July 31, 2018
Amazon
Amazon announced results for its second quarter ended June 30. Sales rose 39.3% to $52.89 billion, which included $4.31 billion from the acquisition of Whole Foods. Whole Foods’ sales increased approximately 18% year over year and we estimate comps were in the mid-single digits. Although shipping costs increased 31% from last year to $5.99 billion, overall gross margin expanded 390 basis points. SG&A margin increased 20 basis points from higher marketing, technology, and fulfillment costs; however due to strong sales and growth of the high margin AWS business, advertising and Prime, EBITDA jumped 82.9% to $8.08 billion, and second quarter margin expanded 370 basis points to 15.3%. In other news, Amazon plans to build a new fulfillment center in the Greater Toronto Area. The one million square-foot facility will join Amazon’s network of existing Ontario buildings in Brampton, Mississauga, Milton and the recently announced facility in Ottawa. This will be Amazon’s ninth facility in Canada.
Walmart
Walmart Canada announced plans to invest more than $175.0 million to build a 300,000 square-foot fulfillment center in Surrey, British Columbia. The frozen grocery facility will provide products to 60 stores in British Columbia. The fulfillment center is expected to open in early 2022. Walmart Canada operates 426 stores across the country.
The Company’s Sam’s Club division has hired about 100 technology employees for a new 45,000 square-foot office in downtown Dallas, TX. Sam’s is working on a new concept store that it plans to open this fall in Lower Greenville, SC, in a space where Walmart operated a Neighborhood Market until early 2016. The Company hasn’t released many details but plans for it to be a technology-driven shopping experience.
In other news, Walmart is making a play for former Babies R Us shoppers. The Company is revamping the baby section of its website and increasing the number of baby products it sells by 30,000 in the past year. It says that baby-related searches are up 40% year-over-year. Babies R Us shut the last of its more than 200 stores last month after parent company Toys R Us filed for bankruptcy protection and liquidated its business.
Meanwhile, published reports indicate that Walmart has “quietly retreated” from a plan disclosed last year that would have store employees bring online orders directly to shoppers’ homes after completing their usual shifts at the store. The goal of the plan was to take advantage of Walmart’s broad geographic reach and high number of employees to tackle the “last mile” issue. The initial test was in New Jersey and Arkansas, but those failed to gain traction with skeptical employees who had to use their time after work. Of the sixteen workers who participated in the trial, many said they were put off by the program’s poor compensation and were concerned who would be responsible if they got into an accident or if merchandise was lost. Walmart is now testing a more modest service with just four Walmart employees who deliver goods from a single store in Woodstock, GA. In this latest initiative, Walmart is also overhauling the guidelines for employees and limiting deliveries to groceries and small items.
Walmart and Capital One entered into a new, long-term credit card program agreement. Per the terms, Capital One will become the exclusive issuer of Walmart’s private label and co-branded credit card program in the U.S. beginning August 1, 2019.
Smart & final
Smart & Final’s second quarter sales increased 4.4% to $1.13 billion, driven by a 1.3% increase in comps and new stores. Comp growth was comprised of a 2.8% increase in average transaction size, partially offset by a 1.4% decrease in transaction count. Sales increased 3.9% to $868.6 million at its Smart & Final banner, and comps rose 0.8%. Sales rose 6.1% to $257.0 million at its Smart Foodservice Warehouse, and comps increased 3.3%. Operating income was down slightly to $19.15 million, and net income was down 7.4% to $6.6 million. During the second quarter the Company opened one new Smart Foodservice Warehouse store, relocated one Smart & Final store, and closed two.
For fiscal 2018, Smart & Final continues to expect sales growth of 4% – 5%, comp growth of 1% – 2%, adjusted EBITDA of $180.0 million – $190.0 million, and adjusted net income of $31.0 million – $35.0 million. It expects to open five Smart & Final stores and four Smart Foodservice Warehouse stores.
In a call with analysts, CEO David Hirz said that online grocery sales for Smart & Final have jumped 100% year over year. More than 85% of Smart & Final stores offered online delivery as of the end of 2Q, covering 97% of the banner’s market area. Mr. Hirz stated, “Average online ticket continues to trend considerably higher than the average in-store ticket, hitting a new high for the Smart & Final banner of over $80.” At the Company’s Smart Foodservice stores, 90% offer delivery or click-and-carry, and Mr. Hirz said the average ticket was over $700.
