June 12, 2018
Lidl
According to an independent survey by global consulting firm Oliver Wyman, shoppers, particularly younger ones, are warming up to Lidl, which entered the U.S. about a year ago. 48% of 600 consumers who tried Lidl are now shopping there on a regular basis (more than twice per month). Consumers also are spending more money per trip at Lidl today than a year ago. Younger shoppers (18 to 34) had a particularly high awareness of Lidl and shopped there frequently, according to the survey.
The survey results come as Lidl has pulled back on its original U.S. expansion plans amid mixed performance results. To date, the Company has opened 53 stores, roughly half of what it had originally intended to open by the end of summer 2018. Lidl is still evaluating its strategy going forward, as we have seen stores open but also continue to see the Company pulling out of planned sites. The CEO of Lidl, Klaus Gehrig, had indicated the Company would open approximately 20 stores this year, but Lidl U.S. has been silent on this issue. According to Oliver Wyman, “Lidl is new in the U.S. market, and we expect that they will gradually adapt their model based on consumer feedback, a pattern they successfully honed entering more than 20 countries in Europe. What Lidl has done so far has struck a chord with younger consumers who are valuing Lidl’s good private brand product quality almost as much as their low prices.”
Wegmans
On June 3, Wegmans Food Markets opened a new store in Chantilly, VA. The 120,000 square-foot supermarket is the Company’s 97th store.
Publix
Publix plans to open a 25,000 square-foot GreenWise Market in the Atlanta, GA market, just down the street from an existing Publix store. GreenWise is the Company’s organic natural foods banner, which it launched back in 2003, but currently has just three locations. Publix is looking to reignite the concept with plans for additional new stores in Tallahassee and Boca Raton, FL and Charleston, SC.
Albertsons
On June 6, Albertsons Companies announced the pricing of its upsized private offering of $750.0 million of new Floating Rate Senior Secured Notes due 2024, at an issue price of 99.50%. The notes will bear interest at LIBOR plus 3.75%. This represents a $250.0 million increase in the original offering amount. The offering is expected to close on June 25. As previously reported, proceeds together with cash on hand and borrowings under a new $1.50 billion term loan and new $5.00 billion revolver are to be used to finance the acquisition of Rite Aid, including the $200.0 million cash component and refinancing of approximately $3.00 billion of Rite Aid net debt.
Casey's
Casey’s fourth quarter sales increased 13.1% to $2.09 billion. Same-store gasoline gallons sold were up 2%, but same-store sales were down 0.4% for grocery and merchandise, and down 1.3% for prepared food and fountain. The Company attributed the negative comps to its decision to reduce 24 hour locations, an indication that the strategy has proven unsuccessful. Only a year ago, the Company was touting the expansion of its 24 hour locations past the 1,000 store milestone. For fiscal 2018, total sales increased 11.8% to $8.39 billion. Same-store gallons sold were up 2.3%, same-store sales were up 1.9% for grocery and merchandise, and up 1.7% for prepared food and fountain. Fourth quarter net income was down 36% to $19.3 million. In early trading this morning, shares were down just over 3%, to $93.25.
For the fiscal year, the Company built and opened 85 new stores, acquired 26, completed 30 replacements, and remodeled 74 stores. As of April 30, 2018, there were 31 new stores, four replacement stores, and three major remodel stores under construction.
Terry Handley, President and CEO, commented, "A suppressed fuel margin and challenging weather had an adverse impact on fourth quarter results, however we believe we are taking market share in most categories. The 53 new stores we opened in the fourth quarter, combined with increased promotional activity and normalized weather throughout our region has us off to an encouraging start to fiscal 2019." The Company also provided a value creation plan update that included hiring a CMO, completing an initial $300.0 million share repurchase authorization, and increasing its quarterly dividend to 12%, among other things. Looking ahead at fiscal 2019, Caseys expects same-store sales growth of 1.5% – 3% for fuel, and grocery and other merchandise, and growth of 1.5% – 3.5% for prepared food and fountain. It expects to build 60 new stores and acquire more than 20.
