October 16, 2018
Sears Holding Corporation
On October 15, Sears Holdings Corporation, DIP filed a voluntary Chapter 11 petition in the U.S. Bankruptcy Court in the Southern District of New York.
Although the Debtor stated that funds will be available for distribution to unsecured creditors, a range of recoveries has not been specified and the recovery will most likely be very thin. It is also unclear whether the DIP Facility will be sufficient to fund operations through the holidays, given the history of ongoing losses even as numerous store closings have been undertaken. The Company’s plan seemingly focuses on 400 of its stores that are reportedly four-wall EBITDA positive (before any lease concessions) and selling them under section 363 of the Bankruptcy Code; the Debtor is in discussions with none other than ESL as the stalking horse bidder. According to the Company’s announcement last evening, the Court granted interim approval of all the Company's first day motions, including authorization to access the $300.0 million senior priming DIP Facility. The Company said it also received authorization to continue paying employee wages and benefits, and to honor member programs including warranties and promotions. Please click here if you are interested in receiving updates on this case.
On October 14, the Bankruptcy Court approved liquidation sales at 184 of National Stores, DIP’s 269 stores (click here to request the list). Store-closing sales will begin immediately and are being conducted by a joint venture consisting of Hilco Merchant Resources, Gordon Brothers Retail Partners, and SB360 Capital Partners. The closing stores are branded as Fallas and Factory 2-U stores across 12 states and Puerto Rico. Click here to see a list of the closing stores. On October 10, we reported that an entity owned by Michael Fallas, the Company’s owner, was the successful bidder for 85 stores, as part of a going concern sale. If the going concern sale does not close by October 19, then store-closing sales will commence for those units as well. The Court stated that it will consider the approval of the going concern sale as part of a separate order.
Walmart lowered its fiscal 2019 adjusted EPS forecast to $4.65 – $4.80 from $4.90 – $5.05. It previously indicated that the Flipkart acquisition could lower full-year estimates by $0.25 – $0.30 per share. For fiscal year 2020, the Company expects U.S. comp sales growth to be 2.5% – 3% and e-Commerce net sales growth to be around 35%. Walmart’s net sales growth for 2020 is predicted to be at least 3%, negatively affected by its deconsolidation of its Brazil operations and reduced tobacco sales at Sam’s Club. Internationally, it expects its net sales growth to be about 5%.
Earlier today, Walmart announced a new partnership with Advance Auto Parts to sell its products and offer delivery and services. On October 12, the Company said it had acquired Bare Necessities, the online women’s lingerie retailer. Terms were not disclosed. The acquisition continues the Company’s strategy of enhancing its online platform with more upscale, fashion forward companies. Bare Necessities carries more than 100,000 products, representing 160 brands of intimates, swimwear, and sleepwear. Bare Necessities CEO Noah Wrubel will lead the intimates category across the Walmart e-commerce site and Jet.com. It will continue to operate as a standalone site, with eventual integration into Walmart’s operations. The acquisition follows last week’s purchase of Eloquii, a plus-size retailer.
Walmart agreed to pay $65.0 million to nearly 100,000 current and former cashiers in California who accused the Company of violating state law by refusing to provide them with seating while they worked. Walmart denied any wrongdoing in the nine-year-old case. The settlement must be approved by a federal judge. In addition to the payout, the Company said it would begin providing seating to its cashiers in California.
According to published reports, Walmart has signed a joint venture with Eko, a developer of interactive video content, and will invest $250.0 million in the venture as well as a funding round. A Company representative said that through W*E Interactive Ventures, Walmart and Eko will develop interactive content spanning toy catalogs to cooking shows. Yoni Bloch, CEO of Eko, will lead the joint venture.
Amazon is opening a new sorting facility in Brooklyn Park, MN. The 350,000 square-foot facility will be the Company’s fourth in Minnesota and will open later this fall. The new Amazon location is separate from a much larger fulfillment center project proposed in Brooklyn Park, a 2.6 million square-foot warehouse with a 40,000 square-foot office building.
In other news, Amazon is partnering with the Travelers insurance company to launch an Amazon storefront, where its customers can buy discounted home security equipment. The security kits can include cameras, motion detectors, water sensors, and Echo Dots, and are cheaper for Travelers customers.
As part of Starbucks’ previously announced plan to return $25.00 billion to shareholders in the form of share buybacks and dividends through fiscal 2020, the Company is currently executing a $5.00 billion accelerated share repurchase (ASR) program. The Company used proceeds from the recently completed transaction with Nestlé S.A. to execute the ASR, effective October 1. The ASR is expected to be completed as early as February and no later than March 2019.
