May 22, 2019
Ascena Retail Group reported plans to wind down operations of Dressbarn, its low-priced women’s clothing unit (click here to request full list of Dressbarn store closings). As we reported on March 25, the Company was exploring options for Dressbarn, which CEO David Jaffee said was operating at “an unacceptable level of profitability.” On May 1, Mr. Jaffee retired as CEO. Management said the decision to wind down Dressbarn has no impact on the operations of any of Ascena’s other brands, and it believes the decision will ultimately strengthen the Company’s overall financial performance. Ascena has been reporting declining sales and margins; most recently sales were down 1.5%, and EBITDA margin fell 1.7% in the second quarter ended February 2. The Company operated 674 Dressbarn stores as of February 2, out of a total of 4,486 units. Excluding the Dressbarn units and the 943 Maurice’s stores which were sold, the Company will operate about 2,869 stores, comprised of Justice (833 stores); Lane Bryant (736 stores); LOFT (669 stores); Catherines (335 stores); and Ann Taylor (296 stores).
On May 16, Fred’s announced it will begin closing an additional 104 underperforming stores as part of an ongoing effort to rationalize its store footprint. Liquidation sales are already underway at the previously announced 159 store closures, see below for Store Closing Map. Together the 263 closures represent 46% of the store base, with only 305 stores remaining for now. Liquidation sales at the 104 stores have begun, with closures planned by June 30 - click here to request a list of closures.
On May 17, Lidl announced it will open 25 new stores in Maryland, New Jersey, New York, North Carolina, South Carolina, Pennsylvania, and Virginia - see below for Store Openings/Closings Map. It will close two locations in North Carolina. The new stores will bring the total close to 100 and only include four on Long Island, after purchasing Best Yet Market’s 26 locations there. Click here to request a list of future openings/closings.
Restaurant Brands International announced plans to grow from roughly 26,000 restaurants to over 40,000 restaurants globally in the next eight to ten years. From 2010 to today, the Company said its restaurant base (Burger King, Tim Hortons, and Popeyes) has expanded from about 12,000 to nearly 26,000, growing system-wide sales from $15.00 billion to over $32.00 billion in that time period.
Funds managed by affiliates of Apollo Global Management announced the commencement of a cash tender offer to purchase all of the outstanding shares of Smart & Final. The offer is being made pursuant to the merger agreement announced on April 16, under which First Street Merger Sub will acquire all of the outstanding shares of Smart & Final for $6.50 per share, which represents a premium of approximately 25% above its average closing price over the 24 days preceding the merger announcement, and 19% over the closing price of $5.48 per share reported on April 15, the last trading day prior to the announcement. Upon completion of the transaction, Smart & Final will become a privately held company
At a recent conference, interim Co-CEO of Sprouts Farmers Market Bradley Lukow discussed brand awareness across the U.S. Half of the new stores Sprouts will open in 2019 will be in new markets. The Company opened about 30 new stores in 2018 and is targeting 28 new locations for 2019, with half of those in new markets (click here to request a list of future Sprouts locations). Mr. Lukow stated, “Traditionally, we’ve been about 70% in our original eight states, from Texas [to the] West. Over the last few years, we’ve continued to enhance our site selection analytics and go-to-market strategy.” Sprouts entered three new states including Pennsylvania, Washington and South Carolina in 2018, and has plans to debut in Louisiana, New Jersey and Virginia. Currently, Sprouts operates 322 stores in 19 states. The Company expects to have 340 stores in 22 states by the end of this year. According to Mr. Lukow, Sprouts has made improvements to product selection, analytics and e-commerce, which has also helped build the brand. It has been experimenting with its retail format, introducing five new prototype stores in 2018 focused on improving the shopper experience in the deli, bakery, meat and seafood areas. Eight of the new stores planned for this year will have the new format, and then in 2020 and beyond the enhanced prototype will be in every location.
