December 14, 2022
Costco saw its nine-quarter streak of double-digit revenue growth broken with its 1Q23 results. While not up double-digits, it was still respectable, as revenue gained 8% and comps grew 7.1%. Management indicated that inflationary increases occurred on much of its merchandise. The bad news came in the form of e-commerce growth, which fell 2%, mostly on lower sales of big-ticket items. Management indicated that both Black Friday and Cyber Monday online sales were exceptionally strong. Comps were led by the Other International segment, up 9.1%, followed by Canada and the U.S., up 8.3% and 6.5%, respectively. On Thursday’s earnings call, CFO Richard Galanti said there will be 27 store openings in FY23, three of which will be relocations. In the U.S., Costco is planning to add 15 locations, and internationally, there will be nine openings, including first-ever stores in New Zealand and Sweden. Click here to request a sample list of future openings.
For the first time ever, Amazon’s Just Walk Out technology and Amazon One service will be available at a third-party customer’s grocery store. The store, Community Groceries, is a single, independent retailer in Kansas City, MO. Amazon’s VP of AWS Applications Dilip Kumar commented, “Community Groceries is renowned for encouraging healthy lifestyles and focusing first and foremost on their local community, so we’re honored to have them as our first customer in the grocery vertical to launch a Just Walk Out technology and Amazon One-enabled store.” In addition to its own Amazon Fresh and Whole Foods locations, Amazon provides the innovative check out technology to convenience stores at various sports venues, most recently at Bridgestone Arena, in Nashville, TN.
In other news, Amazon Go opened a new suburban location this week in the Los Angeles area of Woodland Hills, CA. The 5,000 square-foot unit houses 2,400 square feet of front-of-store selling space and is slightly larger than the average Amazon Go stores based in urban settings, which range from 450 to 2,700 square feet. The Company introduced the Amazon Go suburban format to Mill Creek, WA in April 2022. Since then, it has added locations in Whittier and Torrance, CA. In total, there are now 30 Amazon Go locations operating in the U.S.
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Albertsons Companies announced that the Washington State Court has denied the request for a preliminary injunction by the Attorney General of the State of Washington against the previously announced $6.85 per common share Special Dividend originally scheduled to be paid on November 7, 2022. The Washington State Court has extended the existing temporary restraining order until December 19, 2022, to give the Attorney General of the State of Washington an opportunity to appeal the ruling.
On December 6, 2022, Kroger received a second request from the FTC as part of the regulatory review of the proposed merger. The second request extends the waiting period imposed by the Hart–Scott–Rodino Antitrust Improvements Act until 30 days after Kroger and Albertsons have substantially complied with the requests or the waiting period is terminated sooner by the Federal Trade Commission. The Companies still expect the merger to be completed in early 2024.
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Lululemon’s 3Q22 sales rose 28% with strong performance across all products, channels, and regions, despite strained global supply chains, and inflationary pressures. Revenue was up 26% in North America, and 41% internationally. Comparable store sales rose 14%. E-commerce sales increased 31%, representing 41% of total sales. Operating margin expanded 120 bps, to 19%, on the sales leveraging of fixed costs, which offset a 130 bps gross margin deterioration. In 3Q22, the Company opened 23 new locations, bringing the total to 623 stores. The Company maintained a debt-free balance sheet at quarter-end, with liquidity supported by $353 million in cash and $395 million in revolver capacity. Inventory increased 85%, to $1.70 billion, compared to $900 million at the end of 3Q21. On a per store basis, inventory increased 80%. The Company believes its inventory is well positioned to support its expected revenue growth in 4Q22. Click here to request a sample list of future openings.
RH reported 3Q22 sales of $869.1 million declined 13.6% year-over-year, but rose 28% from pre-pandemic 3Q19. The Company continues to resist giving in to the promotional environment; management indicated it’s been almost two years since it has sent a marketing email, believing there is a long-term risk of brand erosion for those who take such a path.
