Retail News

Rite Aid & Walgreens

Yesterday, Rite Aid announced that it completed the pilot closing and first round of asset sales to Walgreens Boots Alliance (WBA), resulting in the transfer of 97 Rite Aid stores and related assets to WBA. WBA will purchase a total of 1,932 stores, three distribution centers and related inventory from Rite Aid for $4.375 billion. Rite Aid and WBA expect to continue to transfer ownership of the stores in phases over the coming months, with the goal being to complete the transfers in spring of 2018. Rite Aid expects to use a majority of the net proceeds from the transaction to repay existing indebtedness and improve its leverage levels. It currently expects to incur a minimal cash tax payment on this transaction, as the gain it will record on the sale of the assets is expected to be largely offset by its net operating loss carryforwards. As a result of paying down approximately $4.25 billion of debt from the asset sale proceeds, Rite Aid’s debt to EBITDA is expected to improve to the low 4x range.

Publix

Publix Super Markets announced plans to expand its GreenWise Market format beyond Florida to South Carolina. The new Mount Pleasant store will be 25,000 square feet and is expected to open in early 2019. In March 2017, the Company announced plans to “reignite” its GreenWise store concept, which focuses on organic ingredients and products; stores will be smaller than current 37,500 square foot box. The first newly redesigned GreenWise will be in Tallahassee, FL and is expected to debut in late 2018. Publix plans to share additional details related to the new GreenWise format closer to the store opening. It currently has three GreenWise Market stores in Palm Beach Gardens, Boca Raton and Tampa, FL and is aggressively looking for additional GreenWise locations across its operating areas.

Meanwhile, Publix Super Markets announced its expansion into southeastern Virginia with the purchase of a former Martin’s grocery in Williamsburg. The Company has not disclosed when the store, which will be remodeled, will open. Publix acquired 10 Martin’s stores located in Richmond, VA from Ahold Delhaize, pursuant the divestment of 86 other stores as part of the Ahold and Delhaize July 2016 merger.

Kwik Trip

Kwik Trip outlined a $300.0 million capital investment project to meet its rapidly expanding growth initiative. The Company plans to open 40 – 50 new stores annually, up from the 35 – 40 per year it had previously been adding. To support the growth, the Company will invest $113.0 million for a new 200,000, square-foot bread and bun production facility, along with multi-million dollar expansions and improvements to its dairy manufacturing facility, kitchen operations and transportation fleet in LaCrosse, WI. Construction of the new bakery is expected to be completed by late fall 2018. Kwik Trip currently operates 621 stores in Wisconsin, Minnesota and Iowa.

Amazon

While it was expected that Amazon would make an announcement related to its entrance into the pharmacy segment by Thanksgiving, there has been no news yet. Equity research firm Cowen recently released projections indicating the “potential for Amazon to seize a roughly 1% market share in 2018, growing to a 4% market share by 2023. This projection includes distribution through its one or two-day delivery service Prime Now, and the Company’s Whole Foods brick-and-mortar blueprint.” Cowen stated, “Proprietary survey data suggests 67% of Amazon Prime members would purchase prescription drugs through Amazon if they were available.” Cowen also suggested that Amazon could be interested in acquiring Rite Aid, which following its sale of 1,932 stores to Walgreens, will operate about 2,575 stores. It might also look at Rite Aid’s PBM business, EnvisionRx. As we have previously speculated, the most likely initial target for Amazon would be the cash/uninsured market, which might include the acquisition of a discount card program such as GoodRx.

Meanwhile, the increased role traditional pharmacy retailers are playing in the healthcare space, including retail clinics and vertical integration of care coordination and volume control, is one of the protections retailers including Walgreens and CVS Health have against the Amazon threat that Cowen discusses. Cowen identifies Diplomat Pharmacy, which acquired two PBMs in November, also as a potential takeout target for Amazon.

