Struggling retailer Sears Hometown and Outlet Stores (SHOS) seems at first glance to scream: "Cheap!" But a closer look shows that it might just be screaming: "Value Trap!"
Sears (SHLD) spun off Sears Hometown in 2012, and I've been following the stock for a couple of years now as a possible value play. SHOS has fallen some 18% just since I last wrote about it in November. It's also off about 1.5% today at around $6.50 a share, and has lost nearly 90% of its value since peaking intraday at $57.44 in June 2013.
Still, I've never been able to pull the trigger and buy the name. And now, I've come to the conclusion that SHOS might be even too ugly for me -- and that's saying a lot.
It's true that Sears Hometown still has a fairly large presence, with 1,160 stores spread across all 50 U.S. states. The stock even looks good on paper at first glance, trading at just 0.37x tangible book value per share and 0.59x net current asset value.
But I believe SHOS represents a much-dreaded situation that we value sometimes investors face -- a stock that we convince ourselves is cheap when it really isn't. After all, part of what I'm looking for when I evaluate a net/net stock is its "asset quality," or what makes up a company's current assets.
Cash and short-term investments are the most-prized assets, as what you see is what you get with them. Inventory and accounts receivable are less compelling, as a company must sell the former and collect the latter to convert both into cash (and there are no guarantees that a firm can do either).
In Sears Hometown's case, the bulk of its assets take the form of inventory rather than cash. SHOS ended the fiscal year with $18 million in cash, but $435 million in inventory.
Of course, that's par for the course with retailers -- and wouldn't be much of an issue except for the fact that Sears Hometown hasn't turned a profit in two years. Its appliances aren't exactly flying off the shelves, so I can't get excited about the company's asset quality.
Now, retailers come and retailers go, and the list of those that have gone belly up over the years is truly staggering. But some have become net/nets that saw their share prices appreciate considerably for one "last stand" before the chains ultimately went under.
A good example of this was Circuit City, and that's what I've been hoping to see from Sears Hometown -- a couple of decent quarters or something else to put the wind back in its sails. But I just don't see it happening.
Now, Sears Hometown is attempting to become more relevant with consumers by updating some of its stores to reflect the chain's new "America's Appliance Experts" moniker. SHOS also has little debt -- just $68 million as of the fiscal year's end. So, even if the company can't improve operating results and get back to profitability, its demise might be long and drawn out.
But while I hope SHOS ultimately turns things around, I'm not willing to bet any of my hard-earned capital on it. The stock has simply become too much of a "dumpster dive" at this point ... even for me.
