May 30, 2018
Target
Target reported first quarter sales growth of 3.5% to $16.56 billion, driven by 3% comp growth, which includes 3.7% traffic growth. Digital sales rose 28%, on top of a 21% increase in 1Q17. The Company said it saw broad market share gains across its core merchandise categories, particularly its home, essentials, and food & beverage categories. According to CEO Brian Cornell, a late spring took a toll on temperature-sensitive categories, but sales have “accelerated rapidly in recent weeks as weather improved across the country.” Operating income was $1.04 billion, down 9.9% from $1.15 billion in 2017.
In the first quarter, the Company completed 56 remodels, opened seven new stores, introduced three new brands, launched its new Drive-Up service in more than 250 stores, expanded Target Restock nationwide, and rolled out same-day delivery from more than 700 stores, enabled by its recent acquisition of Shipt.
In the second quarter, Target expects comp growth in the low to mid-single-digit range.
Meanwhile, Target said it will open small-footprint stores in Seattle’s University District and Ballard in 2019 and a store in Bellevue’s Wilburton neighborhood in 2020. The Company said last year it would open 35 stores in 2018, the majority of which would be small-format locations. It now has 65 small-format stores across the U.S. and intends to have 130 small-format locations across the country by 2020. The stores are focused in urban areas, dense suburban neighborhoods and near college campuses where traditional-sized Target stores wouldn’t fit. Target says they offer unique products curated to best meet the needs of each neighborhood.
Sears Holdings
Today, ESL Investments announced that it asked Sears Holdings to reconsider limits it has placed on ESL’s ability to engage with potential partners for a deal. ESL said it has received “numerous” inquiries for potential partners in deals involving the sale of Sears’ Kenmore brand and related assets, and both the Sears Home Improvement Products business and the Parts Direct business of the Sears Home Services division. ESL stated since it made its proposal on April 20, there has been a "significant increase" in the price for Sears' unsecured debt that would make certain debt repurchases and debt-for-equity exchanges less attractive. In the letter ESL emphasized that finding an appropriate partner soon will be a critical factor that will “materially impact any definitive proposal that we are able to make.”
Kroger
Last Wednesday, Kroger announced it reached an agreement to acquire Chicago-based meal kit company, Home Chef, in a deal that could total $700.0 million. Kroger would pay an initial purchase price of $200.0 million and up to an additional $500.0 million in “earn-out” payments for meeting certain sales and other performance goals. Home Chef was founded in 2013 in Chicago by Pat Vihtelic. In 2016, consumer-focused private equity firm L Catterton invested $40.0 million in the Company. Home Chef is the country’s largest private meal kit company by sales.
Following completion of the deal, Home Chef would become a wholly owned Kroger subsidiary, with its meal kits available in Kroger stores across the country and online. In addition, Home Chef will continue to offer its existing subscription and home delivery service. Home Chef’s in-store offerings would complement Kroger’s Prep+Pared meal kits already available in more than 525 of its stores. Kroger expects the transaction to have no effect on 2018 earnings and to be slightly accretive in 2019.
Supervalu
As previously reported, Supervalu has exited its Farm Fresh banner and shortly after, in April, announced plans to sell its Shop ‘n Save and Shop ‘n Save East retail operations. More recently, reports have surfaced that its Shoppers Food & Pharmacy banner could be next on the chopping block. The reports were sparked by the recent elimination of 40 administrative positions at Shoppers Food & Pharmacy headquarters in Bowie, MD. Shoppers is also reportedly transferring merchandising and administrative responsibilities for its Retail-East operations, which consist of Shoppers and the soon-to-be-sold Shop ‘n Save banner, to its Retail-West division that includes Cub Foods and Hornbacher’s. This would obviously make sense being that Shoppers would be the sole remaining operation in the east.
QuickTrip Corp.
