January 3, 2019
We Are Tracking Approximately 1,000 Future Fitness Openings In 2019
Amazon
According to published reports, Amazon is planning to expand its Whole Foods Market portfolio, adding more stores to put more customers within its two-hour delivery service range. According to sources familiar with the matter, Whole Foods employees have visited regions of Western North America for potential retail spaces in parts of Idaho, southern Utah, and Wyoming, where it currently has no stores. Amazon also plans to expand its two-hour delivery service, Prime Now, to nearly all of its roughly 475 Whole Foods stores in the U.S., Store Concentration Map below. Prime Now services include a two-hour delivery option to subscribers in more than 60 cities and online grocery pickup from Whole Foods stores in as little as 30 minutes in nearly 30 cities.
Sears Holdings Corporation
In an SEC filing, Sears Holdings Corporation, DIP 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 its 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.
ESL Partners, L.P. submitted a formal bid for 425 stores and other assets of Sears Holdings Corporation, according to published reports. The $4.60 billion bid is partly comprised of a $1.80 billion credit bid and funding from a $350.0 million revolver and a $950.0 million asset based loan, provided by Bank of America and Citigroup (the Company’s existing lenders) and Royal Bank of Canada. The bid is also funded with $400.0 million in non-bank financing. Details of other funding for the $4.60 billion bid were not provided. Other bids were reportedly submitted by liquidators. The Debtor has until January 4 to determine whether ESL is a “qualified bidder.” If so, an auction is scheduled for January 14.
ESL Partners, L.P. submitted an indication of interest in acquiring certain real estate of the Debtor (the Indicative Real Estate Bid), including ground leases, for up to $1.81 billion, in the event the going concern proposal is not qualified or accepted. The Indicative Real Estate Bid is non-binding, and it remains subject to negotiation of a satisfactory asset purchase agreement. ESL Partners also provided details of the approximately $4.40 billion in consideration for its going concern proposal.
Published reports state that the Court approved the sale of $880.7 million of Medium Term Notes (MTN) to Cyrus Capital Partners L.P. for $82.5 million. Cyrus will use the notes to facilitate the settlement of credit default swaps (CDS). The Court had previously approved the transaction, but issues arose concerning rules in the CDS market, which impacted demand and the availability of bidders. Separately, it should also be noted that Cyrus was previously declared the winning bidder to become the lender under the $350 million Junior DIP Term Loan.
Management announced the closure of 86 additional locations, including 80 stores, five Sears Auto Centers, and one distribution center. Liquidation sales will start in two weeks, and the units will close during March 2019, see below for Store Closing Map. Click here to request a list of the closing Sears/Kmart locations.
The Court also issued final authorization for the Debtor to access the $350.0 million Junior DIP term loan.
Codeverse
Codeverse operates studios where children ages 6-13 learn KidScripts, a language the startup developed to teach the fundamentals of coding. The Company began with a studio in Lincoln Park in Chicago, and after raising $10.0 from investors this past summer, recently opened two more locations in the Naperville and Wilmette suburbs. The Company plans to open a studio in a new market in 2019. Eventually, Codeverse plans to expand nationally and offer KidScript as a standalone service.
Gap
On January 1, Gap unexpectedly shuttered its flagship location on Fifth Avenue in Manhattan, NY. The move was surprising given its prime real estate location, although CEO Art Peck did say in late 2018 that the Company would be closing “hundreds” of its 775 Gap stores worldwide. Gap is not the only retail store on Fifth Avenue that is closing; Ralph Lauren Polo closed its flagship location a year ago, and Henri Bendel is set to close this month. Yesterday, Lord & Taylor’s 104-year old flagship closed its doors; the 676,000 square-foot building was sold to co-working business WeWork for $850.0 million in fall 2017. According to Mr. Peck, Gap’s namesake banner stores generate 20% of sales online and 30% from more profitable outlet stores, while the remaining flagship stores are generally dragging down profits.
