April 1, 2020
Fairway Group Holdings Corp. announced the winning bids for six Fairway stores on a going concern basis: Village Supermarket, Inc. (Wakefern Member), Seven Seas Georgetowne, LLC (Key Food Member) and Amazon Retail LLC. In addition to several Fairway stores, Village's winning bid includes Fairway's production and distribution center. Click here for a list of the future openings/closings mentioned above.
On March 29, Pier 1 Imports notified the Court that the going concern auction scheduled for March 31 was cancelled after the Company received bids for only 50 of its 900 stores. The Debtors noted that the cancellation is without prejudice to their right to implement an auction at a later time. Additionally, the Term Loan lenders have elected to pursue a transaction which gives them an ownership interest in the Company. Details of the transaction have not yet been determined. The Debtors, the DIP Lenders, the Term Loan Lenders, and the Creditors’ Committee are evaluating how to structure a value-maximizing transaction in light of the COVID-19 pandemic, increasing government shut-downs, and overall unstable market conditions, including the market affecting credit and exit financing options. Pier 1 announced it implemented a furlough program across its business, including for 65% of home office associates and for certain store and distribution associates, effective March 23 until further notice. The Company is also reducing compensation by 20% for retained associates. At the corporate level, Pier 1 reduced pay for EVPs and above by 50%, and reduced compensation for SVPs by 30%. Stores have been closed since March 22. Click here to request a list of closings.
On March 24, Art Van Furniture, LLC was notified that the prospective purchaser of its 44 Wolf and Levin branded stores has terminated the transaction. Robert Levin, the former owner of Levin Furniture, had previously signed a letter of intent to acquire all stores under the Levin and Wolf Furniture brands. An attorney for the Company said, “The transaction, while it could be revived at some point in the future, is not going forward now.” Additionally, the Company was previously in the process of liquidating 169 other stores, but the GOB sales were stopped due to an increasing number of states mandating that nonessential businesses close down to prevent the spread of COVID-19.
Finally, two former employees initiated a lawsuit against the Company alleging that pre-petition store closings, which put 700 employees out of work, did not provide a 60-day notice, as required by the Worker Adjustment and Retraining Notification (WARN) Act.
Big Lots withdrew first quarter and full-year guidance it had provided on February 27. The Company indicated it has experienced a surge in demand, which led to positive low single-digit comps quarter to date. Big Lots anticipates additional unplanned expenses related to the COVID-19 outbreak, including store cleaning and disinfecting, and a temporary rise in hourly wages.
The Company believes its liquidity position is strong, with revolver borrowings running about $150.0 million below last year; this would leave revolver availability at about $470.0 million. Big Lots plans to dial back some capital expenditures during the year by reducing Store of the Future conversions from 80 to about 20 and deferring any new store openings.
Big Lots plans on keeping its stores open during the pandemic, as food and other consumables make up about 30% of sales. The Company has also added curbside pick-up and has canceled its chain wide in-store “Friends and Family” weekend event in April. Click here to request a list of future openings and closings.
Amazon / COVID-19 Special Analysis
As part of our ongoing coverage of COVID-19, this Special Analysis examines how the coronavirus has affected Amazon, its sellers, and the U.S. consumer.
On March 27, The Cheesecake Factory announced that in an effort to preserve flexibility it does not plan to pay rent on its leases for the month of April. The Company leases all of its 294 restaurants across several banners. Management indicated it is in negotiations with its landlords regarding the potential deferral, abatement, or restructuring of rent that would be due during the COVID-19 situation. In addition, the Company announced that in response to the closure of its dine-in operations, it has furloughed 41,000 hourly restaurant workers representing about 91% of its 44,900 restaurant staff at year-end. Furloughed workers will retain their benefits through June 1 and are being provided one complimentary meal from their restaurant daily. The Company has reduced pay for all corporate and bakery workers that are still employed by 10% to 20%, and all named executive officers, and board members have taken a 20% cut to their annual fees.
Kroger recently provided new career opportunities to more than 23,500 workers nationwide, with plans to hire an additional 20,000 workers over the next several weeks. The Company is forming employment partnerships with some of the industries most affected by COVID-19. Current partners include Frisch’s, Marriott International, McLane Foodservice, Shamrock Foods, Sodexo, SodexoMAGIC, Sysco, Thunderdome Restaurant Group, US Foods, and VF Corporation.
On March 25, Kroger began testing a pickup-only store in greater Mount Carmel, OH in response to higher demand for click-and-collect service. In-store shopping is not available at the location, as store associates are focused on fulfilling online grocery pickup orders, but its pharmacy will remain open. Kroger did not say if other stores in its market areas would become pickup-only.
