March 13, 2018
Kroger
Kroger released its fourth quarter earnings results showing that it continues to battle a highly competitive environment that has been pressuring the retail grocery sector. While identical store (ID) sales (excluding fuel) continued to strengthen, with the Company posting a 1.5% ID sales increase (following a 1.1% advance in the third quarter), it did sacrifice some gross margin, which slipped 50 basis points. Overall, EBITDA grew just under 19% for the quarter, to $1.74 billion, on a 12.4% increase in sales (including an extra week in fiscal 2017). Also during the quarter, Kroger continued to focus on the customer experience; it reached $16.70 billion in annual natural and organic sales, including $2.00 billion in Simple Truth sales, it opened the Kroger Culinary Innovation Center in downtown Cincinnati, and opened its 1,000th ClickList online ordering store. Kroger CEO Rodney McMullen noted that investments in online ordering, which contributed to the lower margin, were critical to the Company’s future though he expects the Company will be more profitable in fiscal 2019 or 2020 fiscal years rather than in fiscal 2018. Mr. McMullen added “We are confident that we will grow identical supermarket sales and market share in 2018. And we will create shareholder value by generating incremental operating margin dollars and free cash flow over the next three years.”
Meanwhile, Kroger is expanding its partnership with Instacart to increase its customer delivery coverage area in 2018. Kroger currently delivers from more than 872 stores in 45 markets, and it offers 1,091 curbside pickup locations, with plans to add 500 new locations this year.
In other news, the Company’s Cincinnati/Dayton division and the UFCW Local 75, which covers nearly 20,000 Kroger associates working at 109 stores in Greater Cincinnati, Dayton, Northern Kentucky and Southeastern Indiana, announced a new contract. The three-year deal is the first contract ratified under “Restock Kroger,” Kroger’s initiative to turn itself around in the wake of intensified industry competition. Kroger plans to spend an extra $500.0 million nationwide on employee wages, training and development over the next three years. The Cincinnati/Dayton division agreement raises starting wages to at least $10 per hour (up from Ohio’s minimum wage of $8.30) and accelerates wage progressions to $11 an hour after one year of service. It also includes a premium increase for night shift work.
Toys "R" Us
On March 8, Bloomberg reported the following: “Toys R Us, DIP is making preparations for a liquidation of its bankrupt U.S. operations after so far failing to find a buyer or reach a debt restructuring deal with lenders, according to people familiar with the matter. While the situation is still fluid, a winding down of the U.S. division has become increasingly likely in recent days, said the people, who asked not to be identified because the information is private. Hopes are fading that a buyer will emerge to keep some of the business operating, or that lenders will agree on terms of a debt restructuring. The situation has also deteriorated for many of the retailer’s overseas divisions, which weren’t part of the bankruptcy. Toys R Us’ U.K. unit put itself in the hands of a court administrator after talks to sell the business fell apart. Its European arm is seeking takeover bids. And talks are being held to offload the growing Asian business, the Company’s most profitable arm. It’s not yet clear what will happen to the Canadian unit, which filed at the same time as the U.S. division.” The Bloomberg article states that a representative for Toys “R” Us declined to comment.
Boxed Wholesale
Boxed Wholesale has reportedly rejected a $400.0 million acquisition offer from Kroger and will pursue a new funding round to remain private, according to a person familiar with the matter. Boxed also had preliminary talks with Amazon, Target and Costco, but Kroger was the only company to submit a bid, the person said. Boxed is said to have an estimated $470.0 million valuation. The Kroger rejection puts Boxed back on the original path set out by CEO Chieh Huang, who has said he wants to remain independent and eventually go public. Boxed has differentiated itself from Amazon by offering a narrower scope of product, which allows it to process more orders using fewer people and less space.
Boxed raised about $165.0 million, including $100.0 million in 2016 that included GGV Capital and American Express Co. The Company said it had sales of about $100.0 million in 2016, up from about $50.0 million the previous year.
Albertsons
On February 25, in connection with reorganization transactions, Albertsons Companies, LLC merged with and into Albertsons Companies, Inc., which became the surviving corporation. Also, as previously announced, President and COO Wayne Denningham resigned, effective February 24. In other news, Albertsons has earned URAC accreditation in Specialty Pharmacy. The Company operates over 1,700 in-store pharmacies, serving approximately 5.5 million patients across 35 states and D.C. Albertsons Specialty Care provides a multitude of services, including prior authorization assistance, patient assistant program coordination, comprehensive care plans and medication adherence support.