Ahold Delhaize
Last week, Ahold Delhaize’s online grocery delivery division Peapod opened its new headquarters in Chicago, IL. All of Peapod’s corporate employees have transferred from Peapod’s former headquarters in Skokie, IL. The Company said the move comes as it is experiencing year-over-year growth and expanding into new zip codes. Peapod is available in 24 metro markets across New York, New Jersey, Connecticut, Rhode Island, Massachusetts, New Hampshire, Illinois, Wisconsin, Indiana, Pennsylvania, Maryland, D.C. and Virginia.
Bertucci's Holdings, Inc., DIP
The Court entered an order approving the purchase of the assets of Bertucci’s Holdings, Inc., DIP by Earl Enterprises, which was declared the successful bidder at a Court-supervised auction. Terms of the transaction include the payment of approximately $3.0 million in cash, assumption of $4.0 million of debt, and the issuance of $13.0 million in new second-lien debt. Earl Enterprises owns various restaurant chains including Planet Hollywood, Buca di Beppo, and Earl of Sandwich. These chains include about 130 locations. Bertucci’s operated 59 stores, located in an area between New England and Virginia, on the petition date. Management initially said it did not intend to close any stores during the proceedings, but it is not clear how many units currently remain in operation.
Amazon
Published reports indicate that Amazon has selected two locations in Chicago, IL for its Amazon Go checkout-free format. The stores will be located in Willis Tower (Chicago’s tallest building) and an office building connected to Ogilvie Transportation Center. An Amazon Go store also is also slated for San Francisco, CA, reportedly in Union Square. Amazon currently operates one 1,800 square-foot Amazon Go store in Seattle, WA.
Quiznos
On June 11, private investment firm High Bluff Capital Partners announced it has purchased substantially all of the assets of Quiznos from QCE LLC and its subsidiaries. Financial terms were not disclosed. Gerry Lopez, an operating partner for High Bluff Capital, will be executive chairman of the new company that will operate the Quiznos brand going forward. Susan Lintonsmith will remain CEO and president of Quiznos. In March 2014, Quiznos’ filed pre-packaged Chapter 11 bankruptcy petitions, and completed its financial restructuring and emerged from bankruptcy in July 2014.
Walmart
Walmart launched a new product line called Winemakers Selection, which includes 10 “distinctive labels” of wine sourced from California, France and Italy. They sell for about $11 per bottle. Walmart began selling its private-label wine in about 1,100 stores nationwide last month.
In other news, Walmart has filed a lawsuit asking a court to block a former top tax executive from joining Amazon, saying the move would violate a non-compete agreement and harm Walmart by potentially tipping off its rival to strategic plans including potential merger targets. Lisa Wadlin told Walmart in January she was considering resigning as SVP, chief tax officer, but the Company did not learn she was joining Amazon until separation papers were signed on May 15, according to the lawsuit. Walmart sent Ms. Wadlin a signed version of her separation agreement on May 15, but she never signed it.
Meanwhile, ModCloth, the online clothing retailer that Walmart acquired in March 2017, has opened its second store in San Francisco, CA. It already has an existing location in Austin, TX, and the Company reportedly has plans to open ModCloth locations in New York, Los Angeles, and Washington, D.C. Customers can get style advice at ModCloth stores and try on styles, which they can order online. The purchase will be shipped to customers’ doors free of charge.
Dollarama
Dollarama reported first quarter sales growth of 7.3% to $756.1 million, driven by continued organic sales growth fueled by comp growth of 2.6%, and a 5.6% increase in the total number of stores over the past 12 months, from 1,108 stores to 1,170 stores. Sales were negatively affected by poor weather conditions in April that delayed customer demand for summer seasonal products by several weeks. Comp growth consisted of a 2.9% increase in the average transaction size, and a 0.3% decrease in the number of transactions. Operating income was up 8.7% to $151.4 million. Net earnings increased 7.3% to $101.6 million, from sales growth and lower SG&A as a percentage of sales.
