June 17, 2020
In the J.C. Penney Chapter 11 case, the Court issued final orders, authorizing the Debtors to:
- Conduct store-closing sales. The Debtors previously identified an initial group of 154 underperforming units where they believe that easing of local stay-at-home restrictions will permit the prompt wind-down and commencement of store-closing sales after entry of the order (click here to request the list of locations).
- Extend the time to pay June and July lease obligations (about $34.0 million) until July 14.
- Pay prepetition claims of critical vendors and 503(b)(9) claimants in the ordinary course of business in an amount not to exceed $49.6 million.
The Debtors stated they have reopened 475 of 862 stores, with plans to open more in the coming weeks, and a goal of reopening more fully by the end of July. According to reports, Authentic Brands may join Simon Property Group and Brookfield Property Partners in an attempt to acquire the Company. The discussions are still fluid and may ultimately end without a transaction. This would not be the first partnership between the potential buyers, as Authentic joined Simon and Brookfield to purchase Forever 21, DIP out of bankruptcy earlier this year. Additionally, it was previously noted that private equity firm Sycamore Partners is reportedly in preliminary talks to acquire J.C. Penney.
Ahold Delhaize and King Kullen terminated their merger agreement under which Ahold’s Stop & Shop unit was to acquire King Kullen. The companies said a joint decision was made not to proceed with the deal because of significant, unforeseen changes in the marketplace that have emerged since the agreement was signed in December 2018, largely driven by the COVID-19 pandemic. We question the logic of canceling the deal, as King Kullen management had struggled prior to the announcement, and then spent the last 18 months focused on completing the transaction, rather than building a go-forward strategy. While King Kullen surely saw a spike in COVID-19-related sales, its long-term outlook remains at risk.
In other news, on June 10, Ahold Delhaize’s Food Lion opened a new store in Morganton, NC. Food Lion recently announced it was acquiring 62 stores from Southeastern Grocers. Click here for a list of openings and closings.
In the Tuesday Morning case, the Court issued an order authorizing the commencement of GOB sales at 136 of the Company’s 687 stores (click here for the list of future closings). The closings, which have started and are expected to take 10 weeks to complete, will be conducted by Great American Group, LLC, a B. Riley Financial, Inc. company. The Debtors intend to identify an additional 100 units for closure in the near future, and Great American Group will conduct closing sales in those locations as well. The Debtors said the determination of the final number of stores to close will depend on whether they are able to negotiate more favorable lease terms and rent reductions for certain units with their landlords. Separately, management said it has reopened more than 80% of its locations, and it continues to reopen as state and local regulations allow.
The U.S. Trustee appointed the Committee of Unsecured Creditors, whose member are: Nourison Industries, Inc.; Three Hands Corp.; The CIT Group/Commercial Services, Inc.: Peacock Alley, Inc.; and Popular Bath. On June 15, the Court adjourned the hearing on final approval of the DIP Facility to June 26.
On June 15, 24 Hour Fitness filed a voluntary Chapter 11 petition in the U.S. Bankruptcy Court for the District of Delaware. The proceedings have been designated as case number 20-11558. In conjunction with the Chapter 11 filing, the Company expects to secure $250.0 million in DIP financing. Management said, "Subject to Court approval, the DIP financing, combined with the Company’s cash from operations, is expected to provide sufficient liquidity and allow the Company to continue operations, including club re-openings, without interruption during the Chapter 11 process." 24 Hour Fitness is continuing to reopen clubs in a phased approach. The Company expects to reopen the majority of its footprint by the end of June. CEO Tony Ueber said, “If it were not for COVID-19 and its devastating effects, we would not be filing for Chapter 11. We intend to use the process to strengthen the future of 24 Hour Fitness for our team and club members, as well as our stakeholders. We expect to have substantial financing with a path to restructuring our balance sheet and operations to ensure a resilient future.” Click here to request a list of future closings.
