September 5, 2018
Essendant & Staples
Essendant previously agreed to merge with S.P. Richards Co. (SPR), an office supply distributor and a unit of Genuine Parts Company. In April 2018, Staples launched a hostile bid for Essendant. More recently, Essendant said Staples had not submitted a proposal "the board can act upon." Yesterday, Staples filed a preliminary proxy statement with the SEC to urge Essendant’s shareholders to vote against the proposed merger with SPR. The vote is scheduled for October 5, 2018. Staples also said it will send Essendant’s legal counsel a merger agreement it is “prepared to execute.” Staples told Essendant’s shareholders it believes the SPR merger is inferior to its all-cash bid for Essendant, and it urged shareholders to vote “no” on the SPR proposal, based on several issues. Staples warned that Essendant’s stock price would plunge if shareholders approve the SPR transaction and it is subsequently blocked by the FTC. Staples offered to pay a $20.0 million termination fee if its proposed deal fails to receive antitrust clearance. Essendant is not dealing from a position of strength in the negotiations. It is wedged in an industry whose core products (traditional office products, sheet paper and certain technology items) are facing a protracted drop in demand.
TravelCenters of America LLC (TA)
TravelCenters of America LLC (TA) entered a definitive agreement for the sale of its Minit Mart convenience store business for approximately $330.8 million to EG Group. The portfolio includes 225 standalone convenience stores and certain other related assets. With the sale, TA exits the standalone convenience store business and turns its focus to its core travel center business. TA expects to complete the transaction in the fourth quarter. EG Group is a privately held convenience store retailer based in the U.K. It entered the U.S. for the first time earlier this year with its acquisition of Kroger’s convenience store business, which included 762 stores under a number of banners. EG also does business with national and global retail and convenience brands including Starbucks, KFC, Texaco, Spar, Carrefour, Burger King, and Esso.
Store Activity
Trader Joe's
Trader Joe's will open its third location in Tennessee and first in the Memphis area, on September 14. The Germantown location has been in the works since 2015. Meanwhile, the Company will open a store in Manchester, CT tomorrow. It is the Company’s eighth store in the state, second in Hartford and first east of the Connecticut River.
H.E. Butt
For some time now H.E. Butt has been cautious about entering Dallas, preferring to situate its stores on the outskirts of the city. However, the Company recently opened its third Central Market in Dallas (Midway) and has two more units in the works, although no timeline has been provided. The Midway store, which was divested as part of Albertsons’ purchase of Safeway, is the Company’s 10th Central Market location, all of which are in Texas. The Company’s high-end Central Market concept is geared toward “foodies” and is generally about 60,000 square-feet. However, before this new store, the most recent location opened in 2012, also in Dallas, and was half that size. President of Central Market Stephen Butt, said the Company has made a commitment "not to open too many stores,” adding, "We'd rather grow at a pace we can support and deliver the customer experience." Mr. Butt also said the Company has been accumulating land in Dallas, Collin, Denton and Tarrant counties, including 12 commercial properties that form two blocks.
Publix Super Markets
Publix Super Markets plans to build a new refrigerated distribution center in Guilford County, NC by the end of 2022, as part of a multiphase project. The Company is expected to invest up to $300.0 million in the first phase of the project. The proposed distribution center will support delivery of grocery products to Publix locations in the Carolinas and Virginia. Publix operates 58 stores in South Carolina, 38 stores in North Carolina and 10 stores in Virginia. The DC would be the first in the state and the Company’s most northern facility. The Company currently operates nine DCs in three states; Florida (7), Georgia (1) and Alabama (1). The Company also has 11 manufacturing sites in Florida and Georgia for bakery, dairy, fresh food and deli items.
Wegmans
Wegmans will open a new, 113,000 square-foot store in Virginia Beach, VA, set to open in the spring of 2019. The new location is Wegmans’ farthest expansion south to date. The Company currently operates 97 stores in New York, Pennsylvania, New Jersey, Virginia, Maryland and Massachusetts.
Woodman's Food Market
Woodman’s Food Market recently opened a 240,000 square-foot store in Buffalo Grove, IL, its 17th location. Although Woodman's stores traditionally have not accepted credit cards, customers can use a Discover card at the Buffalo Grove store. Generally, Woodman’s constructs a new store every two to three years and conducts renovations in between.
