March 6, 2018
The Walking Company
Footwear retailer The Walking Company filed Chapter 11 protection for the second time in a decade this morning. The Company stated that it already obtained the support of its major shareholders, a Plan has been “substantially pre-negotiated,” and it is seeking to “move quickly through the reorganization process, with it lasting no more than 90 days.” The Walking Company secured $70.0 million in equity commitments from its largest shareholders and $50.0 million in revolving financing to both support operations and provide “exit” financing. However, the stakeholders made their commitments and support expressly contingent upon the Company obtaining substantial rent relief by “conforming their lease portfolio to market rents.” The Company commenced negotiations with landlords in February 2018, seeking concessions that would rationalize the lease portfolio. Rent reduction negotiations are ongoing with landlords at virtually all of the Company’s remaining store locations. The Walking Company seeks authority to enter into a new $57.25 million DIP facility with Wells Fargo Bank, consisting of a $50.0 million revolving facility and a term loan facility in an amount up to $7.25 million. Proceeds of the DIP facility will be used to repay the existing prepetition revolving credit obligations and prepetition term loan obligations, and to provide continued access to financing for the Company on a post-petition basis, pending consummation of the Company’s Chapter 11 reorganization plan.
Kohl's
Kohl’s announced last week that it is partnering with Aldi to lease space in 5 – 10 of its existing stores. The move comes as Kohl’s looks to scale back its footprint while making its real estate more productive. The two companies could be a good fit. In June 2017 Aldi announced plans to open 900 more stores in the U.S. in the next five years, and its typical 12,000 square-foot supermarkets take up less space than traditional grocery stores, with only enough room for about five aisles. Meanwhile, Kohl’s cuts costs by shrinking its store footprint and potentially gain new customers who may want to browse its aisles when they shop at an Aldi store. Aldi might not be Kohl’s only new neighbor. The Company says it might seek out other supermarkets, or different types of retailers, to occupy the newly adjacent spaces. Kohl’s has been testing small-concept stores and last year started accepting returns from Amazon in 82 of its stores. It also has dedicated areas in 10 stores that sell Amazon Echos, Fire tablets and other gadgets.
Last week, Kohl’s reported a 6% increase in comps for its fourth quarter, the largest gain since 2001. Sales growth was driven by higher traffic as well as 26% growth in online shopping, another reason the stores are becoming less productive. Kohl’s also reported better-than-expected profits, as it offered fewer discounts.
Amazon
Six months after acquiring Whole Foods, Amazon is working on reorganizing Whole Foods’ shelves by first adding Amazon private-label products and, soon, potentially adding popular consumer packaged goods. This is reportedly causing internal debate and disagreements. When asked if it will add “consumer packaged goods,” a Whole Foods spokesperson said, “As you know, we have really high-quality standards. If there were new products that actually do meet our quality standards, then there’s always that consideration.” Whole Foods does not currently allow foods with artificial preservatives, colors, flavors, sweeteners, and hydrogenated fats. Whole Foods further stated their culture would “naturally evolve” under Amazon, but it will maintain its high-quality standards.
Meanwhile, a recently published report claims that while the immediate impact of the acquisition has been subtle and “for the most part, the 470 stores are still the same upscale, expensive healthy food emporiums that they have always been,” Amazon clearly has “grander ambitions,” with Company executives “devising ways to connect its Prime membership program, which offers benefits like fast and free shipping and video streaming, with the stores.” The report states that the kiosks containing Amazon electronics that are right next to the grocery aisle are “the most conspicuous sign of Amazon’s agenda inside Whole Foods.” Amazon has even opened electronics pop-up shops in a few stores, which are staffed by Amazon employees who can answer questions about the devices. The acquisition has yet to result in a sweeping lowering of prices that make “healthy and organic food affordable for everyone.” However, based on our internal calculations, we believe Whole Foods experienced up to a 10% comp improvement in Amazon’s most recent quarter, which is likely partially due to expanding its offerings to include some higher-priced electronics.
Further, Amazon expanded its Prime Now offering to the Atlanta and San Francisco markets, effective today. Prime customers in these markets can receive free two-hour delivery on orders of $35 or more and one-hour delivery for $7.99. This expands Amazon’s Whole Foods based delivery to six markets.