CVS Health
Moody’s Investors Service assigned a Baa1 rating to CVS Health’s new proposed $40.00 billion senior unsecured notes offering. Proceeds, along with funds raised from the issuance of new term loan facilities, will be used to fund a portion of the cash consideration to acquire Aetna, Inc. in a transaction valued at about $69.00 billion. Moody’s anticipates the transaction should receive regulatory clearance and close without any major changes, and CVS’s senior unsecured rating will be downgraded one notch to Baa2 with a “negative” outlook. The review for downgrade reflects that CVS’s debt levels will significantly increase and credit metrics will weaken following the closing of the Aetna acquisition.
CVS Health shareholders today voted to approve the acquisition of Aetna. The transaction, which is still subject to regulatory approval, is expected to close in the second half of 2018.
Supervalu
Supervalu reportedly plans to build a new urban concept Cub grocery store in Minneapolis, MN. The 46,000 square-foot store, about half the size of the largest Cub stores, is also the first to anchor a residential complex. The smaller store is expected to open in spring 2019 and will feature expanded prepared foods, a pharmacy, and a café. Supervalu does not yet have plans for any additional smaller-format Cub stores.
US Foods
On March 8, US Foods opened its fifth CHEF’STORE, located in Farmers Branch, TX. CHEF’STORE is a wholesale food and restaurant supply concept designed as a one-stop shop for chefs, restaurant owners and other food industry professionals. The 47,000 square-foot store features more than 5,000 food products, equipment and other restaurant supplies. It will serve independent restaurants throughout the Dallas-Fort Worth metroplex.
Casey's General Stores'
Casey’s General Stores’ third quarter sales increased 16.1% to $2.05 billion. Same-store gallons of fuel sold were up 3.8%, Grocery and Other Merchandise comps increased 2.5%, and Prepared Food and Fountain comps increased 1.7%. While sales were up 16%, total operating expenses increased 10.5%, driven by increases in employee-related costs from operating 66 more stores compared to last year, higher credit card fees, fuel expenses, health insurance costs, and consultant fees.
For the YTD period, the Company built and opened 32 new stores, acquired 17 stores, completed 20 replacements, and remodeled 41. In addition, there were 66 new stores, 14 replacement stores, and 33 major remodels under construction. The Company had 140 sites under agreement for new store construction and 14 acquisition stores under agreement to purchase. It plans to open about 50 new stores during 4Q.
In conjunction with its earnings release (and in an attempt to pacify activist investor JCP Investment Management), Casey’s disclosed an increased “value creation plan”. As part of the plan, the Company provided fiscal 2021 guidance that includes same-store sales growth targets of 4% for fuel gallons sold, 6% for Grocery & Other Merchandise, and 10% for Prepared Food & Fountain. Casey’s expects to enhance store performance primarily through three key initiatives: digital engagement, offering customers new digital products and personalized marketing and rewards; a fleet card program to spur fuel sales; and price optimization. At the same time, Casey’s is continuing to focus on implementing its ongoing cost-reduction measures and managing its operating expenses. The Company expects cumulative savings of store-level operating expenditures of $200.0 million by fiscal 2021, which it plans to reinvest into the key initiatives to increase shareholder value.
Sprouts Farmers Market
On March 14, Sprouts Farmers Market will open its first Maryland store, located in Ellicott City, marking its expansion into the Mid-Atlantic area. The 30,000 square-foot Maryland opening is one of six new locations scheduled to open in the second quarter of 2018. Sprouts plans to open approximately 30 new stores across the country in 2018.
iPic Entertainment
iPicEntertainment will open its first theater in Georgia, in midtown Atlanta. A nine-screen, 426-seat luxury iPic theater, along with a 6,700 square-foot destination bar/restaurant is planned for a 2020 opening.
Whole Foods Market
Whole Foods Market will open its first 365 store in Long Beach, CA, its eighth under the format nationwide, on April 25. The 28,000 square-foot store will be the third Whole Foods Market 365 in Southern California, joining the Santa Monica and Silver Lake locations. The store also will include a dedicated restaurant by Yellow Fever and café by Groundwork Coffee as part of the Friends of 365 program. Through the program, the Company partners with outside chefs, food and lifestyle brands, and culinary influencers to create in-store experiences for shoppers.
