
|
)
|
|
(94,553
|
)
|
||
Income tax expense
|
|
(164
|
)
|
|
(504
|
)
|
||
NET LOSS
|
|
$
|
(53,464
|
)
|
|
$
|
(95,057
|
)
|
|
|
|
|
|
||||
NET LOSS PER COMMON SHARE ATTRIBUTABLE TO STOCKHOLDERS
|
|
|
|
|
||||
|
|
|
|
|
||||
Basic:
|
|
$
|
(2.36
|
)
|
|
$
|
(4.19
|
)
|
Diluted:
|
|
$
|
(2.36
|
)
|
|
$
|
(4.19
|
)
|
|
|
|
|
|
||||
Basic weighted average common shares outstanding
|
|
22,702
|
|
|
22,702
|
|
||
Diluted weighted average common shares outstanding
|
|
22,702
|
|
|
22,702
|
|
|
|
Fiscal Year Ended
|
||||||
thousands
|
|
February 2, 2019
|
|
February 3, 2018
|
||||
|
|
|
|
|
||||
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
||||
Net loss
|
|
$
|
(53,464
|
)
|
|
$
|
(95,057
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
|
|
|
|
|
||||
Depreciation and amortization
|
|
12,374
|
|
|
13,039
|
|
||
Gain on the sale of assets
|
|
(1,358
|
)
|
|
—
|
|
||
Amortization of debt issuance costs
|
|
2,946
|
|
|
2,174
|
|
||
Impairment of property and equipment
|
|
2,089
|
|
|
3,357
|
|
||
Provision for losses on franchisee receivables
|
|
2,594
|
|
|
7,361
|
|
||
Share-based compensation
|
|
—
|
|
|
(103
|
)
|
||
Change in operating assets and liabilities:
|
|
|
|
|
||||
Accounts and franchisee receivables
|
|
162
|
|
|
(2,508
|
)
|
||
Merchandise inventories
|
|
59,009
|
|
|
37,521
|
|
||
Payable to Sears Holdings Corporation
|
|
(14,002
|
)
|
|
(52,642
|
)
|
||
Accounts payable
|
|
4,089
|
|
|
(2,112
|
)
|
||
Store closing accrual
|
|
(2,010
|
)
|
|
(3,004
|
)
|
||
Customer deposits
|
|
(3,829
|
)
|
|
(3,287
|
)
|
||
Other operating assets and liabilities, net
|
|
6,477
|
|
|
(10,385
|
)
|
||
Net cash provided by (used in) operating activities
|
|
15,077
|
|
|
(105,646
|
)
|
||
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
||||
Proceeds from sale of property
|
|
2,837
|
|
|
—
|
|
||
Purchases of property and equipment
|
|
(6,438
|
)
|
|
(9,228
|
)
|
||
Net cash used in investing activities
|
|
(3,601
|
)
|
|
(9,228
|
)
|
||
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
||||
Net borrowings of capital lease obligations
|
|
45
|
|
|
72
|
|
||
Net (payments) borrowings on short-term borrowings
|
|
(44,900
|
)
|
|
111,100
|
|
||
Proceeds from term loan
|
|
40,000
|
|
|
—
|
|
||
Debt issuance costs
|
|
(1,913
|
)
|
|
—
|
|
||
Net cash (used in) provided by financing activities
|
|
(6,768
|
)
|
|
111,172
|
|
||
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
4,708
|
|
|
(3,702
|
)
|
||
CASH AND CASH EQUIVALENTS—Beginning of period
|
|
10,402
|
|
|
14,104
|
|
||
CASH AND CASH EQUIVALENTS—End of period
|
|
$
|
15,110
|
|
|
$
|
10,402
|
|
|
|
|
|
|
||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
||||
Cash paid for interest
|
|
$
|
11,546
|
|
|
$
|
7,848
|
|
Cash paid for income taxes
|
|
$
|
1,148
|
|
|
$
|
808
|
|
thousands
|
Number of Shares of Common Stock
|
|
Common Stock/Par Value
|
|
Capital in Excess of Par Value
|
|
Retained Earnings (Deficit)
|
|
Total Stockholders' Equity
|
|||||||||
Balance at January 28, 2017
|
22,716
|
|
|
$
|
227
|
|
|
555,481
|
|
|
(285,009
|
)
|
|
270,699
|
|
|||
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(95,057
|
)
|
|
(95,057
|
)
|
||||
Share-based compensation
|
(14
|
)
|
|
—
|
|
|
(103
|
)
|
|
—
|
|
|
(103
|
)
|
||||
Balance at February 3, 2018
|
22,702
|
|
|
$
|
227
|
|
|
$
|
555,378
|
|
|
$
|
(380,066
|
)
|
|
$
|
175,539
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(53,464
|
)
|
|
(53,464
|
)
|
||||
Cumulative effect adjustment from adoption of new revenue recognition standard
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,119
|
)
|
|
$
|
(2,119
|
)
|
|||
Balance at February 2, 2019
|
22,702
|
|
|
$
|
227
|
|
|
$
|
555,378
|
|
|
$
|
(435,649
|
)
|
|
$
|
119,956
|
|
Fiscal Year
|
Ended
|
Weeks
|
2018
|
February 2, 2019
|
52
|
2017
|
February 3, 2018
|
53
|
thousands
|
|
February 2, 2019
|
|
February 3, 2018
|
||||
Land
|
|
$
|
1,638
|
|
|
$
|
1,741
|
|
Buildings and improvements
|
|
29,735
|
|
|
35,065
|
|
||
Furniture, fixtures and equipment
|
|
35,526
|
|
|
37,303
|
|
||
Capitalized leases
|
|
1,648
|
|
|
1,276
|
|
||
Total property and equipment
|
|
68,547
|
|
|
75,385
|
|
||
Less: accumulated depreciation
|
|
(40,816
|
)
|
|
(39,336
|
)
|
||
Total property and equipment, net
|
|
$
|
27,731
|
|
|
$
|
36,049
|
|
|
|
Fiscal Year
|
||||
thousands
|
|
2018
|
|
2017
|
||
Minimum rentals
|
|
44,379
|
|
|
59,533
|
|
Less-Sublease rentals
|
|
(2,553
|
)
|
|
(7,399
|
)
|
Total
|
|
41,826
|
|
|
52,134
|
|
Fiscal Year
(thousands)
|
|
Capital Leases
|
|
Operating Leases
|
||||
2019
|
|
$
|
259
|
|
|
$
|
39,292
|
|
2020
|
|
359
|
|
|
33,666
|
|
||
2021
|
|
21
|
|
|
26,523
|
|
||
2022
|
|
14
|
|
|
19,037
|
|
||
2023
|
|
5
|
|
|
9,486
|
|
||
Thereafter
|
|
—
|
|
|
4,374
|
|
||
Total Minimum Lease Payments
|
|
658
|
|
|
132,378
|
|
||
Less - Sublease Income on Leased Properties
|
|
—
|
|
|
(3,036
|
)
|
||
Net Minimum Lease Payments
|
|
$
|
658
|
|
|
$
|
129,342
|
|
|
|
|
|
|
||||
Capital lease obligations
|
|
658
|
|
|
|
|||
Less Current Portion of Capital Lease Obligations
|
(259
|
)
|
|
|
||||
Long-term Capital Lease Obligations
|
|
$
|
399
|
|
|
|
•
|
Our revenue is primarily generated from the sales of merchandise to customers through the retail, e-commerce or wholesale channels. Our performance obligations underlying such sales, and the timing of revenue recognition related thereto, remain substantially unchanged following the adoption of this ASU.
