June 5, 2018
Sears Holdings Corporation
Yesterday, Sears Holdings Corporation announced that it borrowed an additional $186.0 million under an amended loan agreement, whose maturity was extended to July 20, 2020. After closing, the loan totaled approximately $779.0 million, up from $593.0 million. The proceeds were used to repay loans outstanding under the 2017 Real Estate Loan Facility.
The Company also released results for its first quarter ended May 5. Sales plunged 31.2% due to store closings and an 11.4% decline in company-wide comparable store sales. At Kmart, comparable store sales decreased 9.5%, while Sears’ comps fell 13.4%. Expense cuts were outpaced by the lower sales volume and gross margin contraction resulting in the quarterly EBITDA loss widening 5.1% to $225.0 million.
On May 31, Sears announced it will be closing an additional 100 stores. The Company released a list of the 63 locations (15 Kmart and 48 Sears) that will be shuttered by early September.
Meal kit company Hello Fresh is joining the growing trend of offering meal kits in supermarkets, and this week will begin selling kits in some 600 Ahold Delhaize-owned Giant and Stop & Shop stores. Meanwhile, Albertsons bought Plated and late last month, Kroger purchased Home Chef.
Last week Blue Apron opened its first pop-up location in New York, where it offers cooking classes and panel discussions by chefs, and will be open through June 24. The Company has begun a push to grow its brick-and-mortar presence. It also has plans for mobile pop-ups in Los Angeles, San Francisco and Seattle, each of which will last two days.
On May 31, Southeastern Grocers announced it successfully completed its financial restructuring and has emerged from Chapter 11, noting that it has cut overall debt levels by approximately $600.0 million (including $522.0 million of debt exchanged for equity in the reorganized Company). Exit financing included a $600.0 million ABL agreement and a $475.0 million term loan. The Company said it hopes to improve its competitive positioning going forward by remodeling stores, including 100 planned for this year (about 30 have been completed to date). The Company will also invest in additional customer programs, including the introduction of a new SE Grocers rewards loyalty program beginning in July 2018. Southeastern Grocers continues to face competition from rivals including Publix, Walmart, Kroger and Aldi.
An independent Piggly Wiggly store owner, in conjunction with and with the support of C&S Wholesale Grocers, purchased two former BI-LO stores in South Carolina. Financial details of the transaction, which closed in mid-May, were not disclosed. The acquired stores were rebranded under the Piggly Wiggly banner name and grand opening celebrations will take place on June 6. C&S Wholesale Grocers, the owner of the Piggly Wiggly brand, stated it is looking forward to extending the Piggly Wiggly footprint. C&S now services 51 Piggly Wiggly locations in South Carolina and Southeast Georgia.
C&S said in March that three Piggly Wiggly owners purchased a combined six stores, including three Bi-Lo locations in South Carolina and three Harvey’s Supermarkets in Georgia, from Southeastern Grocers.
Yesterday, Walmart announced it has finalized a deal to sell 80% of its business in Brazil to private equity firm Advent International; Walmart will keep the remaining 20%. The deal has reportedly been in the works for months and is expected to close later this year. Terms have not been disclosed but Walmart stated it would record a non-cash net loss of $4.50 billion in Q2 as a result. “A significant portion of the net loss is due to the recognition of cumulative foreign currency translation losses and the final loss could fluctuate significantly due to changes in currency exchange rates up to the date of close.” Although Brazil represents the biggest single market in Latin America, the Company has struggled there and last quarter said that it would wind down its first-party e-commerce business in Brazil as well.
Dollar General reported first quarter sales growth of 9% to $6.11 billion. Comp growth of 2.1% was driven by an increase in average transaction amount, partially offset by a decline in customer traffic. Comp growth was also driven by robust sales of consumables, partially offset by sales declines in the apparel, seasonal and home categories. The Company believes that the effect of unseasonably cold and damp weather on certain product categories negatively impacted comps. Operating income rose 3.5% to $490.2 million. Net income increased 30.5%, to $364.9 million. During the quarter the Company opened 241 new stores, remodeled 322, and relocated 31 stores.
Dollar General reiterated its fiscal 2018 EPS guidance of $5.95 – $6.15. It plans to open approximately 900 new stores, remodel 1,000 stores, and relocate 100 stores in fiscal 2018
Dollar Tree’s first quarter sales increased 5% to $5.55 billion. Enterprise same-store sales increased 1.4%, consisting of 4% growth at its Dollar Tree banner and 1.1% growth at its Family Dollar banner. Operating income increased 12.6% to $437.6 million, and operating margin increased to 7.9% from 7.4%. The increase is primarily the result of a $50.9 million receivable impairment recorded in the prior year first quarter. Net income fell $40.0 million, to $160.5 million, largely due to debt refinancing costs. During the quarter, the Company opened 130 stores, expanded or relocated 26, and closed five.
