OSH - Orchard Supply Hardware

[stahleyp]

This is in the vein of Greenblatt.

 

As most are probably aware, this is a spinoff of SHLD. From what I gathered looking through filings, it looks like there are 41 million shares outstanding? I may be way off the mark here.

 

"Authorized Shares. The total number of shares of all classes of stock which the Corporation shall have authority to issue is forty-one million (41,000,000), consisting of four classes of stock, as follows: (1) fifteen million (15,000,000) shares of Class A Common Stock, $0.01 par value per share (the “Class A Common Stock”); (2) three million (3,000,000) shares of Class B Common Stock, $0.01 par value per share (the “Class B Common Stock”); (3) three million (3,000,000) shares of Class C Common Stock, $0.01 par value per share (the “Class C Common Stock,” and together with the Class A Common Stock and Class B Common Stock, the “Common Stock”) and (4) twenty million (20,000,000) shares of Preferred Stock, $0.00001 par value per share (the “Preferred Stock”). Unless otherwise provided in this Amended and Restated Certificate of Incorporation or any Preferred Stock Designation (as defined below) (this Amended and Restated Certificate of Incorporation, together with any and all Preferred Stock Designations, as amended from time to time, the “Charter”), the number of authorized shares of any class or classes of stock of the Corporation may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all of the then-outstanding shares of capital stock of the Corporation entitled to vote thereon, irrespective of Section 242(b)(2) of the DGCL."

 

I'm assuming class A make up most of the market cap at 15 million shares * $15 =$225 million market cap compared to SHLD's $3 billion means that many, many people will probably sell off the shares.

 

Here is a presentation of the company.

 

http://www.sec.gov/Archives/edgar/data/896842/000119312512003636/d277710dex991.htm

 

Here are the financial reports:

 

http://www.sec.gov/Archives/edgar/data/896842/000119312511349574/d268721d10q.htm

 

The bottom line is that it looks like it's a spinoff not many people would be interested in that own shares already based on it's small size. The only reason people who SHLD is because of Lampert. I would imagine that this spinoff could be mispriced a bit.

 

[dwy000]

Stahley - I think the 15m shares is the authorized amount.  It appears from the filings that there are about 6m shares outstanding.

 

This appears to be a real turnaround story.  New management has a good track record but the stores themselves have been performing horribly over the past few years with same store sales down double digits in many quarters and worse than the big box guys (LOW, HD) in most periods.  There's also a ton of debt on the company ($320m - although some of this was paid down with a $30m+ sale leaseback done in December).

 

If they can stabilize things and turn it around there's potential for a decent upside but that's a pretty big "if".  Valuation might become compelling as SHLD holders dump their shares but I'm struggling to put an intrinsic valuation on it.

[ExpectedValue]

One of the things that is super useful when analyzing an over leveraged company like OSH is to look at the actual leverage covenants, this is especially important when you're looking to invest in the equity.

 

On page 24 you can see a breakout of the leverage covenant requirements.

 

NOTE -  from now till May of 2012 they cannot exceed 5.5x Debt/EBITDA

 

"We believe that we were in compliance with the Senior Secured Term Loan covenants, including the maximum leverage ratio, which, at October 29, 2011 and January 29, 2011, were 5.02 to 1.00 and 4.89 to 1.00, respectively. At October 29, 2011 and January 29, 2011, assuming our current level of consolidated total funded debt remains constant, we estimate that a 8.8% and 11.0% or greater decline in our trailing four fiscal quarters adjusted EBITDA, respectively, would cause us to exceed our maximum leverage ratio covenant for that period."

 

I don't know about you guys, but I don't see the margin of safety in an investment that will trip its covenants by posting a 9% drop in EBITDA.

 

 

[stahleyp]

Thanks for all the information guys.

 

Peter, why do you say that?

[bobp]

Orchard Supply has certainly been an exception to the Greenblatt strategy of buying spinoffs. Maybe it's a buy here at 8 down about 70% from it's high of 28 in February?

 

I like to look for beat up stocks near years end but to be honest I don't have the analytical chops to evaluate this one. They've reduced long term debt by 93 million in the past year  according to the cfo in a press release. They're still opening and remodeling stores, although I can't say I'd want to compete with Home Depot.