|
•
|
The adoption of ASU No. 2014-09 requires that we recognize our sales return allowance on a gross basis rather than as a net liability. As such, we now recognize (i) a return asset for the right to recover the goods returned by the customer, measured at the former carrying amount of the goods, less any expected recovery costs (recorded as an increase to prepaid expenses and other current assets), (ii) a return liability for the amount of expected returns (recorded as an increase to other current liabilities) and (iii) deferred revenue for commissions earned on extended protection agreements (recorded as an increase to other current liabilities).
|
Thousands
|
|
As Reported
|
|
ASU 2014-09 Effect
|
|
Excluding ASU 2014-09 Effect
|
||||||
Prepaid expenses and other current assets
|
|
$
|
9,452
|
|
|
$
|
1,226
|
|
|
$
|
8,226
|
|
Other current liabilities
|
|
56,009
|
|
|
3,345
|
|
|
52,664
|
|
|||
Accumulated deficit
|
|
(435,649
|
)
|
|
(2,119
|
)
|
|
(433,530
|
)
|
Thousands
|
|
52 Weeks Ended February 2, 2019
|
||
Merchandise
|
|
$
|
1,343,459
|
|
Services
|
|
79,969
|
|
|
Other
|
|
26,520
|
|
|
Net sales
|
|
$
|
1,449,948
|
|
thousands
|
|
February 2, 2019
|
|
February 3, 2018
|
||||
Short-term franchisee receivables
|
|
$
|
584
|
|
|
$
|
1,205
|
|
Miscellaneous receivables
|
|
11,916
|
|
|
14,314
|
|
||
Long-term franchisee receivables
|
|
1,422
|
|
|
7,962
|
|
||
Other assets
|
|
2,277
|
|
|
5,106
|
|
||
Allowance for losses on short-term franchisee receivables (1)
|
|
(584
|
)
|
|
(847
|
)
|
||
Allowance for losses on long-term franchisee receivables (1)
|
|
(1,422
|
)
|
|
(4,928
|
)
|
||
Total Accounts and franchisee receivables and other assets
|
|
$
|
14,193
|
|
|
$
|
22,812
|
|
thousands
|
|
February 2, 2019
|
|
February 3, 2018
|
||||
Allowance for losses on franchisee receivables, beginning of period
|
|
$
|
5,775
|
|
|
$
|
8,242
|
|
Provisions during the period
|
|
2,594
|
|
|
7,361
|
|
||
Write off of franchisee receivables
|
|
(6,363
|
)
|
|
(9,828
|
)
|
||
Allowance for losses on franchisee receivables, end of period
|
|
$
|
2,006
|
|
|
$
|
5,775
|
|
thousands
|
|
February 2, 2019
|
|
February 3, 2018
|
||||
Customer deposits
|
|
$
|
12,826
|
|
|
$
|
16,655
|
|
Sales and other taxes
|
|
7,165
|
|
|
9,221
|
|
||
Accrued expenses
|
|
23,097
|
|
|
17,755
|
|
||
Payroll and related items
|
|
12,115
|
|
|
7,140
|
|
||
Store closing and severance costs
|
|
2,645
|
|
|
4,655
|
|
||
Total Other current and long-term liabilities
|
|
$
|
57,848
|
|
|
$
|
55,426
|
|
|
|
|
|
Fiscal Year Ended
|
||||||
thousands
|
|
February 2, 2019
|
|
February 3, 2018
|
||||||
(Loss) income before income taxes:
|
|
|
|
|
||||||
U.S.
|
|
$
|
(54,629
|
)
|
|
$
|
(96,166
|
)
|
||
Foreign
|
|
1,329
|
|
|
1,613
|
|
||||
Total
|
|
$
|
(53,300
|
)
|
|
$
|
(94,553
|
)
|
||
Income tax expense (benefit):
|
|
|
|
|
||||||
Current:
|
|
|
|
|
|
|||||
Federal
|
|
$
|
(2
|
)
|
|
$
|
2
|
|
||
State
|
|
302
|
|
|
215
|
|
||||
Foreign
|
|
(136
|
)
|
|
1,046
|
|
||||
Total
|
|
164
|
|
|
1,263
|
|
||||
Deferred:
|
|
|
|
|
||||||
Federal
|
|
—
|
|
|
(759
|
)
|
||||
Total
|
|
$
|
—
|
|
|
$
|
(759
|
)
|
||
Income tax expense
|
|
$
|
164
|
|
|
$
|
504
|
|
|
|
Fiscal Year Ended
|
||||
|
|
February 2, 2019
|
|
February 3, 2018
|
||
Federal tax rate
|
|
21.0
|
%
|
|
33.7
|
%
|
State income tax (net of federal benefit)
|
|
(0.4
|
)%
|
|
(0.2
|
)%
|
Federal tax rate change
|
|
—
|
%
|
|
(37.2
|
)%
|
Valuation allowance
|
|
(21.0
|
)%
|
|
4.4
|
%
|
Foreign taxes
|
|
0.2
|
%
|
|
(1.1
|
)%
|
Other
|
|
(0.1
|
)%
|
|
(0.1
|
)%
|
Effective tax rate
|
|
(0.3
|
)%
|
|
(0.5
|
)%
|
|
|
|
Fiscal Year Ended
|
||||||
thousands
|
February 2, 2019
|
|
February 3, 2018
|
||||||
Deferred tax assets
|
|
||||||||
Bad debts
|
$
|
855
|
|
|
$
|
1,543
|
|
||
Deferred compensation
|
2,181
|
|
|
756
|
|
||||
Net operating loss
|
72,192
|
|
|
54,580
|
|
||||
Property
|
647
|
|
|
2,598
|
|
||||
Royalty-free license
|
23,587
|
|
|
26,451
|
|
||||
Other
|
10,538
|
|
|
7,803
|
|
||||
Sub-total deferred tax assets
|
$
|
110,000
|
|
|
$
|
93,731
|
|
||
Valuation allowance
|
(104,978
|
)
|
|
(92,362
|
)
|
||||
Total deferred tax assets
|
$
|
5,022
|
|
|
$
|
1,369
|
|
||
Deferred tax liabilities
|
|
|
|
||||||
Inventory
|
(4,394
|
)
|
|
(730
|
)
|
||||
Other
|
(628
|
)
|
|
(639
|
)
|
||||
Total deferred tax liabilities
|
(5,022
|
)
|
|
(1,369
|
)
|
||||
Net deferred tax assets
|
—
|
|
|
—
|
|
•
|
We are party to an agreement with Transform Holdco (as assignee from Sears Holdings) pursuant to which Sears Holdings consummated the 2012 Separation. The agreement, among other things, provided for as part of the 2012 Separation the allocation and transfer, through a series of intercompany transactions, of the assets and the liabilities comprising the Sears Hometown and Hardware and Sears Outlet businesses of Sears Holdings. In the agreement SHO and Transform Holdco agree to release each other from all pre-2012 Separation claims (other than with respect to the agreements executed in connection with the 2012 Separation) and each agrees to defend and indemnify the other with respect to its post-2012 Separation business.