For fiscal 2018, Dollar Tree expects sales of $22.73 billion – $23.05 billion, comp growth in the low single-digit range and 3.7% square footage growth. The Company lowered its EPS forecast to $4.80 – $5.10, down from $5.25 – $5.60.
Aldi has proposed a 22,400 square-foot store adjacent to and on land owned by Woodman's in Menomonee Falls, WI. Aldi has offered to purchase the lot from Woodman's for the new store. While both Aldi and Woodman’s are discount grocers, Woodman’s operates on a much grander scale with its Menomonee Falls store standing at nearly 240,000 square-feet. Aldi stores average 16,000 square feet. It is known that Aldi often attempts to open in shopping centers containing or nearby a Walmart as they like to siphon some of the traffic. There is also a Sam's Club store across the street from the Woodman's. Meanwhile, Aldi will open a new, 21,000 square-foot store on June 14 in Mount Airy, NC.
Amazon plans to open more brick-and-mortar bookstores around the country. It has confirmed plans to open least three more in Los Angeles, CA, Bethesda, MD, and Lone Tree, CO. Amazon currently operates 15 stores, all of which opened over the last two years. The openings come as Amazon also plans to open two more Amazon Go checkout-free stores, in Chicago and San Francisco, adding to the one now operating in Seattle.
Sprouts Farmers Market
Sprouts Farmers Market will open its first store in South Carolina on June 13. The 31,000 square-foot Simpsonville store will be the Company’s 300th location in the country, see below for concentration map.
Walgreens will open a store in the Mall of America in Bloomington, MN this fall. The 7,600 square-foot space is on the third floor and will replace a Rainbow clothing store.
In other news, the Company has completed the previously announced sale of a 30% interest in Guangzhou Pharmaceuticals Corporation to its joint venture partner Guangzhou Baiyunshan Pharmaceutical Holdings. Walgreens Boots Alliance will continue to account for its remaining 20% stake in Guangzhou Pharmaceuticals Corporation as an equity method investment.
Fred's, Inc. and CVS Health Corporation
Fred's, Inc. closed on the previously announced sale of certain assets of EntrustRx, its specialty pharmacy unit, to a subsidiary of CVS Health Corporation. The aggregate consideration paid was $40.0 million, plus an amount equal to the value of EntrustRx inventory. Fred’s Interim CEO Joe Anto hinted that more divestitures might be on the way, commenting, “We are pleased to conclude the sale of EntrustRx, an important step in our plans to monetize non-core assets as part of our broader turnaround efforts. The cash proceeds will allow us to pay down a significant portion of our debt and also be used for general corporate purposes.”
Sears Hometown and Outlet Stores
Sears Hometown and Outlet Stores plans to close nine units by July 1, all under the Sears Hometown banner. Stores are slated to close in Staunton and Harrisonburg, VA; Harpers Ferry, WV; Lompoc, CA; Franklin, TN; Waynesville, NC; Marquette, MI; and Lawrence and Lenexa, KS. The Staunton, Harrisonburg and Harpers Ferry stores are all owned by franchisee Montgomery Kellogg. Reports indicate that those three stores are closing due to heightened competition from big box stores and more shoppers turning to online ordering. Owners of the Lompoc store say they were forced to close due to rent increases, and the owner of the Waynesville store is closing to pursue another job opportunity.
Burlington Stores reported first quarter sales increased 12.8% to $1.52 billion, and comps were up 4.8%; both were better than the Company’s projections for sales to increase 9.5% – 10.5% and comps to be up 2% – 3%. Gross margin expanded 35 basis points to 41.2%, primarily due to increased merchandise margin, slightly offset by higher freight costs. As a result of gross margin expansion and expense leverage, adjusted EBITDA rose 20.5% to $164.9 million. Looking to fiscal 2018, the Company expects sales to increase 9.7% – 10.5%, up from previous expectations of 9% – 10%, assuming a comp increase of 2.6% – 3.4%. The Company continues to expect adjusted EBITDA margin to increase 30 to 40 basis points, to open 35 to 40 new stores, and invest $250.0 million in capital expenditures. During the first quarter, the Company opened 18 new stores, averaging 40,000 square feet. This is up from four units opened in the prior year’s first quarter. Burlington will also continue its store remodeling initiative, with plans to remodel 34 stores in 2018. Burlington’s CEO Tom Kingsbury is confident the chain can expand to 1,000 stores, up from 647 at the end of the first quarter.
