In Ahold Delhaize’s second quarter earnings release, management noted that inflation returned in the second quarter (up 0.8%) after a deflationary environment that persisted for more than a year. Ahold Delhaize President and CEO Dick Boer noted that the Company sees inflation coming back in almost all markets, particularly for meat and produce. Mr. Boer also called the Amazon-Whole Foods acquisition “a major development for a market when an online retailer is stepping into the physical world” but added that the deal confirmed to the Company that its activities over the last 20 years, including the building of Peapod’s omnichannel offering in the U.S., is “clearly the way forward.” Ahold Delhaize plans to invest heavily in all of its online businesses, as it hopes to generate about €5.00 billion in annual online sales worldwide by 2020 (8% of today’s total sales). Most recently, Peapod increased the capacity of its New Jersey warehouse by 25% and is now processing more than 20,000 orders a week. Finally, the Company is stepping up its marketing campaign, successfully rolling out its Amazon Prime-style Podpass subscription model (one annual fee, unlimited free deliveries) to new and existing customers.
J.C. Penney’s second quarter sales increased 1.5% to $2.96 billion, despite a comp erosion of 1.3% (the seventh quarterly decrease in the last 10 periods). The top line growth was led by greater e-commerce sales and solid performance in the Home, Sephora, Salon and Fine Jewelry divisions. Additionally, the Company noted the Southwest and Southeast were the best performing regions of the country. Gross margin fell 200 basis points as a result of liquidation sales at 127 of 140 stores which closed during the second quarter; as a result, net loss widened 10.7% to $62.0 million. CEO Marvin R. Ellison said, “We are pleased to deliver a top line sales increase of 1.5% and quarterly sequential improvement of 220 basis points in our comp sales performance in go forward stores. While broader retail remains challenged, we are encouraged by the improved performance in our total apparel business, including a significant acceleration in kids’ apparel. Nearly all categories delivered improved sales results during the quarter, with our growth initiatives in beauty, home refresh and omni-channel continuing to deliver positive sales growth.” During the quarter, the Company opened 32 new Sephora locations within its stores and completed 31 Sephora expansions. By year end, it plans to have 650 Sephora stores located in about 75% of its store base. Other initiatives include adding appliances from Frigidaire to its product offering, expanding its mattress business, revamping its women’s apparel line and rolling out more SKUs online.
Aldi announced that it will offer grocery delivery for the first time in three U.S. cities (Atlanta, GA; Dallas, TX; and Los Angeles, CA) by the end of August through a partnership with Instacart. Aldi says some items may cost more than they do in Aldi stores, and it may expand delivery to more cities. The chain, which has about 1,700 U.S. stores, plans to have 2,500 locations by 2022.
Sprouts Farmers Market
Despite Aldi’s announcement that it is building a distribution center in Goodyear, AZ and potentially entering the state with nine locations, Sprouts Farmers Market indicated in a recent analyst conference call that should Aldi open stores in Arizona, they would not be a major threat. According to CEO Amin Maredia, Aldi’s planned distribution center in Goodyear is meant to support its growth in California. Mr. Maredia commented, “Discounter business and its impact on Sprouts has been minimal in the past, and we would expect it to be similar, based on what we see today and how we see those stores, what they’re selling, how they’re selling and what customers they’re drawing.” Whereas Sprouts’ major focus is on natural/organic products, healthy eating, and growth in private label and deli offerings, Aldi’s primary emphasis is on lower costs as well as European imports. COO Jim Nielsen noted that Aldi’s California presence hasn’t had a major effect on Sprouts’ California stores either. “We called it out about a year ago, 17 Aldis open up within roughly 3 miles in southern California. And outside of that early grand opening period, we fared extremely well. And I think that speaks to the brand, the brand strength in California. So we’re extremely confident in the brand strength here in Arizona.” Still, other grocers operating Arizona could be threatened by Aldi’s expansion, including Kroger, Walmart, Albertsons and perhaps most significantly, Bashas.