Yum! Brands borrowed $525.0 million under its $1.00 billion revolving credit facility. Combined with $425.0 million in revolver borrowings incurred on March 18 to fund the acquisition of The Habit Restaurants, the Company now has $950.0 million in outstanding borrowings under the revolver, leaving remaining availability of $50.0 million.
Management also provided an update on its operations in response to the COVID-19 pandemic. Worldwide, about 7,000 of the Company’s more than 50,000 restaurants are currently closed, including over 1,000 Pizza Hut Express locations in the U.S. and over 900 KFCs in the U.K. Restaurants in certain markets in the U.S. are limited to off-premise options only, including drive-thru, delivery, and carry out. The Company estimates that comparable restaurant sales for the first quarter ended March 31 will be down in the mid to high single digits and will likely fall further in the second quarter as more markets are impacted.
Effective March 30, Yum! Brands’ CEO David Gibbs voluntarily elected to forgo all salary compensation for the balance of 2020.
On March 30, Yum! announced that it has commenced an offering of $500.0 million of Senior Notes due 2025. Net proceeds will be used to pay the fees and expenses of the offering and for general corporate purposes. The closing of the notes is scheduled for April 1. Click here to request a list of future openings and closings.
As of March 30, 92 of Chuy’s Holdings’ 101 restaurants have transitioned to an off-premise consumption operating model and continue to serve guests through enhanced take-out and delivery. The remaining nine restaurants have closed temporarily. Its delivery partner DoorDash has waived delivery fees for Chuy’s customers through April 1. Additionally, Chuy’s continues to partner with Grubhub, BiteSquad, Waitr and other local delivery services in some markets.
To improve financial flexibility, the Company has drawn the full $25.0 million available under its revolving credit facility; it previously had no revolver borrowings. The Company now has more than $28.0 million in cash on hand. Management has also furloughed about 40% of its corporate and administrative staff, and temporarily reduced the salaries of the remaining employees, including senior management, by 25% to 75%. Share repurchases have been suspended, and the Company has deferred all non-essential capital expenditures, including delaying or canceling all new restaurant openings planned for 2020. As a result of the ongoing uncertainty, management has withdrawn its previous guidance for fiscal 2020.
On March 27, Lucky’s Market Parent Company, LLC announced successful bids for 23 liquidated stores to 10 parties for approximately $29.0 million including six stores that will continue to operate as a going-concern. The sold stores include one owned property, 16 leases, and its Florida distribution center. The results of the auction were subject to a final sale hearing on Monday. Publix won the bids for five leased stores, ALDI for one owned property and five leased stores, Southeastern Grocers for four leased stores, Dave’s Market for two leased stores, Seabra’s Market for one leased store, LM Acquisition Co. for two leased stores, Dollar General for a distribution center, Schnuck Markets for one leased store, Oryana Food Cooperative for one leased store, and Hitchcock’s Market for one leased store.Click here for a list of the openings/closings mentioned above.
Last week, Walgreens announced it will be selling groceries at its more than 7,300 pharmacy drive-thrus nationwide. The additional products available at the drive-thru will include cleaning supplies and sanitizers, select over-the-counter products such as cough/cold, pain/fever and immunity support, select grocery items, infant formula/adult nutrition, medical supplies, first-aid items, and paper goods.
Founder and CEO of Amazon Jeff Bezos issued a message to the Company’s employees noting that Amazon has changed its logistics, transportation, supply chain, purchasing, and third-party seller processes to prioritize stocking and delivering essential items like household staples, sanitizers, baby formula and medical supplies. He added that Amazon is hiring 100,000 new employees and raising wages for hourly workers who are fulfilling orders and delivering to customers during this period.
Amazon Logistics plans to open a last-mile distribution center in Racine County, WI, situated between other larger warehouses it operates in Kenosha and Oak Creek. The 438,300 square-foot DC would accept packages from larger Amazon fulfillment centers and ship them out by van or personal vehicle to customers’ doors.
Workers in at least 10 Amazon warehouses have tested positive for COVID-19. In some cases the warehouse shut down for a deep cleaning and quarantined people in close contact. However, workers are saying the Company is not doing enough to protect them.
About 60 Amazon workers at a warehouse in Staten Island, NY went on strike Monday, protesting the Company’s health and safety policies after a colleague tested positive for coronavirus. The strikers are demanding Amazon shut down the facility for a deep clean and pay its workers in the meantime. Amazon fired the employee that led the strike, saying he violated safety regulations, including failing to abide by a 14-day quarantine.
On March 27, the Court issued an order temporarily suspending Modell’s Sporting Goods Chapter 11 case through April 30. The order states that if COVID-19 abates before the suspension has expired, the Company may notify the Court of the termination of the suspension. A hearing has been scheduled for April 30 to consider, among other things, a possible further extension of the suspension. Click here for a list of future closings.