Last week, Macy’s opened a 16,000 square-foot Macy’s Backstage within an existing store in Las Vegas, NV. This is the first Macy’s Backstage in Nevada. Additional Macy’s Backstage store-within-a-store locations will open this fall in Summerlin, Henderson, and Reno, NV. Macy’s has 60 Backstage stores across the U.S., over two thirds of them within other stores. The Company is looking to expand Backstage to 100 locations during the fiscal year, and open a dedicated distribution center in Columbus, OH for the brand.
Rutter's opened its 70th convenience store, in Inwood, WV, on May 30. The store is 9,185 square feet. It is the Company’s first location outside of Pennsylvania and according to the Company, is the first of many it plans to open outside of its home state over the next few years. Rutter’s is private and owned by CHR Corporation.
Headquartered in Des Moines, IA, BW Gas & Convenience, dba Yesway, acquired 11 Pick-A-Dilly convenience stores in northeast Missouri, reaching its 100-store milestone. Yesway already had 14 locations in the state. With the additional stores it currently has under contract to acquire, Yesway expects to operate nearly 150 c-stores and to expand into four new states by the end of June. According to the Company, Yesway remains on track to reach its rather lofty goal of building a 500-store portfolio in select U.S. regions over the next several years.
Stew Leonard’s received approval to build a new 80,000 square foot store in a former Sears location in New Jersey’s Paramus Park mall. While there are currently two independently owned Stew Leonard’s wine stores in the state, this will be the Company’s first supermarket in New Jersey and seventh overall (three in Connecticut and three in New York). The new store is expected to open during the first half of 2019. It is the first to be located in a mall.
PCC Community Markets
PCC Community Markets announced plans for a new 25,000 square foot store in Bellevue, WA, scheduled to open in 2020. It will be the co-op’s fourth Eastside location. It also has plans to open stores in Seattle’s Ballard neighborhood (2019) and Downtown Seattle (2020), Madison Valley in 2020, and reopen its West Seattle store in 2019. It recently opened a store in Burien on May 23. In total, the co-op will grow from 11 stores currently to 16 stores by 2020.
J. Crew’s sales were up 2.8% to $540.5 million, and comps increased 1% (the first quarterly comp increase since 2014), with J. Crew comps down 6% and Madewell comps surging 31%. Management noted on its quarterly conference call that J. Crew’s comps continue to improve sequentially. Gross margin expanded by 200 basis points to 38.3% of sales, primarily due to fewer markdowns and buying and occupancy leverage. As a result, quarterly EBITDA rose 27.7% to $36.9 million. During the first quarter of fiscal 2018, the Company closed eight J. Crew stores, ending the quarter at 524 locations. In fiscal 2018, Madewell will remain the Company’s growth vehicle; management expects to open 11 stores (10 Madewell and one J. Crew) and close at least 20 J. Crew locations.
American Eagle Outfitters
American Eagle Outfitters reported sales increased 8% to $823.0 million, and comps were up 9%. By brand, American Eagle’s comps increased 4% and Aerie’s comps were up 38%. Gross margin increased 50 basis points to 37%, from 36.5%, reflecting rent leverage and a favorable markdown rate, partially offset by increased digital delivery expense. Operating income rose 37.2% to $50.7 million. During the quarter, the Company opened four American Eagle stores and closed two underperforming locations, ending with 935 American Eagle stores, including 118 Aerie side-by-side locations. Additionally, the Company opened one Aerie stand-alone store and closed one underperforming location, ending with 109 Aerie stand-alone stores. Internationally, the Company ended the quarter with 217 licensed stores.
Ulta Beauty’s first quarter sales increased 17.4% to $1.54 billion, and comps were up 8.1%. The comp increase was driven by 5.1% transaction growth and 3% growth in average ticket. Retail comps increased 4.7%, with salon comps up 3.2%. E-commerce sales increased 48%, and salon sales increased 10.1%. Gross margin increased 10 basis points to 36.3% due to leverage in fixed store costs, partially offset by investments in salon services and supply chain operations. Operating income rose 11.4% to $209.8 million. During the first quarter, the Company opened 34 new stores and closed one underperforming location, ending with 1,107 stores, an 11.6% increase in square footage.
Genesco’s first quarter sales inched up 0.2% to $645.0 million, while comps were down 2%. By brand, comps were up 6% at Journeys and 7% at Johnston & Murphy, but comps fell 13% at Schuh and 7% at Lids. Comparable direct sales were up 10%, on top of a 28% increase in the prior year period. Direct to consumer sales now make up 11% of total sales, up from 10% last year. As a result of the comp decline and higher expenses during the quarter, the Company recorded an operating loss of $1.8 million, compared to a profit of $2.8 million in the prior year period. During the quarter, the Company opened 21 new stores and closed 35 underperforming locations, ending with 2,558 stores, a 3% decline from the prior year period.