Brookshire Grocery
Brookshire Grocery’s Super 1 Foods banner is expanding its footprint in Louisiana. It recently reopened seven out of eight former Winn-Dixie stores in Louisiana that it acquired in April; one of the acquired stores was consolidated with an existing Super 1 Foods. The Company relocated existing Super 1 Foods stores in Abbeville and Eunice, LA to the former Winn-Dixie locations in those cities. Meanwhile, Super 1 Foods has launched its Curbside click-and-collect service at 11 locations in Louisiana. The Company already offers same-day grocery delivery via Instacart at select stores there. With the new locations, Super 1 Foods now operates 47 stores. Overall, Brookshire Grocery Co. operates more than 175 stores in Texas, Louisiana and Arkansas.
Rouse's
Rouse’s will open a new store in New Iberia, LA at a former Kmart site. It is expected to open in early 2019. The Company currently operates 56 stores, 47 of which are located in Louisiana.
Meijer
Meijer has submitted plans for a proposed 160,000 square-foot store and gas station in Delavan, WI. The proposal will be considered by the city in September. If approved, Meijer would be the fifth grocery store in Delavan. The city currently has a La Guanajuato, Aldi, Walmart and Piggly Wiggly.
Aldi
According to published reports, Aldi plans to add five more stores in New Jersey by the end of 2018, where it currently operates more than 40 stores.
Albertsons
Albertsons opened a new store in Boise, ID that focuses more on fresh, prepared and unique items, rather than the basics it usually stocks. The store includes an upstairs bar called Broadway on the Rocks, its first in Idaho.
Hy-Vee
Hy-Vee opened its first HealthMarket store in West Des Moines today. At 15,700 square-feet, this pilot project is almost three times larger than the HealthMarkets found inside Hy-Vee grocery stores. The concept offers fresh produce, natural and organic foods, vitamins and supplements, meat and other groceries. It also has a pharmacy, health clinic, sports nutrition area, Basin beauty department and a “hydration station” that sells coffee and specialty waters. An Orangetheory Fitness center is connected to the HealthMarket. Hy-Vee first partnered with Orangetheory last year when it opened a fitness center at its Shakopee, MN grocery store.
Hy-Vee CEO Randy Edeker commented, “Competitive pressure from grocers like Fresh Thyme and Sprouts has forced Hy-Vee to explore adding more HealthMarket stores. I see us having 50 or 60 of these.” Hy-Vee expects to open two HealthMarkets next year, located in the Kansas City area and Madison, WI.
Grocery Outlet
Grocery Outlet will open a new Bargain Market store in Palmer Township, PA in mid-November.
Chipotle
Chipotle reported second quarter sales growth of 8.3% to $1.27 billion, driven by new restaurant openings and a 3.3% increase in comps. Comp growth improved primarily as a result of an increase in average check, including a 4% menu price increase, partially offset by 1.8% fewer comp transactions. Food costs were 32.6% of revenue, a decrease of 150 basis points, driven by the benefit of menu price increases and relief in avocado prices, partially offset by elevated beef prices. Net income was down 29.7% to $46.9 million, impacted by restaurant asset impairment, corporate restructuring and legal costs.
During the quarter, the Company opened 34 new restaurants and closed or relocated eight.
Looking ahead at fiscal 2018, Chipotle expects comps in the low to mid-single digits, an increase from the prior low-single digit expectations; and new restaurants openings at the lower end of the previously announced guidance of 130 – 150.
Subsequently, Chipotle suffered from another foodborne illness outbreak with an estimated 170 individuals reportedly getting sick after eating at a Powell, OH location. The Company voluntarily closed the store temporarily for cleaning and removal of all exposed foods and equipment. The last time Chipotle suffered a similar outbreak in 2016, comps declined over 25% and total sales fell 13%; the Company has since recovered, however, the Company is likely to see a similar impact.
McDonald's
McDonald’s reported second quarter sales fell 11.5% to $5.35 billion due to the Company’s refranchising initiative. Global comps increased 4%, reflecting positive comps in all segments. Comps rose 2.6% in the U.S., driven by growth in average check resulting from both product mix shifts and menu price increases; increased 4.9% in the International Lead segment, reflecting positive results across all markets, primarily driven by the U.K. and France; rose 2.4% in the High Growth segment, led by strong performance in Italy and positive results across most of the segment, partly offset by continued challenges in South Korea; and rose 6.8% in the Foundational markets, reflecting positive sales performance across all geographic regions. Net income increased 7.3% to $ 1.50 billion.
Starbucks
Starbucks reported third quarter sales growth of 11.5% to $6.31 billion, including a 3% benefit from consolidation of the acquired East China business and other streamline-driven activities, including Teavana mall store closures, the Tazo divestiture, and the conversion of certain international retail operations from Company-owned to licensed models. Starbucks’ loyalty program added 1.9 million members in the U.S., up 14% over last year. Starbucks’ same-store sales rose 1% globally and in its U.S. stores. Comps in China fell 2% amid fierce competition and stricter regulations on delivery services. Operating income declined 1% to $1.04 billion, primarily due to higher investments in employees, product mix shift, largely food related, and the impact of ownership changes in East China, partially offset by lower restructuring and impairment costs. During the quarter, the Company opened 511 net new stores.
