September 25, 2018
Sears Holdings Corporation
Yesterday, Sears Holdings Corporation announced receipt of a restructuring proposal from ESL Investments. The proposal states that Sears is facing “significant near-term liquidity restraints,” including the $134.0 million maturity of Second Lien Notes due October 15, 2018 and associated Debt Maturity reserve requirements on October 1, 2018. Sears ended the second quarter with just $291.0 million in liquidity. The ESL plan proposes that creditors refinance $1.10 billion of debt; holders of second lien debt due in October 2019 and July 2020 would have the option to either swap those loans for debt that is convertible into Sears equity or extend the maturities on the debt in exchange for a reduced conversion price; unsecured creditors of debt that matures in December 2019 could exchange it for convertible debt or sell it for approximately 25 cents on the dollar. ESL is also asking Sears to sell $1.50 billion worth of real estate.
Inspire Brands To Acquire Sonic Corp.
Earlier today, Inspire Brands announced it entered into a definitive merger agreement to acquire Sonic Corp. for $2.30 billion, or $43.50 per share in cash including the assumption of Sonic’s net debt. The agreement, previously approved by Sonic’s board, represents a premium of approximately 19% per share to Sonic’s closing stock price on September 24 and a premium of about 21% to its 30-day volume-weighted average price. Under the deal, expected to close later this year, Sonic will operate as a separate, privately held business unit within Inspire, will be based in Oklahoma City, and will preserve its current management team. Inspire Brands was formed in February following the closing of Arby’s Restaurant Group’s $2.90 billion purchase of Buffalo Wild Wings. The Company’s current portfolio includes more than 4,700 Arby’s; 1,200+ Buffalo Wild Wings; and 27 fast-casual Rusty Taco locations.
National Stores, DIP
On September 21, the Bankruptcy Court entered final orders authorizing National Stores, DIP to access up to $100.0 million under the DIP Facility, subject to repayment of $70.8 million in prepetition ABL obligations. The DIP Facility provides for waivers of defaults of the requirement that the Debtor achieve targeted levels of sales. The defaults started on the petition date, and they are continuing. In addition, the Court authorized the Company to make payments to critical vendors in an amount not to exceed $40.0 million, in the aggregate. The Court also extended the date of the conclusion of GOB sales on 74 closing stores to October 31, 2018 from October 15, 2018. The Debtors filed a motion to conduct an auction of their remaining assets. This is part of a dual-prong strategy to either: (i) restructure the business, or (ii) liquidate and sell the assets of the remaining 269 operating stores pursuant to a section 363 sale. If the Debtors are unable to consummate a Chapter 11 Plan or a going concern transaction, GOB sales at all of the stores may commence on and after October 1, 2018, but sales must commence on or before November 5, 2018.
Starbucks
Starbucks is planning corporate layoffs and reorganization as it “tries to reverse stagnant sales and rekindle investors’ interest.” The Company reportedly plans to assess the VP and SVP designations but not eliminate any jobs at the retail level. The layoffs and reorganization are expected to begin as soon as this week and conclude within a couple of months. In an email to employees, CEO Kevin Johnson stated, “We must increase the velocity of innovation that is relevant to our customers, inspires our partners, and is meaningful to our business. To accomplish this, we are going to make some significant changes to how we work as leaders in all areas of the company.” Starbucks continues to battle competition from regional chains and lower demand for its signature Frappuccino by adding new menu items, automating its back-of-store inventory system, and testing delivery.
Marathon Petroleum Corporation and Andeavor
Marathon Petroleum Corporation (MPC) and Andeavor shareholders approved the merger of the two companies, first announced on April 30, creating a combined syndicate of approximately 4,000 corporate-operated locations and 7,800 branded locations. The transaction is expected to close October 1. Under the terms of the deal, MPC will acquire all of Andeavor’s outstanding shares, representing a total equity value of $23.30 billion and a total enterprise value of $35.60 billion. MPC and Andeavor shareholders will own approximately 66% and 34% of the combined company, respectively. The headquarters will be in Findlay, OH with an additional office in San Antonio, Andeavor’s hometown. Speedway, an MPC subsidiary, owns and operates the nation’s third-largest convenience store chain, with about 2,740 convenience stores in 22 states.
