November 27, 2018
Webinar Invite: Warning Signs of Troubled Companies
Thursday, December 13 | 2-3:00 pm EST
In the tumultuous retail environment, the risk of bankruptcy remains high, and it is absolutely critical to be able to spot the early warning signs of distress exhibited by your customers. Learn more about key risk assessment tools and how to better understand warning signs in our sister company's Webinar on Warning Signs of Troubled Companies.
Earlier today, Amazon announced that this year's Cyber Monday was the biggest single-day shopping event in the Company's history, with consumers purchasing more than 180 million items across its global platform during the five-days that began on the Thanksgiving holiday. Amazon also said it sold a record amount of its electronic devices, and that its Echo Dot was the top-selling product from any manufacturer over the long Thanksgiving weekend.
In other news, Amazon and a Texas developer will spend $200.0 million on a distribution center in Oak Creek, WI. The agreement also pledges $16.9 million in city financing to support the planned 2.6 million square-foot building. The facility is expected to open in the first quarter of 2020. This will be Amazon’s second major distribution center in southeast Wisconsin, after its facility in Kenosha. Amazon is building a handful of other multi-story distribution centers across the country, including one proposed in the Twin Cities.
On November 21, Mattress Firm successfully completed its financial restructuring and emerged from Chapter 11. The Company said it will move forward with an optimized store footprint of approximately 2,600 stores across the country and $525.0 million of committed exit financing to support operations and future growth initiatives, including a $125.0 million revolving credit facility that will be undrawn at closing. Commenting on the development, CEO Steve Stagner said, "This is an exciting day for Mattress Firm as we emerge a stronger and more competitive company. With an optimized store footprint, stronger balance sheet and significant liquidity, we will be able to more efficiently focus on our strength -- delivering the best beds at the best value to millions of customers across the country. We knew that our unprecedented growth had led to duplicative store locations in many of our markets. Now, having completed our operational and financial restructuring, we have the right store locations to not only better serve our customers, but also to fuel future growth. Going forward, we will be intensely-focused on enhancing our product offering, driving disciplined and results-oriented operations and building an integrated and educational shopping experience."
Moran Foods LLC, dba Save-A-Lot (SAL)
Moran Foods LLC, dba Save-A-Lot (SAL) appears to still be struggling in the third quarter with recent reports indicating comps were down 5.6% in the third quarter (now 14 quarters of falling comps), which followed a 6.1% decline in the second quarter. TTM sales were $4.10 billion, down from our 2017 year-end estimate of $4.50 billion. The Company is also closing stores, or losing franchises, as the store count is down to 1,230 from the year-end 1,290 locations.
On November 20, SpartanNash announced it reached an agreement to acquire Martin’s Super Markets, a 21 store, family-owned and operated Midwest independent supermarket chain, which was already a distribution customer of SpartanNash. It was reported that for the fiscal year ended July 29, 2018, Martin’s had more than $450.0 million in net sales. The transaction will expand SpartanNash’s existing retail footprint into northern Indiana and southwestern Michigan and is expected to close early in the first quarter of the fiscal year ending December 28, 2019, subject to customary closing conditions. In addition to its wholesale operations, which serve more than 2,100 independent locations throughout the country, and its MDV military division, SpartanNash currently operates 139 supermarkets across 8 mid-west states. The Company operates under 12 banners, including Family Fare Supermarkets, D&W Fresh Market, VG’s Grocery, Dan’s Supermarket and Family Fresh Market. With an appetite for retail acquisitions, perhaps they will consider bidding on the 8-store Hornbacher’s chain in North Dakota being divested by United Natural Grocers.
On November 21, Cava Group Inc. (CAVA) announced the completion of its acquisition of Zoës Kitchen, Inc. CAVA initially agreed to acquire Zoë’s on August 16, 2018, and paid $12.75 per share, which valued Zoës at $300.0 million. The combined company now operates about 330 restaurants across 24 states, consisting of over 260 Zoës Kitchen restaurants and 70 CAVA restaurants.
On November 26, CVS Health’s acquisition of Aetna Inc. received the final regulatory approval required. The acquisition is expected to close on November 28.
AGGDATA IS TRACKING 5,000+ PLANNED RETAIL OPENINGS & CLOSINGS THROUGH 2020
Pegasus Trucking, LLC, the successful bidder for 85 of the National Stores, DIP’s 269 stores operating under the Fallas Stores banner, received a $20.0 million asset-based credit facility from Second Avenue Capital Partners, LLC to help fund the purchase and ongoing working capital needs. Documents in the bankruptcy case note that Michael Fallas, the owner of National Stores, also has an ownership interest in Pegasus Trucking. Under Pegasus Trucking’s ownership, Fallas Stores will remain headquartered in Harbor Gateway, CA, and continue to sell value-priced apparel, bedding, household supplies, décor items, and other general merchandise using the same vendors. The other 184 locations were liquidated in October.
