December 19, 2018
Special Analysis
The Toy Industry: An Epilogue & An Opportunity
Our sister company is issuing a special analysis on the Toys "R" Us decline and the resulting retail toy market opportunities. The report examines why Toys “R” Us failed, identifies which retailers are trying to snap up the newly available market share, and evaluates the risks and opportunities of those players. The report also includes Store Overlap Analysis to highlight the proximity of closed Toys “R” Us stores to competitors’ existing units, which can help determine how and where customers will divert their business following the liquidation.
Amazon
Last week, Amazon announced a new version of its checkout-free Amazon Go format, a 450 square-foot unit that is about one-quarter the size of the other Amazon Go stores that have opened. The first of the new, smaller type opened on the 6th floor of the Macy’s building in Seattle, WA, which now is being leased by Amazon for office space. It is only open to Amazon employees and their guests. According to the Company, “the tiny format could serve office lobbies, communal floors inside tall buildings and perhaps a hospital.”
Meanwhile, yesterday the Company opened its ninth Amazon Go store and second in San Francisco. It stands at 1,750 square feet.
According to published reports, employees at a new Staten Island, NY, fulfillment center opened by Amazon have begun organizing a campaign that could lead to the facility becoming unionized. Employees backing the union effort said issues at the warehouse include safety concerns, inadequate pay, 12-hour shifts with insufficient breaks and unreasonable hourly quotas. Employees are working with the Retail, Wholesale and Department Store Union, or RWDSU, which has also backed organizing efforts at Whole Foods. Amazon’s workforce is union-free throughout the U.S. The move comes at the same time as Amazon begins the process of creating a new headquarters in Long Island City, NY.
Amazon has reportedly leased a third downtown Bellevue, WA office building standing at 377,000 square feet. It recently expanded its Toronto Tech Hub with a new 113,000 square-foot office that will primarily focus on research and software development.
The Company also announced plans to open a regional air hub at the Fort Worth Alliance Airport, which is expected to commence operations in 2019. The air hub is expected to cater to Amazon’s large-scale needs and manage flights on a daily basis.
Amazon has also opened an 18,000 square-foot sortation center in Birmingham, AL that will be operated by Amazon Logistics, which manages its last-mile delivery services and will also introduce the Company’s Delivery Service Partner and Flex programs to the Birmingham area. The opening comes in advance of a massive fulfillment center expected to open in Bessemer, AL.
Workers at two Amazon distribution centers in Germany have gone on strike as part of a push for improved work conditions, leading to fears that Christmas orders may be delayed. The ver.di union representing the workers says Amazon employees receive lower wages than others in retail and mail-order jobs in Germany. Amazon has said that its employees earn relatively high wages for the industry.
Sears Holdings Corporation
Reports state that Sears Holdings Corporation, DIP decided to forgo selecting a stalking horse bidder for the auction of its stores by the December 15, 2018 deadline. The Company has instead opted to solicit additional offers before the final bid deadline of December 28, 2018. It should be noted that ESL Partners, L.P. previously submitted a $4.60 billion bid to acquire substantially all of the assets of the Debtors and certain non-Debtors. Additionally, the Company has received offers from liquidation firms to close some or all of its stores, as well as bids for specific assets or divisions. The reports state that Tiger Capital Group LLC and Great American Group LLC have joined forces, and Gordon Brothers Retail Partners LLC and Hilco Global Merchant Resources LLC have also teamed up to submit bids.
In an SEC filing, the Company reported that it expects to incur $443.0 million in charges, including $81.0 million in markdowns, $9.0 million in severance costs, $335.0 million in lease termination costs, $12.0 million in other charges, and $6.0 million in depreciation, during the third and fourth quarters of 2018. The charges stem from store closures associated with the bankruptcy filing. Approximately $229.0 million of the charges were already reported in the Company’s Form 10Q for the 2018 third quarter.
The Court approved the sale of the Sears Home Improvement business to Service.com for $60.0 million in cash.
Toys "R" Us
On December 13, Toys “R” Us, DIP received Bankruptcy Court approval to sell the majority stake of its Asian business operations to a group of investment firms and Fung Retailing Ltd., for $760.0 million. Fung Retailing previously owned about 15% of a Hong-Kong-based joint venture with Toys “R” Us. The Asian operations include more than 450 stores in 10 markets, with the largest presence in Japan and China.
Are You Interested In Retailers That Will Be Opening & Closing In Your Trade Area?
Shopko
On the heels of the announcement last week that Kroger will buy the pharmacy files from 42 of Shopko’s stores, Hy-Vee announced it has acquired the business of 22 Shopko pharmacies in Iowa, Illinois, Minnesota, Nebraska, South Dakota and Wisconsin. Shopko patient files will merge into existing Hy-Vee Pharmacy locations in the 17 cities where the acquisitions have taken place. The transition will begin this week and run through January.
