1. 1
Long Sears Hometown and Outlet
Stores (SHOS)
March 30th 2014
Tianyou Gu
Sagehen Capital Management

2. 2
Sears Hometown & Outlet Stores Overview
 SHOS, traded at Nasdaq, $23.6, Market Cap $537 Million
 Spinoff from Sears Holdings Corporation in late 2012
 Sells hardware, home appliances, lawn and garden equipment
– 4th largest retailer of home appliances, 1,200 stores across 50 US states
– 2013 Revenue of $2.45 Billion

3. 3
Why Buy SHOS?
 Cheap and Undercovered Spinoff
– No analyst coverage
– Valuation in the Range of $32 - $48
– Has declined 60% from its high
– Insiders purchased at much higher prices
 Core Strengths and Superior Business Model
– Keeps the core strength of hardware and appliance brands from Sears
– Expands in a “capital-light” franchise operating model
 Favorable Tailwinds
– Benefactor of Sears Holdings store closings
– US housing recovery, online platform expansion
 Shareholder Friendly
– Created specifically to unlock value from Sears Holdings by hedge fund
manager Eddie Lampert, who’s currently the chairman
– Share buybacks

4. 4
Superior Operating Model
 Dealer/Franchise Model
– SHOS collects a royalty for the use of the Sears trademarks meanwhile
offloading the capital-intensive parts of managing a retail operation to its
dealers/ franchisees
– The inventory is provided by Sears Holdings and SHOS receives a percentage
of profit from sold goods
 Benefits from Franchise Model
– Capital light; high margin royalty income
– Effective than centralized model
– Asymmetric risk/reward
 Profitable and growing online business platforms
 Favorable Alliance with Sears Holdings
– Rapidly expanding membership rewards program operated by Sears Holdings
Corporation – SHOP YOUR WAY™
– Delivery, installation and product service capabilities through alliance with Sears
Holdings

5. 5
Competition
 Competitors: Home Depot, Lowe’s, BestBuy, Kohl’s, Walmart,
Amazon
 Safe from competitive threats due to different product and
geographic focus
– Locate stores in more rural settings and smaller markets, generally in areas that
are too small to attract the Home Depot and Lowe’s
– SHOS is isolated from competition from Amazon and Wal-Mart given the types
of items it sells: consumer durables, tools and lawn & garden equipment

6. 6
Valuation
 $23 is at bottom of 52-Week Range (between $20.5 and $57.5)
 Comparable Implies $32 – $42
– Using Implied EV/EBITDA of 7.5x – 8.5x and P/E of 15x – 18x
 DCF Implies $36 - $48, under Conservative Assumptions
– 25% - 28% gross margins (LTM 24.5%) and 4 - 5% net profit margins (LTM
3.2%)
– These net profit margins are less than the 4 and 6% generated by Lowe's and
Home Depot, respectively
– Growth rate 2.5% (historically 1.5%) in next 5 years, then 1.5% terminal growth
rate
– Stable capital structure
 Insider’s Buying at $30 – 40 in Past Twelve Months
EV/Revenues EV/EBITDA EV/EBIT Forward P/E Growth Gross
Margin
EBITDA
Margin
Net Income
Margin
SHOS 0.2x 7.0x 7.9x 13.0x 3.20% 25.35% 2.82% 1.47%
BestBuy 0.2x 4.0x 6.5x 16.8x 1.20% 22.90% 3.25% 1.30%
Lowe's 1.1x 10.6x 10.2x 15.40x 2.50% 32.44% 10.69% 4.28%
Home Depot 1.6x 11.4x 13.6x 21.20x 5.40% 32.70% 13.90% 6.80%
Valuation Multiples Operating Ratios

7. 7
Tailwinds/Catalysts
 Benefactor of Sears Holdings store closings
– As Sears executes its transition plan (closing department stores and switching
channels to online and SHOS), more retail flow will be directed to SHOS
– This creates significant, long-term revenue growth opportunity
 Improving 2014 financials
– Fiscal 2013 results were significantly below expectation, caused by unusually
severe winter weather in many of trade areas and disappointing holiday sales of
important Kenmore appliances and Craftsman tools
– Positions favorably for 2014 as SHOS opened 30 stores last year, with half of
those openings occurring in January
– Double-digit year-on-year growth in both online and multichannel sales
– Product mix shifts towards high-margin tools from home electronics
 Real estate market recovery
 Rural market expansion, Online platform growth
 Share buyback plans

8. 8
Risks
 The U.S. real estate market reverses its upward trend
– Clean balance sheet protects the company from severe hits
 Continued lack of coverage from the investment industry; stays
undervalued in the near term
– Tailwinds
– Already at bottom of trading range, very little downside risk
 New franchises may expand at a slower speed
 Bottom line: majority shareholder is a hedge fund manager (Eddie
Lambert), who will maximize shareholder value

9. 9
Recommendation
 Buy 1000 Shares of SHOS worth $2,3600
 Adjust position based on earnings calls (Q1, 2014 comes out in
three months)