September 11, 2018
Essendant & Staples
Essendant Inc. (ESND) issued an update on the offer to be acquired by Staples, Inc. Management stated that the Staples proposal to acquire Essendant for an all cash consideration of $12.80 per share is superior to Essendant’s previously announced plan to merge with Genuine Parts Company (GNC). Essendant plans to terminate the agreement with Genuine Parts, which has three days to propose amendments to the merger agreements. GPC subsequently announced it still believes its proposal is superior, but said it will not issue a counter-offer. Upon termination of the agreement with GPC, Essendant will be required to pay a termination fee to GPC in the amount of $12.0 million.
CVS
CVS Health’s planned acquisition of Aetna is reportedly close to receiving approval from antitrust federal regulators. The approval, expected within a few weeks, will likely require the companies to sell off some of their assets; however, the amount has not been determined. WellCare, a Tampa, FL-managed care provider for government-sponsored health programs, is reportedly a potential buyer for some of the Medicare Part D prescription drug business that might be divested. WellCare completed its $2.50 billion purchase of Meridian, a privately held, for-profit managed care organization in the U.S., on September 1. With Meridian, WellCare is expected to have about $23.00 billion in annual revenue. Meanwhile, the purchase of Express Scripts by Cigna is also expected to get the go-ahead. That $54.00 billion deal reportedly may go through without any required divestitures.
On September 7, Teamsters Local 727, which represents nearly 10,000 workers throughout the Chicago, IL area, filed an unfair labor practice charge against CVS as a result of the Company’s bad faith bargaining, after “negotiators continued delay tactics and refused to provide the union with multiple dates for negotiations.” Local 727 demanded a return to negotiations after nearly two years of CVS delaying progress in federal mediation and refusing to speak to the bargaining committee. It is the union’s hope that the NLRB will determine that these actions by CVS were in bad faith and order CVS negotiators to provide more dates and meet more frequently. The Local 727 bargaining committee and CVS will hold their next meeting on September 21;the union has received no other dates from CVS.
Big Lots
On September 5, Big Lots announced that it has entered into a new $700.0 million, five-year unsecured credit facility. The new facility replaces a similar facility that was set to mature May 30, 2020; the new agreement will mature August 31, 2023. As of August 31, 2018, the Company had $351.0 million outstanding on the line and $13.0 million in letters of credit, leaving an estimated $336.0 million in availability.
Wawa
Wawa agreed to pay employees $25.0 million to settle a lawsuit accusing Wawa of forcing them to sell their Company stock at an unfair price. The settlement will benefit about 2,300 current and former Wawa employees who invested their retirement savings in the privately held Company’s stock. The workers say Wawa wrongly forced them to sell the shares held in their employee stock ownership plan at $6,940 per share in 2015. This share price was below market value at the time and $712 below the share price three months after the forced sale. Wawa operates more than 800 convenience stores in Pennsylvania, New Jersey, Delaware, Maryland, Virginia, Florida, and Washington, D.C.
Ahold Delhaize
Ahold Delhaize provided an update on its €2.00 billion share repurchase program announced on November 8, 2017. The Company repurchased 2.4 million of its common stock from September 3 up to and including September 7 at an average price of €20.84 per share for a total consideration of €50.2 million. The total repurchased under this program to date is 77 million common shares for a total consideration of €1.51 billion.
In other news, Ahold Delhaize’s Giant Food Stores has agreed to acquire a Darrenkamp’s store in Lancaster, PA. Once the purchase is complete, Giant will close the store temporarily to remodel it. Currently, Giant operates eight stores in Lancaster County. The acquisition comes as the Company is in the midst of a $22.0 million investment in the county, announced in June; the investment includes a new e-commerce hub, four store remodels, lower prices in stores and a new Lititz fuel station. Darrenkamp’s is closing its three other stores by early November.
HBC (Hudson's Bay Company)
HBC (Hudson’s Bay Company) announced it entered into definitive agreements with SIGNA Retail Holdings, a European retail and real estate operator, to form a strategic partnership for its European retail and real estate assets. HBC Europe’s retail operations will merge with SIGNA’s Karstadt Warenhaus GmbH, with HBC taking a 49.99% interest in the combined businesses. The deal primarily includes two banners, Galeria Kaufhof and Karstadt, but also includes other HBC and SIGNA banners. Together, these businesses generated approximately €5.40 billion in total sales during fiscal 2017. The new retail Company will be led by Dr. Stephan Fanderl, CEO of Karstadt. HBC and SIGNA will share six board seats and have joint oversight of all major decisions. SIGNA will also acquire a 50% interest in HBC’s German real estate assets, and a 50-50 joint venture will be formed to own and manage HBC’s German real estate assets. These transactions will generate net proceeds to HBC of €411.0 million ($616.0 million), and value the German real estate assets at a total of €3.25 billion ($4.88 billion), compared to the total Galeria Kaufhof purchase price of €2.51 billion ($3.77 billion) when HBC acquired it in 2015.