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Neiman Marcus

Neiman Marcus reported first quarter sales increased 3.8% to $1.12 billion, and comps were up 4.2%, marking the Company’s first quarterly comp increase since the fourth quarter of fiscal 2015. The solid comp growth was driven by a 14.4% increase in online sales (which now account for over 32% of revenue), as comps at physical stores were flat. Management commented on its quarterly conference call that Hurricanes Harvey and Irma negatively impacted sales by 100 basis points. It also noted that positive sales momentum continued into the second quarter and that its core customer is “spending again.” The higher sales, and gross margin expansion primarily due to fewer markdowns, combined to push EBITDA 1.2% higher to $123.5 million. Despite the quarterly improvement, debt increased slightly year-over-year to $4.81 billion and continued to negatively impact credit metrics; TTM interest coverage fell to just 1.42x and total debt to TTM EBITDA deteriorated to 11.27. As previously reported, the Company is closing 10 Last Call locations and expects its Hudson Yard store in New York City to open as scheduled in 2019, although with somewhat smaller square footage than originally planned.

Macys

Macy’s announced a cash tender offer to purchase up to $400.0 million of its outstanding Notes, which include 8.75% Senior Debentures due 2029, 7.875% Senior Debentures due 2030, 6.7% Senior Debentures due 2034, 6.9% Senior Debentures due 2032, 6.375% Senior Notes due 2037, 7% Senior Debentures due 2028, 6.9% Senior Debentures due 2029, 6.79% Senior Debentures due 2027, 6.7% Senior Debentures due 2028, 7.6% Senior Debentures due 2025, and 10.25% Senior Debentures due 2021. The tender offer will expire on December 22, 2017, unless extended or terminated. Noteholders must validly tender their notes on or before December 8.

In other news, Macy’s was one of four retailers affected by technical glitches on Black Friday that slowed purchasing activity and transaction processing. In each case, the problems were reportedly resolved within hours. Macy’s confirmed that credit card processing was slowed due to system “over-capacity” problems at stores in Chicago, Washington D.C., and San Diego, amongst other markets, as well as on its website. Other retailers affected included Lowe’s Companies and U.K.-based retailers Perfume Shop and Game. This is the second year in a row that Macy’s experienced a website crash on Black Friday.

In a recent published report citing analysis by investment management and banking firm Cowen, Macy’s real estate reportedly has an estimated value of $16.00 billion, which is much higher than the Company’s market value of $6.40 billion. The Company’s flagship store on 34th Street in Manhattan, NY is worth an estimated $3.30 billion. The building contains more than one million square feet of retail space, and Macy’s spent $400.0 million renovating it between 2012 and 2016. While the Company has no plans to sell this building, as it serves as a tourist attraction, it may eventually consider tapping into the building’s value. Macy’s, in addition to some of its competitors like Nordstrom, has already sold off certain real estate, including a store in Portland, OR that will soon serve as a “creative” office space with a coffee shop and a gym. In addition, next summer Amazon is moving into a former Macy’s store in downtown Seattle, WA, a 470,000 square-foot space which has been turned into offices. At the beginning of this year, Macy’s announced it was closing more than 60 stores, many of which are located in suburban malls, as part of cost-saving measures that will allow the Company to invest $250.0 million annually into its digital business and other growth strategies.

Aldi

Aldi is continuing its expansion into Southern California with plans to open new stores in Santa Ana and Alhambra, CA on November 30. The stores will offer expanded produce and a large assortment of dairy and bakery items. The openings will bring Aldi’s count in Southern California to 46. It launched its first stores on the West Coast in March 2016. By the end of the year, Aldi plans to have 54 stores in Southern California. Other stores are planned for Westminster, Chula Vista, Monrovia, Laguna Woods, La Habra, Glendora, Oxnard and Escondido. Next year, Aldi said it would open 20 – 25 stores in Southern California.

In the East, Aldi will relocate its Heath, NJ store next summer. The expanded store will occupy about half that space and will be upwards of 12,000 square feet.

