10-Q

UNITEDSTATES

SECURITIESANDEXCHANGECOMMISSION

WASHINGTON, DC 20549

_______________________________________________

FORM 10-Q

_______________________________________________ 

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	FOR THE QUARTERLY PERIOD ENDED NOVEMBER 1, 2014

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-35641

_______________________________________________

SEARS HOMETOWN AND OUTLET STORES, INC.

(Exact Name of Registrant as Specified in Its Charter)

_______________________________________________

DELAWARE	80-0808358
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
5500 TRILLIUM BOULEVARD, SUITE 501 HOFFMAN ESTATES, ILLINOIS	60192
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code: (847) 286-7000

_______________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past

90 days.    Yes  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	ý
Non-accelerated filer (Do not check if a smaller reporting company)	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

As of December 4, 2014, the registrant had 22,735,849 shares of common stock, par value $0.01 per share, outstanding.

SEARS HOMETOWN AND OUTLET STORES, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations (Unaudited) for the 13 and 39 Weeks Ended November 1, 2014 and November 2, 2013	1
	Condensed Consolidated Balance Sheets (Unaudited) at November 1, 2014, November 2, 2013 and February 1, 2014	2
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the 39 Weeks Ended November 1, 2014 and November 2, 2013	3
	Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the 39 Weeks Ended November 1, 2014 and November 2, 2013	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34
Item 4.	Controls and Procedures	35
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 6.	Exhibits	39

SEARS HOMETOWN AND OUTLET STORES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

	13 Weeks Ended						39 Weeks Ended
Thousands, except per share amounts	November 1, 2014			November 2, 2013			November 1, 2014			November 2, 2013
NET SALES	$	565,147		$	561,068		$	1,793,694		$	1,819,084
COSTS AND EXPENSES
Cost of sales and occupancy	430,085			425,596			1,367,644			1,380,966
Selling and administrative	139,766			121,698			414,271			379,815
Impairment of goodwill	167,000			—			167,000			—
Depreciation	2,035			2,177			6,390			6,569
Gain on the sale of assets	(155		)	(1,567		)	(155		)	(1,567		)
Total costs and expenses	738,731			547,904			1,955,150			1,765,783
Operating income (loss)	(173,584		)	13,164			(161,456		)	53,301
Interest expense	(915		)	(738		)	(2,754		)	(1,969		)
Other income	888			460			2,366			1,306
Income (loss) before income taxes	(173,611		)	12,886			(161,844		)	52,638
Income tax benefit (expense)	2,401			(5,191		)	(2,327		)	(20,812		)
NET INCOME (LOSS)	$	(171,210	)	$	7,695		$	(164,171	)	$	31,826
NET INCOME (LOSS) PER COMMON SHARE
ATTRIBUTABLE TO STOCKHOLDERS
Basic:	$	(7.55	)	$	0.33		$	(7.24	)	$	1.38
Diluted:	$	(7.55	)	$	0.33		$	(7.24	)	$	1.38
Basic weighted average common shares outstanding	22,666			22,999			22,666			23,066
Diluted weighted average common shares outstanding	22,666			22,999			22,666			23,070

See Notes to Condensed Consolidated Financial Statements.

1

SEARS HOMETOWN AND OUTLET STORES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

Thousands	November 1, 2014		November 2, 2013		February 1, 2014
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	23,189	$	21,487	$	23,475
Accounts and franchisee receivables	20,930		17,207		19,252
Merchandise inventories	462,226		488,626		482,107
Prepaid expenses and other current assets	17,893		8,113		13,216
Total current assets	524,238		535,433		538,050
PROPERTY AND EQUIPMENT, net	50,454		49,544		48,973
GOODWILL	—		167,000		167,000
LONG-TERM DEFERRED TAXES	47,359		63,916		52,672
OTHER ASSETS	41,185		32,115		40,490
TOTAL ASSETS	$	663,236	$	848,008	$	847,185
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings	$	73,200	$	87,900	$	99,100
Payable to Sears Holdings Corporation	79,940		57,414		68,396
Accounts payable	20,238		31,727		24,129
Other current liabilities	60,079		74,306		60,319
Current portion of capital lease obligations	75		1,082		662
Total current liabilities	233,532		252,429		252,606
CAPITAL LEASE OBLIGATIONS	136		98		95
OTHER LONG-TERM LIABILITIES	2,908		5,139		4,259
TOTAL LIABILITIES	236,576		257,666		256,960
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY
TOTAL STOCKHOLDERS' EQUITY	426,660		590,342		590,225
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	663,236	$	848,008	$	847,185

See Notes to Condensed Consolidated Financial Statements.

2

SEARS HOMETOWN AND OUTLET STORES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	39 Weeks Ended
Thousands	November 1, 2014			November 2, 2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(164,171	)	$	31,826
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation	6,390			6,569
Share-based compensation	606			598
Gain on the sale of assets	(155		)	(1,567		)
Impairment of goodwill	167,000			—
Provision for losses on franchisee receivables	11,526			—
Change in operating assets and liabilities:
Accounts and franchisee receivables	(14,517		)	(16,216		)
Merchandise inventories	19,881			(60,189		)
Payable to Sears Holdings Corporation	11,544			(22,077		)
Accounts payable	(3,891		)	(103		)
Customer deposits	(3,225		)	5,998
Deferred income taxes	785			15,520
Other operating assets	2,639			1,246
Other operating liabilities	1,673			(15,767		)
Net cash provided by (used in) operating activities	36,085			(54,162		)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of property and investments	155			2,641
Purchases of property and equipment	(10,039		)	(5,995		)
Net cash used in investing activities	(9,884		)	(3,354		)
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock repurchased and retired	—			(8,369		)
Payments of capital lease obligations	(587		)	(596		)
Net short-term borrowings (payments)	(25,900		)	67,900
Net cash provided by (used in) financing activities	(26,487		)	58,935
NET CHANGE IN CASH AND CASH EQUIVALENTS	(286		)	1,419
CASH AND CASH EQUIVALENTS—Beginning of period	23,475			20,068
CASH AND CASH EQUIVALENTS—End of period	$	23,189		$	21,487
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest	$	2,466		$	2,012
Cash paid for income taxes	$	246		$	19,355

See Notes to Condensed Consolidated Financial Statements.

3

SEARS HOMETOWN AND OUTLET STORES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

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 February 2, 2013	23,100		231			556,575			9,481			566,287
Net income			—			—			31,826			31,826
Share-based compensation	88		1			597			—			598
Common stock repurchased and retired	(279	)	(3		)	(6,728		)	(1,638		)	(8,369		)
Balance at November 2, 2013	22,909		$	229		$	550,444		$	39,669		$	590,342
Balance at February 1, 2014	22,753		228			547,021			42,976			590,225
Net income (loss)			—			—			(164,171		)	(164,171		)
Share-based compensation	(17	)	(1		)	607			—			606
Balance at November 1, 2014	22,736		$	227		$	547,628		$	(121,195	)	$	426,660

See Notes to Condensed Consolidated Financial Statements.

4

SEARS HOMETOWN AND OUTLET STORES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—BACKGROUND AND BASIS OF PRESENTATION

Background

Sears Hometown and Outlet Stores, Inc. is a national retailer primarily focused on selling home appliances, hardware, tools, and lawn and garden equipment. As of November 1, 2014 the Company and its dealers and franchisees operated 1,257 stores across all 50 states and in Puerto Rico and Bermuda. In these notes and elsewhere in this Quarterly Report on Form 10-Q the terms “we,” “us,” “our,” “SHO,” and the “Company” refer to Sears Hometown and Outlet Stores, Inc. and its subsidiaries.

Description of the Separation

On October 11, 2012, Sears Holdings Corporation (“Sears Holdings”) completed the separation of its Sears Hometown and Hardware and Sears Outlet businesses (the “Separation”). As part of the Separation, through a series of intercompany transactions, Sears Holdings and several of its subsidiaries transferred the assets and liabilities comprising the Sears Hometown and Hardware and Sears Outlet businesses to Sears Hometown and Outlet Stores, Inc., which was formed prior to the Separation as a wholly owned subsidiary of Sears Holdings. Effective upon the Separation, Sears Holdings ceased to own shares of our common stock, and thereafter our common stock began trading on the NASDAQ Stock Market under the trading symbol “SHOS.”

Basis of Presentation

These unaudited condensed consolidated financial statements include the accounts of Sears Hometown and Outlet Stores, Inc. and its subsidiaries, all of which are wholly owned. These unaudited condensed consolidated financial statements do not include all of the information and footnotes required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the fiscal quarter ended November 1, 2014 are not necessarily indicative of the results that may be expected for the full fiscal year. These financial statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

We operate through two segments--our Sears Hometown and Hardware segment ("Hometown") and our Sears Outlet segment ("Outlet").

Our fiscal year end is the Saturday closest to January 31 each year. Our third fiscal-quarter end is the Saturday closest to October 31 each year. 

Variable Interest Entities and Consolidation

The Financial Accounting Standards Board ("FASB") has issued guidance on variable interest entities and consolidation for determining whether an entity is a variable interest entity as well as the methods permitted for determining the primary beneficiary of a variable interest entity. In addition, this guidance requires ongoing reassessments of whether a company is the primary beneficiary of a variable interest entity and disclosures related to a company’s involvement with a variable interest entity.

On an ongoing basis the Company evaluates its business relationships, such as those with its dealers, franchisees, and suppliers, to identify potential variable interest entities. Generally, these businesses qualify for a scope exception under the consolidation guidance, or, where a variable interest exists, the Company does not possess the power to direct the activities that most significantly impact the economic performance of these businesses. The Company has not consolidated any of such entities in the periods presented.

Fair Value of Financial Instruments

We determine the fair value of financial instruments in accordance with standards pertaining to fair value measurements. Such standards define fair value and establish a framework for measuring fair value under GAAP. Under fair value measurement accounting standards, fair value is considered to be the exchange price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. We report the fair value of financial assets and liabilities based on the fair value hierarchy prescribed by accounting standards for fair value measurements, which prioritizes the inputs to valuation techniques used to measure fair value into three levels, as follows:

5

SEARS HOMETOWN AND OUTLET STORES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Level 1 inputs—unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide ongoing pricing information.

Level 2 inputs—inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable for the asset or liability, such as interest-rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risks, and default rates.

Level 3 inputs—unobservable inputs for the asset or liability.

Cash and cash equivalents (level 1), accounts and notes receivable, short-term debt (level 2), merchandise payables, and accrued expenses are reflected in the Condensed Consolidated Balance Sheets at cost, which approximates fair value due to the short-term nature of these instruments. For short-term debt, the variable interest rates are a significant input in our fair value assessments. The carrying value of long-term notes receivable approximates fair value.

We measure certain non-financial assets and liabilities, including long-lived assets, at fair value on a non-recurring basis. As disclosed in Note 4, the Company recorded a goodwill impairment charge during the quarter ended November 1, 2014. The Company utilized Level 3 inputs to measure the fair value of goodwill.

Recent Accounting Pronouncements

Revenue from Contracts with Customers

In May 2014, the FASB issued an accounting standards update which establishes a comprehensive revenue recognition standard in U.S. GAAP for virtually all industries, including those that previously followed industry-specific guidance such as the real estate, construction, and software industries. The update is effective in fiscal 2017, and we are currently evaluating the potential impact. Accordingly, we cannot estimate the effect on our consolidated financial position, results of operations, or cash flows.

NOTE 2—ACCOUNTS AND FRANCHISEE RECEIVABLES AND OTHER ASSETS

Accounts and franchisee receivables and other assets consist of the following:

	November 1, 2014
Thousands	Hometown			Outlet		Total
Short-term franchisee receivables	$	8,129		$	4,463	$	12,592
Miscellaneous receivables	7,609			2,112		9,721
Long-term franchisee receivables	21,246			27,688		48,934
Other assets	2,112			282		2,394
Provision for losses on short-term franchisee receivables (1)	(1,383		)	—		(1,383		)
Provision for losses on long-term franchisee receivables (1)	(10,143		)	—		(10,143		)
Total Accounts and franchisee receivables and other assets	$	27,570		$	34,545	$	62,115

6

SEARS HOMETOWN AND OUTLET STORES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	November 2, 2013
Thousands	Hometown		Outlet		Total
Short-term franchisee receivables	$	2,676	$	896	$	3,572
Miscellaneous receivables	13,198		437		13,635
Long-term franchisee receivables	21,090		7,974		29,064
Other assets	2,844		207		3,051
Total Accounts and franchisee receivables and other assets	$	39,808	$	9,514	$	49,322

	February 1, 2014
Thousands	Hometown		Outlet		Total
Short-term franchisee receivables	$	2,748	$	1,844	$	4,592
Miscellaneous receivables	13,029		1,631		14,660
Long-term franchisee receivables	21,207		16,409		37,616
Other assets	2,662		212		2,874
Total Accounts and franchisee receivables and other assets	$	39,646	$	20,096	$	59,742

(1) The Company recognizes a provision for losses on franchisee receivables (which consist primarily of franchisee promissory notes) in an amount equal to estimated probable losses net of recoveries. The provision is based on an analysis of expected future write-offs, existing economic conditions, and an assessment of specific identifiable franchisee promissory notes and other franchisee receivables considered at risk or uncollectible. The expense associated with the provision for losses on franchisee receivables is recognized as selling, general, and administrative expense. Most of our franchisee promissory notes authorize us to deduct debt service from our commissions otherwise due and payable to the franchisees, and we routinely make those deductions to the extent of available commissions payable. We established the provision for losses on franchisee receivables in the third quarter of fiscal 2014 based on our receivable-by-receivable assessment during the quarter that some of the Hometown franchisee receivables were potentially uncollectible in future periods due to (a) declining results of operations of, or other adverse financial events with respect to, Hometown franchise stores that indicated that the franchisees might not be able to meet their debt-service and other obligations to us as they became due and (b) the refusal during the quarter of one of our Hometown franchisees to continue to operate its franchise stores in accordance with the franchisee's agreements with us. Based on our assessment during the quarter we made no provision for losses on Outlet franchisee receivables.

NOTE 3—OTHER CURRENT AND LONG-TERM LIABILITIES

Other current and long-term liabilities consist of the following:

Thousands	November 1, 2014		November 2, 2013		February 1, 2014
Customer deposits	$	32,322	$	40,913	$	35,547
Sales and other taxes	14,052		14,072		11,403
Accrued expenses	10,617		13,267		9,523
Payroll and related items	5,996		11,193		8,105
Total Other current and long-term liabilities	$	62,987	$	79,445	$	64,578

NOTE 4—GOODWILL

Goodwill allocated to our Hometown and Outlet segments as of November 1, 2014, and changes in the carrying amount of goodwill for the nine months ended November 1, 2014, are as follows:

7

SEARS HOMETOWN AND OUTLET STORES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Thousands	Hometown			Outlet		Total
Balance (gross) at February 1, 2014	$	167,000		$	—	$	167,000
Impairment Loss	(167,000		)	—		(167,000		)
Balance at November 1, 2014	$	—		$	—	$	—

For the first nine months of fiscal 2014, the decrease in goodwill is due entirely to the non-cash impairment loss with respect to the Hometown Reporting Unit as discussed further below.

We review the Hometown Stores and Home Appliance Showrooms ("Hometown Reporting Unit") goodwill for impairment annually at the beginning of the fourth fiscal quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The goodwill impairment test involves a two-step process. In the first step, SHO compares the fair value of the Hometown Reporting Unit to its carrying value. If the fair value of the Hometown Reporting Unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the Hometown Reporting Unit is less than its carrying value, SHO must perform the second step of the impairment test to measure the amount of impairment loss. In the second step, the Hometown Reporting Unit's fair value is allocated to all of the assets and liabilities of the Hometown Reporting Unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the Hometown Reporting Unit were being acquired in a business combination. If the implied fair value of the Hometown Reporting Unit's goodwill is less than its carrying value, the difference is recorded as a non-cash impairment loss.

During the third quarter of fiscal 2014, we determined that sufficient indicators of potential impairment existed to require that we conduct an interim impairment analysis of the Hometown Reporting Unit's goodwill. These indicators included a significant and sustained decline in the recent trading values of SHO's stock, coupled with market conditions and business trends affecting the Hometown Reporting Unit. The primary operating factors were declines in revenue and profitability for fiscal 2014. Merchandise revenues in fiscal 2014 were impacted by the highly promotional environment, along with other factors that caused declines in comparable store sales and related profitability below expectations for the Hometown Reporting Unit.

SHO estimated the fair value of the Hometown Reporting Unit using a weighting of fair values derived from the income approach and the market approach. Under the income approach, SHO calculated the fair value of the Hometown Reporting Unit based on the present value of the Hometown Reporting Unit's estimated future cash flows. The cash flow projections were based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. SHO used a discount rate that was based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the Hometown Reporting Unit and its projected cash flows. SHO's market approach used estimated fair values based on market multiples of revenue and earnings derived from comparable publicly traded companies with operating and investment characteristics that were comparable to the operating and investment characteristics of the Hometown Reporting Unit.

Due to the complexity and the effort required to estimate the fair value of the Hometown Reporting Unit for the first step of the impairment test and to estimate the fair values of all assets and liabilities of the Hometown Reporting Unit for the second step of the impairment test, SHO used fair value estimates that were derived based on assumptions and analyses that are subject to change. SHO’s first-step evaluation concluded that the fair value of the Hometown Reporting Unit was substantially below its carrying value. Based on SHO's second-step analyses, the implied fair value of the Hometown Reporting Unit's goodwill was $0. As a result, a full impairment of goodwill was required and we recorded a $167.0 million non-cash goodwill impairment charge in the third quarter of fiscal 2014, which is reflected as "Impairment of goodwill" in the Condensed Consolidated Statements of Operations. The primary factor that contributed to the goodwill impairment loss was the aforementioned 2014 operating issues leading to less-optimistic forecasts for the remainder of fiscal 2014 and fiscal 2015 and the corresponding impact beyond those periods.

NOTE 5—INCOME TAXES

In connection with the Separation, SHO and Sears Holdings entered into a Tax Sharing Agreement that governs the rights and obligations of the parties with respect to pre-Separation and post-Separation tax matters. Under the Tax Sharing Agreement, Sears Holdings generally is responsible for any federal, state, or foreign income tax liability relating to tax periods ending on or before the Separation. For all periods after the Separation, the Company generally is responsible for any federal, state, or foreign tax liability. Current income taxes payable for any federal, state, or foreign income tax returns is reported in the period incurred.

8

SEARS HOMETOWN AND OUTLET STORES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We account for uncertainties in income taxes according to accounting standards for uncertain tax positions. The Company is present in a large number of taxable jurisdictions and, at any point in time, can have audits underway at various stages of completion in one or more of these jurisdictions. We evaluate our tax positions and establish liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable. Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law, and closings of statutes of limitation. Such adjustments are reflected in the tax provision as appropriate. For the 39 Weeks ended November 1, 2014 and November 2, 2013, no unrecognized tax benefits have been identified and reflected in the financial statements.

We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of income tax expense. As no unrecognized tax benefits have been identified and reflected in the condensed consolidated financial statements, no interest or penalties related to unrecognized tax benefits are reflected in the condensed consolidated balance sheets or statements of operations.

As of November 1, 2014 the Company's net deferred tax asset balance was $57.2 million compared to $61.1 million as of November 2, 2013 and $58.0 million as of February 1, 2014.

NOTE 6—RELATED-PARTY AGREEMENTS AND TRANSACTIONS

According to publicly available information ESL Investments, Inc. and its investment affiliates beneficially own approximately 47% of our outstanding shares of common stock and approximately 56% of Sears Holdings' outstanding shares of common stock.

In connection with the Separation, we entered into various agreements with Sears Holdings (the "SHO-Sears Holdings Agreements") that, among other things, (1) govern specified aspects of our relationship with Sears Holdings, (2) establish terms under which subsidiaries of Sears Holdings provide services to us, and (3) establish terms pursuant to which subsidiaries of Sears Holdings obtain merchandise inventories for us. The terms of the SHO-Sears Holdings Agreements were agreed to prior to the Separation in the context of a parent-subsidiary relationship and in the overall context of the Separation. The costs and allocations charged to the Company by Sears Holdings do not necessarily reflect the costs of obtaining the services from unaffiliated third parties or of the Company itself providing the applicable services. The Company engages in frequent discussions, and seeks to resolve disputes, with Sears Holdings about the terms and conditions of the SHO-Sears Holdings Agreements, the business relationships that are reflected in the SHO-Sears Holdings Agreements, and the details of these business relationships, many of which details are not addressed by the terms and conditions of the SHO-Sears Holdings Agreements or, if addressed, are in dispute as to their meaning or application in the context of the existing business relationships. Some of these discussions have resulted in adjustments to the relationships that the Company believes together are in Company's best interests. In many other instances the Company's dispute-resolution efforts, which are continuing, have yet to resolve the underlying disputes.

