Kroger
According to a report published last week, Kroger is exploring an alliance with China-based e-commerce giant Alibaba. Multiple sources claim that senior Kroger executives met with senior Alibaba officials last month in China and, while details of the discussions were not released, a Chinese government press release notes that the two companies have teamed up on a deal “to speed up the integration of online and off-line sales.” Similar to Amazon following its acquisition of Whole Foods, Alibaba operates supermarkets that use Amazon Go-like technology, allowing for cashier-less stores. A partnership would allow Kroger access to the Alipay platform, which allows customers to pay for goods through an app. Likewise, Kroger could direct customers to the Alibaba site to purchase general merchandise. An Alibaba spokesperson commented, “Alibaba has dialogue with hundreds of businesses around the world every day about expanding commercial relationships and reaching Chinese consumers, and Kroger is an example of just that.”
Last week, we reported on recent claims that Kroger may be considering an acquisition of online wholesaler Boxed as well as the e-commerce business of Overstock.com. However, sources subsequently indicated that Boxed.com rejected a purchase offer made by Kroger.
Separately, Kroger announced last week that its Simple Truth brand has achieved $2.00 billion in annual sales. The brand offers more than 1,400 products across multiple categories, including grocery, meat, produce, deli, bakery, baby, household essentials, personal care and Fair Trade Certified. The Company plans to continue to introduce new items to the line in 2018.
Since falling from just over $35 a share at the end of 2016, to below $20 in July 2017, when investors were spooked by the implications of Amazon’s acquisition of Whole Foods, Kroger’s shares seem to have regained much of that lost confidence and are up more than 50% since that time, surpassing $31 a share yesterday.
Casey's General Stores
When Kroger announced last October that it was exploring strategic alternatives for its nearly 800 convenience stores, which could fetch up to $2.00 billion if sold, we noted in this publication that geographically, Casey’s General Stores seemed a good fit for the stores, but that the Company might not want to operate multiple banners and types of stores that do not fit into its current marketing/branding strategy. However, facing pressure from activist investors, Casey's has reportedly submitted an initial bid for Kroger's convenience stores which operate under the Kwik Shop, Turkey Hill and Tom Thumb banners, according to sources familiar with the matter. Final offers in the sale process are due in early February. In January, JCP Investment Management called for the Company to explore strategic alternatives, including a potential sale. James Pappas, managing member of investment firm JCP Investment Management LLC suggested that the chain is “significantly undervalued” and urged the board to “immediately engage a financial adviser to explore all strategic alternatives, including a potential sale, merger or similar transaction in order to maximize shareholder value.” Mr. Pappas represents JCP Investment Management LLC, BLR Partners LP and Joshua E. Schechter, who collectively own about $45.0 million worth of Casey's stock. According to the reports, Casey’s believes a deal to purchase the Kroger stores could dampen JCP’s desire to push for a sale of the Company, since any potential suitor would be less interested in acquiring a Company in the midst of its own acquisition integration. We continue to believe that acquiring the Kroger stores would present a significant business risk for Casey’s, given the logistical challenges presented by the nearly 40% increase in store base and the required capital necessary to re-banner the stores and do necessary remodels to integrate Casey’s prepared food offerings into all of those locations (not to mention the additional debt required to finance the deal). Separately, Casey’s announced last week that it acquired five convenience store locations in the Jefferson County, WI area from Whitewater, WI-based Frawley Oil Co. The acquisition, terms of which were not disclosed, is expected to close in the first week of February. Once completed, the Company expects to rebrand the sites.
Stein Mart
According to published reports, Stein Mart has hired advisers to help it explore strategic alternatives. The Company has reportedly hired Foley & Lardner LLP as its legal adviser. Stein Mart has also engaged Alvarez & Marsal to review its operations for performance enhancements. According to the reports, the Company is considering putting itself up for sale, obtaining new financing, or a possible restructuring. The Company has had merchandising issues, and comparable store sales have fallen for nine consecutive quarters. Stein Mart did not release holiday sales results. Unlike many other distressed retailers, the Company has modest debt on its balance sheet, consisting primarily of revolver borrowings.
