April 3, 2018
Toys "R" Us
Toys “R” Us published a list of bidders who are qualified to participate in an auction of 147 of the Company’s U.S. stores. The Company modified downward the original number of stores subject to bids, to 147 units from 150 originally. Approximately 10 Toys “R” Us stores were scheduled to be auctioned off last Thursday, and the locations already have 58 bidders from companies that range from retailers to real estate investment firms. According to sources, Target and Aldi are both looking at one location each in Florida, while Big Lots is bidding on five stores in Fresno, CA; Exton, PA; Durham, NC; Woodbridge, VA; and Indianapolis, IN. Raymour and Flanigan plans to bid on three stores in New Jersey (2) and New York (1). Golf & Tennis Pro Shop will also bid on the Indianapolis store, as well as a location in Vernon Hills, IL. In addition, more than 10 privately owned real estate firms and equity groups are eyeing the Toys “R” Us real estate.
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Piggly Wiggly
On March 28, three Piggly Wiggly store owners, in conjunction with and supported by C&S Wholesale Grocers, announced they have entered into a definitive agreement with Southeastern Grocers, LLC, DIP to acquire three BI-LO stores in South Carolina and three Harveys Supermarkets in Georgia for $450,000. The transactions are expected to close by the end of this month. Upon completion, the acquired stores will be rebranded under the Piggly Wiggly banner. As reported, Southeastern Grocers, DIP filed pre-packaged Chapter 11 petitions on March 27. With the additional stores converting to the Piggly Wiggly banner, C&S Wholesale Grocers will service 50 Piggly Wiggly locations in South Carolina and Southeast Georgia. Piggly Wiggly stores are typically 35,000 to 50,000 square feet, compared to BI-LO at 25,000 to 63,000 square feet and Harveys at 18,000 to 35,000 square feet.
Meanwhile, Mitchell Grocery Corp. has agreed to acquire three Winn-Dixie stores in Alabama for $300,000. Mitchell Grocery is purchasing the stores on behalf of two of its current customers, Johnson’s Giant Foods and The D’Alessandro Organization LLC. These nine store leases are part of the 33 units Southeastern Grocers previously disclosed it was selling for aggregate proceeds of $13.4 million, plus additional cash consideration for certain inventory. Southeastern Grocers, DIP has also entered agreements to sell eight Louisiana Winn-Dixie stores to Brookshire Grocery for $8.5 million, three Winn-Dixie stores in Alabama (2) and Florida (1) to Associated Wholesale Grocers for $505,000, and two Winn-Dixie stores in Louisiana and Mississippi to Shoppers Value for $236,173. Prior to filing its Chapter 11 petition, Southeastern Grocers sold six Winn-Dixie stores in Alabama to Shoppers Value Foods for approximately $1.4 million. Various other parties agreed to acquire 11 other Winn-Dixie stores for aggregate proceeds of $3.4 million. The Court approved the Debtor’s motion for sale procedures related to these and 85 other underperforming stores.
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Whole Foods
According to multiple reports, Whole Foods may offer 10% discounts for Amazon Prime subscribers. Trial-stage marketing materials were seen in a store in Austin, TX last Wednesday but removed a day later; one banner indicated “blue signs mean special deals” for Prime members, while another offered an extra 10% off “hundreds of sale prices.” Whole Foods denied it was testing the offers at any stores. During Amazon’s FYE earnings call in February, Amazon CFO Brian Olsavsky commented, “the technical work continues to make Prime the Whole Foods customer rewards program, and we expect to have more on that later this year.” If substantiated, this move would be similar to Target, which offers customers a 5% discount for using the Target Red credit card.
Sprouts Farmers Market
Sprouts Farmers Market announced the closing of an amended and restated credit agreement that increases the size of the revolver to $700.0 million from $450.0 million, extends its maturity through March 2023 from April 2020, and adds financial flexibility.
Grocery Outlet
Last week, Grocery Outlet opened its eighth Orange County store in Huntington Beach, CA. The store replaces a vacant Fresh & Easy, which shuttered after filing for bankruptcy in 2015. Grocery Outlet has 28 stores in Southern California and said it plans to open 25 to 35 more stores this year nationwide.
