Retail News

March 6, 2019

Industry Spotlight:

Youth Apparel

The Gymboree Corporation, DIP filed a notification that The Gap and The Children's Place will purchase assets associated with the Janie and Jack, Gymboree, and Crazy 8 businesses.

The successful bidders are well positioned in the Babies and Kid’s fashion segment, but other retailers are poised to gain significant market share, as well…

Gap

On Monday, Gap completed the $35.0 million purchase of the children’s fashion brand Janie and Jack from Gymboree, DIP. Janie and Jack, which operates 102 stores and 45 outlets, will continue to operate as a standalone brand based in San Francisco, CA. In addition, Gap agreed to purchase the Janie and Jack inventory at cost plus additional fees and expenses. Meanwhile, The Children’s Place will pay $76.0 million to Gymboree, DIP for the copyrights, internet domains, trademarks and customer data of the Gymboree and Crazy 8 businesses; as previously reported, the store locations of these two brands are in the process of being liquidated.

The Janie and Jack stores average 2,000 square feet and, as shown in the Store Concentration map below, are located predominantly in California (21.1%), Texas (10.9%), Florida (10.9%), and New Jersey (5.4%).

Also last week, The Gap announced plans to split into two separate publicly traded companies: Old Navy and a new yet-to-be-named entity “NewCo,” which will house the Gap, Athleta, Banana Republic, Intermix and Hill City brands. Gap shareholders are expected to own shares in both companies in equal proportion. The transaction is targeted for completion in 2020. The Company did not disclose the capitalization of the two companies following the separation. With approximately $8.00 billion in yearly revenues, Old Navy is the strongest performing of the Company’s businesses, whose growth has significantly outpaced that of the higher priced Gap and Banana Republic brands. Meanwhile, NewCo will have roughly $9.00 billion in revenues. The namesake Gap brand has struggled with merchandising, declining sales and net store closures while losing ground to fast fashion chains such as H&M.

The Company announced fourth quarter sales decreased 3.2% to $4.62 billion, operating income dropped 6.1% to $372.0 million, and comps declined 1%. Fourth quarter and fiscal 2018 results were negatively impacted by the loss of the 53rd week and the translation of foreign currencies into U.S. dollars. As of the end of the quarter, the Gap operated 3,666 stores, down 22 from the prior-year period.

The Company also announced it will close 230 Gap specialty stores over the next two years (click here to request updates on closing locations.) The store closures will result in lost yearly sales of roughly $625.0 million but are expected to result in pre-tax savings of $90.0 million. Management estimates it will incur related pre-tax one-time cash costs of $250.0 million and $300.0 million. 

Amazon

Amazon’s Whole Foods said it plans to convert all 12 existing 365 stores to its traditional Whole Foods Market concept by the end of this year. There will be changes in store signage, product assortment, and back-end distribution, according to people familiar with the plan. A Whole Foods spokesperson said the transformation will not be too disruptive to current operations. Back in January, we reported that Whole Foods announced it would discontinue the expansion of the Whole Foods 365 banner, but at the time it was unclear what the Company was going to do with the existing stores.

Meanwhile, according to reports, Amazon is planning to launch a second retail grocery concept as soon as this year. The new grocery concept is not intended to compete directly with Whole Foods but instead will offer products at lower price points as initially conceptualized for the now defunct Whole Foods 365 banner. The report noted that the targeted store size is about 35,000 square feet, smaller than the 60,000 square feet for a typical supermarket and slightly smaller than a typical Whole Foods store (~40,000 square feet). The Company plans to open the first of these in the Los Angeles area as early as the end of this calendar year and has already signed leases for at least two other locations, with openings planned for early 2020. Additionally, Amazon is reportedly evaluating San Francisco, Seattle, Chicago, Washington D.C., and Philadelphia, with supposed plans to expand to dozens of grocery stores in several major U.S. cities. At the same time, the Company is reportedly exploring acquisition opportunities to expand the new supermarket brand by purchasing existing regional grocery chains of about a dozen stores. News of this concept would seem to suggest the Company has realized the limitations of the Whole Foods banner, primarily related to pricing. On the flip side, unless they have some new technology or other wrinkles as part of the format, adding the fixed cost base that comes with brick and mortar may alleviate some of its other perceived advantages online. Its ability to successfully compete in this manner would be a big question mark. 