|
•
|
We obtain a significant amount of our merchandise inventories from Transform Holdco. This enables us to take advantage of the amount and scope of Transform Holdco's purchasing activities. The Operative Agreements include an Amended and Restated Merchandising Agreement with subsidiaries of Transform Holdco (the "Merchandising Agreement") pursuant to which they (1) sell to us, with respect to certain specified product categories, Sears-branded products including KCD Products and vendor-branded products obtained from Transform Holdco's vendors and suppliers and (2) grant us licenses to use the trademarks owned by subsidiaries of Transform Holdco, or the "Sears marks," including the KCD Marks in connection with the marketing and sale of products sold under the Sears marks. The initial term of the Merchandising Agreement will expire on February 1, 2023, subject to
one
three
-year renewal term with respect to the KCD Products. We pay, on a weekly basis, a royalty determined by multiplying our net sales of the KCD Products by specified fixed royalties rates for each brand’s licensed products, subject to adjustments based on the extent to which we feature Kenmore brand products in certain of our advertising and the extent to which we pay specified minimum commissions to our franchisees and Hometown Store owners. The Operative Agreements also provide for related logistics, handling, warehouse and transportation services, the charges for which are based generally on merchandise inventory units. We also pay fees for participation in Transform Holdco's Shop Your Way program.
|
•
|
We obtain our merchandise from Transform Holdco and other vendors. Products which we acquired from Transform Holdco, including KCD Products and other products, accounted for approximately
60%
and
78%
of our total purchases of inventory from all vendors for
2018
and
2017
, respectively. The loss of or a reduction in the amount of merchandise made available to us by Transform Holdco could have a material adverse effect on our business and results of operations.
|
•
|
Transform Holdco (as assignee from Sears Holdings) provides the Company with specified corporate services pursuant to the Operative Agreements. These services include tax, accounting, procurement, risk management and insurance, advertising and marketing, loss prevention, environmental, product and human safety, facilities, logistics and distribution, information technology (including the point-of-sale system used by the Company and our dealers and franchisees), online, payment clearing, and other financial, real estate management, merchandise-related and other support services. Transform Holdco charges the Company for these corporate services generally based on actual usage, a pro rata charge based upon sales, head count, or square footage, or a fixed fee or commission as agreed between the parties.
|
•
|
Transform Holdco (as assignee from Sears Holdings) has licensed the Company until October 11, 2029, on a royalty-free basis, to use under specified conditions (1) the name "Sears" in our corporate name and to promote our businesses and (2) the www.SearsOutlet.com (our license to use "SearsOutlet.com" on a web platform not operated by Transform Holdco will expire on February 1, 2023), www.searshomeapplianceshowroom.com, www.searshometownstores.com, and www.searshardwarestores.com domain names to promote our businesses. Also, Transform Holdco has licensed the Company until October 11, 2029, on an exclusive, royalty-free basis, under specified conditions to use for the purpose of operating our stores the names "Sears Appliance & Hardware," "Sears Authorized Hometown Stores," "Sears Hometown Store," "Sears Home Appliance Showroom," "Sears Hardware," and "Sears Outlet Store."
|
•
|
Transform Holdco (as assignee from Sears Holdings) has assigned to us leases for, or has subleased to us, many of the stores that we operate or that we have, in turn, subleased to franchisees. Generally, the terms of the subleases match the terms, including the payment of rent and expiration date, of the existing leases between Transform Holdco (or one of its subsidiaries) and the landlord. In addition, a small number of our stores are in locations where Transform Holdco currently operates one of its stores or a distribution facility. In such cases we have entered into a lease or sublease with Transform Holdco (or one of its subsidiaries) for the portion of the space in which our store will operate, and we pay rent directly to Transform Holdco on the terms negotiated in connection with the 2012 Separation. We also lease from Transform Holdco office space for our corporate headquarters.
|
•
|
SHO receives commissions from Transform Holdco for specified sales of merchandise made through www.sears.com and www.SearsOutlet.com, the sale of extended-service plans, delivery and handling services and relating to the use in our stores of credit cards branded with the Sears name. For certain transactions SHO pays a commission to Transform Holdco.
