May 22, 2018
Walmart reported first quarter sales growth of 4.4% to $122.69 billion for the period ended April 30. Walmart U.S. comps increased 2.1% (excluding fuel), and comp traffic rose 0.8%. Sam’s Club comps increased 3.8%, led by comp traffic growth of 5.6%. Tobacco sales negatively impacted comp sales by approximately 140 basis points. Sales at Walmart International rose 11.7% to $30.30 billion, with 8 of 11 markets posting positive comps. Walmart’s e-commerce sales grew 33%, above the 23% growth in the previous three months. It said it is on track to increase U.S. e-commerce sales by 40% for the full year. Net income fell nearly 30% to $2.13 billion, impacted by an unrealized loss of $1.80 billion due to a decline in the JD.com stock price. Operating income fell 1.5% to $5.2 million.
As previously reported, on May 9, Walmart signed definitive agreements to become the largest shareholder in Flipkart. The Company will pay $16.00 billion for an initial stake of approximately 77%. The investment is expected to negatively impact fiscal 2019 EPS by $0.25 – $0.30 if the transaction closes at the end of 2Q.
Walmart is partnering with Lord & Taylor to create an online store on Walmart.com that will offer about 125 fashion brands. The new online store reflects Lord & Taylor’s desire to reach a wider audience and Walmart’s hope to attract more upscale customers.
Meanwhile, Walmart said it would use what it learned from its discontinued Scan & Go service in developing “Check Out With Me,” a new service that arms its employees with mobile checkout devices. Announced last month, the functionality is being tested in the Lawn & Garden Centers of more than 350 Walmart stores nationwide.
Finally, Walmart Canada announced last week that it intends to sell its Canadian banking operations to U.S. investment firm Centerbridge Partners LP and Canadian financier Stephen Smith, which in turn will provide credit card and insurance products to Walmart’s Canadian customers. Terms of the sale were not disclosed.
Albertsons and Rite Aid
Last Tuesday, Albertsons and Rite Aid hosted a joint analyst event to discuss the strategic and financial benefits of the proposed merger transaction between the two companies. The combined company will generate pro forma revenue of roughly $83.00 billion and operate about 4,900 stores, 4,350 pharmacies and 320 in-store health clinics across 38 states and D.C. Executives said there is enough space in Albertsons grocery stores to expand health and wellness, including Rite Aid’s RediClinics, while tapping new markets for health and drug benefits. Rite Aid chairman and CEO John Standley noted that Albertsons’ pharmacies will be rebranded to the Rite Aid banner once the deal is approved. The companies project $3.70 billion in pretax earnings for the combination’s first year including $375.0 million in annual cost savings, which are not expected to be fully realized until 2022. They said they plan to generate new revenue by merging rewards programs, selling Albertsons-branded products in Rite Aid stores, and offering more services online. The transaction is expected to close early in the second half of 2018. The boards of both companies have already approved the agreement, which will take privately held Albertsons public. The chart below shows the combined companies geographic coverage and market position in regional geographies:
Sears Holdings Corp.
Sears Holdings Corp. entered into an amendment of its credit card program with Citibank, providing for a five-year extension of the program through November 2, 2025. Sears has the right to extend it for an additional two-year term through November 2, 2027.
In other news, Sears quietly announced it is closing at least 40 stores consisting of 31 Sears stores and nine Kmart stores, across 24 states including Arizona, California, Florida, Missouri, Ohio and Minnesota. Most of the stores will close in July and August. While the total number is significant, some of the closures have already been announced. This is in addition to the 166 stores the Company previously said it would close this year, bringing the total to just over 200. Sears has cut its store count in half in the past five years.
According to Bloomberg, based on information from sources who participated in the recent fourth quarter earnings call, PetSmart reported fiscal 2017 revenues of $8.70 billion, boosted by the May 2017 Chewy.com acquisition. However, comps were down 3.8%. EBITDA for the fourth quarter was $203.4 million, on revenues of $2.50 billion, down compared to last year’s $324.0 million, excluding the effects of Chewy. Subsequently, on May 15, Moody’s downgraded PetSmart’s rating to Caa1 from B2, its senior secured term loan to B3 from B1, and its senior unsecured notes to Caa3 from Caa1. The Company’s term loan closed the week down 64 basis points to 77.94 after the announcement.