Dunkin' Brands Group
According to published reports, Dunkin' Brands Group plans to unveil 50 U.S. test stores this year that aim to make it more convenient for customers to get coffee with dedicated pickup areas, digital kiosks and expanded drive-through windows that prioritize orders via mobile app. The Company will reportedly invest about $100.0 million in the effort; more than half will go toward store equipment to aid the on-the-go beverage strategy, with the remainder for technology infrastructure and training.
Amazon
Over the past week, Amazon opened its second and third Amazon Go checkout-free stores in Seattle, WA. Unlike the 1,800 square-foot original store, where offerings range from convenience-store staples such as chips and drinks to limited grocery fare and liquor, the second store is smaller at 1,450 square feet and does not offer liquor or grocery staples like milk and bread. It also doesn’t have space for an in-store kitchen, and will have its fresh food supplied by an Amazon kitchen facility in Seattle. The third store is the largest of the three at 2,100 square feet and offer breakfast, lunch, dinner, snacks, grocery essentials and beer and wine. The two new stores are likely to generate more business from office workers than the original, which is adjacent to residential neighborhoods. There have also been reports that the Company expects to open as many as six Amazon Go stores before the end of 2018.
In other news, Amazon has ordered 20,000 Mercedes-Benz vans as part of a plan to build its own last-mile delivery service and hedge its exposure to UPS, FedEx and USPS. The operation will work similar to a franchise agreement with up to 500 companies being allowed to operate Amazon vans, which will be owned by fleet-management companies.
Sprouts Farmers Market
Sprouts Farmers Market will open a new, 25,000 square-foot store in Vacaville, CA, on September 12. It is just one of many new stores Sprouts has announced will be opening in the region. In 2018 alone, Sprouts has announced stores in Natomas, Arden Arcade and Lodi - click the below Future Store Openings Map to request the list.
Hy-Vee
On September 25, Hy-Vee will open its third Wahlburgers franchise location in Olathe, KS. The store will be about 5,200 square feet. Last year, Hy-Vee announced that it plans to build, own, and operate 26 Wahlburgers restaurants. It currently operates a Wahlburgers at Mall of America in Bloomington, MN, and is opening another location on September 11 in West Des Moines, IA.
Stater Bros.
On August 31, Stater Bros. held grand re-openings for four renovated stores in California. The stores are located in Santa Ana, Calimesa, West Covina, and Cucamonga. Key renovations include an updated store layout and an expanded selection of prepared foods. Stater currently operates 171 supermarkets in California.
Macy's
Macy’s is putting the historic Medinah Temple building in Chicago, IL up for sale. The Company will move the Bloomingdale’s home furnishings store out of the space and into a nearby mall. The Company has yet to disclose when the store will move or how much the Company expects to make from the property sale. A buyer could redevelop the 130,000 square-foot building into another use, such as offices or other types of retail.
New York & Company
New York & Company opened a flagship location on State Street in Chicago, IL, an iconic retail destination in the downtown area. The 18,000 square-foot location will include expanded assortments from all of the Company’s exclusive brands. For the first time, the Company’s recently acquired plus-size brand, Fashion to Figure, will also be featured. New York & Company operates over 400 retail and outlet locations. It has been out of the downtown Chicago market for several years.
Earning Releases
Giant Eagle
Giant Eagle’s revenues continue to fall, with sales for the fiscal year ended June 30, 2017 down about $400.0 million, to $8.90 billion, continuing a downward trend over the last four years. The Company contends with a highly competitive operational environment that we believe has resulted in slightly negative comp-store sales and the ongoing erosion of its market share. In addition to competition from Walmart, Aldi has been gaining substantial share throughout Giant Eagle’s primary markets, which we expect to continue. Ultimately, store closures, failed banners, shrinking market share, and a pattern of declining sales are obvious warning signs of a struggling company, at least operationally.