|
|
|
Fiscal Year Ended
|
||||||
thousands
|
|
February 2, 2019
|
|
February 3, 2018
|
||||
Net Commissions from Sears Holdings
|
|
$
|
50,964
|
|
|
$
|
66,557
|
|
Purchases related to cost of sales and occupancy
|
|
689,599
|
|
|
958,560
|
|
||
Services included in selling and administrative
|
|
40,027
|
|
|
60,822
|
|
|
|
2018
|
||||||||||
thousands
|
|
Hometown
|
|
Outlet
|
|
Total
|
||||||
Net sales
|
|
|
|
|
|
|
||||||
Appliances
|
|
$
|
659,401
|
|
|
$
|
406,233
|
|
|
$
|
1,065,634
|
|
Lawn and garden
|
|
169,012
|
|
|
16,846
|
|
|
185,858
|
|
|||
Tools and paint
|
|
79,313
|
|
|
12,989
|
|
|
92,302
|
|
|||
Other
|
|
50,792
|
|
|
55,362
|
|
|
106,154
|
|
|||
Total
|
|
958,518
|
|
|
491,430
|
|
|
1,449,948
|
|
|||
Costs and expenses
|
|
|
|
|
|
|
||||||
Cost of sales and occupancy
|
|
768,624
|
|
|
358,128
|
|
|
1,126,752
|
|
|||
Selling and administrative
|
|
240,955
|
|
|
108,127
|
|
|
349,082
|
|
|||
Impairment of property and equipment
|
|
1,007
|
|
|
1,082
|
|
|
2,089
|
|
|||
Depreciation and amortization
|
|
6,263
|
|
|
6,111
|
|
|
12,374
|
|
|||
Gain on sale of assets
|
|
—
|
|
|
(1,358
|
)
|
|
(1,358
|
)
|
|||
Total
|
|
1,016,849
|
|
|
472,090
|
|
|
1,488,939
|
|
|||
Operating (loss) income
|
|
$
|
(58,331
|
)
|
|
$
|
19,340
|
|
|
$
|
(38,991
|
)
|
Total assets
|
|
$
|
225,919
|
|
|
$
|
117,852
|
|
|
$
|
343,771
|
|
Capital expenditures
|
|
$
|
4,812
|
|
|
$
|
1,626
|
|
|
$
|
6,438
|
|
|
|
2017
|
||||||||||
thousands
|
|
Hometown
|
|
Outlet
|
|
Total
|
||||||
Net sales
|
|
|
|
|
|
|
||||||
Appliances
|
|
$
|
805,490
|
|
|
$
|
446,118
|
|
|
$
|
1,251,608
|
|
Lawn and garden
|
|
204,371
|
|
|
19,024
|
|
|
223,395
|
|
|||
Tools and paint
|
|
103,706
|
|
|
14,289
|
|
|
117,995
|
|
|||
Other
|
|
63,655
|
|
|
63,298
|
|
|
126,953
|
|
|||
Total
|
|
1,177,222
|
|
|
542,729
|
|
|
1,719,951
|
|
|||
Costs and expenses
|
|
|
|
|
|
|
||||||
Cost of sales and occupancy
|
|
931,078
|
|
|
440,330
|
|
|
1,371,408
|
|
|||
Selling and administrative
|
|
283,294
|
|
|
136,273
|
|
|
419,567
|
|
|||
Impairment of property and equipment
|
|
2,581
|
|
|
776
|
|
|
3,357
|
|
|||
Depreciation and amortization
|
|
5,378
|
|
|
7,661
|
|
|
13,039
|
|
|||
Total
|
|
1,222,331
|
|
|
585,040
|
|
|
1,807,371
|
|
|||
Operating loss
|
|
$
|
(45,109
|
)
|
|
$
|
(42,311
|
)
|
|
$
|
(87,420
|
)
|
Total assets
|
|
$
|
281,805
|
|
|
$
|
130,883
|
|
|
$
|
412,688
|
|
Capital expenditures
|
|
$
|
4,156
|
|
|
$
|
5,072
|
|
|
$
|
9,228
|
|
|
Fiscal Year Ended
|
||||||
thousands except income per common share
|
February 2, 2019
|
|
February 3, 2018
|
||||
Basic weighted average shares
|
22,702
|
|
|
22,702
|
|
||
Dilutive effect of restricted stock
|
—
|
|
|
—
|
|
||
Diluted weighted average shares
|
22,702
|
|
|
22,702
|
|
||
|
|
|
|
||||
Net loss
|
$
|
(53,464
|
)
|
|
$
|
(95,057
|
)
|
|
|
|
|
||||
Loss per common share:
|
|
|
|
||||
Basic
|
$
|
(2.36
|
)
|
|
$
|
(4.19
|
)
|
Diluted
|
$
|
(2.36
|
)
|
|
$
|
(4.19
|
)
|
thousands
|
|
2018
|
|
2017
|
||||
401(k) Savings Plan
|
|
$
|
1,258
|
|
|
$
|
1,056
|
|
Thousands
|
Lease Termination Costs (1)
|
|
Inventory Related (1)
|
|
Accelerated Depreciation (2)
|
|
Other Charges (3)
|
|
Total Store Closing Costs
|
||||||||||
Fiscal year ended February 2, 2019
|
$
|
237
|
|
|
$
|
11,730
|
|
|
$
|
1,431
|
|
|
$
|
1,425
|
|
|
$
|
14,823
|
|
Thousands
|
Lease Termination Costs (1)
|
|
Inventory Related (1)
|
|
Accelerated Depreciation (2)
|
|
Other Charges (3)
|
|
Total Store Closing Costs
|
||||||||||
Fiscal year ended February 3, 2018
|
$
|
9,665
|
|
|
$
|
4,527
|
|
|
$
|
979
|
|
|
$
|
224
|
|
|
$
|
15,395
|
|
(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.
|
|
|
52 and 53 Weeks Ended
|
||||||
Thousands
|
|
February 2, 2019
|
|
February 3, 2018
|
||||
Store closing and severance costs reserve, beginning of period
|
|
$
|
4,655
|
|
|
$
|
7,659
|
|
Store closing costs
|
|
13,392
|
|
|
14,416
|
|
||
Payments/utilization
|
|
(15,414
|
)
|
|
(17,420
|
)
|
||
Store closing and severance costs reserve, end of period
|
|
$
|
2,633
|
|
|
$
|
4,655
|
|
Plan Category
|
|
(a)
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1)
|
|
(b)
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (1)
|
|
(c)
Number of Securities Remaining Available for Future Issuances Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
|
||
Equity Compensation Plans Approved by Security Holders
|
|
—
|
|
—
|
|
3,674,609
|
|
(2)
|
Equity Compensation Plans Not Approved by Security Holders
|
|
—
|
|
—
|
|
—
|
|
|
Total
|
|
—
|
|
—
|
|
3,674,609
|
|
(2)
|
(1)
|
Financial Statements
|
Sears Hometown and Outlet Stores, Inc.
