February 21, 2019
Industry Spotlight:
Food Retail
A clear division has appeared in the competitive landscape for food retailers. While discount supermarkets like Aldi and Lidl are in the midst of noteworthy expansion campaigns, specialty and organic grocers like Sprouts and H-E-B’s Central Market will also increase store counts in response to a different set of consumer preferences. Wegmans has garnered a cult-like following, ramped up growth, and will be adding new stores in new markets. Despite bold expansion from these growing food retailers, regional grocers have developed unwavering loyalty in the markets they serve, and should not be underestimated as viable competitors.
Payless ShoeSource
On February 18, Payless ShoeSource, DIP filed a voluntary Chapter 11 petition in the U.S. Bankruptcy Court in the Eastern District of Missouri (click here to request case updates). The Honorable Kathy A. Surratt-States was assigned to the case, which has been designated as case number 19-40883. Certain Canadian subsidiaries will also be seeking protection pursuant to the Companies’ Creditors Arrangement Act (CCAA) in the Ontario Superior Court of Justice. The Company said it intends to use the proceedings to facilitate a wind-down of its approximately 2,500 store locations in North America (see below for Store Closings Map - click here to request a list of the closings) and its e-commerce operations. The Company expects that store closings will begin at the end of March and many stores will remain open through the end of May, as it conducts liquidation sales in the U.S. and Canada. Payless has also wound down its e-commerce operations. Retail operations outside of North America, including Company-owned stores in Latin America, are separate legal entities and are not included in the Chapter 11 or CCAA filings. Payless’ 420 stores across 20 countries in Latin America, its stores in the U.S. Virgin Islands, Guam and Saipan, and its 370 international-franchised stores in 16 countries across the Middle East, India, Indonesia, Indochina, Philippines and Africa will continue operating business as usual in every respect. Payless is seeking customary initial relief from the U.S. Bankruptcy Court and Canadian Court, including authorization to support its operations during the process and certain other customary relief in these circumstances.
Carrols Restaurant Group
Yesterday, Carrols Restaurant Group, the largest Burger King franchisee in the U.S., announced that it will acquire 166 Burger King and 55 Popeyes restaurants from Cambridge Franchise Holdings, LLC in 10 Southeastern and Southern states. Cambridge will receive approximately 7.36 million shares of Carrols stock, and at closing will own approximately 16.6% of Carrols’ outstanding shares. Cambridge will also receive shares of 9% PIK Series C Convertible Preferred Stock that will be convertible into approximately 7.45 million shares of Carrols stock at $13.50 per share (a 44% premium to the $9.35 closing share price on February 19). As part of the transaction, Cambridge will have the right to designate up to two director nominees, and Matt Perelman and Alex Sloane, managing directors of Garnett Station Partners, which controls Cambridge, will join Carrols board upon completion of the merger. Carrols also announced select preliminary financial results for the fourth quarter and year ended December 30, 2018. Fourth quarter restaurant sales increased 8.4% to $307.7 million, driven by comp growth of 2.7%. Fiscal 2018 restaurant sales rose 8.3% to $1.18 billion, and comps increased 3.8%. Fourth quarter adjusted EBITDA was $24.3 million, compared to $25.8 million last year, and for fiscal 2018 was $102.3 million, compared to $91.4 million in the prior year. During fiscal 2018, the Company acquired 44 restaurants, opened eight and closed 10, bringing its total store count to 849 Burger King restaurants.
Whole Foods
According to recently published reports, Amazon’s Whole Foods is raising prices on hundreds of products and blaming pressure from consumer-product makers to cover rising costs for packaging, ingredients and transportation. The report cited an email the Company sent in December, listing 550 items that would see increases, ranging from cookies and crackers to olives. Prices also rose this month on an additional 50 items, as 700 contracts to sell certain goods at low prices expired. While acknowledging the price increases, a Whole Foods statement released to the press noted, “Like all grocers, Whole Foods Market has experienced increased costs from suppliers due to materials, labor and transportation, and we’ve absorbed much of the inflation. Many prices have also decreased, and we continue to expand the number of promotions we offer to give our customers better value. We remain committed to continuing to lower prices with Amazon as we deliver on our mission to make high-quality, natural and organic food more affordable and accessible.” In addition to the price increases, Whole Foods last month announced it was pulling back on its cheaper Whole Foods 365 store format, claiming prices at the regular Whole Foods stores are more affordable now. The Company also introduced exclusive discounts for Amazon Prime members in mid-2018, offering them an extra 10% off all sale items as well as rotating weekly discounts on a selection of products.