Walgreens
Walgreens reported results for its second quarter ended February 28, including U.S. retail sales growth of 12.2%. Comparable retail sales increased 2.4%, consisting of a 5.1% increase in pharmacy and a 2.7% decline in the front-end. Prescriptions filled in comparable stores increased 4%. Since the end of the second quarter, the Company completed the acquisition of 1,932 Rite Aid stores for $4.16 billion. The transition of three distribution centers and related inventory is expected to begin in fiscal 2019. Rite Aid continues to expect to complete integration of the acquired stores and related assets by the end of fiscal 2020, at a cost of approximately $750.0 million. The Company also continues to expect to close approximately 600 stores over an 18-month period, resulting in pre-tax charges of $450.0 million.
During an investor call discussing its results, COO Alex Gourlay provided color on a new format it will unveil in pilot stores over the coming months that will combine retail, healthcare, and other services currently offered separately in some stores. Mr. Gourlay stated, “In the new store format we’ll bring together such areas as optical, hearing care and lab along with further testing of value loyalty and supply chain initiatives.” There are no plans yet for a major nationwide rollout.
Walgreens is offering FedEx services in nearly all of its stores and “enhanced beauty departments” in 2,900 stores; it has spent $500.0 million on building, testing and implementing new IT systems. In the next three years, the Company will spend another $500.0 million on systems.
Rite Aid
In connection with the announcement that Walgreens completed the acquisition of all 1,932 stores it agreed to acquire, Rite Aid said its board terminated the tax benefits preservation plan it adopted on January 3. As a result, Rite Aid protected roughly $2.20 billion of the Company’s net operating losses. The plan was originally scheduled to expire on January 3, 2019. Proceeds from the sale of the stores are being used to reduce debt.
To that end, in March the Company launched a tender offer to repay $900.0 million of its 9.25% Notes due 2020, 6.75% Notes due 2021 and 6.125% Notes due 2023, on a pro rata basis. The offer expired on March 29, and noteholders had tendered just $48.7 million in notes, including $3.45 million of 2020 Notes, representing 0.38% of the outstanding principal; $3.5 million of 2021 Notes, or 0.43% of the outstanding principal; and $41.75 million of 2023 Notes, or 2.32% of the outstanding principal. The Company subsequently announced it planned to redeem all of its remaining 9.25% Notes due 2020 (approximately $899.0 million) at a price equal to 100% of the principal amount.
Separately, Rite Aid announced that the waiting period under Hart-Scott-Rodino in connection with its merger with Albertsons Companies expired on March 28, which keeps the deal on track for approval later this year. The next step is garnering approval from Rite Aid shareholders; a Company spokesperson commented, “We will be setting a date and time for a special shareholder meeting in the coming months.”
E-Commerce News
Target
Target continues the expansion of its delivery footprint with Shipt, adding five metropolitan areas in the Northwest. On April 17, the Eugene and Portland, OR metro areas will begin receiving service, followed on April 19 by Seattle and Spokane, WA, as well as Boise, ID. This latest addition brings the total to 66 metropolitan areas that Target can now access since it acquired Shipt in December 2017.
Ahold Delhaize
Ahold Delhaize’s Food Lion chain expanded its partnership with Instacart to include the greater Fayetteville, NC area. The Company recently expanded the service to Raleigh, Charlotte, and Greensboro, NC as well as Richmond and Norfolk, VA.
Weis Markets
Weis Markets announced the addition of its Weis 2 Go online ordering with curbside pickup to 25 stores by April 26. With the added stores, the option will be available in 81 Weis Markets.
Fresh Thyme Farmers Market
Fresh Thyme Farmers Market has partnered with Instacart for its online shopping and delivery service called Fresh Thyme Delivers. The service is available in 55 of Fresh Thyme’s 70 stores throughout the Midwest.