For fiscal 2019, the Company expects comp growth of 4% – 5% and to open 60 – 70 new stores. The Company raised its capex guidance from $150.0 million – $160.0 million to $190.0 million – $200.0 million, which includes costs associated with the expansion of an existing distribution center.
Five Below
Five Below’s first quarter sales increased 27.2% to $296.3 million, and comps were up 3.2%. The Company opened 33 new stores and ended the quarter with 658 stores in 32 states, an increase of 19% from the prior-year period. Operating income rose 93.3% to $24.7 million. CEO Joel Anderson said, “Continued outperformance from our new stores and healthy comparable sales were accompanied by strong gross margin performance, SG&A leverage and tax rate favorability, resulting in EPS that more than doubled versus last year.”
Neiman Marcus
Neiman Marcus reported third quarter revenues of $1.17 billion, representing an increase of 4.8% compared to $1.11 billion for the third quarter of fiscal 2017. During the quarter, comparable store sales increased 6%, the third consecutive quarterly comp gain. Solid comp growth was driven by a 17.1% increase in online sales (online sales now account for over 35% of revenue). Management also noted that store comps were positive but didn’t provide specifics. The higher sales and gross margin expansion boosted EBITDA 7.3% higher to $128.1 million. Debt declined 4.3% year over year due to lower revolver borrowings, but it remains high at $4.68 billion, with over $3.00 billion maturing in October 2020. During its quarterly conference call, management did not comment on any potential debt refinancing or restructuring. The Company did not open or close any stores during the quarter, after closing 11 Last Call locations during the second quarter. The Company plans to close three additional Last Call stores during the fourth quarter, which will bring the banner’s store count to 24. Management continues to expect the Hudson Yard store in NYC to open as scheduled in March 2019.
Hudson's Bay Company
On June 5, Hudson’s Bay Company (HBC) announced that it is closing up to 10 Lord & Taylor stores through 2019, including its flagship store on Fifth Avenue in New York City. Management said it plans to optimize Lord & Taylor’s store footprint in an effort to enhance the unit’s digital business and improve its profitability. The store closings represent approximately 21% of the 48 Lord & Taylor units currently in operation. Commenting on this news, management indicated “this reduced store network will allow new leadership to re-think the model and better position Lord & Taylor for future success.” HBC also reported results for the fiscal 2018 first quarter, noting that sales improved 1% to $3.09 billion, driven by five net store openings, slightly offset by comps declining 0.7%. Management noted that comparable digital sales increased 7.7%, Saks Fifth Avenue’s store comps grew 6%, while DSG (Hudson’s Bay, Lord & Taylor and Home Outfitters) comps fell 0.6%, Saks OFF 5TH comps declined 3.5%, and HBC Europe comps declined 6.6%.
National Stores
A lawsuit was filed against National Stores, Inc. alleging damages of $400,000 for non-payment of invoices for inventory including towels, bath rugs, sheets and comforters. The invoices span a period from November 9, 2017 through March 2, 2018. Arkwright LLC filed the lawsuit on June 5 in the U.S. District Court for the Eastern District of Pennsylvania. National Stores operates approximately 364 discount department and home stores under the Factory 2-U, Fallas, Fallas Paredes, Fallas Discount, and Anna’s Linens by Fallas banners. Store sizes generally average between 10,000 square feet and 20,000 square feet. The Company has expanded over the years by acquiring distressed or bankrupt retailers, including Weiner’s Stores, Factory 2-U Stores, Conway Stores and Anna’s Linens.
J.C. Penney
J.C. Penney has rolled out in-store Fanatics shops in 325 Penney stores, with plans to add approximately 325 additional Fanatics destinations by the back-to-school season. Fanatics is an online seller of licensed sports merchandise; J.C. Penney has partnered with Fanatics since 2014 via its online Sports Fan Shop, but this is the first time the relationship has expanded to brick-and-mortar stores. At approximately 650 square feet, the in-store Fanatics shops showcase t-shirts, sideline apparel, jerseys, headwear and more for men, women and children. Of the 325 current locations, 50 stores in top sports markets will offer expanded 1,300 square-foot “flagship” Fanatics shops. The shops will be refreshed each sports season.