According to a new report by the National Association of Convenience Stores (NACS), “nearly three in four (72%) convenience retailers said in-store sales increased over the first nine months of 2018 compared to the same time last year, and more than half (52%) said their fuel sales increased compared to last year, according to a nationwide survey of U.S. convenience store owners … Only 9% of retailers said that in-store sales declined and only 20% said fuels sales declined.”
Dine Brands
RMH Franchise Holdings Inc., the second-biggest franchisee of Dine Brands’ Applebee’s restaurants, which recently closed 13 locations as part of its bankruptcy reorganization, is planning to close at least six more locations by the end of the month. RMH also said it “will likely need to close certain additional restaurant locations” beyond those six depending on the outcome of lease negotiations. After closing the six restaurants, RMH will own about 140 Applebee’s locations in the U.S. RMH is a portfolio company of private-equity firm Acon Investments LLC, which is planning to put $10.0 million into the business to get it out of bankruptcy.
Walmart
Walmart sent a letter to U.S. Trade Ambassador Robert Lighthizer warning that proposed tariffs on $200.00 billion of Chinese goods would hurt consumers and American businesses. Walmart’s letter says there will be repercussions of the tariffs, which would apply to goods like food and beverages, personal care products, detergents, motor vehicles, and paper goods. The tariffs were initially proposed in July and were scheduled to go into effect yesterday. The 10% tax on Chinese imports will rise to 25% on January 1, 2019, according to members of the Trump administration. China said it would impose tariffs on $60.00 billion worth of U.S. goods.
In other news, Walmart-owned Bonobos named Co-President and Chief Marketing Officer Micky Onvural as its new CEO. Mr. Onvural replaces Andy Dunn, who co-founded Bonobos in 2007. Mr. Dunn will continue to serve as SVP of digital brands at Walmart, which acquired Bonobos for $310.0 million in June 2017.
Walmart Canada has partnered with Food-X Urban Delivery to introduce a sustainable online grocery delivery option in the Vancouver market. Food-X employs food waste reduction technology and practices, reduces truck trips and emissions by consolidating orders and increasing delivery density, and uses low-waste and compostable packaging. Walmart Canada is the first national customer for Food-X, which is part of Sustainable Produce Urban Delivery, one of Canada’s largest online grocery companies. In April, Walmart unveiled a plan to reach zero food waste in its Canadian operations by 2025. The Company operates 410 stores in Canada.
Following years of testing, Walmart will require “suppliers of fresh, leafy greens to implement real-time, end-to-end traceability of products back to the farm” using a blockchain tool developed by IBM. The Company plans similar mandates for other fresh fruit and vegetable providers within the next year. The requirements will apply to suppliers to both Walmart and Sam’s Club stores.
Finally, the Equal Employment Opportunity Commission filed a lawsuit against Walmart on Friday, alleging the Company unlawfully discriminated against pregnant workers at one of its warehouses in Wisconsin. Walmart is also reportedly facing class action lawsuits for its treatment of pregnant workers in Illinois and New York…. In March, a federal judge in Illinois denied Walmart’s bid to dismiss the claims. The New York case is pending.”
Staples & Essendant
On September 24, Staples commenced the previously announced tender offer for all outstanding shares of Essendant’s common stock at a purchase price of $12.80 per share. Essendant's board unanimously recommends that Essendant stockholders tender their shares in the offer. The tender offer is scheduled to expire on October 23. After completion of the tender offer, Essendant will become a privately-held company and operate as a subsidiary of Staples.
Rent-A-Center
Rent-A-Center’s shareholders voted in favor of the Company to be acquired by Vintage Capital Management for $1.365 billion, including debt. There were 41.54 million votes in favor of the merger and 2.91 million shareholders voting against the plan, according to a filing with the SEC. The vote follows a request from the FTC for additional information and documents from both companies as it conducts a competition review. Both companies are cooperating with the FTC and expect the deal to close during the first quarter of 2019.