In other news this week, RH acquired Dmitriy & Co, a New York-based to-the-trade custom upholstery designer. Founders Donna and David Feldman have been hired to create RH Couture Upholstery. In addition, RH said it has acquired Jeup, a Michigan-based to-the-trade custom furniture designer and manufacturer, and Jeup’s founder, Joseph Jeup, has been hired to develop RH Bespoke Furniture. RH also hired Margaret Russell, former Editor-in-Chief of Architectural Digest and Elle Decor, to launch RH Media, an editorial-content platform.
Gary Friedman, RH Chairman and CEO, commented, “Today’s announcements, plus our previous acquisition of Waterworks, firmly plant four RH flags at the very top of the luxury mountain, and clearly state our intention of establishing RH as an arbiter of taste and design in the To-the-Trade, luxury home furnishings market.” As of October 29, 2022, RH operated 67 galleries (28 Design; 35 Legacy; one Modern; three Baby & Child and TEEN), 39 outlets, and 14 Waterworks showrooms, as well as one Guesthouse, its first hotel located in New York City’s Meatpacking District.
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Select Staples stores will now be accepting in-person Amazon returns in a pilot program between the two companies. The initiative furthers the relationship as Staples also sells Amazon-branded products, in stores and online, including the Echo, the Fire tablet, Fire TV Stick and accessories. According to reports, if the partnership expands to all Staples stores, it will give Amazon about 1,000 more customer touch points in 45 states.
This past week, fast-growing Aldi opened seven new grocery stores across the U.S. The new locations were in Greenville and Caro, MI, Brick Township, NJ, Loma, CA, Abingdon, MD, Rolla, MO, and Sioux Falls, SD. The Company is planning to add more outlets before the end of the year, with openings in Hudsonville, MI and New Albany, OH scheduled for later this month. Aldi currently operates in 38 states with approximately 2,200 units.
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Wawa is expanding into three new states, announcing last week that it will open its first convenience stores in Ohio, Indiana, and Kentucky sometime after 2025. In April 2022, it was reported that the Company intends to double its number of units and extend its footprint to additional states over the next 10 years, and in June 2022 Tennessee was added to the list of new states for 2025. The estimated timeframes and ranges for the number of stores by state will be announced in 2023. Wawa is currently accepting site suggestions from real estate representatives for all locations, including adjacent and new market areas. At this time, the c-store retailer operates nearly 1,000 locations throughout Pennsylvania, New Jersey, Delaware, Maryland, Virginia, Florida and Washington, D.C.
Casual dining chain Condado Tacos is planning to open up to 100 new stores by 2026. The Company’s restaurants specialize in “build-your-own” tacos and offer other standard menu fare, including chips and salsa and nacho bowls. The first location opened in Columbus, OH in 2014, and in February 2020, Condado Tacos entered into an investment partnership with New York-based private-equity firm The Beekman Group LLC to expand the Company’s footprint. Currently, there are more than 20 Condado Tacos units in Ohio, Michigan, Pennsylvania, Indiana, Tennessee, North Carolina, and Kentucky. For 2023, the Company has 12 restaurants scheduled to open in new regions that include St. Louis, MO, Louisville, KY, Knoxville, TN, Greenville, SC, and Birmingham, AL.
Loblaw Companies is planning to launch more pharmacist-led health clinics after the initial success of its first location in the town of Lethbridge in Alberta, Canada. The Lethbridge clinic, opened to make it easier for patients to access medical services, has been operating since June inside the Loblaw-owned Real Canadian Superstore and has been averaging more than 40 patient visits each day. The Company announced it will add new clinics in Fort Saskatchewan, Brooks, Red Deer, and Edson in the Alberta province in the coming weeks.