Yesterday, Stein Mart announced that its board appointed a special committee to explore all opportunities to improve operating performance and identify potential strategic alternatives. The Company has retained PJ SOLOMON as an investment banking and financial advisor. CEO Hunt Hawkins commented, “Given the continuing challenges of the retail environment, it is prudent for us to review our strategic options while focusing on ways to improve our business.” Stein Mart said it will not disclose further developments unless and until the committee has approved a transaction or otherwise determines that disclosure is appropriate.
J.C. Penney
J.C. Penney will close its store at the Westfield Garden State Plaza in Paramus, NJ on March 10; liquidation began last Thursday. A spokesperson commented, “As part of the Company’s ongoing efforts to achieve sustainable growth and long-term profitability, we continually evaluate our store portfolio. During this review, the decision was made to close the J.C. Penney at Garden State Plaza.” Last year, the Company announced it would close 138 stores, but the Paramus location was not on the released list of stores slated for closure. There are 13 remaining J.C. Penney stores in New Jersey.
Ahold Delhaize
Ahold Delhaize announced pro forma net sales of €15.76 billion for the fourth quarter ending December 31. Pro forma net sales declined 2.8% but were up 2.5% at constant exchange rates. For the full year, pro forma net sales were €62.69 billion, up 0.6%, or 1.7% at constant exchange rates. In an interview following the opening of the first Amazon Go store last week, Ahold Delhaize CEO Dick Boer was asked if automated stores were the future of food retailing. Mr. Boer opined that automation was only one piece of the grocery retail puzzle, noting that higher margin fresh products account for more than 50% of the Company’s sales, while Amazon Go is more focused on packaged goods. “What we do on the fresh side is create entertainment, create excitement and create innovation around fresh,” Mr. Boer said. “We see opportunities also for the service levels in the stores, and the excitement for the customers.”
Lidl
Lidl made news last Thursday by announcing its entry into the New York City metro area, signing a 36,000 square foot lease in the Staten Island Mall. No time frame was given for the opening. The new store will be part of extensive renovations the mall is undergoing. Competitors on Staten Island include Stop and Shop, Key Food, ShopRite, Trader Joe’s, and several smaller independent grocers. Lidl indicated it was reevaluating its expansion plans after initially opening 48 stores in the U.S. last year. Much of the revised planning focuses on changes to the real estate acquisition process and the Company’s plan to switch from strictly ownership of stores to adding leased properties in the future. While the new location meets the criteria of being in a higher-traffic location, the store size is similar to the owned stores (36,000 square feet) the Company has opened in the U.S., which has been cited as one of the problems in its real estate portfolio. It was thought the Company would seek out smaller, 15,000 –25,000 square foot sites, more in line with its European store size.
Sobeys
Sobeys has partnered with U.K.-based Ocado Group to develop its online grocery shopping business. Ocado will provide support and engineering services; the two companies are planning to build a customer fulfillment center in the Toronto metro area, which is slated for completion in about two years. Ocado has its own grocery and retail businesses under Ocado.com and other specialty banners as well as a corporate partnering business. Canadian grocers have been ramping up their online initiatives in recent months following Amazon’s acquisition of Whole Foods last year
In other news, Sobeys will close 10 Safeway stores in British Columbia, Canada this summer. UFCW Local 1518 said Sobeys informed members of the decision last Tuesday, on the eve of bargaining for all Safeway stores in B.C. The union also said Sobeys indicated that if it gets favorable terms and conditions for its FreshCo discount banner, it may open FreshCo stores at five of the closed Safeway locations. The locations slated for closure include Lougheed Mall and Royal Oak in Burnaby, City Square and Point Grey in Vancouver and Sunwood Square in Coquitlam. Stores that may reopen as FreshCo locations include Blundell and Broadmoor in Richmond, Newton Town Centre and Strawberry Hills in Surrey, and Safeway Mission. The stores are scheduled to close on May 5 with the exception of the Safeway City Square location, which will close on July 28.