Pet Supplies Plus
On December 13, private equity owner Irving Capital sold Pet Supplies Plus (PSP) to private equity firm Sentinel Capital Partners. Terms of the acquisition were not disclosed. Golub Capital provided part of the acquisition financing. As the third largest pet store chain, PSP sits behind and competes with PetSmart and Petco.
Pet Supplies Plus is comprised of 448 Company-owned and franchised stores, with the stores about evenly split. Estimates indicate that the stores average about $2.5 million in sales, putting total annual sales in the range of $1.12 billion. The Company has grown through the use of the franchising model. Sentinel Capital has significant experience in the franchise business; it owns franchisees in the fast food, automotive, and healthcare segments. Sentinel has investments in Taco Bell, Checkers, TGI Fridays, Captain D’s, Fazoli’s, and Pizza Hut.
Buehler
Buehler, Inc., DIP and Buehler, LLC filed a motion seeking the entry of an order establishing bidding procedures in connection with the sale of its Save-A-Lot stores. The debtors explained that while they initially intended to close certain unprofitable stores, they have since determined their best strategy for reorganizing continues to be closing unprofitable stores, in addition to selling their seven better-performing Save-A-Lot branded stores, and focus on managing their four better-performing Cash Saver branded stores. The Debtors have asked the Court to establish a bid deadline of January 18, schedule a January 25 auction, and hold a hearing to consider the approval of the sale on January 28.
Amazon
Amazon said it had a “record-breaking” holiday season, with a billion items shipped for free with Prime in the U.S. alone. In contrast, sales at department stores slipped 1.3%, after two years of below 2% growth, largely due to store closures. But online sales grew 10.2% for the group. Apparel and home improvement spending had a strong season, with growth of 7.9% and 9%, respectively. But sales of electronics and appliances fell 0.7%, compared with a 7.5% rise last year.
Meanwhile, Amazon said it is going to lower some fees it charges third-party sellers on its marketplace. The marketplace allows third-party sellers, who account for over 50% of the total units sold on Amazon, to sell on its website and app.
In other news, Amazon announced plans for its first Mississippi fulfillment center to be located in Marshall County. The 554,000 square-foot facility will ship household consumer goods.
Finally, Amazon announced plans to lease 10 more Boeing 767 freighters from Air Transport Services Group, as it expands Amazon Air’s network, increasing the fleet to 50 aircraft. Amazon previously leased 40 freighters in 2016.
Lululemon Athletica
Lululemon Athletica partnered with Penguin Random House books for a pop-up library located in its HUB Seventeen community space in New York City’s Flatiron district, where Lululemon hosts classes. The pop-up library includes spaces for guests to read or checkout over 1,000 books, as well as iPads to listen to audiobooks. The pop-up will also host several events throughout its duration such as celebrity book readings and food experiences. It will run through the spring of 2019. The move comes as the Company is transitioning from an athletic brand to a lifestyle brand. It has been pushing to lure more male customers, calling attention to its sweat classes and other events, and piloting a membership program in Edmonton, Alberta in Canada for a $128 fee.
Kings Food Markets
Joseph Parisi has been promoted to COO at Kings Food Markets and Balducci’s Food Lover’s Market. Mr. Parisi fills the vacancy left when President and COO Richard Durante left in April 2017 to join The Fresh Market as EVP of Midwest and Southeast merchandising, becoming CMO a year later. Under parent company AG Supermarket Holdings LLC, Kings operates 25 supermarkets in New Jersey, New York and Connecticut, and Balducci’s, a specialty gourmet grocer acquired in 2009, has eight stores in Connecticut, Maryland, New York and Virginia. The Company also has a Balducci’s Gourmet On The Go location in New York City and a Balducci’s Express outlet in Philadelphia.
Target
Target has signed a lease for a second distribution warehouse in Hawaii, located in Central Oahu. At 124,450 square feet it is nearly four times the Company’s only other warehouse (32,540 square feet) in the Islands located in Halawa Valley. Target has seven stores in Hawaii, including four on Oahu, two on the Big Island and one on Maui. According to a Target representative, while the Company “is continuously evaluating potential store locations,” there are no plans at this time to add to its Hawaii retail footprint.