Dine Brands Global
On September 5, Applebee’s Funding LLC and IHOP Funding LLC, each a subsidiary of Dine Brands Global, replaced its existing $100.0 million revolving credit facility with a new $225.0 million facility with more favorable interest rates.
PetSmart
Wilmington Trust, the agent for PetSmart’s term loan lenders, has countersued to prevent the transfer of 36.5% of the equity in Chewy.com to the Company’s private equity owners and a subsidiary set up by the Company. Wilmington alleges the transfer is in violation of the loan and bond documents; it states the transfer violated the fixed ratio requirements, served no business purpose, and that the action was a fraudulent transfer due to PetSmart’s insolvency at the time of the transfer. The Southern District of New York will now have to sort this out and determine where the equity properly resides or, more likely, determine if they had the right to make the transfers.
The Michaels Companies
The Michaels Companies’ board authorized a new share repurchase program for up to $500.0 million of its common stock. Since the Company’s IPO in 2014, it has generated nearly $2.00 billion in cash from operations, of which $900.0 million has been allocated towards share repurchases and more than $500.0 million towards debt reduction. When combined with its remaining authorization, the Company has a total authorization of $600.0 million as of September 7, 2018.
Cracker Barrel
Cracker Barrel announced the closing of a new five-year, $950.0 million revolving line of credit, which will replace its previous $750.0 million revolver that would have matured on January 8, 2020. The Company had $400.0 million in outstanding borrowings under the previous revolver at the time of closing, which will likely be repaid with borrowings under the new revolver.
Brinker International
Brinker International announced that Kelli Valade, president of its Chili’s banner, will leave the Company, effective September 14, to become CEO and president of research firm TDn2K. Brinker’s CEO Wyman Roberts will assume Ms. Valade’s responsibilities until a permanent replacement is found. Mr. Roberts previously served as president of Chili’s from November 2009 to June 2016.
HCA Healthcare
HCA Healthcare announced that President and COO Sam Hazen will be promoted to CEO, effective January 1, 2019. Mr. Hazen has also been appointed to the board, effective immediately, increasing its membership to 12. Mr. Hazen will be replacing current Chairman and CEO Milton Johnson, who will retire as CEO but remain chairman until the annual shareholders’ meeting on April 26, 2019. At that time, the board plans to appoint board member Thomas F. Frist III as chairman. Mr. Frist has been on the board since 2006 and is the son of HCA’s founder, Thomas Frist Jr.
Whole Foods
A group of Whole Foods employees stepped up efforts to unionize the Company in an email sent to thousands of workers last Thursday, citing a list of grievances stemming from before Amazon’s purchase of the Company last year. “In the last three years, we have experienced layoffs, job consolidations, reduced labor budgets, poor wage growth, and constantly being asked to do more with less resources and now with less compensation…. Jeff Bezos should not have earned $150.00 billion while the majority of his workers live paycheck to paycheck and do not receive profit sharing.” One of the chief complaints is that Whole Foods reportedly stopped granting stock options to lower-level employees after Amazon’s acquisition last year. The employees are fighting for better pay, benefits, and profit sharing, according to the email. A Whole Foods representative responded by saying the Company believes its wages and benefits are competitive with the rest of the market and pushed back on the need for a labor union.
Store Activity
Stater Bros.
Stater Bros. is closing all 22 of its remaining in-store SuperRx Pharmacies and transferring that business to CVS in order to concentrate on its core food business. Financial terms were not disclosed. The Company expects to complete the sale of assets to CVS later this month; when the deal is complete, pharmacy records and inventory from the 22 locations will be transferred to nearby CVS stores. Stater Bros. plans to close the SuperRx locations by September 28; over the next few months, the former pharmacy spaces will be remerchandised, while supermarket operations remain intact. Stater CEO Pete Van Helden commented, “This business decision will allow the company to grow areas of our core food business that meet the evolving food needs and shifting grocery preferences of our customers.”
Walgreens
Retail clinics operated by Norton Health will open in eight Walgreens stores in the Louisville, KY area, including three in southern Indiana and five in Louisville. The clinics, which already exist, will transition to Norton Healthcare in early 2019. They will be named Norton Prompt Care at Walgreens. Until then, Walgreens will continue to manage the clinics. This is just another example of how Walgreens is relying on partnerships to expand its healthcare offerings.
In other news, yesterday Walgreens and Fred’s, Inc. announced a definitive asset purchase agreement, pursuant to which Walgreens will acquire pharmacy patient prescription files and related pharmacy inventory from 185 Fred’s stores across 10 Southeastern states for $165.0 million, subject to adjustment, plus an amount equal to the value of related inventory. Fred’s will continue to operate its retail stores at most of these locations after the pharmacies close; once the transaction is complete, Fred’s will still operate approximately 162 pharmacies across nearly 600 stores. The transaction is part of a previously announced plan by Fred’s to improve shareholder value by monetizing non-core assets through strategic transactions. The companies expect the file transfers to begin in 4Q18 and be completed in 1Q19.