Publix
Publix’s fourth quarter sales fell 2.1% to $8.90 billion but would have increased 5% excluding an additional week in 4Q16. Comps rose 3.2%. Net earnings jumped 40.8% to $766.6 million, including a benefit of $224.0 million from U.S. tax reform. The Company said it was giving raises to its 193,000 employees, though it did not disclose the dollar impact. For the full year, sales increased 1.6% to $34.84 billion, comps rose 1.7%, and net earnings were up 13.1% to $2.29 billion. Effective March 1, Publix’s stock price increased from $36.85 per share to $41.40 per share. The Company’s stock is not publicly traded and is made available for sale only to current Publix associates and members of its board.
As of December 31, Publix owned the land and building at 302 stores and owned the building and leased the land at 69 of its 1,167 locations, or 31.8%. In 2007, Publix owned just 11% of its stores; it has focused on increasing its ownership in recent years.
Meijer
Meijer announced plans to invest $25.0 million to build a fourth store in Fort Wayne, IN. The 150,000 square-foot store could open as early as 2020. According to the Company, the new location will be slightly smaller than current stores, which is part of a new design, and will include a garden center, drive-thru pharmacy and a fuel station with a convenience store built in front. It will be located across the street from a new Kroger planned for the area. Last year, Meijer opened new stores in nearby McCordsville and Franklin.
Rainbow Foods
Rainbow Foods in Richfield, MN, which is owned by Jerry’s Enterprises, will close on March 16. Kent Dixon, president of Jerry’s, commented, “All stores have a life cycle as the business evolves, and it’s difficult to stay in it if you don’t reinvest. It was declining in sales volume due to competitive changes and two summers of road construction.” The closure will leave only one remaining Rainbow in the Twin Cities in Maplewood, owned by Supervalu. Rainbow was founded in 1983 and grew to become the second-largest grocer in the Twin Cities, with 30 stores as recently as 2013 under the ownership of Roundy’s. In 2015, Roundy’s exited the market, and nine of the then 27 Rainbow stores closed immediately. A group led by Supervalu that included Jerry’s and other firms purchased the 18 others. All but six were quickly rebranded and soon there will be only one of those remaining under the Rainbow banner.
JAE Restaurant Groyp
JAE Restaurant Group acquired 34 Wendy’s restaurants throughout Knoxville, TN. JAE now owns 212 Wendy’s units in North, South and Central Florida; Albuquerque, NM; and El Paso, TX, with two locations currently under construction.
WinCo
WinCo reportedly plans to open its first store in Montana. It recently filed plans to build an 88,000 square-foot store in Billings at a former Kmart location slated to be demolished. Construction is scheduled to begin later this year. WinCo currently has 113 stores in Arizona, California, Idaho, Nevada, Oklahoma, Oregon, Texas, Utah and Washington.
Chipotle
Chipotle’s quick-service burger restaurant Tasty Made closed last Wednesday. According to the Company, the single-unit Lancaster, OH restaurant, which opened in 2016, did not have “the economics” they wanted.
Rite Aid
Yesterday, Rite Aid provided an update on the progress of its plans to sell stores to Walgreens Boots Alliance. As of March 2, Rite Aid transferred 1,651 stores and related assets to Walgreens and received cash proceeds of $3.60 billion, which the Company continues to use to reduce debt. Under the Asset Purchase Agreement, Walgreens will purchase a total of 1,932 stores, three distribution centers and related inventory from Rite Aid for $4.40 billion. Rite Aid expects to complete the store transfer process this spring.
Walmart
Walmart is rolling out a new technology that could eliminate more than $2.00 billion in food waste over the next five years and help the Company offer fresher products. Eden, a suite of apps, was developed in-house as a way to increase the efficiency of Walmart’s supply chain. The Company claims it will be able to predict the shelf-life of fresh foods, including produce, and reroute products accordingly. According to published reports, Walmart will begin selling prepared meals in 250 of its stores, with plans to expand to 2,000 stores by the end of the year. The meals will be priced from $8 – $10 and include a wide range of offerings. In addition, Walmart is expected to enter the meal kit business with four in-store options (Walmart has sold meal kits before but only online).
Target
Target reported fourth quarter sales growth of 10% to $22.77 billion, reflecting the impact of an additional week in 4Q17, 3.6% comp growth, and sales in new stores. Comp digital channel sales rose 29% and contributed 1.8 percentage points of comp growth. Profit jumped 34.8% to $ 1.10 billion and included a benefit of $388.0 million from U.S. tax reform. For the full year, sales increased 3.4% to $71.88 billion, and net income rose 7.2% to $2.93 billion. Looking ahead at fiscal 2018, Target expects low-single digit comp growth and EPS of $5.15 – $5.45, compared to $5.32 in fiscal 2017.