Essendant
Essendant provided additional information on its proposed combination with Genuine Parts Company’s (GPC) S.P. Richards business. Management previously announced that Essendant and GPC entered into a definitive agreement on April 12, in which Essendant agreed to combine with GPC’s S.P. Richards business. The Company anticipates that the combination may result in over $75.0 million in annual run-rate cost synergies and more than $100.0 million in working capital improvements. Essendant’s board evaluated GPC’s proposal under which Essendant shareholders would be provided a non-transferable right to a contingent cash payment of up to $4.00 per Essendant share. After a thorough evaluation, the board determined that it was not in the best interest of Essendant and its shareholders to agree to the terms of the contingent value rights (CVR) agreement. Essendant and GPC then determined that they could not agree on the CVR, and their merger agreement would not be amended to reflect the CVR. The merger agreement remains in effect, and Essendant’s board has not changed its recommendation that its shareholders vote in favor of the transaction. Essendant also received a request for additional information from the FTC, which extended the waiting period for the merger until 30 days after Essendant and GPC have complied with the request. Essendant said it and GPC plans to continue cooperating with the FTC.
Separately, with regard to the previously disclosed unsolicited proposal from Staples, Essendant provided Staples a revised draft confidentiality agreement on May 17. Essendant’s management said that as of June 6, Staples has not entered into a confidentiality agreement with Essendant and has not otherwise engaged in discussions concerning the proposal. The stockholder rights plan Essendant adopted on May 17 remains in effect. The potential business combination with the S.P. Richards unit offers diversification and greater scale within the office products and breakroom supply niche, while also reducing overall costs to improve operations.
Sears Hometown and Outlet Stores
Sears Hometown and Outlet Stores’ first quarter sales decreased 14.9% to $381.3 million, driven by 130 net store closures since last year and a 10.5% decrease in comparable sales, which came on top of a 7.3% decrease in the same period last year. Gross margin expanded 200 basis points to 22.9% due to sourcing improvements and lower markdowns in the Outlet segment, partially offset by lower margins in the Sears Hometown segment. SG&A margin improved 70 basis points reflecting lower occupancy, IT, and commission expenses, and the closure of underperforming units. Quarterly EBITDA improved to $2.9 million, from ($8.7 million) last year, and EBITDA margin improved 270 basis points into positive territory. The Company opened five Buddy’s Home Furnishings Rent-to-Own stores in the first quarter, and it plans to open between 10 – 15 more of these stores during the year. Management continues to evaluate the store base for underperforming locations, most of which have been in the Sears Hometown segment. The Company anticipates closing 90 to 100 Sears Hometown stores during second quarter. It expects that the decrease in inventory will help address cash burn.
PriceSmart
PriceSmart’s May sales increased 6.2% to $248.7 million, while comps rose 3.1%. For the YTD period, comps increased 3%. The Company opened two new warehouse clubs over the past year, bringing its store count to 41.
Home Depot
Home Depot plans to spend $1.20 billion to add 170 distribution hubs across the U.S., including building roughly seven e-commerce fulfillment centers, over the next five years to speed up delivery of goods to homes and job sites. The Company is looking to reach 90% of the U.S. population in one day or less to meet consumer expectations for delivery options and to better compete with Amazon. The new sites will include direct fulfillment centers for next-day or same-day delivery as well as 100 local hubs where bulky items like patio furniture and appliances will be consolidated for direct shipment to customers. At a conference last week, EVP of Supply Chain and Product Development Mark Holifield indicated Home Depot is realigning its supply chain to a changing retail landscape, as customers “expect delivery to be free, they expect it to be timely. Sometimes they want it fast, and are willing to pay for that. Sometimes they want it free, and they’re willing to wait for it. We need to have the right options there. This is part of an $11.00 billion overall plan to re-engineer our company to ensure that we are prepared for the future in retail.” Online orders accounted for 6.7% of the Company’s $100.90 billion in sales last year, yet digital revenues expanded 21% from the year before. About 45% of online orders are picked up inside stores, and the Company is rolling out self-service lockers at the front of some stores to speed up order retrieval. The Company is also testing the use of cars and vans for lower-cost delivery of smaller orders in some markets, and expanding its network of flatbed trucks that can deliver loads of concrete and other building materials to professional customers, who account for about 40% of the retailer’s sales.