Meanwhile, at a recent conference, Bill Ackman of Pershing Square Capital revealed it owns 15.2 million Starbucks shares at an average cost of $51 per share. As of yesterday’s close, Starbucks stock price was at $56.75. As part of its presentation, Pershing Square said there is “robust” international growth led by China, which it expects will become an increasingly greater percentage of the total Company over time. Starbucks currently has about 3,400 stores in China. Pershing also said there is incremental penetration opportunity for Starbucks in the U.S., particularly in the Midwest and South.
Dine Brands International
Less than three months after announcing that the IHOP brand would be expanding to South America with restaurants in Peru, Dine Brands International announced it plans to expand further into Ecuador. Through an agreement with new franchisee Restaurantes Unidos Restaunsa S.A., a total of 12 IHOP restaurant locations are expected to open throughout Ecuador by 2024. The first location is expected to open in 2019.
On October 10, CVS Health announced that it entered into an agreement with the U.S. Department of Justice (DOJ) that allows it to proceed with its proposed acquisition of Aetna. DOJ clearance is a key milestone toward finalizing the transaction, which is also subject to state regulatory approvals, many of which have been granted. CVS Health’s acquisition of Aetna remains on track to close in the early part of Q4 2018. CVS and Aetna entered into a consent decree with the DOJ, pursuant to which Aetna agreed to sell its individual standalone Medicare Part D prescription drug plans, which have approximately 2.2 million members. The previously disclosed asset purchase agreement between Aetna and WellCare Health Plans, Inc. satisfies the consent decree’s divestiture requirement. Following the close of the transaction, Aetna will operate as a standalone business within the CVS Health enterprise and will be led by members of its current management team.
Walgreens Boots Alliance
Walgreens Boots Alliance’s U.S. retail sales increased 14.4% in the fourth quarter, including the benefit of acquiring 1,932 Rite Aid stores. Management commented that its share of the U.S. prescription market grew 150 basis points to 21.7%. Comparable retail sales increased 0.3%, including a 1.3% increase in comparable pharmacy sales and a 1.9% decline in front-end comp store sales. U.S. adjusted operating income in the second quarter increased 0.1% from the year-ago quarter to $1.40 billion.
In other news, Walgreens plans to open a minimum of 600 medical testing facilities inside its stores, as it looks for new ways to build traffic. The testing labs will be run by LabCorp, one of the nation’s biggest medical testing companies. The announcement follows the demise of Walgreens’ partnership with Therano, which fell apart after the blood-testing startup’s technology failed to work. The move comes just as CVS is acquiring Aetna, which will facilitate CVS offering more services inside and outside its stores, and highlights Walgreens emphasis on employing partnerships over acquisitions as a key to health care offerings and growing retail sales. During its analyst call discussing fourth quarter results, CEO Stefano Pessina noted that partnerships “enable us to quickly align our products, services and people to the needs of the rapidly changing and integrated omnichannel marketplace” and are “vital for our growth.” Walgreens also has a partnership with UnitedHealthcare to test urgent care centers at its stores.
Walmart Canada recently announced it will invest $175.0 million in its network of stores. Several stores across the country will be refurbished or updated. The Company said 23 of its 410 Walmart stores in Canada are set for renovation before February 2019. President and CEO Lee Tappenden commented, “This investment in our stores is part of our commitment to provide our customers with an improved in-store shopping experience. We are modernizing our stores, ensuring a seamless omni-channel shopping experience and meeting evolving customer needs.” Walmart Canada also said it recently expanded its Supercenter format into Newfoundland with the conversion of three stores.
In other news, Walmart Canada has been exploring the sale of marijuana products in its stores, including CBD-infused beverages, although the Company has not made any immediate plans. CBD is linked to a range of health benefits but does not have the psychoactive properties of marijuana. Canada is set to legalize marijuana federally tomorrow. In the U.S., the CBD market is estimated to be a $1.00 billion business.
On October 13, Claire’s Stores announced that it successfully completed its financial restructuring and emerged from Chapter 11, as the Company’s Court-confirmed Plan of Reorganization went into effect. Under the terms of the Plan, the Company eliminated approximately $1.90 billion of debt from its balance sheet and gained access to $575.0 million of additional capital. Claire’s emerged with 2,471 stores in 17 countries and 6,631 concession locations, after shuttering approximately 167 locations during the bankruptcy proceedings.
Allbirds, an online footwear retailer founded in San Francisco, CA in 2016, raised another $50.0 million of Series C venture capital funding in a deal led by T. Rowe Price, bringing the total amount raised to $77.45 million. Other investors include Tiger Global Management, Fidelity Management & Research, and other undisclosed parties. According to published reports, the Company is valued at $1.40 billion. Allbirds plans to use the funding to debut new stores in the U.S., the U.K., and Asia. It opened its first flagship store in New York City last month, and reopened its San Francisco location after it underwent a remodel. The Company also had a limited time pop up store in Toronto. Online, Allbirds is available in the U.S., New Zealand, Canada and Australia, and this month expanded into the U.K. The Company’s focus is on comfortable, fashionable, environmentally friendly footwear.