Published reports indicate that QuikTrip Corp. has invested more than $10.0 million in land in the San Antonio, TX, area as it prepares to enter the market. The Company acquired 18 lots totaling approximately 98 acres since December. QuikTrip plans to open around 60 convenience stores in San Antonio and 40 in Austin. The first San Antonio store is expected to open in October. The Company operates more than 700 c-stores across 11 states, see below for concentration map. Competitors in Texas will include Alimentation Couche-Tard’s Circle K, 7-Eleven and Buc-ee’s.
Trader Joes
Third-party logistics company NFI Industries Inc. has notified the state of Pennsylvania that it plans to cut more than 250 jobs beginning July 24 at a Northampton County warehouse it operates for Trader Joe’s. Without identifying Trader Joe’s, NFI officials said in a letter to the Pennsylvania Department of Labor & Industry that the customer advised NFI it will reduce the transportation services that it contracted with NFI to provide.
Publix
Publix will open a new urban store in downtown Nashville, TN. The 28,000 square-foot store is significantly smaller than a traditional 50,000 square-foot Publix but will still offer amenities such as a pharmacy and expanded prepared foods section.
Aldi
Aldi said its ongoing growth has prompted an expansion of its warehouse and an associated 60 new jobs in Hinckley, OH.
On June 14, Aldi will open a store in Jacksonville, its seventh in Northeast Florida. The 26,000 square-foot store stands in a former Bed Bath & Beyond. The Company has already identified four additional sites in Northeast Florida.
Chipotle
Chipotle plans to relocate its headquarters from Denver, CO to Newport Beach, CA. Over the next six months, Chipotle will transition its Denver and New York office functions to Newport Beach and an existing office in Columbus, OH. Following the transition, Chipotle will close its Denver and New York City offices, affecting approximately 400 employees between the two cities in the 2018 fourth quarter.
Amazon
Amazon announced plans for its first Oklahoma fulfillment center, to be located in Oklahoma City. The 600,000 square-foot facility, expected to open in 2019, will pack and ship small items.
In other news, Amazon appears to be restarting its funding efforts in India after Acko, the digital insurance startup in India, confirmed that it led a new round of funding for its business. Amazon reportedly led a $12.0 million funding round for Acko alongside Ashish Dhawan, the founder of PE firm ChrysCapital, and existing backer Catamaran Ventures. The deal takes Acko to $42.0 million raised to date.
Meijer
Last week, Meijer opened a new, $20.0 million, 195,000 square-foot store in Valparaiso, IN, its 39th store in the state. Nearby competitors include Strack & Van Til, Town & Country, Aldi, Target, and Walmart (store overlap map below). Meijer plans to open six more units across the Midwest this year. The Company also opened a 195,000 square-foot store in Marquette Township, MI. Nearby competitors include Walmart and Target.
Stein Mart
Stein Mart’s first quarter sales decreased 3.1% to $326.7 million, while comparable store sales decreased 0.7%. Management commented that most of the comp decline was due to lower clearance sales and noted that early second quarter comp trends have been positive. Gross margin for the first quarter was 29.4% compared to 28.3% in 2017. Gross margin expansion was primarily due to reduced markdowns. Management said that average inventory per store is down 10%, which should reduce the need for markdown activity in the second quarter of fiscal 2018. Operating expenses were slightly higher due to a planned increase in advertising. As a result, Stein Mart’s quarterly EBITDA was essentially flat at $18.2 million. Based on better-than-expected first quarter results, management raised first-half operating guidance; it now expects operating income to be in excess of $10.0 million compared to previous guidance of $8.0 million. The Company had an operating loss of $11.5 million in the first half of fiscal 2017. TTM EBITDA margin and interest coverage were only 0.4% and 0.8x, respectively. During the first quarter of fiscal 2018, the Company closed four locations ending the quarter with 289 locations. In fiscal 2018, the Company expects to open two new stores and close a total of seven stores upon lease expirations.