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Meijer is rolling out a new store concept called Meijer Grocery early next year. The first two locations of the new banner are slated to open in Orion Township and Macomb Township, MI on January 26, 2023, and each will be 75,000 – 90,000 square feet in size, significantly smaller than Meijer’s traditional 155,000 square-foot stores and its larger 200,000+ square foot formats reflecting a move away from a Supercenter format. The Meijer Grocery stores offer fresh foods, everyday essentials, baby, health and beauty, and pet food and products. Shoppers can take advantage of “shop & scan” in the Meijer app, which allows customers to scan and bag items on the go and then scan the final barcode at the self-checkout to pay. Meijer operates 125 stores in Michigan and 264 overall. See the map below for Meijer’s store concentration.
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David’s Bridal will open prom pop-up shops in 1Q23, ahead of prom season. The retail outlets, named “House of Prom by David's,” will be geared for high school students and feature dresses as well as digital content and social gathering opportunities. The Company said more information about the pop-up locations will be shared in the new year. At the same time, David’s Bridal is also launching Diamond Prom, a free loyalty program for high school students, as a mobile app that is an extension of the Company’s current loyalty program, which the retailer says already has nearly 2 million subscribers to date.
Academy Sports + Outdoors’ 3Q22 sales fell 6.2% to $1.49 billion, reflecting a comp decline of 7.2%, partially offset by the opening of six stores during the year. Lower sales reflected fewer transactions compared to last year, mainly from a decline in hunting sales. When compared to pre-pandemic 3Q19, net sales increased 30.5%. Management said that its core group of middle-income customers continue to spend on items associated with health and wellness, and especially on supporting their children in organized sporting activities. However, they noted that may change if inflation does not subside. Management has not yet announced its store opening targets for FY23, but noted “it will be more than this year.” The Company plans to open between 80 and 100 new stores over the next five years. Gross margin decreased 20 bps to 35%, due to an increase in shrinkage (much of which management attributed to “organized crime”), partially offset by higher merchandise margin. SG&A margin increased 140 basis points due to fixed cost deleveraging from the decline in sales, and additional pre-opening expenses, driven by the increase in store count. EBITDA and EBITDA margin declined 12% and 100 bps, respectively. Management said it expects more promotions going forward but it believes it can maintain the double-digit margins it has realized over the last seven quarters. Margins have been boosted during that period by private label brands, which now constitute 20% of revenue. Management narrowed its full year guidance toward the low end of previous expectations. At the end of the period, net debt increased 29% to $368 million and liquidity of $1.30 billion was adequate to fund capital requirements.
In the Cineworld, DIP case, the Court entered an order authorizing the rejection of five unexpired leases. The Debtors filed a motion seeking to extend the 210-day deadline within which to assume or reject unexpired leases by 90 days through and including July 5, 2023. The Debtors further requested that the proposed extension be without prejudice to their right to seek additional extensions of the time to assume or reject the unexpired leases, with the consent of the applicable counterparty. Separately, reports state that lenders have held talks on selling the Debtors’ eastern European operations. According to speculation, bids of approximately $1 billion would be sufficient to meet the lenders’ threshold for a sale of the Cinema City and Yes Planet theatres in eastern Europe, and the operations of Rav-Chen theaters in Israel. However, no formal process has started yet. In late October, landlords and lenders agreed to explore a potential sale of certain assets and to allow creditor input on the business plan.
BJ’s Wholesale Club opened a new location in Midlothian, VA. This warehouse store is the Company’s 14th retail unit in Virginia, bringing its total U.S. store count to 235 in 18 states.
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Ahold Delhaize’s banner Stop & Shop is extending its partnership with food-waste reduction company Flashfood to four more stores in the New York City region, making the feature available at outposts in Queens and Brooklyn. Using the Flashfood app, shoppers can save on fresh items like meat, produce, dairy, and bakery items, as well as non-perishable foods and snacks that are nearing their best-by dates. Purchases are made directly through the app and customers then pick up their order from the Flashfood zone located inside their participating Stop & Shop store. In 2021, Stop & Shop launched a pilot with Flashfood at four stores in Worcester, MA, and after eight months, the program resulted in nearly 35,000 pounds of reduced food waste. Following the initial trial, the Company rolled out the Flashfood app to more stores starting in January 2022, including in Pawtucket and Providence, RI, Nantucket, MA, and the Bronx, NY. Between the U.S. and Canada, Flashfood is now available in more than 1,400 stores.