Published reports indicate that Buzzfeed plans to open a toy store in the Flatiron District of New York City in time for the upcoming holiday season. The 11,000 square-foot space is being sublet from Canadian apparel brand Joe Fresh, which recently vacated. Joe Fresh is a subsidiary of Loblaw Companies. The space includes a selling area in the front and an experiential play area in the back. Buzzfeed, a gossip news site, already sells various types of merchandise including its own beauty brand and kitchen supplies offered through Walmart. Meanwhile, Walmart, Target and Amazon are all expanding their toy offerings. Walmart said it would boost its toy assortment by 30% in stores and 40% online. Target said it would double its new and exclusive toys for the season, and Amazon is planning a toy catalog. BJ’s Wholesale, Costco, Party City, Kohl’s, J.C. Penney and Five Below, among others, are also looking to grab some of Toys “R” Us’ lost share. Even FAO Schwartz, which was owned by Toys “R” Us until two years ago, is opening a new 20,000 square-foot flagship store in New York City on November 16 at Rockefeller Plaza. Toys “R” Us had acquired FAO Schwartz in 2009, but in 2015 shuttered the 45,000 square-foot three-level flagship store in Midtown. FAO Schwartz is currently owned by ThreeSixty, which is working on bringing the banner back. Earlier this year it inked a deal to bring the banner into airports, and last year partnered with Kohl’s to reintroduce certain best-selling items.
Toys "R" Us
While Toys R” Us has shuttered all 800 of its stores, owners of the chain’s intellectual property are actively working on a possible comeback. Earlier this month we reported that lenders were reorganizing the Company’s assets under a new holding company, Geoffrey LLC, which will retain control of the Toys “R” Us and Babies “R” Us brands. At a recent toy industry wholesale event, Geoffrey the Giraffe made an appearance, and the mascot is also being marketed on social media, likely in an attempt to boost the brand’s reputation should Toys “R” Us try to reopen stores this holiday season.
Jack In The Box
On October 9, the National Jack in the Box Franchisee Association revealed that it has called for current Jack in the Box CEO Leonard Comma to step down and relinquish his position and for the board to replace the current leadership team. This call is the aftermath of a majority vote of ‘No Confidence’ from the association’s members at its annual meeting held in July. The membership of the National Jack in the Box Franchisee Association is comprised of 95 franchisees, representing ownership of approximately 2,000 restaurants out of a system-wide total of approximately 2,240 restaurants.
Last week, Schnuck Markets reopened nine of the 19 Shop ‘n Save stores it recently acquired in metro St. Louis, MO from Supervalu. All of the stores were closed for about two-and-a-half days for the conversion to the Schnucks banner, which includes switching out point-of-sale systems, rebranding signage and restocking merchandise. According to Schnucks, it has plans for a broader remodeling “in the near future.” The Company expects to close and reopen the remaining 10 former Shop ‘n Save stores and one standalone pharmacy by the end of this week.
On October 9, Ahold Delhaize’s Food Lion division announced that it completed a $91.7 million investment in 63 stores in the greater Roanoke, VA area. The investment included remodeling the stores and hiring nearly 2,000 additional associates. The stores, which reopened on October 10, feature expanded assortments, more prepared foods and a more efficient checkout process. With the completion of this market, Food Lion has remodeled 712 of its 1,030 stores in the last four years (about 70% of the store base). In August, the Company completed the renovation of 105 stores in the greater Norfolk market. Food Lion plans to continue to remodel additional stores in other markets.
Meanwhile, Ahold Delhaize’s Retail Business Services’ subsidiary, Infinity Meat Solutions, began construction on a new 200,000 square-foot fresh protein packaging facility in Rhode Island. Retail Business Services provides services to six East Coast grocery brands, including Food Lion, Giant Food, GIANT/MARTIN’S, Hannaford and Stop & Shop, as well as online grocer Peapod.
Lidl & Aldi
Lidl is jumping into the Jersey Shore grocery scene, with new stores in Eatonton, Hazlet, and Union all expected to open by mid-November. Lidl will compete directly with an Aldi in Hazlet, which is being relocated to a long-closed Pathmark there. Meanwhile, Aldi opened a new store in nearby Old Bridge last Thursday. Aldi also announced plans to build a store in Ocean Springs, its second store in Mississippi. Although no set date has been announced, it is scheduled to open sometime next year. On October 25 Aldi will open a store in Concord, NH, its seventh in the state. The 19,000 square-foot store will compete with a Shaw’s located down the street. Other competing supermarkets include two Market Baskets, a Hannaford and another Shaw’s.