Stein Mart
On September 18, Stein Mart amended its existing revolving credit agreement with Wells Fargo Bank and its term loan with Gordon Brothers Finance Company, which are coordinated through an inter-creditor deal and provide for combined borrowing availability of $275.0 million. The amendment extends the maturities to September 18, 2023 from February 3, 2020 and modifies the cash dominion, which applies in the future only if excess availability is less than 12.5% of the loan cap. The Wells Fargo borrowing limit is raised from $225.0 million to $240.0 million, with an increase in the advance rate, and the Gordon Brothers term loan is decreased from $50.0 million to $35.0 million, with the borrowing base lowered by 25 basis points. There are also administrative improvements that enhance liquidity. The Company stated that the impact of the new agreements will decrease annual borrowing costs by approximately $1.0 million and will result in all loan amounts outstanding being classified as long-term obligations. Borrowings under the amended agreements remain available for working capital and general corporate purposes, as well as to support the Company's letter of credit requirements.
Del Frisco's Restaurant Group
Del Frisco’s Restaurant Group (DFRG) agreed to sell Sullivan’s Steakhouse to Romano’s Macaroni Grill for gross proceeds of approximately $32.0 million. The net proceeds, which have not yet been finalized, will be used to reduce DFRG’s outstanding indebtedness. The transaction is expected to close on or before September 30. The divestiture of Sullivan’s Steakhouse represents the culmination of a strategic alternatives process for the brand, which was first announced in March. Sullivan’s Steakhouse currently operates 14 locations across 12 states.
Academy, Ltd.
Moody's Investors Service downgraded the rating on Academy, Ltd.'s $1.64 billion secured Term Loan one notch to Caa1(seven notches below investment grade) fromB3. The ratings outlook remains stable. Moody’s said the downgrade reflects its lower estimated recovery rate for the Term Loan, following expansion of the Company’s ABL facility to $1.00 billion from $650.0 million. The revolver was also extended to May 22, 2023 from July 2, 2020.
McDonald's
On September 21, Moody’s affirmed McDonald’s Baa1 senior unsecured rating and P-2 short term commercial paper rating. The outlook is “stable.” McDonald’s recently announced that it will raise its dividend by approximately 15% and will increase its shareholder return target to about $25.00 billion from $24.00 billion. According to Moody’s, “Overall, McDonald’s is supported by its brand strength, global scale, geographic reach and unique business model that generates strong and steady cash flows which offset certain quantitative credit metrics that are weak for the rating.”
On September 24, McDonald’s announced that Doug Goare, its president, International Lead Markets and chief restaurant officer, will retire on December 31. Mr. Goare has served in various roles with the Company for the past 40 years. The Company also announced that beginning on January 1, 2019, it will operate under a new organizational structure separated into three business segments: U.S., International Operated Markets (IOM), and International Developmental Licensed Markets (IDL). The IOM segment consists of operations in markets where the Company operates restaurants and includes Australia, Canada, France, Germany, Italy, Netherlands, Russia, Spain, and the U.K. The IDL segment consists of the remaining markets. The new structure reflects the Company’s shift to a more heavily franchised model. The Company currently segments its non-U.S. operations into International Lead Markets, High Growth Markets, and Foundational Markets.
Dollar Tree
Dollar Tree announced it will begin the consolidation of its Family Dollar HQ in Matthews, NC, which will be phased out and eventually shuttered, with some 700 jobs transferred to Dollar Tree’s new 510,000 square foot, 12-story office tower in Chesapeake, VA. Dollar Tree acquired Family Dollar in July 2015; the consolidation should be completed by fall 2019. The Company expects to incur costs of approximately $40.0 million to $49.0 million, with $5.0 to $8.0 million incurred in fiscal 2018. The Family Dollar distribution center in Matthews will remain open.