Sears Holdings Corporation
In a filing with the SEC, Sears Holdings Corporation, DIP reported that Edward S. Lampert, board chairman, and Kunal S. Kamlani, a director, each provided notification of their respective decisions to step down from the board. Their resignations relate to the completion of the Going Concern Transaction whereby ELS will acquire 425 stores, and are not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. Mr. Lampert previously stepped down as CEO when Sears filed for bankruptcy last year. He remained chairman, and Mr. Kamlani is president of ESL Investments, Inc. Prior to news that Mr. Lampert will be stepping down, he addressed his plans for the “new” Sears (Transform Holdco LLC). Mr. Lampert stepped down from Sears Holdings and is chairman of Transform Holdco LLC. He will hire a new CEO. He intends to: (i) sell or sublease some of the 425 remaining stores, (ii) allocate more retail space to tools and appliances, while deemphasizing apparel, and (iii) open more smaller stores. He also said he hopes to win back suppliers, noting, "We have a clean balance sheet; we hope suppliers take a more constructive approach." The restructured company will include 223 Sears stores and 202 Kmart locations, as well as the Kenmore and DieHard brands. Sears sold its Craftsman brand to Stanley Black & Decker in 2017, but it retains a license to sell products under the name. Meanwhile, the Debtor filed a motion to set April 10 as the deadline to file proofs of claim, including 503(b)(9) claims. Unless an objection is filed, there will not be a hearing to consider the motion, and the Court may enter the proposed order on February 21.
Lewis Drug
Lewis Drug purchased the pharmacy assets, including prescription files and records, from six Shopko stores. The stores include three in South Dakota, two in Minnesota and one in Iowa. Lewis said it already operates in four of these cities, with plans to open a new Aberdeen, SD location, which will serve a community where Shopko ceased pharmacy operations in January and filed Chapter 11 Bankruptcy on January 16. Once its new locations open, Lewis Drug will operate 58 pharmacies in South Dakota, Minnesota and Iowa.
Walmart
According to published reports, the Competition and Markets Authority (CMA) has said that it may block Sainsbury’s $9.50 billion takeover of Walmart’s Asda chain, as it believes that such a deal would result in higher prices and fewer choices. The CMA said that it could either prevent the deal or “force the sale of a large number of stores or even one of the brand names.” If approved, the deal would create a Company with annual revenue of about $66.00 billion, more than 2,800 stores and a grocery market share of 31.2%.
Amazon
On February 14, Amazon announced that it will end plans to build a headquarters in New York due to opposition from New York politicians on tax breaks and grants offered. In the wake of the announcement, Amazon also said that when it finishes building its Seattle campus, which includes 14 million square feet consisting of both existing buildings and some under construction, it will have completed its expansion in the city. According to published reports, Amazon has secured central London retail space for checkout-free Amazon Go stores, in what would be the Company’s first expansion of the concept outside the U.S. The reports did not say how many sites had been secured for the stores. In the U.K. the concept could compete with chains such as Pret-A-Manger, Eat, and Marks & Spencer, as well as the convenience stores of Tesco and Sainsbury’s. Amazon currently sells food in Britain through its Amazon Fresh, Amazon Pantry and Amazon Prime Now services. Austria’s antitrust agency says it has initiated an investigation into Amazon over complaints of unfair trade practices on its “marketplace” platform. The Federal Competition Authority, or BWB, said Thursday it had received several complaints from Austrian retailers through the country’s trade association, alleging that “Amazon discriminates against other retailers and thereby tries to inordinately favor its own products on the Amazon marketplace.” Among other things, it’s investigating allegations of the abrupt termination of seller accounts, and unjustified loss of some sellers’ product rankings. The investigation comes amid ongoing probes by German antitrust authorities and the European Commission, and the BWB says it has been in discussions with both. Amazon said it could not comment on ongoing proceedings but pledged to “cooperate fully” with Austrian authorities. In other news, Amazon is partnering with Western Union to introduce PayCode, a service that allows consumers to make purchases using local cash currency, in Chile, Colombia, Hong Kong, Indonesia, Kenya, Malaysia, Peru, Philippines, Taiwan and Thailand. Amazon recently led a $700.0 million round of funding in Rivian Automotive LLC, a Michigan-based electric vehicle startup. Rivian plans to launch an electric pickup and electric SUV in the U.S. in 2020. The news comes a few days after reports surfaced that Amazon and General Motors were in talks to invest in Rivian in a deal that would value the Company at between $1.00 billion – $2.00 billion. Amazon already has invested in self-driving car startup Aurora Innovation Inc., in a $530.0 million funding round announced earlier this month. It has also been increasing its logistics footprint by building warehouses around the world and partnering with Mercedes as well as cargo airlines to help with delivery. According to published reports, Amazon’s Chinese joint venture is in talks about a merger with local e-commerce firm Kaola, which sells imported products in China. Kaola, owned by NetEase Inc., sells apparel, household appliances and other products, and is the biggest among Chinese shopping sites that focus on imported goods. It buys goods directly from overseas manufacturers; last year it imported more than 5,000 brands from 80 countries. Operating in China has come under increased pressure amid trade tensions between Beijing and Washington. Philadelphia officials say Amazon has warned that a proposed ban on cashless stores would impact plans to open a brick-andmortar location in the city. The City Council approved a bill last week that would prohibit most stores from refusing to take cash as payment. Proponents argue that cashless stores discriminate against low-income residents, who don’t have credit or debit cards.