The Relay Shoe Company
A Delaware bankruptcy Court approved the liquidation plan for The Relay Shoe Company, DIP (fka The Rockport Company, DIP), according to a court filing. Rockport filed for Chapter 11 protection in May 2018, with the aim of being acquired by a private equity firm. In August 2018, the Company sold most of its assets, including the Dunham, Aravon and Rockport brands, wholesale and e-commerce operations in North America for those brands, and all international operations, for $150.0 million, to an affiliate of Charlesbank Capital Partners. The sale did not include the Company’s 27 U.S. stores and 33 Canadian stores, which were shuttered. The Company had to pay former owner Adidas $8.0 million from its sale proceeds (for post-closing adjustments) and change its name following the sale. The Rockport Company, LLC, the entity established from the assets acquired by Charlesbank, continues to operate. Rockport recently announced the hiring of Javan Bunch as president, and it is working on a series of improvements and advancements in product and marketing efforts.
Rite Aid: Strategic Sales Insights
In its first two quarters since terminating the planned Albertson’s merger amid protests from Rite Aid institutional shareholders who felt it undervalued the chain, Rite Aid posted a modest improvement in sales during the second quarter. However, its outlook remains challenged as it continues to contend with a leveraged capital structure, weak cash flow, and industry headwinds. Our report takes a close look at the Company’s operational and competitive status, including market position, real estate and sales trends, and provides visual competitive analyses as well as key real estate metrics like store count, average sales per store and sales per square foot.
Gymboree Group
On November 28, we reported that Gymboree Group (i) is considering closing up to half of its roughly 900 stores, (ii) retained Berkely Research Group LLC to help it formulate strategic options, and (iii) the options reportedly include “filing for bankruptcy again.” On December 19, published reports stated that the Company is evaluating bankruptcy financing, as it prepares for a possible second Chapter 11 filing in less than two years. A bankruptcy filing could occur as soon as early January 2019 and would enable the closure of most of its stores, according to the reports. The Company is also evaluating keeping some of its stores open while it seeks a buyer. Under that scenario, the Company may close a majority of its 900 stores, while it has identified over 100 of its better-performing Janie & Jack stores to put up for sale. The reports also note that the negotiations remain “fluid” and may not result in a bankruptcy filing. On July 16, 2018, the Company re-launched the Gymboree brand, following its exit from bankruptcy on September 29, 2017, with an $85.0 million term loan from Goldman Sachs and a $200.0 million revolving credit facility from Bank of America, Merrill Lynch and Citizens Bank. The Chapter 11 filing occurred on June 11, 2017.
Boot Barn
Boot Barn acquired the naming rights to Bourbon Brothers Presents, LLC, the operator of a live music venue and event center in Colorado Springs, CO, via an agreement with the building entity. The venue, located adjacent to a Bass Pro Shops, is host to country music artists, songwriters, and Southern rock musicians. Boot Barn, which partners with country musicians, is renaming the venue Boot Barn Hall at Bourbon Brothers. The venue will seat between 400 and 1,200 concertgoers and will open on March 8.
Rite Aid Corporation
Rite Aid Corporation announced results for its third quarter ended December 1. Revenues from continuing operations for the quarter increased 1.8% to $5.45 billion. Retail Pharmacy Segment revenue rose 0.4% to $3.98 billion, due to a 1.6% increase in same store sales, partially offset by store closures. The comp increase was driven by a 3.1% increase in pharmacy, partially offset by a 1.5% decrease in front-end sales. Revenue in the Pharmacy Services Segment rose 5.6% to $1.53 billion, attributable to an uptick in Medicare Part D membership. Although the positive sales growth is encouraging, EBITDA was essentially flat for the quarter due to gross margin erosion. The Company also narrowed its fiscal 2019 adjusted EBITDA guidance range to $545.0 million – $570.0 million, from $540.0 million – $590.0 million previously. Original guidance was for EBITDA of between $615.0 million – $675.0 million, and compared to fiscal 2018 pro forma adjusted EBITDA of $647.5 million (pro forma for the sale of stores to Walgreens and the TSA fee of approximately $96.0 million to be received in fiscal 2019). During its investor conference call, management disclosed that it recently appointed Justin Mennen as its new SVP and CIO, and this spring will launch a pilot delivery program with Instacart. Mr. Mennen most recently served as chief digital officer and CIO at CompuCom Systems Inc.