On November 26, Peak Resorts completed its previously announced acquisition of Snow Time, Inc. for $76.0 million in cash and shares. Peak Resorts paid $70.0 million in cash and issued 1.18 million shares of its common stock at a price of $5.07 per share. Financing for the cash portion of the purchase price consists of a $50.0 million, two-year senior secured term loan from CAP 1 LLC (which will accrue interest at an annual rate of 6.95% and carry no prepayment penalty) and $20.0 million in proceeds from the sale of 20,000 shares of Series A cumulative convertible preferred stock and issuance of accompanying warrants to CAP 1 LLC pursuant to an existing securities purchase agreement. The Company also announced that through October 31, 2018, Snow Time pass sales increased by approximately 20% on a unit basis and by approximately 19% on a revenue basis, compared to the prior year. Approximately 27% of Snow Time season pass holders took advantage of the Company’s buy-up offer and upgraded to the Peak Pass. The acquisition of Snow Time expands Peak Resorts’ portfolio to 17 resorts across the Northeast and Midwest through the addition of three ski resorts in Pennsylvania –Liberty Mountain Resort, Whitetail Resort, and Roundtop Mountain Resort.
As L Brands’ Victoria’s Secret continues to lose share in the lingerie sector, competition is ramping up between brick-and-mortar retailers like Gap and American Eagle’s Aerie, as well as online rivals Adore Me, True & Co., Lively, and ThirdLove. Forbes listed San Francisco-based ThirdLove on its Next Billion Dollar Startup List in October 2018, with an estimated annual revenue of $160.0 million. Adore Me announced in March 2018 an aggressive expansion plan that includes opening 200 to 300 stores over the next five years. On November 21, it opened a 3,600 square-foot store in the Bridgewater Commons mall in New Jersey. It was twice the size of its original brick and mortar location in Manhattan, NY (Midtown). Lively, which manufactures its own products, also has a Manhattan location (in SoHo). True & Co was launched in 2012 in San Francisco and sells both its own labels as well as national brands.
On November 21, GameStop entered into a definitive agreement to sell its Spring Mobile business, which owns and operates 1,289 AT&T wireless stores, to Prime Communications, for $700.0 million, excluding transaction fees and subject to customary working capital and indebtedness adjustments. The transaction is expected to close in the fourth quarter of fiscal 2018. As previously announced, GameStop’s board, together with outside financial advisors, is undertaking a comprehensive review of a wide range of strategic and financial alternatives to enhance shareholder value. In connection with its review, the board determined that the sale of Spring Mobile is in the best interest of the Company and its shareholders, as the transaction generates immediate cash proceeds, and enables the Company to increase its focus on its core video game and collectibles business. Proceeds from the sale may be used to reduce outstanding debt, fund share repurchases, reinvest in its core business to drive growth, or some combination of these options.
Ahold Delhaize - Giant Food
Ahold Delhaize’s Giant Food (Landover, MD) opened two new stores this month in Herndon and Alexandria, VA, replacing smaller stores and offering expanded departments. Both stores also feature full-service pharmacies and self-checkout. Giant Food operates 164 supermarkets in Virginia, Maryland, Delaware and D.C., Store Concentration Map below.
Last week, Payless, DIP opened its first holiday pop-up store in New York City. In addition to the New York location, the Company also opened eight other pop-up stores across the country. The temporary locations, many of which are housed in large, open industrial spaces, have a more modern look and feel than traditional Payless stores. Payless operates over 3,400 stores globally. The Company exited Chapter 11 bankruptcy protection in 2017 after closing about 800 underperforming locations.
H.E. Butt has begun construction on a 1.6 million square-foot warehouse in San Antonio, TX, part of a multiphase plan to develop 871 acres in the city. The cost of the project was not disclosed. Construction is set for completion in late 2019 and the facility is expected to be operational in 2020. The warehouse will provide additional space for dry goods and other grocery products as well as supply volume relief at its other facilities in San Antonio and San Marcos, the Company noted. For more than 50 years the city and surrounding areas have been serviced by a 120,000 square-foot distribution center nearby that could hold only 3,800 grocery items. The new facility will stock more than 17,000 grocery items and have 200 loading docks and 180 trailers. Long term, H-E-B said it plans to develop a campus at the location, which will include operations such as manufacturing, warehouse and transportation.
BJ's Wholesale Club
Last week, BJ’s Wholesale Club announced results for its third quarter and 39 weeks ended November 3, 2018. Comparable club sales for the third quarter increased 3.6%. Excluding the impact of gasoline sales, merchandise comparable sales increased 1.9% representing the fifth consecutive quarter of positive merchandise comparable sales. General merchandise comps were 5%, including double-digits in apparel, leading all categories. Comps in edible grocery increased 1%, non-edible grocery increased 3% and perishables were flat. Deflation accelerated during 3Q, impacting perishable comps (reducing it) by 1.5% or 0.4% for the total merchandise comp for the quarter. Deflation is expected to continue into the fourth quarter but the Company raised the lower end of its full year comp guidance to 1.9% from 1.8% despite this development; YTD merchandise comps were up 2% through the first three quarters. Operating income increased to $90.3 million, or 2.8% of total revenue compared to 2.6% last year.