Claire's, DIP
On September 21, Claire’s, DIP announced that it received approval for its Third Amended Plan of Reorganization from the U.S. Bankruptcy Court for the District of Delaware. The Company expects to complete its balance sheet restructuring and emerge from Chapter 11 by early October. Under the terms of the Plan, which is supported by all of the Company’s major creditor groups, the Company will eliminate approximately $1.90 billion of debt from its balance sheet and gain access to $575.0 million of additional capital. Claire’s recently released second quarter results; consolidated comparable store sales increased 0.1%, with North American comps increasing 4.4% and Europe comps decreasing 6.3%. Gross margin expansion and lower expenses lifted quarterly EBITDA 12.5% to $54.2 million.
Dave & Busters
Dave & Buster’s will test its first fast-casual foodservice offering, a street-tacos concept called “TNT Tacos,” by the end of the year. The restaurant will have a menu based on tacos typically sold from a food truck and will open in a converted special event/functions room next to the arcade at a Dave & Buster’s in its headquarters city of Dallas, TX. The goal is to increase penetration, particularly among millennials; based on the new unit’s performance, the Company will evaluate whether or not to roll it out. Dave & Buster’s also has reduced the size of its casual-dining menu by 20% to improve speed of service. The Company owns and operates 117 venues in 38 states as well as Canada and Puerto Rico.
Macy's
For the upcoming holiday season, Macy’s is rolling out a number of new experiential concepts. For one, it’s partnering with Facebook to launch The Market @ Macy’s, a “retail as a service” model that will curate 150 e-commerce brands on a two week rotation at nine Macy’s stores. The assortment will range from apparel, accessories and beauty to home décor, technology and more. The Company is also working with Marxent to scale a virtual reality experience from its pilot of two stores to 69 by the end of November. Management indicated that the technology is helping to boost basket sizes by 60%, and it uses just 5,000 square feet of store space. Meanwhile, Macy’s is in the early stages of developing its beauty product offerings. In 50 stores nationwide, customers can now digitally try on over 250 beauty products through in-store kiosks powered by virtual mirror technology.
Supervalu
According to published reports, Supervalu will lay off as many as 1,500 employees across 16 of its Shop ‘n Save stores if the locations are not sold in the coming months. The stores in question are the ones not being purchased by Schnuck Markets. An additional 50 associates at Shop ‘n Save’s headquarters in Kirkwood, MO were also given notices. On September 17, Supervalu agreed to sell 19 of its 36 Shop ‘n Save grocery stores, primarily located in the St. Louis, MO area, to Schnuck Markets.
Costco
Costco plans to open a $300.0 million chicken hatchery, feed mill and processing plant in Fremont, NE in approximately one year, as part of efforts to control more of the supply chain and sustain the low price of its popular $5 rotisserie chicken. CEO Richard Galanti said the plant, which broke ground last year, will produce about 100 million chickens a year, roughly a quarter of the Company’s annual U.S. demand. The location offers an advantage on feed costs due to Nebraska’s vast production of corn and soybeans. Longer term, Costco will reportedly add multiple new chicken barns in Nebraska and Iowa to be operated by producers under long-term contracts with the Company. Mr. Galanti previously called the rotisserie chickens “the new hot dog” – a reference to the Costco’s trademark $1.50 hot dog and soda combo; the Company procures a significant volume of hot dogs from a plant it owns in Tracy, CA, allowing it to maintain the price. In 2015, he said Costco was “willing to eat, if you will, $30 to $40 million a year in gross margin” by holding its rotisserie chicken prices at $4.99 as competitors raised prices. The rotisseries are usually in the back of its stores, which the Company relies on to entice shoppers into more profitable purchases since Costco takes a substantial loss on the chickens themselves.
In other news, Costco Canada is expanding its two-day grocery delivery service to multiple cities across Ontario, following a successful launch in Toronto in mid-July. The service, Costco Grocery, is now available at 34 of the Company’s 35 locations in Ontario (the exception being its location in Sudbury) and offers hundreds of items, including health and beauty products as well as vitamins and supplements, with no charge for orders exceeding $75. Costco Canada currently operates 100 warehouse clubs across the country.