Hamleys, a 259-year-old toy retailer with 167 stores in 18 countries, was acquired by Reliance Brands Ltd., a Mumbai-based conglomerate owned by Indian billionaire Mukesh Ambani, for £68.0 million (US$88.5 million) in cash. The acquisition is the first outside India for Reliance, which operates more than 420 stores and 350 in-store shops, including 88 franchised Hamleys stores, in India. Hamleys is best known for its flagship store in London, the U.K., a 54,000 square-foot store opened in 1881 that features elaborate displays, toy demonstrations, and year-round events. There has been speculation that Hamleys would open a store in the U.S., with reports in December 2018 that the chain was close to finalizing a deal to open a store in Manhattan’s Herald Square. So far, Hamleys has not opened any U.S. stores. The chain was previously owned by Hong Kong-based C. Banner since 2015.
Trader Joe’s announced plans to open another location in the East Village of Manhattan. The 23,000 square-foot store is expected to open this year (click here to request a list of future openings). The location marks Trader Joe’s eighth in Manhattan, including one just a couple blocks west. The Company has a dozen locations in total across the five boroughs.
On May 14, Grocery Outlet released the preliminary prospectus for its IPO originally announced in March. In October 2014, Grocery Outlet was acquired for $1.12 billion by affiliates of Hellman & Friedman from its principal owner Berkshire Partners. Although the actual number of shares and offer price have not yet been disclosed, the initial prospectus calls for the Company to sell $100.0 million in shares, starting the process for its private equity parent to exit its position and provide further returns on its investment. It already paid an $86.5 million dividend in 2016 and a $152.2 million dividend in 2018.
Kroger will open its first store in downtown Cincinnati, OH in September. The 52,000 square-foot, two-story supermarket is located next to the Company’s headquarters building. Its design is similar to the format of many of Kroger’s Mariano’s stores in the Chicago, IL area (acquired in 2015). No opening date has been set.
Ahold Delhaize’s Giant Food Stores plans to acquire Ferguson & Hassler (F&H), operator of a grocery store in Quarryville, PA. Financial terms were not disclosed. It is the Company’s second acquisition in Lancaster County in less than a year, after its purchase of a Darrenkamps store last September. Giant has announced openings for eight new stores in Pennsylvania over the past couple of months. Earlier this month, it opened a 55,000 square-foot store in Walnutport and plans to open a 68,000 square-foot replacement store in State College on June 7. The new store, which replaces a nearby Giant, will offer expanded fresh and prepared foods, online shopping, in-store beer and wine, Starbucks, and a full-service pharmacy.
Natural Grocer by Vitamin Cottage will relocate a store in Austin, TX to a nearby 14,000 square-foot space in the “Triangle,” a busy intersection for retail. The store is set to open in July.
Raley’s recently broke ground on its new flagship store in Sacramento, CA, which will open in 2020. The 55,000-square-foot unit is a replacement location for a store one block away, which will remain open during construction of the new store.
Jack in the Box announced that it has concluded its review of strategic and financing alternatives, which had been ongoing since December 2018. The Company plans to replace its existing senior credit facility, consisting of a term loan and revolving credit facility, with a new securitization facility. Following completion of the transaction, the Company will conduct share repurchases with the intent of reaching a target leverage ratio of approximately 5x EBITDA.
The Company also reported results for its second quarter ended April 14. Sales rose 2.8% to $215.7 million; however, excluding $39.0 million in franchise advertising contributions included in revenues due to changes in accounting standards, sales would have declined 15.7%. This was a function of the Company’s now complete re-franchising strategy, which reduced the number of Company-owned stores from 276 at the start of fiscal 2018 to 137 at quarter-end.
Kona Grill, Inc., DIP entered into a stalking horse asset purchase agreement with Williston Holding Company, Inc., whereby Williston would acquire the Company for $20.3 million, plus the assumption of $7.1 million in liabilities, which include unexpired leases, post-petition accounts payable, and unpaid payroll, among other items. This agreement is subject to the solicitation of higher and better offers as part of an auction process that will be conducted under the supervision of the Bankruptcy Court. The agreement includes a $1.0 million breakup fee. An auction is scheduled for July 23, with a sale hearing on July 26, and closing of the transaction is set for July 31. Williston Holding Company is a restaurant operator and franchisor with over 50 locations in six states under a number of banners, including Casa Ole, Monterey’s Little Mexico, Uberrito Fresh Mex, Williston Brewing Company, Cargo Food Authority, and several others.
The U.S. Trustee appointed the Committee of Unsecured Creditors, whose members include: The Taubman Company, Brookfield Property REIT, Inc., Edward Don & Company, Tracy Fortman, c/o Robert R. Hopper & Associates, LLC, and True Worlds Foods, LLC.