Publix
Last week, Publix announced a three-store expansion of its GreenWise Market natural grocer concept, its first sign of expansion of the concept since it was introduced with three FL stores in 2007 that are still in operation. New stores will open in Lakeland (no projected opening date), Tallahassee in September 2018, and Mount Pleasant, SC in January 2019. Unlike the first three stores, which are called “Publix GreenWise Market,” the three new stores are attempting to create a brand distinct from its parent and will drop Publix from the name. The GreenWise stores will be about 28,000 square feet, or about 25% smaller than existing stores that average 36,000 – 39,000 square feet, and will have a greater focus on organic foods. Not many companies have achieved much success in establishing new banners or formats, e.g., Sweetbay, Valu King or Food Basics. Even Publix has essentially sat on this GreenWise concept for 10 years with no further growth, so it is too soon to create expectations for the concept beyond what has been announced. Publix introduced its Hispanic-themed Sabor concept in April 2005 and currently operates seven Sabor locations.
Target
Following a strong fourth quarter performance, Target announced a major rollout of several of its delivery services. The Company will expand “Drive Up” to nearly a thousand stores nationwide in 2018. The service, available through the Target app, allows shoppers to have their online orders brought out to their cars within a couple minutes. It also announced free two-day shipping when customers use their REDcard or spend more than $35, and expansion of its service that lets customers shop select urban stores and have their orders delivered the same day for a flat fee. After last year’s successful pilot launch in four New York City stores, Target will roll out the service throughout the year to all stores in the five New York boroughs and select urban locations in Boston, Chicago, San Francisco and Washington, D.C. Target is also expanding its “restock” overnight essentials delivery service. It will roll out in 2018 to 40 markets, covering nearly three-fourths of the U.S. population, by the end of the year. Finally, the Company announced plans to offer same-day delivery of groceries, essentials, home goods, electronics and other products through Shipt. That service is already available at more than 440 stores across the Southeast and in the Midwest, and will expand to the majority of Target stores and all major markets by the 2018 holiday season.
Meanwhile, Target announced it is raising its minimum hourly wage to $12 this year, part of its previously announced initiative to raise the minimum wage to $15 by 2020. This year, the Company will triple the size of its remodel program, updating more than 300 stores around the country, and deliver more than a dozen new exclusive brands by the end of 2018.
Amazon
According to published reports, Amazon is offering a discount on Prime membership to adult recipients of Medicaid, the public health insurance program for low-income Americans that includes about 35 million people. They can receive the benefits of Prime for $5.99 a month, less than half the standard monthly fee of $12.99. Last year, Amazon started offering the Prime discount to people with electronic benefit transfer cards, which are used to distribute aid for food purchases. These efforts are part of the Company’s goal of attracting low-income consumers.
Meanwhile, Amazon is shifting its Prime Pantry service, which focuses on non-perishable household goods, to a $5 per month membership model for Prime members, down from the current $6 per box. The monthly service charge allows free shipping on orders of at least $40. In the future, those who don’t opt for the new monthly flat rate will pay $8 per box.
Earlier today, Amazon opened its 15th Amazon Books store, located in the Georgetown neighborhood of Washington D.C. In addition to books, the 10,000 square-foot location carries toys and games that are well reviewed on Amazon.com. Just last week, the Company opened an Amazon Books in Austin, TX. Existing locations are in California, Illinois, Massachusetts, New Jersey, New York, Oregon, Texas and Washington. Plans for additional Amazon Books include Lone Tree, CO and Bethesda, MD.
Amazon is planning to open an 800,000 square-foot packing and shipping facility in suburban St. Louis, MO. The Company currently has more than 75 fulfillment centers across the U.S. and Canada.
Greg Greeley, who has been an Amazon executive since 1999, has overseen the Company’s Prime membership program, and most recently charged with helping integrate Whole Foods into Amazon’s operations, is leaving the Company to run Airbnb’s core home-rental business.