Target’s plan to remodel more than 1,000 stores nationwide by the end of 2020 is moving along. The Company remodeled 110 locations last year and is nearly tripling that number in 2018, with plans to complete 325 additional remodels. According to the Company, remodels are resulting in 2% – 4% sales improvements at the stores. Target’s largest remodel market this year will be its Minneapolis-St. Paul hometown, where it is investing $250.0 million to remodel 28 stores, which represents about half of its footprint in the area. “We’ll also go big in places like Los Angeles, New York and Chicago,” Target stated. “Over the next few years, we’ll remodel stores in every major city.” Target noted that each remodel is tailored to meet the specific needs of local shoppers. General enhancements include background music, a modern store design, and updated merchandise presentations. In addition, many stores will have features that help them get online orders to shoppers faster, including a larger order pickup counter or a drive-up lane in the parking lot.
J.C. Penney, Nordstrom, Kohl's and Dillard's
Over the past week, J.C. Penney, Nordstrom, Kohl’s and Dillard’s all reported fourth quarter results, in which all four companies recorded positive comps compared to comp declines in the prior-year period. All four companies recorded sales increases, with Kohl’s generating the highest sales growth of 9.2% to $6.78 billion, followed by Nordstrom’s 8.9% increase to $4.70 billion, Dillard’s 6.5% increase to $2.06 billion, and J.C. Penney’s 1.8% increase to $4.03 billion. Three of the companies generated increases in EBIT as a result of gross margin improvement due to inventory management and fewer promotions. However, Nordstrom’s retail EBIT decreased $93.0 million due to investments to support growth plans. In addition, J.C. Penney’s fiscal 2017 EBITDA fell 7.9% to $864.0 million primarily due to gross margin erosion during the first three quarters. During the year, Nordstrom opened one full-line location in Canada and 17 Nordstrom Rack stores across the U.S. and Canada, while it shuttered one underperforming full-line location in the U.S., ending the year with 366 stores in operation. For fiscal 2018, it plans to open one new full-line store in the U.S. and 12 Nordstrom Rack stores (including six in the U.S. and six in Canada). Kohl’s opened four new namesake stores, relocated one existing Kohl’s store, and opened one Off/Aisle location, ending the year with 1,158 stores. J.C. Penney closed 141 underperforming stores during fiscal 2017 and plans to shutter an additional eight stores in fiscal 2018, primarily during the second quarter. J.C. Penney also noted it is cutting roughly 130 jobs at its headquarters and an additional 230 positions related to its group, regional, district and store support teams. Management believes the reductions will result in annual savings of as much as $25.0 million. Dillard’s ended fiscal 2017 with 268 stores and 24 clearance centers.
As previously reported last week, Macy’s fourth quarter sales increased 1.8% to $8.67 billion, comps were up 1.4%, and the Company’s operating income rose 48.8% to $1.21 billion (primarily due to $234.0 million in book gains from the sale of its Union Square Men’s building in San Francisco, CA during fiscal 2016).
Camping World
Camping World said its earnings call that early trends for its Gander Outdoors chain (launched November 2017) have been very promising, and there have been favorable conversion rates of Gander customers to the Good Sam club and the Good Sam credit card. The plan is to open nearly 72 Gander Outdoor stores by mid-June 2018. In addition, the Company provided an initial outlook for 2018, calling for Company-wide revenue of $4.80 billion – $5.00 billion, and adjusted EBITDA of $431.0 million – $441.0 million. Management does not anticipate that the Gander Outdoor stores will have much impact on the Company’s adjusted EBITDA in 2018. With the Gander Outdoors stores opening in the first half of the year and their peak selling season being the third and fourth quarters, management expects the Gander Outdoors stores to be a drag on adjusted EBITDA in the first half of the year and accretive in the second half of the year. At December 31, 2017, the Company operated the following locations: 140 Camping World retail stores, two Overton’s, two TheHouse.com locations, two Gander Outdoors stores, two W82 units, and five Uncle Dan’s locations. The new Gander Outdoors stores will average 40,000 square feet, down from 100,000 for some of the former Gander Mountain units. From a merchandising perspective, Gander Mountain was skewed toward hunting and apparel, but Gander Outdoors has a more diversified merchandise mix, focusing on fishing and marine, active lifestyle, and archery, hunting and firearms.