Starbucks updated its fiscal 2018 guidance and now expects global comp growth to be just below the 3% – 5% targeted range, and EPS of $3.26 – $3.28.
In other news, Starbucks is reportedly partnering with Alibaba’s food delivery unit, Ele.me, to deliver coffee and snacks to customers in China. According to sources, the deal is set to be announced later this week and comes just after it reported a 2% comp decline in China, as mentioned above.
Chick-fil-A
Chick-fil-A will open its first franchisee-owned restaurants outside of the U.S. in Toronto. The goal is to have the first franchised location open during the first half of 2019 and open another 15 within the next five years. The Company is recruiting operators for the locations, offering a low economic barrier to entry for ownership at C$15,000, compared to $100,000 – $300,000 for many Canadian franchises.
BJ's
BJ’s reported second quarter revenue growth of 6.2% to $265.8 million, impacted by an additional 3.5% of operating weeks. Comps increased 5.6%. Net income surged from $9.6 million last year to $16.9 million, including a $1.1 million excess tax benefit from equity awards. During the quarter, BJ’s opened new restaurants in Hagerstown, MD and Albany, NY, bringing its store count to 200. It plans to open one more unit by the end of the year.
Sears Hometown and Outlet Stores
On July 27, Sears Hometown and Outlet Stores completed the refresh of three stores in Arkansas (Mena, Nashville and Russellville), three stores in North Carolina (Hendersonville, Louisburg and Wallace), two stores in Ohio (Coshocton and Marion), and one store in Big Rapids, MI. The store refresh program included new product assortments, redesigned merchandising, new fixtures and signage, and comprehensive employee training, as part of the Company’s efforts to rebrand as “America’s Appliance Experts.” In the new store design, appliances occupy more than half of the sales floor and consist of more brands and an improved presentation. The new floor plan also includes the ability to showcase complete kitchen packages through the addition of three kitchen vignettes. Sears Hometown and Outlet Stores began refreshing its stores in 2015 and now has more than 500 “America’s Appliance Experts” locations across the U.S. As of May 5, the Company operated 882 stores nationwide.
RadioShack
RadioShack is rolling out RadioShack Express, a store-within-a-store concept that will open in 100 HobbyTown stores across the U.S. The RadioShack brand is owned by General Wireless Operations, which acquired the Company out of bankruptcy and continues to operate 400 standalone stores in rural locations after the vast majority of RadioShack’s 1,500 stores were shuttered. HobbyTown, which sells specialty toys through 150 locations, said the partnership “will enhance the product selection and services” at its stores.
Lumber Liquidators
Lumber Liquidators’ second quarter sales increased 7.6% to $283.5 million, and comps were up 4.7%, driven by a 4.6% increase in average sale and a 0.1% increase in the number of customers invoiced. Merchandise comps grew 0.9%. The Company opened eight new stores during the quarter, bringing its total store count to 406. Adjusted gross margin declined 50 basis points due to increased transportation costs, higher costs associated with obsolete inventory, and an increased mix of installation sales, which carry lower gross margins. As a result, the Company recorded an operating loss of $913,000, compared to an operating income of $5.1 million in the prior-year period. CEO Dennis Knowles commented, “During the second quarter, we were pleased with our topline revenue growth, as well as the continued strong installation expansion and opening of eight new stores. In addition, with the appointment of Jennifer Bohaty as Chief Ethics and Compliance Officer and Charles Tyson as Chief Customer Experience Officer, we have truly transformed the leadership of the Company over the past two years. In that time we have recruited eight new, accomplished professionals to lead the most critical functions of our Company. We believe this leadership is well on its way to building a sustainable, customer-focused and growing company for the long term.”
Tractor Supply
Tractor Supply’s second quarter sales increased 9.7% to $2.21 billion, and comps were up 5.6% on top of a 2.2% increase in the prior-year period. The comp increase resulted from a 3.7% increase in comparable average ticket and a 1.8% increase in transaction count. These improvements were primarily driven by broad-based strength in everyday merchandise and robust growth across spring and summer seasonal categories. Operating income rose 6% to $273.5 million. The Company opened 25 new Tractor Supply stores and three new Petsense locations during the quarter, and it closed one underperforming Petsense store, ending with 1,899 stores in operation, consisting of 1,725 Tractor Supply stores and 174 Petsense stores.