Meanwhile, BJ’s Wholesale Club announced it plans to expand into southeast Michigan in late 2019 with two stores in Taylor and Madison Heights. The stores will be about 100,000 square feet and include gas stations. The closest BJ's Wholesale Club to metro Detroit is its Avon, OH location, more than two hours away.
Reports also suggest the Company will make a move to the West Coast, with plans to open two San Diego, CA locations in 2019. Until now the Company has operated its 217 warehouse clubs primarily along the East Coast, see below for Store Concentration Map.
Hibbett Sports reported third quarter sales decreased 8.8% to $216.9 million; the decrease included a $17.3 million sales decline due to the week shift from the 53rd week last year, and a $2.4 million decrease due to the sale of the Company’s Team Division in December 2017. Comps inched up 0.1% and e-commerce sales increased 62.2%, representing 8.8% of total sales, up from 5% last year. Gross margin improved to 32.5% from 32% mainly due to fewer clearance markdowns. Logistics and store occupancy expenses declined 3.3%, but increased as a percentage of net sales due to the week shift. SG&A expenses widened to 28.7% of sales from 24.4% of sales last year, due to higher operating expenses related to e-commerce, $1.5 million in non-recurring costs related to the acquisition of City Gear, and deleveraging associated with lower sales. As a result, operating income fell 84.4% to $1.8 million. CEO Jeff Rosenthal stated, “We continue to see good momentum in our branded apparel business, which helped offset softness in our licensed, equipment, and accessories business in the quarter. Footwear comparable sales were relatively flat, although we see potential upside in the fourth quarter as the depth of our premium products continues to improve. Our e-commerce business continues to exceed expectations, and we expect continued traction as we benefit from enhancements to our mobile app and our new Buy Online, Pick up in Store and Reserve Online capabilities.” During the quarter, the Company opened seven new stores, expanded or relocated one store, and closed 24 underperforming locations, bringing its store base to 1,042 stores in 35 states as of November 3.
Best Buy’s third quarter sales increased 2.9% to $9.59 billion, due to a 4.3% increase in comparable store sales, partially offset by the net closing of 297 stores. Most of the store closings (287) consisted of the smaller mobile units, while 10 of the big box stores were shuttered. This was the seventh straight quarter of sales growth. Domestic revenue of $8.76 billion increased 3.1% compared to the same period last year, driven by comparable sales growth of 4.3%, partially offset by the loss of revenue from the previously identified store closures. Domestic online revenue of $1.21 billion increased 12.6% on a comparable basis, primarily due to higher conversion rates and increased traffic. As a percentage of total domestic revenue, online revenue increased 110 basis points to 13.8%, up from 12.7% last year. Quarterly EBITDA margin was flat with a decrease in gross margin offset by improvement in SG&A margin. Gross margin fell on higher transportation costs and the roll out of the Total Tech Support program. TTM EBITDA margin and interest coverage were 6.3% and 153x, respectively.
Gap reported third quarter sales increased 6.5% to $4.10 billion, driven in part by the addition of 49 net new stores since last year. By banner, comps increased 4% at Old Navy and 2% at Banana Republic, but Gap banner comps declined 7%, following a 1% increase last year. The Gap banner sales fell 3% to $1.30 billion, while Old Navy and Banana Republic revenues rose 10.8% and 7.9% to $1.9 billion and $601.0 million, respectively. During the third quarter earnings call, management stated that the Gap banner outlets (roughly 500 stores) are consistent performers, and the online business is growing, but that specialty stores (775 locations) generated only a modest contribution on a cash basis. Management will be evaluating some flagship stores for potential closure, which collectively are a cash drain, in addition to “hundreds” of other stores that are underperforming. The timing and the locations of the closures are being worked out as the Company is negotiating with its landlords. The store closures will initially have a negative cash impact, which the Company will look to minimize; however, approximately $100.0 million of earnings contribution is anticipated from rationalizing the store fleet.
Foot Locker reported third quarter sales were essentially flat at $1.86 billion. However, excluding the effect of foreign exchange rate fluctuations and the 53rd week shift, sales would have been $77.0 million higher, representing a 3.6% growth rate. Comps were up for a second consecutive quarter at 2.9%. Gross margin increased to 31.6% from 31%, but SG&A margin rose to 21.4% from 19.7%. As a result, operating income fell 7.1% to $144.0 million. CEO Richard Johnson commented, “Our accelerating comparable sales and improving bottom line reflect the strategic partnerships with our vendors, as well as our efforts to inspire and empower youth culture and create deeper connections with local communities. We believe we are well positioned to produce even stronger results in the all-important holiday selling season and the fourth quarter overall.” During the third quarter, the Company opened 10 new stores, remodeled or relocated 13 stores, and closed 20 stores. As of November 3, 2018, the Company operated 3,266 stores in 26 countries in North America, Europe, Asia, Australia, and New Zealand. In addition, 108 franchised Foot Locker stores were operating in the Middle East, as well as 10 franchised Runners Point stores in Germany.