Big 5 Sporting Goods
Big 5 Sporting Goods reported fourth quarter sales decreased 8.8% to $242.9 million, and comps were down 9.4%. The Company noted that lower sales were due to reduced demand for higher-ticket winter-related goods and firearms. Gross margin fell to 30% from 32.8% on a decrease in merchandise margins of 126 basis points and an increase in store occupancy and distribution costs as a percentage of net sales. Fourth quarter EBITDA and EBITDA margin fell 92.8% and 590 basis points, respectively. EBITDA margin was only 0.5% for the full year, comparing unfavorably with Dick’s Sporting Goods, which is 9.4% on a TTM basis. The Company has lapped last year’s benefit associated with the closing of 200 competitive stores in its markets. This was compounded by the more recent reopening of 10% of the Sports Authority stores as Dick’s units in Big 5’s market area, as well as the unfavorable weather conditions noted by management. During the fourth quarter, the Company opened three new stores, including one relocation, ending fiscal 2017 with 435 stores in operation. For the fiscal 2018 full year, the Company currently anticipates opening approximately eight new stores and closing approximately three stores.
Shiekh Shoes
On March 2, the Bankruptcy Court approved the closing of 45 of Shiekh Shoes LLC, DIP’s 122 stores. The Court also authorized access to an $11.0 million second lien term loan from an entity controlled by the Shiekh family trust. The Company stated that the term loan is necessary to fund operating and administrative expenses. The deadline for filing proofs of claim, including claims under section 503(b)(9), is April 30.
Best Buy
On March 1, Best Buy reported fourth quarter sales increased 14% to $15.36 billion, due to a 17.9% increase in online sales and a 9% increase in comps, following a 0.7% comp decrease in the same period last year. This was partially offset by the closing of 38 underperforming stores during the year. Domestic online sales rose to $2.80 billion and represented 20% of total sales, up from 18.6% last year. Gross margin was down 0.2% reflecting the impact of competitive pricing. EBITDA increased 10.6%, while EBITDA margin was down 20 basis points. The Company is staking out markets where it can avoid competition from Amazon. This includes more consultative and service-oriented offerings that Amazon cannot emulate, including expanding the In-Home Advisor program as well as launching a total tech support program this spring. Total tech support is a new Geek Squad offering which was tested last year.
Meanwhile, the Company plans to close all of its 250 small-format mobile phone stores in the U.S. by the end of May. The stores, which average 1,400 square feet (the Company’s big box units average 39,000 square feet), are mostly located in shopping malls. Management said the stores have become less profitable as the mobile phone market has matured, margins have fallen, and the cost per square foot of operating the standalone units became higher than the Company’s big box stores. The Company first began operating the mobile stores in 2006; at their peak there were just over 400 units. Management said revenue from the mobile phone stores represents about 1% of Best Buy’s overall revenue, and the stores occupy 1% of the total square footage of all its stores. The Company hopes to transfer the business to its U.S. big-box stores and website. About 85% of Best Buy’s mobile stores are located within three miles of one of its big-box stores.
Office Depot
Office Depot’s fourth quarter sales were down 5.3% to $2.58 billion, reflecting a comp decline of 4% on top of a 4% decrease in the same period last year, and the closing of 63 stores during the year. The drop in sales also reflected fewer transactions and average order rates during the quarter. Gross margin fell 50 basis points as a result of the deleveraging impact of store and supply chain costs on the lower sales base. SG&A margin also deteriorated as a result of the deleveraging impact of lower sales. Ultimately, quarterly EBITDA fell 6.8% to $137.0 million, EBITDA margin dropped 10 basis points, and full-year EBITDA margin fell to 5.8% from 5.9%. Sales from CompuCom Systems, Inc. totaled $156.0 million following its acquisition on November 8, 2017, with reported operating income of $8.0 million. Looking ahead, the Company expects total sales in 2018 to be $10.60 billion (the increase over 2017 reflects the acquisition of CompuCom), with operating income of $350.0 million. During the 2017 fourth quarter and full year, the Company closed 26 and 63 stores, respectively. At the end of the year, the Company occupied 31 million square feet of space, and average store size was 22,500 square feet. During 2017, the Company converted 63 stores to a smaller 15,000 square-foot store format from the traditional 20,000 – 30,000 square-foot stores. As part of the transformation to a more business services-driven platform, the Company unveiled the makeover of 14 stores in the Austin, TX market in February. The new BizBox stores are intended to combine digital services with traditional office products.