Brooks Brothers
Brooks Brothers is overhauling its supply chain with plans to tap into its network of 260 retail locations in North America. The goal is to fulfill orders more quickly and speed up delivery. COO Gianluca Tanzi commented, “We want to use all our stores as a warehouse, and also serve the major towns the same day.” Most online orders for Brooks Brothers’ U.S. customers are currently handled through the Company’s two distribution centers in Connecticut and North Carolina. The Company is looking to upgrade technology that will shorten standard delivery times and allow stores to fulfill a broader range of orders, not just for items that aren’t available at the distribution centers. The Company is joining a growing field of retailers, including Macy’s, Walmart and Target, looking to use their brick-and-mortar stores as online fulfillment centers in response to growing competition from e-commerce retailers. Brooks Brothers expects the system to be fully operational next year.
Sobey's
Empire Co. Ltd., parent of Sobeys, announced it will acquire Ontario-based grocer Farm Boy in a deal valued at $800.0 million. The deal, which includes 26 supermarkets in Ontario, will allow Empire to speed its growth in markets like Toronto and southwestern Ontario. Empire CEO Michael Medline said the Company hopes to double the size of the Farm Boy business, including adding new stores and converting some existing Sobeys locations. Farm Boy will be set up as a separate subsidiary and will continue to be led by co-CEOs Jean-Louis Bellemare and Jeff York. Farm Boy products will also be added to Sobeys’ Ocado-based e-commerce business, set to launch in 2020 in the Toronto metro area.
Cineplex
Cineplex and CJ 4DPLEX, a cinema technology company, are partnering to bring the 4DX experience to as many as 13 additional Cineplex locations across Canada over the coming years. The companies opened Canada’s first 4D auditorium in downtown Toronto, Ontario in 2016, and this partnership is a continuation of that original effort.
Crate & Barrel
Crate & Barrel’s CEO Neela Montgomery mentioned in a recent TV interview that the Company does not foresee making changes in sourcing its merchandise as the U.S.-China trade war intensifies. Ms. Montgomery commented, “Other than upholstery, where we have a great manufacturing base in the U.S., some of those products would be very difficult to manufacture domestically. So in reality it’ll move to another Asian market or to Europe.” Crate & Barrel doesn’t see the current status of the tariffs impacting prices, citing the Company’s diversified supply chain from 42 countries.
BJ's Wholesale Club
Yesterday, BJ’s Wholesale Club commenced an underwritten public offering of 28 million shares of its common stock. Underwriters will have a 30-day option to purchase up to an additional 4.2 million shares. BJ’s will not receive any of the proceeds.
Whole Foods
Whole Foods and affiliates Mrs. Gooch’s Natural Food Markets and WFM-WO will pay $1.6 million for failing to properly dispose of hazardous materials at their California stores over a five-year period. The settlement consists of $1.4 million for civil penalties and legal costs and the remainder for supplemental environmental projects and the prosecution of similar crimes.
Meijer
Meijer has begun home delivery of beer and wine to customers from 40 Ohio stores through Meijer Home Delivery, which uses Shipt for order fulfillment and delivery. Currently, Ohio and Michigan (launched in July 2017) are the only states where alcohol is included as part of the Meijer Home Delivery service.
Fareway Stores
Fareway Stores is planning to begin testing an e-commerce service. It has not disclosed a launch date or solidified plans. The Company is also reportedly considering turning a store closing in Des Moines, IA into an ecommerce fulfillment center. The old store is being replaced by a newer location three miles away. Fareway already operates an e-commerce service for meat, which ships to 48 states from a distribution center in Boone, IA. The Company operates 122 supermarkets in Iowa, Illinois, Minnesota, Nebraska and South Dakota.