Hy-Vee

Hy-Vee will open its first Wahlburgers restaurant at the Mall of America in Bloomington, MN in summer 2018. It will be 5,500 square feet. Hy-Vee has an agreement with the Boston-based burger chain to build, own and operate 26 Wahlburgers restaurants. It also serves Wahlburgers’ hamburgers at its full-service Market Grille restaurants. Wahlburgers currently operates 17 restaurants in nine states and Canada.

Maurice Sporting Goods, DIP

On November 27, the Court authorized Maurice Sporting Goods, DIP to access up to $13.4 million of a $17.4 million DIP Facility, provided by BMO Harris Bank, N.A., on an interim basis. A hearing to consider final approval of the DIP Facility is scheduled for December 5. Middleton Management LLC, the stalking horse bidder, made an offer of up to $39.0 million to purchase the Company, subject to higher offers. The offer values the current inventory at $21.0 million and provides for $5.0 million for new inventory. A breakup fee of $150,000 would be payable to Middleton if the transaction falls through, under certain conditions. Qualified bids are due by December 13. The DIP Facility includes a milestone requiring that a sale of the business close on or before December 22.

H.E. Butt

H.E. Butt opened a new 82,000 square-foot store on November 15 in Huntsville, TX, replacing a nearby location. The store includes expanded prepared food offerings and curbside pickup.

Best Buy

In preparation for the holiday season that began last week, Best Buy’s 23 distribution centers switched to operating 24 hours a day to replenish store shelves and fulfill online orders. The Company is looking to better compete with Amazon’s Prime loyalty program; as a result of its efforts, it can now complete most online orders within two days. This was accomplished in part by using stores to also ship items and expanding its carrier network beyond UPS to include U.S. Postal Service and FedEx. The Company is also working on its same-day delivery service, which it expanded to 40 markets this fall through partnerships with third-party delivery firms Deliv and Geodis; it also dropped the price of the service from $14.99 to $5.99. This means that many orders placed by noon on Christmas Eve will be delivered by 6 p.m. that evening. Management indicated that in addition to TVs, appliances are its best-selling product this time of year (right after Black Friday through the first week of December).

Albertsons Companies

Albertsons Companies today announced an agreement with Instacart to enhance its home delivery choices. Under the agreement, Instacart's delivery service is expected to be available in more than 1,800 of Albertsons Companies' stores across the country by mid-2018. This year, Albertsons began rolling out same day delivery and Drive-up & Go, and acquired meal kit company Plated.

Alimentation Couche-Tard

Alimentation Couche-Tard reported second quarter revenue growth of 43.8% to $12.14 billion, primarily due to the contribution from its newly acquired CST Brands network, partly offset by the negative impact of Hurricanes Harvey and Irma, which cost approximately 3,000 lost store days in merchandise and service sales and 5,700 lost store days in road transportation fuel sales. President and CEO Brian Hannasch commented, “The integration of the CST network is going extremely well. Our operation teams are successfully optimizing site layouts, implementing key programs and pushing strategic promotions to increase traffic to those stores. Our strategies allowed us to reverse the negative traffic trend in less than three months. On the synergies side, in less than four months, our annual run rate in cost reductions reached $84.0 million, which puts us ahead of our initial plan and makes us optimistic that we will reach our initial target of $150.0 to $200.0 million in cost reductions over the three years following the close of the transaction.” Total merchandise and services revenues jumped 23.4% to $3.10 billion. Comp merchandise sales, excluding the CST Brands stores network, rose 0.7% in the U.S., 1.6% in Europe and fell 1.6% in Canada. Net earnings rose 35.4% to $435.3 million, including a foreign exchange loss of $17.3 million, hurricane expenses of $4.8 million, a $4.2 million pre-tax accelerated depreciation and amortization expense in connection with the global brand initiative, and acquisition costs of $3.4 million. The Company also noted that its Circle K rebranding project is progressing well, with about 2,000 stores in North America and 1,400 stores in Europe now displaying the Circle K global brand.