In other news, yesterday PetSmart appointed J.K. Symancyk as CEO, effective the week of June 11. He will also join the Company’s board. Mr. Symancyk has served as president and CEO of Academy Sports + Outdoors since 2015, and he previously served as president of Meijer.
Essendant and Staples
In a filing with the SEC, Essendant Inc. indicated that Staples, Inc. may be interested in acquiring it for $11.50 per share in cash. According to the filing, on April 17, Staples sent a letter to Essendant’s CEO and board expressing interest in discussions regarding a proposal to acquire all of the remaining common stock of Essendant. Staples currently owns 9.9% of Essendant’s common stock. The letter stated that Staples does not require any third-party financing or financing approvals to consummate the transaction, and it intends to fund the transaction with cash. The letter further stated that unlike Essendant’s deal to merge with Genuine Parts Company’s S.P. Richards business (GPC transaction), a combination with Staples will likely generate significant cost savings and will not lessen competition, which should facilitate regulatory approval. Sycamore’s LBO of Staples in 2017 was intended to take advantage of the relatively stable operations in the commercial unit. Combining with Essendant could potentially help boost efficiency, but excess costs would need to be cut. Essendant’s operations have been deteriorating, with a TTM EBITDA margin at only 1.9% and the ratio of debt/TTM EBITDA at 5.7x.
GPC responded to the announcement of Staples’ competing offer, saying, “We do not believe Staples’ conditional, non-binding proposal to acquire Essendant for $11.50 per share in cash to be a superior proposal nor reasonably likely to lead to a superior proposal. Indeed, given the proposed enhanced terms and the expected financial benefits of more than $75.0 million in annual run-rate cost synergies and more than $100.0 million in working capital improvements, we are confident that the merger between S.P. Richards and Essendant delivers superior value to Essendant’s shareholders. Based on our preliminary analysis, we estimate an implied trading multiple for the combined company of approximately 8.0x EBITDA, in which case these expected synergies would result in an additional $700.0 million in shareholder value, or approximately $8.75 per share.”
The Children's Place
The Children’s Place reported first quarter sales slipped 0.1% to $436.3 million, and comps were down 1.8%. Lower-than-expected traffic in the quarter pressured gross margin, resulting in a promotional environment to clear inventory. Gross margin rate was also negatively impacted by the increased penetration of the Company’s digital business to 26% from 23% last year. As a result, operating income fell 45.5% to $23.1 million. During the quarter, the Company closed 12 stores, ending with 1,002 stores in operation, down 2.7% from last year. Since the Company’s fleet optimization initiative began in 2013, the Company has closed 181 stores.
Amazon is expanding programs targeting low-income shoppers that might not have credit cards or bank accounts to shop on the site (an estimated 15.6 million people). Initiatives include Amazon Cash, which allows people to load money onto their Amazon account through a convenience store. The Company recently expanded the program to include Coinstar machines. There are no fees associated with the services, which will roll out to 5,000 Coinstar machines. Additionally, Amazon offers discounted Prime memberships to those with Electronic Benefits Transfer (EBT) or Medicaid cards. The Company is also testing a pilot program with the USDA to offer SNAP benefits to online shoppers. According to published reports, Amazon is working on a program that would create a product similar to a checking account for customers to hold money and accept deposits. Most of these potential customers are either younger or have lower incomes than traditional Prime members.
According to published reports, as of May 30, Amazon Fresh is no longer allowing third-party vendors to sell local goods on its platform. Previously, vendors with locally sourced items could enroll in Amazon Fresh’s Local Market Seller initiative, which allowed the local products to be delivered to Prime members alongside their Fresh orders. Instead, Amazon is transitioning the local program to be more retail-based, where it buys the local product wholesale and resells it to customers. Amazon announced earlier this year that it was merging its Fresh platform with its Prime Now service. Amazon has stopped its grocery delivery in several markets, including parts of New York, New Jersey, Pennsylvania, Maryland and California while at the same time introducing its Prime Now two-hour delivery service in several markets.