ALDI
ALDI issued a press release announcing plans to fill more than 1,000 permanent positions across various locations, warehouses and corporate roles in September and October. The Company previously reported it would invest over $5.30 billion to remodel and expand to 2,500 stores by the end of 2022, including adding 25,000 new jobs in stores, warehouses and offices.
Winn-Dixie
On September 8, Southeastern Grocers’ Winn-Dixie reopened three newly remodeled stores in Louisiana, in Covington (2) and Mandeville. Features include a new façade, a modernized store design, an updated fresh produce department, expanded prepared and grab-and-go foods, an improved deli, more beer offerings, an expanded bakery department, and a larger HBC section. According to a Company spokesperson, since the summer of 2017, Winn-Dixie has remodeled eight stores in Louisiana — one each in Baton Rouge, New Orleans East, Laplace, Luling, Marrerro and Mandeville, and two in Covington. The renovations are part of Southeastern Grocers’ planned improvements in the wake of its May 2018 emergence from Chapter 11 bankruptcy protection, including “nearly 100 store remodels and new store concepts just this year.”
Giant Eagle
Giant Eagle acquired a former Toys “R” Us building in Monaca, PA for $3.75 million. The store and 100 other Toys “R” Us buildings were put up for auction after it went bankrupt and closed all of its stores in the U.S. Giant Eagle has not disclosed its plans for the location.
Grocery Outlet
A Grocery Outlet Bargain Market in Spokane, WA recently closed after three years in operation. A Company spokesperson said the primary reason for the closure was because the aging building was becoming too costly to update.
Starbucks
Starbucks opened its first store in Italy, a 25,000 square-foot Starbucks Reserve Roastery in Milan, on September 7. Italy is the Company’s 78th global market, and the location is Starbucks’ third under the Roastery format; its Seattle Roastery opened in 2014, and its Roastery in Shanghai debuted in 2017. The Company plans to bring additional cafés to Milan with licensed partner Percassi beginning late 2018. Starbucks opened its first store in Europe 20 years ago in London. Since then, it has grown in partnership with strategic licensees to more than 3,100 stores in 40 countries across Europe, the Middle East and Africa.
Central Network Retail Group and Mac's Hardware
The Central Network Retail Group (CNRG) will acquire 14 Mac’s Hardware locations throughout the Midwest. Mac’s Hardware employs roughly 200 workers in North Dakota, South Dakota and Minnesota. The business was established in 1965 by Otto McWethy, and it focuses on selling surplus goods to customers. According to Chairman Chuck McWethy, the acquisition provides future opportunities to expand Mac’s footprint and better serve customers. Under the agreement, Mac’s Hardware stores will continue to operate under their existing brand name and all current employees will continue working at the 14 locations. CNRG operates more than 104 hardware stores, home centers, and lumberyards throughout 14 states across the U.S.; Jimmy Smith (president of Natchez Home Center), and Boyden Moore (president of Tyndale Advisors, a whole-owned subsidiary of Orgill) founded CNRG in 2011.
Walmart
Last Wednesday, Walmart announced that it is testing a crowd-sourced delivery platform service called Spark Delivery to get online grocery orders to customers faster. Walmart is piloting the program through a partnership with Bringg, a delivery logistics technology platform. The service is currently being piloted in Nashville, TN and New Orleans, LA, and will debut in “a few more metro areas” this year, according to Walmart. Spark Delivery utilizes independent drivers who partner with Delivery Drivers, a nationwide firm that specializes in last-mile contractor management, to complete deliveries. The drivers use the Spark platform to sign up for slots that work best for their schedule, as well as access order details and navigation assistance. The program directly competes with Amazon Flex, which hires individual drivers to deliver packages.
Separately, last week Walmart announced it would launch a premium online outdoor store, under its Moosejaw subsidiary, selling high-end hiking boots, camping gear and outdoor apparel. According to a published report, the Company is receiving blowback from certain brands expressing concern about low pricing, with outdoor gear manufacturers Leki, Deuter and Black Diamond Equipment asking to be removed from Walmart’s website. Walmart reportedly has complied with the requests. The report states, “The dust-up highlights the pressures faced by both brands and retailers as they struggle to adapt to the rise of online buying. Brands are looking to boost sales online while still controlling the price and selection available. Traditional retailers are more aggressively facing off with Amazon, ensnaring brands. For Walmart, the outdoor-store challenges point to the balancing act of maintaining its reputation for low prices while attracting more premium brands that want to keep prices high.”