|
||
|
|
|
By:
|
|
/S/ E. J. BIRD
|
Name:
|
|
E. J. Bird
|
Title:
|
|
Senior Vice President and Chief Financial Officer
|
|
||
Date:
|
|
May 3, 2019
|
Exhibit
Number
|
|
Document Description
|
3.1
|
|
|
3.2
|
|
|
3.3
|
|
|
4.1
|
|
|
10.1
|
|
|
10.2
|
|
|
10.3
|
|
|
10.4
|
|
|
10.5
|
|
|
10.6
|
|
|
10.7
|
|
|
10.8
|
|
|
10.9
|
|
|
10.10(1)
|
|
|
10.11(1)
|
|
|
10.12
|
|
|
10.13
|
|
10.14
|
|
|
10.15(1)
|
|
|
10.16
|
|
|
10.17
|
|
|
10.18
|
|
|
10.19
|
|
|
10.20(1)
|
|
|
10.21
|
|
|
10.22
|
|
|
10.23
|
|
|
10.24
|
|
|
10.25(1)
|
|
|
10.26
|
|
|
10.27(1)
|
|
|
10.28
|
|
|
10.29
|
|
|
10.30
|
|
|
10.31(2)
|
|
|
10.32(2)
|
|
10.54(3)
|
|
|
21(3)
|
|
|
23(3)
|
|
|
24(3)
|
|
|
31.1(3)
|
|
|
31.2(3)
|
|
|
32.1(3)
|
|
|
101(4)
|
|
(1)
|
The Securities and Exchange Commission granted the registrant's request for confidential treatment for the omitted portions of this Exhibit. The registrant has separately filed the omitted portions with the Securities and Exchange Commission.
|
(2)
|
A management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(b) of Form 10-K.
|
(3)
|
Filed herewith.
|
(4)
|
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.
|
1.
|
Definitions
. All capitalized terms used herein and not otherwise defined shall have the same meaning herein as in the Credit Agreement.
|
2.
|
Amendment to Article I of Credit Agreement
. The provisions of Section 1.01 of the Credit Agreement are hereby amended as follows:
|
(a)
|
The definition of “Change of Control” is hereby amended by (i) replacing the “.” at the end of clause (d) thereof with “; and”, and (ii) adding the following new clause (e) at the end thereof:
|
(b)
|
The definition of “Extended Maturity Date” is hereby amended and restated in its entirety as follows:
|
(c)
|
The definition of “Permitted Indebtedness” is hereby amended by deleting clause (k) thereof in its entirety and by substituting the following in its stead:
|
(d)
|
The following new definitions are hereby added to Section 1.01 of the Credit Agreement in appropriate alphabetical order:
|
(e)
|
The provisions of Section 6.12 of the Credit Agreement are hereby amended by adding the following new clause (h) at the end thereof:
|
3.
|
Limited Waiver
. As of the date of this Amendment, subject to the terms and conditions of this Amendment, including, without limitation clauses (a) through (c) below, the Agent and the Required Lenders hereby agree to waive the application of the Audit Covenant through the earlier of (i) October 31, 2019 and (ii) the date that any other Event of Default shall have occurred and be continuing;
provided
, that commencing on August 1, 2019, this limited waiver shall be subject to the following conditions:
|
(a)
|
The Loan Parties shall deliver to the Agent a Borrowing Base Certificate on Friday of each week (or, if Friday is not a Business Day, on the next succeeding Business Day), as of the close of business on the immediately preceding Saturday (it being understood that any weekly Borrowing Base Certificate shall include the results of rolled forward information regarding Eligible Inventory and other items, as applicable);
|
(b)
|
The parties hereto hereby acknowledge and agree that, as of August 1, 2019, a Cash Dominion Event shall be deemed to have occurred and be continuing for all purposes under the Loan Documents; and
|
(c)
|
The Loan Parties shall deliver to the Agent a Cash Flow Forecast (as defined below) on Friday of each week (or, if Friday is not a Business Day, on the next succeeding Business Day). As used herein, the term “Cash Flow Forecast” shall mean the thirteen week cash flow forecast of the Loan Parties through the Extended Maturity Date, and prepared by the Loan Parties in consultation with AlixPartners LLP, and such forecast shall be approved in writing by, and shall be in form and substance reasonably satisfactory to, the Agent and the Required Lenders in their Permitted Discretion, which cash flow forecast shall depict, on a weekly basis, cash revenues, receipts, expenses and disbursements of the Loan Parties and their Subsidiaries.
|
4.
|
Limited Consent Regarding Certain Acquisition
. The Agent and the Lenders hereby (x) consent to the Loan Parties negotiating and entering into an agreement and plan of merger or other acquisition agreement for all of the Equity Interests of Parent, in each case, with the Permitted Holders and with any Persons Acting in Concert (any such agreement, the “
Proposed Acquisition Agreement
”
|
5.
|
Amendment to the GB Term Loan Credit Agreement
. Contemporaneously herewith, the Loan Parties shall enter into a waiver, consent and amendment to the GB Term Loan Credit Agreement, substantially in the form of
Exhibit A
hereto (the “
Term Loan Amendment
”). Each Loan Party hereby acknowledges and agrees that any default under the Term Loan Amendment shall constitute an immediate Event of Default under the Credit Agreement for which there shall be no grace or cure period.
|
6.
|
Ratification of Loan Documents
. Except as otherwise expressly provided herein, all terms and conditions of the Credit Agreement and the other Loan Documents remain in full force and effect. The Loan Parties hereby ratify, confirm, and reaffirm that all representations and warranties of the Loan Parties contained in the Credit Agreement or any other Loan Document are true and correct in all material respects on and as of the date hereof, except (i) to the extent that such representations and warranties specifically refer to an earlier date, in which case they were true and correct in all material respects as of such earlier date, and (ii) in the case of any representation and warranty qualified by materiality, in which case they are true and correct in all respects. The Guarantors hereby acknowledge, confirm and agree that the Guaranteed Obligations of the Guarantors under, and as defined in, the Guaranty and Security Agreement include, without limitation, all Obligations of the Borrowers at any time and from time to time outstanding under the Credit Agreement and the other Loan Documents, as such Obligations have been amended pursuant to this Amendment. The Loan Parties hereby acknowledge, confirm and agree that the Security Documents and any and all Collateral previously pledged to the Agent, for the benefit of the Credit Parties, pursuant thereto, shall continue to secure all Secured Obligations (as defined in the Guaranty and Security Agreement) at any time and from time to time outstanding under the Credit Agreement and the other Loan Documents.
|
7.
|
Conditions to Effectiveness
.
|
(a)
|
This Amendment shall become effective on the date on which each of the following conditions precedent has been fulfilled to the reasonable satisfaction of the Agent (the “
First Amendment Effective Date
”):
|
(i)
|
The Agent shall have received counterparts of this Amendment duly executed and delivered by each of the Loan Parties and the Required Lenders.