Pathmark Supermarkets
Last week, Allegiance Retail Services LLC, a retailer owned co-op headquartered in Iselin, NJ, announced the return of Pathmark Supermarkets. The first store under the resurrected banner is a 49,000 square-foot Pathmark under construction in Brooklyn, NY, with the store expected to open in late March or early April of this year. The owner and operator of the store is PSK Supermarkets. This storefront had been a Pathmark until the A&P bankruptcy in 2015. It was from this bankruptcy proceeding that Allegiance Retail Services LLC purchased the intellectual property of the Pathmark name and associated marks to increase the number of banners available to co-op members and, more importantly, to develop a format to target a specific and underserved consumer segment. Allegiance has 32 members operating 120 retail supermarkets in New York, New Jersey, and Pennsylvania. Allegiance says it will assess the response to this first unit before announcing any additional new stores or retrofitting existing units.
CVS Health
CVS Health reported fourth quarter revenue growth of 12.1% to $54.25 billion, driven by increased pharmacy network claims, increased prescription volume and the acquisition of Aetna, which closed November 28, 2018. The increase was partially offset by continued price compression in the Pharmacy Services segment and reimbursement pressure in the Retail/LTC segment, as well as increased generic dispensing. CVS Health reported a net loss of $419.0 million, compared with net income of $3.29 billion last, impacted by a goodwill impairment charge of about $2.20 billion related to its Long-Term Care business and a higher tax rate, as most of the goodwill impairment charge was not tax deductible. The Company blamed weakness in its long-term healthcare business, which includes the Omnicare unit it acquired for about $10.00 billion in 2015, for its disappointing fiscal 2019 EPS forecast of $6.68 – $6.88, down about 3% – 6% on a year-over-year basis.
In other news, CVS Health’s retail division has begun piloting HealthHub, a new format that leverages its recent combination with Aetna, at three locations in Houston, TX. The HealthHub format offers a broader range of health care services, new product categories, digital tools and on-demand health kiosks, advice and personalized care. With the new format, over 20% of the store is now dedicated to health services, including counseling for certain chronic conditions, medical equipment and supplies. It is focused on nutritional health with counseling by an in-store licensed dietitian, areas set aside for health classes and seminars, and a Care Concierge that helps with customer engagement.
Walmart
Walmart reported fourth quarter revenue growth of 1.9% to $138.79 billion. Comps (excluding fuel) increased 4.2% in the U.S. and 3.3% at Sam’s Club. E-commerce contributed about 180 basis point to U.S. comps, benefiting from the expansion of grocery pickup and delivery and a broader assortment on Walmart.com. While Sam’s Club’s e-commerce sales increased 21%, sales for the quarter fell 3.7%, reflecting the closure of 63 warehouses in early 2018. E-commerce contributed about 90 basis point to Sam’s Club’s comps. Sales at Walmart International were $32.3 billion, a decline of 2.3%. Excluding currency exchange, sales were $34.00 billion, an increase of 2.7%. Operating income was $6.1 million, compared to $4.5 million last year. For fiscal 2019, revenue increased 2.9% to $495.76 billion. Walmart U.S. comps increased 3.6%. As of the end of fiscal 2019, grocery pickup was available in more than 2,100 stores and delivery from nearly 800 locations. That is expected to increase to 3,100 and 1,600, respectively, by the end of fiscal 2020, but overall net U.S. count fell by five units. Walmart continues to reposition its International store base, where it closed a net 367 stores last year. For fiscal 2020, the Company is planning on opening 10 or fewer stores in the U.S., but anticipates growth overseas of about 300, with most of that in China and its Walmex subsidiary. Capital expenditures should be in the $11.00 billion range. Walmart CFO Brett Briggs commented that the macroeconomic outlook still looks good, with low unemployment and stronger wages. Looking ahead at fiscal 2020, the Company expects sales growth of about 3%, U.S. comp growth of 2.5% – 3%, Sam’s Club comp growth of 1%, and U.S. e-commerce sales growth of 35%. Operating income is expected to decline by a low single-digit percentage range, including Flipkart.