H.E. Butt
H.E. Butt signed a long-term lease for a two-story, 81,000 square-foot technology facility and innovation lab in East Austin, TX. Plans call for the recently renovated industrial warehouse to be transformed into a “world-class” creative and collaborative workspace for H.E. Butt’s digital team and Favor’s (on-demand delivery service) corporate headquarters. H.E. Butt has steadily extended its online grocery reach via H-E-B Delivery and H-E-B Curbside service, now offered at more than 145 stores in Texas and slated to become available at 165 stores this year. Overall, the Company operates 400 stores in Texas and Mexico.
Amazon
Amazon Go’s cashier-less concept could be expanding to New York City. Amazon posted a number of NYC job listings on its website last week. The concept features breakfast, lunch, dinner and snack options prepared by Amazon chefs across local kitchens and bakeries. It will also feature grocery essentials. There was no indication of how big the store will be or when it will open. The job listings come after Amazon Go opened its third location in Seattle last Monday. Its first store opened in January following by its second on August 27. The Company plans to expand the concept into other cities, including Chicago and San Francisco.
Earning Releases
Sears Hometown and Outlet
Sears Hometown and Outlet’s second quarter sales decreased 12% to $431.0 million, driven 149 net store closures since last year, partially offset by a 0.9% increase in comparable sales, which followed a 2.1% decrease during the same period last year. The lawn, garden and tools categories were among the best performers, while home appliances and mattresses underperformed the comp store sales average. Gross margin expanded 170 basis points to 22.8% due to sourcing improvements and lower markdowns in the Outlet segment, partially offset by lower margins in the Sears Hometown segment. SG&A margin improved 90 basis points, reflecting lower occupancy, IT, and commission expenses, and the closure of underperforming units. Quarterly EBITDA improved to $13.3 million, from $2.4 million last year, and EBITDA margin improved 260 basis points. TTM EBITDA margin and interest coverage remained negative. During the second quarter of 2018, the Company opened two stores and shuttered 101 stores, including 98 of 109 announced closings during the quarter. The remaining 11 stores are expected to be closed in the third quarter.
GameStop
According to DealReporter, GameStop Corp. hired Perella Weinberg Partners as an advisor to run a formal auction for the sale of the Company. Currently, there are two private equity firms, Sycamore Partners and Apollo Global Management, who have expressed interest in a potential takeover. This news came the day before GameStop reported second quarter results, in which sales decreased 2.4% to $1.65 billion, and comps declined 0.5% (2.4% increase in the U.S., offset by a 6.4% decrease internationally). New hardware sales increased 20.1%, driven by the launch of the Xbox One X and continued strong sales of the Nintendo Switch and PS4. However, new software sales decreased 18.5% primarily due to the lack of significant title launches during the quarter. Pre-owned sales declined 9.9%. Collectibles sales increased 15.7% to $141.7 million, driven by continued expansion of licensed merchandise offerings, new and improved product offerings, and notable growth in apparel. Technology Brands sales declined 10.3% to $168.9 million, primarily due to store closures over the past year. Operating income plummeted 50.5% to $21.6 million.
The speculation on the Company’s buyout has been discussed for the past three months. After news of the advisor hiring, the public market reacted positively as GameStop’s share price jumped 15.7% on September 5 to $16.26, valuing the business at $1.66 billion market capitalization. Continued interest amongst private equity investors is not surprising given 1) the Company’s $9.07 billion in TTM sales as of the second quarter ended August 4, 2018; 2) cheap valuation as the business currently trades at 0.2x sales and 3.4x EBITDA; and 3) GameStop’s focus to diversify its business from hardware and console sales, which are in secular decline, as the gaming industry shifts towards digital, cloud, and e-sports. Currently, the Company’s non-core segments (digital, technology brands, and collectibles) represent $1.62 billion of TTM sales (~18%), which still remains a relatively small percentage to transform the business.
Duluth Holdings
Duluth Holdings reported second quarter sales increased 28.3% to $110.7 million, fueled by new stores, a growing contribution from its women’s business, and customer demand for its spring and summer products. The Company posted its 34th consecutive quarter of increased sales over the prior year. Sales growth was driven by a 5.5% increase in direct sales and a 74.4% growth in retail sales, as a result of operating 16 more stores than in the prior year period (the Company now operates 40 stores nationwide). Gross margin decreased 50 basis points to 56.2% from 56.7% in the prior year’s second quarter, primarily attributable to a slight increase in product margin, which was more than offset by a decline in shipping revenue and an increase in freight costs. Adjusted EBITDA rose 38.6% to $13.1 million. During the second quarter, the Company opened six retail stores in Colorado Springs, CO; Lubbock, Denton, and Arlington, TX; Portland, OR; and Columbus, OH. The six stores joined two stores opened during the first quarter, and management indicated it is on track to open seven more stores during the second half of the year. The average square footage of the eight stores opened so far this year is 16,500 square feet.
