February 6, 2019
Industry Spotlight:
Apparel Retailers
The competitive landscape for apparel retailers will experience a significant shift in 2019. The Gymboree bankruptcy presents a rare opportunity for Carter’s, Justice, The Children’s Place, and other children’s apparel retailers. Similarly, the upcoming Charlotte Russe closures will result in available market share for Forever 21, H&M, Aeropostale, Hollister, American Eagle, Express, and other fast-fashion retailers serving young women. Tilly’s, Zumiez, and The Buckle are also well-positioned to gain new customers. However, all of the aforementioned retailers will need to contend with continued expansion from Marshalls, T.J. Maxx, Burlington and Ross Dress For Less. Additionally, Von Maur will continue to grow, with plans to open new stores over the next few years.
Charlotte Russe Holdings
On February 3, Charlotte Russe Holdings, DIP filed a voluntary Chapter 11 petition in the U.S. Bankruptcy Court in the District of Delaware. The Honorable Kevin J. Carey has been assigned to the proceedings, which have been designated as case number 19-10210. The Company said it intends to use the proceedings to facilitate an orderly wind-down of approximately 94 of its 530 stores (click here to request the list), while continuing to pursue a going-concern sale of the business and assets - see below for Store Closing Map. Charlotte Russe and its Peek brand stores and online platforms are currently open and continue to serve customers. The Company said it will provide more details about the plans for the closing locations and their store closing sales in the near term. Management said it has received a commitment for a $50.0 million Debtor-In-Possession financing facility. If approved by the Bankruptcy Court, management said it believes that the financing will support the Company’s operations and administration during the Chapter 11 proceedings. The Company has filed a number of customary motions with the U.S. Bankruptcy Court, seeking authorization to operate its business in the ordinary course during the Chapter 11 proceedings.
Hennes & Mauritz AB
For the fourth quarter ended November 30, 2018, Hennes & Mauritz AB reported that net sales increased 12% to SEK 56.41 billion ($6.20 billion) from SEK 50.41 billion ($5.54 billion) for the same period last year. In local currencies, net sales increased 6%. Gross margin fell 1.2% to 54.2%, and profit after tax dropped 11.3% to SEK 3.54 billion from SEK 3.99 billion last year. Management said the results were negatively affected by costs in connection with the replacement of logistics systems, and also by activities in preparation for upcoming “transitions.” Together with “negative year-end effects” these costs amounted to approximately SEK 560 million in the quarter.
For fiscal 2019, the Company plans to open about 335 new stores, including 240 H&M stores and 95 stores under the COS, & Other Stories, Monki, Weekday, ARKET and Afound banners. Of the planned H&M stores, three will be standalone and 25 will include in-store home departments. The majority of the H&M store openings will be in markets outside of Europe and the U.S. Management said that approximately 160 store closures (about 4% of the store base) are planned in 2019, which is part of an intensified store optimization being carried out that also includes renegotiations, rebuilds, and adjustment of store space to ensure that the portfolio is the best fit for each market. The net addition of new stores will thus amount to approximately 175 for 2019.
Francesca's
Francesca’s board initiated a review of its strategic and financial alternatives to maximize value, including a potential sale of the Company, a financing or a refinancing. The Company has engaged Rothschild & Co. and other advisors to assist in the process. The Company has not set a timetable for completion of the process, and it does not intend to comment further regarding the process unless a specific transaction or other alternative is approved by the board, the process is concluded, or it is otherwise determined that further disclosure is appropriate or required by law. It should be noted that on February 1, Francesca’s received a letter from Nasdaq indicating that its closing bid price over the last 30 consecutive business days was below the minimum bid price of $1 per share. The Company has until July 31 to regain compliance.