|
(ii)
|
The Agent shall have received a duly executed and effective Term Loan Amendment, executed and delivered by each of the parties thereto.
|
(iii)
|
All corporate or other organizational action on the part of the Loan Parties necessary for the valid execution, delivery and performance by the Loan Parties of this Amendment shall have been duly and effectively taken and evidence thereof shall have been provided to the Agent.
|
(iv)
|
All outstanding Credit Party Expenses (including, without limitation, in respect of the preparation, negotiation, administration, management, execution and delivery of this Amendment and any related documents, instruments and agreements), to the extent invoiced to the Lead Borrower, shall have been paid.
|
(v)
|
The Borrowers shall have paid the Agent, for the account of each Lender that has executed this Amendment, a nonrefundable amendment fee in an amount equal to 0.05% of the amount of the Commitments (after giving effect to this Amendment) of such Lender. The amendment fee shall be fully earned, due and payable by the Borrowers to the Agent in full on the First Amendment Effective Date.
|
(vi)
|
No Default or Event of Default shall have occurred and be continuing.
|
8.
|
Representations and Warranties
. The Parent and the Borrowers, on behalf of each Loan Party, represent and warrant to the Agent, the L/C Issuer and the Lenders that:
|
(a)
|
This Amendment has been duly executed and delivered by each Loan Party that is party thereto and, together with the Credit Agreement and the other Loan Documents, constitutes a legal, valid and binding obligation of such Loan Party, enforceable against each Loan Party that is party thereto in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.
|
(b)
|
The execution, delivery and performance by each Loan Party of this Amendment and the other Loan Documents executed in connection herewith and the performance of each Loan Party’s obligations hereunder and thereunder have been duly authorized by all necessary corporate or other organizational action, do not and shall not: (i) contravene the terms of any of such Person's Organization Documents; (ii) conflict with or result in any breach, termination, or contravention of, or constitute a default under, or require any payment to be made under (x) any Material Contract or any Material Indebtedness to which such Person is a party, or (y) any order, injunction, writ or decree of any Governmental Authority or any arbitral award to which such Person or its property is subject; (iii) result in or require the creation of any Lien upon any asset of any Loan Party (other than Liens in favor of the Agent under the Security Documents and Liens permitted by Section 7.01 of the Credit Agreement); or (iv) violate any Law.
|
(c)
|
No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person is necessary or required in connection with the execution, delivery or performance by, or enforcement against, any Loan Party of this Amendment or any other Loan Document executed in connection herewith to which it is a party, except for such as have been obtained or made and are in full force and effect.
|
(d)
|
No Default or Event of Default has occurred and is continuing.
Release
. Each Loan Party hereby acknowledges that on its own behalf, and on behalf of its employees, agents, officers, directors, successors, and assigns, it does hereby fully, unconditionally, and irrevocably forever relieve, relinquish, release, waive, discharge, and hold harmless the Agent, each Lender, each other Credit Party and each of their respective current and former shareholders, directors, officers, employees, agents, attorneys, successors, and assigns (collectively, the “
Releasees
”) of and from any and all claims, debts, actions, causes of action, liabilities, demands, obligations, promises, acts, agreements, costs, expenses (including but not limited to reasonable attorneys’ fees) and damages (collectively, “
Claims
”) of whatsoever kind and nature, whether now known or unknown, based upon any matter, cause, thing or event occurring on or prior to the First Amendment Effective Date, resulting from, arising out of, or in connection with the Loan Documents, the Agent’s and each other Releasee’s administration of the Loans or other financial accommodations made by the Credit Parties or any of their Affiliates from time to time to or for the account of the Loan Parties or any Affiliate thereof pursuant to the Loan Documents and the documents governing or evidencing any Obligations, including, without limitation, any Loans made or Letters of
|
(e)
|
This Amendment may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Amendment and the other Loan Documents constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Delivery of an executed counterpart of a signature page of this Amendment by telecopy, pdf or other electronic transmission shall be as effective as delivery of a manually executed counterpart of this Amendment.
|
(f)
|
If any provision of this Amendment is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Amendment shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
|
(g)
|
The Loan Parties represent and warrant that they have consulted with independent legal counsel of their selection in connection with this Amendment and are not relying on any representations or warranties of the Agent or the Lenders or their counsel in entering into this Amendment.
|
(h)
|
This AMENDMENT and any claims, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this AMENDMENT and the transactions contemplated hereby shall be governed by, and construed in accordance with, the law of the State of NEW YORK.
|
9.
|
Definitions
. All capitalized terms used herein and not otherwise defined shall have the same meaning herein as in the Credit Agreement.
|
10.
|
Amendment to Article I of Credit Agreement
. The provisions of Section 1.01 of the Credit Agreement are hereby amended as follows:
|
(a)
|
The definition of “Change of Control” is hereby amended by (i) replacing the “.” at the end of clause (d) thereof with “; and”, and (ii) adding the following new clause (e) at the end thereof:
|
(b)
|
The definition of “Maturity Date” is hereby amended and restated in its entirety as follows:
|
(c)
|
The definition of “Revolver Maturity Date” is hereby amended and restated in its entirety as follows:
|
(d)
|
The following new definitions are hereby added to Section 1.01 of the Credit Agreement in appropriate alphabetical order:
|
(e)
|
The provisions of Section 6.12 of the Credit Agreement are hereby amended by adding the following new clause (h) at the end thereof:
|
11.
|
Limited Waiver
. As of the date of this Amendment, subject to the terms and conditions of this Amendment, including, without limitation clauses (a) through (c) below, the Agent and the Required Lenders hereby agree to temporarily waive the application of the Audit Covenant through the earlier of (i) October 31, 2019 and (ii) the date that any other Event of Default shall have occurred and be continuing; provided, that commencing on August 1, 2019, this limited waiver shall be subject to the following conditions:
|
(a)
|
The Loan Parties shall deliver to the Agent a Borrowing Base Certificate on Friday of each week (or, if Friday is not a Business Day, on the next succeeding Business Day), as of the close of business on the immediately preceding Saturday (it being understood that any weekly Borrowing Base Certificate shall include the results of rolled forward information regarding Eligible Inventory and other items, as applicable);
|
(b)
|
The parties hereto hereby acknowledge and agree that, as of August 1, 2019, a Cash Dominion Event shall be deemed to have occurred and be continuing for all purposes under the Loan Documents; and
|
(c)
|
The Loan Parties shall deliver to the Agent a Cash Flow Forecast (as defined below) on Friday of each week (or, if Friday is not a Business Day, on the next succeeding Business Day). As used herein, the term “Cash Flow Forecast” shall mean the thirteen week cash flow forecast of the Loan Parties through the Maturity Date, and prepared by the Loan Parties in consultation with AlixPartners LLP, and such forecast shall be approved in writing by, and shall be in form and substance reasonably satisfactory to, the Agent and the Required Lenders in their Permitted Discretion, which cash flow forecast shall depict, on a weekly basis, cash revenues, receipts, expenses and disbursements of the Loan Parties and their Subsidiaries.