Neiman Marcus

Neiman Marcus filed a Form 8K announcing the Company has reached an agreement in principle with debtholders on the framework of a comprehensive transaction to extend the maturities of certain Notes and Term Loans. The agreement resulted from discussions with an ad hoc committee of Term Lenders and an ad hoc committee of the Company’s unsecured 8.750%/9.500% Senior PIK Toggle Notes due 2021, and unsecured 8.000% Senior Cash Pay Notes due 2021. In connection with the negotiations, the Company disclosed to the Noteholders and Term Lenders that second quarter comparable store sales increased 0.5% to 1%, the sixth consecutive quarterly increase. In addition, the Company expects second quarter EBITDA to be “generally consistent with previously disclosed expectations.” Management had previously stated that it expected second quarter EBITDA to exceed last year’s $154.8 million.

In response to this announcement, Marble Ridge, an investor in Neiman Marcus, sent a letter to Neiman’s board saying, “The market price of the Neiman Marcus five-year credit default swaps more than doubled, implying a greater than 80% probability of default by Neiman Marcus over five years according to Bloomberg estimates – an increase of 60% from the previous day.” The reason for this, according to Marble Ridge, is due to a provision that will make Neiman Marcus a co-issuer for the first time for the newly-issued debt. 

Dollar Tree

Dollar Tree is moving closer to breaking ground on a distribution center in Rosenberg, TX after receiving approval for an incentive agreement. According to a court document, Dollar Tree must complete construction no later than December 31, 2020, and invest at least $88.0 million in building the 1.2 million square-foot facility. It also expects to invest $40.6 million in equipment and $10.0 million in inventory.

Fresh Thyme Farmers Market

Fresh Thyme Farmers Market issued a press release announcing double-digit sales growth of 19.8% for 2018, outpacing almost all other retailers in the natural space. In 2018, the Company opened about 10 new stores in Minnesota, Ohio, Missouri, Indiana and Pittsburgh, bringing its store count to 75 locations throughout the Midwest. Expansion continues to be a priority in 2019, with four new stores currently scheduled. The Company will also focus on in-store and digital initiatives. During 2018, Fresh Thyme added 455 new private-label products, bringing its total to 1,840. The Company also launched a partnership with Instacart last year and in January debuted a new website.

Ingles Markets Inc. - Strategic Sales Insights

Ingles Markets posted increased sales for its 2018 fiscal year and received a lift at the bottom line from deferred tax benefits. The Company opened five new stores and closed four locations, some of which it noted were or are in the process of being rebuilt. Other store improvement projects focused on enhancements in merchandising, convenience, and the range of products offered to customers.  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.

Amazon

Amazon is offering Prime members a more tailored delivery option that will also help the Company lower its escalating shipping costs and reduce its carbon footprint. The Company is introducing Amazon Day, a service that allows Prime members in the U.S. to select one day of the week to be their delivery day. This enables Amazon to group and deliver purchases together, which potentially reduces the number of packages and delivery trips.

New York Governor Andrew Cuomo has reportedly been in contact with Amazon executives, urging them to rethink their decision to abandon plans for a headquarters campus in Long Island City. 

In other news, Amazon is taking a new approach to its long-standing counterfeit problem called Project Zero, which allows brands to use its self-service counterfeit removal tool to delete knock-off products.

Meanwhile, Amazon has reportedly decided to stop selling the Dash buttons that it introduced back in 2015 as a way to facilitate replenishment of items customers previously bought from Amazon. Amazon has integrated its Dash Replenishment Service into hundreds of products from major manufacturers worldwide, which eliminates the need for a button. In addition, the Company has enabled voice shopping through its Alexa-powered voice assistant system.

Store Activity

Academy Ltd.

