June 19, 2019
Kohl’s Corporation announced it plans to close its four Off/Aisle by Kohl’s locations (click here to request a list). The stores, located in Wauwatosa, Brown Deer, and Waukesha, WI, and Cherry Hill, NJ, will close on August 3. The concept, started in 2015, sold merchandise returned to Kohl’s at deeply discounted prices. Management commented that improved inventory management did not allow it to appropriately stock the stores.
In late April, PetSmart filed its initial S-1 for a public offering of common stock for Chewy.com. On Friday, Chewy.com launched its IPO on the NYSE. Shares immediately surged above its IPO price of $22 per share (and beyond the expected range of $19 to $21), to $36 per share, closing at $34.99 by the end of the day and $33.70 as of Monday. About 46.5 million Chewy shares were sold in the IPO, up from the anticipated 41.6 million, as majority owner PetSmart sold more shares than originally planned. PetSmart will receive almost $900.0 million from the sale of its stock. Chewy raised $123.2 million and has indicated it will use net proceeds for working capital and other general corporate purposes. PetSmart will remain majority owner of Chewy and intends to use the funds for debt reduction, working capital, and general corporate purposes. The offering now values Chewy.com at about $13.70 billion. This is more than 4x the $3.35 billion acquisition price that PetSmart paid for Chewy in May 2017.
A class action lawsuit has been filed on behalf of shareholders of Ascena Retail Group between September 16, 2015 and June 8, 2017 in the U.S. District Court for the District of New Jersey. According to the lawsuit, Ascena failed to disclose, following the 2015 acquisition of Ann Taylor and LOFT, that operations were “in far worse condition than had been represented to the public.” The lawsuit alleges that the Company delayed recognizing an impairment charge to the value of Ann’s goodwill and, as a result, Ascena’s reported income and assets were materially overstated. On May 17, 2017, Ascena revised its third quarter of fiscal 2017 guidance, noting that it would be taking an impairment charge, but failed to quantify the amount. In response, its share price dropped from $2.82 to $2.06, a 26% decline. On June 7, 2017, Ascena reported its third quarter of fiscal 2017 results, which included a non-cash pre-tax impairment charge of $1.324 billion to write down a portion of its goodwill and other intangible assets. As a result, Ascena’s stock fell another 35% to $1 on June 8, 2017.
In other news, Ascena hired liquidation firm Gordon Brothers to help conduct going-out-of-business sales at Dressbarn. As previously reported in May, Ascena said it would shut down all 650 Dressbarn stores and had hired real estate advisory firm A&G Realty Partners to help with the closures.Click here to request a complimentary list of Dressbarn locations.
Fred's delayed its required reporting again, pushing its first quarter 10-Q from June 13, 2019 to June 18, 2019. The Company cited the new lease requirements (ASU No. 2016-02) and the subsequent amendments, as the reason, but a more likely explanation is the adjustments required for the announced store closings. The Company is still operating under its May 15, 2019 Forbearance Agreement with its lenders which requires a commitment letter for new financing by this Friday, June 21st.
Revenue continued its decline, down 5.2% for the first quarter ended May 4, as reduced traffic and persistent out of stock positions drove consumable sales down by 16.3%; overall general merchandise was down 7.8%, but surprisingly, pharmacy showed a small 0.7% increase; overall, comps declined 8.5%. Gross margin fell 310 basis points on the continuing close out sales and company-wide discount initiatives. SG&A fell on a dollar basis, but the deleveraging from the sales decline drove SG&A margin up 30 basis points.
On June 14, 2019, the Company filed a WARN Act notice, advising of the permanent closure of the former Tennessee headquarters building and distribution center. This could be an indication that a closing on the sale of the building is close, which could give the Company some breathing room. Fred's has indicated it is seeking a buyer for the script files from its remaining 169 pharmacies, but has not disclosed if any of the 76 owned stores are being marketed.
Krispy Kreme has announced plans to open a “first of its kind” flagship store in New York City’s Time Square early next year. The 4,500 square-foot shop will be open 24 hours a day and have a glaze waterfall.
In April, Smart & Final (S&F) had entered into a definitive merger agreement with funds managed by affiliates of Apollo Global Management (Apollo) whereby Apollo will acquire S&F for a total valuation of $1.12 billion, including assumed net debt (6.2x TTM EBITDA). This morning, Apollo announced the successful completion of the previously commenced cash tender offer to purchase all of the outstanding shares of common stock of S&F.
On June 12, Whole Foods opened a new store in Malibu, CA. The 25,000 square-foot store is the Company’s 34th store in the greater Los Angeles area. See below for Future Openings Map, click here to request a list of future openings & closings.