J. Crew Group filed a motion seeking to reject 67 store leases (click here for a list of future closures).The Debtors said they continue to have productive discussions with landlords regarding lease terms, and they will remove a store lease from the rejection list in the future if they reach an acceptable resolution with the affected landlord. Additionally, the Company reopened 171 stores on June 12, to bring the total number of reopened locations to 315, representing 64% of its total store fleet, following the temporary closure of all locations due to COVID-19.
In the Modell’s Sporting Goods case, the Debtors plan to restart GOB sales this week in locations outside of New York City. Liquidation sales commenced at 60 stores in Pennsylvania, New Jersey, Massachusetts, Delaware and Connecticut on Monday, and an additional 27 stores in the mid-Hudson Valley and Long Island are scheduled for this Thursday, June 18. The Company is still waiting for government restrictions to lift in New York City before GOB sales can resume there. The Debtors were forced to suspend inventory liquidations when government regulations forced most non-essential retailers to close due to the coronavirus pandemic. Click here for a list of closings.
In the Neiman Marcus Group case, reports state that the Debtors are considering closing or downsizing the flagship store at Hudson Yards in New York City. Possible closures are also being evaluated for stores in downtown Dallas, TX; St. Louis, MO; Ft. Lauderdale, FL; Natick, MA; and Westchester, NY. No decisions on store closings or downsizings have been finalized, and they would depend on management’s outlook on the stores and negotiations with landlords. Management stated, “Our restructuring plan is focused on alleviating our debt load, not mass store closures. Stores that have been open for more than a year prior to COVID-19 are four-wall EBITDA positive. Currently, we have 13 stores open and we intend to open seven more this week, and more in the coming weeks as state and local regulations allow, and as we feel it is safe to do so.”
Best Buy announced that as of June 15 more than 800 locations are allowing a limited number of shoppers into stores at one time, while continuing to offer curbside pickup and in-store consultations. Best Buy will limit the number of customers to 25% of the store’s capacity, with marked signs to ensure social distancing and other precautions. This effort allows Best Buy to bring back more than 9,000 of its previously furloughed employees. Employees must continue to wear protective gear, have mandatory health checks, and frequently sanitize the stores.
Meanwhile, Best Buy Canada announced an exclusive, long-term partnership with Canadian lender Fairstone Financial to provide in-store and online point-of-sale financing to Best Buy customers across Canada. Fairstone will assume management of Best Buy’s private label credit card portfolio on July 1. Click here for a list of openings and closings.
During fiscal 2019, H Mart generated an estimated $1.25 billion in sales; we expect top-line gains have risen considerably in the first half of fiscal 2020, driven by panic buying during the early days of COVID-19 and sustained increases of food-at-home purchases. Historically, H Mart was an East Coast operator, concentrated in New York, New Jersey, and Pennsylvania; however, over the last several years it has expanded rapidly on the West Coast and into several new markets including Georgia, Illinois, Michigan, and Texas. The Company currently operates 100 stores (83 domestic, 17 international), after adding 21 new stores over the last three years.
Cineplex received notice from Cineworld Group that it intends to terminate its previous purchase agreement. Looking forward, following the temporary closure of all its locations since mid-March, Cineplex plans to reopen six theaters in Alberta on June 26 and will reopen as many of its locations as it can on July 3, based on government guidelines. The Company also plans to reopen The Rec Room locations beginning this week in Winnipeg, Calgary, and Edmonton. Management did not provide any guidance regarding the adverse financial impact of the pandemic on 2020 operations due to ongoing uncertainty, but noted the Company “will be able to address any liquidity issues arising from the impact of COVID-19 as it moves forward in the coming weeks and months.”
Starbucks provided an update on its operations and long-term store development plans. After temporarily closing about half of its U.S. stores in mid-March, mainly those that did not have drive-thrus, the Company began reopening stores in the second week of May, reaching 95% opened as of June 10. Management indicated that the majority of the 5% of stores that remain closed are located in the New York City metro area. U.S. comps continue to be down significantly year-over-year, with a 63% drop in April followed by a 43% drop in May. However, comps have been improving sequentially week to week, and in the last week of May were down 32%. Management expects 3Q comps will be down 40% to 45%, followed by a 10% to 20% decline in 4Q, resulting in a full-year decline of 10% to 20%.
