Sears
Sears Holdings announced on January 4 that it plans to close an additional 103 stores, consisting of 64 Kmart and 39 Sears locations (click here for a complimentary geo-coded list). The stores are expected to close between early March and April with liquidation sales beginning as early as January 12. After this latest round of store closings the Company will operate approximately 401 Kmart stores and 537 Sears locations. To put that in perspective, at the end of fiscal 2013 Kmart operated 1,221 stores and Sears had 798 locations.
Sprouts Farmers Market
Sprouts Farmers Market reported preliminary results for its fourth quarter and fiscal year ended December 31, including 4Q comp growth of 4.6%. For fiscal 2017, it expects sales growth of 15.3%, comp growth of 2.9%, and EPS to be slightly above its previously announced guidance of $0.98 – $0.99. This excludes the expected favorable impact resulting from the federal tax reform that will result in a revaluation of the net deferred tax liability balance and a consequential reduction in the income tax expense in 4Q17.
On January 4, Sprouts Farmers Market announced six new locations scheduled to open in 2Q18, including its first in South Carolina, located in Simpsonville. The others will open in Augusta, GA; Charlotte, NC; Lincoln, CA; San Diego, CA; and Sparks, NV. With these new openings, the Company will operate in sixteen states. During 2018, Sprouts plans to open approximately 30 new stores across the country, including stores in three new states; Maryland, Pennsylvania and Washington.
Macy's
Macy’s announced that its comparable sales on an owned plus licensed basis increased by 1.1% in the combined November/December period. Comps for the same period last year declined 2.1%. Macy’s saw improved holiday sales across Macy’s, Macy’s Backstage, Bloomingdale’s, Bloomingdale’s The Outlet and Bluemercury. Based on holiday results, management narrowed the range of its previously provided full-year sales guidance. The Company now expects adjusted EPS of $3.59 – $3.69, compared to prior guidance of $3.38 – $3.63 per share.
Macy’s announced the closure of 11 Macy’s stores, four of which were previously disclosed. The Company intends to close approximately 19 additional stores as leases or operating covenants expire or sale transactions are completed. Macy’s also announced restructuring activities, including: (i) in-store staffing adjustments and (ii) further streamlining of certain non-store functions. Management expects annual expense savings of $300.0 million beginning in fiscal 2018, as well as one-time charges of approximately $160.0 million to be booked in the fourth quarter of 2017.
Casey's General Stores
In a letter to shareholders of Casey's General Stores dated January 3, 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.
In other news, Casey’s is reportedly proposing a $35.0 million expansion at its headquarters in Ankeny, IA. The proposal will encompass 60,000 square feet and comes just as the Company’s store count surpassed 2,000 in November.
Camping World
Following some initial hesitation, it appears Camping World Holdings is making progress in its plan to open the acquired Gander Outdoors (fka Gander Mountain) locations. The Company previously stated its intention to operate 70 or more locations subject to negotiating acceptable lease terms with landlords, with 15 – 20 of the stores opening by the end of November 2017. Most recently, management said it planned to open the initial 15 – 20 Gander Outdoors stores by the end of 1Q18 and an additional 40 – 45 stores during 2Q18 and 3Q18. Last week, the Company stated that following negotiations and remodeling existing locations, it now plans to open 69 locations by May 2018.
SRS Distribution
SRS Distribution opened three new stores in Bremerton, WA; St. Augustine, FL; and Corpus Christi, TX. The Bremerton location will operate as a Stoneway Roofing Supply, the St. Augustine location will operate as Suncoast Roofers Supply, and the Corpus Christi location will operate as Southern Shingles. Each will carry a full line of roofing products and will serve roofing contractors, remodeling contractors, and home builders. With the new locations as well as the nine stores the Company acquired in Florida and Ohio in December, SRS currently operates 206 locations in 41 states.
Aldi
According to published reports, Aldi recently opened a remodeled store near its Batavia, IL headquarters that includes an in-house bakery and a fresh produce section positioned at the front of the store. The additional bakery amenity is offered at rival Lidl stores.
Aldi also plans to open its first Kingwood store on Thursday as part of its aggressive expansion throughout the Houston, TX region. The store will offer a wider selection of fresh products, including produce, dairy and baked goods. Aldi intends to add as many as 17 stores and invest $34.0 million in store renovations in the Houston region by the end of this year.