Five Below
Five Below’s second quarter sales increased 22.7% to $347.7 million, and comps were up 2.7%. The Company opened 34 new stores and ended the quarter with 692 stores operating in 33 states (see below for store concentration map), an increase of 18.5% from the prior year period. Operating income rose 15.7% to $30.4 million. CEO Joel Anderson commented, “With our increasing scale, digital marketing expansion and store densification strategy, our brand awareness is growing and we are seeing great opportunities for product, real estate and talent. We believe we are well positioned to continue to execute in the second half.”
PriceSmart
PriceSmart announced that August net sales increased 4.4% to $248.8 million. For the 12 months ended August 31, sales rose 4.9% to $3.05 billion. For the five weeks ended September 2, comparable warehouse sales were flat. For the 52-week period ended September 2, comps increased 2.3%. There were 41 warehouse clubs in 12 countries and one U.S. territory in operation at the end of August, two more than the prior-year period. PriceSmart plans to release fourth quarter and fiscal 2018 results on October 25.
The Cato Corporation, The Buckle, L Brands, and Zumiez
The Cato Corporation, The Buckle, L Brands, and Zumiez reported their comps and net sales for August. August sales and comp growth were satisfactory for Zumiez, Cato, and L Brands, but Buckle stumbled, following a strong performance in July. The following summarizes the four Companies’ results:
Cato’s sales in August rose 0.4% to $56.4 million, and comps were up 5%. President and CEO John Cato, stated, “August same-store sales exceeded our expectations. However, same-store sales in August were positively impacted by Hurricane Harvey last year, which caused store closures and business disruption."
L Brands’ August sales grew 1.7% to $856.3 million, on comp growth of 1% compared to the prior year period. Victoria’s Secret comparable sales were down 5% due to flat lingerie comps and declines in the Pink brand, which offset growth in the beauty business. Bath & Body Works’ comps were up a solid 15%, from strong product demand. Company-wide merchandise margin was down, driven by continuing promotional activity at Victoria’s Secret.
Buckle’s sales fell 6.3% to $75.2 million, driven by a 0.7% decline in comps. While there has been some improvement in 2018, Buckle has yet to deliver consistent sales performance.
Zumiez’ momentum continued as sales rose 9% to $107.4 million in August, driven by a healthy 9.5% increase in comps. Zumiez also reported second quarter sales increased 13.9% to $219.0 million, and comps were up 6.3%. In addition, the Company recorded an operating income of $6.7 million, compared to a loss of $762,000 in the prior year period.
CEO Rick Brooks commented, “Our differentiated merchandise offering combined with our authentic brand positioning and seamless multi-channel shopping experience continue to drive robust comparable sales gains. We also expanded product margins by 30 basis points through increased full price selling and meaningfully leveraged our expenses on higher sales. The broad based improvements across our business fueled a marked improvement in profitability compared with a year ago.”
Casey's General Stores
Casey’s General Stores reported a first quarter sales increase of 23.6%, to $2.59 billion, on a 35% rise in fuel sales to $1.65 billion, a 7.9% advance in total grocery and other merchandise revenue to $644.8 million, and a 7.3% gain in total prepared food and fountain revenue to $281.0 million. Fuel same-store gallons sold were up 0.5% with an average margin of 20.5 cents per gallon, grocery and other merchandise comps were up 3.2% with an average margin of 32.4%, and prepared food and fountain comps were up 1.7% with an average margin of 62%. On the expense side, the Company noted that its focus on reducing hours worked in its stores and changes to 24-hour and pizza delivery locations allowed it to manage store-level operating expenses effectively, but higher fuel prices caused a significant increase in credit card fees and fleet fuel expenses compared to a year ago. Profit increased 23.7% to $70.2 million. At the end of the first quarter, Casey’s operated 2,085 stores, a net increase of 12 stores compared to the prior-year period.
President and CEO Terry Handley commented, “The combination of recent investments made in expanding our store count, a more proactive strategic pricing approach in all areas of the business, continued focus on reducing labor hours inside the stores, the favorable impacts of tax reform, and share repurchases contributed to strong diluted earnings per share growth. We continue to invest in the Value Creation Plan that we believe will drive long-term shareholder value, and we remain on track to begin realizing benefits in the second half of fiscal 2019.”
Alimentation Couche-Tard
Acquisition activity pushed Alimentation Couche-Tard’s first quarter sales up 50.2% to $14.79 billion. Global fuel volumes increased 32%, as fuel revenues reached $10.90 billion, up from $6.80 billion last year, due to higher retail prices and acquisitions. Same-store sales increased 0.6% in the U.S. but were down 0.1% in Europe and down 3.3% in Canada. Merchandise sales rose to $3.55 billion from $2.78 billion. Same-store sales were up 4.2% in the U.S., 7.3% in Europe and 6.6% in Canada.Net income surged 25% to US$455.5 million. CFO Claude Tessier noted that the Company’s strong cash flow generation has prompted it to accelerate its deleveraging plan.