7-Eleven
7-Eleven is expanding its partnership with facility and asset management solutions company Vixxo to include its recently acquired Sunoco stores. Vixxo will provide maintenance services, including overall maintenance for fuel, food and beverage services and HVAC, to more than 500 Sunoco locations on the East Coast. 7-Eleven first partnered with Vixxo in 2009 for maintenance services at its corporate and franchisee-owned 7-Eleven stores across North America.
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According to the 2018 NACS/Nielsen Convenience Industry Store Count, the number of U.S. convenience stores increased to a record 154,958 stores as of December 31, 2017, a 0.3% increase (423 stores) from the previous year. The convenience store count is significantly higher than other channels of trade, accounting for more than one third (34.4%) of the brick-and-mortar retail universe tracked by Nielsen in the U.S. According to the study, the retail drug store count fell 1.07% to 43,169; and the supermarket count fell 0.11% to 51,132. Dollar stores was the only other segment to see an increase, up 5.2% from 28,832 to 30,332.
Wegmans
Wegmans received city council approval that will allow it to begin construction on a new store in Alexandria, VA.
ABC Supply
ABC Supply opened a new location in Fairfield, CA, its fifth new branch in the state in the past eight months. The Company now operates over 30 locations in California and more than 700 locations nationwide.
Toys 'R' Us
On January 24, Toys ‘R’ Us Inc., DIP announced that it expects to close 182 of its 791 stores (about 23%) in the U.S (click here for a complimentary listing of the closures). The majority of the stores will close in the middle of April. The stores, characterized as “underperforming,” collectively constitute about 6.9 million square feet of retail space. Most of the closing stores have eroding sales trends and have failed to meet performance standards. About half of the closing units are Babies ‘R’ Us, representing about 44% of that banner’s locations. The determination of whether to close all 182 stores will depend on the outcome of negotiations with landlords for more favorable lease terms and rent reductions. Management said it plans to convert a number of the remaining locations into co-branded Toys ‘R’ Us and Babies ‘R’ Us stores. It is important to note that the president of the Company’s Canadian operation, Melanie Teed-Murch, issued a statement that all 83 of its locations there would remain open.
A day earlier, the Court approved a motion by the Debtor to extend the 210-day deadline to assume or reject unexpired store leases in exchange for consideration to be paid to the consenting landlords. The deadline was originally set to expire on April 16, 2018. The Debtors will compensate the landlords up to $1.3 million for attorney fees and other expenses. As part of the agreement, the Debtors stipulated that if they do not reject a lease and surrender possession of the premises by August 31, they will not reject the lease until January 4, 2019, at the earliest (the Blackout Period). The Debtors reserve the right to reject any leases during the Blackout Period if such a rejection is part of a confirmed Chapter 11 Plan of Reorganization.
Bozzuto's
Bozzuto’s purchased two I.G.A. supermarkets, in Montauk and East Hampton, NY from owner Robert Stark. Bozzuto’s plans to operate the stores under the I.G.A. banner and maintain their original staff.
Butera Finer Foods
A new, 63,000 square-foot Butera Finer Foods opened in Des Plaines, IL on January 19, its third in the city. The family-owned Company operates 13 Chicago-area stores and 104 Piggly Wiggly markets in Wisconsin. According to owner Paul Butera Sr., the grocery business has become more competitive with new operators such as Mariano’s and Fresh Thyme coming into the market. Nevertheless, Butera paid $32.0 million in 2016 to buy the real estate assets of Joe Caputo & Sons, which became overextended with its own expansion plans. Butera recently opened other new stores in Palatine and Algonquin, IL.
Wegmans
A new Wegmans Food Markets in Virginia Beach is scheduled to open in 2019. Construction on the 130,000 square-foot store is expected to start this spring.
Steak n Shake
Steak n Shake’s comps have been negative and EBITDA had fallen 75% for the quarter and 56% for the 9-months ended September 30, 2017. The Company had stated should operations continue to decline, it may begin selling excess properties and explore financial alternatives, and it would need to dig deep into its $15.0 million credit facility, which had been reduced from $30.0 million in August 2017. The drop in performance as well as concern over future liquidity prompted us to downgrade Steak n Shake’s credit rating two notches to D2 from C2.