As previously mentioned, Francesca’s CEO Steven P. Lawrence resigned from the Company to serve as EVP and chief merchandising officer at Academy Sports + Outdoors, effective February 11. The Company expects that Michael Prendergast will be appointed interim CEO subject to the finalization of an agreement with Alvarez & Marsal. Mr. Prendergast is currently a senior director in Alvarez & Marsal’s Private Equity Performance Improvement Retail practice. Francesca’s has reported five consecutive quarters of double-digit comparable store sales declines, which management attributes primarily to merchandising mistakes. The Company maintains a debt-free balance sheet but has begun to burn cash. Liquidity at the end of the third quarter was adequate at $45.2 million. The Company has halted expansion and expects to close 30 to 40 boutiques in fiscal 2019.
Amazon
Amazon’s fiscal 2018 fourth quarter sales grew 19.7% to $72.38 billion, which included $4.40 billion from the acquisition of Whole Foods Market. Excluding the $801.0 million unfavorable impact in foreign exchange rates, net sales increased 21%. Additionally, while it appears that Physical Store sales (primarily Whole Foods) fell 2.7% from last year, management noted that on an apples-to-apples basis (excluding a five-day calendar shift, Prime Now sales and online delivery sales) Whole Foods comps grew 6% from last year. By products, North America Retail sales grew 18% and International Retail sales were up 15%; AWS (cloud computing) rose 45%, reaching a run-rate of over $29.72 billion (about 11% of total sales on a run-rate basis).
Amazon officials appeared before the New York City Council last Wednesday with a swarm of supporters to counter the protests from those who oppose the Company’s pending Long Island City headquarters. Still, protests continued, with opposition that included activists, politicians, the Retail Wholesale and Department Store Union, and the Teamsters.
Additionally, for the first time ever, Amazon reported a new risk in its annual filing – counterfeit products. Our analysts note that with third-party sellers contributing 52% of units and approximately 66% of gross merchandise value online, this issue could grow. “The American Apparel & Footwear Association, which represents more than 1,000 brands, recommended that some Amazon sites should be added to the “Notorious Markets” list because of counterfeits, saying Amazon should “be a leader in the fight against counterfeits.”
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Smart & Final
According to a historically reliable source, Ares (Ares) Management LLC, the majority owner of Smart & Final (S&F), is exploring strategic options including a sale of the Company. The Company has reportedly retained investment banks on a sale process and has reached out to other private equity firms that could be potential acquirers.
Genesco
On Monday, Genesco announced it completed the sale of its Lids Sports Group to FanzzLids Holdings for $101.0 million. The final transaction amount remains subject to working capital and other adjustments, and does not include a tax benefit estimated at $30.0 million. FanzzLids is a holding company controlled and operated by affiliates of Ames Watson, LLC.
Staples and Essendant
On January 31, Staples announced the completion of its tender offer to acquire all outstanding shares of Essendant common stock. Staples has acquired a sufficient number of shares to close the acquisition without the affirmative vote of Essendant’s stockholders. The $482.7 million transaction is now completed, resulting in Essendant becoming a wholly owned subsidiary of Staples. The FTC conditioned its approval of the transaction, by requiring Staples to agree to limit its access to commercially sensitive information about some of Essendant’s customers. This was to resolve the FTC’s concerns that the transaction may harm competition in the market for office supply products sold to small- and mid-sized businesses. The agreement is subject to public comment through February 27, after which the FTC will conduct an additional review and decide whether it should withdraw from the agreement or modify its order. Wells Fargo Capital Finance announced that it acted as administrative agent for a $1.20 billion asset-based credit facility and a $125.0 million term loan facility in connection with the deal. As part of the transition, Ric Phillips, president and CEO of Essendant, announced his intention to seek opportunities outside the Company. Harry Dochelli, who has been with the Company for the past six years, most recently in the role of president of office and facilities, has been named as president of Essendant. Essendant is the largest U.S. wholesale distributor of office products, janitorial products, breakroom supplies, technology products, office furniture, and industrial and automotive products. It sells to office supply resellers and owns a network of distribution centers.