Additionally, Amazon plans to expand in Ohio with its sixth fulfillment center in West Jefferson. The 855,000 square-foot facility will focus on smaller items such as electronics, books, housewares and toys. The Company has invested $2.00 billion in Ohio in customer fulfillment infrastructure and compensation to its employees. In the last few years, Amazon announced multiple facilities in the state.
At J. C. Penney, sales decreased 4.3% to $2.58 billion, and comps increased 0.2%. Management noted that comps were negatively impacted by cooler-than-normal temperatures in April, but February and March comps were strong. Gross margin eroded 240 basis points, primarily driven by increased markdowns and continued growth in the mix of the Company’s online business. Management stated that gross margin improvement will be a focus for the Company for the balance of 2018. SG&A margin improved 240 basis points due to lower controllable and marketing costs. As a result, EBITDA increased 3.1% to $133.0 million. Management lowered its fiscal 2018 earnings guidance, now expecting EPS of ($0.07) – $0.13, down from $0.05 – $0.25.
This morning, J.C. Penney announced that Chairman and CEO Marvin R. Ellison is resigning to pursue another opportunity with Lowe’s Companies. Mr. Ellison will remain CEO until June 1 but will step down immediately as chairman. The board elected lead independent director Ronald W. Tysoe as chairman and has created an office of the CEO, which will be comprised of CFO Jeff Davis, Chief Customer Officer Joe McFarland, CIO and Chief Digital Officer Therace Risch, and EVP of Supply Chain Mike Robbins. These four executives will share responsibility for the Company’s day-to-day operations until a new CEO is appointed. A search for a permanent CEO is currently underway.
The Rockport Group, LLC, DIP
On May 14, The Rockport Group, LLC, DIP filed a voluntary Chapter 11 petition in the U.S. Bankruptcy Court in the District of Delaware. The case, designated 18-11145, was assigned to the Honorable Laurie Silverstein. The Chapter 11 petition states that funds will be available for distribution to unsecured creditors. Management stated that the Company entered into an asset purchase agreement with CB Marathon Opco, LLC, which is an affiliate of Charlesbank Equity Fund IX, Limited Partnership, under which Charlesbank will acquire substantially all of Rockport’s assets. Accordingly, Charlesbank will serve as the “stalking horse bidder” in a Court-supervised sale process. Rockport has obtained $20.0 million in new DIP financing from its existing noteholders, which, in addition to its existing $60.0 million credit facility, will provide the Company with liquidity to maintain its operations through the sale process. Rockport said it expects to pay for all goods and services delivered on or after May 14 in the normal course. Payment for goods and services delivered prior to the filing will be addressed through the Chapter 11 process. Under the terms of the agreement, Charlesbank will assume responsibility for payment of certain pre-petition obligations. Documents in the Chapter 11 case indicate the Company plans to close all 60 of its U.S. and Canadian stores by July 31 if there is no interest in the units; the Company operates 27 stores in the U.S. and 33 locations in Canada.
At an investor conference held in China last week, Starbucks announced plans to build 600 net new stores annually over the next five years in Mainland China. This would double the market’s store count from the end of fiscal 2017 to 6,000 across 230 cities. Today, Starbucks operates approximately 3,300 stores in 141 cities in China. The Company also announced plans to more than triple revenue and more than double operating income in China by the end of fiscal 2022, relative to fiscal 2017 levels.