Dollar General
Dollar General’s second quarter sales rose 10.6% to $6.44 billion, driven by comp growth of 3.7% and new store growth, partially offset by store closures. Comp growth was driven by increases in average transaction amount and customer traffic, as well as positive results in the consumables, seasonal and apparel categories, partially offset by sales declines in the home category. The Company reported operating income growth of 10.6% to $545.5 million. Net income rose 38.1% to $407.2 million, from $294.8 million last year when the Company took a charge related to the acquisition of Dollar Express stores.
During the first half of fiscal 2018, the Company opened 510 new stores, remodeled 643 stores and relocated 67 stores. The Company reiterated that it plans to open approximately 900 new stores for the full year. It will also remodel 1,000 locations and relocate 100 stores.
The Company updated its fiscal 2018 guidance and now expects sales growth of 9% – 9.3%, up from 9%, and its same-store sales growth outlook to the mid-to-high 2% range. It continues to expect EPS to be $5.95 – $6.15 and capex of $725.0 million – $800.0 million.
Dollar Tree
Dollar Tree’s second quarter sales increased 4.6% to $5.53 billion. Enterprise same-store sales increased 1.8%, consisting of 3.7% growth at the Dollar Tree banner and flat sales at the Family Dollar banner. Operating income fell to $382.5 million compared with $419.5 million last year, and operating margin was 6.9% compared to 7.9%. Net income increased by 17.2% to $273.9 million.
During the quarter, the Company opened 146 stores, expanded or relocated 13 stores, and closed 26 stores. Retail selling square footage at quarter end was approximately 118.5 million square feet.
Looking ahead the Company revised and narrowed its fiscal 2018 guidance and now expects sales of $22.75 billion – $22.97 billion, compared to previous guidance of $22.73 billion – $23.05 billion. It expects a low single-digit increase in same-store sales and 3.4% square footage growth. The U.S. Department of Commerce recently imposed an anti-dumping duty on certain ribbon purchased from China. The Company expects to incur a charge of $0.04 per share in 4Q. The Company narrowed its EPS estimates to $4.85 – $5.05, compared to previous guidance of $4.80 – $5.10.
Sears Hometown and Outlet Stores
On August 29, Sears Hometown and Outlet Stores announced that for the fiscal 2018 second quarter it expects to report positive comparable store sales for its Hometown segment as well as for the Company overall. Management also expects to report that: (1) net loss decreased $18.5 million – $20.5 million compared to the same period last year, and (2) adjusted EBITDA increased $7.5 million – $8.7 million. All of the improvement was generated by the Outlet segment. Management said it intends to file its 2018 earnings release for the 13-week period ended August 4, 2018 on September 7, 2018, before the market opens. We will issue our Snapshot Report shortly thereafter. The Company has been waging an uphill battle following the spin-off from its troubled parent, Sears Holdings, in 2012. Comps have been negative for 10 straight quarters, and at the end of the 2018 first quarter, the rate of cash burn exceeded liquidity. This means that if unfavorable operational and cash flow trends persist, the Company could possibly burn through its remaining liquidity in less than a year. Underperforming stores are the nub of the problem. To cut costs, the Company has been closing stores at a rate of about 32 per quarter. However, in the fiscal 2018 second quarter the Company significantly increased that amount to about 90. It is likely that management will attribute the operational improvement to the recently accelerated rate of store closings. The Company ended the first quarter with 882 stores in operation.
At Home Group
At Home Group’s second quarter sales increased 24.3% to $288.5 million, driven by the net addition of 29 stores since the second quarter of fiscal 2018 and a comp increase of 2.8%. The Company opened nine new stores in the second quarter of fiscal 2019, ending with 165 stores operating in 35 states, a 21.3% increase since the prior year period. Gross margin expanded 230 basis points to 33.8% from 31.5%, primarily due to the non-recurrence of prior year distribution costs associated with inventory investments, as well as product margin improvement. Adjusted EBITDA rose 33.8% to $50.5 million. In July 2018, the Company completed a sale-leaseback transaction pursuant to which three properties were sold for $43.6 million and simultaneously leased back for cumulative initial annual rent of $3.0 million.
Big Lots
Big Lots reported second quarter sales growth of 0.2% to $1.22 billion, with a 1.6% increase in comps partially offset by a lower store count. The Company currently has 1,416 stores, compared to 1,429 a year ago. Net income fell 17% to $24.2 million, or $0.59, missing analyst projections of $0.67. Results come just days after Big Lots announced that Bruce Thorn would become CEO.