Couche-Tard is in the process of switching its global brand to Circle K everywhere but Quebec. To date, more than 3,650 stores have been rebranded in North America and more than 1,700 in Europe. As of July 22, the Company’s annual synergies run rate for the CST Brands acquisition reached approximately $189.0 million. The Company expects synergies to reach $215.0 million in the next two years.
On July 3, Couche-Tard divested 13 retail sites in the Canadian Atlantic provinces for approximately $30.0 million, resulting in a gain of $4.5 million. These stores, which will continue to be operated by Couche-Tard, were previously acquired in the CST brands deal. The Company completed the construction, relocation or reconstruction of 10 stores during the quarter. As of July 22, 32 stores were under construction and should open in the upcoming quarters.
Christopher & Banks
Christopher & Banks’ second quarter sales rose 0.9% to $87.4 million, following a 2.6% decline in the first quarter, as a result of stronger comps and higher e-commerce sales, which offset operating 12 fewer stores since last year’s second quarter. Store comps increased by 0.8%, compared to a 0.6% decrease in the same period the previous year, due to a higher average basket size and a favorable calendar shift in 2018. While store traffic declined, e-commerce sales grew 15% from last year, and made up 22% of total sales. Lower occupancy costs contributed to a slight improvement in gross margin to 28.5%, but SG&A margin deteriorated 20 basis points from higher consulting fees, and continued investments in the e-commerce channel. The Company expects SG&A margin to improve in the second half of the fiscal year. Overall, quarterly EBITDA and EBITDA margin were negative $5.4 million and -5.1%, respectively, while both TTM EBITDA margin and interest coverage remained negative. During the quarter, the Company closed one MPW store, and no new stores were opened, for a net one store reduction to 461 stores. The retail square footage was 2.5% lower than the second quarter of last year. Capital expenditures declined 24% to $0.8 million from lower store construction expenses.
Destination Maternity
Destination Maternity reported a 1.2% increase in second quarter comps, following a 3.4% decline in the second quarter last year. A 19.4% increase in e-commerce sales more than offset a 3.3% decline in store revenues and accounted for the turnaround in comps. Sales fell 1.9% to $96.4 million due to the net closure of 27 retail stores since the same period last year. E-commerce continued to grow and represented 24% of total sales, up from 20% last year, but it pressured margins. Aggressive promotions to reduce old inventory also contributed to the 130 basis point contraction in gross margin to 51.7%. SG&A margin improved 120 basis points from lower employee costs and store occupancy expenses. Overall, EBITDA was essentially flat at $4.0 million, while TTM EBITDA continued its negative trend, falling 25% to $10.3 million. TTM interest coverage of 2.4x remains below our 3.0x warning threshold, and total debt to TTM EBITDA deteriorated to 3.5x, despite an 8.4% decrease in debt levels. Management reiterated that it would focus on improving profitability through reductions in SG&A expenses, stabilizing store comps and growing e-commerce sales. During the quarter, the Company invested $1.4 million on IT and two new store locations; it closed six stores, for a net of four store closures, ending the quarter with 480 Company-operated locations. For 2018, the Company expects to open only three stores and close between 20 and 25 units.
Urban Outfitters
Urban Outfitters announced retail segment comps (as of September 3) for the third quarter of fiscal 2019 increased 10%. This represents continued double digit growth, as second quarter comps increased 13% (including 17% at Free People, 15% at Urban Outfitters, and 11% at Anthropologie), and 10% in the first quarter. The Company operates 246 Urban Outfitters stores, 228 Anthropologie stores, 135 Free People units and 12 restaurants.
Francesca's
Francesca’s second quarter sales decreased 5.6% to $113.0 million, with comps down 13% on top of a 3% decrease last year. The comp decline was primarily due to decreased store traffic, partially offset by sales from 50 net new locations added over the past year. The Company opened four new stores and closed six underperforming locations during the quarter, bringing its total store count to 742 at quarter end. Gross margin decreased to 39% from 46.3%, due to lower merchandise margin and higher occupancy costs. Merchandise margin decreased due to higher markdowns and marked-out-of-stock charges as a result of the Company’s in-season clearance strategy and in order to transition stores to its new merchandising direction. As a result, operating income plummeted 93% to $83,000. For the third quarter, sales are expected to be $105.0 million – $110.0 million, assuming a comp decrease of 3% – 8% (last year’s comps were down 18%). The Company plans to open one new store and close three underperforming stores during the third quarter.