REI
On February 12, Recreational Equipment, Inc. (REI) announced that CEO Jerry Stritzke resigned for failing to disclose a relationship with the head of another organization in the outdoor industry. Mr. Stritzke will leave his position March 15, when COO Eric Artz will become interim CEO. The Company said the resignation occurred following an outside investigation into “a personal and consensual relationship.” It was also noted that the working relationship between REI and the outside organization, which was not identified, did not involve financial misconduct. REI Chairman Steve Hooper said that since Mr. Stritzke became CEO in 2013, “He and a strong team have consistently delivered outstanding results.” Mr. Stritzke said in a letter to employees that he was sorry he didn’t disclose the relationship. Under Mr. Stritzke’s leadership, sales grew from just over $2.00 billion in 2013 to over $2.60 billion in 2017, as the Company expanded from 132 to 153 stores. The Company is a strong operator, with an EBITDA margin of 11%, almost $620.0 million in liquidity, and a strong balance sheet as of the end of 2017. Fiscal 2018 results are not available yet.
Ace Hardware
Ace Hardware’s fourth quarter sales increased 5.7% to $1.39 billion, with wholesale revenue up 4.5% to $1.28 billion and retail revenue up 21.6% to $19.3 million. Retail revenue increased as a result of new retail stores added over the past year as well as a 1.3% comparable store sales increase. The comp increase was attributable to a 2.3% increase in average ticket, partially offset by a 1% decrease in same-store transactions. Ace Retail had 123 stores at the end of the year, compared to 108 in the prior-year period. Wholesale gross margin was 11.5%, up from 11.1%, and retail gross margin was 41.1%. Overall, operating income rose 23.5% to $20.5 million. CEO John Venhuizen commented, “Strong new store growth, increased same-store sales, and a 43% increase in acehardware.com revenues helped us realize a healthy 5.7% increase in revenues during the fourth quarter. The 6.1% full year growth fueled our $142.0 million dividend distribution to shareholders. While still meaningful, this is a reduction from last year driven by our expanded assortment, higher inventory and lower RSC productivity which drove expenses up and profit down for the year.”
American Eagle Outfitters
American Eagle Outfitters announced plans to expand its American Eagle and Aerie brands throughout Europe with a multi-year license agreement with AEO EU, a partnership of European brand builders led by Sunil Shah. The first American Eagle stores are expected to open in Ireland this summer. An e-commerce site serving the European Union is expected to follow the first store openings. Then over the next three years, the brands will open stores across Germany, Switzerland, Austria, the Czech Republic, the U.K. and the Netherlands. American Eagle operates more than 1,000 stores in the U.S., Canada, Mexico, China and Hong Kong, and ships to 81 countries worldwide through its websites.
Charlotte Russe
On February 19, management of Charlotte Russe, DIP provided the following update on proceedings in the Chapter 11 case, stating, “The Company remains in active discussions with prospective bidders to effectuate a going-concern sale of the business to avoid the liquidation of substantially all of its assets. The Company expects that competing bids will be due by March 3 and an auction will be scheduled for March 5. If a going-concern transaction is not selected as the highest or otherwise best bid following the conclusion of the auction, the Company will facilitate an orderly wind-down of all of its store locations and operations beginning on or about March 7. Charlotte Russe and Peek stores and online platforms are currently open and continuing to serve customers. While the Company did recently announce an orderly wind-down of a group of approximately 94 of its stores, no additional store closures are being announced at this time.” On February 15, the U.S. Trustee appointed the Committee of Unsecured Creditors, which include Valueline Group Co Ltd., Ven Bridge Ltd., Shantex Group LLC, Global Capital Fashion Inc., Jainson’s International, Inc., Simon Property Group, L.P., and Brookfield Property REIT Inc.
FAO Schwarz
FAO Schwarz announced licensing agreements with Britannica Home Fashions, Galerie USA, and Uncas International to expand its product assortment and its footprint. Britannica will allow the Company to develop a home collection of various bedding, bath, holiday décor, and more. Galerie USA will create chocolates, gift sets and bespoke candy offerings to celebrate various holidays. Uncas International will launch a line of FAO Schwarz accessories like jewelry, hair products and key chains. FAO Schwarz returned to New York City last year, and plans to open its first European flagship in November in London. In addition, FAO is partnered with Chinese toy retailer Kidsland, with plans for flagship locations in Beijing and Shanghai, plus 30 smaller FAO Schwarz specialty stores and shop-in-shops in 200 department stores across China over the next five years.