Academy Ltd. announced it plans to open seven new stores in 2019, including locations in Georgetown, TX; Buford, GA (in the Metro Atlanta region); Gastonia and Mooresville NC (the 14th and 15th North Carolina locations); Ardmore, OK (the 13th Oklahoma location), and Terrell and Frisco, TX (the 24th and 25th Dallas-Ft. Worth-area locations). These locations are in addition to the one future closing and five future openings that we are already tracking, as reflected in the map below. Please click here to request a list of future locations.

7-Eleven

7-Eleven is entering India through a master franchise agreement with a subsidiary of Future Retail Ltd.; the first location is set to open later this year. Future Retail plans to build new 7-Eleven stores as well as convert some of its existing locations to the 7-Eleven banner. Future Group currently offers more than 80 brands across fashion, footwear, fast-moving consumer goods, food and homeware segments. 

Starbucks

Starbucks opened its largest store, a new Reserve Roastery store in Tokyo. The 32,000 square-foot store offers 100 coffee and tea beverages and merchandise, as well as a menu of artisanal Princi Italian fare for the first time in Japan. It is the Company’s fifth Roastery; the others are located in Milan, Shanghai, NYC and Seattle, and there are plans to open one in Chicago.

On March 4, Starbucks promoted Jill Walker to SVP, corporate financial services and chief accounting officer. Ms. Walker joined the Company in March 2000, has served as VP, controller, since April 2013 and held a number of accounting, financial reporting and finance roles with the Company prior to being named controller. 

Southeastern Grocers

Southeastern Grocers’ Winn-Dixie has reopened two recently remodeled stores in Jacksonville, FL. The stores include new modern signage and colors, expanded produce departments, a new dollar shop section, and expanded prepared food options. Despite these remodels, Southeastern Grocers unexpectedly announced plans to close 22 locations across its footprint in South Carolina, North Carolina, Georgia, and Florida - see below for Store Closing Map (click here to request the list of closures).

Earning Reports

Ahold Delhaize

Ahold Delhaize announced results for its fourth quarter and fiscal year ended December 30, 2018. Sales at Ahold Delhaize USA grew 2.6% at constant exchange rates. Comparable sales, excluding fuel, increased 2.7%, including a slightly positive weather impact. Online sales increased 12.1% to €203.0 million (US$230.0 million), driven by same-day delivery, Peapod, and Hannaford To Go.

In a subsequent call with analysts, CEO Frans Muller said the Company is on track to meet a 20% U.S. online sales growth target this year as it opens automated grocery distribution points along the East Coast. Several new centers will be opened this year, with a higher number in 2020, but specifics were not provided. Mr. Muller also said that Ahold Delhaize sees more opportunities in the U.S. for strategic acquisitions.

In other news, Ahold Delhaize’s Food Lion division announced plans to remodel 92 stores in the greater Myrtle Beach, Florence, Columbia and Charleston, SC markets in 2019. The Company will invest $158.0 million in the remodels, lowering prices, and expanding product assortment. The stores will remain open during the remodel process and, when complete, about 80% of Food Lion’s network of more than 1,000 stores across a ten-state footprint will have been renovated.

Publix

Publix’s fourth quarter sales increased 3.9% to $9.37 billion, and comps rose 1.1%. Net earnings were $406.9 million, down 46.9% from the prior-year period. Earnings were negatively impacted by a new accounting standard, and a one-time adjustment due to tax reform in 2017. Excluding these impacts, earnings would have increased 21.7%. For fiscal 2018, sales rose 4.4% to $36.09 billion, comps increased 2.1% and earnings were up 3.9% to $2.38 billion.

Effective March 1, Publix’s stock price increased from $42.70 per share to$42.85 per share. Publix stock is not publicly traded and is made available for sale only to current Publix associates and members of its board.

During fiscal 2018, the Company opened 51 supermarkets (including eight replacements) consisting of 24 in Florida, 11 in North Carolina, six in Alabama, four in Virginia, three in Tennessee, two in Georgia and one in South Carolina. Publix also remodeled 146 supermarkets and closed seven stores. 