Costco
Costco reported fourth quarter sales increased 10.8% to $33.00 billion. Total comps, excluding gas, increased 5.4% and consisted of growth of 5.7% in the U.S., 2.5% in Canada, and 7.4% in Other International. E-commerce comps were up 27.3%, boosted by site traffic gains, higher conversion rates and more merchandise orders. Net income increased 36.1% to $701.0 million, and included a benefit of $74.0 million related to U.S. tax reform. Without the tax benefit, Costco’s profit came in below analyst expectations.
During an earnings conference call, CFO Richard Galanti noted that the Company plans to invest the tax savings in its employees, lowering prices, and other activities that will attract more customers and increase sales volume, ultimately translating to greater profits. Mr. Galanti said that the Company has been able to reap high profits out of lower-priced products. Mr. Galanti stated, “The average price per item has come down — we’ve done a lot to drive greater value.” This has resulted in higher total sales and more margin dollars at the chain, largely due to negotiating better deals with suppliers.
During the quarter the Company opened three new warehouse clubs globally, bringing its total club count to 749. The Company expects to open about 23 new stores during fiscal 2018.
Subsequent to the end of the quarter, for the four weeks ended March 4, sales rose 12.8% to $10.21 billion, while total comps increased 7.7%. Comps rose 7.5% in the U.S., 3.2% in Canada and 14.1% in Other International. E-commerce comps jumped 37%.
Meanwhile, Costco is reportedly pushing its suppliers “to lower prices on everything from steaks to televisions, aiming to keep customers away from rivals like Amazon.” Costco wants vendors to shoulder a greater part of the cost of limited-time promotions. The Company is also introducing more products under its Kirkland Signature brand, such as fragrances, apparel, and food products.
Dollar Tree
Dollar Tree reported fourth quarter sales growth of 12.9% to $6.36 billion. Comps were up 2.4%, driven by increases in average ticket and transaction count. Comps increased 3.8% for the Dollar Tree banner and rose 1% for the Family Dollar banner. Operating income jumped 30.5% to $765.6 million, and operating margin increased to 12%, compared to 10.4% last year. During the quarter, the Company received a $35.0 million settlement related to the Dollar Express impairment charge, which was partially offset by an increase in the workers’ compensation reserve of $12.6 million. Net income was $1.04 billion, compared to $321.8 million last year, largely due to a benefit of $583.7 million related to U.S. tax reform. The Company expects to continue to benefit from the tax reform by about $250.0 million for fiscal 2018. As a result, it plans to invest approximately $100.0 million in stores, increase hourly rates, add benefits for associates, and establish paid maternity leave. During the quarter, the Company opened 137 stores, expanded or relocated 8 stores, and closed 46 stores. During fiscal 2017, sales rose 7.4% to $22.25 billion, comps increased 1.9%, and net income nearly doubled to $1.71 billion.
For fiscal 2018, the Company expects sales of $22.70 billion – $23.12 billion, EPS of $5.25 – $5.60, low single-digit comp growth, and 3.7% square footage growth.
Big Lots
Big Lots reported fourth quarter sales growth of 4% to $1.64 billion, benefitting from an extra week, partially offset by a lower store count year-over-year. As of fiscal 2017, the Company operated 1,416 stores, 16 net fewer stores from last year. Comps fell 0.1%, compared to the Company’s guidance of flat to an increase of 2%, but net income jumped 16.4% to $104.8 million. As a result of U.S. tax reform, the Company incurred a provisional tax expense of $4.5 million in 4Q17. It expects to realize a cash benefit from a lower tax rate in fiscal 2018 and is planning to reinvest 70% of it into the business while returning 30% to shareholders. During fiscal 2017, sales rose 1.4% to $5.27 billion, comps increased 0.4%, and net income was up 24.2% to $189.8 million. The Company returned $195.0 million to shareholders, consisting of $45.0 million in dividend payments and $150.0 million in share repurchases. It announced a new stock repurchase program of up to $100.0 million, and increased its quarterly dividend by about 20% to $0.30 per share, payable April 6, to shareholders of record March 23.
Looking ahead at fiscal 2018, Big Lots expects EPS of $4.75 – $4.95, representing a 7% – 11% increase over fiscal 2017; it expects comp growth in the low single-digit range.
As previously announced, Big Lots President and CEO David Campisi took a medical leave of absence in early December 2017 and remains on leave. His executive responsibilities are being overseen by Lisa Bachmann, EVP, chief merchandising & operating officer, and Timothy Johnson, EVP and CFO.