Hobby Lobby
Hobby Lobby announced it is exiting the home furnishing business, with the closure of eight stores operating under its furniture brand Hemispheres. Six of the stores are located in Texas (Allen, Arlington, Fort Worth, Frisco, Cedar Park and San Antonio) and two are located in Oklahoma (Oklahoma City and Moore). Hemispheres was started in 2001 by David Green, founder of Hobby Lobby. The Company said it would operate the stores normally for the next several months to sell inventory it has already purchased from suppliers, but it is no longer issuing new purchasing orders from furniture suppliers. The stores are expected to close by year end. Hemispheres’ President Malora Spurlock said, “The home furnishing business is very competitive. We ultimately determined long-term profitability in this retail niche was going to be difficult to sustain.”
Thornton's LLC
Thorntons LLC was acquired by a joint venture between ArcLight Capital Partners and BP on February 11. The deal puts Simon Richards, former head of regional development of BP Products North America, as the new CEO of Thorntons. All existing convenience stores will continue to operate under the Thorntons name. Terms of the transaction were not disclosed. Thorntons operates 191 c-stores in Florida, Illinois, Indiana, Kentucky, Ohio and Tennessee.
Sleep Number
Sleep Number reported fourth quarter sales increased 13.4% to $411.8 million, and retail comps were up 9%. Adjusted EBITDA rose 38.9% to $54.6 million. During 2018, the Company opened 53 stores and closed 30 underperforming stores, ending with 579 stores in operation. In addition, Sleep Number announced that on February 11 it amended its revolving credit facility to increase the aggregate availability from $300.0 million to $450.0 million. The facility matures in February 2024.
Store Activity
Sprouts Farmers Market
Yesterday, Sprouts Farmers Market opened a 30,000 square-foot store in Naples, FL, the Company’s eighth in the state. According to our Store Concentration Map, there are 12 competing retail food stores operating within five miles from the new store. Click here for a list of the Company’s planned new locations.
Albertsons Market
A former Albertsons Market in Santa Fe, NM has been converted to a Market Street, an upscale banner of Albertson’s United division. It is the first Market Street in New Mexico. According to the Company, the concept is “the future of grocery” and combines everyday grocery needs with gourmet and specialty items, whole-health products and freshly prepared foods. The Company operates 16 Market Street locations in Texas.
Big Y Foods
Big Y Foods is looking to transfer ownership of its store in Adams, MA. Citing the small footprint of the store at approximately 16,000 square feet, compared to its average store size of 55,000, Big Y has determined that this store is incompatible with its current business model, and it can no longer operate this store effectively. With the pending transition of ownership, Big Y stated it is forced to lay off approximately 90 employees at the store.
Winco Foods
On March 3, WinCo Foods will open two new 84,000 square-foot stores in Billings, and Helena, MT. The new stores will be the Company’s first in Montana and will bring its total store count to 126 in 10 states.
Ahold Delhaize
Ahold Delhaize’s Giant Food Stores has opened a new Beer & Wine Eatery at its Bradford Plaza location in West Chester, PA. The new eatery seats 30 and offers hundreds of beers and an extensive wine collection.
Meijer
Meijer announced it will open a new smaller-footprint store in Beaumont, MI, called Woodward Corner Market. The 40,000 square-foot store will offer about 20,000 items, including groceries and consumer merchandise, with a focus on “local value and fresh food.” The store is expected to open next year and will be the Company’s second neighborhood style market.
Conn's
Conn’s is expanding into the New Orleans, LA market, with the opening of three new Conn’s HomePlus stores this year. The first store opened on February 15 in the Manhattan Crossing shopping center in Harvey, LA and brought the Company’s store count to 124 across 14 states. Conn’s will open stores in Slidell and Metairie in late June. In addition to the three new stores in New Orleans, the Company opened a second location in Baton Rouge on February 16. The new stores average 45,000 square feet.
Wayfair
On February 15, Wayfair opened its first permanent location, an outlet center in Florence, KY, near its distribution center in Erlanger, KY. The 20,000 square-foot store will sell items that have been returned but are in good condition, as well as other discontinued goods. Wayfair first opened two pop-up shops during the 2018 holiday season, in Natick, MA and Paramus, NJ.
This information contained in this newsletter is compiled from sources which Market Service Inc. does not control and unless indicated is not verified. Its contents are not to be divulged. Market Service Inc., its principals and writers do not guarantee the accuracy, completeness or timeliness of the information provided nor do they assume responsibility for failure to report any matter omitted or withheld because of their negligence.