Varsity Brands
Varsity Brands is exploring a sale that could value the Company at over $2.50 billion, including debt, according to published reports. The reports also note that private equity firm Charlesbank Capital Partners and European investment firm Partners Group Holding AG have hired investment bank Jefferies LLC to run an auction for the Company. The Company reportedly generated approximately $1.70 billion of revenue during its last fiscal year. Founded in 1920 by Harry J. Herff and Randall H. Jones, Varsity Brands manufactures class rings, yearbooks, caps and gowns, awards, championship rings, and graduation diplomas. The Herff Jones Company, which bought Varsity Brands in 2011, acquired BSN Sports in 2013 for $460.0 million and later rebranded the entire company under the Varsity Brands banner.
Sportsman's Warehouse
Sportsman’s Warehouse reported first quarter sales increased 14.8% to $180.1 million, attributed primarily to the opening of 10 new stores since last year, and a 3.4% increase in comparable store sales compared to a 6.9% decrease in the same period last year. The Company opened two new stores in 1Q18 and ended the quarter with 89 stores in 22 states, for square footage growth of 8.9% from the end of the first quarter of fiscal 2017. TTM EBITDA margin and interest coverage were 8.4% (above the industry average of 7.6%) and 4.9x, respectively.
On May 23, the Company’s credit facility was amended to increase maximum capacity to $250.0 million from $150.0 million, add a new $40.0 million term loan, and extend the maturity date to May 23, 2023. Funds from the revolver and new term loan repaid the remaining balance of $132.0 million under the previous term loan. The amendment is a prudent move, which holds the prospect for long-term financial improvement.
Hibbett Sports
Hibbett Sports reported first quarter sales slipped 0.4% to $274.7 million, and comps were down 0.3%. Gross margin was 35.2%, down from 35.6% primarily due to increased sales of clearance merchandise and freight associated with e-commerce sales. Operating income fell 16.2% to $28.6 million. During the quarter, Hibbett opened seven new stores, expanded four existing stores, and closed 18 underperforming locations, bringing its store base to 1,068 stores in 35 states.
Best Buy
Best Buy’s first quarter sales increased 6.8% to $9.11 billion, due to a 7.1% increase in comparable store sales, partially offset by the closing of 207 stores. Most of the store closures (193) consisted of the smaller mobile units, while 17 of the big box stores were shuttered. Domestic online revenue of $1.14 billion increased 12% on a comparable basis, primarily due to higher average order values and higher conversion rates. Quarterly EBITDA margin fell 20 basis points, reflecting a gross margin decrease of 40 basis points to 23.3% and an SG&A margin improvement of 20 basis points. TTM EBITDA margin and interest coverage were 6.2% and 98x respectively.
The Company expects to have all 250 small-format mobile phone stores in the U.S. closed 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.
Bravo Brio Restaurant Group
On May 24, Bravo Brio Restaurant Group (BBRG) closed on the previously announced merger agreement pursuant to which a subsidiary of Spice Private Equity Ltd. acquired the Company. Under the terms of the merger agreement dated March 7, BBRG’s shareholders received $4.05 per share in cash, representing an enterprise value of approximately $100.0 million.
Gap
Gap’s sales were up 10% to $3.78 billion, and comps were up 1% on top of a 2% increase last year. By brand, Old Navy’s comps were up 3%, and Banana Republic’s comps were also up 3%, but Gap’s comps were down 4%. Gross margin was 37.7%, a decrease of 20 basis points, and operating margin was 6.1%, a decrease of 130 basis points. The Company opened 26 Company-operated stores and closed 20 underperforming locations, ending with 3,171 Company-operated stores. Another 36 franchise locations were opened, and 19 were closed, for a total of 446 in operation. The Company continues to expect store openings to be focused on Athleta and Old Navy, and closings focused on Gap and Banana Republic.