Costco
According to a published report in Canada, Costco is looking to offer online grocery fulfillment in Canada following its successful rollout in the U.S. last year. A spokesperson for Costco Canada declined to comment and indicated that “no timelines have been set.” Costco’s U.S. division introduced online shopping for non-perishable items last year and has since expanded its partnership with Instacart to offer delivery from 441 of its 519 warehouse clubs. In public comments last week, Costco CEO Richard Galanti said Instacart will be available in most of the Company’s remaining locations by the end of 2018. He also said Costco’s e-commerce sales in the U.S., Canada, U.K., Mexico, Korea and Taiwan reached US$1.50 billion in the second quarter, a 29% increase from the prior-year period, and that a Costco member using ecommerce increases their annual spend by up to 3% a year, despite making between two and four fewer trips to their brick-and-mortar location. Instacart also partnered with Canada’s Loblaw Companies last year to offer home delivery from its Loblaws, Real Canadian Superstore and T&T supermarket banners.
Walmart
Stories surfaced late Thursday night that Walmart and Humana were in discussions about extending their existing partnership or even a possible acquisition. The speculation seems logical, especially following the announced mergers of CVS Health and Aetna as well as Express Scripts and Cigna. If these two deals are approved by regulators, it could put pressure on the entire health care supply chain. Walmart is no doubt looking to stay in the game, as well as get a foot up on Amazon, which has been widely speculated to be on the verge of making a deeper push into health care. In late January of this year, Amazon, JP Morgan and Warren Buffett’s Berkshire Hathaway announced intentions to form an organization to deliver better benefits to its employees at first and possibly look to scale up after that.
While the combined entities would have revenues of just over $550.00 billion and EBITDA estimated at about $36.00 billion, it is the strategic combination that is more important. Humana is the second largest provider of Medicare Advantage plans and has its own pharmacy benefit management company. The two companies already partner on Medicare Part D plans. Walmart has 4,700 pharmacies and about 200 clinics and, similar to the CVS/Aetna deal, a deeper partnership with Humana could allow it to turn its stores into healthcare hubs by opening more in-store health care clinics. Bringing more customers/patients through its doors could also help stimulate store sales, including pharmacy.
Humana has been purchasing doctor practices that focus on the treatment of the elderly and currently serve over nine million Medicare related members. Combined with Walmart’s 4,700 store locations plus almost 600 Sam’s Clubs, this could create a powerful healthcare distribution network.
With healthcare reform stalled in Washington, we are seeing perhaps the first salvos fired in the private sector’s attempts to improve the system. Where these efforts will go and the effects they could have remain to be seen, as the nation attempts to better manage health care costs, which comprise about 18% of its GDP.
In what appears to be a test of the waters, Walmart is in talks to acquire prescription drug specialist PillPack, which packages prescription drugs in easy-to-use pouches to make taking multiple medications simpler for users. While the deal is not finalized, if the parties agree, it would close in the next few months.
In other news, following disappointing fourth quarter e-commerce sales (digital sales rose just 23%, less than half of the increases seen in previous quarters), Walmart executives discussed updates to the business. At a presentation last week, EVP of Central Operations Mark Ibbotson indicated the Company is rolling out its Pickup Towers for online orders to as many as 650 stores by year end. He noted that, where possible, the kiosks will be positioned near checkout, and that initial tests have had positive results. Walmart is also tweaking the self-serve, refrigerated online grocery pickup kiosk it started testing in Oklahoma last year. The concept will come to a store in Texas by the end of the year.
Additionally, the Company is expanding online grocery pickup to another 1,000 stores to reach more than 2,000 by the end of the year, and concurrently plans to roll out same-day delivery to 100 metropolitan areas. President and CEO of walmart.com Marc Lore said Walmart and Jet.com would continue to operate as separate business units, and the Company plans to continue to acquire digital brands while also creating its own, e.g., the recently launched Allswell mattress and bedding brand.
Lastly, Walmart recently filed a number of patents related to tracking inventory. Patents include devices that make shopping carts smart and communicate with mobile devices, tracks users through wearables, and senses inventory levels. Walmart has also filed a patent for drones that would assist customers shopping in-stores and two others for autonomous technology. These patents are part of a broader effort by Walmart to take advantage of technology in its stores, such as the shelf-scanning robots that it is testing in 50 stores as way of confirming inventory levels. It remains to be seen which ideas will eventually come to fruition.