Macy’s sales in the second quarter of fiscal 2017 totaled $5.55 billion, down 5.4% from last year’s quarter despite double-digit e-commerce growth. Comps on an owned plus licensed basis were down 2.5%, reflecting decreased foot traffic and promotional activity. However, management cut SG&A expenses substantially and as a result EBITDA rose 25.3% to $792.0 million. During the quarter, Macy’s opened 16 new freestanding Bluemercury beauty specialty stores and 12 new Macy’s Backstage off-price stores within existing Macy’s stores; it also closed two underperforming Macy’s stores in Temple, TX, and Dublin, OH. Subsequent to quarter end, the Company announced it will close the Macy’s store at Magic Valley Mall in Twin Falls, ID, in early 2018. CEO Jeff Gennette stated, “We saw a notable contribution from the full execution of our new women’s shoe and jewelry models and the continued successful testing of Backstage in store. We are excited about plans for fall, including the launch of a new loyalty program and the new marketing strategy, which we anticipate will further improve our sales trend in the back half of the year.”
Office Depot’s second quarter sales decreased 8.5% to $2.36 billion due to a comp decline of 6% (the sixth straight quarterly decrease) and the closing of 105 stores over the past year. Management attributed the sales weakness to the loss of customers in the commercial unit as well as less store traffic and continued competition. In fact, during the conference call management acknowledged that Amazon is responsible for taking some of the Company’s core customers from its commercial unit. This comment may have aggravated the over 20% decrease in the Company’s stock on August 9. Profit plummeted 88.6% to $24.0 million, as results in the prior year quarter benefited from the $250.0 million termination fee from Staples. Commenting on results, CEO Gerry Smith said, “We continue to build our capabilities across the organization as we focus on driving the omni-channel growth opportunities we have identified in the North American market. I’m pleased that we have delivered year to date adjusted operating income that is ahead of the prior year and we remain on track to achieve our full year target.” During the first half of 2017, the Company closed 33 stores, ending with 1,408 stores in operation. Management plans to close another 42 stores during the second half of this year, as part of plans announced in August 2016 to close 300 retail locations over a three-year period.
In other news, Office Depot purchased its corporate headquarters in Boca Raton, FL for $132.0 million. The building has more than 625,000 square feet and houses about 2,000 employees; it was last sold for $171.0 million in 2011 to Equity Commonwealth, a real estate investment trust. The building was custom built for Office Depot in 2008 for $100.0 million.
The Golub Corp.
The Golub Corp. is looking to reduce the workforce at its headquarters in Schenectady, NY. According to the Company, the offer of voluntary separation was extended to full-time administrative staff at the headquarters, as part of its ongoing effort to operate more efficiently. No further workforce reductions are planned. The Company, which operates more than 130 Price Chopper and Market 32 supermarkets in six states, laid off a total of about 200 people at the headquarters in three separate waves from 2012 through 2016. About 650 people currently work there, most of them full time.
Dick's Sporting Goods
Dick’s Sporting Goods reported second quarter sales increased 9.6% to $2.16 billion, and comps inched up 0.1%. Comps were lower than the 2% – 3% increase the Company had projected. E-commerce sales increased 19%. Profit rose 22.9% to $112.4 million. In its conference call, the Company cited “irrational pricing” in some sectors of the industry and said it will respond by becoming more promotional to protect market share and drive customer traffic. It anticipates third quarter and full year margins to decline year-over-year, with the hunting business remaining especially tough.
CEO Edward W. Stack commented, “In this very competitive and dynamic marketplace, we were able to deliver a significant increase in our bottom line from last year. We continued to capture market share and generated strong results in e-commerce, footwear and golf, although sales were pressured by weakness in hunting, licensed and athletic apparel.” During the quarter, the Company opened 13 new Dick’s stores and closed one underperforming specialty concept store. As of July 29, the Company operated 704 Dick’s stores in 47 states, 98 Golf Galaxy stores in 32 states, and 29 Field & Stream stores in 14 states. Looking ahead, the Company now expects comps to be flat or rise in the low single digits, down when compared to a 3.5% increase last year and a 1% – 3% increase previously projected.