The following is a summary of the nature of the related-party transactions between SHO and Sears Holdings:

• SHO receives commissions from Sears Holdings for specified sales of merchandise made through www.sears.com and www.searsoutlet.com, the sale of extended service contracts, delivery and handling services, and relating to the use in our stores of credit cards branded with the Sears name. For specified transactions SHO pays a commission to Sears Holdings.

• We obtain a significant amount of our merchandise inventories from Sears Holdings. We have a retailer's customary rights to return to Sears Holdings merchandise that is defective (except with respect to agreed-upon amounts of defective apparel that we purchase and then liquidate) or otherwise does not meet contract requirements. In addition, we may determine that an item of Outlet merchandise (usually merchandise that is not new in-box) we have received from Sears Holdings cannot be refurbished or reconditioned or is otherwise not in a physical condition to offer for sale to our customers. We and Sears Holdings (and our Outlet vendors generally) refer to an item of merchandise in this condition as “not saleable” or "non-saleable," and in the normal course we can return the item to Sears Holdings. We generally have comparable return rights with our other Outlet vendors.

• We pay royalties related to our sale of products branded with the KENMORE®, CRAFTSMAN®, and DIEHARD® marks (which marks are owned by subsidiaries of Sears Holdings).

• We pay fees for participation in Sears Holdings' SHOP YOUR WAY REWARDS® program.

9

SEARS HOMETOWN AND OUTLET STORES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

• We have also entered into agreements with Sears Holdings for logistics, handling, warehouse, and transportation services, the charges for which are based generally on merchandise inventory units.

• Sears Holdings provides the Company with specified corporate services. These services include accounting and finance, human resources, and information technology, among other services. Sears Holdings charges the Company for these corporate services based on actual usage or pro rata charges based upon sales, head count, or other measurements.

• Sears Holdings leases stores and distribution/repair facilities to the Company, for which the Company pays rent and related occupancy charges to Sears Holdings.

The following table summarizes the results of the transactions with Sears Holdings reflected in the Company’s Condensed Consolidated Financial Statements:

	13 Weeks Ended				39 Weeks Ended
	November 1, 2014		November 2, 2013		November 1, 2014		November 2, 2013
Thousands
Net Commissions from Sears Holdings	$	22,069	$	21,424	$	76,808	$	68,327
Purchases related to cost of sales and occupancy (1)	351,935		395,178		1,156,632		1,224,254
Services (1)	23,302		29,410		73,089		85,655

(1) Amounts previously presented for the 13 and 39 Weeks ended November 2, 2013 and for the 13 weeks ended May 3, 2014 within "Purchases related to cost of sales and occupancy" have been reclassified into "Services." The reclassified items were primarily costs associated with marketing. The reclassified amount for the 13 weeks ended November 2, 2013 was $23.8 million. The reclassified amounts for the 39 Weeks ended November 2, 2013 and November 1, 2014 were $69.6 million and $20.3 million, respectively.

We incur payables to Sears Holdings for merchandise inventory purchases and service and occupancy charges (net of commissions) based on the SHO-Sears Holdings Agreements.  Amounts due to or from Sears Holdings are non-interest bearing and are settled on a net basis. We generally pay undisputed amounts within 10 days after the invoice date.

NOTE 7—FINANCING ARRANGEMENT

As of November 1, 2014 we had $73.2 million outstanding under our asset-based senior secured revolving credit facility with a group of financial institutions (the “Senior ABL Facility”), which approximated the fair value of these borrowings. The Senior ABL Facility provides (subject to availability under a borrowing base) for maximum borrowings up to the aggregate commitments of all of the lenders, which as of November 1, 2014 totaled $250 million. Up to $75 million of the Senior ABL Facility is available for the issuance of letters of credit and up to $25 million is available for swingline loans. The Senior ABL Facility permits us to request commitment increases in an aggregate principal amount of up to $100 million. Availability under the Senior ABL Facility as of November 1, 2014 was $171.2 million, with $5.6 million of letters of credit outstanding under the facility.

The principal terms of the Senior ABL Facility are summarized below.

Senior ABL Facility

Maturity; Amortization and Prepayments

The Senior ABL Facility will mature on the earlier of (i) October 11, 2017 or (ii) six months prior to the expiration of our Merchandising Agreement with Sears Holdings (the "Merchandising Agreement") and the other agreements with Sears Holdings or its subsidiaries in connection with the Separation that are specified in the Senior ABL Facility, unless such agreements have been extended to a date later than October 11, 2017 or terminated on a basis reasonably satisfactory to the administrative agent under the Senior ABL Facility.

The Senior ABL Facility is subject to mandatory prepayment in amounts equal to the amount by which the outstanding extensions of credit exceed the lesser of the borrowing base and the commitments then in effect.

10

SEARS HOMETOWN AND OUTLET STORES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Guarantees; Security

The obligations under the Senior ABL Facility are guaranteed by us and each of our existing and future direct and indirect wholly owned domestic subsidiaries (subject to certain exceptions). The Senior ABL Facility and the guarantees thereunder are secured by a first priority security interest in assets of the borrowers and guarantors consisting primarily of accounts and notes receivable, inventory, cash, cash equivalents, deposit accounts and securities accounts, as well as certain other assets (other than intellectual property) ancillary to the foregoing and all proceeds of all of the foregoing, including cash proceeds and the proceeds of applicable insurance.

Interest; Fees

The interest rates per annum applicable to the loans under the Senior ABL Facility are based on a fluctuating rate of interest measured by reference to, at our election, either (1) an adjusted London inter-bank offered rate (LIBOR) plus a borrowing margin, which rate was approximately 2.41% at November 1, 2014 or (2) an alternate base rate plus a borrowing margin, with the borrowing margin subject to adjustment based on the average excess availability under the Senior ABL Facility for the preceding fiscal quarter, which rate was approximately 4.50% at November 1, 2014.

Customary fees are payable in respect of the Senior ABL Facility, including letter of credit fees and commitment fees.

Covenants

The Senior ABL Facility includes a number of covenants that, among other things, limit or restrict our ability to, subject to specified exceptions, incur additional indebtedness (including guarantees), grant liens, make investments, make prepayments on other indebtedness, engage in mergers, or change the nature of our business.

The Senior ABL Facility limits SHO's ability to declare and pay cash dividends and repurchase its common stock. SHO may declare and pay cash dividends to its stockholders and may repurchase stock if the following conditions are satisfied: either (a) (i) no specified default then exists or would arise as a result of the declaration or payment of the cash dividend or as a result of the stock repurchase, (ii) SHO and its subsidiaries that are also borrowers have demonstrated to the reasonable satisfaction of the agent for the lenders that monthly availability (as determined in accordance with the Senior ABL Facility), immediately following the declaration and payment of the cash dividend or the stock repurchase and as projected on a pro forma basis for the twelve months following and after giving effect to the declaration and payment of the cash dividend or the stock repurchase, would be at least equal to the greater of (x) 25% of the Loan Cap (which is the lesser of (A) the aggregate commitments of the lenders and (B) the borrowing base) and (y) $50,000,000, and (iii) after giving pro forma effect to the declaration and payment of the cash dividend or the stock repurchase as if it constituted a specified debt service charge, the specified consolidated fixed charge coverage ratio, as calculated on a trailing twelve months basis, would be equal to or greater than 1.1:1.0, or (b) (i) no specified default then exists or would arise as a result of the declaration or payment of the cash dividend or the stock repurchase, (ii) payment of the cash dividend or the stock repurchase is not made with the proceeds of any credit extension under the Senior ABL Facility, (iii) during the 120-day period prior to declaration and payment of the cash dividend or the stock repurchase, no credit extension was outstanding under the Senior ABL Facility, and (iv) SHO demonstrates to the reasonable satisfaction of the agent for the lenders that, on a pro forma and projected basis, no credit extensions would be outstanding under the Senior ABL Facility for the 120-day period following the declaration and payment of the cash dividend or the stock repurchase. No default or event of default presently exists.

The Senior ABL Facility also contains certain affirmative covenants, including financial and other reporting requirements.

Events of Default

The Senior ABL Facility includes customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross default to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments, change of control, failure to perform a "Material Contract" (which includes the Merchandising Agreement and other SHO-Sears Holdings Agreements) to the extent required to maintain it in full force and effect, and the failure to enforce a Material Contract in accordance with its terms.

11

SEARS HOMETOWN AND OUTLET STORES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8—SUMMARY OF SEGMENT DATA

The Hometown reportable segment consists of the aggregation of our Hometown Stores, Hardware Stores, and Home Appliance Showrooms business formats described in “Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations-Executive Overview" of this Quarterly Report on Form 10-Q. The Outlet reportable segment also represents a business format. These segments are evaluated by our Chief Operating Decision Maker to make decisions about resource allocation and to assess performance. Each of these segments derives its revenues from the sale of merchandise and related services to customers, primarily in the U.S. The net sales categories include appliances, lawn and garden, tools and paint, and other (which includes initial franchise revenue of $6.5 million and $7.8 million for the 13 weeks ended November 1, 2014 and the 13 weeks ended November 2, 2013, respectively). For the 39 Weeks ended November 1, 2014, initial franchise revenue (which consists of franchise fees paid with respect to new or existing Company-operated stores that we transfer to franchisees plus the net gain or loss on any related transfer of assets to the franchisees) was $15.2 million compared to $14.8 million in the 39 Weeks ended November 2, 2013.

	13 Weeks Ended November 1, 2014
Thousands	Hometown			Outlet		Total
Net sales
Appliances	$	261,645		$	139,519	$	401,164
Lawn and garden	59,447			7,065		66,512
Tools and paint	41,736			4,649		46,385
Other	24,915			26,171		51,086
Total	387,743			177,404		565,147
Costs and expenses
Cost of sales and occupancy	299,013			131,072		430,085
Selling and administrative	103,395			36,371		139,766
Impairment of goodwill	167,000			—		167,000
Depreciation	746			1,289		2,035
Gain on the sale of assets	(155		)	—		(155		)
Total	569,999			168,732		738,731
Operating income (loss)	$	(182,256	)	$	8,672	$	(173,584	)
Total assets	$	455,112		$	208,124	$	663,236
Capital expenditures	$	579		$	2,410	$	2,989

	13 Weeks Ended November 2, 2013
Thousands	Hometown			Outlet			Total
Net sales
Appliances	$	289,834		$	115,386		$	405,220
Lawn and garden	59,049			5,843			64,892
Tools and paint	44,516			3,458			47,974
Other	19,772			23,210			42,982
Total	413,171			147,897			561,068
Costs and expenses
Cost of sales and occupancy	318,362			107,234			425,596
Selling and administrative	94,818			26,880			121,698
Depreciation	760			1,417			2,177
Gain on the sale of assets	—			(1,567		)	(1,567		)
Total	413,940			133,964			547,904
Operating income (loss)	$	(769	)	$	13,933		$	13,164
Total assets	$	657,019		$	190,989		$	848,008
Capital expenditures	$	1,341		$	2,259		$	3,600

12

SEARS HOMETOWN AND OUTLET STORES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	39 Weeks Ended November 1, 2014
Thousands	Hometown			Outlet		Total
Net sales
Appliances	$	795,919		$	398,299	$	1,194,218
Lawn and garden	278,305			19,546		297,851
Tools and paint	132,470			13,566		146,036
Other	79,838			75,751		155,589
Total	1,286,532			507,162		1,793,694
Costs and expenses
Cost of sales and occupancy	983,214			384,430		1,367,644
Selling and administrative	307,747			106,524		414,271
Impairment of goodwill	167,000			—		167,000
Depreciation	2,127			4,263		6,390
Gain on the sale of assets	(155		)	—		(155		)
Total	1,459,933			495,217		1,955,150
Operating income (loss)	$	(173,401	)	$	11,945	$	(161,456	)
Total assets	$	455,112		$	208,124	$	663,236
Capital expenditures	$	2,509		$	7,530	$	10,039

	39 Weeks Ended November 2, 2013
Thousands	Hometown		Outlet			Total
Net sales
Appliances	$	868,489	$	362,600		$	1,231,089
Lawn and garden	280,029		20,938			300,967
Tools and paint	138,996		10,063			149,059
Other	74,394		63,575			137,969
Total	1,361,908		457,176			1,819,084
Costs and expenses
Cost of sales and occupancy	1,040,750		340,216			1,380,966
Selling and administrative	299,175		80,640			379,815
Depreciation	2,372		4,197			6,569
Gain on the sale of assets	—		(1,567		)	(1,567		)
Total	1,342,297		423,486			1,765,783
Operating income	$	19,611	$	33,690		$	53,301
Total assets	$	657,019	$	190,989		$	848,008
Capital expenditures	$	2,711	$	3,284		$	5,995

13

SEARS HOMETOWN AND OUTLET STORES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 9—COMMITMENTS AND CONTINGENCIES

We are subject to various legal and governmental proceedings arising out of the ordinary course of business, the outcome of which, individually or in the aggregate, in the opinion of management, would not have a material adverse effect on our business, financial position, results of operations, or cash flows.

NOTE 10—INCOME PER COMMON SHARE

Basic income per common share is calculated by dividing net income by the weighted average number of common shares outstanding for each period. Diluted income per common share also includes the dilutive effect of potential common shares.

The following table sets forth the components used to calculate basic and diluted income per common share attributable to our stockholders.

	13 Weeks Ended			13 Weeks Ended		39 Weeks Ended			39 Weeks Ended
	November 1, 2014			November 2, 2013		November 1, 2014			November 2, 2013
Thousands except income per common share
Basic weighted average shares	22,666			22,999		22,666			23,066
Dilutive effect of restricted stock	—			—		—			4
Diluted weighted average shares	22,666			22,999		22,666			23,070
Net income (loss)	$	(171,210	)	$	7,695	$	(164,171	)	$	31,826
Income (loss) per common share:
Basic	$	(7.55	)	$	0.33	$	(7.24	)	$	1.38
Diluted	$	(7.55	)	$	0.33	$	(7.24	)	$	1.38

14

SEARS HOMETOWN AND OUTLET STORES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11—EQUITY

Stock-based Compensation

Four million shares of the Company's common stock are reserved for issuance under the Company's Amended and Restated 2012 Stock Plan. A total of 89,221 shares of restricted stock were granted under the plan in the second quarter of 2013 to a group of eligible individuals (as defined in the plan), all of whom were employees of the Company at the time of the grant. As of November 1, 2014, 18,974 shares of the original grant of 89,221 shares of restricted stock had been forfeited. We are authorized to grant stock options and to make other awards to eligible plan participants pursuant to the Amended and Restated 2012 Stock Plan. Except for the 89,221 shares of restricted stock, the Company has made no stock-option or other grants or awards under the plan.

We account for stock-based compensation using the fair value method in accordance with accounting standards regarding share-based payment transactions. During the first three quarters of 2014 we recorded $0.6 million in total compensation expense for the remaining 70,247 shares of restricted stock (none of which had vested as of November 1, 2014). At November 1, 2014, we had $1.6 million in total unrecognized compensation cost related to the 70,247 shares of non-vested restricted stock, which cost we expect to recognize over approximately the next 1.5 years.

The 70,247 shares of restricted stock will vest, if at all, on May 16, 2016 in accordance with and subject to the terms and conditions of restricted-stock agreements, including forfeiture conditions, and the Amended and Restated 2012 Stock Plan. The fair value of these awards is equal to the market price of our common stock on the date of grant. We do not currently have a broad-based program that provides for restricted-stock awards on an annual basis. Changes in restricted-stock awards for 2014 were as follows:

	39 Weeks Ended November 1, 2014
(Shares in Thousands)	Shares		Weighted-Average Fair Value on Date of Grant
Beginning of year balance	87		44.45
Granted	—		$	—
Vested	—		—
Forfeited	(17	)	44.45
Balance at 11/1/2014	70		$	44.45

Share Repurchase Program

On August 28, 2013 the Company's Board of Directors authorized a $25 million repurchase program for the Company's outstanding shares of common stock. The timing and amount of repurchases depend on various factors, including market conditions, the Company's capital position and internal cash generation, and other factors. The Company's repurchase program does not include specific price targets, may be executed through open-market, privately negotiated, and other transactions that may be available, and may include utilization of Rule 10b5-1 plans. The repurchase program does not obligate the Company to repurchase any dollar amount, or any number of shares, of common stock. The repurchase program does not have a termination date, and the Company may suspend or terminate the repurchase program at any time.

Shares that are repurchased by the Company pursuant to the repurchase program will be retired and resume the status of authorized and unissued shares of common stock.

No shares were repurchased during the 39 Weeks ended November 1, 2014. At November 1, 2014 we had approximately $12.5 million of remaining authorization under the repurchase program.

15

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes contained in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and notes contained in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014 (the "2013 10-K"). This discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements.

Executive Overview

We are a national retailer primarily focused on selling home appliances, hardware, tools, and lawn and garden equipment. As of November 1, 2014, we and our dealers and franchisees operated 1,257 stores across all 50 states, Puerto Rico, and Bermuda. In the third quarter of 2014, the Company opened nine new stores and closed three stores.

In addition to merchandise, we provide our customers with access to a full suite of services, including home delivery, installation, and extended service contracts.

Our Hometown and Hardware stores are designed to provide our customers with in-store and online access to a wide selection of national brands of home appliances, tools, lawn and garden equipment, sporting goods, and household goods, depending on the particular format. Our Outlet stores are designed to provide our customers with in-store and online access to purchase, at prices that are significantly lower than manufacturers' list prices, new, one-of-a-kind, out-of-carton, discontinued, obsolete, used, reconditioned, overstocked and scratched and dented products across a broad assortment of merchandise categories, including home appliances, lawn and garden equipment, apparel, mattresses, sporting goods, and tools.

As of November 1, 2014, Hometown consisted of 1,108 stores as follows:

• 922 Sears Hometown Stores—Primarily independently operated stores, predominantly located in smaller communities and offering appliances, lawn and garden equipment, and hardware. Most of our Sears Hometown Stores carry proprietary Sears brand products, such as Kenmore, Craftsman, and DieHard, as well as a wide assortment of other national brands.

• 81 Sears Hardware Stores—Stores that carry Craftsman brand tools and lawn and garden equipment, DieHard brand batteries, and a wide assortment of other national brands and other home improvement products along with a selection of Kenmore and other national brands of home appliances.

• 105 Sears Home Appliance Showrooms—Stores that have a simple, primarily appliance showroom design that are positioned in metropolitan areas.

As of November 1, 2014, Hometown operated through 917 dealer-operated stores, 160 franchisee-operated stores, and 31 Company-operated stores. The Company requires all dealer and franchisee-operated stores to operate according to the Company’s standards to protect and enhance the quality of its brands. These stores must display the required merchandise, offer all required products and services, and use the Company’s point of sale system. Also, the Company has the right to approve advertising and promotional and marketing materials and imposes certain advertising requirements. The Company owns the merchandise offered for sale by all dealer and franchisee-operated stores, establishes all selling prices for the merchandise, and bears general inventory risk (with specific exceptions) until sale of the merchandise and if the customer returns the merchandise. In addition, because each transaction is recorded in the Company’s point of sale system, the Company bears customer credit risk. The Company establishes a commission structure for stores operated by dealers and franchisees and pays commissions to the dealers and franchisees when they sell the Company's merchandise and provide services.

The Company began a trial program for franchising Outlet stores in late 2012 and completed the first Outlet store franchise transactions in the first quarter of 2013 and, since that time, the Company has continued to franchise Outlet stores. As of November 1, 2014, 58 of the 149 Outlet stores were operated by franchisees.

Dealers and franchisees exercise control over the day-to-day operations of their stores, make capital decisions regarding their stores, and exclusively make all hiring, compensation, benefits, termination, and other decisions regarding the terms and conditions of employment, and exclusively establish all employment policies, procedures, and practices, with respect to their employees.

