February 21, 2018
Albertsons/Rite Aid
Yesterday, Albertsons Companies and Rite Aid Corporation announced a definitive merger agreement under which privately held Albertsons Companies will merge with publicly traded Rite Aid. The integrated company will operate approximately 4,900 locations, 4,350 pharmacy counters, and 320 clinics across 38 states and Washington, D.C. Most Albertsons pharmacies will be rebranded as Rite Aid, and the company will continue to operate Rite Aid stand-alone pharmacies. The combined companies would become the fourth largest retail pharmacy operator, behind Walgreens, CVS Health and Walmart, with an estimated $16.00 billion in pharmacy sales. From Albertsons perspective, the deal would expand their pharmacy and health offerings and make them more competitive with Kroger, while from the Rite Aid side the deal provides it with needed scale for its front-end merchandise. There remains the question of which pharmacy supplier the Companies will choose. Albertsons currently has a pharmacy supply contract with McKesson (through 2021), which is also Rite Aid’s current supplier. However, as part of its sale of 1,932 stores to Walgreens, Rite Aid has an option to participate in the Walgreens and AmerisourceBergen global sourcing agreement. Rite Aid’s management said it would need to go back and have a conversation with Walgreens about adding Albertsons. Rite Aid management also continues to talk with McKesson about a competing sourcing agreement.
Subsequent to the announcement, the two companies conducted a conference call that further outlined details of the merger agreement, as well as certain operational expectations for the combined company following the merger.
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Tops Holding II Corporation, DIP
Earlier today, Tops Holding II Corporation, DIP filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in U.S. Southern District of New York. The Debtor has received a commitment for a $125.0 million debtor-in-possession (DIP) term loan financing facility from certain noteholders and a $140.0 million DIP asset based revolving loan from Bank of America, N.A., which are expected to support the Debtor’s continued operations during the court-supervised restructuring process. The Debtors are filing a motion requesting that the Court consolidate their Chapter 11 cases for administrative purposes under the case number assigned to the Tops Holding II Corporation, LLC (18-22279).
Southeastern Grocers
Last week we reported that Southeastern Grocers is planning to close roughly 200 stores as part of a possible formal restructuring. As we have been reporting, the Company has been attempting to negotiate the refinancing of about $1.20 billion in debt that comes due within the next year, starting with $475.0 million in 8.625% unsecured notes due in September 2018.
The Company's store concentration map can be seen below.
Walmart
Walmart’s fourth quarter revenue increased 4.1% to $126.27 billion. U.S. comps increased 2.6%, and comp traffic rose 1.6%. e-Commerce sales increased 23%, much slower than the prior quarter’s 50% jump, and down from last year’s 29% growth during the same quarter. The Company said the decrease was anticipated, as sales growth on Jet.com, which it acquired in 2016, slowed. However, issues regarding proper inventory amounts available during the holiday season also contributed to the dip. Sam's Club comps, excluding fuel, increased 2.4% led by comp traffic growth of 4.3%. Sales at Walmart International rose 6.7% to $33.10 billion, with nine of eleven markets posting positive comps. Consolidated operating income was $4.50 billion, a decrease of 28%, largely due to higher promotional activity and greater investments in fresh inventory and store renovations.
Looking ahead at fiscal 2019, the Company expects EPS of $4.75 – $5.00, U.S. comp growth of 2%, and Sam’s Club comp growth of 4%. E-commerce sales are forecast to grow roughly 40%.
On the news, Walmart’s stock price fell 10.2% to close at $94.11 yesterday.
J.C. Penney
J.C. Penney plans to close eight underperforming stores by May 2018, part of its plans to “right-size” its store fleet as more sales move online. The stores are located in St. Louis, MO; Paramus, NJ; Galesburg, IL; Alexandria, MN; Bartlesville, OK; Burlington, WA; Calexico, CA; and Mt. Vernon, OH. The Company currently operates about 875 stores nationwide, after shuttering nearly 140 stores last year. In addition, J.C. Penney said it would close a two million square foot fulfillment center in Wauwatosa, WI this summer, eliminating 670 jobs. This move is part of the Company’s plans to reduce its supply chain network to better match its shrinking national store footprint. The facility, built in 1963, has a market value of more than $24.0 million. Operations will be transferred to facilities in Lenexa, KS and Columbus, OH.