Barnes & Noble
Barnes & Noble’s first quarter sales declined 6.9% to $794.8 million, driven by online sales falling 14%, three net store closures and a 6.1% drop in comparable store sales (on top of a 4.9% decline last year). However, management noted that comp declines are moderating, with comps declining just 0.8% in August. Gross margin eroded 100 basis points from higher occupancy costs and an unfavorable sales mix in NOOK, while SG&A costs improved 50 basis points from continued cost-cutting measures in headcount, wages, and advertising. SG&A cost cuts were not enough to offset gross margin erosion and as a result EBITDA fell 34.9% to $8.1 million for the quarter. By category, NOOK generated EBITDA of $2.3 million, a $1.7 million improvement over the prior year due to expense reductions. B&N’s EBITDA of $5.4 million decreased $5.2 million primarily due to the comparable store sales decline, somewhat mitigated by expense reductions. Going forward, management noted it is slowly stopping the decline in comps through improved merchandise offerings, and it expects comps to improve throughout the remainder of fiscal 2019. Additionally, Barnes & Noble plans to boost gross margin by reducing or removing slower moving merchandise, and continuing to cut SG&A expenses in headcount and wages. TTM interest coverage of 13.4x and debt to TTM EBITDA of 1.2x remained modest, despite additional borrowings on its revolver and interest expense increasing 59% to $3.3 million. On the conference call, management stated that although there are applicants for the open CEO position, the Company is not currently looking for a new CEO. Instead, the current management team in place will run all CEO duties until the Company’s annual meeting on October 3. During the first quarter of fiscal 2019, the Company closed one store and plans on opening four new locations in the second quarter, which includes three relocations. Overall, the Company expects to be net store positive for fiscal 2019.
Costco
Costco reported net sales of $11.00 billion for the four weeks ended September 2, an increase of 12.2% over the prior-year period. Total Company comps, excluding fuel and foreign exchange, increased 8%; U.S., Canada and International comps were up 8.9%, 4.8% and 6.8%, respectively. E-commerce comps rose 24.5%.
Genesco
Genesco’s second quarter sales increased 6.1% to $653.9 million. Comparable sales increased 3%, with store comps up 2% and direct comps up 7%. Direct-to-consumer sales were 10% of total retail sales, up slightly compared to the prior year. Gross margin was 49.2%, down 50 basis points primarily reflecting increased markdowns to clear slower-moving product at Schuh and Johnston & Murphy’s wholesale operations. Also contributing to the decrease was Journeys due in part to the shift in the calendar as a result of the 53rd week last year, partially offset by better full price selling in the Company’s other business segments. The Company recorded operating income of $1.4 million, compared to a loss of $2.0 million in the prior year period. For the second quarter, capital expenditures were $12.0 million, which consisted of $7.0 million related to store remodels and new stores and $5.0 million related to direct to consumer, omnichannel, information technology, distribution center, and other projects. The Company opened eight new stores and closed 31 underperforming locations, ending with 2,540 stores, a 3% decrease from last year.
Reitman's (Canada)
Reitmans (Canada) reported second quarter sales slipped 0.8% to $248.8 million, primarily due to a net reduction of 28 stores over the past year. The Company continues to reduce its store presence and invest in its e-commerce capabilities, however it did not indicate the e-commerce percentage of total sales. Sales were also negatively impacted by $6.1 million due to the second quarter of fiscal 2019 ending one week later than in the prior year period. Comps rose 3.4%, with store comps decreasing 1.2% and e-commerce sales increasing 40.8%. Adjusted EBITDA rose 9.7% to $21.4 million, primarily due to the increase in gross profit resulting from the previously mentioned calendar shift, coupled with a positive foreign exchange impact on U.S. dollar denominated purchases. Subsequent to quarter end, August sales decreased 3.8%, and comps declined 0.7%, with store comps down 5.9% and e-commerce sales up 44.8%. Reitmans operates 636 stores consisting of 268 Reitmans, 119 Penningtons, 88 Addition Elle, 84 RW & CO., 62 Thyme Maternity, and 15 Hyba.
Lands' End
Lands’ End reported second quarter sales inched up 1.9% to $307.9 million. Direct segment sales increased 6.4% to $276.6 million. However, retail segment sales decreased 25.8% to $31.3 million, primarily attributable to the reduction of 57 Lands’ End Shops at Sears locations, combined with a comp decline of 5.8%. Comps declined 6.7% at the Sears shops and 0.6% at Company-operated stores. Gross margin of 44.4% was up slightly compared to the prior year. Adjusted EBITDA rose 13.1% to $7.7 million. CEO Jerome S. Griffith stated, “Overall, we continue to see evidence that our strategic initiatives are taking hold with product and marketing efforts both resonating with our customer. Looking ahead, we will remain intently focused on our four key focus areas of product, digitization, uni-channel (one channel focus, i.e. mobile) distribution, and infrastructure.”