 

Lampert has sold common and bought preferred.

 

Maybe at this price some of you would find it interesting.

 

[texual]

Glad I cashed out of this early on when it spiked. I have no interest in owning this business really.

[Guest rimm_never_sleeps]

Orchard Supply has certainly been an exception to the Greenblatt strategy of buying spinoffs. Maybe it's a buy here at 8 down about 70% from it's high of 28 in February?

 

I like to look for beat up stocks near years end but to be honest I don't have the analytical chops to evaluate this one. They've reduced long term debt by 93 million in the past year  according to the cfo in a press release. They're still opening and remodeling stores, although I can't say I'd want to compete with Home Depot.

 

Lampert has sold common and bought preferred.

 

Maybe at this price some of you would find it interesting.

 

I would do what ESL did. I would sell the common and move up the cap structure.

[Yours Truly]

Just noticed this thread and per Capital IQ, Eddie Lampert and Bruce Berkowitz collectively own 45% of the total shares outstanding.. only gripe is that they have been selling a small amount of shares here and there..

 

This has classic Greenblatt spin-off written all over it: highly leveraged company, large favourable owners, no analyst coverage, dropped 70% YTD, miniscule market cap (45 mil).

 

Top 5 holders own the bulk of the company:

 

Ares Management - 20%

ESL Investments - 20%

Eddie Lampert - 13%

Fairholme - 10%

Samana Capital - 7%

 

= 70% of total shares o/s

 

Looks interesting so far

[Yours Truly]

Another interesting recent Sears Holdings spin-off is Sears Hometown and Outlet Stores, Inc. (SHOS):

 

Lampert and Berkowitz collectively own 78% of total shares outstanding

 

There's a decent write-up and discussion on it on VIC if anyone is interested

[Olmsted]

One puzzle to solve before investing in this company is why it was spun with the odd series of preferreds above the common.  $4 liquidation preference + no dividend = odd.  Are they to facilitate a poison pill?  A cheap way to keep control?  A cheap way to keep control in BK?  And now Lampert is rotating into this series.  What is he up to? 

 

I couldn't figure out the point of those when this spin happened, and still can't.

[Palantir]

Anybody still owning this? Most of the damage seems to be in its "Intangible Assets" which have turned into "Invisible Assets".

[hyten1]

wow this thing has been decimated, anyone?

[Guest hellsten]

Seems Mr. Market has left this company for dead. OSH seems attractive to me. I guess everyone who owned SHLD at the time of the spin-off must be selling because they are afraid of all the debt and don't want to own a nano-cap company that "lost" $243 million in 2008.

 

From the company presentation:

Sale-leaseback transactions on 5 properties. Generated gross proceeds of $57.8 million

 

Here are a few select notes from the spin-off prospectus:

http://www.searsholdings.com/invest/docs/osh_prospectus_12.12.2011.pdf

 

Of the 89 retail stores, we owned 14 stores and lease 75 stores, six

of which are situated on ground leases. Nineteen of our locations (composed of our 14 owned retail locations,

four ground leases and the distribution center) were collateralized pursuant to our $50.0 million Real Estate

Secured Term Loan agreement.

 

The impact of these economic factors specific to the home and garden improvement industry is exacerbated by what is expected

to be a gradual and prolonged period of economic recovery with slow employment growth. We believe that these

economic conditions were a contributing factor in our year-over-year decline in revenues of $21.7 million, $79.1

million and $73.3 million for fiscal 2010, 2009 and 2008, respectively.

 

 

the Company continues to examine a number of alternatives with respect to future compliance and liquidity, including asset

sales and/or sale-leaseback transactions. In addition, if necessary or advisable, we may seek to strengthen our

financial position by monetizing additional owned store properties or by seeking to renegotiate our financing

arrangements in order to remain in compliance while continuing to follow our current business plan, which

includes plans for store expansion. In such case, if such renegotiations were necessary but unsuccessful, we

would expect to modify our business plan in a manner that would allow us to remain in compliance.