Kroger
Kroger recently announced six underperforming store closures. The Company’s Central Division is closing two underperforming stores in Peoria, IL at the end of January. Two underperforming stores in Memphis, TN will close by February 3, a store in Columbus, OH will close January 31, and a store in Brownwood, TX will be shuttered in March. The Company commented, "Within the past several years, we attempted to increase sales, profitability and store conditions, but despite our best efforts, we were not successful."
AggData's Future Store Closing Database Currently Contains 100+ Locations Scheduled To Close In 1Q 2018.
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Giant Eagle
Giant Eagle will close one of its two grocery stores in Monroeville, PA on February 3. The Company said the lease on the 32,000 square-foot store was set to expire in the spring. The store is only two miles from another, much larger Giant Eagle in the city, where it recently invested more than $1.0 million in renovations.
Hy-Vee
In May 2017, Hy-Vee announced it would experiment with a hybrid 12,000 – 16,000 square-foot Fast & Fresh store concept. The format will offer groceries and fuel and will serve as an alternate pickup point for online orders. The first concept stores are expected to open in Des Moines and Altoona, IA later this year; a third location was announced last week for Waukee, IA.
Boot Barn
Boot Barn announced preliminary results for the third quarter, including a 13% increase in sales to approximately $225.0 million, a same-store sales increase of about 5.2% (compared with third quarter guidance of 2% – 4%), with stores outperforming e-commerce sales, and net income per diluted share of $0.70 – $0.71 based on 27.6 million weighted average diluted shares outstanding. Excluding the impact of the federal tax law change, net income per diluted share is forecast at $0.45 – $0.46, compared to guidance of $0.40 – $0.43. Net income per diluted share includes $0.02 from a $1.0 million pre-tax net gain from insurance and other settlements, primarily related to losses suffered in the second quarter from Hurricane Harvey. The Company opened four new stores during the quarter. Boot Barn plans to report third quarter results on January 31. Given its strong performance, the Company raised its outlook for its fiscal year ending March 31. Boot Barn now expects comp growth of 3% – 4%, compared to a prior outlook of low single-digit same store sales growth, and income from operations of $42.3 million – $43.8 million, compared to a prior outlook of $40.0 million – $42.5 million.
The Company estimates changes in federal tax law will result in an effective tax rate of 25% during the year ending March 30, 2019, the first full fiscal year under the new law. Boot Barn expects the deferred tax impact will result in a non-cash tax benefit of $6.0 million to its third quarter earnings. The fiscal year 2018 effective tax rate is anticipated to drop from 39% to 35.5% and is expected to result in lower tax expense of $800,000 during the third quarter.
Darden Restaurants
Darden Restaurants announced it will record non-cash net tax benefits of approximately $70.0 million, or approximately $0.56 per share, related to the Tax Cuts and Jobs Act of 2017 and the revaluation of deferred tax assets and deferred tax liabilities to account for the future impact of lower corporate tax rates. The impact will reduce its fiscal 2018 effective tax rate by 600 basis points. Separately, an anticipated resolution of other tax matters will reduce the rate by an additional 100 basis points, resulting in an effective tax rate of approximately 18% for fiscal 2018.
Based on the updated effective tax rate, Darden increased its outlook for fiscal 2018 adjusted EPS from continuing operations to $4.70 – $4.78, including plans to make an investment of approximately $20.0 million in its workforce. Previous guidance was $4.45 – $4.53. The Company continues to expect same-restaurant sales growth of 2%, 40 new restaurant openings and total sales growth of 13%.
Denny's Corporation
Yesterday, Denny’s Corporation reported preliminary results for domestic same-store sales and restaurant openings and closings for its 4Q and FYE December 27, 2017. Fourth quarter domestic system-wide same-store sales increased 2.2%, including a 2.2% increase at domestic franchised restaurants and a 2.1% increase at Company restaurants. Fiscal year domestic system-wide same-store sales rose 1.1%, including 1.1% growth at domestic franchised restaurants and 1.0% growth at Company restaurants. In 2017, Denny’s opened 39 restaurants, including seven international locations, bringing the total restaurant count to 1,735. In addition, 250 remodels were completed.
Based on preliminary results, Denny’s is reiterating its full year 2017 guidance expectations for Adjusted EBITDA of between $101.0 million and $103.0 million and Adjusted Free Cash Flow of between $48.0 million and $50.0 million provided with the Company’s third quarter 2017 results announced on November 1, 2017. Denny’s expects to release financial and operating results for its fourth quarter and fiscal year ended December 27, 2017 along with annual guidance for 2018, after the market closes on Tuesday, February 13, 2018.