J. Crew
On September 19, J. Crew Group amended its asset-based revolving credit facility to increase the revolving credit commitment from $350.0 million to $375.0 million. The additional $25.0 million is provided by MUFG Union Bank, N.A., which joins the ABL facility as an additional lender (in addition to Chinos Intermediate Holdings and Bank of America). The agreement is secured by essentially all assets of the Company and includes a letter of credit facility for up to $300.0 million. The facility also contains an accordion feature that allows financing to be increased by up to $25.0 million under certain circumstances. The agreement does not contain any financial covenants. As of August 4, 2018, the Company had $25.3 million in direct borrowings and $58.1 million in outstanding standby letters of credit, leaving $215.0 million in excess availability, accounting for borrowing base limitations.
Kroger
Last week, British online grocer Ocado said that Kroger had made progress identifying locations for the first three of at least 20 planned sites on which it will build automated warehouses in the U.S. In May, Kroger struck a deal with Ocado to boost its delivery business with the construction of robotically operated warehouses, each of which typically take two years to open.
Riverhead Building Supply
Riverhead Building Supply is acquiring United Builders Supply, which is based in Westerly, RI and operates four units in Connecticut and Rhode Island. Prior to the sale, Riverhead operated 12 locations throughout Long Island, NY, along with two locations in Rhode Island. The sale is expected to close within the next two months. Terms of the deal were not disclosed.
Target
On September 21, Target completed the roll out of Prologue, its latest brand of women’s apparel, in stores and online nationwide. The new apparel line is part of the Company’s ongoing strategy to revamp its collection of store brands for everything from housewares to fashion. Target has introduced more than a dozen house brands in the past 18 months. The Prologue assortment is “very urban and very simple,” and it doesn’t include accessories. Target indicated that its strategy is to bring new styles to market every four to eight weeks.
Kirklands
Kirkland’s named Steve Woodward as CEO, effective October 22. Mr. Woodward is currently the president and chief merchandising officer at Crate & Barrel. Kirkland’s acting CEO, Mike Cairnes, will be promoted from his position as EVP to president, in addition to resuming his previous role as COO.
Store Activity
Captain D's, LLC
Captain D’s, LLC signed a franchise development agreement to expand its presence in markets throughout the Midwest and the Southeast. This growth will bring three new restaurants to the greater Detroit area; three to Tulsa, OK; three to Southeast Georgia; and six to the greater Chicagoland/Northwest Indiana region, which will mark Captain D’s first locations in the Chicago market. There are currently 530 Captain D’s restaurants in 22 states.
Wawa
Wawa will open its largest store in Pennsylvania, near the University of Pennsylvania campus in Philadelphia. The 8,760 square-foot location is significantly larger than Wawa’s average store size of 4,225 square feet and will include indoor and outdoor seating. There are two other Wawa stores on campus. The new store was announced as part of an expansion throughout Philadelphia. Five other Wawa locations are expected to open within the city by the end of the year. The Company has plans to open an even larger, 11,300 square-foot Wawa in late November in the state. The largest Wawa, at 9,200 square feet, is located in Washington D.C.
Wegmans
Wegmans opened a 120,000 square-foot, $40.0 million store in Lancaster, PA on Sunday. In addition to traditional offerings, the store has expanded prepared foods and its casual restaurant concept The Burger Bar, as well as made-to-order pizza and salad stations. Wegmans currently operates 98 stores in New York, Pennsylvania, New Jersey, Virginia, Maryland and Massachusetts.
Grocery Outlet
Grocery Outlet is continuing to expand into Orange County, CA with a new store in Fullerton that will open on September 27. It will be the Company’s ninth store in Orange County since the brand returned to Southern California in 2015.
99 Cents Only
On October 5, 99 Cents Only will open a store in Eastvale, CA. The store will feature a perishable food department, including fresh produce, dairy products and frozen foods. The Company operates more than 280 stores, or 73% of its total store base, in California.
Wilco
Wilco opened its 20th store in Redmond, OR earlier this month. The Company began its expansion into central Oregon with the 2013 purchase of Round Butte Seed’s stores in Bend and Prineville, OR. The Redmond store marks Wilco’s third store in the state. The store has 22,000 square feet dedicated to retail space, a 5,000 square-foot enclosed greenhouse, dog grooming salon, and warehouse space. The store also has a 5,000 square-foot space dedicated to clothing that focuses on footwear, work and western wear. In addition to the 20 Wilco Farm Stores, the cooperative also serves customers with three additional business units, hazelnut marketing and processing, fuel delivery services, and agronomy supplies and services.