Carter's
Carter’s reported second quarter sales increased 0.6% to $696.2 million. U.S. retail sales increased 2.7% to $402.0 million, and comps were up 0.9%. During the quarter the Company opened 14 new U.S. stores and closed six underperforming locations nationwide. International sales increased 2.6% to $84.7 million, reflecting growth in Canada and contribution from the 2017 Mexico acquisition, partially offset by decreased demand in various markets. At the end of the quarter, the Company operated 181 stores in Canada and 42 stores in Mexico. Overall growth was partially offset by U.S. wholesale segment sales, which decreased 3.8%, reflecting lower shipments due to discontinued sales to Toys “R” Us and Bon-Ton. As a result, adjusted EBITDA declined 10.6% to $77.8 million.
Rent-A-Center
Rent-A-Center’s second quarter revenues declined 4.5% to $647.0 million, driven by 204 net store closures, slightly offset by comp growth of 3.7% (which followed a 7.4% decline in the prior-year period). Domestic comps at core stores increased 3.5%, Acceptance Now comps improved 3.7%, and Mexico comps rose 7.1%. Gross margin expanded 40 basis points to 64.2% as a result of value proposition enhancements to better align pricing. SG&A margin fell 350 basis points as a result of fewer underperforming stores and reduced shrinkage in the Acceptance Now business. Overall, EBITDA rebounded 81% to $52.4 million. Despite the operational improvement, TTM interest coverage of 2x remained below our warning threshold of 3x. In June, Rent-A-Center was acquired by Vintage Capital, an Orlando-based private equity firm, for total cash consideration of $15.00 per share, or $1.37 billion, including net debt. The transaction came at a premium of approximately 25% to the Company’s closing share price on June 15, or roughly 23x TTM EBITDA. Following the merger, which is expected to close toward the end of 2018, Rent-A-Center will become a private company.
GNC Holdings
GNC Holdings’ second quarter revenue declined 3.6% to $617.9 million as a result of negative comps, lost sales from the divestiture of Lucky Vitamin, fewer franchised locations and the discontinuation of the Gold Card Member Pricing Program. Domestically, comparable store sales fell 0.4%. It should be noted that the comp decline followed a 0.9% decline in comps during the prior-year period, so stacked comps were down 1.3% over the two-year period. On a positive note, international sales grew 11% to $48.6 million driven by stronger sales in China and foreign franchises. Gross margin improved 40 basis points due to an improved product mix as more profitable private-label sales represented 50% of overall revenue for the domestic unit, compared to 43% last year. However, management indicated that the competitive field is growing, which has caused the Company to become more promotional and may result in pressure to both gross margin and comps for the back half of the year. Second quarter SG&A margin increased 230 basis points, reflecting increased advertising expenses and higher corporate overhead as well as the deleveraging impact of the lower sales base. Ultimately, EBITDA decreased 18.1% to $63.2 million, and EBITDA margin fell 180 basis points to 10.2%. GNC generated $40.8 million in free cash flow for the first half of fiscal 2018, which was primarily used to pay off the revolver and for original issuance fees relating to the new credit facility.
Party City
Party City priced an offering of $500.0 million of 6.625% Senior Notes due 2026, expected to close on Thursday. Upon closing, the Company expects to amend its senior secured asset-based revolving credit facility, to extend the maturity date to 2023. Proceeds are expected to be used to repay $400.0 million in term loans and $90.0 million in loans under the asset-based loan facility, and to pay all related fees and expenses.
In other news, Party City inked a deal to acquire a master franchise group representing 16 franchise stores in Pennsylvania. The purchase price of $18.8 million represents a fully synergized multiple of EBITDA of approximately four times. In 2017, this franchise operator reported sales of $34.0 million. Prior to this acquisition, the Company’s retail operations included 814 Company-owned Party City stores and approximately 134 franchise stores. Within Pennsylvania, the Company will now have 30 Company-owned stores.
Cost Plus World Market
Cost Plus World Market will open its first store in Connecticut, in the town of Manchester, on Thursday. The retailer is known for its eclectic assortment of unique home furniture, décor, tabletop items, gourmet foods, jewelry and accessories from around the world, ranging from baskets and pottery from Portugal to collectibles from Africa. Cost Plus currently operates 280 stores in 39 states and Washington D.C. under the World Market and Cost Plus World Market banners. It is owned by Bed Bath & Beyond.
O'Reilly Automotive
O’Reilly Automotive’s second quarter sales increased 7.2% to $2.46 billion, and comps were up 4.6%. Gross profit increased 7% to $1.29 billion, and SG&A expenses were up 9%. Operating income rose 4.7% to $479.2 million. CEO Greg Johnson commented, “We are very pleased to report another profitable quarter, highlighted by a solid 4.6% increase in comparable store sales, which exceeded the top of our guidance range for the second quarter. Our top-line performance resulted in a 38% increase in diluted EPS to $4.28 for the second quarter.” The Company opened 129 new stores during the first half of the year and is on target to open 200 stores total for the year.