Several of the primary differences between Company-operated stores and dealer or franchisee-operated stores are that (1) the Company is responsible for occupancy and payroll costs associated with Company-operated stores while dealers and franchisees are responsible for these costs for their stores, (2) the Company is responsible for all terms and conditions of

16

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

employment for the employees in the Company-operated stores and its dealers and franchisees are responsible for all terms and conditions of employment for the employees in their stores, and (3) we pay commissions to our dealers and franchisees.

In the normal course of business, stores can transition from Company-operated to franchisee or dealer-operated, and vice-versa. Potential new stores may be identified by the Company, an existing dealer or franchisee, or a potential dealer or franchisee. If the Company identifies and develops a new store, the Company will generally seek to transfer that store to a dealer or a franchisee. When a dealer or a franchisee ceases to operate a store, the Company may take over its operation, generally on an interim basis, until the Company can transfer the store to another dealer or franchisee. At any given time the Company is generally operating a number of stores that are in transition from one dealer or franchisee to another dealer or franchisee. Transition stores are not included in our count of Company-operated stores due to the expected short-term nature of transition operation.

The Company's transfer of a Company-operated store to a franchisee historically has (1) in most instances increased the Company's gross margin primarily due to decreased occupancy costs and (2) increased the Company's selling and administrative expense primarily due to increased commission payments, offset partially by lower payroll and benefits expense.

Initial franchise revenues consist of franchise fees paid by franchisees with respect to new and existing Company-operated stores that we transferred to the franchisees plus the net gain or loss on related transfers of assets to the franchisees. The number of new franchised stores, the number of Company-operated stores transferred, and the net gain or loss per store transferred are highly variable from quarter to quarter. The variation results from a number of factors, including general economic conditions, which influence both the level of new store development and the level of interest of existing or potential franchisees in acquiring store locations, and economic factors specific to our major product categories, such as appliances. Each of these factors impacts the expected financial returns to the Company from new store development, which in turn impacts the number of Company-operated stores that the Company decides from time to time to make available for transfer to franchisees. Initial franchise revenues were $6.5 million and $7.8 million in the third quarter of 2014 and 2013, respectively.

	13 Weeks Ended				39 Weeks Ended
Thousands	November 1, 2014		November 2, 2013		November 1, 2014		November 2, 2013
Hometown	$	336	$	1,608	$	313	$	4,629
Outlet	6,159		6,175		14,877		10,128
Total initial franchise revenues	$	6,495	$	7,783	$	15,190	$	14,757

Online

We believe that the results of operations for our businesses in the third quarter were adversely affected by the continuing growth at other retailers of online sales of merchandise in important product categories, especially home appliances.  While our online commissions grew in the third quarter, our rights to engage in our own online initiatives that would leverage www.sears.com, and our rights to engage in our own online initiatives that would be independent of www.sears.com, are constrained by the SHO-Sears Holdings Agreements. We believe that these constraints will continue to adversely affect our ability to conduct online business and, as a consequence, will continue to adversely affect the results of operations for our businesses. These adverse effects may grow over time. We are engaging in discussions with Sears Holdings regarding the elimination of these constraints, but we are unable to determine the outcome of these discussions.

Goodwill

We review the Hometown Stores and Home Appliance Showrooms ("Hometown Reporting Unit") goodwill for impairment annually at the beginning of the fourth fiscal quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The goodwill impairment test involves a two-step process. In the first step, SHO compares the fair value of the Hometown Reporting Unit to its carrying value. If the fair value of the Hometown Reporting Unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the Hometown Reporting Unit is less than its carrying value, SHO must perform the second step of the impairment test to measure the amount of impairment loss. In the second step, the Hometown Reporting Unit's fair value is allocated to all of the assets and liabilities of the Hometown Reporting Unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the Hometown Reporting Unit were being acquired in a

17

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

business combination. If the implied fair value of the Hometown Reporting Unit's goodwill is less than its carrying value, the difference is recorded as a non-cash impairment loss.

During the third quarter of fiscal 2014, we determined that sufficient indicators of potential impairment existed to require that we conduct an interim impairment analysis of the Hometown Reporting Unit's goodwill. These indicators included a significant and sustained decline in the recent trading values of SHO's stock, coupled with market conditions and business trends affecting the Hometown Reporting Unit. The primary operating factors were declines in revenue and profitability for fiscal 2014. Merchandise revenues in fiscal 2014 were impacted by the highly promotional environment, along with other factors that caused declines in comparable store sales and related profitability below expectations for the Hometown Reporting Unit.

SHO estimated the fair value of the Hometown Reporting Unit using a weighting of fair values derived from the income approach and the market approach. Under the income approach, SHO calculated the fair value of the Hometown Reporting Unit based on the present value of the Hometown Reporting Unit's estimated future cash flows. The cash flow projections were based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. SHO used a discount rate that was based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the Hometown Reporting Unit and its projected cash flows. SHO's market approach used estimated fair values based on market multiples of revenue and earnings derived from comparable publicly traded companies with operating and investment characteristics that were comparable to the operating and investment characteristics of the Hometown Reporting Unit.

Due to the complexity and the effort required to estimate the fair value of the Hometown Reporting Unit for the first step of the impairment test and to estimate the fair values of all assets and liabilities of the Hometown Reporting Unit for the second step of the impairment test, SHO used fair value estimates that were derived based on assumptions and analyses that are subject to change. SHO’s first-step evaluation concluded that the fair value of the Hometown Reporting Unit was substantially below its carrying value. Based on SHO's second-step analyses, the implied fair value of the Hometown Reporting Unit's goodwill was $0. As a result, a full impairment of goodwill was required and we recorded a $167.0 million non-cash goodwill impairment charge in the third quarter of fiscal 2014, which is reflected as "Impairment of goodwill" in the Condensed Consolidated Statements of Operations. The primary factor that contributed to the goodwill impairment loss was the aforementioned 2014 operating issues leading to less-optimistic forecasts for the remainder of fiscal 2014 and fiscal 2015 and the corresponding impact beyond those periods.

Seasonality

Our business is not concentrated in the holiday season, as the majority of the products we sell are not typically thought of as holiday gifts. Lawn and Garden sales generally peak in our second quarter as customers prepare for and execute outdoor projects during the spring and early summer. See Note 9 to the Consolidated Financial Statements included in the 2013 10-K for our quarterly financial results (unaudited) for our 2012 and 2013 fiscal years.

Results of Operations

The following table sets forth items derived from our consolidated results of operations for the 13 and 39 Weeks ended November 1, 2014 and November 2, 2013.

18

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

	13 Weeks Ended						39 Weeks Ended
Thousands	November 1, 2014			November 2, 2013			November 1, 2014			November 2, 2013
NET SALES	$	565,147		$	561,068		$	1,793,694		$	1,819,084
COSTS AND EXPENSES
Cost of sales and occupancy	430,085			425,596			1,367,644			1,380,966
Gross margin dollars	135,062			135,472			426,050			438,118
Margin rate	23.9		%	24.1		%	23.8		%	24.1		%
Selling and administrative	139,766			121,698			414,271			379,815
Selling and administrative expense as a percentage of net sales	24.7		%	21.7		%	23.1		%	20.9		%
Impairment of goodwill	167,000			—			167,000			—
Depreciation	2,035			2,177			6,390			6,569
Gain on the sale of assets	(155		)	(1,567		)	(155		)	(1,567		)
Total costs and expenses	738,731			547,904			1,955,150			1,765,783
Operating income (loss)	(173,584		)	13,164			(161,456		)	53,301
Interest expense	(915		)	(738		)	(2,754		)	(1,969		)
Other income	888			460			2,366			1,306
Income (loss) before income taxes	(173,611		)	12,886			(161,844		)	52,638
Income tax benefit (expense)	2,401			(5,191		)	(2,327		)	(20,812		)
NET INCOME (LOSS)	$	(171,210	)	$	7,695		$	(164,171	)	$	31,826

Comparable Store Sales

Comparable store sales amounts include merchandise sales for all stores operating for a period of at least 12 full months, including remodeled and expanded stores but excluding store relocations and stores that have undergone format changes.  Comparable store sales include online transactions fulfilled and recorded by SHO and give effect to the change in the unshipped sales reserves recorded at the end of each reporting period. 

Adjusted Comparable Store Sales

In addition to our net sales determined in accordance with GAAP, for purposes of evaluating our sales performance we also use "Adjusted comparable store sales." This measure includes in net sales, as if fulfilled and recorded by SHO, all in-store sales that were transacted by SHO through www.sears.com and that were fulfilled and recorded by Sears Holdings. Our management uses Adjusted comparable store sales to evaluate the sales performance of our overall business and individual stores for comparable periods. Adjusted comparable store sales should not be used by investors or other third parties as the sole basis for formulating investment decisions as it includes sales that were not fulfilled and recorded by SHO and for which sales SHO received only commissions from Sears Holdings. Adjusted comparable store sales should not be considered as a substitute for GAAP measurements.

While Adjusted comparable store sales is a non-GAAP measure, management believes that it is an important indicator of store sales performance:

• SHO receives commissions on all in-store sales that were transacted by SHO through www.sears.com and that were fulfilled and recorded by Sears Holdings.

• During the third quarter of 2014, these sales fulfilled and recorded by Sears Holdings increased significantly to $14.3 million compared to $6.5 million in the third quarter of 2013. During the 39 weeks ended November 1, 2014, these sales fulfilled and recorded by Sears Holdings increased significantly to $62.4 million compared to $20.7 million in the 39 weeks ended November 2, 2013.

• Unadjusted comparable store sales, which do not include in-store sales that were transacted by SHO through www.sears.com and that were fulfilled and recorded by Sears Holdings, understates what SHO believes to be its effective comparable store sales performance.

19

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

The following table presents a reconciliation of Adjusted comparable store sales to net sales, the most comparable GAAP measure, for each of the periods indicated:

	13 Weeks Ended November 1, 2014									39 Weeks Ended November 1, 2014
thousands	Hometown			Outlet			Total			Hometown			Outlet			Total
Net sales	$	387,743		$	177,404		$	565,147		$	1,286,532		$	507,162		$	1,793,694
Less: Non-comparable store sales	(39,062		)	(39,339		)	(78,401		)	(136,925		)	(113,530		)	(250,454		)
Comparable store sales recorded by SHO	348,680			138,066			486,746			1,149,606			393,633			1,543,240
SHO in-store sales through www.sears.com recorded by Sears Holdings (1)	11,761			1,411			13,172			48,996			8,098			57,094
Adjusted comparable store sales	$	360,441		$	139,477		$	499,918		$	1,198,602		$	401,731		$	1,600,333
	13 Weeks Ended November 2, 2013									39 Weeks Ended November 2, 2013
thousands	Hometown			Outlet			Total			Hometown			Outlet			Total
Net sales	$	413,171		$	147,897		$	561,068		$	1,361,908		$	457,176		$	1,819,084
Less: Non-comparable store sales	(41,446		)	(21,620		)	(63,066		)	(136,763		)	(57,938		)	(194,701		)
Comparable store sales recorded by SHO	371,725			126,277			498,002			1,225,145			399,238			1,624,383
SHO in-store sales through www.sears.com recorded by Sears Holdings (1)	5,360			932			6,292			17,675			2,394			20,069
Adjusted comparable store sales	$	377,085		$	127,209		$	504,294		$	1,242,820		$	401,632		$	1,644,452
	13 Weeks Ended November 1, 2014 vs. 13 Weeks Ended November 2, 2013									39 Weeks Ended November 1, 2014 vs. 39 Weeks Ended November 2, 2013
	Hometown			Outlet			Total			Hometown			Outlet			Total
Comparable store sales recorded by SHO	(6.2		)%	9.3		%	(2.3		)%	(6.2		)%	(1.4		)%	(5.0		)%
Adjusted comparable store sales	(4.4		)%	9.6		%	(0.9		)%	(3.6		)%	0.0		%	(2.7		)%

(1) SHO in-store sales through www.sears.com fulfilled and recorded by Sears Holdings above are for comparable stores only. For all comparable and non-comparable stores, these sales for the 13 weeks and 39 weeks ended November 1, 2014 were $14.3 million and $62.4 million compared to $6.5 million and $20.7 million for the 13 weeks and 39 weeks ended November 2, 2013.

Adjusted EBITDA

In addition to our net income determined in accordance with GAAP, for purposes of evaluating operating performance we also use Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization, or “Adjusted EBITDA,” which excludes certain significant items as set forth below. Our management uses Adjusted EBITDA, among other factors, for evaluating the operating performance of our business for comparable periods. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items. Adjusted EBITDA should not be considered as a substitute for GAAP measurements.

20

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

While Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of operating performance because:

• 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.

The following table presents a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, for each of the periods indicated:

	13 Weeks Ended						39 Weeks Ended
Thousands	November 1, 2014			November 2, 2013			November 1, 2014			November 2, 2013
Net income (loss)	$	(171,210	)	$	7,695		$	(164,171	)	$	31,826
Income tax expense (benefit)	(2,401		)	5,191			2,327			20,812
Other income	(888		)	(460		)	(2,366		)	(1,306		)
Interest expense	915			738			2,754			1,969
Operating income (loss)	(173,584		)	13,164			(161,456		)	53,301
Depreciation	2,035			2,177			6,390			6,569
Gain on the sale of assets	(155		)	(1,567		)	(155		)	(1,567		)
Impairment of goodwill	167,000			—			167,000			—
Adjusted EBITDA	$	(4,704	)	$	13,774		$	11,779		$	58,303

13-Week Period Ended November 1, 2014 Compared to the 13-Week Period Ended November 2, 2013

Net Sales

Net sales in the third quarter of 2014 increased $4.1 million, or 0.7%, to $565.1 million from the third quarter of 2013. This increase was driven primarily by new stores (net of closures) and higher online commissions earned by SHO on sales of merchandise for home delivery made through www.sears.com, a website owned by Sears Holdings ($4.2 million in the third quarter of 2014 compared to $2.4 million in the third quarter of 2013), partially offset by a 2.3% decrease in comparable store sales and lower initial franchise revenues (which were $6.5 million in the third quarter of 2014 compared to $7.8 million in the third quarter of 2013).

In-store sales transacted by SHO and its independent dealers and franchisees through www.sears.com and recorded and fulfilled by Sears Holdings during the third quarter of 2014 were $14.3 million compared to $6.5 million in the third quarter of 2013. As a result comparable store sales, which measure the increase in sales on transactions fulfilled and recorded by SHO, were unfavorably impacted. Including total sales for online transactions fulfilled and recorded by Sears Holdings, Adjusted comparable store sales for the third quarter of 2014 decreased 0.9%. Comparable store sales in Hometown were down 6.2% while comparable store sales in Outlet were up 9.3%. Adjusted comparable store sales were down 4.4% in Hometown and up 9.6% in Outlet.

Gross Margin

Gross margin was $135.1 million, or 23.9% of net sales, in the third quarter of 2014 compared to $135.5 million, or 24.1% of net sales, in the third quarter of 2013. The decrease in gross margin rate was primarily driven by (1) a reduced merchandise margin rate, (2) higher Outlet distribution center costs, (3) lower initial franchise revenues, and (4) a $0.9 million net payment to Sears Holdings related to the reconciliation of payments between Sears Holdings and SHO. These reductions were partially offset by (1) lower occupancy costs resulting from the conversion of Company-operated stores to franchisee-operated stores, (2) higher online commissions, (3) lower support-services charges from Sears Holdings, and (4) higher delivery income. Excluding the impact of online commissions and initial franchise revenues gross margin was 22.4% of net sales in the third quarter of 2014 compared to 22.8% of net sales in the third quarter of 2013.

21

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

Selling and Administrative Expenses

Selling and administrative expenses increased to $139.8 million, or 24.7% of net sales, in the third quarter of 2014 from $121.7 million, or 21.7% of net sales, in the prior-year quarter. The increase was primarily due to an $11.5 million provision for losses on franchisee receivables recognized in the third quarter of 2014, higher owner commissions in Outlet (primarily related to the conversion of Company-operated stores to franchisee-operated stores), and new stores opened since the third quarter of 2013. We established the provision for losses on Hometown franchisee receivables in the third quarter of fiscal 2014 based on our assessment during the quarter that some of the Hometown franchisee receivables were potentially uncollectible in future periods due to (a) declining results of operations of, or other adverse financial events with respect to, Hometown franchise stores that indicated that the franchisees might not be able to meet their debt-service and other obligations to us as they became due and (b) the refusal during the quarter of one of our Hometown franchisees to continue to operate its franchise stores in accordance with the franchisee's agreements with us. See also Note 2 to the Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. These increases were partially offset by lower payroll and benefits costs resulting from the conversion of Company-operated stores to franchisee-operated stores.

Impairment of Goodwill

During the three months ended November 1, 2014, we recorded a non-cash goodwill impairment charge of $167.0 million associated with the Hometown Reporting Unit. See Note 4 to the Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for further discussion of the impairment of goodwill.

Operating Income (Loss)

We recorded an operating loss of $173.6 million and operating income of $13.2 million in the third quarters of 2014 and 2013, respectively. The $186.8 million decrease in operating income was driven by the non-cash goodwill impairment charge, higher selling and administrative expenses, the lower gross margin rate, and a $1.6 million gain on the sale of an Outlet store in the third quarter of 2013, partially offset by higher net sales.

Income Taxes

Income tax benefit of $2.4 million and income tax expense of $5.2 million was recorded in the third quarters of 2014 and 2013, respectively. The effective tax rate was 1.4% (benefit) and 40.3% in the third quarters of 2014 and 2013, respectively. The change in the effective tax rate in the third quarter of 2014 compared to the third quarter of 2013 is primarily due to the impact of the goodwill impairment charge, which is not tax deductible.

Net Income (Loss)

We recorded net loss of $171.2 million for the third quarter of 2014 compared to net income of $7.7 million for the prior-year quarter. The decrease in net income was primarily attributable to the factors discussed above.

22

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

39-Week Period Ended November 1, 2014 Compared to the 39-Week Period Ended November 2, 2013

Net Sales

Net sales in the first three quarters of 2014 decreased $25.4 million, or 1.4%, to $1,793.7 million from the first three quarters of 2013. This decrease was driven primarily by a 5.0% decrease in comparable store sales, partially offset by new stores (net of closures) and higher online commissions earned by SHO on sales of merchandise for home delivery made through www.sears.com ($18.4 million in the first three quarters of 2014 compared to $7.4 million in the first three quarters of 2013). Sears Holdings fulfilled and recorded these online transactions and paid commissions to SHO, which are included in SHO's net sales.

In-store sales transacted by SHO and its independent dealers and franchisees through www.sears.com and recorded and fulfilled by Sears Holdings during the first three quarters of 2014 were $62.4 million compared to $20.7 million in the first three quarters of 2013. As a result, comparable store sales, which measure the increase in sales on transactions fulfilled and recorded by SHO, were unfavorably impacted. Including total sales for online transactions fulfilled and recorded by Sears Holdings, Adjusted comparable store sales for the first three quarters of 2014 decreased 2.7%. Comparable store sales in Hometown were down 6.2% while comparable store sales in Outlet were down 1.4%. Adjusted comparable store sales were down 3.6% in Hometown and were flat in Outlet. Initial franchise revenues increased $0.4 million in the first three quarters of 2014 to $15.2 million compared to $14.8 million in the first three quarters of 2013.

Gross Margin

Gross margin was $426.1 million, or 23.8% of net sales, in the first three quarters of 2014 compared to $438.1 million, or 24.1% of net sales, in the first three quarters of 2013. The decrease in gross margin rate was primarily driven by (1) lower margins on merchandise sales, (2) additional Outlet distribution-center costs, (3) higher inventory shrinkage in Outlet, (4) lower Outlet apparel liquidation income, and (5) a $0.9 million net payment to Sears Holdings related to the reconciliation of payments between Sears Holdings and SHO. These declines were partially offset by (1) the increase in online commissions, (2) lower support services charges from Sears Holdings, (3) lower occupancy costs resulting from the conversion of Company-operated stores to franchisee-operated stores, and (4) higher delivery income. Excluding the impact of online commissions and initial franchise revenues, gross margin was 22.3% of net sales in the first three quarters of 2014 compared to 23.1% of net sales in the first three quarters of 2013.

