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Sears Outlet Stores Margins Poised For Recovery

Sears Outlet Stores, a subsidiary of Sears Hometown & Outlet Stores (NASDAQ:SHOS), has not exactly soared since leaving the nest of its former parent, Sears Holdings (NASDAQ:SHLD), in late 2012. The business consistently achieved high single digit operating margins and earned around $40 million of operating income per year back when it was still a part of Sears Holdings. Since then, its profitability has deteriorated sharply. Sears Outlet Stores's operating margin, adjusted to exclude the impact of non-recurring initial franchise revenue, declined to 3.4% in 2013 and took another big step down in 2014, turning slightly negative. It seems this unfortunate little bird hit the ground with a thud.

But upon further inspection, there are reasons for optimism that profitability can head back towards historical levels. Two factors have undermined the performance of Sears Outlet Stores over the past couple of years. First, Sears Outlet Stores began to experience a shortage in its most margin rich product category shortly after the separation from Sears Holdings. Second, Sears Holdings considerably stepped up its pricing and promotional aggressiveness in the appliance category over the past two years, forcing Sears Outlet Stores to take similarly aggressive actions at the expense of its margins. Recent developments suggest the impact of both of these factors may diminish going forward. Read more