According to reports, At Home Group has been approached by Kohl’s with a takeover proposal. Sources said Kohl’s recently engaged in conversations with At Home regarding a possible acquisition of the 180-store home décor chain. Purportedly, At Home is exploring a sale of itself, and is currently in negotiations with private equity firms, including Hellman & Friedman. Neither company would comment. At Home continues to post double-digit sales growth, driven by new store openings and positive comps. However, comp growth has decelerated in recent quarters, as competitive pressures in the home décor space intensify. At Home has an ambitious plan to grow its store base to 600 over the long term; however, investments to support this growth have resulted in cash burn and higher debt levels. In the past five years, the Company opened 105 new stores, which it financed with cash from operations, revolver borrowings, and proceeds from sale-leaseback transactions. In fiscal 2019, At Home generated $1.17 billion in sales and $192.5 million in EBITDA, and at year-end, the balance sheet was moderately leveraged, with debt to EBITDA of 3.1x, compared to 5.3x five years ago. An acquisition would expand Kohl’s presence in the home décor category. The department store has experienced margin pressure over the last several years due to an increase in low-margin national brand sales, investments associated with its low-margin digital business, and increased competition. Kohl’s posted $20.23 billion in sales for fiscal 2018, up 0.7% from last year. At fiscal 2018 year end, Kohl’s balance sheet remained robust, with debt to EBITDA improving to 1.4x, and annual interest expense down $43.0 million from last year pushing interest coverage up to 9.5x. While fiscal 2018 top-line growth was modest, the Company generated $1.53 billion in free cash flow, which was 50% higher than the prior year. Accelerating free cash flow generation allowed the Company to reduce total debt by over $1.00 billion year over year. In addition, liquidity of over $1.93 billion at FYE gives Kohl’s plenty of flexibility to consider strategic acquisitions.
In other news, Kohl’s is partnering with Fanatics, which sells licensed sports merchandise, to broaden the fan gear assortment sold through Kohl’s Fan Shop on Kohls.com. Beginning this fall, officially licensed men’s, women’s, and kids apparel, jerseys, hats, collectibles, and tailgating and novelty products from major professional sports leagues and collegiate properties will be added to Kohls.com. Fanatics will fulfill and ship customer orders directly.
Amazon is looking to lease a warehouse in Colonie, NY for “last mile” delivery service. Part of the existing 138,000 square-foot building would be demolished, leaving 113,000 square feet for warehousing and 9,700 square feet for offices.
Meanwhile, Amazon broke ground on May 14 at its $1.50 billion air hub at Cincinnati-Northern Kentucky International Airport. The airport is expected to open in 2021. The three million square-foot building will have capacity for 100 freighters and will be built with a 350,000 square-foot loading wing. The hub will support deliveries for Amazon’s Prime service, which currently guarantees two-day deliveries. Amazon announced in late April that it will move to a one-day delivery standard for Prime orders.
In a regulatory filing last Wednesday, Warren Buffett’s Berkshire Hathaway revealed that the size of its investment in Amazon was 483,300 shares, or $860.6 million, as of March 31 (valued at upward of $900.0 million at the current stock price). Berkshire’s stake in Amazon represents only 0.1% of Amazon’s outstanding equity.
In other news, Amazon has launched a new service, offering customers a network of stores where they can collect their online orders from designated pick-up points. Amazon, through its new service called “Amazon Counter,” will allow its customers to choose a pick-up point when they get to the check-out stage on the Amazon website. The service is only available in the UK and Italy. Amazon plans further roll outs in the future, with more locations and partners across Europe.
Amazon has also submitted preliminary plans for two buildings for its Arlington, VA HQ2 project. The plan includes 2.1 million square feet in a pair of 22-story office towers. It will take two to three years to complete the project once the Company receives the necessary approvals.
Lastly, Amazon announced it has led a $575.0 million investment round into Deliveroo, a British food delivery company that uses motorbikes. Deliveroo said it would use the money to expand its UK engineering team, expand its delivery reach, and continue to develop new products such as its delivery-only kitchens. Deliveroo currently operates in 500 towns and cities across 14 countries and territories.