Tuesday Mornings
Tuesday Morning’s second quarter revenues grew 1.4% to $338.4 million, despite four fewer stores. Comparable stores sales improved 1.9%, on top of a 1.8% increase last year, boosted by higher customer transactions coupled with a slight increase in average ticket. Sales at relocated stores during the past year increased about 46% during the quarter, driven by improved locations and larger average store footprint. Gross margin expanded 280 basis points on reduced markdowns, improvements in initial merchandise mark-ups, and lower supply chain costs.
The Michaels Companies
The Michaels Companies announced that following a strategic review of its real estate portfolio, it will be closing all 35 Pat Catan’s locations (see below for Store Closing Map) and one Prizm Art store - click here to request the list of closings. The closure process is expected to be completed by September 30, and management noted that it intends to rebrand and reopen up to 12 locations depending on lease negotiations, under the Michaels banner. Pat Catan’s, which was acquired in February 2016 with 34 store locations for $150.0 million, averages 32,000 square feet per location; management expects the banner to generate approximately $111.0 million in sales for full-year fiscal 2018 (implying $3.2 million average sales per location and $100 in average sales per gross square foot) and will not have a material impact on Michael’s operating income. Following this announcement, Michaels noted that it expects a one-time after-tax cost of implementing these changes to be in the range of $44.0 million to $48.0 million due to the termination of remaining lease obligations, the write-off of fixed assets, and employee-related expenses. The Company anticipates the vast majority of the cost will be recognized in the fourth quarter of fiscal 2018. Additionally, the Company expects a one-time after-tax cash benefit from this restructuring to be in the range of $20.0 million to $25.0 million in fiscal 2019. This news does not come as a surprise given the secular shift of e-commerce penetration in the arts & crafts segment (estimated at 10%). Although Michaels continues to adapt to the changing retail landscape, it has come at the cost of (i) margin pressure from higher logistics, IT and online costs, and (ii) additional shuttering of stores. Reflecting this, management noted that its online offerings include twice as many SKUs as its stores, which has increased logistics costs, resulting in TTM EBITDA margin eroding 140 basis points from last year to 15.2%. Considering these closures and the shuttering of its 94 stores under the Aaron Brothers banner, Michaels will operate 1,256 locations, all under its namesake banner.
Papa John's International
Hedge fund Starboard Value LP has taken a $200.0 million (£153.0 million) stake in Papa John’s International after the Company rejected a similar offer from Papa John’s founder, John Schnatter. Mr. Schnatter, who was fired as the Company’s chief spokesman last year following the use of a racial slur at a training session, still sits on the board and is considering a lawsuit over the Starboard investment. According to a regulatory filing, Mr. Schnatter said that over the weekend he offered to make a $250.0 million investment “on terms that were substantially similar to, but superior to, the Starboard transaction.” Starboard has an option to invest an additional $50.0 million through March 29. Papa John’s says it intends to use about half the proceeds to repay debt.
Starboard Co-Founder Jeffrey Smith will become Papa John’s board chairman and Anthony Sanfilippo, former chairman and CEO of Pinnacle Entertainment, will join as an independent director. Papa John’s CEO Steve Ritchie since January 2018 will also join the board.
Papa John’s shares, which have fallen more than 65% in the last 52 weeks, jumped 9% Monday to close at $41.97.
In other news, the Company opened its first restaurant in Lahore, Pakistan as part of a new 45-store development agreement with PJ Crescent Limited. A second store in Lahore will be opened by PJ Crescent in a few weeks.
Hudson's Bay Company
Hudson’s Bay Company completed the sale of a 50% stake in 18 German properties, valued at C$375.0 million (US$288.0 million), to a subsidiary of SIGNA Prime Selection. The proceeds have been used to reduce borrowings under HBC’s asset-based revolving facility. In November, HBC received C$257.0 million (US$197.0 million) when HBC Europe and SIGNA’s Karstadt Warenhaus GmbH combined retail operations and formed a real estate joint venture, which now includes the aforementioned 18 properties. SIGNA’s acquisition of the Galeria Kaufhof location in Cologne and the Carsch-Haus store in Duesseldorf is expected to occur this year, subject to customary closing conditions.