Treasure Island Foods
Treasure Island Foods closed the final location of its six stores last week, a couple of days ahead of schedule, ending its 55 years in Chicago, IL.Last week, Treasure Island filed a WARN notice with the state that it was laying off 486 workers.
On October 10, Publix opened a 46,800 square-foot store in Ringgold, GA. In addition to traditional offerings, the store will feature expanded organic and prepared foods, and a full-service and drive-through pharmacy.
Big Y Foods
Big Y Foods has proposed a new convenience store and gas station where a BP station currently stands. Plans call for a five-pump gas station as well as a 2,128 square-foot convenience store with a large seating area; Big Y operates a supermarket across the street.
Last week, Wawa began construction on its first three locations in Miami-Dade County. The stores are expected to open in May 2019; construction on three additional stores there will begin in early 2019. The Company’s goal is to open three new stores every year for the next few years, with an eye to opening at least 50 new stores in Miami. That would make it one of Wawa’s largest Florida markets. Wawa recently made its South Florida debut when it opened five stores in Broward County over the past year, with additional units in the pipeline there.
Wayfair announced plans to open two temporary stores in empty shopping mall spaces, one in Massachusetts and one in New Jersey, for the holiday season. According to the Company, the pop-up stores will test how offline customers interact with the brand, fine-tune its merchandising strategy, and push traffic back to Wayfair’s online store. Pop-ups also give customers a chance to touch and feel items, rather than rely solely on online reviews.
Supervalu reported results for its second quarter and 28 weeks ended September 8. During the quarter, Wholesale net sales increased 3.6% to $2.84 billion, and Retail net sales fell 3.1% to $650.0 million, with flat comps. Corporate fees earned under services agreements were $25.0 million, down from $40.0 million last year. The Company posted an operating loss of $62.0 million, compared to operating income of $17.0 million last year.
In its October 12 10-Q filing, Supervalu said the FTC has cleared the way for its deal to be acquired by United Natural Foods, as the Hart-Scott-Rodino waiting period has expired. The Companies expect the $2.90 billion transaction, announced in late July, to close in 4Q18, pending regulatory and shareholder approvals and other customary closing conditions.
Costco reported September sales growth of 10.3% to $13.64 billion. Total comps, excluding gas and currency exchange rates, increased 7.3%, consisting of growth of 7.7% in the U.S., 6.4% in Canada, and 6.2% in Other International. E-commerce sales rose 25.7%.
Last week, L Brands, Cato, The Buckle, and Zumiez reported their sales and comps for September. It should be noted that L Brands’ sales increased, but Cato, Buckle, and Zumiez experienced declines from the prior year. L Brands and Zumiez generated positive comps, and Cato and Buckle’s comps decreased. The individual results are as follows:
L Brands reported September sales increased 7.8% to $1.06 billion, and comps were up 5%. For the year-to-date period, sales increased 7% to $7.015 billion, and comps rose 3%. Victoria’s Secret’s September combined comps were up 1%, on the strength of online sales (store only comps were down 2%) and growth in the lingerie and beauty lines. Bath & Body Works’ September comps were up a solid 13%, including a 10% increase in store comps. Company-wide merchandise margin was down, driven by continuing promotional activity at Victoria’s Secret. L Brands announced it is pursuing “all alternatives” for its Canadian retailer La Senza, which sells lingerie and intimate apparel. La Senza currently owns and operates 126 stores in North America and 188 non-Company owned international locations; revenues and operating losses for 2018 are estimated at $250.0 million and $40.0 million, respectively. This follows the announced closing of 23 Henri Bendel stores along with its online operations, which were generating $45.0 million in operating losses on $85.0 million in sales.
Cato’s September sales decreased 0.6% to $69.4 million, and comps were down 1%. Year-to-date sales were flat at $568.7 million, and comps increased 1%. CEO John Cato commented, “September same-store sales were below our expectations. However, same-store sales in September had a slight negative impact from the net result of Hurricane Florence this year offset by Hurricane Irma last year, both causing business disruption and closed stores.” As of October 6, the Company operated 1,350 stores in 33 states.
The Buckle’s September sales decreased 3.2% to $75.4 million, and comps were down 2.4%. Year-to-date sales decreased 1.7% to $556.6 million, and comps fell 1.1%. Buckle currently operates 454 stores in 43 states, most recently closing one store in September.
Zumiez’s September sales decreased 8% to $77.7 million, driven by a shift in the retail calendar negatively impacting growth by $8.0 million compared to the prior year. Comps increased 1.2%, compared to a 9.3% increase last year.