BJ's Wholesale Club
Last Wednesday, BJ’s Wholesale Club opened a store in Manchester, NH, in a former Sam’s Club that closed last summer. The store replaces BJ’s Hooksett, NH location that closed on Tuesday. The Company now has eight locations in the state, and CEO Chris Baldwin has said that the Company would like to further expand in the state.
Meijer
According to published reports, Meijer plans to have a total of six small-format, urban-focused stores by 2021. According to the Company, in addition to three previously announced stores, Meijer has three stores in development planned to open in 2020 or 2021. While the original two locations will operate in mixed-use developments, the remaining planned stores are expected to be standalone locations or located in shopping centers.
Among the previously announced stores are a 40,000 square-foot store in Grand Rapids, MI and a similarly sized store in Detroit, which the Company expects to open in 2019. A third store is also slated for construction this year, although the location has not been disclosed. The format will offer fresh food, locally sourced items and Meijer-brand products. The Company said that other potential locations for the concept have been identified across its operating states of Illinois, Indiana, Kentucky, Michigan, Ohio and Wisconsin. The move comes just as Supervalu’s Cub banner is planning an urban-format store in Minneapolis in spring 2019.
Neiman Marcus
Neiman Marcus reported second quarter sales increased 6.2% to $1.48 billion, and comps were up 6.7%, the second consecutive quarterly comp gain and the largest comp increase since the fourth quarter of fiscal 2012. The solid comp growth was driven by a 15.7% increase in online sales (which now account for over 34% of revenue). Management also noted store comps were positive, with traffic up in double-digits. The higher sales, gross margin expansion, and lower operating expenses lifted EBITDA 22% higher, to $154.8 million. Credit metrics improved slightly but remain at comparatively lower levels, with TTM interest coverage at just 1.5x and total debt to TTM EBITDA of 10.16. The elephant in the room remains the Company’s debt levels; although debt declined slightly, it remains mountainous at $4.60 billion, with over $3.00 billion maturing in October 2020. During its quarterly conference call management said it believes it has “sufficient runway” to come up with solutions to manage its capital structure. During the second quarter, the Company closed 11 Last Call locations and continues to expect the Hudson Yard store in NYC to open as scheduled in March 2019.
Stage Stores, Ross Stores and Burlington Stores
Stage Stores, Ross Stores and Burlington Stores each reported fourth quarter results last week; all three companies generated double-digit sales increases and positive comps. At Stage Stores, the 20.9% sales increase to $549.4 million was driven by the addition of Gordmans stores and a 1.1% comp increase. The fourth quarter comp increase broke a string of nine consecutive quarterly declines. However, higher expenses, primarily associated with the Gordmans acquisition, pushed EBITDA down 22.2% to $39.7 million. TTM EBITDA margin is now just 2.3%, which is one of the lowest of the companies we monitor in the department store sector. The Company added 58 stores as a result of the Gordmans acquisition and shuttered 21 underperforming Stage locations during 2017. CEO Michael Glazer said, “We are very pleased to have ended the year with results that exceeded the high end of our guidance and the prior year, including fourth quarter positive comparable sales, gross margin expansion and significant net income growth.
At Ross Stores, fourth quarter operating margin grew 95 basis points to 14.6%, driven by a combination of strong merchandise margin, expense leverage from solid gains in same-store sales (which were up 5% on top of a 4% gain in the prior-year period), and the impact of an extra week during the year. Commenting on results, CEO Barbara Rentler said, “Despite our own difficult multi-year comparisons and a very competitive retail climate, sales and earnings were well ahead of our expectations for both the fourth quarter and the full year.” Looking ahead, the Company plans to open 100 new stores this year, including 75 Ross stores and 25 dd’s Discounts locations. So far it has opened 23 Ross locations and six dd’s in February and March. The Company now has 1,432 Ross stores and 219 dd’s stores, and sees the possibility of growing to 2,000 Ross locations and 500 dd’s locations.
At Burlington, adjusted EBITDA rose 15.7% to $295.0 million, primarily driven by gross margin expansion and SG&A leverage, slightly offset by a reduction in other income/revenue. Commenting on significant milestones of fiscal 2017, CEO Tom Kingsbury stated, “We surpassed $6.00 billion in total sales, expanded our adjusted EBIT margin by 90 basis points to 8.6%, and achieved record low aged inventory and record high comparable store inventory turnover levels.”