This past week, another Flashfood partnership was announced; this one with the retail grocery platform Yellow Banana, which owns and operates 38 stores under the Save A Lot banner across the Cleveland, OH, Chicago, IL, Milwaukee, WI, Jacksonville, FL, and Dallas, TX metropolitan areas. The majority of Yellow Banana’s grocery stores are located in areas with limited access to affordable, quality food. The Company anticipates that the Flashfood deal will allow its customers to save money while also reducing food waste.
AutoZone’s 1Q23 sales increased 8.6% to $4 billion, and domestic comps were up 5.6%. Commercial sales growth accelerated 15% and represented 26% of total revenue. Gross margin decreased 242 bps to 50.1% driven by an $81 million non-cash LIFO charge due to rising freight costs. Operating profit decreased 4.2% to $723 million. During the quarter, AutoZone opened 28 new stores in the U.S., three in Mexico, and four in Brazil. As of November 19, 2022, the Company had 6,196 stores in the U.S., 706 in Mexico and 76 in Brazil, for a total store count of 6,978.
Ollies continued its modest operational improvement over the last two quarters with 3Q22 revenue gaining 9% while comps improved 1.9%. This marks two consecutive quarters of comp growth for the Company. Sales expanded primarily on store growth, which was up just under 9%; both sales and comps were below the Company's projections and missed the street's expected revenue by about 3%. The Company was not up against a tough 3Q21 comparison when sales declined 7.5% and comps fell 15.5%. Margins were stressed during the quarter; gross margin declined 40 bps on higher supply chain costs, while SG&A margin deteriorated 20 bps, primarily on higher store and selling costs. As a result of the cost challenges, EBITDA rose just 4%, but declined 50 bps on a margin basis. Ollie's balance sheet remains essentially debt free, with a net cash position of $181 million and $93 million available on its $100 million revolver, after borrowing base considerations. Inventory is up only 11%, primarily attributable to increased store count and timing of receipts. For FY22, the Company expects to open 40 new stores. See the map below for Ollie’s new store openings. Click here to request a sample list of future openings.
For 3Q23, Dollarama posted double-digit sales and comp growth (15% and 10.8%, respectively) as consumers in Canada turned to dollar stores to stretch their household budgets; Canadian inflation was 6.9% in October. Comps were driven by higher sales of consumable products. However, the shift to higher sales of less profitable consumables caused gross margin to decline by 110 bps. The Company opened 41 new stores this year and remains on track to hit its annual target of 60 – 70.
In 1Q23 (ended October 29), Village Super Market’s total sales advanced 5.2%, on inflation driven comps growth of 4.3%, the opening of a Gourmet Garage in the West Village in Manhattan, NY in April 2022, and increased sales due to the remodel and conversion of the Pelham, NY Fairway to the ShopRite banner in August 2022; same store digital sales increased 5.5%. Gross margin improved 37 bps on decreased warehouse assessment charges from Wakefern, a more favorable product mix and lower promotional spending. Overall, operating income was up 44%, to $15.2 million.
Reports indicate CVS is expanding a plan it initiated in Arizona to help pharmacists fill prescriptions remotely, thereby reducing pharmacists' workload and allowing them to deliver medical services such as vaccinations and health screenings. The Company said it is using technology, including robotics, automation, machine learning and artificial intelligence at more than 9,000 stores. The drug store sector has been struggling with staff shortages, while also expanding the role of pharmacists to provide vaccines and other medical services. CVS’s chief pharmacy officer commented that a model for pharmacist-free drugstores is not the Company’s goal. Instead, the Company is testing if some pharmacies can operate at times without pharmacists on staff.