On May 16, Yum! Brands’ Pizza Hut division and Telepizza Group, the largest non-U.S. pizza delivery company worldwide with more than 1,600 stores in over 20 countries, announced a strategic deal and master franchise alliance to accelerate growth across Latin America (excluding Brazil), the Caribbean, Spain (including Andorra), Portugal and Switzerland. The deal doubles Pizza Hut’s footprint in those regions covered by the alliance. Across all the covered markets, Telepizza Group will oversee nearly 1,000 Pizza Huts and contribute nearly 1,500 of its stores to Pizza Hut’s global unit count. Pizza Hut International franchisees in these regions will continue to operate their businesses under the management of Telepizza Group as a Pizza Hut master franchisee.
AutoZone’s third quarter sales increased 1.6% to $2.66 billion, and comps were up 0.6%. Gross margin increased to 53.5% from 52.6% last year, primarily due to higher merchandise margins and a favorable comparison from the impact of the sale of two business units completed during the quarter. As a result, operating profit rose 3.1% to $545.8 million. During the quarter, the Company opened 26 new stores and relocated two existing stores in the U.S., and opened four new stores in Mexico. As of May 5, there were 5,540 stores in the U.S., 536 in Mexico and 16 in Brazil.
Advance Auto Parts
Advance Auto Parts’ first quarter sales slipped 0.6% to $2.87 billion, and comps were down 0.8%. Gross margin increased to 44.3% from 44%, primarily driven by a reduction in material costs and related items. Adjusted SG&A was 36.5% of sales, a 39 basis-point improvement from the prior year, as the Company continued to make progress in expense-management initiatives, including third-party fee reductions and lower travel costs. As a result, adjusted EBITDA increased 1.6% to $910.1 million. During the quarter, seven stores were opened and 15 underperforming locations were closed. As of April 21, Advance operated 5,044 stores and 131 Worldpac branches in the U.S., Canada, Puerto Rico and the U.S. Virgin Islands. The Company also serves 1,225 independently owned Carquest branded stores across these locations in addition to Mexico and the Bahamas, Turks and Caicos, British Virgin Islands, and Pacific Islands.
A local grocer, Chris Lee, has agreed to acquire two Farm Fresh supermarkets in Virginia from Supervalu. The stores are located in Virginia Beach and Newport News. Mr. Lee, who currently operates two other nearby independent grocery stores, plans to cut prices, expand selections, and continue to use the FarmFresh banner. In March, Supervalu announced its intention to divest 21 of its 38-unit Farm Fresh chain operating mostly in the Virginia Beach area. Of the 21 stores sold, for $43.0 million (all of which closed by May 14), ten were acquired by Harris Teeter, eight by Kroger’s mid-Atlantic division and three by Food Lion. Supervalu closed the remaining 18 Farm Fresh stores.
Meanwhile, Supervalu will close the Shop 'n Save store in Maplewood, MO next month. The Company decided not to renew its lease. Last month, Supervalu announced it was pursuing the sale of the corporate-owned stores of Shop ‘n Save and Shop ‘n Save East, which have stores in West Virginia, Maryland, Pennsylvania and Virginia. Recent speculation suggests that Schnuck Markets may buy all or parts of Shop ‘n Save, according to individuals in the St. Louis grocery and retail markets. Schnucks said at the time that it wouldn’t confirm a deal and doesn’t comment on rumor or speculation. There are 41 Shop ‘n Save locations in the St. Louis region and about 50 including stores in central Illinois. According to Nielsen, as of January 2018, the Company held a nearly 30% share of the St. Louis metro area, followed by Walmart with a 26% share, and Supervalu with a 12.6% share; Schnucks represents the area’s higher-end grocery offering.
Wegmans will open a 100,000 - 130,000 square-foot store to anchor a mixed-use development in Cary, NC. Site work will continue through the end of this year, with construction beginning near the end of the year and a goal of opening by late 2019. The new store is part of the Company’s latest push for expansion in the Triangle area; construction is already underway on a Wegmans in Raleigh, and two more units are planned for Chapel Hill as well as one in another mixed-use development in Cary.