Hy-Vee will open a new supermarket in St. Peter, MN. The building, which was a Shopko store that closed in 2018, will be renovated to accommodate a pharmacy and grocery store. Construction is expected to start this summer, with the store slated to open in early 2020. At 36,000 square feet, the footprint of the St. Peter store will be smaller than the Company’s average 60,000 square-foot store. The Company has a wide range of grocery stores ranging from 6,000 to 90,000 square feet.
Dunkin’ Brands is partnering with third-party delivery service Grubhub to begin the rollout of a national delivery service called Dunkin’ Delivers. The service launched Monday at more than 400 Dunkin’ restaurants throughout New York City’s five boroughs, with delivery offered through Seamless, Grubhub’s New York brand. Following the initial launch, Dunkin’ and Grubhub will look to expand the service to locations in other markets in the coming months, including in Boston, Chicago and Philadelphia.
White Paper - Private Equity In Retail
After a record setting year for global private equity (PE) fundraising in 2017, the 2018 tally was a little more muted. There are several factors that contributed to this, including higher prices for deals, volatility in the capital markets, trade tensions, Brexit, and the possibility of a recession. With the economic expansion trend now entering its tenth year, there could be some wariness in the sector about the future of deal making. For 2018, Ernst & Young (EY) reports global PE fundraising totaled $682.00 billion, down 12% from last year’s final count of $775.00 billion. The top 10 funds commanded about 17% of the capital raised. Our U.S. Private Equity Review offers an analysis of the state of the market, including notable retail deals from the past year, as well as a charted list of nearly 40 U.S. firms, their total assets, select retail holdings and deal activity.
Costco announced it will open its first New Zealand store on Auckland’s north-western fringe.
Last week, Ocado and Kroger broke ground on their first U.S. customer fulfillment center (CFC) in Monroe, OH. Kroger owns a 6% interest in UK-based Ocado, who is partnering exclusively with Kroger in the U.S., enhancing Kroger's digital and robotics capabilities and helping expand its coverage area throughout the U.S. to facilitate the convenience of shopping for anything, anytime and anywhere. Kroger is investing $55.0 million on the 335,000 square-foot automated warehouse facility with digital and robotic capabilities, also known as a shed. Kroger intends to open 20 CFCs and has selected two additional sites in the Central Florida and Mid-Atlantic regions.
In other union news, Kroger announced its Central division associates in Indiana ratified a new labor agreement with the UFCW Local 700. The new agreement covers nearly 9,500 associates under the Indianapolis collective bargaining agreement. Kroger has said it is investing an incremental $500.0 million in associate wages, training and development across the business.
Last week, Walmart announced that its Jet e-commerce business will be integrated into the Company’s mainstream business, though Jet will continue to be marketed as a separate brand, largely in urban areas where not being Walmart is seen as an advantage. Walmart acquired Jet three years ago for $3.00 billion. Simon Belsham, the president of Jet, will leave the Company, though he will remain until late summer to facilitate the transition. Walmart e-commerce president and CEO Marc Lore said, “Across most of the country, we saw we could get a much higher return on our marketing investments with Walmart.com, so we’ve dialed up our marketing spend there. However, in specific large cities where Walmart has few or no stores, Jet has become hyper focused on those urban customers … While this has made Jet smaller from a sales perspective, it has helped us create a smart portfolio approach where our businesses complement each other … Jet continues to be a very valuable brand to us.” Walmart said it isn’t planning to cut jobs and expects existing Jet employees to move to new roles within the Company.
Mexican officials blocked Walmart’s deal to buy delivery app Cornershop because Walmart could not guarantee a level playing field for rival retailers, whose customers use the app to order groceries and other goods, according to an official document and an interview with the top competition regulator this week. Cornershop operates in Mexico and Chile, promoting the app as providing delivery of “groceries to your front door in one hour” from retailers including Costco, Chedraui and Walmart. It charges retail chains a commission for its services. Walmart had struck a deal to buy the popular app for $225.0 million.
Walmart’s Sam’s Club is reportedly looking to reduce its SKU count. The Company is said to be in the midst of its annual review of merchandise assortment, with plans to reduce inventory items. According to a Company executive, the assortment has “ballooned” as larger pack sizes were added to push revenue higher, which resulted in fewer members buying certain products, and squeezing already thin profit margins.
Conn’s opened a nearly 42,000 square-foot Conn’s HomePlus store in Texas City, TX (near Galveston). There are more than 20 HomePlus locations in the greater Houston area, including a recently expanded and remodeled showroom in Baytown. Conn’s currently has more than 130 locations in 14 states. Click here to request a list of Conn's Future Openings.