Eddie Bauer and Pacific Sunwear of California
Golden Gate Capital has established a new operating company for its Eddie Bauer and Pacific Sunwear of California portfolio companies. The new PSEB Group, which will maintain distinct brand opportunities, will have a footprint of more than 700 stores and is expected to post approximately $1.50 billion in combined total sales in 2018, including $400.0 million in ecommerce sales. Although earlier reports suggested a consolidation effort, there was no mention of store closings in the announcement. The two retailers “will continue to operate independent front ends, with unique brand identities, design, merchandising, marketing, e-commerce and retail operations, while benefitting from shared services and enhanced scale.” CEO and president of Eddie Bauer, Mike Egeck, will serve as CEO of PSEB, with oversight of both brands. The transaction is expected to close in the third quarter of 2018. Golden Gate acquired Eddie Bauer in 2009 at a bankruptcy auction and bought PacSun out of bankruptcy in fall 2016.
Francesca's
Francesca’s reported first quarter sales decreased 6.8% to $100.4 million, and comparable store sales were down 16%, on top of a 5% decrease in the prior-year period. The comp decline was primarily attributed to lower store traffic and was partially offset by 65 new stores added in the last year. The Company opened 27 new stores and closed four underperforming stores during the quarter, bringing its total count to 744. Gross margin declined to 38.2%, from 45.2%, due to deleveraging of occupancy costs and a decrease in merchandise margin as a result of increased markdowns. As a result, the Company reported an operating loss of $4.5 million, compared to a profit of $7.4 million in the prior-year period.
At Home Group
At Home Group’s first quarter sales increased 20.9% to $256.2 million, driven by the net addition of 27 stores over the past year and a comp increase of 0.9%. During the quarter the Company opened nine new stores and relocated two existing stores, ending with 156 stores in 34 states. Gross margin contracted 60 basis points to 33.3%, from 33.9%, due primarily to increased occupancy costs resulting from sale-leaseback transactions, and as a result operating margin decreased 70 basis points to 9.4%. Adjusted EBITDA rose 12.9% to $42.2 million. Looking ahead to the second quarter, the Company expects sales to increase 22% – 24%, and comps to be up 2.5% – 3%. CFO Judd Nystrom said, “We expect to drive significant gross margin expansion through product margin improvement and the lapping of last year’s incremental inventory-related distribution costs, which enables us to continue reinvesting in new store growth and advertising to support our brand awareness initiatives. We expect to nearly double pro forma adjusted net income in the second quarter of fiscal 2019, and we are raising our full year pro forma adjusted EPS outlook to reflect the impact of tax rate reductions from the Tax Act and benefits related to stock option exercises.” Fiscal 2019 EPS is now expected to be $1.25 – $1.30, up from a previous estimate of $1.18 – $1.24.
AMC Entertainment
AMC Entertainment expects to receive $45.0 million in cash as part of a transaction in which private equity firm Abry Partners will take a controlling interest in Screenvision Media. Subsequent to this transaction, AMC continues to retain a minority equity position in Screenvision, which provides on-screen advertising, in-lobby promotions, and integrated marketing programs in movie theaters. AMC acquired its interest in Screenvision through its purchase of Carmike Cinemas in December 2016. This is the sixth transaction related to its plan to identify $400.0 million of non-strategic assets to be monetized over a two-year period (which began in August 2017). The other five transactions include (i) selling its 50% stake in Open Road Releasing, LLC for $14.4 million, (ii) the sale leaseback agreement for seven theaters for $128.0 million, (iii) the sale of 12 million shares of National CineMedia stock for $73.1 million, (iv) the sale of 2.8 million shares of National CineMedia stock for $18.2 million, and (v) the sale of one million shares of National CineMedia stock for $7.2 million.