Loblaw
Loblaw and its major shareholder, George Weston (which owned 48.6% of Loblaw’s common shares at FYE), proposed that Loblaw spin off its interest in Choice Properties to Weston in an all-stock, tax-free transaction. The proposal has unanimous support of the Loblaw board and George Weston; the companies expect a shareholder vote to occur in October, with a potential closing to occur in Q4. This proposal follows Loblaw (through Choice Properties) acquiring Canadian Real Estate Investment Trust in a C$6.00 billion transaction earlier this year, which created the largest REIT in Canada. Details of the proposal have Loblaw transferring its 61.6% ownership interest in Choice Properties to George Weston, which will then own a 65.4% interest of Choice Properties (it currently owns a 3.8% interest). Subsequently, George Weston will issue approximately 26.7 million shares worth roughly C$2.70 billion to existing Loblaw shareholders, providing them with 16.8% of the equity interest of George Weston.
In other news, Loblaw expects to record a third-quarter charge of about $368.0 million in connection with a Tax Court of Canada ruling involving the Company’s defunct Glenhuron Bank Ltd. subsidiary. In 2015, Loblaw filed an appeal of reassessments of Barbados-based Glenhuron dating as far back as 2001 and totaling more than $400.0 million in taxes, interest and penalties. The government claimed Glenhuron didn’t meet the requirements to be considered a foreign bank and alleged it had been misused to avoid taxes. Loblaw shut down the bank in 2013 to fund its acquisition of Shoppers Drug Mart. The case went to trial in April, and last Friday the Tax Court of Canada issued a decision that lowered the amount of taxes that Loblaw owed and determined that the Company hadn’t been trying to avert paying taxes. Yesterday, Loblaw said it plans to appeal. Excluding amounts already paid, the incremental cash payment would be about $242.0 million, which Loblaw claims it would be able to fund from cash on hand and without impacting its capital investment plans, dividends or share repurchase program.
Bankruptcy Updates
The Bon-Ton Stores, DIP
The Bon-Ton Stores, DIP, which shuttered its remaining stores back in August as part of its liquidation, may be gearing up for a comeback. A subsidiary of CSC Generation Holdings, a retail technology platform provider, signed a $900,000 deal giving it the rights to the intellectual property of Bon-Ton and its subsidiary department store chains, Boston Store, Bergner’s, Carson’s, Elder Beerman, Herberger’s, and Younkers. The intellectual property includes trademarks, websites, private label brands, customer lists, and other data. CSC outbid apparel retailer Christopher & Banks by $50,000. In recent weeks, Bon-Ton’s websites have created online speculation with messages saying the stores will return. Published reports indicate that while the relaunched business will be focused on its e-commerce site, there are plans to reopen physical locations in Illinois, Colorado, Wisconsin, and Pennsylvania. Bon-Ton filed for bankruptcy in February 2018 and was unable to find an investor. As a result, a group of liquidators and some Bon-Ton creditors purchased the department store in an April bankruptcy auction. The chain operated nearly 230 stores prior to filing Chapter 11.
Brookstone Holdings, DIP
In the Brookstone Holdings, DIP Chapter 11 case, the Court authorized Bluestar Alliance, LLC to revise its stalking horse bid to $56.4 million, up from its previous bid of $40.0 million. The bid consists of $50.5 million in cash and $5.9 million of “readily salable inventory.” As part of its modified bid, Bluestar will evaluate a “going concern transaction,” under which it will consider keeping between 30 and 50 stores open. GOB sales at all 103 of the Company’s retail stores are already under way. Bluestar said it has been discussing a going concern transaction with various potential retail partners, and it feels “very confident” it will continue Brookstone’s business operations in China under the Company’s current business arrangement. The date of the auction was rescheduled from September 24, 2018 until September 26, 2018.
Toys "R" Us, DIP
In the Toys “R” Us, DIP bankruptcy case, the Court entered an order approving (i) the adequacy of the Toys “R” Us–Delaware, Inc. Disclosure Statement, and (ii) the solicitation and notice procedures with respect to confirmation of the Debtors' proposed Chapter 11 Plan. Under the Plan, holders of administrative claims that participate in a settlement agreement will be entitled to their pro rata share of (a) $180.0 million set aside from the prepetition secured lenders’ recoveries, (b) certain contingent amounts, once the post-petition recovery to the B-4 Lenders exceeds certain thresholds, and (c) proceeds from a Non-Released Claims Trust, if any. Holders of allowed administrative claims are expected to receive an estimated recovery of about 22%. Holders of administrative claims that do not opt out of the settlement agreement will receive a waiver of all preference and avoidance actions. General unsecured claims will receive no distribution, except to the extent there is any residual value available after secured creditors, allowed administrative claims, and priority tax claims are paid in full. The Disclosure Statement indicates that the projected recovery for general unsecured claims is 0%. A hearing on confirmation of the Plan is scheduled for October 10.