Selling and Administrative Expenses

Selling and administrative expenses increased to $414.3 million, or 23.1% of net sales, in the first three quarters of 2014 from $379.8 million, or 20.9% of net sales, in the prior year. The increase was primarily due to (1) higher owner commissions in both Hometown and Outlet (primarily related to the conversion of Company-operated stores to franchisee-operated stores), (2) an $11.5 million provision for losses on Hometown franchisee receivables recognized in the third quarter of 2014 (see Note 2 to the Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on10-Q), (3) new stores opened since the third quarter of 2013, and (4) higher marketing costs, partially offset by lower payroll and benefits costs resulting from the conversion of Company-operated stores to franchisee-operated stores.

Impairment of Goodwill

During the three quarters ended November 1, 2014 we recorded a non-cash goodwill impairment charge of $167.0 million associated with the Hometown Reporting Unit. See Note 4 to the Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for further discussion of the impairment of goodwill.

Operating Income (Loss)

We recorded operating loss of $161.5 million and operating income of $53.3 million in the first three quarters of 2014 and 2013, respectively. The $214.8 million decrease in operating income was driven primarily by (1) the non-cash goodwill impairment charge, (2) higher selling and administrative expenses, (3) a lower gross margin rate, (4) lower net sales, and (5) a $1.6 million gain on the sale of an Outlet store in the third quarter of 2013.

23

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

Income Taxes

Income tax expense of $2.3 million and $20.8 million was recorded in the first three quarters of 2014 and 2013, respectively. The effective tax rate was 1.44% and 39.5% in the first three quarters of 2014 and 2013, respectively. The change in the effective tax rate in the first three quarters of 2014 compared to the first three quarters of 2013 is primarily due to the impact of the goodwill impairment charge, which is not tax deductible.

Net Income (Loss)

We recorded net loss of $164.2 million for the first three quarters of 2014 compared to net income of $31.8 million for the first three quarters of last year. The decrease in net income was primarily attributable to the factors discussed above.

Business Segment Results

Hometown

Hometown results and key statistics were as follows:

	13 Weeks Ended						39 Weeks Ended
Thousands, except for number of stores	November 1, 2014			November 2, 2013			November 1, 2014			November 2, 2013
Net sales	$	387,743		$	413,171		$	1,286,532		$	1,361,908
Comparable store sales % (1)	(6.2		)%	(1.5		)%	(6.2		)%	(2.9		)%
Cost of sales and occupancy	299,013			318,362			983,214			1,040,750
Gross margin dollars	88,730			94,809			303,318			321,158
Margin rate	22.9		%	22.9		%	23.6		%	23.6		%
Selling and administrative	103,395			94,818			307,747			299,175
Selling and administrative expense as a percentage of net sales	26.7		%	22.9		%	23.9		%	22.0		%
Impairment of goodwill	167,000			—			167,000			—
Gain on the sale of assets	(155		)	—			(155		)	—
Depreciation	746			760			2,127			2,372
Total costs and expenses	569,999			413,940			1,459,933			1,342,297
Operating income (loss)	$	(182,256	)	$	(769	)	$	(173,401	)	$	19,611
Total Hometown stores							1,108			1,108

(1) Adjusted comparable store sales for the 13 and 39 Weeks ended November 1, 2014 were (4.4)% and (3.6)% respectively.

13-Week Period ended November 1, 2014 Compared to the 13-Week Period Ended November 2, 2013

Net Sales

Hometown net sales decreased $25.4 million, or 6.2%, to $387.7 million in the third quarter of 2014 from $413.2 million in the third quarter of 2013. The decrease was primarily due to a 6.2% decrease in comparable store sales and lower initial franchise revenues (which were $0.3 million in the third quarter of 2014 compared to $1.6 million in the third quarter of 2013) partially offset by higher online commissions ($3.7 million in the third quarter of 2014 compared to $2.1 million in the third quarter of 2013). Adjusted comparable store sales for the third quarter of 2014, which includes in-store sales transacted through www.sears.com that were fulfilled and recorded by Sears Holdings, decreased 4.4% primarily due to declines in major appliances. This segment continues to be affected by the highly promotional environment. We also believe that the results for Hometown were adversely affected by the continuing growth of online sales of merchandise in important product categories, especially home appliances. Our rights to fully engage in the online channel are subject to restrictions in our agreements with Sears Holdings Corporation that were entered into prior to our October 2012 separation.

24

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

Gross Margin

Gross margin was $88.7 million, or 22.9% of net sales, in the third quarter of 2014 compared to $94.8 million, or 22.9% of net sales, in the prior-year quarter. The flat gross margin rate was primarily due to a $2.3 million charge as a result of the reconcilement of payments between SHO and Sears Holdings, lower initial franchise revenues, and a lower merchandise margin rate. These reductions were offset by (1) higher online commissions, (2) lower occupancy costs resulting from the conversion of Company-operated stores to franchisee-operated stores, (3) higher delivery income, and (4) lower support services charges from Sears Holdings. Excluding the impact of online commissions and initial franchise revenues, gross margin was 22.1% of net sales in the third quarter of 2014 compared to 22.3% of net sales in the third quarter of 2013.

Selling and Administrative Expenses

Selling and administrative expenses increased to $103.4 million, or 26.7% of net sales, in the third quarter of 2014 from $94.8 million, or 22.9% of net sales, in the prior-year quarter. The increase was primarily due to an $11.5 million provision for losses on Hometown franchisee receivables recognized in the third quarter of 2014 (See Note 2 to the Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for further discussion), partially offset by a reduction in payroll and benefits due to Company-operated store conversions.

Impairment of Goodwill

During the three months ended November 1, 2014 we recorded a non-cash goodwill impairment charge of $167.0 million associated with the Hometown Reporting Unit. See Note 4 to the Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for further discussion of the impairment of goodwill.

Operating Income (Loss)

We recorded operating losses of $182.3 million in the third quarter of 2014 and $0.8 million in the third quarter of 2013. The overall increase in operating loss of $181.5 million was driven primarily by the non-cash $167.0 million goodwill impairment charge, the increase in selling and administrative expenses and lower net sales.

39-Week Period ended November 1, 2014 Compared to the 39-Week Period Ended November 2, 2013

Net Sales

Hometown net sales decreased $75.4 million, or 5.5%, to $1,286.5 million in the first three quarters of 2014 from $1,361.9 million in the first three quarters of 2013. The decrease was primarily due to a 6.2% decrease in comparable store sales and a reduction in initial franchise revenues (which were $0.3 million in the first three quarters of 2014 compared to $4.6 million in the first three quarters of 2013), partially offset by an increase in online commissions ($15.7 million in the first three quarters of 2014 compared to $6.6 million in the first three quarters of 2013). Adjusted comparable store sales for the first three quarters of 2014, which include in-store sales transacted through www.sears.com that were fulfilled and recorded by Sears Holdings, decreased 3.6% primarily due to declines in major appliances.

Gross Margin

Gross margin was $303.3 million, or 23.6% of net sales, in the first three quarters of 2014 compared to $321.2 million, or 23.6% of net sales, in the prior year. The flat gross margin rate was primarily driven by (1) increases in online commissions, (2) lower occupancy costs resulting from the conversion of Company-operated stores to franchisee-operated stores, (3) higher delivery income, and (4) lower support services charges from Sears Holdings, offset by lower margins on merchandise sales, lower initial franchise revenues, and a $2.3 million charge due to the reconcilement of payments between SHO and Sears Holdings. Excluding the impact of online commissions and initial franchise revenues, gross margin was 22.6% of net sales in the first three quarters of 2014 compared to 22.9% of net sales in the first three quarters of 2013.

Selling and Administrative Expenses

Selling and administrative expenses were $307.7 million, or 23.9% of net sales, in the first three quarters of 2014 compared to $299.2 million, or 22.0% of net sales, in the prior year. The higher selling and administrative expenses were primarily driven by an $11.5 million provision for losses on franchisee receivables recognized in the third quarter of 2014 (See Note 2 to the Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for further

25

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

discussion), higher owner commissions mainly related to the conversion of Company-operated stores to franchisee-operated stores and higher marketing costs partially offset by a reduction in payroll and benefits due to Company-operated store conversions.

Impairment of Goodwill

During the three quarters ended November 1, 2014 we recorded a non-cash goodwill impairment charge of $167.0 million associated with the Hometown Reporting Unit. See Note 4 to the Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for further discussion of the impairment of goodwill.

Operating Income (Loss)

We recorded an operating loss of $173.4 million in the first three quarters of 2014 and operating income of $19.6 million in the first three quarters of 2013. The overall decrease in operating income of $193.0 million was primarily driven by the non-cash goodwill impairment charge, the decrease in net sales, and the increase in selling and administrative expenses.

Outlet

Outlet results and key statistics were as follows:

	13 Weeks Ended						39 Weeks Ended
Thousands, except for number of stores	November 1, 2014			November 2, 2013			November 1, 2014			November 2, 2013
Net sales	$	177,404		$	147,897		$	507,162		$	457,176
Comparable store sales % (1)	9.3		%	(3.4		)%	(1.4		)%	1.9		%
Cost of sales and occupancy	131,072			107,234			384,430			340,216
Gross margin dollars	46,332			40,663			122,732			116,960
Margin rate	26.1		%	27.5		%	24.2		%	25.6		%
Selling and administrative	36,371			26,880			106,524			80,640
Selling and administrative expense as a percentage of net sales	20.5		%	18.2		%	21.0		%	17.6		%
Depreciation	1,289			1,417			4,263			4,197
Gain on the sale of assets	—			(1,567		)	—			(1,567		)
Total costs and expenses	168,732			133,964			495,217			423,486
Operating income	$	8,672		$	13,933		$	11,945		$	33,690
Total Outlet stores							149			131

(1) Adjusted comparable store sales for the 13 and 39 Weeks ended November 1, 2014 were 9.6% and 0.0% respectively.

13-Week Period ended November 1, 2014 Compared to the 13-Week Period Ended November 2, 2013

Net Sales

Outlet net sales increased $29.5 million, or 20.0%, to $177.4 million in the third quarter of 2014 from $147.9 million in the third quarter of 2013. The increase was primarily due to new store sales (net of closures) and a 9.3% increase in comparable store sales. Adjusted comparable store sales for the third quarter of 2014, which includes in-store sales transacted through www.sears.com that were fulfilled and recorded by Sears Holdings, increased 9.6%. The increase was driven by higher major appliances sales due to more effective promotional strategies and higher sales in furniture due to category expansion partially offset by a decrease in apparel sales due to a reduction of floor space (resulting from conversions and closures of apparel-only stores and expansion in other categories) along with a lower mix of wearables in inventory (higher mix of accessories and basics). Initial franchise revenues in the third quarter of 2014 were $6.2 million, which was flat compared to the third quarter of 2013.

26

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

Gross Margin

Gross margin was $46.3 million, or 26.1% of net sales, in the third quarter of 2014 compared to $40.7 million, or 27.5% of net sales, in the prior year. The gross margin rate decreased in the third quarter of 2014 compared to the prior-year quarter primarily due to a reduced merchandise margin rate, a lower franchise revenue rate, and higher distribution center costs, partially offset by lower occupancy costs resulting from the conversion of Company-operated stores to franchisee-operated stores and a $1.4 million expense reduction due to the reconcilement of payments between SHO and Sears Holdings. Excluding the impact of online commissions and initial franchise revenues, gross margin was 23.2% of net sales in the third quarter of 2014 compared to 24.2% of net sales in the third quarter of 2013.

Selling and Administrative Expenses

Selling and administrative expenses increased to $36.4 million, or 20.5% of net sales, in the third quarter of 2014 from $26.9 million, or 18.2% of net sales, in the prior-year quarter. The increase in selling and administrative expenses was primarily due to higher franchisee commissions for stores that we converted from Company-operated to franchisee-operated and new stores opened since the third quarter of 2013. These increases were partially offset by lower payroll and benefits costs resulting from the conversion of Company-operated stores.

Operating Income

We recorded operating income of $8.7 million in the third quarter of 2014 compared to $13.9 million in the third quarter of 2013. The decrease in operating income of $5.2 million was driven primarily by higher selling and administrative expenses, a lower gross margin rate, and a $1.6 million gain on the sale of an Outlet store in the third quarter of 2013, partially offset by higher net sales.

27

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

39-Week Period ended November 1, 2014 Compared to the 39-Week Period Ended November 2, 2013

Net Sales

Outlet net sales increased $50.0 million, or 10.9%, to $507.2 million in the first three quarters of 2014 from $457.2 million in the first three quarters of 2013. The increase was primarily due to new store sales (net of closures), higher initial franchise revenues, and higher online commissions ($2.7 million in the first three quarters of 2014 compared to $0.8 million in the first three quarters of 2013). These increases were partially offset by a 1.4% decrease in comparable store sales. Adjusted comparable store sales for the first three quarters of 2014, which include in-store sales transacted through www.sears.com that were fulfilled and recorded by Sears Holdings, were flat. The flat Adjusted comparable store sales were driven by higher furniture sales due to category expansion and higher major appliances sales due to more effective promotional strategies. These increases were offset by lower apparel sales due to a reduction of floor space (resulting from conversions and closures of apparel-only stores and expansion in other categories), a lower mix of wearables in inventory (higher mix of accessories and basics), and lower sales in both power lawn and garden and fitness (due to the reduced availability of opportunity buys and inventory flow).

Gross Margin

Gross margin was $122.7 million, or 24.2% of net sales, in the first three quarters of 2014 compared to $117.0 million, or 25.6% of net sales, in the prior year. The gross margin rate decreased primarily due to (1) lower margins on merchandise sales, (2) higher inventory shrinkage, (3) additional distribution center costs, and (4) lower Outlet apparel-liquidation income. These declines were partially offset by (1) lower occupancy costs resulting from the conversion of Company-operated stores to franchisee-operated stores, (2) higher franchise revenues, (3) higher online commissions, and (4) a $1.4 million expense reduction due to the reconcilement of payments between SHO and Sears Holdings. Excluding the impact of online commissions and initial franchise revenues, gross margin was 21.5% of net sales in the first three quarters of 2014 compared to 23.8% of net sales in the first three quarters of 2013.

Selling and Administrative Expenses

Selling and administrative expenses increased to $106.5 million, or 21.0% of net sales, in the first three quarters of 2014 from $80.6 million, or 17.6% of net sales, in the prior year. The increase in selling and administrative expenses was primarily due to higher franchisee commissions for stores that we converted from Company-operated to franchisee-operated, new stores opened since the third quarter of 2013, and an increase in marketing costs. These increases were partially offset by lower payroll and benefits costs resulting from the conversion of Company-operated stores.

Operating Income

We recorded operating income of $11.9 million in the first three quarters of 2014 compared to $33.7 million in the first three quarters of 2013. The decrease in operating income of $21.8 million was driven primarily by higher selling and administrative expenses, a lower gross margin rate, and a $1.6 million gain on the sales of an Outlet store in the third quarter of 2013, partially offset by higher net sales.

28

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

Analysis of Financial Condition

Cash and Cash Equivalents

We had cash and cash equivalents of $23.2 million as of November 1, 2014, $21.5 million as of November 2, 2013, and $23.5 million as of February 1, 2014.

For the third quarter of 2014 we funded ongoing operations with cash on-hand and cash generated by operating activities. Our primary needs for liquidity are to fund inventory purchases and capital expenditures and for general corporate purposes.

Cash Flows from Operating Activities

For the first three quarters ended November 1, 2014 cash provided by operating activities was $36.1 million compared to $54.2 million used in the first three quarters ended November 2, 2013. The increase was due predominately to a reduction in investments in inventory and an increase in payables in 2014 compared to 2013, partially offset by lower net income.

Total merchandise inventories were $462.2 million at November 1, 2014 and $488.6 million at November 2, 2013. Merchandise inventories decreased $26.4 million due to an $18.5 million decrease in Hometown and a $7.9 million decrease in Outlet. The decrease in Hometown was primarily due to lower home appliances inventory driven by a change in the timing of product transitions and lower tools inventory resulting from the closing of hardware stores. Outlet's reduction, despite a 14% increase in store count, was driven by a shift in the mix of home appliances from "new, in-box" to lower-cost "as-is" merchandise, partially offset by increases in apparel from higher receipts and in furniture due to category expansion.

We obtain our merchandise through agreements with subsidiaries of Sears Holdings and with other vendors. Merchandise acquired from subsidiaries of Sears Holdings (including Kenmore, Craftsman, DieHard, and other merchandise) accounted for approximately 82% and 85% of total purchases of all inventory from all vendors for the 13 and 39 weeks ended November 1, 2014, respectively. The loss of, or a material reduction in, the amount of merchandise made available to us by Sears Holdings could have a material adverse effect on our business and results of operations. See also "Part II, Item 1A, Risk Factors" in this Quarterly Report on Form 10-Q

In addition, our merchandise-vendor arrangements generally are not long-term (except the Merchandising Agreement) and none of them guarantees the availability of merchandise inventory in the future. Our growth strategy depends to a significant extent on the willingness and ability of our vendors to supply us with sufficient merchandise inventory. As a result, our success depends, in part, on maintaining or improving relationships with existing vendors to seek to ensure continuity of merchandise inventory and on developing relationships with new vendors, especially with respect to merchandise inventory to be sold by Outlet. If we fail to maintain or improve our relations with our existing vendors or fail to maintain the quality of merchandise inventory they supply us, or if we cannot maintain or acquire new vendors of favored brand-name merchandise inventory, and if we cannot acquire new vendors of merchandise inventory to be sold by Outlet, our ability to obtain a sufficient amount and variety of merchandise at acceptable prices may be limited, which could have a negative impact on our business and could materially affect our results of operations, financial condition, liquidity, and cash flows. In addition, merchandise inventory acquired from alternative sources, if any, may be of a lesser quality and more expensive than the merchandise inventory that we currently purchase.

Cash Flows from Investing Activities

Cash used in investing activities was $9.9 million for the first three quarters of 2014 compared to $3.4 million for the first three quarters of 2013. Cash used in investing activities in both periods was for purchases of property and equipment.

Cash Flows from Financing Activities

Cash used in financing activities was $26.5 million for the 39 Weeks ended November 1, 2014 compared to $58.9 million provided during the 39 Weeks ended November 2, 2013. The decrease of $85.4 million in cash provided by financing activities was primarily due to a reduction of $25.9 million in net borrowings under our Senior ABL Facility in the first three quarters of 2014 compared to an increase of $67.9 million in the first three quarters of 2013.

Financing Arrangements

As of November 1, 2014 we had $73.2 million outstanding under the Senior ABL Facility, which approximated the fair value of these borrowings. The Senior ABL Facility provides (subject to availability under a borrowing base) for maximum borrowings up to the aggregate commitments of all of the lenders, which as of November 1, 2014 totaled $250 million. Up to $75 million of the Senior ABL Facility is available for the issuance of letters of credit and up to $25 million is available for

29

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

swingline loans. The Senior ABL Facility permits us to request commitment increases in an aggregate principal amount of up to $100 million. Availability under the Senior ABL Facility as of November 1, 2014 was $171.2 million with $5.6 million of letters of credit outstanding under the facility.

The principal terms of the Senior ABL Facility are summarized below.

Senior ABL Facility

Maturity; Amortization and Prepayments

The Senior ABL Facility will mature on the earlier of (i) October 11, 2017 or (ii) six months prior to the expiration of the Merchandising Agreement and the other agreements with Sears Holdings or its subsidiaries in connection with the Separation that are specified in the Senior ABL Facility, unless such agreements have been extended to a date later than October 11, 2017 or terminated on a basis reasonably satisfactory to the administrative agent under the Senior ABL Facility.

The Senior ABL Facility is subject to mandatory prepayment in amounts equal to the amount by which the outstanding extensions of credit exceed the lesser of the borrowing base and the commitments then in effect.

Guarantees; Security

The obligations under the Senior ABL Facility are guaranteed by us and each of our existing and future direct and indirect wholly owned domestic subsidiaries (subject to certain exceptions). The Senior ABL Facility and the guarantees thereunder are secured by a first priority security interest in assets of the borrowers and guarantors consisting primarily of accounts and notes receivable, inventory, cash, cash equivalents, deposit accounts, and securities accounts, as well as certain other assets (other than intellectual property) ancillary to the foregoing and all proceeds of all of the foregoing, including cash proceeds and the proceeds of applicable insurance.

Interest; Fees

The interest rates per annum applicable to the loans under the Senior ABL Facility are based on a fluctuating rate of interest measured by reference to, at our election, either (1) adjusted LIBOR plus a borrowing margin, approximately 2.41% at November 1, 2014, or (2) an alternate base rate plus a borrowing margin, approximately 4.50% at November 1, 2014, with the borrowing margin subject to adjustment based on the average excess availability under the Senior ABL Facility for the preceding fiscal quarter.