The Company extended its current $700.0 million unsecured credit facility by five years, to August 2023. The facility maintains similar structure and financial covenants. As of May 5, 2018, the Company had $174.0 million in borrowings and $8.6 million in outstanding letters of credit, leaving $517.4 million available under its facility.
For fiscal 2018, the Company now expects EPS of $4.40 – $4.55, compared to fiscal 2017 EPS of $4.45. Guidance is based on comp growth of 1% and cash flow of $100.0 million – $110.0 million.
On the news, the Company’s stock dropped more than 10% to close at $43.05 Friday, adding to a 15% decline this year.
Burlington Stores
Burlington Stores reported second quarter sales increased 9.9% to $1.50 billion, and comps were up 2.9%. Gross margin expanded 70 basis points to 41.4%, primarily driven by increased merchandise margin, which was slightly offset by higher freight costs. SG&A costs were 26.9% of sales, a 20 basis point improvement, driven primarily by disciplined expense management, partially offset by increased stock compensation expense. Adjusted EBITDA rose 19.5% to $152.1 million. Looking to fiscal 2018, the Company expects sales to increase 10.1% – 10.6%, up from previous estimates of 9.7% – 10.5%. Comps are now projected to increase 2.9% – 3.4%, narrowed from prior expectations of 2.6% – 3.4%. Adjusted EBIT margin is expected to increase 30 – 40 basis points, up from 20 – 30 basis points previously predicted. The Company expects to open 43 net new stores and invest $275.0 million in capital expenditures. Burlington previously expected to open 35 – 40 net new stores, and to invest $250.0 million in capex. Adjusted EPS is anticipated to be $6.13 – $6.20, up from $5.90 – $6.00.
Dick's Sporting Goods
Dick’s Sporting Goods reported second quarter sales increased 1% to $2.18 billion. Consolidated same store sales decreased 1.9% following a 0.1% increase in the 2017 second quarter. E-commerce revenue for the second quarter of 2018 increased 12% and represented 11% of total net sales, up from 9% during the same period in 2017. Gross margin improved 80 basis points as a result of a stronger product mix, partially offset by higher freight and shipping costs as the Company expands its e-commerce business. Increased payroll deleveraged weak sales growth, which caused SG&A margin to erode 60 basis points. From the above, Dick’s second quarter EBITDA margin improved 20 basis points to 10.5%. TTM EBITDA margin is now 8.7%, which is above our Sporting Goods industry average of 8%. The Company opened five DICK'S Sporting Goods stores during the quarter. As of August 4, 2018, the Company operated 729 DICK'S Sporting Goods stores, 94 Golf Galaxy units, and 35 Field & Stream stores.
The Company expects to open 19 new DICK'S Sporting Goods stores and relocate four DICK'S Sporting Goods stores in 2018. It does not expect to open any new Field & Stream or Golf Galaxy stores this year.
Best Buy
Best Buy’s second quarter sales increased 4.9% to $9.38 billion due to a 6.2% increase in comparable store sales, partially offset by the net closing of 306 stores. Most of the closings (292) consisted of the smaller mobile units, while 17 of the big box stores were shuttered. This was the sixth straight quarter of sales growth. Domestic revenue of $8.64 billion increased 4.4% compared to the same period last year, driven by comparable sales growth of 6%, partially offset by the loss of revenue from the previously identified store closures. Domestic online revenue of $1.21 billion increased 10.1% on a comparable basis, primarily due to higher conversion rates and increased traffic. As a percentage of total domestic revenue, online revenue increased 80 basis points to 14% versus 13.2% last year. Quarterly EBITDA margin increased 40 basis points, reflecting a gross margin decrease of 30 basis points to 23.8% and an SG&A margin improvement of 70 basis points. TTM EBITDA margin and interest coverage were 6.3% and 124.3x, respectively.
Lululemon Athletica
Lululemon Athletica’s second quarter sales increased 24.5% to $723.5 million, and comps were up 20%. Store comps were up 10%, while direct to consumer comps increased 48%. Gross margin was 54.8%, an increase of 360 basis points, and operating income rose 95.3% to $134.2 million.