As previously mentioned, HBC’s Lord & Taylor building on Fifth Avenue in Manhattan was sold in October 2017 to WeWork, an office-sharing start-up that plans to use the 676,000 square-foot space as its headquarters. On February 4, HBC announced WeWork Property Investors exercised its option to convert C$163.0 million (US$125.0 million) of the transaction value into an equity interest in the building to be held by HBC through a joint venture structure upon closing. All parties involved in the purchase and sale of the Lord & Taylor Fifth Avenue building are working diligently to close the transaction, which is expected to occur shortly.
Neiman Marcus
Neiman Marcus announced a partnership with Hudson BLVD Group to bring BLVD, a “multi-brand luxury beauty destination,” to certain Neiman Marcus locations, starting with the Short Hills, NJ store that opened on February 1 and the forthcoming store in Brooklyn, NY, opening in March. The partnership is focused primarily on services that BLVD offers, which will now be available at Neiman Marcus locations and can be booked through BLVD. BLVD offers salon services, nail services, eyelash extensions, brow shaping and hair removal.
This morning, Neiman Marcus announced the appointments of David Goubert to EVP, stores and retail experience, and Ginger Mollo to SVP, retail experience – West Coast. Mr. Goubert joins Neiman Marcus from Starboard Cruise Services, a division of LVMH, where he was most recently SVP, luxury cruise lines. Ms. Mollo joins Neiman Marcus after 18 years at Apple, where she was most recently the global lead for advancing the culture of Apple within the store environment.
McDonald's
McDonald’s fourth quarter sales fell 3.3% to $51.60 billion, primarily due to the Company’s refranchising initiative. Around 90% of the Company’s stores globally are run by franchisees, and management is trying to increase that to 95%. Comps rose 4.4% in the quarter and 4.5% for the year. U.S. comps were up 2.3% in the quarter, driven by higher prices, partially offset by lower traffic. Modernized stores and growth in delivery helped bring in more customers globally last year, but lower store traffic in the U.S. remains a concern. The Company reported net income of $1.42 billion, compared with $698.7 million last year.
Topgolf International, Inc.
Topgolf International, Inc. announced plans to open 11 new locations in 2019, after opening 10 new venues in 2018, to end the year with 62 locations. However, these venues are capital intensive, with each location averaging 65,000 square feet and requiring $18.0 million in build-out costs, store investments and working capital, plus additional capital costs for ongoing maintenance. As a result, it is not surprising that the Company has recently been compelled to seek more capital. On January 29, the Company reported plans to issue a $500.0 million senior secured credit facility, comprised of a $175.0 million senior secured revolving credit facility due 2024 and a $325.0 million term loan due 2026. The proceeds from this issuance are slated for refinancing existing debt as well as funding growth initiatives. On January 30, S&P assigned the Company a B- Issuer Credit Rating, with a “stable” outlook. The agency stated that the credit rating reflects the Company’s “adequate liquidity and access to external financing to complete its current venue growth plan,” and the stable outlook reflects the assumption that “if Topgolf is unable to source external financing, the Company will halt future venue constructions prior to breaking ground, eliminating growth capital expenditures and reducing pre-opening expenses. This would allow Topgolf to likely generate positive free cash flow and EBITDA well above its fixed charges.” S&P did note significant risks associated with Topgolf, which included balance sheet leverage, limited debt servicing coverage and continued cash burn. These operational metrics are reflected in the Company’s current price talks on the $325.0 million term loan due 2026 at LIBOR plus 5.75% to 6%, representing an approximate 300 basis-point increase from the previous issue.
Topgolf currently operates 52 locations (as of January 2019) across the U.S. (48), U.K. (3), and Australia (1). The Company has plans to expand to Canada, Mexico, and the United Arab Emirates in 2019.