Lowe's Companies
Lowe’s Companies reported first quarter sales increased 3% to $17.36 billion. Comps were up 0.6%, with comps in the U.S. home improvement business up 0.5%. As a result of higher SG&A expenses, operating income slipped 6% to $1.47 billion. CEO Robert A. Niblock said, “We drove solid performance in indoor categories and continued to grow our sales to Pro customers. However, prolonged unfavorable weather across geographies led to a delayed spring selling season which impacted results in outdoor categories. Spring has now arrived and we are encouraged by strong sales in the month of May.” As of May 4, Lowe’s operated 2,154 stores in the U.S., Canada, and Mexico.
L Brands
L Brands’ sales were up 7.8% to $2.63 billion, and comps were up 3%. Bath & Body Works comps were up 8% and Victoria’s Secret comps were up 1%. Excluding direct sales, Bath & Body Works’ store comps were up 5%, while Victoria’s Secret’s store comps were down 5%. Victoria’s Secret continues to struggle against increasing competition and changing customer trends, and the promotional environment has caused a buildup of inventory. As a result, operating income fell 26% to $154.8 million. The Company opened 14 new stores and closed 20 underperforming locations during the quarter, ending with 3,069 Company-owned stores in operation. There were also 32 non Company-owned stores opened during the quarter, and 15 underperforming locations closed, for a total of 830 stores in operation. Looking ahead, L Brands slashed its full year profit outlook, now expecting EPS of $2.70 – $3.00, down from its earlier estimate of $2.95 – $3.25.
Shiekh Shoes, DIP
On May 29, Shiekh Shoes, DIP filed a motion to confirm its Plan of Reorganization. The Plan contemplates the Company operating 64 stores, down from a peak of 126 units prior to the Chapter 11 filing. The related Disclosure Statement provides that general unsecured creditors will realize a recovery of 5.3% of allowed claims. Upon confirmation of a Plan, the holders of general unsecured claims will participate in a $1.2 million unsecured note, due three years from the effective date of the Plan. The note will not bear interest and will require principal payments of $100,000 per quarter, with the first quarterly principal payment due on September 30, 2018.
Urban Outfitters
Urban Outfitters reported first quarter sales increased 12.4% to $855.7 million, and comps were up 10%. The comp increase was attributed to strong, double-digit digital growth and positive retail store sales. By brand, Free People comps were up 15%, Anthropologie comps were up 10%, and Urban Outfitters comps were up 8%. As a result of strong sales, healthy margin improvement, and SG&A leverage, operating income rose 156.2% to $53.9 million. During the quarter the Company opened four new locations, including two Free People stores and two Urban Outfitters, and closed one Urban Outfitter, ending with 246 Urban Outfitters, 226 Anthropologie stores, 134 Free People stores, and 10 restaurants.
Shoe Carnival
Three footwear retailers, Shoe Carnival, Foot Locker, and DSW, reported first quarter sales increases, primarily attributable to the continuation of a strong athletic and athleisure trend. Shoe Carnival’s sales increased 1.6% to $257.4 million, and comps were up 1.3%. Gross margin rose 150 basis points to 30%; merchandise margin was up 0.7% while buying, distribution and occupancy expenses decreased 0.8%. As a result, operating income grew 30.9% to $17.3 million. The Company closed three underperforming stores during the quarter, as part of its plans to open three new stores and shutter 20 – 25 underperforming stores during fiscal 2018.
DSW
DSW’s sales increased 2.9% to $712.1 million, and comps were up 2.2%. Gross margin increased 40 basis points due to the wind-down of Ebuys, while operating expenses increased 100 basis points due to marketing investments, Ebuys exit costs and transaction expenses related to the acquisition of Town Shoes (completed May 10). As a result, operating income fell 5.4% to $38.5 million. The Company is in the process of conducting a comprehensive review of Town Shoes and will provide future expectations for this business in its second quarter earnings release. At the end of the quarter, DSW operated 517 namesake stores and supplied 289 leased locations under its affiliated business group (ABG), down from 508 DSW stores and 379 ABG stores in the prior-year period.