The Company opened five new stores and closed one underperforming location during the quarter, ending with 415 stores in operation. For fiscal 2018, the Company now expects sales of $3.18 billion – $3.23 billion, up from previous estimates of $3.04 billion – $3.07 billion. The sales estimate is based on a comp increase in the low teens, compared to its previous outlook for a comp increase in the high single digits. EPS is projected to be $3.45 – $3.53, up from $3.10 – $3.18.
J. Crew Group
J. Crew Group reported net sales increased 3% to $587.6 million in the second quarter. Comparable store sales rose 5% for the quarter, with J. Crew comps up 1% (the first quarterly increase in four years) and Madewell comps surging 28%. Management noted on its quarterly conference call that the comp improvement was driven by both increased traffic and conversion. Gross margin expanded by 30 basis points to 38.5%, primarily due to favorable product costs and buying and occupancy leverage.
However, due to higher expenses, EBITDA fell 17% to $54.2 million, with margins down 220 basis points. During the second quarter, the Company opened one J. Crew and one Madewell store and closed one J. Crew location, ending the quarter with 526 locations. In fiscal 2018, Madewell will remain the Company’s growth vehicle; management expects to open 11 stores (10 Madewell and one J. Crew) and close approximately 30 J. Crew locations.
Shoe Carnival
Shoe Carnival’s second quarter sales increased 14.2% to $268.4 million, and comps were up 6.7%. Gross margin increased to 31.2% from 29%. Merchandise margin increased 0.2% while buying, distribution and occupancy expenses decreased 2%. Operating income rose 132.4% to $14.9 million. The Company plans to open three new stores in the third quarter and close 15 – 17 stores during the year, of which six were closed during the first half of the year. Shoe Carnival also raised its fiscal 2018 outlook, now expecting sales of $1.016 billion – $1.020 billion, narrowed from $1.013 billion – $1.020 billion. EPS is projected to be $2.07 – $2.15, up from $1.90 – $2.05.
Ulta Beauty
Ulta Beauty’s second quarter sales increased 15.4% to $1.49 billion, and comps were up 6.5%. The comp increase was driven by 3.1% transaction growth and 3.4% growth in average ticket. Retail comps increased 4%, including salon comp growth of 1.7%. E-commerce sales increased 37.9% to $132.8 million, representing 250 basis points of the 6.5% comp increase. Operating income rose 7.8% to $193.8 million. During the quarter, the Company opened 19 stores and closed two underperforming locations, ending with 1,125 stores, an 11.2% increase in square footage since last year.
Chico's FAS
Chico’s FAS reported second quarter sales decreased 5.9% to $544.7 million, primarily reflecting a comp decline of 3.2%, the unfavorable impact of the calendar shift due to the 53rd week in fiscal 2017, and the impact of 42 net store closures since last year’s second quarter. The comp decline was driven by a decrease in transaction count, partially offset by higher average dollar sales. Gross margin was flat at 36.1%, reflecting fewer markdowns, offset by additional costs related to continued expansion of its omni-channel fulfillment programs and deleverage of store occupancy costs. Operating income fell 35.8% to $22.8 million. During the first half of fiscal 2018, the Company shuttered 20 underperforming locations, including 11 during the second quarter, ending with 1,440 stores in operation.
The Michaels Companies
The Michaels Companies reported second quarter sales decreased 1.8% to $1.05 billion, primarily due to the closure of all 94 full-size Aaron Brothers stores in the first quarter and a 0.4% decline in comparable store sales. The sales decrease was partially offset by sales from 21 net additional Michaels stores over the past year and an increase in wholesale revenue. During the quarter, the Michaels banner opened nine new stores, closed one underperforming location, and relocated seven existing stores. At the end of the second quarter, the Company operated 1,251 Michaels stores and 36 Pat Catan’s stores. Operating income decreased, as expected, due to lower gross profit (caused by higher distribution-related costs, increased promotional activity, and occupancy cost deleveraging), partially offset by lower SG&A expenses. As a result, adjusted EBITDA fell 9.3% to $113.4 million.