Customary fees are payable in respect of the Senior ABL Facility, including letter of credit fees and commitment fees.

Covenants

The Senior ABL Facility includes a number of covenants that, among other things, limit or restrict our ability to, subject to specified exceptions, incur additional indebtedness (including guarantees), grant liens, make investments, make prepayments on other indebtedness, engage in mergers, or change the nature of our business.

The Senior ABL Facility limits SHO's ability to declare and pay cash dividends and repurchase its common stock. SHO may declare and pay cash dividends to its stockholders and may repurchase stock if the following conditions are satisfied: either (a) (i) no specified default then exists or would arise as a result of the declaration or payment of the cash dividend or as a result of the stock repurchase, (ii) SHO and its subsidiaries that are also borrowers have demonstrated to the reasonable satisfaction of the agent for the lenders that monthly availability (as determined in accordance with the Senior ABL Facility), immediately following the declaration and payment of the cash dividend or the stock repurchase and as projected on a pro forma basis for the twelve months following and after giving effect to the declaration and payment of the cash dividend or the stock repurchase, would be at least equal to the greater of (x) 25% of the Loan Cap (which is the lesser of (A) the aggregate commitments of the lenders and (B) the borrowing base) and (y) $50,000,000, and (iii) after giving pro forma effect to the declaration and payment of the cash dividend or the stock repurchase as if it constituted a specified debt service charge, the specified consolidated fixed charge coverage ratio, as calculated on a trailing twelve months basis, would be equal to or greater than 1.1:1.0, or (b) (i) no specified default then exists or would arise as a result of the declaration or payment of the cash dividend or the stock repurchase, (ii) payment of the cash dividend or the stock repurchase is not made with the proceeds of any credit extension under the Senior ABL Facility, (iii) during the 120-day period prior to declaration and payment of the cash dividend or the stock repurchase, no credit extension was outstanding under the Senior ABL Facility, and (iv) SHO demonstrates to the reasonable satisfaction of the agent for the lenders that, on a pro forma and projected basis, no credit extensions would be outstanding

30

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

under the Senior ABL Facility for the 120-day period following the declaration and payment of the cash dividend or the stock repurchase.

The Senior ABL Facility also contains certain affirmative covenants, including financial and other reporting requirements. As of November 1, 2014 we were in compliance with all of the covenants of the Senior ABL Facility.

Events of Default

The Senior ABL Facility includes customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross default to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments, and change of control, and other events of default including the failure to perform a "Material Contract" (which includes the Merchandising Agreement and other SHO-Sears Holdings Agreements) to the extent required to maintain it in full force and effect and the failure to enforce a Material Contract in accordance with its terms.

Uses and Sources of Liquidity

We believe that our existing cash and cash equivalents, cash flows from our operating activities, and, to the extent necessary, availability under the Senior ABL Facility will be sufficient to meet our anticipated liquidity needs for at least the next 12 months. As of November 1, 2014, we had cash and cash equivalents of $23.2 million. The adequacy of our available funds will depend on many factors, including the macroeconomic environment and the operating performance of our stores.

Capital lease obligations as of November 1, 2014 and November 2, 2013 were $0.2 million and $1.2 million, respectively.

Off-Balance Sheet Arrangements

As of November 1, 2014, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission's Regulation S-K.

31

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

Recent Accounting Pronouncements

See Part I, Item 1, “Financial Statements—Notes to Condensed Consolidated Financial Statements— Note 1 — Recent Accounting Pronouncements,” for information regarding new accounting pronouncements.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements made in this Quarterly Report on Form 10-Q contain forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements. Forward-looking statements include without limitation information concerning our future financial performance, business strategy, plans, goals, and objectives.

Statements preceded or followed by, or that otherwise include, the words “believes,” “expects,” “anticipates,” “intends,” “project,” “estimates,” “plans,” “forecast,” “is likely to,” "continue," and similar expressions or future or conditional verbs such as “will,” “may,” “would,” “should” and “could” are generally forward-looking in nature and not historical facts. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements.

The following factors, among others, separately or together could cause our actual results, performance, and achievements to differ from those set forth in the forward-looking statements, and one or more of the differences could have a material adverse effect on our ability to operate our business and could have a material adverse effect on our results of operations, financial condition, liquidity, and cash flows:

• our ability to offer merchandise and services that our customers want, including those under the Kenmore, Craftsman, and DieHard brands, which brands are owned by Sears Holdings (the "KCD Marks");

• the Merchandising Agreement provides that (1) if a third party that is not an affiliate of Sears Holdings acquires the rights to one or more (but less than all of) the KCD Marks Sears Holdings 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 Sears Holdings acquires the rights to all of the KCD Marks Sears Holdings may terminate the Merchandising Agreement in its entirety, over which events we have no control;

• the sale by Sears Holdings and its subsidiaries to other retailers that compete with us of major home appliances and other products branded with one of the KCD Marks;

• 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, the consolidation of Hometown and Outlet into a single business entity, the Separation, and operating as a standalone business entity;

• the impact of increased costs due to a decrease in our purchasing power following the Separation and other losses of benefits (such as a more effective and productive business relationship) that were associated with having been wholly owned by Sears Holdings and its subsidiaries;

• our continuing reliance on Sears Holdings for most products and services that are important to the successful operation of our business, and our potential need to rely on Sears Holdings for some products and services beyond the expiration or earlier termination by Sears Holdings of our agreements with Sears Holdings;

• the willingness of Sears Holdings' appliance, lawn and garden, tools, and other vendors to continue to supply to Sears Holdings, on terms (including vendor payment terms for Sears Holdings' merchandise purchases) that are acceptable to it and to us, merchandise that we would need to purchase from Sears Holdings to ensure continuity of merchandise supplies for our businesses;

• our ability to resolve on commercially reasonable terms existing disputes and, when they arise, future disputes with Sears Holdings regarding many of the material terms and conditions of our agreements with Sears Holdings;

32

SEARS HOMETOWN AND OUTLET STORES, INC.

13 and 39 Weeks Ended November 1, 2014 and November 2, 2013

• our ability to establish information, merchandising, logistics, and other systems separate from Sears Holdings that would be necessary to ensure continuity of merchandise supplies for our businesses if vendors were to reduce, or cease, their merchandise sales to Sears Holdings;

• our ability to establish a more effective and productive business relationship with Sears Holdings, particularly in light of the existence of pending, and the likelihood of future, disputes with respect to the terms and conditions of the SHO-Sears Holdings Agreements;

• the SHO-Sears Holdings Agreements were negotiated while we were a subsidiary of Sears Holdings and we may have received different terms from unaffiliated third parties (including with respect to costs and 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 Sears Holdings to provide computer systems 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 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 SHC-Supplied Systems");

• SHO's SHC-Supplied Systems may be subject to disruptions and data/security breaches for which Sears Holdings may be unwilling or unable to indemnify and defend us against third-party claims and other losses resulting from such disruptions and data/security breaches;

• the ability and willingness of Sears Holdings to perform its contractual obligations to us;

• the possible effects on us if Sears Holdings’ financial condition were perceived to significantly deteriorate, including if as a consequence Sears Holdings were to choose to seek the protection of the U.S. bankruptcy laws;

• limitations and restrictions in the Senior ABL Facility and our ability to service our indebtedness;

• our ability to obtain additional financing on acceptable terms;

• our dependence on independent dealers and franchisees to operate their stores profitably and in a manner consistent with our concepts and standards;

• our dependence on sources outside the U.S. for significant amounts of our merchandise;

• impairment charges for intangible assets and fixed-asset impairment for long-lived assets;

• our ability to attract, motivate, and retain key executives and other employees;

• the impact of increased costs associated with being a publicly held company;

• our ability to sell profitably online all of our merchandise and services;

• our ability to maintain effective internal controls as a publicly held company;

• our ability to realize the benefits that we expect to achieve from the Separation;

• litigation and regulatory trends challenging various aspects of the franchisor-franchisee relationship in the fast-food industry could expand to challenge or affect our relationships with our independent dealers and franchisees;

• 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 stockholders’ ability to exert control over us.

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements, including our "Risk Factors," that are included in our filings with the Securities and Exchange Commission and our other public announcements. While we believe that our forecasts and assumptions are reasonable, we caution that actual results may differ materially. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Consequently, actual events and results may vary significantly from those included in or contemplated or implied by our forward-looking statements. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or review any forward-looking statement made by us or on our behalf, whether as a result of new information, future developments, subsequent events or circumstances, or otherwise.

33

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to interest rate risk associated with our Senior ABL Facility, which requires us to pay interest on outstanding borrowings at variable rates. Assuming our Senior ABL Facility were fully drawn in principal amount equal to $250 million, each one percentage point change in interest rates payable with respect to the Senior ABL Facility would result in a $2.5 million change in annual cash interest expense with respect to our Senior ABL Facility.

34

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the 13 weeks ended November 1, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

35

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

As of the date hereof, we are not party to any litigation that we consider material to our operations.

Notwithstanding the above, from time to time we are, and will continue to be, subject to various legal claims, including those alleging wage and hour violations, payroll violations, employment discrimination, unlawful employment practices, Americans with Disabilities Act claims, Family and Medical Leave Act claims, product liability claims as a result of the sale of merchandise and services, claims with respect to franchise and dealer transactions, relationships, and operations, as well as various legal and governmental proceedings. Some of these claims from time to time include, and will continue to include, class or collective-action allegations, and the proceedings for some of these claims are, and will continue to be, in jurisdictions with reputations for aggressive application of laws and procedures against corporate defendants. Litigation is inherently unpredictable. Each proceeding, claim, and regulatory action against us, whether meritorious or not, could be time consuming, result in significant legal expenses, require significant amounts of management time, result in the diversion of significant operational resources, require changes in our methods of doing business that could be costly to implement, reduce our net sales, increase our expenses, require us to make substantial payments to settle claims or satisfy judgments, require us to cease conducting certain operations or offering certain products in certain areas or generally, and otherwise harm our business, results of operations, financial condition, and cash flows, perhaps materially. See also "Cautionary Statement Regarding Forward-Looking Information" and "Risk Factors" in this Quarterly Report on Form 10-Q.

36

Item 1A. Risk Factors

There have been no material changes from the risk factors as previously disclosed in the 2013 10-K with three exceptions.

The first exception is with respect to the risk factor entitled, "We may not be able to resolve successfully existing and, if they arise, future contractual disputes and other conflicts with Sears Holdings" that is included in "Risk Factors" in the 2013 10-K. We believe that, generally, we have successfully resolved many disputes with Sears Holdings that have arisen post-Separation with respect to the SHO-Sears Holdings Agreements and related business arrangements. However, many significant disputes with Sears Holdings remain unresolved and are the subject of ongoing discussions. We are unable to determine if, when, or how these disputes will be resolved.

The second exception is with respect to the risk factor entitled, "If Sears Holdings' perceived financial condition were to significantly deteriorate, our ability to operate our business and our financial performance could be materially and adversely affected" that is included in "Risk Factors" in the 2013 10-K. At any time one or more of Sears Holdings’ vendors could take one or more of the following actions with respect to Sears Holdings based on the vendors’ assessments of Sears Holdings’ willingness or ability to meet its obligations to pay for merchandise purchases as they become due: (i) reduce or cease altogether the vendors’ sales of major home appliances, lawn and garden equipment, tools, and other merchandise, which could reduce or eliminate our purchases from Sears Holdings of the vendors’ merchandise; (ii) increase the vendors’ merchandise prices, which could result in higher prices for the merchandise to be purchased by us from Sears Holdings; (iii) reduce or cease altogether the vendors’ allowances, subsidies, and other vendor promotional support, which could reduce our receipt of vendor promotional support from Sears Holdings; or (iv) take other adverse merchandise-related actions. If one or more of the foregoing events were to occur, the event or events could have a material adverse effect on our results of operations, financial condition, liquidity, and cash flows. 

The third exception is with respect to the risk factor entitled, "Our operating results are tied in part to the success of our dealers and franchisees, and the inability of our dealers and franchisees to continue operating their stores profitably could adversely affect our operating results" that is included in "Risk Factors" in the 2013 10-K. We may reacquire one or more stores from our franchisees from time to time and establish reserves for, write down, or write off associated franchisee receivables if the franchisees are unable to operate their stores profitably or in a manner consistent with our concepts and standards or are otherwise unwilling to meet their obligations to us.

The risks described in the preceding paragraphs and in “Risk Factors” beginning on page 8 of the 2013 10-K should be carefully considered. Those risks could materially affect our results of operations, financial condition, liquidity, and cash flows. Those risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Cautionary Statement Regarding Forward-Looking Information,” and the risks to our businesses described elsewhere, in this Quarterly Report on Form 10-Q.

37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Share Repurchases

On August 28, 2013 the Company's Board of Directors authorized a $25 million repurchase program for the Company's outstanding shares of common stock. The timing and amount of repurchases depend on various factors, including market conditions, the Company's capital position and internal cash generation, and other factors. The Company's repurchase program does not include specific price targets, may be executed through open-market, privately negotiated, and other transactions that may be available, and may include utilization of Rule 10b5-1 plans. The repurchase program does not obligate the Company to repurchase any dollar amount, or any number of shares, of common stock. The repurchase program does not have a termination date, and the Company may suspend or terminate the repurchase program at any time.

Shares that are repurchased by the Company pursuant to the repurchase program will be retired and will resume the status of authorized and unissued shares of common stock.

The Company did not repurchase any shares during the 13 weeks ended November 1, 2014. As of November 1, 2014 we had approximately $12.5 million of remaining authorization under the repurchase program.

The Senior ABL Facility limits SHO's ability to declare and pay cash dividends and repurchase its common stock. SHO may declare and pay cash dividends to its stockholders and may repurchase stock if the following conditions are satisfied: either (a) (i) no specified default then exists or would arise as a result of the declaration or payment of the cash dividend or as a result of the stock repurchase, (ii) SHO and its subsidiaries that are also borrowers have demonstrated to the reasonable satisfaction of the agent for the lenders that monthly availability (as determined in accordance with the Senior ABL Facility), immediately following the declaration and payment of the cash dividend or the stock repurchase and as projected on a pro forma basis for the twelve months following and after giving effect to the declaration and payment of the cash dividend or the stock repurchase, would be at least equal to the greater of (x) 25% of the Loan Cap (which is the lesser of (A) the aggregate commitments of the lenders and (B) the borrowing base) and (y) $50,000,000, and (iii) after giving pro forma effect to the declaration and payment of the cash dividend or the stock repurchase as if it constituted a specified debt service charge, the specified consolidated fixed charge coverage ratio, as calculated on a trailing twelve months basis, would be equal to or greater than 1.1:1.0, or (b) (i) no specified default then exists or would arise as a result of the declaration or payment of the cash dividend or the stock repurchase, (ii) payment of the cash dividend or the stock repurchase is not made with the proceeds of any credit extension under the Senior ABL Facility, (iii) during the 120-day period prior to declaration and payment of the cash dividend or the stock repurchase, no credit extension was outstanding under the Senior ABL Facility, and (iv) SHO demonstrates to the reasonable satisfaction of the agent for the lenders that, on a pro forma and projected basis, no credit extensions would be outstanding under the Senior ABL Facility for the 120-day period following the declaration and payment of the cash dividend or the stock repurchase.

The Senior ABL Facility also imposes various other requirements, such as a cash dominion requirement and a requirement that the fixed charge ratio at the last day of any quarter be not less than 1.0 to 1.0, which take effect if availability falls below designated thresholds and which may limit our ability to make share repurchases.

38

Item 6. Exhibits

The Exhibits listed in the accompanying “Exhibit Index” have been filed as part of this Quarterly Report on Form 10-Q.

39

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Sears Hometown and Outlet Stores, Inc.
By:	/S/ RYAN D. ROBINSON
Name:	Ryan D. Robinson
Title:	Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
Date:	December 4, 2014

40

SEARS HOMETOWN AND OUTLET STORES, INC.

EXHIBIT INDEX

Exhibit Number	Document Description
*31.1	Certification of Chief Executive Officer Required Under Rule 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of 1934, as amended.
*31.2	Certification of Chief Financial Officer Required Under Rule 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of 1934, as amended.
*32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished only).
**101	The following financial information from the Quarterly Report on Form 10-Q for the fiscal quarter ended November 1, 2014, formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Statements of Operations (Unaudited) for the 13 and 39 Weeks Ended November 1, 2014 and November 2, 2013; (ii) the Condensed Consolidated Balance Sheets (Unaudited) at November 1, 2014, November 2, 2013, and February 1, 2014; (iii) the Condensed Consolidated Statements of Cash Flows (Unaudited) for the 39 Weeks Ended November 1, 2014 and November 2, 2013; (iv) the Condensed Combined Statements of Stockholders' Equity (Unaudited) for the 39 Weeks Ended November 1, 2014 and November 2, 2013; and (v) the Notes to the Condensed Consolidated Financial Statements (Unaudited).

* Filed herewith.

** 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.

41

EX-31.1

CERTIFICATIONS

I, W. Bruce Johnson, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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(s) 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(s) 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:	December 4, 2014
/s/ W. Bruce Johnson
W. Bruce Johnson
Chief Executive Officer and President
Sears Hometown and Outlet Stores, Inc.

EX-31.2

CERTIFICATIONS

I, Ryan D. Robinson, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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(s) 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(s) 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:	December 4, 2014
/s/ Ryan D. Robinson
Ryan D. Robinson
Senior Vice President and Chief Financial Officer
Sears Hometown and Outlet Stores, Inc.

EX-32.0

CERTIFICATION

Pursuant to 18 U.S.C. 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

Each of the undersigned, W. Bruce Johnson, Chief Executive Officer and President of Sears Hometown and Outlet Stores, Inc. (the “Company”) and Ryan D. Robinson, Senior Vice President and Chief Financial Officer of the Company, has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 1, 2014 (the “Report”).

Each of the undersigned hereby certifies that:

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. 

December 4, 2014

/s/ W. Bruce Johnson

W. Bruce Johnson

Chief Executive Officer and President

/s/ Ryan D. Robinson

Ryan D. Robinson

Senior Vice President and

Chief Financial Officer

XML

Income Per Common Share (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Nov. 01, 2014	Nov. 02, 2013	Nov. 01, 2014	Nov. 02, 2013
Earnings Per Share [Abstract]
Basic weighted average shares	22,666	22,999	22,666	23,066
Dilutive effect of restricted stock	0	0	0	4
Diluted weighted average shares	22,666	22,999	22,666	23,070
Net income (loss)	$ (171,210)	$ 7,695	$ (164,171)	$ 31,826
Income (loss) per common share:
Basic (in dollars per share)	$ (7.55)	$ 0.33	$ (7.24)	$ 1.38
Diluted (in dollars per share)	$ (7.55)	$ 0.33	$ (7.24)	$ 1.38

XML

Background and Basis of Presentation (Details)	9 Months Ended
	Nov. 01, 2014 segment store state
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Number of stores	1,257
Number of states in which the Company operates	50
Number of operating segments	2

XML

Goodwill

9 Months Ended

Nov. 01, 2014

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill

GOODWILL

Goodwill allocated to our Hometown and Outlet segments as of November 1, 2014, and changes in the carrying amount of goodwill for the nine months ended November 1, 2014, are as follows:

Thousands	Hometown			Outlet		Total
Balance (gross) at February 1, 2014	$	167,000		$	—	$	167,000
Impairment Loss	(167,000		)	—		(167,000		)
Balance at November 1, 2014	$	—		$	—	$	—

For the first nine months of fiscal 2014, the decrease in goodwill is due entirely to the non-cash impairment loss with respect to the Hometown Reporting Unit as discussed further below.

We review the Hometown Stores and Home Appliance Showrooms ("Hometown Reporting Unit") goodwill for impairment annually at the beginning of the fourth fiscal quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The goodwill impairment test involves a two-step process. In the first step, SHO compares the fair value of the Hometown Reporting Unit to its carrying value. If the fair value of the Hometown Reporting Unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the Hometown Reporting Unit is less than its carrying value, SHO must perform the second step of the impairment test to measure the amount of impairment loss. In the second step, the Hometown Reporting Unit's fair value is allocated to all of the assets and liabilities of the Hometown Reporting Unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the Hometown Reporting Unit were being acquired in a business combination. If the implied fair value of the Hometown Reporting Unit's goodwill is less than its carrying value, the difference is recorded as a non-cash impairment loss.