Earning Reports
Five Below has been a good growth story over the last few years, and while FY19 saw continued growth, it was propelled primarily by store growth, as comps were up a modest 0.6% for the year. Slower store growth, combined with the Company's "tween" oriented demographic, could pose challenges for FY20. However, all is not lost; Five Below remains debt free. It recently increased the maximum borrowing capability on its revolver to $50.0 million, but thus far it has not needed to draw. The fourth quarter saw a strong sales increase (up 14%), but comps fell 2.2% on weak holiday season performance. The shorter holiday buying period caused a 3.4% drop in traffic, slightly offset by a 1.4% increase in average ticket. The sales increase propelled EBITDA up 24.3% and EBITDA margin up 200 bps. Five Below had planned for about 20% store growth in 2020, but that will likely be modified with no revenue being generated. At present, all 900 stores are closed due the pandemic; once stores re-open, the Company may have to re-evaluate its new strategy of raising prices and the new Ten Below concept, to see if these programs still resonate in the post pandemic world. Click here to request the report.
GameStop’s 4Q sales dropped 28.4% to $2.19 billion, and comps plummeted 26.1%. Console and hardware sales continue to fall as consumers delay purchases ahead of new platform launches expected in the second half of 2020. Adjusted EBITDA fell 32.1% to $136.1 million. CEO George Sherman said, “We delivered profitability, on an adjusted basis, ahead of our updated expectations, marking progress on our strategy to evolve our operating model and position GameStop for long-term profitable growth. We accomplished this, despite industry challenges that led to an expected significant decline in sales.” The Company closed 333 stores in 2019 and will continue to rationalize underperforming stores in 2020; management plans to see a similar or greater number of closures in 2020. The wind down of operations in Denmark, Finland, Norway, and Sweden continues, and GameStop is likely to exit these markets by late July. Proceeds from the sale of non-core business assets will be used to repay debt.
Looking to 1Q20, GameStop has temporarily closed the majority of its 5,500 global locations, with the notable exception of Australia and New Zealand. In the U.S. (3,730 units), stores are closed to customer traffic but still fulfilling increased demand for products through curbside delivery. Despite the closures, the increased demand for products across the world has led to a 2% comp increase for March (through March 21). Management has suspended guidance for 2020 but expects challenging operating conditions in the first three quarters, ahead of the expected new game console launches in the fourth quarter. The Company ended fiscal 2019 with $499.4 million in cash and $419.8 million in debt. Click here to request the report.
Dollar Tree announced its quarter-to-date comp trends from February 2 through March 29 were +7.1% for Dollar Tree and +14.4% for Family Dollar. The Company indicated “sales have materially moderated very recently, however, as the Company enters the peak of the Easter selling season with Dollar Tree recording same-store sales of -19.4% in the seven days ending March 29, and Family Dollar +8.8%.” Sales of household consumables and food remain strong in both banners. The Company’s first quarter will end on May 2, and it is scheduled to report earnings on May 28.
The Company has a $1.25 billion revolving line of credit maturing April 19, 2023. As of March 30, Dollar Tree had approximately $1.90 billion of cash and investments, including $750.0 million drawn on its revolver; there were no borrowings at FYE. The Company plans to repay the remaining $250.0 million of its floating rate note due in April and does not expect to repurchase shares in the near term under the current share repurchase authorization that has $800 million remaining. Click here to request the report.
GNC Holdings reported 4Q sales dropped 14.1% to $470.4 million, driven by 851 fewer stores and a comp decrease of 2.4%, partially offset by e-commerce growth of 15%. By segment, U.S. and Canadian sales fell 7.3% (87.7% of total sales), international sales were down 20.4% (8.7% of total sales), and manufacturing sales dropped 85% (3.6% of total sales). A focus on cost controls, such as lower wages and occupancy costs, coupled with product margin improvements, aided profitability, though adjusted EBITDA fell nearly 25% from last year to $26.3 million as sales continue to stumble. Going forward, the Company continues to optimize its store portfolio and work to improve same-store sales. On its 4Q earnings conference call, GNC stated that its lenders in Asia were no longer interested in refinancing the Company’s debt. While the Company is working through alternatives, the process has slowed due to the impact of COVID-19, and it is unknown as to whether GNC will be able to refinance its debt.
As previously reported, the Company’s 2019 audit opinion includes a going-concern note, resulting from the upcoming maturity of its tranche B2 term loan and convertible notes. On March 24, GNC drew down $30.0 million on its revolver and currently has $130.0 million of cash on hand. GNC had $862.6 million of debt at year-end. The impact of COVID-19 will likely slow GNC’s top line turnaround, even as the Company keeps its roughly 7,500 stores open (5,400 are in the U.S.). Though it is a health and wellness retailer, its products are not going to be able to prevent or improve outcomes for COVID-19 patients, and the Company will likely continue to see weak traffic and sales as consumers stay home or shop other general merchandise retailers. Click here to request the report.