Foot Locker
Foot Locker’s sales increased a higher-than-expected 1.2% to $2.025 billion, and while comps slipped 2.8%, the decrease was less than anticipated. Gross margin decreased to 32.9% from 34% last year, while SG&A expenses increased to 19% from 18.5% of net sales, reflecting the Company’s investments in its digital operations. As a result, operating income was down 16.4% to $224.0 million. Foot Locker opened 11 new stores, remodeled or relocated 43 stores, and closed 37 underperforming stores, ending with 3,294 stores in operation.
The Buckle
The Buckle’s sales fell 3.5% to $204.9 million, and comps were down 3.1%, marking the 13th consecutive quarterly decline, or 18th decline in the past 19 quarters. However, it also marks the fifth consecutive quarterly improvement. Online sales rose 6.1% to $23.1 million and now make up 11.3% of total sales (up from 10.3% last year). Operating income was down 7.1% to $23.3 million. The Buckle currently operates 455 stores in 43 states, most recently closing one store in May (subsequent to first quarter end).
New York & Company
New York & Company’s sales increased 4.3% to $218.8 million, and comps were up 2.7%. The sales increase reflects higher sales from Fashion to Figure and growth of e-commerce sales but was partially offset by a reduced store count. Gross profit as a percentage of sales increased 130 basis points to 32%, reflecting the highest gross margin rate achieved in the first quarter since 2005. The increase reflects a 260 basis-point improvement in the leverage of buying and occupancy costs due to a $3.4 million reduction in expenses, partially offset by a 130 basis-point decrease in merchandise margin, largely driven by increased shipping expense, severance expense, and a slight increase in promotional activity. The Company generated operating income of $3.5 million, compared to a loss of $3.9 million in the prior-year period. During the quarter, the Company opened one New York & Company store, eight Fashion to Figure stores, converted one existing New York & Company store to an outlet store, closed eight New York & Company stores and one outlet store, and remodeled/refreshed two existing locations, ending the quarter with 432 stores in operation, including 119 outlet stores.
Destination XL Group
Destination XL Group’s sales were up 5.3% to $113.3 million, and comps were up 2.2%. Gross margin was 44.7% compared to 45.2% due to a 120 basis-point decrease in merchandise margins, partially offset by a 70 basis-point improvement in occupancy costs as a percentage of sales. EBITDA increased 104% to $5.1 million from $2.5 million, driven by sales growth as well as reduced SG&A expenses related to lower marketing costs. During the first quarter, the Company opened three new DXL stores, rebranded two Casual Male XL stores to DXL, and closed four Casual Male XL stores and two Casual Male XL outlets, ending with 339 stores in operation. Subsequent to quarter end, the Company committed to a corporate restructuring to accelerate its path to profitability by eliminating 2% of its total workforce. The Company expects to realize savings of $5.6 million in SG&A expenses in fiscal 2018.
Williams-Sonoma
Williams-Sonoma’s first quarter sales increased 8.2% to $1.20 billion; retail sales were up 4.9% to $556.8 million, and e-commerce sales were up 11.3% to $646.2 million. E-commerce sales now make up 53.7% of total sales, up from 52.2% last year. Comps were up 5.5% Companywide, with each segment generating positive comps: West Elm comps were up 9%, Williams Sonoma comps were up 5.6%, Pottery Barn Kids and Teen comps were up 5.3%, and Pottery Barn comps were up 2.7%. As a result, operating income rose 6.5% to $66.6 million. The Company opened three new stores (one Pottery Barn and two West Elm stores) during the quarter and closed seven underperforming locations (four Williams Sonoma stores, two Pottery Barn Kids stores, and one Pottery Barn location); it ended with 627 stores in operation. For the remainder of fiscal 2018, the Company expects to open another 17 new stores and close 23 underperforming stores.