During the third quarter of fiscal 2014, we determined that sufficient indicators of potential impairment existed to require that we conduct an interim impairment analysis of the Hometown Reporting Unit's goodwill. These indicators included a significant and sustained decline in the recent trading values of SHO's stock, coupled with market conditions and business trends affecting the Hometown Reporting Unit. The primary operating factors were declines in revenue and profitability for fiscal 2014. Merchandise revenues in fiscal 2014 were impacted by the highly promotional environment, along with other factors that caused declines in comparable store sales and related profitability below expectations for the Hometown Reporting Unit.

SHO estimated the fair value of the Hometown Reporting Unit using a weighting of fair values derived from the income approach and the market approach. Under the income approach, SHO calculated the fair value of the Hometown Reporting Unit based on the present value of the Hometown Reporting Unit's estimated future cash flows. The cash flow projections were based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. SHO used a discount rate that was based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the Hometown Reporting Unit and its projected cash flows. SHO's market approach used estimated fair values based on market multiples of revenue and earnings derived from comparable publicly traded companies with operating and investment characteristics that were comparable to the operating and investment characteristics of the Hometown Reporting Unit.

Due to the complexity and the effort required to estimate the fair value of the Hometown Reporting Unit for the first step of the impairment test and to estimate the fair values of all assets and liabilities of the Hometown Reporting Unit for the second step of the impairment test, SHO used fair value estimates that were derived based on assumptions and analyses that are subject to change. SHO’s first-step evaluation concluded that the fair value of the Hometown Reporting Unit was substantially below its carrying value. Based on SHO's second-step analyses, the implied fair value of the Hometown Reporting Unit's goodwill was $0. As a result, a full impairment of goodwill was required and we recorded a $167.0 million non-cash goodwill impairment charge in the third quarter of fiscal 2014, which is reflected as "Impairment of goodwill" in the Condensed Consolidated Statements of Operations. The primary factor that contributed to the goodwill impairment loss was the aforementioned 2014 operating issues leading to less-optimistic forecasts for the remainder of fiscal 2014 and fiscal 2015 and the corresponding impact beyond those periods.

XML

Income Taxes (Details) (USD $) In Millions, unless otherwise specified	Nov. 01, 2014	Feb. 01, 2014	Nov. 02, 2013
Income Tax Disclosure [Abstract]
Deferred tax assets	$ 57.2	$ 58.0	$ 61.1

XML

Goodwill (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Nov. 01, 2014	Nov. 02, 2013	Nov. 01, 2014	Nov. 02, 2013
Goodwill [Line Items]
Balance (gross) at February 1, 2014			$ 167,000
Impairment Loss	(167,000)	0	(167,000)	0
Balance at November 1, 2014	0		0
Sears Hometown and Hardware [Member]
Goodwill [Line Items]
Balance (gross) at February 1, 2014			167,000
Impairment Loss	(167,000)		(167,000)
Balance at November 1, 2014	0		0
Sears Outlet [Member]
Goodwill [Line Items]
Balance (gross) at February 1, 2014			0
Impairment Loss	0		0
Balance at November 1, 2014	$ 0		$ 0

XML

Related Party Agreements and Transactions (Details) (USD $)	3 Months Ended				9 Months Ended
	Nov. 01, 2014		Nov. 02, 2013		Nov. 01, 2014		Nov. 02, 2013
Related Party Transaction [Line Items]
Exclusion of on-line sales			$ 23,800,000		$ 20,300,000		$ 69,600,000
ESL [Member]
Related Party Transaction [Line Items]
Beneficial interest acquired by related party, percentage	47.00%				47.00%
Sears Holdings Corporation [Member]
Related Party Transaction [Line Items]
Net Commissions from Sears Holdings	22,069,000		21,424,000		76,808,000		68,327,000
Purchases related to cost of sales and occupancy (1)	351,935,000	[1]	395,178,000	[1]	1,156,632,000	[1]	1,224,254,000	[1]
Services (1)	$ 23,302,000	[1]	$ 29,410,000	[1]	$ 73,089,000	[1]	$ 85,655,000	[1]
Invoice payment term	10 days
Sears Holdings [Member] | ESL [Member]
Related Party Transaction [Line Items]
Beneficial interest acquired by related party, percentage	56.00%				56.00%

[1] Amounts previously presented for the 13 and 39 Weeks ended November 2, 2013 and for the 13 weeks ended May 3, 2014 within "Purchases related to cost of sales and occupancy" have been reclassified into "Services." The reclassified items were primarily costs associated with marketing. The reclassified amount for the 13 weeks ended November 2, 2013 was $23.8 million. The reclassified amounts for the 39 Weeks ended November 2, 2013 and November 1, 2014 were $69.6 million and $20.3 million, respectively.

XML

Financing Arrangements (Details) (Senior ABL Facility [Member], USD $)	9 Months Ended
	Nov. 01, 2014
Debt Instrument [Line Items]
Remaining borrowing capacity	$ 73,200,000
Covenant, maximum percentage of Loan Cap	25.00%
Covenant, component of aggregate commitment calculation	50,000,000
Covenant, fixed charge coverage ratio	1.1
Covenant, period of credit extensions outstanding	120 days
LIBOR [Member]
Debt Instrument [Line Items]
Basis spread on variable rate	2.41%
Base Rate [Member]
Debt Instrument [Line Items]
Basis spread on variable rate	4.50%
Revolving Credit Facility [Member]
Debt Instrument [Line Items]
Aggregate maximum borrowings	250,000,000
Increases in aggregate principal	100,000,000
Letter of Credit [Member]
Debt Instrument [Line Items]
Remaining borrowing capacity	171,200,000
Aggregate maximum borrowings	75,000,000
Amount outstanding	5,600,000
Swingline Loans [Member]
Debt Instrument [Line Items]
Aggregate maximum borrowings	$ 25,000,000

XML

Other Current and Long-Term Liabilities

9 Months Ended

Nov. 01, 2014

Payables and Accruals [Abstract]

OTHER CURRENT AND LONG-TERM LIABILITIES

OTHER CURRENT AND LONG-TERM LIABILITIES

Other current and long-term liabilities consist of the following:

Thousands	November 1, 2014		November 2, 2013		February 1, 2014
Customer deposits	$	32,322	$	40,913	$	35,547
Sales and other taxes	14,052		14,072		11,403
Accrued expenses	10,617		13,267		9,523
Payroll and related items	5,996		11,193		8,105
Total Other current and long-term liabilities	$	62,987	$	79,445	$	64,578

XML

Summary of Segment Data (Details) (USD $)	3 Months Ended		9 Months Ended
	Nov. 01, 2014	Nov. 02, 2013	Nov. 01, 2014	Nov. 02, 2013	Feb. 01, 2014
Segment Reporting Information [Line Items]
Initial franchise revenue	$ 6,500,000	$ 7,800,000	$ 15,200,000	$ 14,800,000
Net sales	565,147,000	561,068,000	1,793,694,000	1,819,084,000
Cost of sales and occupancy	430,085,000	425,596,000	1,367,644,000	1,380,966,000
Selling and administrative	139,766,000	121,698,000	414,271,000	379,815,000
Impairment of goodwill	167,000,000	0	167,000,000	0
Depreciation	2,035,000	2,177,000	6,390,000	6,569,000
Gain on the sale of assets	(155,000)	(1,567,000)	(155,000)	(1,567,000)
Total costs and expenses	738,731,000	547,904,000	1,955,150,000	1,765,783,000
Operating income (loss)	(173,584,000)	13,164,000	(161,456,000)	53,301,000
Total assets	663,236,000	848,008,000	663,236,000	848,008,000	847,185,000
Capital expenditures	2,989,000	3,600,000	10,039,000	5,995,000
Appliances [Member]
Segment Reporting Information [Line Items]
Net sales	401,164,000	405,220,000	1,194,218,000	1,231,089,000
Lawn and Garden [Member]
Segment Reporting Information [Line Items]
Net sales	66,512,000	64,892,000	297,851,000	300,967,000
Tools and Paint [Member]
Segment Reporting Information [Line Items]
Net sales	46,385,000	47,974,000	146,036,000	149,059,000
Other [Member]
Segment Reporting Information [Line Items]
Net sales	51,086,000	42,982,000	155,589,000	137,969,000
Sears Hometown and Hardware [Member]
Segment Reporting Information [Line Items]
Net sales	387,743,000	413,171,000	1,286,532,000	1,361,908,000
Cost of sales and occupancy	299,013,000	318,362,000	983,214,000	1,040,750,000
Selling and administrative	103,395,000	94,818,000	307,747,000	299,175,000
Impairment of goodwill	167,000,000		167,000,000
Depreciation	746,000	760,000	2,127,000	2,372,000
Gain on the sale of assets	(155,000)	0	(155,000)	0
Total costs and expenses	569,999,000	413,940,000	1,459,933,000	1,342,297,000
Operating income (loss)	(182,256,000)	(769,000)	(173,401,000)	19,611,000
Total assets	455,112,000	657,019,000	455,112,000	657,019,000
Capital expenditures	579,000	1,341,000	2,509,000	2,711,000
Sears Hometown and Hardware [Member] | Appliances [Member]
Segment Reporting Information [Line Items]
Net sales	261,645,000	289,834,000	795,919,000	868,489,000
Sears Hometown and Hardware [Member] | Lawn and Garden [Member]
Segment Reporting Information [Line Items]
Net sales	59,447,000	59,049,000	278,305,000	280,029,000
Sears Hometown and Hardware [Member] | Tools and Paint [Member]
Segment Reporting Information [Line Items]
Net sales	41,736,000	44,516,000	132,470,000	138,996,000
Sears Hometown and Hardware [Member] | Other [Member]
Segment Reporting Information [Line Items]
Net sales	24,915,000	19,772,000	79,838,000	74,394,000
Sears Outlet [Member]
Segment Reporting Information [Line Items]
Net sales	177,404,000	147,897,000	507,162,000	457,176,000
Cost of sales and occupancy	131,072,000	107,234,000	384,430,000	340,216,000
Selling and administrative	36,371,000	26,880,000	106,524,000	80,640,000
Impairment of goodwill	0		0
Depreciation	1,289,000	1,417,000	4,263,000	4,197,000
Gain on the sale of assets	0	(1,567,000)	0	(1,567,000)
Total costs and expenses	168,732,000	133,964,000	495,217,000	423,486,000
Operating income (loss)	8,672,000	13,933,000	11,945,000	33,690,000
Total assets	208,124,000	190,989,000	208,124,000	190,989,000
Capital expenditures	2,410,000	2,259,000	7,530,000	3,284,000
Sears Outlet [Member] | Appliances [Member]
Segment Reporting Information [Line Items]
Net sales	139,519,000	115,386,000	398,299,000	362,600,000
Sears Outlet [Member] | Lawn and Garden [Member]
Segment Reporting Information [Line Items]
Net sales	7,065,000	5,843,000	19,546,000	20,938,000
Sears Outlet [Member] | Tools and Paint [Member]
Segment Reporting Information [Line Items]
Net sales	4,649,000	3,458,000	13,566,000	10,063,000
Sears Outlet [Member] | Other [Member]
Segment Reporting Information [Line Items]
Net sales	$ 26,171,000	$ 23,210,000	$ 75,751,000	$ 63,575,000

XML

Condensed Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Nov. 01, 2014	Nov. 02, 2013	Nov. 01, 2014	Nov. 02, 2013
NET SALES	$ 565,147	$ 561,068	$ 1,793,694	$ 1,819,084
COSTS AND EXPENSES
Cost of sales and occupancy	430,085	425,596	1,367,644	1,380,966
Selling and administrative	139,766	121,698	414,271	379,815
Impairment of goodwill	167,000	0	167,000	0
Depreciation	2,035	2,177	6,390	6,569
Gain on the sale of assets	(155)	(1,567)	(155)	(1,567)
Total costs and expenses	738,731	547,904	1,955,150	1,765,783
Operating income (loss)	(173,584)	13,164	(161,456)	53,301
Interest expense	(915)	(738)	(2,754)	(1,969)
Other income	888	460	2,366	1,306
Income (loss) before income taxes	(173,611)	12,886	(161,844)	52,638
Income tax benefit (expense)	2,401	(5,191)	(2,327)	(20,812)
NET INCOME (LOSS)	$ (171,210)	$ 7,695	$ (164,171)	$ 31,826
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO STOCKHOLDERS
Basic (in dollars per share)	$ (7.55)	$ 0.33	$ (7.24)	$ 1.38
Diluted (in dollars per share)	$ (7.55)	$ 0.33	$ (7.24)	$ 1.38
Basic weighted average common shares outstanding (in shares)	22,666	22,999	22,666	23,066
Diluted weighted average common shares outstanding (in shares)	22,666	22,999	22,666	23,070

XML

Background and Basis of Presentation

9 Months Ended

Nov. 01, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

BACKGROUND AND BASIS OF PRESENTATION

BACKGROUND AND BASIS OF PRESENTATION

Background

Sears Hometown and Outlet Stores, Inc. is a national retailer primarily focused on selling home appliances, hardware, tools, and lawn and garden equipment. As of November 1, 2014 the Company and its dealers and franchisees operated 1,257 stores across all 50 states and in Puerto Rico and Bermuda. In these notes and elsewhere in this Quarterly Report on Form 10-Q the terms “we,” “us,” “our,” “SHO,” and the “Company” refer to Sears Hometown and Outlet Stores, Inc. and its subsidiaries.

Description of the Separation

On October 11, 2012, Sears Holdings Corporation (“Sears Holdings”) completed the separation of its Sears Hometown and Hardware and Sears Outlet businesses (the “Separation”). As part of the Separation, through a series of intercompany transactions, Sears Holdings and several of its subsidiaries transferred the assets and liabilities comprising the Sears Hometown and Hardware and Sears Outlet businesses to Sears Hometown and Outlet Stores, Inc., which was formed prior to the Separation as a wholly owned subsidiary of Sears Holdings. Effective upon the Separation, Sears Holdings ceased to own shares of our common stock, and thereafter our common stock began trading on the NASDAQ Stock Market under the trading symbol “SHOS.”

Basis of Presentation

These unaudited condensed consolidated financial statements include the accounts of Sears Hometown and Outlet Stores, Inc. and its subsidiaries, all of which are wholly owned. These unaudited condensed consolidated financial statements do not include all of the information and footnotes required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the fiscal quarter ended November 1, 2014 are not necessarily indicative of the results that may be expected for the full fiscal year. These financial statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

We operate through two segments--our Sears Hometown and Hardware segment ("Hometown") and our Sears Outlet segment ("Outlet").

Our fiscal year end is the Saturday closest to January 31 each year. Our third fiscal-quarter end is the Saturday closest to October 31 each year. 

Variable Interest Entities and Consolidation

The Financial Accounting Standards Board ("FASB") has issued guidance on variable interest entities and consolidation for determining whether an entity is a variable interest entity as well as the methods permitted for determining the primary beneficiary of a variable interest entity. In addition, this guidance requires ongoing reassessments of whether a company is the primary beneficiary of a variable interest entity and disclosures related to a company’s involvement with a variable interest entity.

On an ongoing basis the Company evaluates its business relationships, such as those with its dealers, franchisees, and suppliers, to identify potential variable interest entities. Generally, these businesses qualify for a scope exception under the consolidation guidance, or, where a variable interest exists, the Company does not possess the power to direct the activities that most significantly impact the economic performance of these businesses. The Company has not consolidated any of such entities in the periods presented.

Fair Value of Financial Instruments

We determine the fair value of financial instruments in accordance with standards pertaining to fair value measurements. Such standards define fair value and establish a framework for measuring fair value under GAAP. Under fair value measurement accounting standards, fair value is considered to be the exchange price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. We report the fair value of financial assets and liabilities based on the fair value hierarchy prescribed by accounting standards for fair value measurements, which prioritizes the inputs to valuation techniques used to measure fair value into three levels, as follows:

Level 1 inputs—unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide ongoing pricing information.

Level 2 inputs—inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable for the asset or liability, such as interest-rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risks, and default rates.

Level 3 inputs—unobservable inputs for the asset or liability.

Cash and cash equivalents (level 1), accounts and notes receivable, short-term debt (level 2), merchandise payables, and accrued expenses are reflected in the Condensed Consolidated Balance Sheets at cost, which approximates fair value due to the short-term nature of these instruments. For short-term debt, the variable interest rates are a significant input in our fair value assessments. The carrying value of long-term notes receivable approximates fair value.

We measure certain non-financial assets and liabilities, including long-lived assets, at fair value on a non-recurring basis. As disclosed in Note 4, the Company recorded a goodwill impairment charge during the quarter ended November 1, 2014. The Company utilized Level 3 inputs to measure the fair value of goodwill.

Recent Accounting Pronouncements

Revenue from Contracts with Customers

In May 2014, the FASB issued an accounting standards update which establishes a comprehensive revenue recognition standard in U.S. GAAP for virtually all industries, including those that previously followed industry-specific guidance such as the real estate, construction, and software industries. The update is effective in fiscal 2017, and we are currently evaluating the potential impact. Accordingly, we cannot estimate the effect on our consolidated financial position, results of operations, or cash flows.

XML

Equity (Restricted Stock Awards) (Details) (Restricted Stock [Member], USD $) In Thousands, except Per Share data, unless otherwise specified	9 Months Ended
	Nov. 01, 2014
Restricted Stock [Member]
Shares
Beginning of year balance	87
Granted	0
Vested	0
Forfeited	(17)
Balance at end of period	70
Weighted-Average Fair Value on Date of Grant
Beginning of year balance (in dollars per share)	$ 44.45
Granted (in dollars per share)	$ 0.00
Vested (in dollars per share)	$ 0.00
Forfeited (in dollars per share)	$ 44.45
Balance at end of period (in dollars per share)	$ 44.45

XML

Summary of Segment Data (Tables)

9 Months Ended

Nov. 01, 2014

Segment Reporting [Abstract]

Schedule of Segment Data

	13 Weeks Ended November 1, 2014
Thousands	Hometown			Outlet		Total
Net sales
Appliances	$	261,645		$	139,519	$	401,164
Lawn and garden	59,447			7,065		66,512
Tools and paint	41,736			4,649		46,385
Other	24,915			26,171		51,086
Total	387,743			177,404		565,147
Costs and expenses
Cost of sales and occupancy	299,013			131,072		430,085
Selling and administrative	103,395			36,371		139,766
Impairment of goodwill	167,000			—		167,000
Depreciation	746			1,289		2,035
Gain on the sale of assets	(155		)	—		(155		)
Total	569,999			168,732		738,731
Operating income (loss)	$	(182,256	)	$	8,672	$	(173,584	)
Total assets	$	455,112		$	208,124	$	663,236
Capital expenditures	$	579		$	2,410	$	2,989

	13 Weeks Ended November 2, 2013
Thousands	Hometown			Outlet			Total
Net sales
Appliances	$	289,834		$	115,386		$	405,220
Lawn and garden	59,049			5,843			64,892
Tools and paint	44,516			3,458			47,974
Other	19,772			23,210			42,982
Total	413,171			147,897			561,068
Costs and expenses
Cost of sales and occupancy	318,362			107,234			425,596
Selling and administrative	94,818			26,880			121,698
Depreciation	760			1,417			2,177
Gain on the sale of assets	—			(1,567		)	(1,567		)
Total	413,940			133,964			547,904
Operating income (loss)	$	(769	)	$	13,933		$	13,164
Total assets	$	657,019		$	190,989		$	848,008
Capital expenditures	$	1,341		$	2,259		$	3,600

	39 Weeks Ended November 1, 2014
Thousands	Hometown			Outlet		Total
Net sales
Appliances	$	795,919		$	398,299	$	1,194,218
Lawn and garden	278,305			19,546		297,851
Tools and paint	132,470			13,566		146,036
Other	79,838			75,751		155,589
Total	1,286,532			507,162		1,793,694
Costs and expenses
Cost of sales and occupancy	983,214			384,430		1,367,644
Selling and administrative	307,747			106,524		414,271
Impairment of goodwill	167,000			—		167,000
Depreciation	2,127			4,263		6,390
Gain on the sale of assets	(155		)	—		(155		)
Total	1,459,933			495,217		1,955,150
Operating income (loss)	$	(173,401	)	$	11,945	$	(161,456	)
Total assets	$	455,112		$	208,124	$	663,236
Capital expenditures	$	2,509		$	7,530	$	10,039