|
12.
|
Limited Consent Regarding Certain Acquisition
. The Agent and the Lenders hereby (x) consent to the Loan Parties negotiating and entering into an agreement and plan of merger or other acquisition agreement for all of the Equity Interests of Parent, in each case, with the Permitted Holders and with any Persons Acting in Concert (any such agreement, the “
Proposed Acquisition Agreement
” and any such related acquisition, the “
Proposed Acquisition
”) that, if consummated in accordance with its terms, would constitute a Change of Control under clause (e) of the definition of “Change of Control” and (y) agree that notwithstanding anything to the contrary in the Credit Agreement or in any other Loan Document, the negotiation, execution and delivery of any such Proposed Acquisition Agreement in accordance with the terms of this Amendment shall not in and of itself be deemed to result in the occurrence of a “Default” or “Event of Default” under the Credit Agreement or any of the other Loan Documents or otherwise constitute a breach of any representation, covenant, condition or provision of the Credit Agreement or any of the other Loan Documents (including, for the avoidance of doubt, under or pursuant to Section 7.08, Section 7.09 or Section 7.10 of the Credit Agreement);
provided
that (i) the Proposed Acquisition shall be conducted in compliance with all applicable Laws, (ii) at the Agent’s request from time to time, the Loan Parties shall promptly furnish the Agent with current drafts of the acquisition documents in connection with the Proposed Acquisition (and final copies thereof as and when executed), and (iii) the Proposed Acquisition Agreement shall contain a condition precedent to the closing of the Proposed Acquisition requiring payment in full in cash of the Obligations and the termination of all Commitments of the Lenders under the Credit Agreement (which condition precedent shall not be modified, waived or otherwise amended without the prior written consent of the Agent). The Credit Agreement and the other Loan Documents shall be deemed amended by this Amendment solely to the extent necessary to give effect to the foregoing limited consent. For the avoidance of any doubt, except to the extent that (x) all Obligations are paid in full in cash and (y) all Commitments of the Lenders under the Credit Agreement are terminated in connection with the consummation of any Proposed Acquisition, a Change of Control shall be deemed to have occurred for all purposes of the Credit Agreement in the event that the Permitted Holders (or any Person Acting in Concert) beneficially own, directly or indirectly, collectively (x) more than 75.0% of the Equity Interests of the Parent or (y) except as a result of their ownership of Parent, any Equity Interest of any other Loan Party.
|
13.
|
Amendment to the Revolver Credit Agreement
. Contemporaneously herewith, the Loan Parties shall enter into a waiver and amendment to the Revolver Credit Agreement, substantially in the form of
Exhibit A
hereto (the “
Revolver Amendment
”). Each Loan Party hereby acknowledges and agrees that any default under the Revolver Amendment shall constitute an immediate Event of Default under the Credit Agreement for which there shall be no grace or cure period.
|
14.
|
Ratification of Loan Documents
. Except as otherwise expressly provided herein, all terms and conditions of the Credit Agreement and the other Loan Documents remain in full force and effect. The Loan Parties hereby ratify, confirm, and reaffirm that all representations and warranties of the Loan Parties contained in the Credit Agreement or any other Loan Document are true and correct in all material respects on and as of the date hereof, except (i) to the extent that such representations and warranties specifically refer to an earlier date, in which case they were true and correct in all material respects as of such earlier date, and (ii) in the case of any representation and warranty qualified by materiality, in which case they are true and correct in all respects. The Guarantors hereby acknowledge, confirm and agree that the Guaranteed Obligations of the Guarantors under, and as defined in, the Guaranty and Security Agreement include, without limitation, all Obligations of the Borrowers at any time and from time to time outstanding under the Credit Agreement and the other Loan Documents, as such Obligations have been amended pursuant to this Amendment. The Loan Parties hereby acknowledge, confirm and agree that the Security Documents and any and all Collateral previously pledged to the Agent, for the benefit of the Credit Parties, pursuant thereto, shall continue to secure all Secured Obligations (as defined in the Guaranty and Security Agreement) at any time and from time to time outstanding under the Credit Agreement and the other Loan Documents.
|
15.
|
Conditions to Effectiveness
.
|
(a)
|
This Amendment shall become effective on the date on which each of the following conditions precedent has been fulfilled to the reasonable satisfaction of the Agent (the “
First Amendment Effective Date
”):
|
(i)
|
The Agent shall have received counterparts of this Amendment duly executed and delivered by each of the Loan Parties and the Required Lenders.
|
(ii)
|
The Agent shall have received a duly executed and effective Revolver Amendment, executed and delivered by each of the parties thereto.
|
(iii)
|
All corporate or other organizational action on the part of the Loan Parties necessary for the valid execution, delivery and performance by the Loan Parties of this Amendment shall have been duly and effectively taken and evidence thereof shall have been provided to the Agent.
|
(iv)
|
All outstanding Credit Party Expenses (including, without limitation, in respect of the preparation, negotiation, administration, management, execution and delivery of this Amendment and any related documents, instruments and agreements), to the extent invoiced to the Lead Borrower, shall have been paid.
|
(v)
|
The Borrowers shall have paid the Agent, for the account of each Lender that has executed this Amendment, a nonrefundable amendment fee in an amount equal to $25,000. The amendment fee shall be fully earned, due and payable by the Borrowers to the Agent in full on the First Amendment Effective Date.
|
(vi)
|
No Default or Event of Default shall have occurred and be continuing.
|
16.