Bon-Ton Stores
On March 31, Bon-Ton Stores, DIP announced that it is in active discussions with interested parties regarding a going-concern bid to acquire the Company in a Bankruptcy Court-supervised sale process. As a result of the discussions, the Company sought and received approval from the lenders to extend the deadline for submitting qualified bids from April 2, 2018, to April 4, 2018. Bon-Ton will evaluate all qualified bids with the assistance of its advisors to determine which bids maximize value for the Company and all of its stakeholders. Bon-Ton stated, “There can be no assurances that discussions with these interested parties will lead to a definitive agreement being reached on any transaction.” The Company expects to conduct an auction under Section 363 of the Bankruptcy Code on April 9, 2018, after which a Court hearing will take place to approve a potential sale on April 13, 2018.
Meanwhile, on April 2 the Creditors Committee filed an adversary proceeding seeking a declaratory judgment against Wells Fargo, N.A. for “defects in its liens” securing $350.0 million in second lien bonds (issued in 2013). Wells Fargo, the original indenture trustee for the bonds, perfected the bondholders’ liens on Bon-Ton’s assets. However, Wells Fargo failed to file documents to continue the liens until January 2018, about a month prior to Bon-Ton’s bankruptcy filing. The complaint states that the filings occurred within the 90-day preference period and, therefore, the bondholders’ claim should be disallowed as a voidable preference.
Hudson Bay Company
Hudson’s Bay Company’s fourth quarter sales increased 2.1% to C$4.70 billion due to the extra week of sales and the opening of 29 new stores during the year (which contributed C$267.0 million in sales), as well as strong performance from Hudson's Bay and Saks Fifth Avenue. Hudson's Bay said it generated double digit online sales growth while largely maintaining store traffic and sales, and it expects this trend to continue as Hudson's Bay benefits from the closure of Sears Canada, the only other national department store in Canada. In addition, HBC expects that the luxury sector and Saks Fifth Avenue will continue to grow during fiscal 2018. However, overall comps fell 2.4% due primarily to the closure of 17 underperforming stores, and a negative foreign exchange impact on the translation to Canadian dollars. Comps at Saks Fifth Avenue increased 2.1%, the third consecutive quarter of comp growth and the highest in three years. However, comps declined 2.6% at DSG (department store group), 3.4% at HBC Europe, and 7.6% at HBC Off Price. These declines were impacted by operational challenges resulting from the Company’s transformation plan and lower traffic at Lord & Taylor, HBC Off Price, and Galeria Kaufhof. As a result, adjusted EBITDA was down 21.5% to C$317.0 million. Commenting on its poorly executed turnaround plan, new CEO Helena Foulkes said, “There are no sacred cows. We’re looking at every part of the business to improve performance and everything is on the table.” HBC continues to expect its transformation plan to generate annual savings of C$350.0 million by the end of fiscal 2018.
Meanwhile, on April 2, Hudson’s Bay announced a data breach at its Saks Fifth Avenue, Saks Off Fifth and Lord & Taylor chains, and said an investigation is underway while the Company is taking steps to contain the breach. The Company did not indicate how many stores or customers were affected, and there is no indication that the breach affected online shoppers. The disclosure came after security firm Gemini Advisory LLC revealed on April 1 that it came across a hacking group claiming to have up to five million stolen credit and debit cards, and subsequently about 125,000 records were immediately released for sale. Among the records, Gemini confirmed, were customer data from Saks and Lord & Taylor. It appears the breach resembles past retail breaches that involved Home Depot, Target, and Neiman Marcus. Gemini also revealed that most of the stolen data appears to have come from stores in the New York metro area and other Northeast U.S. states.
Modell's Sporting Goods
An article in Crains New York Business noted that the family that owns Modell’s Sporting Goods may be nearing the sale of its 300,000 square foot warehouse on a 12-acre lot in the Bronx, NY for a reported $100.0 million. Modell’s Sporting Goods leases the warehouse from a related party. The unit in the Bronx is the Company’s only distribution facility. It appears that the proceeds from a transaction would be received by the related party. It would then be the related party’s decision whether or not to invest any of the proceeds in Modell’s. At this point there are numerous issues which are unclear, including the timing, the identity of the purchaser, and the structure of a transaction.