TJX Companies

TJX Companies’ fourth quarter sales increased 1.5% to $11.13 billion. Consolidated comps increased 6%, consisting of growth of 7% at Marmaxx (U.S.), 5% at HomeGoods (U.S.), 4% at TJX Canada, and 5% at TJX International (Europe & Australia). Comp growth was driven primarily by customer traffic. Net income fell 4.1% to $841.5 million, impacted by an extra week a year ago, a change in TJX’s tax rate due to U.S. tax reform, and an impairment charge. For fiscal 2019, sales rose 8.7% to $38.97 billion, and consolidated comps increased 6%. During fiscal 2019, the Company increased its store count by 236 stores to a total of 4,306 stores. Square footage increased by 4% over last year. See below for Future Store Openings Map - click here to request a list.

Looking ahead at fiscal 2020, the Company expects EPS of $2.55 – $2.60, representing a 5% – 7% increase over the prior year’s $2.43. Comps are expected to increase 2% – 3% on a consolidated basis.

In a subsequent investor call, CEO Ernie Herrman, announced that the Company plans to launch an online platform for Marshalls later this year. The Company is hoping to prevent cannibalization of sales by keeping the assortment online and at its brick-and-mortar stores as different as possible.

Nordstrom

Nordstrom’s fourth quarter sales decreased 4.6% to $4.48 billion, primarily due to lower income tax expense associated with corporate tax reform. Comps were up 0.1%, with full-price comps down 1.6% driven by softer traffic trends, while off-price comps increased 4%. Earnings before interest and income taxes fell 4.9% to $333.0 million. Gross margin decreased 33 basis points to 35.1% due to higher markdowns taken in response to softer full-price sales trends. Looking ahead, Nordstrom plans to open two full-line stores and five new Nordstrom Rack stores in 2019. The full-price stores are opening in the fall in New York City and Norwalk, CT. The off-price stores are opening in Porter Ranch, CA; Westminster, CO; Baltimore, MD; El Segundo, CA; and Staten Island, NY. The Company operates 379 stores, including 240 off-price stores and 139 full-price locations.

Office Depot

Office Depot reported sales for the fourth quarter totaled $2.67 billion, up 3.4% from the fourth quarter of 2017. Product sales in the fourth quarter fell 1%, while service revenue grew 34%, due to contributions from the CompuCom unit and growth in the commercial division. Fourth quarter service revenue, excluding the CompuCom division (acquired November 8, 2017), grew 19% for the combined retail and commercial divisions in the fourth quarter compared to last year, and represented 16% of total sales. The Company closed 17 net stores during the year, and fourth quarter comps fell 5% on top of a 4% decrease in the same period last year. Quarterly EBITDA and EBITDA margin fell 0.7% and 20 basis points, respectively, due to competitive pricing issues, which contributed to TTM EBITDA margin falling to 5% from 5.7% in 2017. Additionally, TTM interest coverage dropped from 14.6x to 5.7x, reflecting higher interest expense associated with acquisition debt during most of the year, although $200.0 million of it was repaid near the end of the year with cash balances. For 2019 management anticipates sales will be about $11.10 billion, slightly higher than 2018, with EBITDA of $575.0 million, up from $550.0 million in fiscal 2018. Free cash flow for 2019 is expected to be $350.0 million.

Best Buy

Best Buy’s fourth quarter sales decreased 3.7% to $14.80 billion, with domestic sales down 3.5% to $13.50 billion, and international sales down 5.2% to $1.30 billion. The revenue decline was primarily due to the extra week of revenue in the prior-year period, and the loss of revenue from 257 Best Buy Mobile and 12 large-format store closures in the past year. Comps were up 3%, with domestic comps up 3%, and international comps up 2.5%. Operating income rose 12.2% to $978.0 million.

Lowe's Companies

Lowe’s Companies reported fourth quarter sales increased 1% to $15.65 billion, and U.S. comps were up 2.4%. The Company recorded an operating loss of $567.0 million, compared to income of $1.10 billion in the prior-year period. Lowe’s recorded $1.60 billion in pre-tax charges during the quarter, including a $952.0 million goodwill impairment charge, $208.0 million related Orchard Supply lease obligations, $150.0 million in accelerated depreciation and amortization, $222.0 million related to asset impairment charges associated with its exit of Mexico, and other severance obligations. As of February 1, Lowe’s operated 2,015 stores in the U.S., Canada and Mexico.