Claire's Stores
According to published reports, Claire’s Stores is preparing to file for a formal restructuring. The filing would enable the Company to seek relief from its $2.20 billion debt load, of which about $1.90 billion is scheduled to mature in 2019. In November, Claire’s hired Lazard Ltd. as an advisor. According to the recent reports, the Company is closing in on a deal in which ownership would pass from Apollo Global Management to lenders including Elliott Capital Management and Monarch Alternative Capital. Venor Capital Management and Diameter Capital Partners are also said to be involved.
Christopher & Banks
Christopher & Banks had 21 fewer stores than last year, yet net sales for the fourth quarter increased 8.6% to $92.3 million. The improvement was driven by higher comps across its core stores, outlets and e-commerce channels but also included $5.0 million of sales attributable to an additional week in the quarter. After four consecutive quarterly declines, comps turned positive and increased 5.7%, a 0.9% increase in basket size, plus an 11.6% increase in e-commerce sales. Fewer markdowns improved merchandise margin, and sales leverage on occupancy costs drove a 240 basis point increase in gross margin to 27.2%. Additionally, the Company had a 650 basis point improvement in SG&A margin due to lower store operating costs, the absence of employment claims and severance benefits, and lower medical expenses; it also reported $2.0 million in savings during the quarter from its cost-reduction plan. Despite a relative improvement in sales and margins, EBITDA and EBITDA margin remained negative for the quarter. During the quarter, the Company closed one CJ Banks store, one outlet, and nine MPW stores. It ended the year with 463 stores, including 314 MPW, 78 outlets, 34 CJ and 37 CB stores. Square footage decreased 4.4% compared to last year. The outlook for 2018 is for seven additional closures and five new store openings, for a net reduction of two stores.
Foot Locker
Foot Locker plans to continue its store optimization strategy for fiscal 2018, with plans to open about 40 new stores and close 110 underperforming locations. This is on top of the 94 stores opened in 2017 and the 147 locations that were closed. Foot Locker’s fourth quarter comps declined 3.7% and fiscal 2017 comps decreased 3.1%, sending its stock price down 17%. Since 2008, Foot Locker has been proactive with its store fleet by optimizing its locations through remodeling, relocating and if needed, closures. Although over the past decade the Company has closed a total of 1,440 locations, it is important to note that Foot Locker has also opened 965 locations over the same time period. Over the last 10 years, the Company has closed approximately 13% of its stores; however, on a yearly basis that figure is just 1.3%. It should be noted that as a result of its proactive store optimization initiatives, Foot Locker has elevated its average sales per gross foot by nearly 50% to $515 in fiscal 2016.
Party City
Party City’s fourth quarter sales increased 5.4% to $789.6 million, with retail sales up 4.6% driven primarily by the addition of 36 franchised stores, eight independent stores and nine new Company-owned stores over the past year. Brand comps decreased 1.4% and were essentially flat after adjusting for the impact of the New Year’s Eve timing shift, which caused that holiday’s sales to fall into the first quarter of fiscal 2018. Gross margin increased 50 basis points to 46.9%, primarily due to a 300 basis-point increase in share of shelf (the percentage of retail product cost of sales supplied by wholesale operations). Adjusted EBITDA was up 2.6% to $197.4 million, and adjusted EBITDA margin was 25%, down from 25.7% in the prior-year period. Commenting on results, CEO James M. Harrison stated, “We made strong progress against many of our key strategic priorities: expanding the reach of our unique vertical model; improving in-store efficiency and the shopping experience for our customers; elevating our digital capabilities; increasing our presence across multiple alternative market channels as well as in key international markets; expanding our manufacturing capabilities and entering new streams of business through acquisitions and finally, executing a highly accretive share buyback program.”
In other news, Party City inked a deal to acquire the master franchise group representing 11 franchise stores in the Maryland market. The purchase price of $14.0 million represents a fully synergized multiple of EBITDA of approximately four times. In 2017, this franchise operator reported sales of $26.0 million. Prior to the acquisition, the Company’s retail operations included 803 Company-owned Party City stores and 148 franchised stores.