Destination XL Group
Destination XL Group’s second quarter sales inched up 0.9% to $122.2 million, due to a comp increase of 3.3% and an increase of $2.0 million in non-comparable sales from DXL stores open less than 13 months. These increases were partially offset by lost sales at closed stores of $2.3 million, and a $1.9 million shift in calendar weeks due to the 53rd week in fiscal 2017. E-commerce sales increased to 21.2% of total sales, compared to 20.5% in the prior year period. Gross margin was 46.3%, up from 46.1%, due to a 30 basis point decrease in occupancy costs, partially offset by a 10 basis point decrease in merchandise margins. The decrease in merchandise margin was related to an increase in shipping costs, primarily in the Company’s direct business. Occupancy costs improved from leverage on a higher sales base and a decrease of $0.2 million related to closed stores. Adjusted EBITDA rose 31.3% to $8.8 million, driven by comp growth as well as reduced SG&A expenses related to lower payroll costs. For the first six months of fiscal 2018, the Company opened two new DXL stores, one DXL outlet store, rebranded three Casual Male XL stores to DXL and closed seven Casual Male XL stores, three Casual Male XL outlets, and one DXL store. The Company ended the quarter with 334 stores.
Signet Jewelers Limited
Signet Jewelers Limited reported second quarter sales increased 1.5% to $1.42 billion, and comps were up 1.7%. The comp increase was inclusive of a 40 basis point positive impact due to planned shifts in timing of promotions at Jared, partially offset by a 160 basis point negative impact due to transition issues related to the October 2017 outsourcing of its in-house credit program. Comps were up 7.1% at Zales, 1.2% at Jared, 11.5% at Piercing Pagoda, and 25.3% at James Allen. However, comps fell 2.1% at Kay, 10.5% at regional banners, 3.8% at H.Samuel, and 1.1% at Ernest Jones. E-commerce sales were up 82.8% to $150.3 million, with James Allen sales up 25.3% to $54.4 million. E-commerce sales increased across all segments and accounted for 10.6% of second quarter sales, up from 5.9% of total sales in the prior year second quarter. Gross margin was down 260 basis points to 30.1% due to an inventory charge. As a result of the inventory charge, credit outsourcing and higher expenses, the Company generated an operating loss of $58.1 million, compared to income of $135.6 million in the prior year period. This year the Company plans to close more than 200 stores and open 35 – 40 new stores, for a net selling square footage decline of 4% – 5%. Signet opened 23 stores and closed 86 underperforming locations during the quarter, ending with 3,493 units in operation.
Kirkland's
Kirkland’s reported second quarter sales increased 1.7% to $133.9 million, driven by an increase in both store count and e-commerce revenue. Kirkland’s opened six stores and closed five underperforming locations during the second quarter, bringing the total number of stores to 426 at quarter end. Comps declined 3.9%, compared to an increase of 1.2% in the prior year quarter. Brick-and-mortar traffic was challenging, which resulted in a decrease in transactions that was slightly offset by a higher average ticket. E-commerce sales were driven by gains in traffic and average ticket. Operating loss widened 57.3% to $9.0 million, negatively impacted by transition charges associated with the resignation of the Company’s former CEO.
Mattress Firm
Steinhoff International Holdings reported its unaudited quarterly results for the nine months ended June 30, 2018. The following are results for the Stripes U.S. segment, doing business as Mattress Firm. Turnaround efforts continue as the Company optimizes its real estate, while facing competitive pressures online and offline. Mattress Firm’s sales for the year-to-date period of fiscal 2018 fell 13.7% to €1.92 billion (~US$2.30 billion), driven by 245 net store closures and a 5% decline in comparable store sales (on top of a 10% drop last year). Mattress Firm’s third quarter comps grew 2.6% from last year due to improved merchandising assortment, which led to higher unit volume per store, while average unit price declined 3.3%. Pricing pressure remains high due to gaps in the luxury product range. Management has addressed this issue by introducing new luxury mattresses. Mattress Firm is in the process of closing locations by evaluating leases as they come up for renewal and through the previously announced store optimization initiative. During the YTD period of fiscal 2018, Mattress Firm opened 32 stores, acquired 14 franchised stores and closed 197 stores, ending at 3,205 locations. For the remainder of fiscal 2018, the Company expects to open approximately 28 new stores and to close 53 underperforming locations, ending at 3,180 units.