|
Representations and Warranties
. The Parent and the Borrowers, on behalf of each Loan Party, represent and warrant to the Agent and the Lenders that:
|
(a)
|
This Amendment has been duly executed and delivered by each Loan Party that is party thereto and, together with the Credit Agreement and the other Loan Documents, constitutes a legal, valid and binding obligation of such Loan Party, enforceable against each Loan Party that is party thereto in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law;
|
(b)
|
The execution, delivery and performance by each Loan Party of this Amendment and the other Loan Documents executed in connection herewith and the performance of each Loan Party’s obligations hereunder and thereunder have been duly authorized by all necessary corporate or other organizational action, do not and shall not: (i) contravene the terms of any of such Person's Organization Documents; (ii) conflict with or result in any breach, termination, or contravention of, or constitute a default under, or require any payment to be made under (x) any Material Contract or any Material Indebtedness to which such Person is a party, or (y) any order, injunction, writ or decree of any Governmental Authority or any arbitral award to which such Person or its property is subject; (iii) result in or require the creation of any Lien upon any asset of any Loan Party (other than Liens in favor of the Agent under the Security Documents and Liens permitted by Section 7.01 of the Credit Agreement); or (iv) violate any Law.
|
(c)
|
No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person is necessary or required in connection with the execution, delivery or performance by, or enforcement against, any Loan Party of this Amendment or any other Loan Document executed in connection herewith to which it is a party, except for such as have been obtained or made and are in full force and effect.
|
(d)
|
No Default or Event of Default has occurred and is continuing.
|
17.
|
Release
. Each Loan Party hereby acknowledges that on its own behalf, and on behalf of its employees, agents, officers, directors, successors, and assigns, it does hereby fully, unconditionally, and irrevocably forever relieve, relinquish, release, waive, discharge, and hold harmless the Agent, each Lender, each other Credit Party and each of their respective current and former shareholders, directors, officers, employees, agents, attorneys, successors, and assigns (collectively, the “
Releasees
”) of and from any and all claims, debts, actions, causes of action, liabilities, demands, obligations, promises, acts, agreements, costs, expenses (including but not limited to reasonable attorneys’ fees) and damages (collectively, “
Claims
”) of whatsoever kind and nature, whether now known or unknown, based upon any matter, cause, thing or event occurring on or prior to the First Amendment Effective Date, resulting from, arising out of, or in connection with the Loan Documents, the Agent’s and each other Releasee’s administration of the Term Loans or other financial accommodations made by the Credit Parties or any of their Affiliates from time to time to or for the account of the Loan Parties or any Affiliate thereof pursuant to the Loan Documents and the documents governing or evidencing any Obligations, including, without limitation, any
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18.
|
Miscellaneous
.
|
(a)
|
This Amendment may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Amendment and the other Loan Documents constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Delivery of an executed counterpart of a signature page of this Amendment by telecopy, pdf or other electronic transmission shall be as effective as delivery of a manually executed counterpart of this Amendment.
|
(b)
|
If any provision of this Amendment is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Amendment shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
|
(c)
|
The Loan Parties represent and warrant that they have consulted with independent legal counsel of their selection in connection with this Amendment and are not relying on any representations or warranties of the Agent or the Lenders or their counsel in entering into this Amendment.
|
(d)
|
This AMENDMENT and any claims, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this AMENDMENT and the transactions contemplated hereby shall be governed by, and construed in accordance with, the law of the State of NEW yORK.
|
19.
|
Consent to Revolver Amendment
. Notwithstanding anything to the contrary contained in the ABL Intercreditor Agreement or in any other Loan Document, by its signature below, each of the undersigned Lenders and the Agent, in its capacity as Second Lien Agent under and as defined in the ABL Intercreditor Agreement, acknowledges and consents to the execution, delivery and performance of the Revolver Amendment in substantially the form attached hereto as
Exhibit A
and agrees that references to the “Revolver Credit Agreement” or the “Revolver Credit Agreement as in effect on the date hereof” (or words of similar import) appearing in the Credit Agreement and the “First Lien Credit Agreement” or the “First Lien Credit Agreement as in effect on the date hereof” (or words of similar import) appearing in the ABL Intercreditor Agreement shall, in each case, be deemed to refer to the Revolver Credit Agreement and, as applicable, the First Lien Credit Agreement, as amended by the Revolver Amendment, or the Revolver Credit Agreement and, as applicable, the First Lien Credit Agreement, as in effect on the First Amendment Effective Date (as amended by the Revolver Amendment). The First Lien Agent and the First Lien Secured Parties (as each is defined in the ABL Intercreditor Agreement) shall be express third party beneficiaries of this Section 11.
|
|
Jurisdiction of Formation
|
Sears Authorized Hometown Stores, LLC
|
Delaware
|
Sears Home Appliance Showrooms, LLC
|
Delaware
|
Sears Outlet Stores, LLC
|
Delaware
|
Gift Card Operations, LLC
|
Delaware
|
Leasing Operations, LLC
|
Delaware
|
Outlet Merchandising, LLC
|
Delaware
|
Signature:
|
|
/S/ WILL POWELL
Will Powell
|
Title: Director and Chief Executive Officer and President
|
Signature:
|
|
/S/ E. J. BIRD
E.J. Bird
|
Title: Director and Senior Vice President and Chief Financial Officer
|
Signature:
|
|
/S/ JAMES F. GOOCH
James F. Gooch
|
Title: Director
|
Signature:
|
|
/S/ JOSEPHINE LINDEN
Josephine Linden
|
Title: Director
|
Signature:
|
|
/S/ KEVIN LONGINO
Kevin Longino
|
Title: Director
|
Signature:
|
|
/S/ ALBERTO FRANCO
Alberto Franco
|
Title: Director
|
Signature:
|
|
/S/ JOHN E. TOBER
John E. Tober
|
Title: Director
|
1.
|
I have reviewed this Annual Report on Form 10-K of Sears Hometown and Outlet Stores, Inc.
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4.
|
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
(a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
(b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
(c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
(d)
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
5.
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
(a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
(b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date:
|
May 3, 2019
|
|
|
|
|
/s/ WILL POWELL
|
|
|
Will Powell
|
|
|
|
|
|
Chief Executive Officer and President
|
|
|
Sears Hometown and Outlet Stores, Inc.
|
|
1.
|
I have reviewed this Annual Report on Form 10-K of Sears Hometown and Outlet Stores, Inc.
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4.
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
(a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
(b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
(c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
(d)
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
5.
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
(a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
(b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
May 3, 2019
|
|
|
|
/s/ E.J. BIRD
|
|
E.J. BIRD
|
|
Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
|
|
Sears Hometown and Outlet Stores, Inc.
|
1.
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
2.
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
May 3, 2019
|
|
|
|
/s/ WILL POWELL
|
|
Will Powell
|
|
Chief Executive Officer and President
|
/s/ E.J. BIRD
|
|
E.J. BIRD
|
|
Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
|