Kroger
Kroger opened a 12,000 square-foot Culinary Innovation Center in downtown Cincinnati, OH. The commercial kitchen features multiple cooking stations and video streaming technology. The Center will support Kroger’s initiatives to expand its restaurant concept, Kitchen 1883, the first of which opened in November 2017, and its Prep+Pared Meal Kits program that also launched last year.
H.E. Butt
Last week, H.E. Butt Grocery announced that it acquired NeighborFavor Inc. dba Favor, an Austin, TX-based “innovative on demand delivery service,” and will run it as a wholly owned subsidiary. Terms of the deal were not disclosed. H-E-B said the acquisition would create a “powerful partnership” that will accelerate “its path to become a digital retail industry leader in Texas, enabling customers to choose how they shop, pay for and receive products.” The partnership complements H.E. Butt’s brick-and-mortar operations by growing its online presence. Founded in 2013, Favor quickly expanded its presence to 50 cities across the state of Texas. In 2017, Favor more than doubled its footprint across the state, proclaiming that it is the first U.S. on-demand delivery company to achieve profitability. Favor and H.E. Butt are a good fit, as both operate only in Texas.
Meanwhile, H.E. Butt also plans to bring its curbside service to its Central Market stores, beginning on Thursday with its Fort Worth store.
In other news, last week the Company launched a mobile app that it is piloting at two locations in San Antonio. The mobile app is called H-E-B Go and in some respects, mirrors Amazon Go, a new store launched by Amazon where customers pay for goods via smartphones and leave without having a cashier scan items. H.E. Butt’s app also enables customers to use mobile kiosks to scan coupons and buy alcohol.
Price Rite
Price Rite’s 11 locations across Connecticut are undergoing several in-store changes in a rebranding effort led by the Company's new president, Jim Dorey, touting the new name and logo of Price Rite Marketplace. The redesign features repositioned aisle markers with clearer signage and better organized products. Price Rite has also shifted stock to feature a mix of local, national, and private label products, with a focus on healthy alternatives and organics. Bill Devin, the Company’s director of operations for its New England Market, said, “We’ve taken our quality up a notch. We already had great quality, but consumers wanted healthier options. They wanted Wholesome Pantry items, which are the organic natural peanut butters and stuff like that.” Price Rite Marketplace also recently partnered with Instacart for home delivery. Price Rite Marketplace operates 65 stores, all of which are expected to receive the rebranding effort this year, and is a subsidiary of Wakefern Food.
Gelson's Markets
This week, Gelson’s Markets, which is owned by Arden Group, will reopen three stores located in Del Mar, La Costa/Carlsbad and Rancho Mirage, CA, following extensive remodels. The remodeled stores feature expanded produce sections and more prepared food and restaurant options. There are 27 Gelson’s Markets in Southern California.
Sprouts Farmers Market
Today, Sprouts Farmers Market opened a new, 30,000 square-foot store in Valrico, FL, in a former Albertson’s. It will be the state’s fifth Sprouts store. The Company’s stores average 28,000 square feet. The store will compete with a nearby Publix and a Fresh Market across the street. Sprouts also has locations in South Tampa and Carrollwood and is adding a second Pinellas location later this year. In 2017, Sprouts opened 31 new stores and plans to open approximately 30 more this year, including units in Clearwater, Winter Park and Naples.
Bon-Ton Stores, DIP
On February 16, the U.S. Trustee appointed the unsecured creditors committee for Bon-Ton Stores, DIP, consisting of Estee Lauder, Simon Properties, Keurig, Notations, General Growth Properties, Washington Prime, and Pension Board Guaranty Corporation. Pachulski Stang Ziehk & Jones LLP were appointed as attorneys to the creditors committee.
