Orchard Supply Hardware posts Q3 sales decline

As its retail transformation continues, San Jose, Calif.-based Orchard Supply Hardware posted a net loss amid sales declines in the third quarter. 

For the period ended Oct. 27, the company saw net sales of $155.2 million, down 2.2% compared with $158.7 million in the prior-year period. Comparable-store sales for the quarter were essentially flat, decreasing 0.1%.

Net loss in the third quarter of fiscal 2012 was $53.6 million compared with a net loss of $10.1 million in the third quarter of fiscal 2011.

Mark Baker, president and CEO, described the transformation of the retail company in a prepared statement: “At the beginning of fiscal 2012, we outlined five strategic priorities, which included our plans to transform Orchard’s store portfolio to our productive new neighborhood format. Thus far in 2012, we opened two new stores and remodeled four existing locations, three of which were completed during the third quarter, and we’re seeing increased customer traffic and engagement at those locations. While comparable store sales were flat in the third quarter, the combination of stronger sales of seasonal merchandise and contributions from the newly remodeled stores drove an improvement in comp store trends throughout the period. However, our margins were pressured as we increased our promotional activity to help drive traffic and sales.”

By the end of fiscal 2012, the company expects to have opened a total of two new stores and remodeled five existing Orchard locations. During the third quarter, the retailer opened one new store and completed three remodels. As of Oct. 27, 2012, the company had eight stores operating in its new neighborhood store format and anticipates having 10 stores by the end of fiscal 2012. 

Next year, Orchard expects to open at least four new stores and remodel at least six existing locations and expects to have approximately 20 stores in the new format, representing more than 20% of the portfolio, by fiscal year-end. 

"This is only one part of our plan to reposition the company and the Orchard brand," said Baker. "We are also focused on strengthening our financial position and driving improvement in other key areas of the business, including merchandising, marketing and store operations, which we believe will provide the foundation for improved sales and profitability over the long term.” 

Net loss in the 2012 quarterly period includes $65.1 million of non-cash charges comprised of $60.3 million for impairment of trade names and $4.8 million for impairment of store assets, as well as $1.1 million of charges related to litigation and financial advisory fees related to the company’s financing efforts.

Non-GAAP adjusted EBITDA for the quarter was $1.7 million compared with $9.3 million in the third quarter of fiscal 2011. Gross margin in the third quarter was impacted largely by increased promotional activity versus a year ago to help drive sales and clear inventory. Adjusted EBITDA for the quarterly period also includes approximately $0.9 million of incremental costs associated with the effect of having transitioned to a publicly traded company independent from Sears Holdings Corp. and approximately $0.7 million of rent associated with sale-leaseback properties owned by the company in the prior-year period and for which the company did not pay rent (see “Non-GAAP Financial Measures” below for a discussion of this non-GAAP measure and reconciliation to its most directly comparable GAAP financial measure and further information on its uses and limitations).

As of Oc. 27, 2012, total long-term debt was $173.7 million, all of which was classified as current. Total long-term debt plus capital leases was $228.4 million compared with $320.0 million at Oct. 29, 2011. During the period, Orchard successfully refinanced its Senior Secured Credit Facility, providing the company with increased borrowing capacity at a lower cost. At the close of the third quarter, the company had approximately $66.5 million of available cash and credit.

“We remain confident in and committed to our real estate strategy,” added Baker. “We are pleased with the results to date of our new and remodeled stores and plan to continue our rollout of the concept in fiscal 2013."

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