	39 Weeks Ended November 2, 2013
Thousands	Hometown		Outlet			Total
Net sales
Appliances	$	868,489	$	362,600		$	1,231,089
Lawn and garden	280,029		20,938			300,967
Tools and paint	138,996		10,063			149,059
Other	74,394		63,575			137,969
Total	1,361,908		457,176			1,819,084
Costs and expenses
Cost of sales and occupancy	1,040,750		340,216			1,380,966
Selling and administrative	299,175		80,640			379,815
Depreciation	2,372		4,197			6,569
Gain on the sale of assets	—		(1,567		)	(1,567		)
Total	1,342,297		423,486			1,765,783
Operating income	$	19,611	$	33,690		$	53,301
Total assets	$	657,019	$	190,989		$	848,008
Capital expenditures	$	2,711	$	3,284		$	5,995

XML

Equity (Tables)

9 Months Ended

Nov. 01, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of Restricted Stock Award Activity

We do not currently have a broad-based program that provides for restricted-stock awards on an annual basis. Changes in restricted-stock awards for 2014 were as follows:

	39 Weeks Ended November 1, 2014
(Shares in Thousands)	Shares		Weighted-Average Fair Value on Date of Grant
Beginning of year balance	87		44.45
Granted	—		$	—
Vested	—		—
Forfeited	(17	)	44.45
Balance at 11/1/2014	70		$	44.45

XML

Accounts and Notes Receivable and Other Assets

9 Months Ended

Nov. 01, 2014

Receivables [Abstract]

Accounts and Notes Receivable and Other Assets

ACCOUNTS AND FRANCHISEE RECEIVABLES AND OTHER ASSETS

Accounts and franchisee receivables and other assets consist of the following:

	November 1, 2014
Thousands	Hometown			Outlet		Total
Short-term franchisee receivables	$	8,129		$	4,463	$	12,592
Miscellaneous receivables	7,609			2,112		9,721
Long-term franchisee receivables	21,246			27,688		48,934
Other assets	2,112			282		2,394
Provision for losses on short-term franchisee receivables (1)	(1,383		)	—		(1,383		)
Provision for losses on long-term franchisee receivables (1)	(10,143		)	—		(10,143		)
Total Accounts and franchisee receivables and other assets	$	27,570		$	34,545	$	62,115

	November 2, 2013
Thousands	Hometown		Outlet		Total
Short-term franchisee receivables	$	2,676	$	896	$	3,572
Miscellaneous receivables	13,198		437		13,635
Long-term franchisee receivables	21,090		7,974		29,064
Other assets	2,844		207		3,051
Total Accounts and franchisee receivables and other assets	$	39,808	$	9,514	$	49,322

	February 1, 2014
Thousands	Hometown		Outlet		Total
Short-term franchisee receivables	$	2,748	$	1,844	$	4,592
Miscellaneous receivables	13,029		1,631		14,660
Long-term franchisee receivables	21,207		16,409		37,616
Other assets	2,662		212		2,874
Total Accounts and franchisee receivables and other assets	$	39,646	$	20,096	$	59,742

(1) The Company recognizes a provision for losses on franchisee receivables (which consist primarily of franchisee promissory notes) in an amount equal to estimated probable losses net of recoveries. The provision is based on an analysis of expected future write-offs, existing economic conditions, and an assessment of specific identifiable franchisee promissory notes and other franchisee receivables considered at risk or uncollectible. The expense associated with the provision for losses on franchisee receivables is recognized as selling, general, and administrative expense. Most of our franchisee promissory notes authorize us to deduct debt service from our commissions otherwise due and payable to the franchisees, and we routinely make those deductions to the extent of available commissions payable. We established the provision for losses on franchisee receivables in the third quarter of fiscal 2014 based on our receivable-by-receivable assessment during the quarter that some of the Hometown franchisee receivables were potentially uncollectible in future periods due to (a) declining results of operations of, or other adverse financial events with respect to, Hometown franchise stores that indicated that the franchisees might not be able to meet their debt-service and other obligations to us as they became due and (b) the refusal during the quarter of one of our Hometown franchisees to continue to operate its franchise stores in accordance with the franchisee's agreements with us. Based on our assessment during the quarter we made no provision for losses on Outlet franchisee receivables.

XML

Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Nov. 01, 2014	Feb. 01, 2014	Nov. 02, 2013
CURRENT ASSETS
Cash and cash equivalents	$ 23,189	$ 23,475	$ 21,487
Accounts and notes receivable	20,930	19,252	17,207
Merchandise inventories	462,226	482,107	488,626
Prepaid expenses and other current assets	17,893	13,216	8,113
Total current assets	524,238	538,050	535,433
PROPERTY AND EQUIPMENT, net	50,454	48,973	49,544
GOODWILL	0	167,000	167,000
LONG-TERM DEFERRED TAXES	47,359	52,672	63,916
OTHER ASSETS	41,185	40,490	32,115
TOTAL ASSETS	663,236	847,185	848,008
CURRENT LIABILITIES
Short-term borrowings	73,200	99,100	87,900
Payable to Sears Holdings Corporation	79,940	68,396	57,414
Accounts payable	20,238	24,129	31,727
Other current liabilities	60,079	60,319	74,306
Current portion of capital lease obligations	75	662	1,082
Total current liabilities	233,532	252,606	252,429
CAPITAL LEASE OBLIGATIONS	136	95	98
OTHER LONG-TERM LIABILITIES	2,908	4,259	5,139
TOTAL LIABILITIES	236,576	256,960	257,666
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY
TOTAL STOCKHOLDERS' EQUITY	426,660	590,225	590,342
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 663,236	$ 847,185	$ 848,008

XML

Background and Basis of Presentation (Policies)

9 Months Ended

Nov. 01, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Variable Interest Entities and Consolidation

Variable Interest Entities and Consolidation

The Financial Accounting Standards Board ("FASB") has issued guidance on variable interest entities and consolidation for determining whether an entity is a variable interest entity as well as the methods permitted for determining the primary beneficiary of a variable interest entity. In addition, this guidance requires ongoing reassessments of whether a company is the primary beneficiary of a variable interest entity and disclosures related to a company’s involvement with a variable interest entity.

On an ongoing basis the Company evaluates its business relationships, such as those with its dealers, franchisees, and suppliers, to identify potential variable interest entities. Generally, these businesses qualify for a scope exception under the consolidation guidance, or, where a variable interest exists, the Company does not possess the power to direct the activities that most significantly impact the economic performance of these businesses. The Company has not consolidated any of such entities in the periods presented.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

We determine the fair value of financial instruments in accordance with standards pertaining to fair value measurements. Such standards define fair value and establish a framework for measuring fair value under GAAP. Under fair value measurement accounting standards, fair value is considered to be the exchange price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. We report the fair value of financial assets and liabilities based on the fair value hierarchy prescribed by accounting standards for fair value measurements, which prioritizes the inputs to valuation techniques used to measure fair value into three levels, as follows:

Level 1 inputs—unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide ongoing pricing information.

Level 2 inputs—inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable for the asset or liability, such as interest-rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risks, and default rates.

Level 3 inputs—unobservable inputs for the asset or liability.

Cash and cash equivalents (level 1), accounts and notes receivable, short-term debt (level 2), merchandise payables, and accrued expenses are reflected in the Condensed Consolidated Balance Sheets at cost, which approximates fair value due to the short-term nature of these instruments. For short-term debt, the variable interest rates are a significant input in our fair value assessments. The carrying value of long-term notes receivable approximates fair value.

We measure certain non-financial assets and liabilities, including long-lived assets, at fair value on a non-recurring basis.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

Revenue from Contracts with Customers

In May 2014, the FASB issued an accounting standards update which establishes a comprehensive revenue recognition standard in U.S. GAAP for virtually all industries, including those that previously followed industry-specific guidance such as the real estate, construction, and software industries. The update is effective in fiscal 2017, and we are currently evaluating the potential impact. Accordingly, we cannot estimate the effect on our consolidated financial position, results of operations, or cash flows.

XML

Document and Entity Information Document	9 Months Ended
	Nov. 01, 2014	Dec. 04, 2014
Document and Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Nov. 01, 2014
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q3
Entity Registrant Name	Sears Hometown & Outlet Stores, Inc.
Entity Central Index Key	0001548309
Current Fiscal Year End Date	--01-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		22,735,849

XML

Accounts and Notes Receivable and Other Assets (Tables)

9 Months Ended

Nov. 01, 2014

Receivables [Abstract]

Schedule of Accounts and Notes Receivable and Other Assets

Accounts and franchisee receivables and other assets consist of the following:

	November 1, 2014
Thousands	Hometown			Outlet		Total
Short-term franchisee receivables	$	8,129		$	4,463	$	12,592
Miscellaneous receivables	7,609			2,112		9,721
Long-term franchisee receivables	21,246			27,688		48,934
Other assets	2,112			282		2,394
Provision for losses on short-term franchisee receivables (1)	(1,383		)	—		(1,383		)
Provision for losses on long-term franchisee receivables (1)	(10,143		)	—		(10,143		)
Total Accounts and franchisee receivables and other assets	$	27,570		$	34,545	$	62,115

	November 2, 2013
Thousands	Hometown		Outlet		Total
Short-term franchisee receivables	$	2,676	$	896	$	3,572
Miscellaneous receivables	13,198		437		13,635
Long-term franchisee receivables	21,090		7,974		29,064
Other assets	2,844		207		3,051
Total Accounts and franchisee receivables and other assets	$	39,808	$	9,514	$	49,322

	February 1, 2014
Thousands	Hometown		Outlet		Total
Short-term franchisee receivables	$	2,748	$	1,844	$	4,592
Miscellaneous receivables	13,029		1,631		14,660
Long-term franchisee receivables	21,207		16,409		37,616
Other assets	2,662		212		2,874
Total Accounts and franchisee receivables and other assets	$	39,646	$	20,096	$	59,742

(1) The Company recognizes a provision for losses on franchisee receivables (which consist primarily of franchisee promissory notes) in an amount equal to estimated probable losses net of recoveries. The provision is based on an analysis of expected future write-offs, existing economic conditions, and an assessment of specific identifiable franchisee promissory notes and other franchisee receivables considered at risk or uncollectible. The expense associated with the provision for losses on franchisee receivables is recognized as selling, general, and administrative expense. Most of our franchisee promissory notes authorize us to deduct debt service from our commissions otherwise due and payable to the franchisees, and we routinely make those deductions to the extent of available commissions payable. We established the provision for losses on franchisee receivables in the third quarter of fiscal 2014 based on our receivable-by-receivable assessment during the quarter that some of the Hometown franchisee receivables were potentially uncollectible in future periods due to (a) declining results of operations of, or other adverse financial events with respect to, Hometown franchise stores that indicated that the franchisees might not be able to meet their debt-service and other obligations to us as they became due and (b) the refusal during the quarter of one of our Hometown franchisees to continue to operate its franchise stores in accordance with the franchisee's agreements with us

XML

Condensed Consolidated Statements of Cash Flows (USD $)	9 Months Ended
	Nov. 01, 2014	Nov. 02, 2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$ (164,171,000)	$ 31,826,000
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation	6,390,000	6,569,000
Share-based compensation	606,000	598,000
Gain on the sale of assets	(155,000)	(1,567,000)
Impairment of goodwill	167,000,000	0
Provision for losses on franchisee receivables	11,526,000	0
Change in operating assets and liabilities:
Accounts and notes receivable	(14,517,000)	(16,216,000)
Merchandise inventories	19,881,000	(60,189,000)
Payable to Sears Holdings Corporation	11,544,000	(22,077,000)
Accounts payable	(3,891,000)	(103,000)
Customer deposits	(3,225,000)	5,998,000
Deferred income taxes	785,000	15,520,000
Other operating assets	2,639,000	1,246,000
Other operating liabilities	1,673,000	(15,767,000)
Net cash provided by (used in) operating activities	36,085,000	(54,162,000)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of property and investments	155,000	2,641,000
Purchases of property and equipment	(10,039,000)	(5,995,000)
Net cash used in investing activities	(9,884,000)	(3,354,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock repurchased and retired	0	(8,369,000)
Payments of capital lease obligations	(587,000)	(596,000)
Net short-term borrowings (payments)	(25,900,000)	67,900,000
Net cash provided by (used in) financing activities	(26,487,000)	58,935,000
NET CHANGE IN CASH AND CASH EQUIVALENTS	(286,000)	1,419,000
CASH AND CASH EQUIVALENTS—Beginning of period	23,475,000	20,068,000
CASH AND CASH EQUIVALENTS—End of period	23,189,000	21,487,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest	2,466,000	2,012,000
Cash paid for income taxes	$ 246,000	$ 19,355,000

XML

Financing Arrangements

9 Months Ended

Nov. 01, 2014

Debt Disclosure [Abstract]

Financing Arrangements

FINANCING ARRANGEMENT

As of November 1, 2014 we had $73.2 million outstanding under our asset-based senior secured revolving credit facility with a group of financial institutions (the “Senior ABL Facility”), which approximated the fair value of these borrowings. The Senior ABL Facility provides (subject to availability under a borrowing base) for maximum borrowings up to the aggregate commitments of all of the lenders, which as of November 1, 2014 totaled $250 million. Up to $75 million of the Senior ABL Facility is available for the issuance of letters of credit and up to $25 million is available for swingline loans. The Senior ABL Facility permits us to request commitment increases in an aggregate principal amount of up to $100 million. Availability under the Senior ABL Facility as of November 1, 2014 was $171.2 million, with $5.6 million of letters of credit outstanding under the facility.

The principal terms of the Senior ABL Facility are summarized below.

Senior ABL Facility

Maturity; Amortization and Prepayments

The Senior ABL Facility will mature on the earlier of (i) October 11, 2017 or (ii) six months prior to the expiration of our Merchandising Agreement with Sears Holdings (the "Merchandising Agreement") and the other agreements with Sears Holdings or its subsidiaries in connection with the Separation that are specified in the Senior ABL Facility, unless such agreements have been extended to a date later than October 11, 2017 or terminated on a basis reasonably satisfactory to the administrative agent under the Senior ABL Facility.

The Senior ABL Facility is subject to mandatory prepayment in amounts equal to the amount by which the outstanding extensions of credit exceed the lesser of the borrowing base and the commitments then in effect.

Guarantees; Security

The obligations under the Senior ABL Facility are guaranteed by us and each of our existing and future direct and indirect wholly owned domestic subsidiaries (subject to certain exceptions). The Senior ABL Facility and the guarantees thereunder are secured by a first priority security interest in assets of the borrowers and guarantors consisting primarily of accounts and notes receivable, inventory, cash, cash equivalents, deposit accounts and securities accounts, as well as certain other assets (other than intellectual property) ancillary to the foregoing and all proceeds of all of the foregoing, including cash proceeds and the proceeds of applicable insurance.

Interest; Fees

The interest rates per annum applicable to the loans under the Senior ABL Facility are based on a fluctuating rate of interest measured by reference to, at our election, either (1) an adjusted London inter-bank offered rate (LIBOR) plus a borrowing margin, which rate was approximately 2.41% at November 1, 2014 or (2) an alternate base rate plus a borrowing margin, with the borrowing margin subject to adjustment based on the average excess availability under the Senior ABL Facility for the preceding fiscal quarter, which rate was approximately 4.50% at November 1, 2014.

Customary fees are payable in respect of the Senior ABL Facility, including letter of credit fees and commitment fees.

Covenants

The Senior ABL Facility includes a number of covenants that, among other things, limit or restrict our ability to, subject to specified exceptions, incur additional indebtedness (including guarantees), grant liens, make investments, make prepayments on other indebtedness, engage in mergers, or change the nature of our business.

The Senior ABL Facility limits SHO's ability to declare and pay cash dividends and repurchase its common stock. SHO may declare and pay cash dividends to its stockholders and may repurchase stock if the following conditions are satisfied: either (a) (i) no specified default then exists or would arise as a result of the declaration or payment of the cash dividend or as a result of the stock repurchase, (ii) SHO and its subsidiaries that are also borrowers have demonstrated to the reasonable satisfaction of the agent for the lenders that monthly availability (as determined in accordance with the Senior ABL Facility), immediately following the declaration and payment of the cash dividend or the stock repurchase and as projected on a pro forma basis for the twelve months following and after giving effect to the declaration and payment of the cash dividend or the stock repurchase, would be at least equal to the greater of (x) 25% of the Loan Cap (which is the lesser of (A) the aggregate commitments of the lenders and (B) the borrowing base) and (y) $50,000,000, and (iii) after giving pro forma effect to the declaration and payment of the cash dividend or the stock repurchase as if it constituted a specified debt service charge, the specified consolidated fixed charge coverage ratio, as calculated on a trailing twelve months basis, would be equal to or greater than 1.1:1.0, or (b) (i) no specified default then exists or would arise as a result of the declaration or payment of the cash dividend or the stock repurchase, (ii) payment of the cash dividend or the stock repurchase is not made with the proceeds of any credit extension under the Senior ABL Facility, (iii) during the 120-day period prior to declaration and payment of the cash dividend or the stock repurchase, no credit extension was outstanding under the Senior ABL Facility, and (iv) SHO demonstrates to the reasonable satisfaction of the agent for the lenders that, on a pro forma and projected basis, no credit extensions would be outstanding under the Senior ABL Facility for the 120-day period following the declaration and payment of the cash dividend or the stock repurchase. No default or event of default presently exists.

The Senior ABL Facility also contains certain affirmative covenants, including financial and other reporting requirements.

Events of Default

The Senior ABL Facility includes customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross default to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments, change of control, failure to perform a "Material Contract" (which includes the Merchandising Agreement and other SHO-Sears Holdings Agreements) to the extent required to maintain it in full force and effect, and the failure to enforce a Material Contract in accordance with its terms.

XML

Related Party Agreements and Transactions

9 Months Ended

Nov. 01, 2014

Related Party Transactions [Abstract]

RELATED-PARTY AGREEMENTS AND TRANSACTIONS

RELATED-PARTY AGREEMENTS AND TRANSACTIONS

According to publicly available information ESL Investments, Inc. and its investment affiliates beneficially own approximately 47% of our outstanding shares of common stock and approximately 56% of Sears Holdings' outstanding shares of common stock.

In connection with the Separation, we entered into various agreements with Sears Holdings (the "SHO-Sears Holdings Agreements") that, among other things, (1) govern specified aspects of our relationship with Sears Holdings, (2) establish terms under which subsidiaries of Sears Holdings provide services to us, and (3) establish terms pursuant to which subsidiaries of Sears Holdings obtain merchandise inventories for us. The terms of the SHO-Sears Holdings Agreements were agreed to prior to the Separation in the context of a parent-subsidiary relationship and in the overall context of the Separation. The costs and allocations charged to the Company by Sears Holdings do not necessarily reflect the costs of obtaining the services from unaffiliated third parties or of the Company itself providing the applicable services. The Company engages in frequent discussions, and seeks to resolve disputes, with Sears Holdings about the terms and conditions of the SHO-Sears Holdings Agreements, the business relationships that are reflected in the SHO-Sears Holdings Agreements, and the details of these business relationships, many of which details are not addressed by the terms and conditions of the SHO-Sears Holdings Agreements or, if addressed, are in dispute as to their meaning or application in the context of the existing business relationships. Some of these discussions have resulted in adjustments to the relationships that the Company believes together are in Company's best interests. In many other instances the Company's dispute-resolution efforts, which are continuing, have yet to resolve the underlying disputes.

The following is a summary of the nature of the related-party transactions between SHO and Sears Holdings:

• SHO receives commissions from Sears Holdings for specified sales of merchandise made through www.sears.com and www.searsoutlet.com, the sale of extended service contracts, delivery and handling services, and relating to the use in our stores of credit cards branded with the Sears name. For specified transactions SHO pays a commission to Sears Holdings.

• We obtain a significant amount of our merchandise inventories from Sears Holdings. We have a retailer's customary rights to return to Sears Holdings merchandise that is defective (except with respect to agreed-upon amounts of defective apparel that we purchase and then liquidate) or otherwise does not meet contract requirements. In addition, we may determine that an item of Outlet merchandise (usually merchandise that is not new in-box) we have received from Sears Holdings cannot be refurbished or reconditioned or is otherwise not in a physical condition to offer for sale to our customers. We and Sears Holdings (and our Outlet vendors generally) refer to an item of merchandise in this condition as “not saleable” or "non-saleable," and in the normal course we can return the item to Sears Holdings. We generally have comparable return rights with our other Outlet vendors.