 

 

 

As of January 29, 2011 we had intangible asset balances of $145.5 million, which are subject to testing for

impairment annually or more frequently if events or changes in circumstances indicate that the asset might be

impaired. Our intangible assets consist of $107.6 million of our trade names and $37.9 million of favorable

leasehold rights

 

 

Although we have no actual knowledge of any plan or intention on the part of any significant shareholder to

sell our capital stock following the spin-off, it is likely that some shareholders, possibly including our significant

shareholders, will sell shares of our capital stock if, for reasons such as our business profile or market

capitalization as a company independent from Sears, we do not fit their investment objectives. In particular,

Sears Holdings is a member of the S&P 500 Index, while we will not be and, accordingly, certain Sears Holdings

shareholders may elect or be required to sell our shares following the spin-off due to such shareholders’ own

investment guidelines or other reasons.

 

Figures for 2006-2010:

EBITDA:

$ 112,128

$ 93,593

$ 84,831

$ 80,746

$ 69,392

 

Net sales:

$888,558

$834,741

$761,489

$682,393

$660,701

 

Net income:

$ 25,944

$14,389

$(243,367) - We recorded a $262.8 million goodwill impairment charge in fiscal 2008 as a result of the decline in our net sales and projected future cash flows.

$19,305

$ 8,717

 

Depreciation and amortization:

$31,127

$35,324

$31,410

$29,870

$31,187

 

 

Store Expansion. New store growth has been limited in recent years due to economic conditions and

Company’s performance. However, assuming market conditions improve in future years, we plan to

increase the expansion of our store base within California.

 

 

The Company seeks to remain in compliance with its financing arrangements and generate sufficient

liquidity by executing its sales growth strategy by, among other things, making improvements to its stores and

store operations and upgrading and differentiating its product assortment. Notwithstanding the foregoing, the

Company continues to examine a number of alternatives with respect to future compliance and liquidity,

including asset sales and/or sale-leaseback transactions. In addition, if necessary or advisable, we may seek to

strengthen our financial position by monetizing additional owned store properties or by seeking to renegotiate

our financing arrangements in order to remain in compliance while continuing to follow our current business

plan, which includes plans for store expansion

 

 

The $18.3 million decrease in cash provided by

operating activities was primarily due to a decrease of $9.7 million in net income due to lower net sales as a

result of unfavorable weather conditions in the months of March and June 2011.

 

 

In fiscal 2011, we spent $6.2 million on capital expenditures, allocated as follows: 47% for new

stores, 33% for maintenance, 13% for core technology, and 7% for merchandising.

 

In fiscal 2010 we spent $11.5 million on capital expenditures, allocated as follows: 34% for new stores,

21% for maintenance, 17% for core technology, 9% for merchandising and 19% for other initiatives. In fiscal

2010, we added one new store

 

 

The Board of Directors uses EBITDA as the primary profitability measure for establishing the required level

of financial performance that must be achieved for management and executive annual incentive compensation

purposes.

 

Under the terms of the Annual Incentive Plan for fiscal 2010, we were required to achieve at least 90% of

our EBITDA objective in order for any bonus amounts to be paid.

 

http://i.imgur.com/7Q3KKdS.png

 

As of January 29, 2011, debt maturities (excluding capitalized lease obligations) for the next three years are

as follows (in millions):

Fiscal Years

2011 $13.5

2012 $2.5

2013 $255.5

Total $271.5

 

Operating lease rental expense was $30.3 million, $30.2 million and $30.5 million during fiscal 2010, fiscal

2009 and fiscal 2008, respectively, which included contingent rentals of approximately $0.3 million,

$0.1 million and $0.4 million, respectively.

[Palantir]

I'm telling you, with some of these microcaps, I bet some of us (wealthier posters, not me) could get together and start raiding them like Carl Icahn.

 

 

I'm serious.

 

 

 

That being said, given that the firm might not have any equity next quarter, how would you go about valuing it?

[Guest hellsten]

That being said, given that the firm might not have any equity next quarter, how would you go about valuing it?