Shiekh Shoes, LLC
Last week, Shiekh Shoes, LLC, DIP is seeking new DIP financing after State Bank and Trust Company, the current DIP Facility provider, declared an event of default. The default triggered an increase in the interest rate to 11.5%, up from 9.5%. Documents in the Chapter 11 case state that the default was based on the Debtor’s noncompliance in connection with: (i) its cash management system; and (ii) an inability to meet deadlines surrounding certain real estate milestones. The Debtor filed a motion with the Court to replace the existing $16.0 million DIP Facility provided by State Bank with a $5.0 million term loan from the brother of one of the principals. The Debtor anticipates that this will be followed by a second stage of funding which would include $10.0 million from the refinancing of one of the principal’s personal residences. The Debtor anticipates using the new $5.0 million term loan to pay off $4.0 million in outstanding DIP Facility borrowings to State Bank, while using the balance, as well as cash on hand, to operate the business until the second loan is finalized. On November 29, we reported that the Company filed a voluntary Chapter 11 petition in the U.S. Bankruptcy Court for the Central District of California. The Company has closed 31 stores since entering bankruptcy, at which time it operated over 100 locations.
Walgreens
Walgreens Boots Alliance’s U.S. sales for the first quarter ended November 30 increased 8.9% to $22.50 billion, boosted by strong pharmacy comps, which grew 7.4% due to volume growth from Medicare Part D and the positive impact of new pharmacy partnerships including the formation of AllianceRx Walgreens Prime. Despite the volume growth in the back-end, front-end comps fell 0.9% due to declines in consumables and general merchandise, which were partially offset by sales growth in the health and wellness and beauty categories. Management noted this was the sixth consecutive quarter of growth for the category. The Company has introduced enhanced beauty offerings to over 1,000 additional stores, bringing the total number of stores to around 2,900, and sales in these sites outperformed the rest of the chain. Beauty now represents 9% of retail sales and is a focus for future growth. During its earnings conference call with analysts, Vice Chairman and CEO Stefano Pessina commented, “We have been conducting pilot studies in certain U.S. stores to test our merchandising, format, supply chain and beauty propositions and a number of new initiatives and partnerships. In 2018, you will see us deploy the first pilot store incorporating all the work we have done to-date in a single-store format.” Management didn’t disclose any detailed plans, but indicated it is “rethinking and redefining our presence in and relevance to the communities we serve. That requires us to rethink our supply chains, the services we offer to our customers and how we deliver those services.” In contrast to CVS’ pending mega-merger with Aetna, management emphasized its growing partnerships for its U.S. business, such as those with Prime and AmerisourceBergen.
Through December, the Company acquired 357 Rite Aid stores; it continues to expect to complete integration of the acquired Rite Aid stores by the end of fiscal 2020, at an estimated cost of approximately $750.0 million. The Company also plans to spend approximately $500.0 million on store conversions and realize $300.0 million in annual synergies within four years.
Walgreen also disclosed this week that as a result of the recently enacted U.S. tax legislation, it expects to obtain cash tax benefits in excess of $200.0 million for fiscal 2018. The legislation is expected to favorably impact adjusted diluted net fiscal 2018 EPS by $0.30 – $0.35.
Walmart
In a recent interview, Walmart.com CEO Carter Cast stated that he believes there will be “store closures ahead for Walmart that are going to be good for the Company and good for shareholders.” According to Mr. Cast, there is “ too much square footage in the industry now,” and he argues that even if it closes a lot of stores, Walmart has a large enough physical presence that it “could still keep much of its U.S. customer base within close range,” which is seen as one of its competitive advantages against Amazon. Mr. Cast also applauded Walmart's efforts to adapt to online commerce, in a time of change for retail, and predicts an uptick in online sales for the Company from about 4% – 5% currently, to “well over 10%."
In other news, Walmart is facing a federal lawsuit over deceiving its customers related to organic eggs. Walmart sells eggs at a premium under its Organic Marketside brand with labels saying the eggs came from hens with “outdoor access,” according to the lawsuit. However, the birds are raised by Cal-Maine Foods inside enclosed structures that have screens to let in air.