Captain D’s signed a franchise development agreement to expand its presence throughout Florida’s West Coast, brining nine new restaurants to the Tampa-St. Petersburg and Sarasota-Bradenton, FL markets.
Nordstrom’s second quarter sales increased 3.5% to $3.72 billion, and comps were up 1.7%. By brand, Nordstrom sales increased 2.4% and comps were up 1.4%; Nordstrom Rack sales increased 9.8% and comps were up 3.1%. Online sales rose 20% during the quarter as the Company held its annual anniversary sale; management indicated that the anniversary sale performed better than recent trends. Profit slipped 6% to $110.0 million. The Company opened six Nordstrom Rack stores and closed one underperforming full-line store during the first half of 2017. Looking ahead, Nordstrom narrowed its fiscal 2017 EPS guidance to $2.85 – $3.00 from $2.75 – $3.00. As previously reported, Nordstrom announced it was exploring a transaction under which the Nordstrom family may take the Company private. The family members have offered preferential terms to potential equity partners willing to fund a buyout.
Published reports indicate that Dunkin’ Donuts is planning a new format store in Quincy Point, MA, which offers different drive-thru options targeting commuters into Boston. There will be four lanes for ordering, converging at one pickup window: one with a microphone for ordering and a window for paying, two with touch-screens for ordering and paying by card, and one for those who already ordered and paid online. It will also operate under the “Dunkin” name (dropping “Donuts).
Camping World’s second quarter sales increased 20.1% to $1.28 billion, reflecting the opening of 19 new stores in the last year and a 10.6% comp increase (on top of a 5.9% rise in comps last year). The Company operated 137 retail locations and two Overton’s retail locations as of June 30, compared to 120 retail locations in the prior year period. Most of the increase in comps was from new vehicle revenue. EBITDA and EBITDA margin increased 32% and 1.1%, respectively. It should be noted that none of the Gander locations have yet been reopened, and they are not part of this quarter’s operational metrics. CEO Marcus Lemonis said, “We delivered record-breaking results in the second quarter, which demonstrates the power and leverage of our unique operating model. While our business model has traditionally been focused on the RV owner, we see a much broader opportunity to leverage our products and services across the larger base of outdoor lifestyle consumers.”
Ignite Restaurant Group
On August 8, Landry’s Inc. was selected as the successful bidder, with a bid of $55.0 million in the Court-supervised auction for Ignite Restaurant Group, Inc., DIP’s assets. A hearing to approve the sale is scheduled for Thursday (August 17). With closures over the past few months, Joe’s Crab Shack currently operates around 75 units, down from 112 on April 3.
Kohl’s second quarter sales slipped 0.9% to $4.14 billion, and comps were down 0.4%. Profit rose 48.6% to $208.0 million, as the Company recorded charges totaling $128.0 million in the prior year period related to impairments and store closures. CEO Kevin Mansell said, “The traffic momentum that we saw in the combined March/April period accelerated in the second quarter. Though transactions for the quarter were lower than last year, July transactions increased. We are also excited by the sequential sales trend improvement in all our lines of business, all geographic regions, and in both our proprietary and national brand portfolios.” Kohl’s ended the quarter with 1,154 Kohl’s stores in 49 states, as well as 12 FILA Outlets and four Off/Aisle clearance centers.
CVS Health’s MinuteClinic recently opened five new locations in New York within CVS Pharmacy stores located in Brooklyn (2), Manhattan (2) and Queens.
Bartell Drugs will open its 68th store in Arlington, WA. The Company will break ground on the 14,600 square-foot unit in late summer 2017, with a planned opening date during the first quarter of 2018. The Company also opened its 14th CareClinic by Kaiser Permanente in Redmond, WA. The opening comes less than a month after it opened a CareClinic in Snoqualmie.