Store closing sales began on February 1 at 42 locations under the Bon-Ton banner as well as Bergner’s, Boston Store, Carson’s, Elder-Beerman, Herberger’s, and Younkers. More stores are expected to be added to the store closing process. Store closing sales are being conducted by a joint venture consisting of Gordon Brothers and Hilco Merchant Resources.
Gander Outdoors
Gander Outdoors is opening two former Gander Mountain stores this Saturday in Onalaska, WI and Portage, MI. Onalaska is the chain’s second store in Wisconsin and will be followed by openings in De Forest and Rothschild in February; Kenosha in March; Appleton, Baraboo, Eau Claire and Sheboygan in April; and Green Bay and Waukesha in May. The Portage store is also the chain’s second in Michigan and will be joined by openings in Flint, Marquette and Traverse City later this month; Coldwater in March; Saginaw in Apri; and Port Huron in May. As reported last week, Gander most recently opened stores in Hermantown, MN and Indianapolis, IN. In total, the new chain has 68 stores that are either already opened or opening this year, including 14 stores opening this month, and another 13 in March, 14 in April and 15 in May. Gander Outdoors is owned by Camping World; CEO Marcus Lemonis purchased Gander Mountain’s assets in May 2017.
Sportsman's Warehouse
Sportsman’s Warehouse plans to open a store in Anderson, SC in late June 2018, joining an existing South Carolina store in Columbia. The Company is currently renovating a property formerly leased by Kmart. The Company operates 86 stores nationwide, the vast majority of which are located in the western U.S. However, its growing corporate footprint includes nine stores east of the Mississippi River, in South Carolina, North Carolina, Mississippi, Louisiana, Tennessee, Kentucky, Virginia and West Virginia.
Ace Hardware
Ace Hardware’s fourth quarter sales increased 6.8% to $1.32 billion, reflecting a 3.1% rise in comps and the opening of new stores. Higher sales were noted across all product categories, with power tools and paint showing the largest gains. Retail sales increased 5.3% to $67.8 million. CEO John Venhuizen said, “New store growth, a 3.1% increase in same-store retail sales, along with revenues from our acquisition of The Grommet at the end of the last quarter, were the predominant drivers behind our strong 6.8% overall sales increase and record setting fourth quarter revenue.” During fiscal 2017, Ace added 152 new domestic stores and cancelled 97 stores. This brought the Company’s total domestic store count to 4,418 locations at the end of the fourth quarter, an increase of 55 locations from the same time last year.
Cracker Barrel
Cracker Barrel’s second quarter sales increased 2% to $787.8 million. Comps rose 1.1%, including a 2% increase in average check that was partially offset by a 0.9% decrease in comp restaurant traffic. Comp retail sales increased 0.5%. The average menu price increased 2.3%. Operating income was $76.7 million (9.7% of total revenue), a decrease from $82.7 million (10.7% of total revenue). Increases in store operating expenses, cost of goods sold, and general and administrative expenses were partially offset by reductions in labor and related expenses. Net income rose 72.9% to $91.1 million, including a $25.0 million benefit from U.S. tax reform.
Driven primarily by changes in the tax rate, the Company raised its guidance for fiscal 2018 EPS to $10.35 – $10.55 and adjusted EPS of $9.30 – $9.50. The Company continues to anticipate total revenue of $3.10 billion, reflecting the expected openings of 8 – 9 new Cracker Barrel stores and three new Holler & Dash Biscuit House restaurants. It lowered its comp expectations to 1% – 2%, down from 2% – 3%, and continues to expect flat retail comps. The Company now expects food commodity inflation in the range of 2.5% to 3% for the year, compared to its previous estimate of 2% – 2.5%.