PriceSmart
PriceSmart announced plans to open its fourth store in Guatemala and 44th overall location. The Company acquired 8,200 square meters of land within the Guatemala City metro area. The new store is expected to open in fall 2019 and is PriceSmart’s third property currently under development. The Company is also developing its sixth warehouse club in Panama and its fifth in the Dominican Republic, both of which are expected to open in spring 2019.
Sprouts Farmers Market
Sprouts Farmers Market plans to open a new store in Jupiter, FL at the former site of a Winn-Dixie that closed in April. Jupiter joins Clearwater, Deerfield Beach, Naples, Oviedo, Riverview, Trinity and Wellington as locations for the chain’s planned expansion in Florida. Sprouts currently operates five stores in Florida, with a sixth opening in Winter Park in October. The Company did not say when the Jupiter location would open, but plans for a 20,700 square-foot store were submitted in June.
Sprouts also opened its first Pennsylvania store last week in Philadelphia.
Neighborhood Goods
Neighborhood Goods, a startup that calls itself a “modern alternative to – and evolution of – the department store” is opening its first physical store in Plano, TX this November. The new location will showcase a series of cult and pure play e-commerce brands, including sneaker marketplace Stadium Goods, direct-to-consumer home furnishings The Inside, U.K. pajama brand Desmond & Dempsey, online mattress brand Allswell, menswear from Buck Mason, Reese Witherspoon’s Draper James, kids clothing Primary, men’s wellness company hims, underwear and loungewear brand MeUndies, and contact lens startup Hubble, among others. Neighborhood Goods resembles Story, the retail concept recently acquired by Macy’s.
Earning Releases
Ascena Retail Group
Ascena Retail Group’s fourth quarter sales increased 6.5% to $1.77 billion due primarily to a 4% increase in comps, the first quarterly increase since the second quarter of fiscal 2015. The Company generated positive comps at all retail banners except the troubled Dressbarn banner, where comps fell 5%. In its quarterly conference call management commented that it believes business has stabilized at Dressbarn. By business segment the best performers were Kids, up 15%, and Premium, where comps rose 5%. Gross margin expanded 10 basis points primarily due to improvements at Premium Fashion and Kids, mostly offset by declines at Plus and Value segments. As a result, EBITDA increased 24.2% to $163.3 million. Fiscal 2018 EBITDA fell 8.3% due to lower sales and gross margin. During the quarter the Company opened one new store and closed 42 locations, ending the year with 4,622 locations. Management stated it expects to close between 197 and 247 locations in fiscal 2019, approximately 5% of its store fleet.
Darden Restaurants
Darden Restaurants’ first quarter sales increased 6.5% to $2.06 billion, driven by the addition of 52 net new restaurants. Blended same-restaurant sales rose 3.3%, consisting of 5.3% growth for Olive Garden, 3.1% for LongHorn Steakhouse, 3.9% for The Capital Grille, 3% for Eddie V’s, 0.6% for Yard House, 1.1% for Bahama Breeze; and declines of 4% for Cheddar’s Scratch Kitchen and 1.9% for Seasons 52. Operating income was $189.1 million, compared to $174.5 million last year. The Company said labor costs were 0.7% higher as a share of sales compared with a year earlier, but a decrease in food, marketing and other restaurant costs more than offset the rise. Net income increased 39.7% to $166.2 million, boosted by a lower effective tax rate as a result of U.S. tax reform.
The Company increased its fiscal 2019 financial outlook and now expects same-restaurant sales growth of 2% – 2.5%, up from previous guidance of 1% – 2%; total sales growth of 5% – 5.5%, up from 4% – 5%; and EPS of $5.52 – $5.65, up from $5.40 – $5.56.