New York & Company / Fashion to Figure

This morning, New York & Company announced it entered into an asset purchase agreement to acquire certain assets of Fashion to Figure, including intellectual property rights related to the Fashion to Figure brand, for a cash purchase price of $1.4 million plus up to $1.0 million of fees and expenses. The assets will be acquired by TFT Acquisition LLC in a bankruptcy auction, and subsequently acquired by New York & Company late in the fourth quarter of fiscal 2017. The Company expects to fund the entire purchase price with cash on hand; as of October 28, it had $69.2 million of cash and no borrowings under its asset based credit facility.

All lease obligations remain with the seller. Yesterday, a bankruptcy judge approved an order authorizing a joint venture of SB Capital Group and 360 Merchant Solutions to conduct liquidation sales at all of B. Lane Inc., DIP’s (dba Fashion to Figure) remaining stores. At the time of its Chapter 11 filing on November 13, 2017, the chain operated 26 stores as well as an e-commerce site. Immediately following the filing, it closed seven locations and consolidated store inventory into the remaining 19 locations. New York & Company anticipates contacting various landlords to negotiate satisfactory agreements regarding future lease terms to remain in certain existing Fashion to Figure locations. The Company also anticipates hiring certain former employees of Fashion to Figure, including members of the design, merchandising and e-commerce teams, who are expected to join the Company during the fourth quarter of fiscal 2017. In addition, New York & Company will negotiate with certain market vendors in an effort to secure inventory for the anticipated relaunch of the brand in early February 2018 through its website and select stores. Fashion to Figure was founded in 2004 to provide on trend fashion options for women’s plus-size clothing and related accessories.

Arby's Restaurant Group & Buffalo Wild Wings

Earlier today, Arby’s Restaurant Group announced it will acquire Buffalo Wild Wings (BWW) for $157 per share in cash, in a transaction valued at approximately $2.90 billion, including BWW’s net debt. The agreement, which has been approved by both companies’ boards, represents a premium of approximately 38% to BWW’s 30-day volume-weighted average stock price as of November 13, the latest trading day prior to news reports speculating about a potential transaction. The transaction is expected to close in 1Q18. Following the close of the transaction, BWW will be a privately held subsidiary of Arby’s Restaurant Group, Inc. and will continue to be operated as an independent brand. Paul Brown will continue to serve as CEO of the parent company.

Qdoba & Jack in the Box

According to people familiar with the matter, private equity firm Apollo Global Management LLC is nearing a deal to buy Qdoba Mexican Eats from Jack in the Box for more than $300.0 million. Qdoba has more than 700 restaurants in 47 states and Canada. The deal would be the culmination of a strategic review that Jack in the Box initiated in May, after stating that the chain was not a good fit with the rest of the Company’s dining portfolio. Apollo’s deal for Qdoba could come as early as this week, the sources said, cautioning that negotiations could still end without a deal. Activist hedge fund Jana Partners LLC disclosed a small stake (1.3 million shares) in Jack in the Box earlier this month.

Apollo also owns Chuck E. Cheese, which it took private for $1.30 billion in 2014. Jack in the Box shares jumped 3% to a high of $105.46 on Wednesday’s news but have since retreated to close at $100.70 yesterday.

J. Crew, Chico's FAS & Christopher & Banks

J. Crew, Chico’s FAS and Christopher & Banks each reported disappointing third quarter results in the last week, marked by mid to high single digit comp declines and continued store closures. J. Crew’s sales declined 4.5% to $566.7 million, and comps were down 9% (a 12% decline at J. Crew partially offset by a 13% increase at Madewell). Gross margin expanded as a result of fewer markdowns, leading to a quarterly EBITDA increase of 27.4% to $67.9 million. During the quarter, the Company opened two Madewell stores and one J. Crew location, ending with 574 locations in operation. However, the Company expects to close 39 locations during the fourth quarter, up from the 23 store closures previously anticipated and on top of 11 closures that occurred during the first three quarters (including four during the third quarter). The Company expects to end the year with 535 stores in operation, down from the 574 in operation at the end of the third quarter.