Toys "R" Us
Toys “R” Us plans to open a temporary 35,000 square-foot store at the corner of 42nd Street and Broadway in Times Square, just two blocks from the 110,000 square-foot Manhattan flagship that closed at the end of 2015. Scheduled to open later this month, the store will offer a dedicated play area, life-size toy displays and interactive elements ahead of the 2017 holiday season. The Company did not indicate how long the store would remain open. With significant debt maturities in 2018 and 2019 it is critical that the iconic toy retailer gains some operational momentum to open up the refinancing markets as an IPO seems unlikely at this point.
In other news, Toys “R” Us named Mark Johnson as EVP, U.S. Marketplace Operations. Mr. Johnson has been serving as interim EVP, store operations since May.
Yesterday, Target announced it has agreed to acquire Grand Junction, a transportation technology company, to improve and expand Target’s delivery capabilities. The acquisition will also accelerate Target’s investments and ongoing efforts to transform its supply chain. San Francisco-based Grand Junction offers a software platform that’s used by retailers, distributors and third-party logistics providers to manage local deliveries through a network of more than 700 carriers. Currently, Grand Junction is working with Target on its same-day delivery pilot at the Target store in New York’s Tribeca neighborhood.
Last week, Target made a number of announcements related to the pet industry. The Company said it will begin selling pet toys and treats from New York City-based Bark, operator of the subscription service BarkBox, which has over 500,000 subscribers. This is the first time Bark products will be sold at retail stores. Its products are already being sold on Target’s website. Target also said it would begin selling wet and dry foods from Blue Buffalo Co., which had previously only offered its products at pet specialty stores. Additionally, it has revamped its own Boots & Barkley pet line, with over 200 new items for cats and dogs. The Company will also partner with St. Paul, MN style blogger Kate Arends of Wit & Delight for a pet clothing and accessories line. The Wit & Delight line will be available at select Target stores on October 31.
Finally, yesterday Target also announced it hired two new senior food and beverage executives to aid in accelerating its strategy in those categories. Mark Kenny will join Target from Walmart, as VP divisional, meat and fresh prepared food. Liz Nordlie will join Target from General Mills, as VP, product design and development for food and beverage.
Staples extended the consent time period and the expiration date for its previously announced cash tender offer for $500.0 million of its 4.375% Senior Notes due 2023. As of August 11, 46.3% of the $500.0 million outstanding, or $231.6 million, was validly tendered. The consent period is now expected to conclude on August 18, and the expiration date is now September 1. This morning, an affiliate of Sycamore priced an offering of $1.00 billion of Senior Notes due 2025, which will bear an interest rate of 8.5% annually. Consummation of the offering is expected to occur on August 28; Sycamore intends to use proceeds, together with borrowings under certain senior secured credit facilities, to finance a portion of its acquisition of Staples. As previously reported, Staples and Sycamore Partners entered into a merger agreement under which Sycamore will acquire Staples for $6.90 billion. The transaction is expected to close during the third quarter.
Walmart is expanding the use of its Scan & Go mobile app to ten more brick-and-mortar locations in Dallas-Fort Worth, TX and Nashville, TN by the end of the month. It is already being tested in 12 other stores in Arkansas, Florida, Texas and Georgia.
In other news, sources indicate that Walmart could be a suitor for online subscription beauty retailer Birchbox, which has reportedly been discussing a potential sale. Birchbox has raised more than $80.0 million from investors since it was founded in 2010, in addition to previously undisclosed venture debt that the start-up secured in 2015. The discussions of a sale come as Birchbox has been working to right its business this year, following a rough 2016 that included two rounds of layoffs. In addition to its e-commerce site, Birchbox operates two stores, one in New York City’s SoHo neighborhood, and another in Paris, which it opened in spring 2017. If Walmart were to acquire Birchbox, it would be the chain’s fifth e-commerce acquisition since last August.
Meanwhile, reports indicate that the Company has been growing its online advertising business with more frequent banner ads by third-party sellers, and the linking of in-store and online shopping data. Walmart’s e-commerce business has grown tremendously in recent quarters, more than 60% year over year. Although online sales only account for a tiny fraction of its total revenue, the Company has made it clear that it plans to build its online business.