In light of the COVID-19 pandemic’s impact on customer behavior and increased demand for mobile and contactless ordering, Starbucks announced plans to accelerate a transformation of its store portfolio. The Company has already begun testing a smaller "Starbucks Pickup" store model designed for densely populated, urban markets and tailored for customers using mobile ordering and third party-delivery services. Management initially planned to roll out this new store model over a three to five-year timeframe but now expects to do so over the next 18 months through a portfolio optimization initiative. Up to 400 U.S. and 200 Canadian Company-operated stores will close or be repositioned, compared to about 100 closures that typically occur annually in the Americas due to lease expirations and other factors. Over time, the Company expects to open a greater number of Starbucks Pickup stores, and management’s long-term 3% to 4% annual unit growth target in the Americas is unchanged.
Sportsman’s Warehouse announced at an investor conference last week that the COVID-19 situation was a successful stress test of its omnichannel business, including using its stores to fulfill ship to home and BOPIS orders. The Company also continues to expand its relationships with local firearm retailers to fulfill online orders; it has about 400 third-party partners to complete the face-to-face purchase requirements of online orders and plans to expand that number to 500 within the year; this would put it within a 45-minute drive of all U.S. customers. The Company is reducing its new store openings in 2020 to eight to ten stores, with total planned capital expenditures of $25.0 million to $35.0 million, including for a new DC in the Midwest.
As of June 11, Dave & Buster’s had reopened 28 of its 137 locations, and by the end of this week will have 48 units open in 15 states under reduced hours and capacity limitations as dictated by locality. Each of the reopened stores has implemented extensive incremental cleaning and sanitation procedures, new seating and game configurations to promote social distancing, and a temporarily condensed food and beverage menu.
Walmart has partnered with Shopify to create an all-in-one e-commerce platform. This is the first time Walmart has partnered with a commerce platform to enable small to medium-sized businesses to sell through its online marketplace. It should be noted that Amazon has had this feature for years. The integration will allow approved Shopify sellers to list their items on Walmart.com, which gives Walmart customers access to a broader assortment. By the end of this year, 1,200 Shopify merchants are expected to be able to sell through the Walmart marketplace.
In other news, Walmart is reportedly replacing its traditional, in-person checkout lanes with self-checkout kiosks at a store in Fayetteville, AR. Amid the pandemic, the Company is trying to figure out how to more quickly move people through checkout.
Walmart’s Sam’s Club announced the nationwide launch of curbside pickup, bringing the service to all of its 597 U.S. clubs. The Company had been piloting curbside pickup at 16 club locations before the launch. With the pandemic sending more shoppers online, Sam’s Club expedited the rollout to all locations, where the service is free for Plus-level members and above. Click here for a list of openings and closings.
Town Sports International reopened nine clubs in Florida and plans to reopen up to 26 additional clubs over the coming weeks, in California, Connecticut, and Washington D.C., based on guidance from state and local authorities. The Company noted that the impact of temporary club closures has substantially reduced cash flow, and it faces significant debt maturities in the near term. The Company’s revolving credit facility is set to expire on August 15, and its Term Loan facility is due to mature on November 15. The upcoming maturities pose significant refinancing risk, as management stated it does not have adequate sources of cash to repay the amounts outstanding.
The Company is currently reviewing its options, including negotiating with existing lenders, attempting to raise additional capital, or filing for bankruptcy. The Company indicated that in the event it files for bankruptcy, it expects to raise up to $80.0 million in financing.