In a similar fashion, Chico’s FAS’ sales declined 10.8% to $532.3 million, primarily reflecting a comp decrease of 8.2%, driven by a lower average dollar sale and a decline in transaction count. By brand, comps were down 14.1% at White House Black Market, 5.8% at Chico’s and 1.7% at Soma. Unlike J. Crew, however, gross margin declined 37%, primarily reflecting the deleverage of store occupancy costs as a percent of sales and store impairment charges related to the hurricanes, partially offset by an improvement in merchandise margin. As a result, operating income was down 18.8% to $25.3 million. The Company indicated that the hurricanes resulted in reduced operating hours or the temporary closure of more than 300 stores, as well as a decline in direct to consumer sales. The impact to income from operations due to lower sales, impairment charges and other incremental hurricane related expenses was approximately $10.0 million. During the quarter, the Company permanently closed eight underperforming locations, including two Chico’s, four White House Black Markets and two Soma stores. It ended the quarter with 1,474 stores in operation.

As reported this morning, Christopher & Banks’ sales fell 7.7% to $98.5 million, and comps were down 5%; management attributed the disappointing results in part to weather, as sales improved with more seasonable weather and the receipt of new holiday merchandise. Due to higher promotions and markdowns to move inventory, the Company’s gross margin rate decreased 300 basis points. As a result, adjusted EBITDA was down 79.1% to $1.4 million. Looking to the fourth quarter, the Company noted that comps to date are up in the mid-single digits, reflecting an increase in transactions and average dollar sales. In its earnings release, the Company announced it recently engaged a commercial real estate company to solicit interest in a sale and leaseback of its corporate facility in Plymouth, MN, which has an estimated value in the low to mid-teen million dollar range. As of November 28, the Company operated 472 stores in 45 states.

The Cheesecake Factory

The Cheesecake Factory recently opened its first restaurant in Canada, in Toronto. The Company currently owns and operates 211 restaurants throughout the U.S., Puerto Rico and Canada, comprised of 197 restaurants under The Cheesecake Factory banner, 13 under the Grand Lux Cafe brand, and one under RockSugar Pan Asian Kitchen.

Everlane

Online apparel retailer Everlane is opening its first two brick-and-mortar stores on December 2 in New York and San Francisco. The 2,000 square-foot New York store and 3,000 square-foot San Francisco store will sell the Company’s best-selling products, including T-shirts, cashmere, denim and shoes. Management indicated that the decision to have physical locations came as a result of customers looking to see products in person before they buy, and for those who prefer to return or exchange items in person. The Company is aiming to both reach new shoppers and interact more closely with existing ones. There have been more opportunities for niche brands to open small-format physical locations under flexible leases, as shopping centers look to fill thousands of vacancies left by traditional retailers. Everlane was founded online in 2011 to sell $15 T-shirts made in a Los Angeles factory. The Company expanded to $35 ties made in a New York factory, then sweatshirts and backpacks. Today, the Company offers more than 500 products manufactured by about two dozen factories, all of which must pay fair wages, offer reasonable working hours and make environmentally friendly decisions. Over the past two years, the brand has experimented with different types of formats, including pop-up shops, “open houses” and most recently a six-week “pop-in” at Nordstrom stores, which Nordstrom indicated was its most successful “pop-in” to date. Everlane expects annual sales to double this year.

Novus

Novus, a footwear retailer that operates 65 stores in Puerto Rico and the Dominican Republic, opened its first U.S. store last week, in Orlando, FL. The Company targets men and women with exclusive brands designed and made in Brazil, Italy, Spain and Asia. In addition to footwear, it sells jewelry and handbags. Management indicated that Orlando was chosen for its large Puerto Rican demographic, and that looking ahead it expects to grow further in the U.S. into different markets “that are similar to our preferences and likings.”

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