L Brands

L Brands’ net sales increased 0.6% to $4.85 billion, reflecting a 3% increase in comps, partially offset by 132 net store closures during the year. The 3% increase in quarterly comps came in on top of a 2% improvement last year. By banner, Victoria’s Secret’s fourth quarter comps were down 7%, while Bath & Body Works’ comps were up 8%. During fiscal 2018, L Brands opened 88 stores, closed 90, and sold 130 units, ending the year at 2,943 locations.

L Brands received a letter from activist investor Barington Capital Group with suggestions to address current challenges and meaningfully improve long-term value for shareholders. Barington suggested the Company take swift action to improve performance at Victoria’s secret to correct past merchandising mistakes, and retain a financial advisor to explore opportunities to unlock value at Bath & Body Works, such as through a spinoff of Victoria’s Secret or an IPO for Bath & Body Works. In addition, Barington recommends L Brands make changes to its board, saying that current directors “lack the independence and diversity needed to effectively oversee and advise management.” 

Foot Locker

Foot Locker’s fourth quarter sales increased 2.8% to $2.27 billion, and comps were up 9.7%. Operating income nearly tripled to $219.0 million. CEO Richard Johnson said, “The fundamentals of our core business remain strong and led to meaningful improvement in our financial results, not only during the fourth quarter but throughout 2018. This positive performance was made possible by our team’s unrelenting focus on providing compelling assortments to our customers, launching exciting collaborations with our strategic partners, both long-standing and new, and making our stores and digital channels unique and exciting destinations.” During the fourth quarter, the Company opened 11 new stores, remodeled or relocated 33 stores, and closed 56 stores. As of February 2, the Company operated 3,221 stores in 27 countries and franchised 112 stores in the Middle East and 10 stores in Germany.

Kirklands

Kirkland’s reported sales for the fourth quarter and fiscal year ended February 2. Quarterly net sales decreased 3.8% to $216.1 million, as an extra week in fiscal 2017 was responsible for approximately $10.0 million of net sales during the fourth quarter. On a 13-week comparison, comp store sales, including ecommerce sales, decreased 3.3%, compared to a 2% increase in the prior year. For the fiscal year, net sales rose 2.1% to $647.1 million, comparable store sales, including e-commerce, decreased 1.3%, compared to an increase of 0.3% in the prior year. Kirkland’s opened 25 stores and closed 15 sttores during the fiscal year, bringing the total number of stores to 428 at year end. CEO Steve “Woody” Woodward commented, “We were disappointed with our fourth quarter performance, which was influenced by several factors. Aspects of the core assortment, particularly wall décor, remained challenging. Seasonal product performed well, and we made important strides in gifting and new relevant products in January. Yet these were not enough to offset weakness in brick & mortar sales driven by an ongoing shift in channel mix. January was also impacted by port constraints that affected product flow.”

Based on the fourth quarter results, Kirkland’s now expects full year 2018 diluted earnings per share to be approximately $0.24. Adjusted earnings are expected to be approximately $0.38 per share, excluding severance and other charges associated with the Company’s CEO transition. Kirkland’s ended fiscal 2018 with no debt and cash of approximately $58.0 million. Kirkland’s will issue its full earnings release on March 15.

GNC Holdings

GNC Holdings reported fourth quarter sales decreased 2.7% to $547.9 million, primarily driven by the closure of 257 Company-owned stores over the past year and domestic comps falling 0.6%; international comps increased 12%, driven by sales in China, Mexico and South Korea. Adjusted EBITDA dropped 37.9% to $35.0 million. CEO Ken Martindale commented, “While fourth quarter operating results were below our expectations, we recently achieved some major milestones in repositioning the Company. The completion of Harbin’s $300.0 million strategic investment strengthens our capital structure and will accelerate our growth plans in China, while our $176.0 million strategic partnership with International Vitamin Corporation will create meaningful efficiencies in manufacturing, further strengthen the innovation and product development capabilities that set GNC apart and drive further reductions in our debt.”