On Friday, S&P lowered Steak n Shake’s corporate credit rating to CCC+ from B-. The outlook is “negative.” It also lowered the issue-level rating on the Company’s secured credit facility to CCC+ from B. According to S&P, “The downgrade reflects our view of Steak n Shake's capital structure as potentially unsustainable, driven by its weak operating performance and our view that increased restaurant industry competition will further pressure profitability and cash flow generation.”
Publix Super Markets
Publix Super Markets has opened the first two of more than two dozen telehealth clinics at Publix pharmacies through a partnership with BayCare Health System. Called Walk-In Care Provided by BayCare, the clinics feature private rooms with an interactive kiosk that enables customers to receive non-urgent medical care from physicians via teleconferencing and medical diagnostic equipment. The Company plans to operate 26 Walk-In Care centers at its pharmacies by the end of the year. The first clinic opened in December in Valrico, FL, and the second opened on January 8 in Tampa, FL. Publix plans to open 24 more telehealth clinics in its in-store pharmacies across the Tampa Bay area.
Kinney Drugs
Kinney Drugs is closing its 12,000 square-foot store in Manlius, NY, after just three years in operations. According to Kinney, the closure is due to "unique challenges with that specific location which have led to its underperformance." A CVS drugstore recently opened nearby. The exact date of the closing is still being finalized. Kinney operates 98 stores, including 30 in Central New York. The map below shows the areas in New York where CVS (blue pin) operates within ten miles of a Kinney location (orange pin).
Shopko
Last week we announced that Spirit Realty Capital provided Specialty Retail Shops (Shopko) with a $35.0 million term loan into its existing $784.0 million asset backed lending facility, sharing the collateral on a subordinated basis but senior to landlord claims and other unsecured creditors. During an investor call discussing progress with its previously announced spin-off of certain assets including the Shopko store leases, Spirit also provided an update on Shopko, discussing its corporate reorganization, operational initiatives including cost cuts and headcount reductions, store rationalization plan, and plans to increase private-brand penetration.
Target
On the heels of its $550.0 million acquisition of Shipt, Target announced it will debut same-day delivery services via Shipt on February 1 across 57 stores in South Florida and Birmingham, AL. The Company plans to rapidly expand the service to nearly half of its 1,834 stores by the end of the first quarter (February 12) and the majority of its stores in time for the 2018 holiday season. Same-day delivery will initially be available for an assortment of groceries, essentials, home and electronics; by the end of 2019, it will include all major product categories.
Walmart
Last week, Walmart announced a strategic alliance with Japanese e-commerce giant Rakuten that “leverages each company’s unique strengths and assets to expand consumer reach and enhance how customers are served in Japan and the U.S.” The companies formed an exclusive retail alliance enabling Walmart to begin selling eBooks and audiobooks, as well as offer Rakuten Kobo eReaders in Walmart stores and online in the U.S. starting later this year; the collaboration also includes the launch of a new online grocery delivery service in Japan through Walmart’s Seiyu GK subsidiary beginning in the third quarter of 2018, for which the companies will establish a dedicated fulfillment center and offer delivery from Seiyu stores.
In other news, the Company confirmed that it has cut up to 500 corporate staff positions in its Bentonville, AR headquarters across areas that include human resources and real estate, as part of restructuring efforts. The Company said, "As we've previously stated, we've been looking at our structure for some time as we explore ways to operate more effectively."
Earlier today, Walmart said it plans to share more data with suppliers to move faster in replenishing out-of-stock items, as it tries to better compete. Its “On Shelf Customer Availability (OSCA)” data was previously only accessible internally but will now be shared. This is in line with its goal announced in 2017 of having orders delivered on time 95%, resulting in $1.00 billion in added revenue due to improved product availability at stores. Walmart has been implementing this goal in phases and will now require large suppliers to deliver full orders within a specified delivery window 85% of the time or face a fine of 3% of the cost of delayed goods. Previously, large suppliers had to hit a 75% threshold to avoid fines. For smaller suppliers, the delivery threshold will move to 50%, up from 33%. The change is expected to take effect in April.