Sportsman’s Warehouse reported 4Q sales increased 6.4% to $258.2 million, including the contribution from eight acquired stores from Dick’s Sporting Goods, momentum in the firearm and ammunition categories in January, and growth in e-commerce. However, comps fell 4.8%, and adjusted EBITDA declined 10.9% to $19.6 million. The Company ended the year with 103 stores, compared to 92 the prior year. Looking to 1Q20, management commented that business further accelerated, which it believes was driven by fewer competitors, increased demand from COVID-19 uncertainty, and the current election cycle. The acceleration occurred in firearms, ammunition, generators, water filtration, and dehydrated foods. The Company has experienced double to triple-digit growth in firearms and ammunition, and as a result has pulled the product from online sales to meet store demand, while also putting limits on the amount that can be purchased.
The Company has reduced store hours to ensure sufficient time for cleaning and restocking and is limiting the number of customers in stores to ensure social distancing. Relating to its supply chain, there has been some interruption out of China primarily related to camping and fishing products, but the Company has not yet seen a significant financial impact. As of last week, only a handful of stores have temporarily closed, and a few others are operating with just curbside pickup. However, management warned more temporary closures may occur due to local or state requirements. Click here to request the report.
Domino’s Pizza announced that for its first quarter ended March 20, U.S. Company-owned stores recorded comp growth of 3.9%, while U.S. franchise stores reported comp growth of 1.5%. For its international stores, comps rose 1.5%. The Company noted there are currently 14 international markets closed and 23 international markets with partial store closures, representing approximately 1,400 international stores that are temporarily closed. France, Spain, New Zealand and Panama represent approximately 900 of these temporary store closures. Domino’s withdrew its fiscal 2020 guidance. The Company also drew down the remaining availability of $158.0 million under its outstanding variable funding notes, citing the need to improve financial flexibility.
On March 26, The Wendy’s Company provided an update on its quarter-to-date results and the actions it has taken in response to the COVID-19 situation. Global comparable restaurant sales for the first quarter through March 22 were up 2.8%. Comp growth in January and February was 4% before the impact of COVID-19 and has since deteriorated to about a 20% decline in the week ended March 22, as the Company has been forced to suspend dine-in service and rely on drive-thru and delivery only.
As of March 24, 235 of the Company’s more than 6,700 restaurants have been temporarily closed, including 46 in the U.S. and 189 in international markets. Carry-out service has been broadly shut down across the Company’s store network in favor of drive-thru, with certain exceptions on a case-by-case basis. In the week ended March 22, drive-thru encompassed 90% of all sales, with digital ordering growing from 2.5% to 4.3% of sales.
Management also announced a full draw down of its $150.0 million revolving credit facility to improve its financial flexibility. The Company borrowed $120.0 million and indicated it now has more than $340.0 million in cash on hand. Management suspended all share repurchase activity and withdrew both its fiscal 2020 guidance and its 2021 to 2024 long-term guidance.
In order to support its franchisees, Wendy’s has extended payment terms for royalties and marketing funds by 45 days for the next three months. The Company also deferred base rent payments on properties it owns and leases to franchisees by 50% for the next three months.
Shoe Carnival’s 4Q sales increased 2.2% to $239.9 million, and comps were up 3.2%. Gross margin increased 70 basis points to 29.1%, and merchandise margin rose 0.7%. As a result, operating income jumped 219.1% to $4.8 million. The Company opened one new store and closed six underperforming locations during the year, ending with 392 stores in 35 states and Puerto Rico. All stores have been closed since March 19. Click here to request the report.
Lululemon Athletica’s 4Q sales jumped 19.7% to $1.40 billion, and comps were up 9%. Gross margin increased 70 basis points to 58%. Operating income rose 25.7% to $416.5 million, and operating margin rose 140 basis points to 29.8%. The Company opened 57 new stores and closed six underperforming locations during the year, ending with 491 stores in operation. All 38 Mainland China stores were closed on February 21, and all but one have reopened. The Company’s remaining North America, Europe, Malaysia, and New Zealand stores have been closed since March 16 and remain closed indefinitely. Click here to request the report.
RH’s 4Q sales were lower than forecast, decreasing 0.9% to $665.0 million. Management said the elimination of its holiday assortment caused lower customer traffic, and the Company experienced higher-than-expected backorders due to inventories being down 18% over the prior year. Gross margin improved 420 basis points to 42.6%, but SG&A margin widened 230 basis points to 27.4%. Operating income rose 12.8% to $101.0 million.
Commenting on the ongoing pandemic, the Company said its executive leadership team has chosen to forego salaries until business conditions stabilize. The Company has also taken steps to defer new business introductions and capital spending, while reducing costs. All 68 galleries and 38 outlets have been closed since March 17 and will remain closed until further notice.