Sportsman's Warehouse
Sportsman’s Warehouse reported fourth quarter sales increased 9.8% to $243.2 million, due primarily to the opening of 12 new stores over the past year, partially offset by a 4.5% decrease in comps, which came on top of a 5.2% decrease in the prior year period. The decrease in comps reflected declines of 2.5% in firearms, 4.7% in ammunition, and 3.2% in non-hunting categories. EBITDA and EBITDA margin fell 7.7% and 190 basis points, respectively, as gross margin deterioration reflected a more promotional selling environment and operating costs increased due to store openings. TTM EBITDA margin was 8.5%, down from 10% in 2016. TTM interest coverage was acceptable at 5.0x, although it was down from 5.8x in 2016. Commenting on results, CEO Jon Barker said, “In 2017, despite a difficult backdrop and a heightened promotional environment in the second half, we successfully completed our 12 planned new store openings, generated important learnings that are informing our omnichannel strategy, delivered an over 80% increase in website driven sales year-over-year, increased customer engagement with our growing loyalty member base and targeted marketing efforts, generated free cash flow, and reduced debt by $2.3 million.”
Camping World
On March 28, Goldman Sachs Bank amended the credit agreement governing Camping World’s term loan to increase the facility by $250.0 million to $1.19 billion. In addition, the interest rate was reduced by 25 basis points, with a reduction in the applicable interest margin to 1.75% from 2% annually for base rate loans, and to 2.75% from 3% annually for LIBOR loans. Proceeds from the additional borrowings are expected to be used to fund future dealership acquisitions and expand the Company’s retail platform, as well as to pay related fees and expenses.
Meanwhile, the Company continues the process of reopening former Gander Mountain stores that have been re-bannered to Gander Outdoors, most recently opening a location in Greenfield, IN on March 26. The 45,000 square-foot store is one of three Gander Outdoor locations in Indiana, joining two other stores in Fort Wayne and Indianapolis. There are now 28 Gander Outdoors stores opened, with another 46 slated to open in the coming months.
Finish Line & Shoe Carnival
Finish Line and Shoe Carnival both reported modest sales increases and comp declines for their respective fourth quarters. Finish Line’s fourth quarter sales inched up 0.7% to $561.3 million, primarily due to sales at Finish Line Macy’s locations increasing 8.5%, partially offset by Finish Line store sales decreasing 0.9%. However, comps fell a steeper than expected 7.9%; during the quarter, the Company opened one new location and shuttered 11 underperforming stores, ending with 556 stores in operation. Operating income was down 43.8% to $11.4 million as results were negatively impacted by impairment charges, store closing costs, and the Company’s revaluation of its deferred tax liability due to the tax reform. Commenting on results, CEO Sam Sato said, “While we anticipated that our business would be under pressure during the fourth quarter due to a difficult selling environment for athletic footwear, sales ended up being down more than we forecasted. Despite the top-line headwinds, we worked hard on tightly controlling costs and managing inventories to deliver adjusted EPS for the fourth quarter at the high-end of our most recent guidance range of $0.58 – $0.59.” As previously mentioned last week, Finish Line entered into a definitive merger agreement with JD Sports Fashion plc under which JD will acquire Finish Line for $13.50 per share in an all cash transaction. The deal is expected to close no earlier than June 2018.
Shoe Carnival’s fourth quarter sales were up 3.9% to $243.2 million, but comps slipped 0.5% as the Company closed 16 underperforming stores during the quarter. SG&A expenses increased $4.1 million to $70.0 million as a result of non-cash impairment charges totaling $3.4 million for 30 underperforming stores, and a $1.9 million increase in stock-based compensation expense due to the tax reform. Gross profit margin was 28.9%, which included a $4.4 million gain on insurance proceeds related to hurricane affected stores.
As a result, the Company recorded an operating income of $0.2 million compared to a loss of $1.5 million in the prior year period. Commenting on the lackluster results, CEO Cliff Sifford said, “2017 was a transitional year for Shoe Carnival, as we refined our strategic direction to create an even more fun, exciting, and memorable experience for our customers, with the goal of engaging them across our omnichannel offering to position us for growth over the next several years. Our team executed well throughout the year in the face of external challenges, particularly as our business continues to recover from the hurricanes in certain markets like Puerto Rico. In addition, we strategically pulled back on our promotional cadence during the year, including the decision to close our doors on Thanksgiving Day.”