Lowe’s Canada announced it will construct a new distribution center in the greater Calgary market. The new 1.23 million square-foot facility is slated to open in the fall of 2021. The project was announced in conjunction with Highfield Investment Group, a Calgary-based investment firm that operates and manages assets in residential and commercial real estate developments. Lowe’s and Highfield are jointly investing more than C$120.0 million (US$88.45 million) in the facility. Lowe’s Canada, along with its subsidiary RONA, operates and services more than 470 corporate and independent affiliate dealer stores in a number of formats and banners, including Lowe’s, RONA, Reno-Depot, and Dick’s Lumber.
Marcus Corporation announced plans to start reopening theaters on Friday, June 19. The Company will start by reopening six theaters, including Marcus Ridge, Renaissance, BistroPlex and Valley Grand Cinemas in Wisconsin; Majestic Cinema of Omaha in Nebraska; and the Roswell Movie Tavern in Georgia. Theaters will initially be open only four days a week with limited hours. Upon reopening, every movie will cost $5; the Company will start charging standard pricing once new movies are released. Theaters will also be operating at limited capacity for proper social distancing. The Company plans to continue reopening its theaters in the coming weeks, preparing for summer blockbusters such as Chris Nolan’s Tenet, which is expected to be released on July 17. As of the announcement, the Company operated 1,110 screens across 91 locations in 17 states.
Earning Reports
GameStop’s 1Q20 global comps decreased 30%, or 17% excluding stores that were closed. However, liquidity remains adequate, with management estimating at least $575.0 million in liquidity at the end of 2Q20. As a result, the Company’s chances of making it to the critical 4Q period, when the next console launches from Sony and Microsoft are expected, are improving. Still, store rationalization is expected to continue, especially as the industry continues its shift towards online. Management noted that beginning in March, it began negotiating with landlords to abate rent at stores that were closed due to COVID-19, modify terms of its leases going forward, and terminate certain leases. Gross margin declined 270 bps, driven by the increased mix of hardware sales. SG&A was $386.5 million, down $67.2 million or 15%, which includes $18.5 million in incremental wages paid to hourly associates to help offset lost wages due to store closures, and approximately $3.0 million in incremental costs associated with safety materials and equipment. Adjusted operating loss was ($98.8 million), compared to adjusted operating income of $17.5 million in 1Q19.
GameStop has suspended FY20 guidance. However, it anticipates it will generate positive adjusted EBITDA for FY20.
The Company noted that May comps declined approximately 4%, as heightened demand for its product offerings was tempered by the expected decline in sales as a result of the final stage of a hardware console cycle and the shift of several key new software titles to later in the year.
GameStop first closed all 3,526 U.S. locations on March 22, with about 65% of these locations conducting limited curbside pickup offerings. During the final six-weeks of 1Q20, 90% of the global store fleet was closed to customer access, and only Australia remained fully open and accessible to customers; approximately 42% remained open for limited curbside pickup and 48% remained fully closed. At the end of May, the Company had 85% of its U.S. locations open for in-store or curbside pickup, and about 90% of its international locations open. Click here to request a copy of the 1Q Sales Report.
Red Robin Gourmet Burgers reported a 25.3% sales decline to $306.1 million in 1Q20, driven largely by a 20.8% drop in comparable restaurant sales. As of June 7, 35 of 452 Company-operated restaurants remain temporarily closed, but management has reopened 270 dining rooms, and its remaining locations continue to operate on an off-premise only model. The Company plans to continue reopening dining rooms and estimates it can reach nearly 100% by late July or early August, depending on local guidance. Weekly comparable restaurant sales are improving sequentially, but slowly, with comps at restaurants with open dining rooms down 26.7% in the week ended June 7, compared to a 39.7% system-wide decline.
Red Robin’s steep top-line decrease deleveraged operating costs, particularly labor and occupancy expenses. Click here to request a copy of the 1Q Sales Report.