Floor & Décor opened an 84,000 square-foot store in Saugus, MA on June 13, its second store in the Boston market. This represents the ninth Floor & Décor store in the Northeast, joining locations in New York (1), New Jersey (3), Pennsylvania (2), and Maryland (1), in addition to the other Massachusetts location. The Northeast is a largely undeveloped region for the Company, which operates about half of its store base in Florida, Texas, California, and Georgia. For fiscal 2019, the Company plans to open 20 new locations, including three that opened in the first quarter (ended March 28) and three in the second quarter (ending June 27). It expects to have 120 locations operating by year end, up from 100 last year and 106 currently. Click here to request a list of Floor & Décor Future Openings.
Associated Food Stores (Salt Lake City, UT) announced that it will be consolidating its Macey’s store in Logan, UT into its Providence location. The Logan location will close on July 19. Darin Peirce, VP of retail operations, said the decision was prompted by “rampant and rapid changes in retail across the U.S.,” and it was a difficult choice. In April 2019, the Company closed a Fresh Market store in Spanish Fork, UT.
Hudson’s Bay Company reported first quarter sales decreased 3.3% to C$2.12 billion due to operating 10 fewer stores than the prior-year period, and a double-digit comp decline at Lord & Taylor. As previously reported last month, HBC is pursuing strategic alternatives for Lord & Taylor, including a possible sale or merger, and is closing all Home Outfitters by the end of the second quarter. On June 10, we reported HBC is considering a proposal from a group of shareholders led by the Company’s Chairman Richard Baker to take the Company private. Overall comps were down 2.1% (or up 0.2% excluding Lord & Taylor), compared to a decline of 0.7% last year; by segment, comps were down 4.3% at Hudson’s Bay and 17.1% at Lord & Taylor, while Saks Fifth Avenue comps grew 2.4% and Saks OFF 5th comps increased 4.4% (the first comp growth since 2Q17). Gross margin declined 90 basis points to 39% due to store closures and clearance sales. SG&A margin improved 120 basis points to 38.8% due to savings from the lower store count. Adjusted EBITDA declined 48.2% to C$44.0 million. The Company ended the quarter with 342 stores, including 89 Hudson’s Bay stores, 45 Lord & Taylor locations, 42 Saks Fifth Avenue stores, 129 Saks Off 5th locations, and 37 Home Outfitters.
Lord & Taylor President Vanessa LeFebvre announced her departure from the chain. She joined the Company in May 2018 from Stitch Fix, where she served as VP and general merchandise manager for a year. Ms. LeFebvre previously spent 10 years at Lord & Taylor from 1999 to 2009. HBC also announced that CFO Ed Record is taking a medical leave of absence. The Company has appointed Becky Roof as interim CFO. Ms. Roof previously served as interim CFO at a number of large companies and is currently a managing director at AlixPartners.
Dollarama reported first quarter sales growth of 9.5% to $828.0 million, driven by 5.8% comp growth and new store openings. Comp growth consisted of a 4.9% increase in average transaction size and a 0.9% increase in the number of transactions. The Company opened a net of 55 new stores, bringing its store count to 1,236 at the end of the quarter. Net earnings increased 1.9% to $103.5 million, mainly the result of sales growth and lower SG&A as a percentage of sales, partially offset by a lower gross margin.
The expansion of Dollarama’s Montreal-area distribution center, which began in March 2018, is expected to be completed by the end of calendar 2019, on schedule and on budget.
Looking ahead at fiscal 2020, the Company now expects comp growth of 3% – 4%, up from its previous guidance of 2.5% – 3.5%.
Reports indicate book distributor Readerlink LLC is working on a potential bid for Barnes & Noble that would be higher than the June 7 deal between Barnes & Noble and Elliott Advisors (U.K.) Limited, an affiliate of Elliott Management. That all cash transaction valued Barnes at $683.0 million, including debt. Following the announcement of that deal, shares closed on June 10 at $6.80 per share, above the $6.50 per share purchase price from Elliott, suggesting investors believe the Elliott deal undervalues the Company. One investor, Richard Schottenfeld, who has a 3.4% stake in Barnes & Noble, is urging the Company’s special committee to reevaluate all offers and consider the superior bid. A filing with the SEC says the Elliott deal has a “keep-shop” provision for a $17.5 million breakup fee should Barnes & Noble strike a deal with another party. According to the reports, Readerlink was in the process of arranging financing prior to that breakup fee’s effective date (June 13), but no deal has been announced yet. Readerlink distributes books to non-book retailers including Target and Walmart.
Harps Foods will reopen a newly remodeled store in Fort Smith, AR, on June 19. The store will feature expanded offerings and prepared foods. Harps operates 91 stores in Arkansas, Oklahoma, Missouri and Kansas.
This information contained in this newsletter is compiled from sources which Market Service Inc. does not control and unless indicated is not verified. Its contents are not to be divulged. Market Service Inc., its principals and writers do not guarantee the accuracy, completeness or timeliness of the information provided nor do they assume responsibility for failure to report any matter omitted or withheld because of their negligence.