Kroger and U.K.-based online supermarket Ocado have entered into an exclusive partnership agreement that will bring the Ocadco Smart Platform to the U.S. Ocado operates its own grocery and general merchandise retail businesses under Ocado.com and other specialty shop banners, together with its Solutions division. The Platform includes online ordering, automated fulfillment, and home delivery capabilities. As part of the agreement, Kroger will increase its existing investment in Ocado by 5% bringing its total investment to more than 6%. Ocado will partner exclusively with Kroger in the U.S. The companies say they are already working to identify the first three sites for development of new, automated warehouse facilities and will determine the locations of up to 20 over the first three years of the agreement. The new relationship is not expected to affect Kroger’s EPS guidance range for 2018 and 2019, as it is already reflected in the Company’s Restock Kroger plan.
Walmart has ended its Scan & Go service that allowed customers pay for items while they browsed in-store, skipping the checkout line. The decision comes four months after the Company announced it would expand Scan & Go to more than 100 stores. The Company discovered that few customers actually used the mobile self-checkout service, as many didn’t see the value of doing more work while browsing when they could have cashiers at checkout do the bagging and scanning. Scan & Go will continue to be offered at all Sam’s Club stores, where Company executives have said customer use of the service has surged.
Today, Walmart is launching its grocery delivery service in the Chicago, IL metro area. Walmart already offers pickup in 28 Chicago-area stores. Its major competitors there, including Jewel-Osco, Mariano’s, Aldi and Meijer, already offer some form of mobile ordering, pickup or delivery. Chicago is the 11th metro area to get Walmart’s delivery offering, which is being rolled out nationwide. According to CEO Doug McMillon, by year end Walmart plans to expand grocery delivery to about 800 stores, covering about 40% of the U.S. population.
Manna Development Group has acquired 38 Panera Bread cafes in Colorado, expanding its operating footprint to over 130 Panera Bread cafes across seven states.
Long John Silver's
Long John Silver’s acquired 76 Long John Silver’s restaurants owned by franchisee ServUS located primarily in Indiana. Financial terms were not disclosed. The Company has shifted from a 100% franchised system and began acquiring restaurants in late 2015. Currently, it owns about 20% of the restaurants.
Last week, Aldi opened its third store in Delaware, in the Stanton-Milltown area. The other stores are in Camden and Middletown.
Last week, Raley’s opened a new wellness-focused supermarket concept called Market 5-ONE-5 in downtown Sacramento, CA. The 11,000 square-foot store caters to consumers who seek healthier fare and want more details about the food they eat. The “ONE” in the name stands for “organic, nutrition and education.” Market 5-ONE-5 offers full grocery shopping with an emphasis on fresh items, expanded prepared food offerings, and onsite dining. According to the Company, additional sites in other urban markets across Northern California are being evaluated for the concept’s expansion.
Yesterday, the Company assumed operation of six recently acquired Scolari’s Food and Drug stores in northern Nevada. Five of the locations are slated to be converted to the Raley’s banner and one Sak ‘N Save store is set to retain its name and become part of Raley’s Food Source division. All will be fully converted by June 10. With the new units, the Company operates 128 stores under four banners.
PriceSmart has acquired land in Panama and the Dominican Republic, where it plans to construct new warehouse clubs. The Panama site is in Santiago and, upon completion, will be the sixth PriceSmart in the country. The Dominican Republic site is in Santo Domingo and will be the fifth in the country. Both are expected to open in spring 2019.
TJX reported first quarter sales growth of 11.6% to $8.69 billion. Consolidated comps rose 3%, consisting of growth of 4% at Marmaxx, 2% at HomeGoods, 3% at TJX Canada, and 1% at TJX International (Europe & Australia). Net income jumped 33.6% to $716.4 million. During the quarter, the Company increased its store count by 71 stores to a total of 4,141, with square footage growth of 5% over last year. Looking ahead at fiscal 2019, TJX expects EPS of $4.75 – $4.83, representing an 18% – 20% increase over the prior year’s $4.04.