Conn’s reported 3Q23 revenue fell 21% to $321 million, as Conn’s continues to lap atypically strong retail results from last year, which benefited from stimulus programs and a pull forward of demand. The top line reversal reflected a 27% drop in same store sales compared to 3Q22, and the opening of eight new stores (a 5% increase) during the last 12 months. Operating income and margins both turned negative, which prompted implementation of cost saving and capex reduction programs. Nevertheless, management cautioned that operating costs will increase in FY24 because of store and distribution center expansion plans, which are already committed. This includes a new distribution center in the Southeast, the relocation of a Texas distribution center, and the addition of 10 new stand-alone locations. In that regard, the bank amended the Company’s credit facility to provide six quarters of covenant relief.
As of October 31, 2022, inventory declined 1.5% year-over-year despite a 5% increase in the number of Conn's locations and the rollout of 19 store-within-a-store locations at Belk. Net debt increased 30% to $584 million compared to the same time last year; liquidity of $162 million at the end of 3Q23 was adequate to fund capital requirements.
Heinen's sales are estimated to have advanced mid-single digits in FY22 as inflation sustained and built upon COVID-19 eat-at-home tailwinds over the last couple of years. After adding several stores between 2013 and 2017, Heinen's store count has remained static for the last five years. The lack of expansion has most likely been due to intense competitive headwinds including Meijer entering its largest market, existing conventional grocers competing more for the upscale shopper and Whole Foods expansion. That said, the Company seems to have carved a niche for itself and has seen market share increase in all its primary markets in recent years despite its static store count.
Casey’s 2Q23 topline growth continued the trend from 1Q23 (up 40%), gaining 22%. The growth was propelled by 7.9% inside same store comp (6.9% food and grocery), a 0.3% comparative store growth in fuel gallons sold, and 83 new stores compared to last year. The inside sales were driven by prepared food including pizza and fountain sales. Grocery saw strength in both alcoholic and non-alcoholic beverages. The 2Q23 performance led the Company to increase its FY23 outlook. Casey’s raised its same-store inside sales growth target to 5% – 7%, up from 4% – 6%. Projections for same-store fuel gallons remained the same at flat to 2% higher. The Company plans on adding about 80 stores in FY23. Click here to request a sample list of future openings.
Sportsman’s Warehouse posted lower 3Q22 sales and earnings, but within guidance. Sales fell 10%, including a 15% drop in comps, while the Company reported EBITDA declined 26%. After the last couple of years of elevated sales of firearms and ammunition, especially in personal protection firearms, Sportsman’s Warehouse sales, although still above pre-pandemic levels, are softening. Offsetting some of the negative comps has been the contribution from new stores. The Company opened three stores in 3Q22, and another in November for a total of nine stores in FY22. The Company is targeting 190 to 210 stores by FY25, while it has employed a more flexible store format; the FY22 new stores ranged from 9,000 to 40,000 square feet.
Other targets for FY25 include growing private brand penetration to 7% to 9%, and e-commerce sales to 25%. However, the outlook for FY23 will be challenging as demand for firearms is expected to continue to soften, with management noting it is facing tough macroeconomic consumer headwinds.
Graze Craze, a franchise brand that provides customized picnic boxes and charcuterie boards, is opening a location in Charlotte, NC. It is the first store in the state for the brand, and customers can either pick up their orders from the store or have them delivered.
Founded in 2018 in Oklahoma, the Company is now part of United Franchise Group, which also owns The Great Greek Mediterranean Grill in its food division. Graze Craze currently has 27 stores in 14 states and, according to its website, there are 29 more stores in development across 20 states.
In FY22, Niemann Foods saw its sales stabilize as residual benefits from the pandemic in its grocery business normalized and its hardware stores continued to perform positively as home remodeling activity remained high. In the traditional grocery segment of its business, the Company continues to face tough competition from Hy-Vee, Schnuck Markets, and Meijer. These competitive pressures, as well as industry-wide higher supply chain costs and higher fuel costs are likely weighing on profitability. Looking forward, we suspect the grocery business will continue to perform well in 2023; its Country Market stores are generally lower-priced. The Company also operates a few low-priced Save-A-Lot stores, which are likely seeing a boost in traffic as consumers pursue value in the face of high inflation.
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