Gap, L Brands and Foot Locker
Gap, L Brands and Foot Locker reported fourth quarter results last week, in which all three Companies recorded sales increases. Gap’s sales rose 7.9% to $4.78 billion, while L Brands’ sales were up 7.4% to $4.82 billion, and Foot Locker’s sales were up 4.6% to $2.21 billion. Gap’s comps were up 5%, including a 9% increase at Old Navy, a 1% increase at Banana Republic, and flat comps at Gap. At L Brands, comps were up 2%, including a 6% increase at Bath & Body Works and a 1% decline at Victoria’s Secret (excluding direct to consumer sales, comps were down 2%, including a 4% increase at Bath & Body Works and a 6% decline at Victoria’s Secret). Foot Locker’s comps were down 3.7 (store comps were down 5.1%, while direct to consumer comps were up 4.3%). As a result of positive comp growth and margin expansion, Gap was the only one of the three to report an increase in operating income, a 31.6% increase to $396.0 million. Looking ahead, Gap sees potential in opening Old Navy stores in under-penetrated markets, and is diverting capital from Gap and Banana Republic towards Old Navy and its activewear brand Athleta. Meanwhile, operating income slipped 0.1% to $986.6 million at L Brands, and dropped 72.7% to $76.0 million at Foot Locker (reflecting a gross margin decrease to 31.4% from 33.7% due to a highly promotional environment). It should be noted that Foot Locker’s stock price dropped 14.6% to $40.04 following the earnings release.
Reitmans
Reitmans (Canada) is closing all 17 of its Hyba stores over the next year, with the closings to be completed by next February. The women’s activewear line will continue to be sold online, and through the Company’s 270 Reitmans stores. The Hyba line was launched in 2013, with the first retail locations opening in 2015 in certain former Smart Set locations (a Reitmans brand that was discontinued). Hyba accounts for less than 2% of Reitmans’ annual sales, and Reitmans will incur a non-cash charge of $1.5 million related to the closures.
Bachrach
High-end menswear brand Bachrach, owned by B&B Bachrach, LLC, DIP, is closing its remaining 14 stores located in Texas, Virginia, New Jersey, Tennessee, Michigan, Wisconsin, Indiana and Illinois. It is also shutting down its e-commerce website. Great American Group and Tiger Group are conducting liquidation sales at the stores over the next four to six weeks. The Company filed Chapter 11 in April 2017, and briefly emerged in August 2017 after a round of store closures, but filed again on February 16, 2018 in California Central Bankruptcy Court. The Company at one time operated 32 stores. Scott Carpenter, president of GA Retail Solutions, a division of Great American Group, commented, “Margins in the menswear sector have been shrinking due to declining foot traffic at malls, stiff competition from e-commerce retailers and significant shifts in consumer spending patterns. Unfortunately, Bachrach’s store locations were unable to survive these competitive pressures, despite its strengths, such as high-quality merchandise and customer service.”
Barnes & Noble
Both Barnes & Noble (B&N) and Barnes & Noble Education (BNED) reported third quarter fiscal 2018 results last week. B&N’s sales declined 5.3% to $1.23 billion, driven by a 5.8% drop in comps (on top of an 8.3% decline last year) and four net store closings. Online sales decreased 5.2% due to lapping last year’s Harry Potter book release, and lower promotional activity. NOOK sales decreased 19.5% on lower device unit volume and lower average selling prices. As a result of gross margin erosion from higher markdowns, EBITDA declined 18.5% to $128.6 million, and EBITDA margin eroded 170 basis points. Meanwhile, BNED’s sales increased 15.7% to $603.4 million, primarily due to contributions from the MBS Textbook Exchange and Student Brands acquisitions (February 2017 and August 2017, respectively) and net store growth, partially offset by college bookstore comps declining 6.2%. EBITDA rose 83.7% to $34.6 million, largely due to the acquisitions.
Cineworld
Cineworld Group plc announced February 28 it completed its acquisition of Regal Entertainment Group for $5.90 billion. Shareholders of Regal’s Class A and Class B common stock received $23 per share in cash. Regal operates 561 cinemas in 43 states and other U.S. territories. Cineworld does business in nine countries and is Europe’s second largest distributor in terms of screens, with more than 2,000 in operation.
