On June 21, Fred’s announced its third wave of closings, with an additional 49 stores to shutter (click here to request a list of closings). This follows the April 11 and May 16 announcements of 159 and 104 closures, respectively. This brings the store closing total to 312, leaving 256 open locations. The 312 closures represents 55% of the fiscal year end store base.
The news followed the June 19 release of Fred’s first quarter results, which the Company said had been delayed from June 13 due to new lease requirements (ASU No. 2016-02) and the subsequent amendments. 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 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.
Tru Kids, a Company managed by former executives of Toys “R” Us, reportedly plans to open six physical locations this year, ahead of the holiday season. After Toys “R” Us liquidated its business last year, its lenders took control of the Company’s intellectual property, which includes the Toys “R” Us, Babies “R” Us, and Geoffrey brand names. In late January, several former Toys “R” Us executives started Tru Kids to manage the brands. The forthcoming stores are expected to average 10,000 square feet, smaller than the Toys “R” Us stores, which averaged 20,000 square feet to 50,000 square feet (or 30,000 square feet to 70,000 square feet if combined with Babies “R” Us). Tru Kids is also going to launch an e-commerce shop. Late last year, Tru Kids operated “Geoffrey’s Toy Box” pop-up stores inside 600 Kroger grocery stores during the holidays. Reports indicate that several toy manufacturers, including the makers of Little Tikes, Bratz dolls, and L.O.L. Surprise! toys are signing on to supply the new stores.
Yesterday, H.E. Butt opened its Eastside Tech Hub located in East Austin, TX. The hub will house its growing team of tech/digital employees, as well as the new headquarters for its subsidiary Favor, the Company’s on-demand delivery service.
Amazon is bringing one of its newest physical store concepts called “4-star” to the Dallas, TX area. The concept specializes in providing a variety of products that have achieved a rating of four stars or higher on Amazon’s website. There are three other 4-star stores in SoHo, NYC; Lone Tree, CO; and Berkeley, CA.
Meanwhile, Amazon launched the “Off-to-College” storefront that will sell items for student dorm rooms, Amazon devices, and more. The storefront will offer daily deals, with exclusive perks for Prime Student members.
Sears Hometown and Outlet Stores reported first quarter sales fell 23.7% to $291.1 million, due to the closing of 243 underperforming stores and an 8.9% decrease in comps, which came on top of a 10.5% decrease in the same period last year. Comps have been negative for seven straight quarters due to ongoing weakness across almost all product categories. Quarterly margins improved 60 basis points due to cost cutting; however, TTM EBITDA margin of 1.9% was well below our monitored industry average of 7.6%, while TTM interest coverage of 1.7x was unfavorable relative to our warning level of 3x. Quarterly free cash flow improved due to lower inventory levels which accompanied the store closings (click here to request a list of future closures), while TTM free cash flow totaled $19.0 million. Debt levels increased and the ratio of debt/TTM EBITDA was elevated at 5.2x at the end of the quarter.
Dollar General continues to push into the convenience store segment with the opening of its fourth DGX small-format store on June 20 in Cleveland, OH. The Company has plans to open ten DGX stores in fiscal 2019. The banner offers urban shoppers a selection of consumable items in a compact format, measuring about half the size of a traditional format which is approximately 9,100 square feet. Dollar General opened its first DGX location in Nashville, TN in January 2017, with the other locations following in Philadelphia, PA and Raleigh, NC. Click here to request a sample list of Dollar General Future Openings.
Best Buy announced a new fitness collection featuring products from Flywheel Sports, NormaTec, Hyperice, Hydrow, and NordicTrack. The collection is currently available on BestBuy.com and will be introduced in over 100 stores by the end of 2019. Employees will be trained to help customers select products, and the GeekSquad will manage delivery and installation. This is another step into the health and fitness segment, following Best Buy’s acquisition of health and safety solutions business GreatCall last year for $800.0 million. In April 2019, Best Buy expanded its reach further with sales of the TytoHome medical device.
In other news, Apple added Best Buy to its exclusive list of authorized repair locations. With nearly 1,000 Best Buy locations now offering Apple-certified repairs with an Apple-certified technician, this brings the number of Apple’s third-party repair locations to 1,800, which excludes 300 Apple Stores.
Kroger reported results for its first quarter ended May 25. Kroger’s identical store (ID) sales remained positive, as the Company posted a 1.5% ID sales increase, excluding fuel. Total sales decreased 1.2% to $37.25 billion but, excluding fuel and the convenience store business unit divestiture, total sales increased 2%. Gross margin was relatively stable; management cited a decline in industry-wide gross margin rates in pharmacy as a major headwind during the quarter. SG&A margin deteriorated 40 basis points, despite benefits generated by Restock Kroger initiatives and planned real estate transactions during the quarter.As a result, EBITDA dropped 4.8% to $1.74 billion. Click here to request a list of Kroger Future Openings & Closings.
Rouses Market recently opened a 44,000 square-foot replacement store in Gulfport, MS. The opening comes about two weeks before Rouses opened a 55,000 square-foot store in Daphne, AL. The Company expects to open two more stores later this year.
Rothy’s, a San Francisco-based women’s shoe e-commerce retailer founded in 2016, plans to open five new stores this fall. So far the Company has just one physical location, a 600 square-foot shop in San Francisco. The forthcoming stores will be in New York’s West Village, Boston’s Newbury Street area, Georgetown in Washington D.C., and two in Los Angeles. The Company said these are the four of Rothy’s highest-penetrated markets for sales. Rothy’s indicated that it generated more than $140.0 million in revenue last year. It received $35.0 million in funding from Goldman Sachs at the end of 2018, bringing its total raised to $42.0 million. Looking ahead, the Company plans to continue its brick-and-mortar growth into 2020, though it hasn’t announced locations yet. Rothy’s says it is focused on street-level retail in neighborhoods, not malls.