Applebee's
RMH Franchise Holdings Inc., DIP, the nation’s second-largest Applebee’s franchisee, won final Bankruptcy Court approval of a reorganization that earlier was opposed by the chain’s franchiser and key creditors. The Chapter 11 plan includes a tripling of the initial equity commitment from the franchisee’s owner, private-equity firm ACON Investments.
Dine Brands announced it reached a settlement with RMH Franchises Holdings that requires RMH to pay all of Applebee’s past due royalty and advertising fees. The corporation will also receive, in part, reimbursement of termination fees related to restaurant closures. Additionally, as a result of the settlement, all outstanding litigation between the parties will be dismissed.
Meanwhile, Dine Brands Global purchased 69 restaurants in North and South Carolina. Financial details were not disclosed. The Company intends to own and operate these restaurants for the foreseeable future; however, it will assess and monitor opportunities to refranchise these restaurants under favorable circumstances.
Starbucks
After testing delivery in 100 stores in Miami, FL this fall, Starbucks will expand the service to 2,000 U.S. stores, or about a quarter of its domestic locations. Starbucks Delivers in China, which is offered by a subsidiary of Chinese commerce giant Alibaba, has grown from 150 stores at the end of September to more than 2,000 locations in 30 cities now. A limited pilot in Japan began last month. The Company said it aims to expand its retail store portfolio by approximately 6% – 7% net new units and grow same store sales by 3% – 4%, globally, each year.
Starbucks also announced plans to roll out Draft Nitro Cold Brew to all U.S. Company-operated stores by the end of fiscal 2019.
Meanwhile, under the Global Coffee Alliance, Starbucks and Nestlé are moving with speed to innovate and develop go-to market strategies for the global rollout of Starbucks At-Home Coffee portfolio.
Finally, Starbucks opened its newest Roastery in Manhattan in the meatpacking district. Starbucks opened its first Roastery in Seattle in 2014, and also has locations in Shanghai and Milan. Roasteries in Chicago and Tokyo are slated to open in 2019, and the Company has said it could open as many as 20 to 30 Roasteries globally.
If you're interested in a list of future Starbucks locations, click here.
Walmart
As part of a strategic alliance with Japanese online giant Rakuten announced early in 2018, Walmart has opened its first e-commerce site in Japan. The new “Walmart Rakuten Ichiba Store” offers a variety of U.S.-branded products, including fashion apparel, outdoor goods, and toys. The store will initially offer approximately 1,200 products from a diverse range of brands. The orders will be fulfilled in the U.S. and air freighted directly to Japanese customers. Walmart plans to continue expanding its product range and adding new product categories from its international assortment to the site. The chain’s Japanese subsidiary, supermarket operator Seiyu GK, will provide customer support for the store. In October, Rakuten and Walmart’s Seiyu unit jointly officially opened the Rakuten Seiyu Netsuper, an online grocery delivery service. In addition, Walmart eBooks by Rakuten Kobo was launched in August, giving Walmart U.S. customers access to more than six million eBooks and audiobooks.
Meanwhile, Walmart has increased its ownership position in India’s Flipkart from 77% to 81.3%. Walmart bought India’s largest online retailer Flipkart in May 2018. The acquisition was not well received by everyone; resulted in a share price decline and concern that the cash outflow from Flipkart’s business was eating into Walmart profits. However, CEO Doug McMillon has said that such acquisitions are crucial to the Company’s “global ambitions.” The Indian e-commerce market as a whole is forecast in an Indian government report to quadruple to $200.00 billion in the next eight years, and by 2034 it is predicted to surpass the U.S. as the second largest e-commerce market in the world.
Genesco
On December 14, Genesco inked a deal to sell its Lids Sports Group banner for $100.0 million to FanzzLids Holdings, a specialty retailer of licensed sports apparel, which is owned by private equity investment firm Ames Watson Capital. In connection with the transaction, through a commercial arrangement, Fanatics Inc., a sports licensing and e-commerce Company, will invest a minority stake in FanzzLids Holdings. The transaction, subject to customary closing conditions, is expected to close by the end of Genesco’s 2019 fiscal year (February 2019). Genesco’s board also authorized the Company to repurchase up to $125.0 million of its common stock. A majority of the proceeds will be used for share repurchases. The announced sale agreement benefits Genesco, as it has the potential to improve margins. The Lids banner has underperformed other banners, with comps declining for six consecutive quarters due to weaker demand for major sports league headwear. Following Lids’ 4.5% sales decrease in the third quarter, driven by a 2% drop in comps, management guided comps to decline 2% to 4% for fiscal 2019.