Meanwhile, Lider, Walmart’s main supermarket chain in Chile with 380 stores, signed a new work contract with its employees, averting a possible strike. After weeks of negotiations, the 16,500-member Lider Inter-Company Union (SIL) voted to accept the Company’s latest offer. While the workers had voted to walk off in late July, they kept working while union leaders and Company representatives attempted to negotiate a deal.
Amazon.com is reportedly looking into a way to deliver ready-to-eat meal kits that do not need refrigeration. It is working with tech startup 915 Labs to bring food products that are ready to eat as soon as the package is opened, directly to homes. The food items can be stored in a pantry for up to a year. The startup makes a technology called microwave assisted thermal sterilization (MATS) that puts sealed packages of food in pressurized water and heats them in a microwave for several minutes. The launch could come as soon as next year.
In other news, today Amazon announced that it will issue up to $16.00 billion in senior unsecured notes to fund its pending acquisition of Whole Foods. Moody’s reaffirmed Amazon’s Baa1 senior unsecured rating and assigned a Baa1 rating to the Company’s proposed notes offering. Additionally, Moody’s changed Amazon’s credit rating outlook to “positive” from “stable.” Amazon, which F&D/Creditntell currently rates A2, has $20.55 billion of debt outstanding and $24.46 billion of total liquidity. The planned debt offering will replace Amazon’s previously filed (June 16) bridge loan financing of $13.70 billion, with an interest rate of LIBOR plus a margin of 75 to 175 basis points. Amazon stated that the planned acquisition of Whole Foods is expected to close towards the end of calendar 2017.
True Value’s second quarter comps were up 0.9%, increasing in seven of the Co-op’s 12 geographic regions and in six of its nine product categories. Focused initiatives and investments led to a 22% increase in visits to TrueValue.com and a 19% rise in online sales. Destination True Value, the Co-op’s premier retail business model, reflected a 1.8% growth rate in quarterly same store sales and a 1.1% rise in year-to-date comps. During the first half of fiscal 2017, stores that were remodeled experienced, on average, a 5.9% increase in retail revenues. The Company posted quarterly net earnings of $16.7 million, which represents an approximate 28.1% rise from a year ago reflecting an enhanced gross profit margin and management’s cost controls. CEO John Hartmann commented, “We are now in the third year of our multi-year strategic plan and I’m very encouraged by the strong advancements we are making. After a record-breaking year for ground-up and remodeled stores in 2016, we have continued to make good progress in building a stronger business. Our retailers are benefiting from strategic initiatives in areas such as omni-channel, retail excellence and product assortments that improve the customer experience and generate sales growth. Looking forward, we will continue to look for ways to accelerate our strategic growth plan to ensure that True Value is helping our stores to remain relevant in their communities and supporting their long-term growth, profitability and independence.”
The Home Depot
The Home Depot’s second quarter sales increased 6.2% to $28.11 billion, and comps were up 6.3%; U.S. comps were up 6.6%. Profit jumped 9.5% to $2.67 billion. CEO Craig Menear said, “We were pleased with our results this quarter as our customers rewarded us with the highest quarterly sales in company history. We also achieved the highest quarterly net earnings in company history.” Based on its year-to-date performance, the Company updated its fiscal 2017 sales growth guidance. It now expects sales to increase 5.3% from the prior year (compared to the 4.6% increase previously projected), and comps to be up 5.5% (up from previous expectations for comps to increase 4.6%). The Company also raised its EPS guidance, now expecting 13% growth from fiscal 2016 to $7.29; previously, the Company projected EPS growth of 11% to $7.15.
DineEquity, the parent Company of IHOP and Applebee’s restaurants, appointed Stephen Joyce as CEO, effective September 12. Mr. Joyce has served as CEO and member of the board of Choice Hotels International, Inc. since June 2008. Richard J. Dahl, chairman and interim CEO, will remain as chairman and will continue to serve as interim CEO until Mr. Joyce assumes his position.