Party City’s 1Q20 sales decreased 19.3% to $412.5 million. Retail sales were down 20.3%, principally due to the temporary closure of all 757 retail stores on March 18 through the end of the quarter of March 31. Brand comps through February 29 fell 0.9%, an improvement relative to 4Q19 due to strong New Year’s Eve and Super Bowl performance; however, 1Q20 brand comps declined 17.1%. Retail comps from April through June 7 were down approximately 70%. Global e-commerce retail sales represented 9.9% of total retail sales, up from 8.4% last year. North American e-commerce sales decreased 15.4%, or 6.9% when adjusted for curbside pickup (launched March 25) and delivery and BOPIS sales. Gross margin decreased 560 bps to 28.1%, primarily due to sales deleverage. Adjusted EBITDA was $11.9 million, falling 78.4% from $51.5 million during 1Q19. 1Q20 Adjusted EBITDA excludes $26.2 million in COVID-19 related expenses among other items. Click here to request a copy of the 1Q Sales Report.
As of June 5, curbside pickup and store delivery were expanded to 722 stores. The Company began to reopen stores on May 1, in accordance with state and local health ordinances, and as of June 12, has reopened more than 85% of its stores. Stores that have reopened are at about 80% of productivity compared to last year, with those opening more recently showing stronger results.
H&M’s 2Q20 sales, for the period March 1 to May 31, fell 50% to SEK28.66 billion (approximately US$3.07 billion). Online sales, which comprise roughly 30% of sales, increased 32% in local currencies. The overall sales decline reflects the impact of store closures due to COVID-19, culminating with about 80% of the Company’s total stores being closed in April. From the end of April, H&M gradually began reopening its stores, with approximately 82% of its total 5,058 currently open; 900 stores remain temporarily closed. The Company indicated that the sales recovery varies to a large extent between markets, depending on local restrictions. Sales for the first two weeks of June fell 30% in local currencies. H&M expects to file its full six-month report on June 26. Click here to request a copy of the 2Q Sales Report.
Signet Jewelers’ sales were down 40.5% to $852.1 million during 1Q21 (40.2% on a constant currency basis). Same-store sales declined 38.9% year-over-year, with brick-and-mortar comps down 44.7% reflecting the temporary store closures beginning in late March. Prior to the closure of its 3,172 stores in late March, 1Q comps were running in the positive low single digits, reflecting strong Valentine’s Day performance. E-commerce, which made up about 19% of total sales in the quarter, grew 6.7%, to $164.7 million and increased 18.2% excluding the impact of the shut-down of James Allen’s New York distribution center due to COVID-19. By region, 1Q comps in North America dropped 39%, with average transaction values down 6.5% and the number of transactions down 34.5%; international comps decreased 37.5%. Gross margin contracted 1,100 bps due to lower sales from the pandemic, which led to the deleveraging of fixed costs. SG&A expense declined significantly, driven by lower labor costs from employee furloughs and temporary pay reductions, lower advertising expenses, and overhead reductions, but increased 740 basis points as a percentage of sales. Excluding a preliminary asset impairment charge of $136.3 million and $12.7 million in restructuring charges, EBITDA loss was ($105.2 million) for the period. The 1Q21 results are preliminary, due to the long life, non-cash asset impairment review driven by the COVID-19 pandemic. In light of the uncertainty related to COVID-19, management is not providing FY21 guidance.
In May, Signet began a staggered reopening of its stores; there are currently more than 1,100 stores open, and the Company expects to have at least 75% open by the end of June. Management indicated that the performance of reopened stores has been encouraging, with sequential week-over-week sales performance improvements.
Yum! Brands provided an update on its operations and the status of its global restaurant network. Globally, 90% of the Company’s more than 50,000 restaurants are open (low-contact environment with drive-thru, curbside carryout, and contactless delivery), and by geographic region, 92% of stores in North America, 97% in Asia Pacific, and 78% in the rest of the world, which includes Africa, Europe, Latin America, the Middle East, Russia, and India. Global comp sales for 2Q through May were down 19%, consisting of a 26% decline at KFC, a 10% decline at Pizza Hut, and an 11% decline at Taco Bell. Results from regions outside the U.S. are more negative in part due to a higher amount of temporary restaurant closures.