Ace Hardware announced plans to open namesake stores in 11 former Orchard Supply Hardware locations in California (Orchard Supply was owned by Lowe’s Companies). Nine of the stores will be owned and operated by Westlake Ace Hardware, a subsidiary of Ace Hardware. The two remaining stores will be owned and operated by independent retailers. Most of the locations are expected to open this summer, with each store averaging 30,000 square feet. Ace is not the only entity opening in former Orchard Supply locations. In May 2019, Central Network Retail Group, which operates 104 home improvement stores, announced plans to open seven California stores, in former Orchard Supply stores. Click here to request a list of Ace Hardware Future Openings.
Wawa’s fiscal 2018 estimated sales were up about 20%, reflecting the benefits of an increased store count (up 25 net to 815 at the end of fiscal 2018) and additional legacy stores now offering fuel. The Company plans to open a total of about 65 new stores and remodel 60 existing stores in 2019. A significant part of Wawa’s expansion plan includes building new stores in Florida at a rate of roughly 30 per year.
Dallas-based startup Neighborhood Goods plans to open a 4,500 square-foot store in the Chelsea Market neighborhood of Manhattan, NY later this year. The Company opened its first location, a 14,000 square-foot store in Plano, TX, in November. Neighborhood Goods sells a rotating selection of primarily digital native brands that are looking for a physical presence without the expense of opening stores. It rents out small spaces of various sizes for short periods of time. The Plano store now has more than 35 brands. A second round of funding in February raised $8.8 million and brought the Company’s total funding to $14.5 million. The Company is reportedly looking for more potential store locations in other cities.
Strategic Sales Insights
Despite continuing industry consolidation and the presence of several national giants, the battle for dominance still plays out on a regional level. In the Midwest, Hy-Vee seeks to appeal to consumers and drive traffic by implementing a broad range of changes including diversifying, expanding its Market Grille restaurants, partnering with other retailers like Wahlburgers and Orangetheory Fitness, and dabbling in new categories such as beauty and apparel. Our report takes a close look at the Company’s operational and competitive status, including market position, real estate and sales trends, and provides visual competitive analyses as well as key real estate metrics like store count, average sales per store and sales per square foot.
According to published reports Forever 21 has hired Latham & Watkins LLP to help renegotiate leases with landlords and Alvarez & Marsal to overhaul the Company’s operations. The advisors were brought on board in an attempt to avoid a formal restructuring. The Company was in talks with private equity firm Apollo Global Management about raising debtor-in-possession funds to provide financing should it seek a formal restructuring. The Company sold its Los Angeles headquarters for $166.0 million in February to offset cash burn and enhance liquidity. The Company has reportedly suffered significant operating losses and cash burn the last several years, as it struggles with changing consumer tastes and a hyper-competitive environment. Forever 21 has more than 815 stores in U.S. and worldwide. Click here to request a list of Forever 21 Future Openings.
Charming Charlie LLC has hired Clear Thinking Group as its financial advisor to assist with operational restructuring and liquidity issues, according to our sources. On April 18, we reported that the Company had closed on a $35.0 million asset-backed revolving credit facility co-agented by Second Avenue Capital Partners, LLC (SACP), and White Oak Commercial Finance, LLC. Charming Charlie emerged from bankruptcy on April 25, 2018. After closing 108 locations during the bankruptcy process, the Company currently operates 264 stores (Store Concentration Map below), concentrated in Texas (13.3%), California (8%), Florida (8%) and Illinois (5.3%).
Crate & Barrel announced the acquisition of Hudson Grace, a San-Francisco-based brand selling home décor, entertaining, and gift products. Terms of the deal were not disclosed. While no specific date was announced, Crate & Barrel said it will begin offering a collection of Hudson Grace products in select Crate & Barrel stores before the holiday season. Crate & Barrel plans to grow Hudson Grace’s e-commerce business. Hudson Grace also operates five California stores and one location in Atlanta, GA.
Philadelphia, PA Metro Area - Hot Market Report
The Philadelphia Metro Area, which consists of 11 counties in four states, is the eighth largest metropolitan area in the U.S. The market, home to nearly 6.1 million residents (2018), has experienced 2.1% population growth since 2010, which is lower than the national increase of 5.8% during that period but better than other markets in Rust Belt states that have experienced shrinking populations due to declining steel, coal, and manufacturing industries. Philadelphia benefits from being home to several prestigious universities and attracts tourism to its historical landmarks. The top three grocers – Ahold Delhaize, Albertsons, and Wakefern – all operate traditional supermarket chains and together hold roughly half of the Philadelphia market share. They face heightened competition from newer chains like Lidl and Sprouts, both of which have opened their first Philadelphia locations in the last six months. Our report takes a closer look at the Philadelphia real estate landscape, and provides visual competitive analyses as well as key real estate metrics such as future openings, store count, market share, and demographics.
Lululemon Athletica closed its men’s standalone stores in New York City and Toronto, Canada at the end of fiscal 2018. The Toronto store was opened in December 2016 and the Manhattan Soho store opened in 2014. The men’s location in Soho was consolidated into a larger-format store about four blocks away. Despite the closures, the Company continues to expect to more than double revenues from the men’s segment by 2023. During the first quarter of fiscal 2019, Lululemon’s men’s comps grew 26% from the prior year. This year, the Company plans to introduce shoes, and it recently rolled out a personal care products line for men and women.
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.