Macy’s first quarter sales increased 3.6% to $5.54 billion, and comps increased 4.2%. Management commented that comps were positively impacted from a shift of its “Friends and Family” event from the second quarter last year to the first quarter this year; as a result, comps in the second quarter are expected to be negative, but management anticipates that first half comps will increase 1% to 2%. Gross margin advanced 70 basis points, and SG&A margin improved 50 basis points and quarterly EBITDA climbed 18.8% to $468.0 million. During the quarter, the Company opened 18 Backstage within Macy’s locations and expects to add 82 additional locations by the end of fiscal 2018. The Company also expects to open approximately 25 new freestanding Bluemercury stores in fiscal 2018. Based on the better than expected first quarter results, the Company now expects adjusted EPS to be $3.75 – $3.95, up from $3.55 – $3.75; the Company earned an adjusted $3.11 per share in fiscal 2017.
Nordstrom reported first quarter sales increased 5.8% to $3.47 billion, reflecting an increase of 250 basis points primarily due to the shift of a Nordstrom Rewards loyalty event into the first quarter compared to the second quarter last year; comps were up 0.6%. Full price comps increased 0.7%, while off-price comps were up 0.4%. Gross profit decreased 21 basis points from higher occupancy costs related to U.S. and Canada Rack openings in addition to planned pre-opening expenses associated with the Nordstrom Men’s Store in New York City. As a result, adjusted EBITDAR declined 3.2% to $1.86 billion. The Company opened eight new stores and closed one underperforming location during the quarter, ending with 373 stores in operation.
Dillard’s reported first quarter sales increased 2.7% to $1.46 billion, and comps were up 2%. Total merchandise sales (which excludes its construction business CDI Contractors) increased 1.7% to $1.41 billion. Sales of home and furniture, ladies’ accessories and lingerie, and juniors and children’s apparel performed best, while sales were notably below trend in the shoes category. Gross margin from retail operations declined 31 basis points, and inventory increased 4%. Profit rose 21.4% to $80.5 million.
Home Depot reported first quarter sales increased 4.4% to $24.95 billion, and comps were up 4.2%, with U.S. comps up 3.9%. Operating income rose 1% to $3.38 billion. CEO Craig Menear commented, “We are pleased by the strength of our business despite a slow start to the spring selling season. Outside of our seasonal business, we had solid results in all markets and categories and are seeing strong momentum in all lines of business during these first few weeks of May. These trends, as well as a favorable housing and macroeconomic backdrop, give us confidence to reaffirm our sales and earnings guidance for fiscal 2018.” Increased home improvement activity and new housing trends continue to help the Company post strong growth figures and should benefit Home Depot for the remainder of the year.
Published reports indicate that Target has signed a deal for what will be its eighth small-format store in Manhattan, which it expects to open in Kips Bay next year. Three stores are currently operating, two will open this summer, and another two will open next year. Small-format Target stores offer a food and beverage section, fresh produce, grab-and-go food options, apparel, accessories, home décor and beauty items.
Dollar General opened its15th distribution center in Jackson, GA last week. The Company and state and local agencies have invested $85.0 million in the new DC, which is about one million square feet and supports approximately 750 stores in the Southeast.
Landry’s owner Tilman Fertitta’s Landcadia Holdings Inc. has agreed to acquire online ordering and delivery platform Waitr Inc. for $308.0 million. Landcadia Holdings, an acquisition shell that Mr. Fertitta took public in 2016 and raised $250.0 million, agreed to pay at least $50.0 million in cash as well as stock for Waitr, which offers online ordering and delivery services to independent restaurants and chains in underserved markets. Waitr, founded in 2013, has more than 5,000 restaurant partners in more than 200 cities in the Southeast. The agreement calls for Waitr to become a wholly owned subsidiary of Landcadia. Landcadia will change its name to Waitr Holdings Inc. and become a publicly traded company on the Nasdaq. Proceeds would be used to fund Waitr’s growth in current and new markets and allow Waitr to pursue acquisitions to grow its U.S. footprint. Waitr will have access to Landry’s portfolio of 600 restaurants and access to four million loyalty program members. The deal is scheduled for completion later this year.