Dine Brands Global
Dine Brands Global reported fourth quarter sales fell 3.5% to $148.8 million. Domestic system-wide comps increased 1.3% at Applebee's and fell 0.4% at IHOP. Net income was $85.5 million, compared to $21.3 million last year, primarily due to a benefit of $66.6 million related to the U.S. tax reform, partially offset by a decline in gross profit. The decline was due to an increase in franchisor contributions to the Applebee's national advertising fund, higher bad debt expense, a reduction in revenue recognized due to the non-collectability of Applebee's franchisee royalties, and the impact of restaurant closures.
For fiscal 2017, sales fell 4.6% and the Company reported a net loss of $330.5 million, primarily due to impairment charges of $531.6 million related to the write-downs of Applebee's goodwill and other intangible assets as well as lower gross profit. These items were partially offset by a tax benefit of $94.8 million.
Applebee's and IHOP are planning to close up to 120 restaurants between the two chains this year. Applebee's will close 60 – 80 locations in 2018, after closing 99 in 2017 and 46 locations in 2016. IHOP closed 23 locations last year and 16 in 2016.
Meanwhile, on February 14, the board approved a name change from DineEquity, Inc. to Dine Brands Global, Inc., effective February 20, 2018.
Genesco
On February 13, Genesco announced it is initiating a formal process to explore the sale of its Lids Sports Group business. The Company’s board established a special committee consisting of four independent directors, to oversee the sale process. Investment bank PJ Solomon was retained as an adviser. Lids has faced worsening sales from declining demand for major sports league headwear. Following Lids’ 9.5% sales drop in the third quarter driven by a 6% drop in comps, management guided comps to decline 4% for the fourth quarter due to decreased demand for NFL licensed merchandise. On a TTM basis, Lids contributed 28.6% of Genesco’s total sales, representing $817.6 million; however, it contributed only $23.5 million in operating income (17.9% of total operating income) for a 2.9% operating margin.
Sam's Club
Last Wednesday, Walmart’s Sam's Club said it plans to improve its e-commerce offerings by adding free shipping and opening more e-commerce warehouses this year. It will also consolidate its membership structure for customers and will now offer two membership options; one for $45 a year and one for $100 year (Sam’s Plus). It will offer free shipping on 95% of goods sold online, with no minimum order size for Sam's Plus members. Sam’s Club, which currently relies on Walmart's supply chain network to make online order deliveries, recently said it will open its own first e-commerce fulfillment center in Memphis, TN, and expects to ship its first package in the spring. It is also considering other regions, like Texas, Central Florida, Southern California, the Chicago area, the Mid-Atlantic and the Northeast, for new e-commerce warehouses. Last month, Sam’s Club closed 63 stores, or about 10% of its total store base, and laid off nearly 10,000 workers after a review of profitability. The moves are a part of a strategic shift by Sam's new CEO, John Furner.
Kirkland
Kirkland’s reported fourth quarter sales increased 10.5% to $224.6 million, and comps were up 2% compared to a 4.6% decline last year. Kirkland’s opened five stores and closed two underperforming locations during the period, bringing its total number of stores to 418. Fiscal 2017 sales rose 6.7% to $634.1 million, and comps rose 0.3% after a 2.9% decline in the prior-year period. The Company opened 31 stores and closed 17 over the course of the year. Management indicated that the Company experienced strong results in November and during the Black Friday weekend, but store traffic slowed in the latter half of the quarter, which led to higher-than-expected promotional activity. As a result, fourth quarter earnings were impacted by merchandise margin pressure. CEO Mike Madden commented, “While we are disappointed with our fourth quarter earnings results, we believe we can significantly improve EBITDA in 2018. We’ve implemented a number of changes to improve efficiency and reduce our operating costs, and we expect to benefit from a full year of the initiatives begun in 2017 to repair underperforming categories and improve the overall customer experience.” Based on fourth quarter sales results, Kirkland’s now expects fiscal 2017 EPS of $0.32 – $0.34, down from previous guidance of $0.50 – $0.60. The Company expects to release full fiscal 2017 results on March 16.
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