In the U.S., comps have substantially recovered from the double-digit declines seen in March. In May 2020, KFC comps were up in the mid-teens, Pizza Hut comps were up in the low teens, and Taco Bell comps were slightly positive.
Christopher & Banks’ management noted that 1Q was off to a strong start, with February comps up 4.9%. However, due to the impact of COVID-19, total sales fell 51.8% to $40.1 million. E-commerce sales decreased 10% (and represented 41.8% of total sales, up from 22.7% last year) in the quarter, as consumers moved spending to essentials, but online sales recovered strongly in May and into June. Gross margin declined sharply from 30.8% in 1Q19 to 9.3% in the same period this year. This decrease was due primarily to deleverage of occupancy costs, despite the $2.0 million in rent savings related to negotiations in 2019, as well as merchandise margin declines related to inventory reserves due to the impact from COVID-19. As a result, the quarterly EBITDA loss widened significantly to $14.8 million.
The Company closed all 445 stores on March 19, and they remained shuttered for the balance of the quarter. It began reopening stores on May 1, and it currently has 90% of its store base operating. Management noted that sales volume is building in line with expectations and quarter-to-date digital sales are up 50%. Subsequent to quarter end, the Company secured a $10.0 million PPP loan under the SBA’s alternative size standard. It plans to use the funds for qualified expenses and therefore expects the loan to be forgiven under the usage terms.
The Children’s Place plans to close an additional 300 stores by the end of 2021, with 200 closures planned for this year and another 100 planned for 2021. As of May 2, the Company had 920 stores in the U.S. and Canada. Management indicated that it is targeting its mall-based, brick-and-mortar portfolio to represent less than 25% of its revenue entering FY22. The Company has closed 275 locations since it began its fleet optimization initiative in 2013.
For 1Q20, sales decreased 38.1% to $255.2 million, primarily due to temporary store closures related to COVID-19. Gross margin deleveraged 990 basis points to 26.8% due to increased penetration of its e-commerce business (e-commerce represented 53% of total sales, up from 29.2% last year) and higher fulfillment costs. Operating loss was ($173.1) million, compared to operating income of $5.0 million in the prior-year period. Operating margin deleveraged 1,630 basis points to (14.7%) of sales.
The Company indicated that 2Q20 through June 11 sales are up in the low double-digits, with online sales up 300% (31% of total sales), while 95% of its stores remaining closed. The Company expects to have the majority of its stores open by July 1. Click here to request a copy of the 1Q Sales Report.
Bloomin’ Brands provided an update on its operations and process of reopening dining rooms across its store network. As of June 7, over 760 Company-operated U.S. restaurants, or about 74% of the total, have reopened dining rooms with limited capacity in accordance with local guidance. Management expects to have substantially all of its U.S. restaurants reopened by the end of June. Combined U.S. comparable restaurant sales were down 28.3% in the week ended June 6. Restaurants with reopened dining rooms have, as expected, generated stronger comps compared to restaurants still operating on an off-premise only model, though both categories remain negative with 17.7% and 51.1% declines in the week ended June 6, respectively.
As of June 11, the Company had $128.0 million in cash on hand and $365.0 million in availability under its revolving credit facility. The Company previously bolstered its liquidity in early May through the issuance of $200.0 million in 5% Convertible Notes due 2025.
Lululemon Athletica’s 1Q sales decreased nearly 17% to $652.0 million due to the impact of COVID-19. Company-operated store sales (39.9% of total sales) fell 48.6% to $260.0 million. E-commerce sales (54% of total sales) jumped 67.8% to $352.0 million. Lululemon closed four Company-operated stores in the U.S. and two in Canada during the quarter, ending with 489 stores in operation. Gross margin decreased 260 basis points to 51.3% due to an increase in occupancy and depreciation costs as a result of lower revenue. Operating income was $32.8 million, or 5% of total sales, down from $128.8 million, or 16.5% of total sales, last year. Click here to request a copy of the 1Q Sales Report.