• We pay royalties related to our sale of products branded with the KENMORE®, CRAFTSMAN®, and DIEHARD® marks (which marks are owned by subsidiaries of Sears Holdings).

• We pay fees for participation in Sears Holdings' SHOP YOUR WAY REWARDS® program.

• We have also entered into agreements with Sears Holdings for logistics, handling, warehouse, and transportation services, the charges for which are based generally on merchandise inventory units.

• Sears Holdings provides the Company with specified corporate services. These services include accounting and finance, human resources, and information technology, among other services. Sears Holdings charges the Company for these corporate services based on actual usage or pro rata charges based upon sales, head count, or other measurements.

• Sears Holdings leases stores and distribution/repair facilities to the Company, for which the Company pays rent and related occupancy charges to Sears Holdings.

The following table summarizes the results of the transactions with Sears Holdings reflected in the Company’s Condensed Consolidated Financial Statements:

	13 Weeks Ended				39 Weeks Ended
	November 1, 2014		November 2, 2013		November 1, 2014		November 2, 2013
Thousands
Net Commissions from Sears Holdings	$	22,069	$	21,424	$	76,808	$	68,327
Purchases related to cost of sales and occupancy (1)	351,935		395,178		1,156,632		1,224,254
Services (1)	23,302		29,410		73,089		85,655

(1) Amounts previously presented for the 13 and 39 Weeks ended November 2, 2013 and for the 13 weeks ended May 3, 2014 within "Purchases related to cost of sales and occupancy" have been reclassified into "Services." The reclassified items were primarily costs associated with marketing. The reclassified amount for the 13 weeks ended November 2, 2013 was $23.8 million. The reclassified amounts for the 39 Weeks ended November 2, 2013 and November 1, 2014 were $69.6 million and $20.3 million, respectively.

We incur payables to Sears Holdings for merchandise inventory purchases and service and occupancy charges (net of commissions) based on the SHO-Sears Holdings Agreements.  Amounts due to or from Sears Holdings are non-interest bearing and are settled on a net basis. We generally pay undisputed amounts within 10 days after the invoice date.

XML

Income Per Common Share (Tables)

9 Months Ended

Nov. 01, 2014

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted

The following table sets forth the components used to calculate basic and diluted income per common share attributable to our stockholders.

	13 Weeks Ended			13 Weeks Ended		39 Weeks Ended			39 Weeks Ended
	November 1, 2014			November 2, 2013		November 1, 2014			November 2, 2013
Thousands except income per common share
Basic weighted average shares	22,666			22,999		22,666			23,066
Dilutive effect of restricted stock	—			—		—			4
Diluted weighted average shares	22,666			22,999		22,666			23,070
Net income (loss)	$	(171,210	)	$	7,695	$	(164,171	)	$	31,826
Income (loss) per common share:
Basic	$	(7.55	)	$	0.33	$	(7.24	)	$	1.38
Diluted	$	(7.55	)	$	0.33	$	(7.24	)	$	1.38

XML

Other Current and Long-Term Liabilities (Tables)

9 Months Ended

Nov. 01, 2014

Payables and Accruals [Abstract]

Schedule of Accrued Expenses and Other Long-term Liabilities

Other current and long-term liabilities consist of the following:

Thousands	November 1, 2014		November 2, 2013		February 1, 2014
Customer deposits	$	32,322	$	40,913	$	35,547
Sales and other taxes	14,052		14,072		11,403
Accrued expenses	10,617		13,267		9,523
Payroll and related items	5,996		11,193		8,105
Total Other current and long-term liabilities	$	62,987	$	79,445	$	64,578

XML

Income Per Common Share

9 Months Ended

Nov. 01, 2014

Earnings Per Share [Abstract]

INCOME PER COMMON SHARE

INCOME PER COMMON SHARE

Basic income per common share is calculated by dividing net income by the weighted average number of common shares outstanding for each period. Diluted income per common share also includes the dilutive effect of potential common shares.

The following table sets forth the components used to calculate basic and diluted income per common share attributable to our stockholders.

	13 Weeks Ended			13 Weeks Ended		39 Weeks Ended			39 Weeks Ended
	November 1, 2014			November 2, 2013		November 1, 2014			November 2, 2013
Thousands except income per common share
Basic weighted average shares	22,666			22,999		22,666			23,066
Dilutive effect of restricted stock	—			—		—			4
Diluted weighted average shares	22,666			22,999		22,666			23,070
Net income (loss)	$	(171,210	)	$	7,695	$	(164,171	)	$	31,826
Income (loss) per common share:
Basic	$	(7.55	)	$	0.33	$	(7.24	)	$	1.38
Diluted	$	(7.55	)	$	0.33	$	(7.24	)	$	1.38

XML

Summary of Segment Data

9 Months Ended

Nov. 01, 2014

Segment Reporting [Abstract]

SUMMARY OF SEGMENT DATA

SUMMARY OF SEGMENT DATA

The Hometown reportable segment consists of the aggregation of our Hometown Stores, Hardware Stores, and Home Appliance Showrooms business formats described in “Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations-Executive Overview" of this Quarterly Report on Form 10-Q. The Outlet reportable segment also represents a business format. These segments are evaluated by our Chief Operating Decision Maker to make decisions about resource allocation and to assess performance. Each of these segments derives its revenues from the sale of merchandise and related services to customers, primarily in the U.S. The net sales categories include appliances, lawn and garden, tools and paint, and other (which includes initial franchise revenue of $6.5 million and $7.8 million for the 13 weeks ended November 1, 2014 and the 13 weeks ended November 2, 2013, respectively). For the 39 Weeks ended November 1, 2014, initial franchise revenue (which consists of franchise fees paid with respect to new or existing Company-operated stores that we transfer to franchisees plus the net gain or loss on any related transfer of assets to the franchisees) was $15.2 million compared to $14.8 million in the 39 Weeks ended November 2, 2013.

	13 Weeks Ended November 1, 2014
Thousands	Hometown			Outlet		Total
Net sales
Appliances	$	261,645		$	139,519	$	401,164
Lawn and garden	59,447			7,065		66,512
Tools and paint	41,736			4,649		46,385
Other	24,915			26,171		51,086
Total	387,743			177,404		565,147
Costs and expenses
Cost of sales and occupancy	299,013			131,072		430,085
Selling and administrative	103,395			36,371		139,766
Impairment of goodwill	167,000			—		167,000
Depreciation	746			1,289		2,035
Gain on the sale of assets	(155		)	—		(155		)
Total	569,999			168,732		738,731
Operating income (loss)	$	(182,256	)	$	8,672	$	(173,584	)
Total assets	$	455,112		$	208,124	$	663,236
Capital expenditures	$	579		$	2,410	$	2,989

	13 Weeks Ended November 2, 2013
Thousands	Hometown			Outlet			Total
Net sales
Appliances	$	289,834		$	115,386		$	405,220
Lawn and garden	59,049			5,843			64,892
Tools and paint	44,516			3,458			47,974
Other	19,772			23,210			42,982
Total	413,171			147,897			561,068
Costs and expenses
Cost of sales and occupancy	318,362			107,234			425,596
Selling and administrative	94,818			26,880			121,698
Depreciation	760			1,417			2,177
Gain on the sale of assets	—			(1,567		)	(1,567		)
Total	413,940			133,964			547,904
Operating income (loss)	$	(769	)	$	13,933		$	13,164
Total assets	$	657,019		$	190,989		$	848,008
Capital expenditures	$	1,341		$	2,259		$	3,600

	39 Weeks Ended November 1, 2014
Thousands	Hometown			Outlet		Total
Net sales
Appliances	$	795,919		$	398,299	$	1,194,218
Lawn and garden	278,305			19,546		297,851
Tools and paint	132,470			13,566		146,036
Other	79,838			75,751		155,589
Total	1,286,532			507,162		1,793,694
Costs and expenses
Cost of sales and occupancy	983,214			384,430		1,367,644
Selling and administrative	307,747			106,524		414,271
Impairment of goodwill	167,000			—		167,000
Depreciation	2,127			4,263		6,390
Gain on the sale of assets	(155		)	—		(155		)
Total	1,459,933			495,217		1,955,150
Operating income (loss)	$	(173,401	)	$	11,945	$	(161,456	)
Total assets	$	455,112		$	208,124	$	663,236
Capital expenditures	$	2,509		$	7,530	$	10,039

	39 Weeks Ended November 2, 2013
Thousands	Hometown		Outlet			Total
Net sales
Appliances	$	868,489	$	362,600		$	1,231,089
Lawn and garden	280,029		20,938			300,967
Tools and paint	138,996		10,063			149,059
Other	74,394		63,575			137,969
Total	1,361,908		457,176			1,819,084
Costs and expenses
Cost of sales and occupancy	1,040,750		340,216			1,380,966
Selling and administrative	299,175		80,640			379,815
Depreciation	2,372		4,197			6,569
Gain on the sale of assets	—		(1,567		)	(1,567		)
Total	1,342,297		423,486			1,765,783
Operating income	$	19,611	$	33,690		$	53,301
Total assets	$	657,019	$	190,989		$	848,008
Capital expenditures	$	2,711	$	3,284		$	5,995

XML

Commitments and Contingencies

9 Months Ended

Nov. 01, 2014

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

We are subject to various legal and governmental proceedings arising out of the ordinary course of business, the outcome of which, individually or in the aggregate, in the opinion of management, would not have a material adverse effect on our business, financial position, results of operations, or cash flows.

XML

Equity

9 Months Ended

Nov. 01, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

EQUITY

EQUITY

Stock-based Compensation

Four million shares of the Company's common stock are reserved for issuance under the Company's Amended and Restated 2012 Stock Plan. A total of 89,221 shares of restricted stock were granted under the plan in the second quarter of 2013 to a group of eligible individuals (as defined in the plan), all of whom were employees of the Company at the time of the grant. As of November 1, 2014, 18,974 shares of the original grant of 89,221 shares of restricted stock had been forfeited. We are authorized to grant stock options and to make other awards to eligible plan participants pursuant to the Amended and Restated 2012 Stock Plan. Except for the 89,221 shares of restricted stock, the Company has made no stock-option or other grants or awards under the plan.

We account for stock-based compensation using the fair value method in accordance with accounting standards regarding share-based payment transactions. During the first three quarters of 2014 we recorded $0.6 million in total compensation expense for the remaining 70,247 shares of restricted stock (none of which had vested as of November 1, 2014). At November 1, 2014, we had $1.6 million in total unrecognized compensation cost related to the 70,247 shares of non-vested restricted stock, which cost we expect to recognize over approximately the next 1.5 years.

The 70,247 shares of restricted stock will vest, if at all, on May 16, 2016 in accordance with and subject to the terms and conditions of restricted-stock agreements, including forfeiture conditions, and the Amended and Restated 2012 Stock Plan. The fair value of these awards is equal to the market price of our common stock on the date of grant. We do not currently have a broad-based program that provides for restricted-stock awards on an annual basis. Changes in restricted-stock awards for 2014 were as follows:

	39 Weeks Ended November 1, 2014
(Shares in Thousands)	Shares		Weighted-Average Fair Value on Date of Grant
Beginning of year balance	87		44.45
Granted	—		$	—
Vested	—		—
Forfeited	(17	)	44.45
Balance at 11/1/2014	70		$	44.45

Share Repurchase Program

On August 28, 2013 the Company's Board of Directors authorized a $25 million repurchase program for the Company's outstanding shares of common stock. The timing and amount of repurchases depend on various factors, including market conditions, the Company's capital position and internal cash generation, and other factors. The Company's repurchase program does not include specific price targets, may be executed through open-market, privately negotiated, and other transactions that may be available, and may include utilization of Rule 10b5-1 plans. The repurchase program does not obligate the Company to repurchase any dollar amount, or any number of shares, of common stock. The repurchase program does not have a termination date, and the Company may suspend or terminate the repurchase program at any time.

Shares that are repurchased by the Company pursuant to the repurchase program will be retired and resume the status of authorized and unissued shares of common stock.

No shares were repurchased during the 39 Weeks ended November 1, 2014. At November 1, 2014 we had approximately $12.5 million of remaining authorization under the repurchase program.

XML

Equity (Narrative) (Details) (USD $) In Millions, except Share data, unless otherwise specified	0 Months Ended	9 Months Ended		3 Months Ended	9 Months Ended
	Aug. 29, 2013	Nov. 01, 2014	May 14, 2013	Aug. 03, 2013 Restricted Stock [Member]	Nov. 01, 2014 Restricted Stock [Member]	Nov. 01, 2014 Restricted Stock [Member] May 16, 2016 [Member]
Stock-based Compensation
Shares reserved under plan			4,000,000
Stock granted				89,221	70,247	70,247
Forfeited in period					18,974
Share-based compensation expense					$ 0.6
Total unrecognized compensation					1.6
Period for recognition					1 year 6 months
Share Repurchase Program
Authorized amount	25
Remaining authorized repurchase amount		$ 12.5

XML

Related Party Agreements and Transactions (Tables)

9 Months Ended

Nov. 01, 2014

Related Party Transactions [Abstract]

Schedule of Related Party Transactions

The following table summarizes the results of the transactions with Sears Holdings reflected in the Company’s Condensed Consolidated Financial Statements:

	13 Weeks Ended				39 Weeks Ended
	November 1, 2014		November 2, 2013		November 1, 2014		November 2, 2013
Thousands
Net Commissions from Sears Holdings	$	22,069	$	21,424	$	76,808	$	68,327
Purchases related to cost of sales and occupancy (1)	351,935		395,178		1,156,632		1,224,254
Services (1)	23,302		29,410		73,089		85,655

(1) Amounts previously presented for the 13 and 39 Weeks ended November 2, 2013 and for the 13 weeks ended May 3, 2014 within "Purchases related to cost of sales and occupancy" have been reclassified into "Services." The reclassified items were primarily costs associated with marketing. The reclassified amount for the 13 weeks ended November 2, 2013 was $23.8 million. The reclassified amounts for the 39 Weeks ended November 2, 2013 and November 1, 2014 were $69.6 million and $20.3 million, respectively.

XML

Accounts and Notes Receivable and Other Assets (Details) (USD $) In Thousands, unless otherwise specified	Nov. 01, 2014		Feb. 01, 2014	Nov. 02, 2013
Accounts, Notes, Loans and Financing Receivable [Line Items]
Short-term franchisee receivables	$ 12,592		$ 4,592	$ 3,572
Miscellaneous receivables	9,721		14,660	13,635
Long-term franchisee notes receivables	48,934		37,616	29,064
Other assets	2,394		2,874	3,051
Provision for losses on short-term franchisee receivables (1)	(1,383)	[1]
Provision for losses on franchisee receivables (1)	(10,143)	[1]
Total Accounts and notes receivable and other assets	62,115		59,742	49,322
Sears Hometown and Hardware [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Short-term franchisee receivables	8,129		2,748	2,676
Miscellaneous receivables	7,609		13,029	13,198
Long-term franchisee notes receivables	21,246		21,207	21,090
Other assets	2,112		2,662	2,844
Provision for losses on short-term franchisee receivables (1)	(1,383)	[1]
Provision for losses on franchisee receivables (1)	(10,143)	[1]
Total Accounts and notes receivable and other assets	27,570		39,646	39,808
Sears Outlet [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Short-term franchisee receivables	4,463		1,844	896
Miscellaneous receivables	2,112		1,631	437
Long-term franchisee notes receivables	27,688		16,409	7,974
Other assets	282		212	207
Provision for losses on short-term franchisee receivables (1)	0	[1]
Provision for losses on franchisee receivables (1)	0	[1]
Total Accounts and notes receivable and other assets	$ 34,545		$ 20,096	$ 9,514

[1] The Company recognizes a provision for losses on franchisee receivables (which consist primarily of franchisee promissory notes) in an amount equal to estimated probable losses net of recoveries. The provision is based on an analysis of expected future write-offs, existing economic conditions, and an assessment of specific identifiable franchisee promissory notes and other franchisee receivables considered at risk or uncollectible. The expense associated with the provision for losses on franchisee receivables is recognized as selling, general, and administrative expense. Most of our franchisee promissory notes authorize us to deduct debt service from our commissions otherwise due and payable to the franchisees, and we routinely make those deductions to the extent of available commissions payable. We established the provision for losses on franchisee receivables in the third quarter of fiscal 2014 based on our receivable-by-receivable assessment during the quarter that some of the Hometown franchisee receivables were potentially uncollectible in future periods due to (a) declining results of operations of, or other adverse financial events with respect to, Hometown franchise stores that indicated that the franchisees might not be able to meet their debt-service and other obligations to us as they became due and (b) the refusal during the quarter of one of our Hometown franchisees to continue to operate its franchise stores in accordance with the franchisee's agreements with us

XML

Condensed Consolidated Statements of Stockholders' Equity (USD $) In Thousands, unless otherwise specified	Total	Common Stock [Member]	Capital in Excess of Par Value [Member]	Retained Earnings (Deficit) [Member]
Beginning balance at Feb. 02, 2013	$ 566,287	$ 231	$ 556,575	$ 9,481
Beginning balance, Shares at Feb. 02, 2013		23,100
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income (loss)	31,826			31,826
Share-based compensation	598	1	597
Share-based compensation, Shares		88
Common stock repurchased and retired	(8,369)	(3)	(6,728)	(1,638)
Common stock repurchased and retired, shares		(279)
Ending balance at Nov. 02, 2013	590,342	229	550,444	39,669
Ending balance, Shares at Nov. 02, 2013		22,909
Beginning balance at Feb. 01, 2014	590,225	228	547,021	42,976
Beginning balance, Shares at Feb. 01, 2014		22,753
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income (loss)	(164,171)			(164,171)
Share-based compensation	606	(1)	607
Share-based compensation, Shares		(17)
Ending balance at Nov. 01, 2014	$ 426,660	$ 227	$ 547,628	$ (121,195)
Ending balance, Shares at Nov. 01, 2014		22,736

XML

Income Taxes

9 Months Ended

Nov. 01, 2014

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

In connection with the Separation, SHO and Sears Holdings entered into a Tax Sharing Agreement that governs the rights and obligations of the parties with respect to pre-Separation and post-Separation tax matters. Under the Tax Sharing Agreement, Sears Holdings generally is responsible for any federal, state, or foreign income tax liability relating to tax periods ending on or before the Separation. For all periods after the Separation, the Company generally is responsible for any federal, state, or foreign tax liability. Current income taxes payable for any federal, state, or foreign income tax returns is reported in the period incurred.

We account for uncertainties in income taxes according to accounting standards for uncertain tax positions. The Company is present in a large number of taxable jurisdictions and, at any point in time, can have audits underway at various stages of completion in one or more of these jurisdictions. We evaluate our tax positions and establish liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable. Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law, and closings of statutes of limitation. Such adjustments are reflected in the tax provision as appropriate. For the 39 Weeks ended November 1, 2014 and November 2, 2013, no unrecognized tax benefits have been identified and reflected in the financial statements.

We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of income tax expense. As no unrecognized tax benefits have been identified and reflected in the condensed consolidated financial statements, no interest or penalties related to unrecognized tax benefits are reflected in the condensed consolidated balance sheets or statements of operations.

As of November 1, 2014 the Company's net deferred tax asset balance was $57.2 million compared to $61.1 million as of November 2, 2013 and $58.0 million as of February 1, 2014.

XML

Other Current and Long-Term Liabilities (Details) (USD $) In Thousands, unless otherwise specified	Nov. 01, 2014	Feb. 01, 2014	Nov. 02, 2013
Payables and Accruals [Abstract]
Customer deposits	$ 32,322	$ 35,547	$ 40,913
Sales and other taxes	14,052	11,403	14,072
Accrued expenses	10,617	9,523	13,267
Payroll and related items	5,996	8,105	11,193
Total Other current and long-term liabilities	$ 62,987	$ 64,578	$ 79,445

XML

Goodwill (Tables)

9 Months Ended

Nov. 01, 2014

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Goodwill

Goodwill allocated to our Hometown and Outlet segments as of November 1, 2014, and changes in the carrying amount of goodwill for the nine months ended November 1, 2014, are as follows:

Thousands	Hometown			Outlet		Total
Balance (gross) at February 1, 2014	$	167,000		$	—	$	167,000
Impairment Loss	(167,000		)	—		(167,000		)
Balance at November 1, 2014	$	—		$	—	$	—