The Company also reported second quarter fiscal 2017 results, including a 2.6% decline in IHOP domestic comps, a 6.2% drop in Applebee’s domestic comps, and an 18.2% decline in adjusted quarterly EPS to $1.30.
Based on the Company’s recent performance and operating trends, DineEquity revised its expectations for Applebee’s comps to range between -6% to -8%, compared to previous guidance of -4% to -8%. Additionally, the Company expects restaurant closures to accelerate this year to 105 – 135 units from its previous expectation of 40 – 60 closures. DineEquity also revised its outlook for IHOP and anticipates comps of -1% to -3%, compared to its previous expectation of 0% to 3%.
On August 10, Payless ShoeSource emerged from Chapter 11 bankruptcy protection, having closed 673 stores and reduced its debt by $435.0 million, or roughly half of its funded debt. In addition to the 673 stores closed during the bankruptcy process (which began on April 4), the Company shuttered about 227 other locations between late 2016 and early 2017, leaving it with roughly 3,500 stores in operation. Payless is now owned by private equity firms Golden Gate Capital and Blum Capital Partners. Going forward, Payless plans to invest in its online business as well as international expansion in Asia and Latin America. Looking ahead, CEO Paul Jones plans to retire; a committee that includes CFO Michael Schwindle, COO Mike Vitelli and board chairman Martin Wade III will handle Mr. Jones’ responsibilities while the Company conducts a search for a permanent successor.
Ace Hardware’s second quarter sales rose 4.6% to $1.49 billion. Wholesale revenues were $1.40 billion, up 4.7%, with outdoor living, housewares, impulse and tools showing the largest gains. Retail revenues were $90.3 million, up 3.3%, as a result of an increase of 42 stores over the past 12 months. Comps were up 3.2%, primarily due to the combination of more favorable weather and strong retail execution during the period. However, profit fell 19.5% to $50.9 million; during the quarter, the Company recorded $7.8 million of one-time pre-tax charges primarily related to the future closure of certain warehouse and distribution facilities as part of a network reconfiguration to support future growth. The Co-op added 27 new domestic member stores during the second quarter, while it canceled 28 member stores, bringing its total domestic store count to 4,357. Worldwide, Ace added 52 stores and canceled 31, bringing its store count to 5,024.
The Children's Place
The Children’s Place’s second quarter sales increased 0.6% to $373.6 million, and comps were up 3.1%. The Company recorded a profit of $14.3 million, compared to a loss of $2.0 million in the prior year period. During the quarter, the Company closed seven underperforming stores, ending with 1,026 stores, a decrease of 3.4% compared to the prior year. The Company has closed 156 stores since 2013, when it announced its fleet optimization initiative. CEO Jane Elfers commented, “Our results are indicative of the significant progress we have made against each of our strategic growth initiatives - superior product, business transformation through technology, global growth through alternate channels of distribution and fleet optimization. Gymboree’s recent bankruptcy, and the liquidation of 330 of their stores, presents a market share opportunity for The Children’s Place. We are directly co-located in 216 of those locations and we have experienced sales and traffic lifts in those stores since the Gymboree liquidation began on July 18.” Looking ahead, The Children’s Place updated its fiscal 2017 outlook, now expecting EPS of $7.23 – $7.33, up from prior expectations of $7.10 – $7.20.
Canada Goose Holdings
Canada Goose Holdings, a premium outerwear retailer, plans to open five new stores this fall, in Boston, MA; Calgary, Canada; Tokyo, Japan; Chicago, IL and London, England. The Company operated solely as a manufacturer for more than 60 years before launching its first e-commerce site in Canada in 2014, followed by the U.S. in 2015 and the U.K. and France in 2016. Canada Goose expanded into the brick-and-mortar business in 2016 with its first two standalone stores in Toronto, Canada and New York, NY. Canada Goose went public in March and has a market cap of $2.50 billion.