 

P/S 0.04 sounds cheap to me. If housing and construction in California recovers, then I guess EBITDA might look something like that between 2006-2010:

$ 112,128

$ 93,593

$ 84,831

$ 80,746

$ 69,392

 

I'm no professional, but I guess they could do a few sale-leaseback transactions if needed instead of diluting shareholders?

[17thstcapital]

I don't follow this situation closely but my suggestion to anyone looking to get involved with this one would be to first speak to Moelis or someone involved or familiar with the restructuring discussions.  Maybe even sellside analysts that cover SHLD.  Or someone you may know who trades distressed loans/bonds who may see commentary about this situation.  See if anyone can share something even if its high level. 

 

Otherwise, this is simply a speculation with the possibility of permanent loss being very high.  Just my two cents.....

[Olmsted]

Does anyone remember those really odd converts that were spun off with OSH.  The ones with a liquidation preference and nothing else.  I couldn't for the life of me figure out what the purpose of those things was - but figured that Lampert had some sort of plan (poison pill, etc.).  Well, Lampert started buying them soon after the spinoff, if memory serves me correctly. 

 

Hmm - Lampert creating then buying a security whose only real feature is a liquidation preference, stock in freefall, bond covenants close to being tripped...

[stahleyp]

Olm, are you thinking of the preferreds? OSHSP is the symbol.

 

http://www.sec.gov/Archives/edgar/data/896842/000119312511344104/d198486d424b3.htm#toc198486_16

[Palantir]

Does anyone remember those really odd converts that were spun off with OSH.  The ones with a liquidation preference and nothing else.  I couldn't for the life of me figure out what the purpose of those things was - but figured that Lampert had some sort of plan (poison pill, etc.).  Well, Lampert started buying them soon after the spinoff, if memory serves me correctly. 

 

Hmm - Lampert creating then buying a security whose only real feature is a liquidation preference, stock in freefall, bond covenants close to being tripped...

 

Yeah, I read those over and over again, and I couldn't figure out what they were for apart from making maybe the company harder to take over. Do you feel they have some value in a scenario where the firm basically fails?

[compoundinglife]

Does anyone remember those really odd converts that were spun off with OSH.  The ones with a liquidation preference and nothing else.  I couldn't for the life of me figure out what the purpose of those things was - but figured that Lampert had some sort of plan (poison pill, etc.).  Well, Lampert started buying them soon after the spinoff, if memory serves me correctly. 

 

Hmm - Lampert creating then buying a security whose only real feature is a liquidation preference, stock in freefall, bond covenants close to being tripped...

 

Yeah, I read those over and over again, and I couldn't figure out what they were for apart from making maybe the company harder to take over. Do you feel they have some value in a scenario where the firm basically fails?

 

Why would they make a take over harder? I don't remember any particular feature that gave me that impression, although I have not read the paperwork on them since the time of the spin off. AFAIK its a $4 pref with no-coupon that has be to called within 10 years, they can't pay a div on the common till these are called. Those are the main things that stick out in my memory. 

 

I used to always keep a 60 day limit order open for these at 1.49 and they would show up in my account in dribs and drabs, I haven't re-opened it since the last one expired a few weeks ago.

[Guest hellsten]

Interesting discussion… I'm no expert, so I'm just trying to understand the situation and hopefully learn something new…

 

There's not much information to go on regarding OSH's future. Who knows what plans Lampert has. I guess you would have to trust that OSH management does the right thing for shareholders (source

http://www.marketwatch.com/story/orchard-supply-hardware-stores-corporation-provides-update-on-efforts-to-improve-its-capital-structure-2013-02-15

):

We look forward to bringing our new format to another 10 stores in fiscal 2013 through remodels and new store openings. Importantly, we believe we have established the right business strategy to deliver long-term improved sales and profitability

 

Why would OSH continue to remodel and open new stores if they were in serious trouble?

 

We are very pleased to have expanded our credit facility, as planned, and improved our financial flexibility, both of which provide additional liquidity as we enter our peak spring selling season. We are gratified by the ongoing support of our lenders as we continue our work with Moelis & Co. and our financial partners to achieve a sustainable capital structure that will best position the Company for long-term success.

 

Would Moelis & Co. benefit from not helping OSH?