Neiman Marcus Group
Neiman Marcus Group indicated in its fourth quarter results last week that it effected an organizational change that moved the operations of its fast-growing online business MyTheresa under the parent entity, from its prior position as a subsidiary of Neiman Marcus. The parent entity is owned by Ares Management and Canada Pension Plan Investment Board (CPPIB). Following this announcement, Marble Ridge Capital LP, a value-oriented distressed debt investment firm, sent a letter to the board of Neiman Marcus saying that the transfer was improper and may have violated terms of the Company’s debt that it holds. Marble Ridge is a holder of Neiman Marcus’ 8.75% Senior Notes and Term Loans and an issuer and/or guarantor of at least $4.70 billion of debt. In the September 18 letter, Marble Ridge demanded the rationale behind the transfer of MyTheresa, a change that could block creditors from making any claims on the unit. As stated in the letter, "What these transactions appear to be is an attempt to move the MyTheresa business beyond the reach of existing creditors sitting between the sponsors' equity and the valuable MyTheresa assets. Most troubling, we understand that Ares and CPPIB usurped this massive benefit and took the MyTheresa business for no consideration." Marble Ridge said it believes the Company was insolvent at the time of the transactions or was rendered insolvent as a result of the transactions. Neiman responded by saying, “MyTheresa was already an unrestricted, non-guarantor subsidiary not part of our lenders’ collateral and it will remain outside of the collateral. This reorganization was expressly permitted by the Company’s credit documents.” The allegations made by Marble Ridge are similar to complaints against retailers including PetSmart and J. Crew Group, both of which made changes to their capital structures in a way that complicated restructuring talks.
Le Chateau
Le Chateau reported second quarter sales declined 3.6% to $53.3 million, with 30 fewer stores in operation since the prior year period. Comps were up 5%, with regular store comps up 4.3% and outlet store comps up 8.8%. Adjusted EBITDA rose 16.3% to $4.4 million. The improvement was attributable to the reduction of $2.5 million in SG&A expenses, partially offset by a decline of $1.9 million in gross margin dollars. During the first half of the year, the Company renovated two existing locations and, as planned, closed 12 underperforming locations. As of July 28, the Company operated 148 stores (including 28 fashion outlet stores), down from 178 stores (including 53 fashion outlet stores) in the prior year period. For the first eight weeks of the third quarter, sales decreased 6.1%, with 29 fewer stores in operation. Comps increased 3.5%, with regular store comps up 3.8% and outlet store comps increasing 1.6%.
Pier 1 Imports
On September 20, Pier 1 Imports reported what it called “disappointing” preliminary results for the second quarter of fiscal 2019, ended September 1, 2018, and said it will discontinue its fiscal 2019 guidance. Based on the information currently available, the Company expects comps to decrease approximately 11.4%; loss per share is projected to be $0.62 – $0.64 (widened from prior guidance of $0.54). Quarter-end inventories are expected to decrease 17%, and cash and cash equivalents are anticipated to be $117.0 million (the Company previously expected $34.9 million), with no short-term borrowings under the Company’s $350.0 million revolving credit facility during the quarter. CEO Alasdair James stated, “It is now clear that our initiatives are taking longer than expected to gain traction. Our marketing program did not drive the level of traffic we had anticipated, and we experienced delays in getting certain new products into our stores.”
PetSmart
On September 11, PetSmart held its confidential, investor-only second quarter earnings call, details of which reflect the Company’s continuing storyline of strong online sales growth at Chewy.com while brick-and-mortar sales are challenged.
In other news, PetSmart and its lending banks continue their dispute over the release of the guarantees and collateral regarding the transfer of 36.5% of the equity in Chewy.com to PetSmart’s parent and an unrestricted subsidiary. PetSmart had sued the agent bank, Wilmington Trust, over the issue, and the agent subsequently filed a counterclaim, alleging fraud, violation of loan covenants, and misrepresentation of the calculations used in its ratio of earnings to fixed expenses. A proposed scheduling order has been submitted jointly by the parties, which is still awaiting signoff by the judge. Responses to the counterclaims are due from the PetSmart parties between October 4 and October 9.