Meanwhile, Rite Aid and McKesson announced an agreement to key terms that will continue the companies’ pharmaceutical sourcing and distribution partnership for an additional 10 years, through 2029. Under these terms, McKesson will continue providing Rite Aid with sourcing and direct-to-store delivery for branded and generic pharmaceutical products.
Rite Aid also announced that it completed a refinancing of its $2.70 billion secured revolving credit facility that will extend its debt maturities and provide additional liquidity. The refinancing is expected to include (i) the replacement of its existing revolving credit facility that was scheduled to mature in 2020 with a new $2.70 billion senior secured asset-based revolving credit facility and (ii) a new $450.0 million senior secured asset-based term loan facility advanced on a “first-in, last-out” basis. The new senior secured credit facilities are expected to mature in 2023, subject to an earlier maturity on December 31, 2022 if Rite Aid has not repaid or refinanced its existing 6.125% Senior Notes due 2023 prior to such date (approximately $1.40 billion outstanding). At its third quarter ended September 1, the Company had $1.24 billion in borrowings outstanding under the revolver.
Store Activity
Whole Foods
A new Whole Foods will open in Commack on Long Island, NY in 2019. The store will occupy the space of a former King Kullen that closed in 2017. This will be the fourth Long Island Whole Foods and second in Suffolk County; the Company currently has locations in Lake Grove, Jericho and Manhasset.
Click here to request a list of future Whole Foods locations.
Lidl
Lidl is expanding in Georgia with the opening of three new stores in January and February. Built from the ground up, the stores, which will be the Company’s first in the Atlanta area, are located in Powder Springs, Snellville, and Mableton. As you can see from the below Future Retail Openings Map, the Company has six other planned openings for the state.
K-V-A-T Food Stores
K-VA-T Food Stores will build a 43,700 square-foot Food City in Erwin, TN, expected to be completed this summer. In addition to expanded grocery and prepared food sections, the store will include a pharmacy, drive-thru, Gas n’ Go, and GoCart curbside pick-up. K-VA-T operates 130 retail stores throughout southeast Kentucky, southwest Virginia, eastern Tennessee, Chattanooga, and northern Georgia.
Fiesta Restaurant Group
On December 20, Fiesta Restaurant Group announced that it will close nine Taco Cabana restaurants in Texas as well as 14 Pollo Tropical restaurants, which includes five Florida units and all nine units in the Atlanta, GA area, meaning it is exiting Georgia entirely. These closures follow the completion of a comprehensive restaurant portfolio review under the Company’s Strategic Renewal Plan, which began in February 2017 with the appointment of the Company’s current CEO Richard Stockinger.
Yum! Brands
Yum! Brands recently opened three new Taco Bell restaurants in New York City, as part of its previously announced plan to enter urban markets. The Company said it partnered with New York beer brewer Blue Point Brewing Co. to launch Big City Bell Pilsner, which will be available at all three Manhattan locations.
Click here to request a list of future Yum! Brands locations.
Saks Fifth Avenue
Saks Fifth Avenue is closing its women’s store at The Brookfield Place in Manhattan, NY this Saturday. The Company indicated that its men’s store, which opened in February 2017, will remain open. The women’s store, opened in September 2016, “was a test concept where we learned even more about how our women customers like to shop in New York City.” Meanwhile, the chain’s flagship on Fifth Avenue is undergoing significant renovations, including the move of its beauty section to the second floor. Saks Fifth Avenue is a subsidiary of Hudson’s Bay Company. Another HBC subsidiary, Lord & Taylor, closed its Fifth Avenue flagship yesterday, having sold the 676,000 square-foot building to WeWork for $850.0 million. The chain was originally planning to continue operating a scaled-down retail store, but in June 2018 announced it would totally exit the building. WeWork is planning to have three floors of retail in the building and use the rest of the space for itself.
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.