 

We continue to work with Moelis & Co. toward the refinancing or modification of our Senior Secured Term Loan to achieve an outcome that is in the best interests of the Company and all of its stakeholders. In addition to seeking an agreement with our Term Loan holders to refinance or modify the Senior Secured Term Loan, we continue to explore several actions designed to restructure our balance sheet for a sustainable capital structure, including seeking new long term debt and/or equity.

 

As previously reported, since October 2011, we have generated proceeds and secured tenant improvement allowances through multiple sale-leaseback transactions and have reduced term loan debt by more than $90 million.

 

Wouldn't OSH be able to do more sale-leaseback transactions if needed? Oct. 29, 2011 OSH had $231 million in property and equipment. Now they have $195 million:

http://www.sec.gov/cgi-bin/viewer?action=view&cik=896842&accession_number=0001193125-12-498617&xbrl_type=v#

 

Page 16 in prospectus:

Terms of the Preferred Stock include the following:

• Liquidation Preference. In the event of any liquidation, dissolution or winding up of Orchard, whether

voluntary or involuntary, before any payment or distribution of Orchard’s assets is made to or set apart

for the holders of Class A Common Stock, Class B Common Stock or Class C Common Stock, but

after any payments or distributions are made on, or set apart for, any of Orchard’s indebtedness and to

holders of any stock then outstanding that ranks senior to the Preferred Stock, holders of the Preferred

Stock are entitled to receive an amount per share equal to approximately $4.16, but shall not be entitled

to any further payment or other participation in any distribution of the assets of Orchard.

 

Doesn't this mean that holders of OSHSP would get $4.16 per share if there was any money left after paying all the debt? OSHSP is $1.62/share, so that is quite attractive if you believe property, equipment and inventory can be sold to pay all the debt.

 

Looks like they have until August 3, 2013 and May 1, 2013 to reduce debt and/or refinance:

Term Loan Agreement as a result of any failure by the Borrower to comply with the maximum adjusted leverage ratio covenant contained in the Term Loan Agreement for the fiscal quarter ended February 2, 2013 and ending May 4, 2013, which means that the next applicable measurement date for the leverage covenant is August 3, 2013.

The Waiver, and undertakings made by the Company in connection therewith, require the Company’s continued compliance with the terms and conditions set forth therein, including achievement of a mutually acceptable agreement with the Term Loan lenders by May 1, 2013 relating to refinancing or modifications to the Company’s capital structure in a way that serves the best interests of all of the Company’s stakeholders.

 

Who knows maybe the California weather will be better this Spring:

The $18.3 million decrease in cash provided by operating activities was primarily due to a decrease of $9.7 million in net income due to lower net sales as a result of unfavorable weather conditions in the months of March and June 2011

 

Short interest is high:

http://www.nasdaq.com/symbol/osh/short-interest#.UTB43-tHAg1

[eclecticvalue]

Lets say it goes bankrupt, the preferred distribution will only be $19.9 Million (4,806,000*$4.16) to those holders.

[Grahamisback]

The problem is that tangible equity is negative, so it depends if real estate is undervalued in the balance sheet and how much...

[stahleyp]

wow. big drop today. I don't see any news either.  a ton of volume though. wonder what's going on.

[CorpRaider]

I picked up some of this at $5, so I'm taking a beating.  I figured it was worth a look as a highly levered, hated spin off/stub stock with exposure to California real estate.  I ran some EBIT to EV ratios and it seemed cheap relative to HD and Lowes (of course they're probably not in technical default of any of their LTD obligations).  I can't figure out the play with the preferred either unless it is some way for ESL to prevent Ares from pushing it into bankruptcy to take control.  I think they own some of the debt and the class c shares.  I think OSH has around $58 million of LTD they have to get refinanced or paid off by august.  They sure seem to be continuing to expand with the two new stores in oregon and remodels of existing stores.  It also appears they are hiring 500 workers based on their facebook page.  They are suing home depot alleging unfair trade practices with respect to alleged interference with their relationships with makita and milwaukee.  I haven't seen that in any of the financial press, but I found it snooping around online.  I think some of their allegations about losses and inability to compete in the complaint would probably scare off most retail investors.