PriceSmart
PriceSmart’s December sales increased 4.9% to $344.2 million, and comps rose 6.5%. For the YTD period, sales rose 4.3% to $1.09 billion, and comps increased 3.4%. One additional day of sales compared to December 2016 impacted comp results by 240 basis points and 70 basis points for the month and YTD periods, respectively. PriceSmart opened one new warehouse club over the past year, bringing its store count to 40.
PriceSmart also announced first quarter results for the period ended November 30. Sales rose 4.1% to $745.4 million and operating income fell 13.5% to $33.2 million, resulting from lower merchandise gross margins and higher operating expenses from both the addition of its new warehouse club and the ongoing investments.
Target
Target reported this morning that its holiday comp sales (November/December) rose 3.4%, with all merchandise categories (Home, Apparel, Food & Beverage, Hardline & Essentials) reporting positive comps. The Company now expects fourth quarter comps to be in the same 3.4% range and full year comps to be just over 1.0%. Sales for the quarter are anticipated to be up 9.0%. Target also increased its 4Q adjusted EPS by 25% to $1.30 – $1.40, up from its prior estimate of $1.05 – $1.25; and adjusted fiscal 2017 guidance for adjusted EPS to $4.46 – $4.74, compared to earlier guidance of $4.40 – $4.60. Target credited increased traffic and continued growth in the digital platform for the strong performance. On the news, the Company’s stock opened at $69.52, up 3.5% over the previous day’s close.
When Target first announced its acquisition of Shipt last month for $550.0 million, executives were not definitive about what would happen with its Instacart partnership. The Company recently confirmed that it plans to cut ties with Instacart and will be winding down its partnership, but said there is no timeline yet for when delivery via Instacart from Target stores in the three markets where it offers the service -- the Twin Cities, Chicago, and San Francisco -- will end.
Rite Aid
Rite Aid reported third quarter fiscal 2018 results last week that included a 2.5% drop in comps and a nearly 31% decline in EBITDA. Both the retail pharmacy and EnvisionRx PBM businesses saw lower sales and EBITDA. In addition to lower script counts (down 2.4% on a comparable store basis), retail pharmacy also continued to experience pressure on pharmacy gross margins (front-end gross margin was flat). The biggest impact on pharmacy script counts was new narrow networks by large PBMs that exclude Rite Aid (such as Walgreens’ deal with Prime), and lower opioid sales. Management said it expects to cycle the majority of these network losses in the second quarter of next year. Although management expects reimbursement headwinds to continue, it believes they are stabilizing. The generic sourcing deal with Walgreens Boots Alliance (as part of the sale of 1,932 stores) should provide some benefit (which management has not yet quantified), but the Company is obligated to continue its supply arrangement with McKesson until March 2019 (it is in talks with McKesson for a potential deal similar to the one with Walgreens). Management also indicated now that there is more clarity regarding its future, it is making progress negotiating with PBM payors and also with manufacturers. On the PBM side, revenue was lower as the Company has been shifting away from lower income subsidy Medicare Part D business towards higher margin business. However, costs to support this effort also pushed overhead costs higher and negatively impacted EBITDA. Quarterly results reclassified the 1,932 stores being sold to Walgreens Boots Alliance as discontinued operations. Once all the stores are transferred, expected by this spring, Rite Aid will have 2,569 stores concentrated in eight key coastal states, serviced by six distribution centers. On a pro forma basis, the Company reported adjusted TTM EBITDA of $632.0 million and a leverage ratio of 4.6x, reflecting approximately $3.00 billion in debt.
At the end of the third quarter, the Company had approximately $1.70 billion of liquidity; there was $1.90 billion in borrowings and $59.0 million of letters of credit outstanding under the $3.70 billion revolving credit facility. Management reconfirmed its plans to refinance its credit facility, to both extend the maturity and right-size the facility given the smaller store base. It continues to work on plans to restructure the rest of its debt, which is expected to total about $3.00 billion once the store sales are completed.
The Company also disclosed a plan that effectively discourages an ownership change as defined in the Internal Revenue Code, in order to preserve the value of its approximately $2.70 billion in federal net operating loss carryforwards.
The Company’s credit rating is currently an E1. Considering the expected debt repayment and improved leverage metrics, an upgrade to the D range was possible. However, this will require the Company stabilize sales and margins. Despite management’s optimism, we see this as more of a challenge at least through the first half of fiscal 2019 given the growing trends towards narrow network arrangements with PBMs and ongoing pharmacy reimbursement rate pressures.