Ascena Retail Group
Ascena Retail Group’s third quarter sales declined 3.9% to $1.50 billion, and comps were down 3%. By segment, premium fashion (Ann Taylor and LOFT) comps were down 3%, value fashion (Maurices and Dressbarn) comps were down 9%, and plus fashion (Lane Bryant and Catherines) comps were down 3%; kids fashion (Justice) comps rose 10%. Gross margin dropped 190 basis points due to unfavorable performance in the value fashion segment, where both Maurices and Dressbarn experienced significant declines. As a result, adjusted EBITDA fell 26.4% to $97.0 million. During the quarter, the Company closed 27 underperforming stores consisting of eight in the premium segment, nine in the value segment, three in the plus segment, and seven in the kids segment. As part of its continuing fleet optimization program, the Company has closed 261 stores since January 2017, and realized about $40.0 million in annualized rent reductions through landlord negotiations. The Company continues to expect to end the year with 4,600 – 4,650 stores in operation. It ended the quarter with 4,663 stores.
According to published reports, Ikea has decided not to open new stores in Nashville, TN, Cary, NC and Glendale, AZ. Instead, the Company is shifting its resources to invest in e-commerce and explore opening smaller stores in urban centers where it can be closer to its customers. The Company is behind most other companies in terms of e-commerce, and its annual sales increases in the past two years were not as large as in the two years prior, while net income fell more than 40% in fiscal 2017. According to the Company, “To be fit for long-term growth, we are creating a new business model to make sure we’re accessible and convenient for our customers today and in the future.” Ikea opened 13 new stores in 2017 and will likely continue to expand its store footprint because customers rely on in-person furniture browsing.
Toys "R" Us, DIP
On June 4, the US Bankruptcy Court entered an order dismissing Toys “R” Us Canada from Toys “R” Us, DIP’s Chapter 11 case. Additionally, an order was entered in the Ontario Superior Court of Justice discharging the CCAA proceedings. The orders followed the closing of a transaction in which Fairfax Financial Holdings Limited acquired the stock of Toys “R” Us Canada. The acquisition by Fairfax, a Canadian investment firm, was for a reported $300.0 million; all of the 82 existing stores are expected to remain open. It appears that creditors of Toys Canada are expected to be satisfied in full, as documents in the CCAA case state that “creditors are unaffected…all obligations of the Applicant shall remain…upon the CCAA Termination Date.” Furthermore, reports state that the sale proceeds were used to satisfy all of Toys Canada’s obligations under the DIP ABL/FILO Facilities.
On May 30, rue21 announced that Bank of America agreed to increase maximum borrowing capacity under its secured revolver from $125.0 million to $145.0 million. According to published reports, rue21 was close to finalizing $25.0 million in new financing from Pathlight Capital but the existing term lenders refused to grant permission. The Company emerged from bankruptcy on September 25, 2017, with a $94.0 million term loan. The term lender group also owns 96% of the equity of the Company. The Company currently operates 752 stores in 45 states after closing 421 underperforming locations during the bankruptcy process.
Hudson's Bay Company
Yesterday, Hudson’s Bay Company (HBC) entered into an agreement to sell Gilt Groupe to Rue La La. The transaction is expected to be completed in July. Terms of the agreement were not disclosed. Hudson’s Bay acquired Gilt Group in 2016 for $250.0 million. Gilt Groupe is part of HBC’S Off-price segment, including OFF FIFTH, which has struggled in recent quarters (see first quarter results below). Commenting on the results, HBC stated, “As part of the actions taken to strengthen the foundation of the Company and position HBC for profitable growth, we have made the decision to divest Gilt. These transactions will allow us to focus time and resources on growth drivers that will have the greatest impact on our results.”
This morning, HBC reported first quarter sales increased 1% to $3.09 billion. Overall comps slipped 0.7%, with Saks Fifth Avenue’s 6% comp increase offset by decreases of 0.6% at DSG (Hudson’s Bay, Lord & Taylor and Home Outfitters), 3.5% at Saks OFF 5th and 6.6% at HBC Europe. Gross margin rate improved 20 basis points to 42.1%, while SG&A expenses increased due to higher rent related to eight new store openings in the quarter. As a result of the lower comps and higher costs during the quarter, adjusted EBITDA loss widened 40% to $35.0 million. HBC opened one Saks Fifth Avenue location, four Saks OFF 5th stores, and three Hudson’s Bay stores; it also closed two underperforming Lord & Taylor stores and two Home Outfitters locations, ending with 488 stores in operation.