Walmart’s first quarter revenues rose 1% to $123.93 billion. U.S. comps rose 3.4%, marking the best comp growth in nine years. Walmart U.S. e-commerce sales increased 37%, reflecting strong growth in online grocery, as well as the Home and Fashion categories. Sam’s Club comps rose 0.3%, and e-commerce sales increased 28%. Reduced tobacco sales negatively affected comps by 270 basis points. Net sales at Walmart International were $28.8 billion, a decline of 4.9%. Net income surged to $3.84 billion, up from $2.13 billion last year. Operating income fell 4.1% to $4.95 billion, which was better than planned, as strong results from Walmart U.S. and Sam’s Club were offset by the inclusion of Flipkart this year.
In a subsequent conference call, CEO Doug McMillon said the Company continues to be “more of a digital enterprise,” adding new brands online and improving the customer interface. Walmart U.S. inventory for the quarter also increased 5.9% to make sure e-commerce fulfillment centers can handle more orders. Walmart said earlier this month that it will be offering next-day delivery following Amazon’s announcement that it would upgrade Prime members to free one-day shipping. “In our view, Walmart is now a major competitive force in e-commerce and is capable of capturing shopper share from Amazon and others,” Mr. McMillon said. By year-end, Walmart expects to offer same-day grocery delivery at 1,600 stores and grocery pickup from 3,100 locations.
In the face of President Trump’s tariff hike on $200.00 billion worth of Chinese imports to 25% from 10%, Walmart CFO Brett Biggs said that prices for shoppers will rise. The move is widely expected to raise prices on thousands of products including clothing, furniture and electronics. Mr. Biggs said the Company will seek to ease the pain, in part by trying to obtain products from different countries and working with suppliers’ “costs structures to manage higher tariffs.” Mr. Biggs commented, “We believe Walmart has the wherewithal both financially and via its vendor relationships to minimize the impact on both itself and its shopping base.” Walmart U.S. CEO Greg Foran said the Company will maintain its “low-price leadership” and “manage costs on an item-by-item basis.” This has become increasingly difficult as a result of competition from discount chains, and vendors raising prices.
Walmart has confirmed it is considering an IPO for British supermarket arm Asda, after its proposed merger with Sainsbury’s was blocked by the U.K. regulator last month. Walmart said preparations for the IPO would “take years.”
In other news, after Walmart’s Sam’s Club closed a 139,000 square-foot warehouse club in Worcester, MA over a year ago, the Company is reportedly preparing to reopen the facility as a fulfillment center for online orders. The facility is expected to fill and ship orders to customers from Maine to New York City. Since Sam’s Club shuttered 63 warehouse clubs and laid off thousands of workers in 2018, Walmart has begun converting a small number of Sam’s Club stores into fulfillment centers. The first Sam’s Club fulfillment center opened in Memphis, TN in 2018, and others followed in Matteson, IL, and Fort Worth, TX. Walmart is currently working on three more conversions.
Walmart has released additional plans for its new 350-acre northwest Arkansas campus that will include four quadrants connected by bike and walking paths, an on-campus childcare facility, and a fitness center. The new buildings will be designed and constructed in the next two years, with a goal of opening the site in phases between 2020 and 2024. The new site is blocks away from its current Bentonville headquarters, which was built in 1971.
Home-improvement operator Busy Beaver is opening a 60,000 square-foot location in Calcutta, OH on May 24. The location will include an expanded seasonal department, an indoor lumberyard, a farm and ranch department, and a designated contractor service center. The location will employ roughly 20 full-time and 15 part-time workers. In addition to the new Ohio location, Busy Beaver is also preparing to open more stores in central Pennsylvania, including stores opening in Chambersburg and Red Lion this fall. Last year, Busy Beaver opened five new locations, all throughout Pennsylvania. Founded in 1962 and based in Pittsburgh, PA, Busy Beaver operates 23 locations across Pennsylvania, Ohio and West Virginia.
This information contained in this newsletter is compiled from sources which Market Service Inc. does not control and unless indicated is not verified. Its contents are not to be divulged. Market Service Inc., its principals and writers do not guarantee the accuracy, completeness or timeliness of the information provided nor do they assume responsibility for failure to report any matter omitted or withheld because of their negligence.