Given Lids’ declining sales and negative operating income of $400,000, it does not come as a surprise that the banner was purchased for only 0.14x sales. Following the transaction, we estimate Genesco will generate $2.20 billion in sales (a 33.6% decrease) from its 1,537 stores, with an operating margin of 1.6% (an improvement of 40 basis points).
Lowe's
Lowe’s Companies authorized a new $10.00 billion common stock repurchase program that has no expiration date and adds to the previous program’s balance, which was $4.50 billion as of November 2. The Company also reiterated its prior sales and earnings guidance for fiscal 2018 and issued its sales and earnings guidance for fiscal 2019. Fiscal 2018 sales are expected to increased 4%, and comps are projected to rise 2.5%. EPS is expected to be $4.08 – $4.24, and Lowe’s plans to add eight locations during the year. Fiscal 2019 sales are expected to increase 2%, and comps are projected to rise 3%. EPS is anticipated to be $6.00 – $6.10. In a presentation to investors last week, Lowe’s CEO Marvin Ellison said the Company is making retail fundamentals a priority in the wake of missteps, including a website outage during peak Black Friday shopping; it will continue with its technology efforts. Mr. Ellison also said it will focus on the Company’s professional customers going forward, who spend more but have higher standards for service and merchandising.
On December 13, Lowe’s opened its new direct fulfillment center just outside of Nashville, TN, a 1.1 million square-foot facility. The facility is expected to be able to deliver product to customers in 75% of the country in two days or less, with the capacity to ship up to 100,000 packages daily. The facility currently employs 200 workers and is expected to increase that to 600 workers by 2023. Lowe’s invested $150.0 million in the facility.
L Brands
L Brands announced on December 13 a definitive agreement to transfer ownership and operating control of its Canadian La Senza lingerie brand to an affiliate of private equity firm Regent LP. Assets include the home office organization, North American stores, and e-commerce and international partnerships. As part of the deal, Regent will assume La Senza’s operating liabilities and provide L Brands future consideration if it sells or otherwise monetizes La Senza. La Senza’s 2018 revenues are expected to reach about $250.0 million, with an operating loss of about $40.0 million. The move comes as L Brands shifts its focus to its larger brands, Victoria’s Secret, PINK, and Bath & Body Works. L Brands shuttered its upscale Henri Bendel apparel banner back in September as part of this shift in focus.
Store Activity
Ahold Delhaize
Ahold Delhaize’s Stop & Shop announced the opening of a new store in Newton Highlands, MA. The 20,950 square-foot location will be the first in the state to feature the store’s new logo and updated design. The new small-format concept debuted earlier this year at 21 Hartford, CT area stores. Stop & Shop operates more than 400 stores throughout Massachusetts, Connecticut, Rhode Island, New York and New Jersey.
Whole Foods
Last week, Whole Foods opened two new 365 stores in Atlanta, located in Decatur and Buckhead. The Company now has twelve 365 stores across the country. Click here to request a list of future Whole Foods locations.
Wawa
On December 4, Wawa opened the largest convenience store it has built to date in Philadelphia, PA. The 11,500 square-foot store is more than 2,000 square feet bigger than its next largest store. The new Wawa also features a sleeker style. The Company has opened four other Philadelphia Wawa locations this year.
Big Y
Big Y is planning to build a new store in Milford, CT, next to a plaza housing an Aldi store and a few blocks from a Super Stop and Shop. Pending local approvals, the store will be a freestanding 55,000 square-foot supermarket. The Company operates more than 70 stores in Connecticut and Massachusetts. Another store is scheduled to open in Derby, CT in 2019.
Hy-Vee
Hy-Vee opened a Fast & Fresh store in Davenport, IA on December 11. The 10,000 square-foot store is a new concept that is a smaller-scale grocery stores and carries grocery items, including pantry and frozen items, and a selection of fresh produce, dairy, meat and bakery items. The store also offers a gas station, Hy-Vee Aisles Online pickup, wood-oven pizza, sushi, a craft beer station, wine and spirits. A second Fast & Fresh location is slated to open in Altoona, IA in 2019.
Taco Bueno Restaurants
Taco Bueno Restaurants, Inc., DIP has reportedly closed 12 of its restaurant locations in Texas and Oklahoma. The contents of those restaurants are currently being auctioned online by RestaurantEquipment.bid, an affiliate of TAGeX Brands.Taco Buneo operates about 170 restaurants.
REI
REI expanded its snowshoe rental to 70 locations this month. Looking ahead to 2019, the Company plans to continue expanding its rental program for customers to try new gear, with most gear available for purchase in-store or online. REI also sells some of its “gently used” equipment through its used gear program at the end of every season. The Company operates 154 stores in 35 states and Washington D.C.