The Marcus Corporation
On February 1, Marcus Theatres (division of The Marcus Corporation) announced that it completed the acquisition of Movie Tavern from VSS-Southern Theatres, LLC for approximately $139.0 million. The transaction is being financed with $30.0 million in cash and 2.45 million shares of Marcus Corporation’s common stock (priced as of Monday’s close of $44.57 per share). Movie Tavern is a dine-in movie theatre operator with 22 locations and 208 screens across nine states. With the completion of the transaction, Marcus Theatres now operates a total of 90 locations and 1,097 screens in 17 states, representing a 32% increase in total location count and a 23% increase in total screen count. The Company intends to brand the new locations as “Movie Tavern by Marcus” and introduce its custom offerings such as $5 Movie Tuesdays.
Marcus also reported fourth quarter sales increased 5.7% to $175.0 million. EBITDA rose 8.8% to $35.4 million, and EBITDA margin improved 0.5% to 20.2%.
In other news, Marcus announced the pricing of a registered public offering of 1.5 million shares of the Company’s common stock, held by Southern Margin Loan SPV LLC, at a public offering price of $40.25 per share. The Company issued the shares in connection with the closing of the aforementioned acquisition. The offering is expected to close today, subject to customary closing conditions, and the underwriter will have a 30-day option to purchase up to an additional 225,000 shares. The Company will not receive any proceeds from the offer.
Store Activity
H-E-B
H-E-B opened a new multi-level location in the Heights community of Houston, TX on January 30. As evident from our Store Concentration Mapbelow, the new 92,000 square-foot store is within three miles of 12 competing food retailers, including another H-E-B store.
Meanwhile, H.E. Butt launched its 12th restaurant concept with the opening of seafood venue True Texas Boil House at a Houston supermarket on January 25.
Sprouts Farmers Market - Strategic Sales Insights
Sprouts Farmers Market has grown from a regional fresh foods grocer in the Southwest to operating 315 stores in 19 states nationwide. Since fiscal 2013, the Company has nearly doubled its store count and more than doubled its annual sales. New store openings remain the Company’s primary growth vehicle. It opened 30 new stores in fiscal 2018, on top of 32 in fiscal 2017 and 36 in fiscal 2016. Looking ahead, Sprouts plans to continue this pace of growth for the near term, with 60% – 70% of the growth slated for existing markets. Our report takes a close look at the Company’s operational and competitive status, including market position, real estate and sales trends, and provides visual competitive analyses as well as key real estate metrics like store count, average sales per store and sales per square foot.
Trader Joe's
Trader Joe’s will end grocery delivery services from its stores in Manhattan, NY. In an e-mail statement, the Company said its seven stores in Manhattan will end grocery deliveries effective March 1. The Company cited cost and wide availability of other delivery services in the area as reasons for the change. Trader Joe’s reportedly does not plan to launch grocery delivery in other markets. Currently, third-party services such as Postmates and Envoy deliver from Trader Joe’s in some states. The Company operates more than 470 locations in 43 states and Washington, D.C.
In other news, Trader Joe’s is reportedly opening a new store in the East Village in NYC in a new luxury rental building. A truck was spotted dropping off equipment at the empty retail space and a sign on the supply boxes appears to confirm the long-rumored location. Trader Joe’s operates a nearby location in Union Square that reportedly has significant traffic flow.
Wegmans
Wegmans will break ground on a new 84,000 square-foot store in Alexandria, VA this spring. The store is part of a larger mixed-use project, with much of the Wegmans located on the second floor of the development. The Company currently operates a store nearby (about 20 minutes away), which opened in June 2015.
Sheetz
Sheetz recently opened its 100th store in North Carolina, located in High Point. Our Retail Openings & Closings map below shows 15 additional planned Sheetz openings, including four more in North Carolina.
Hy-Vee
Hy-Vee opened a new Wahlburgers restaurant at The Corners of Brookfield shopping center in Brookfield, WI. The 6,000 square-foot restaurant is part of Hy-Vee’s 2017 plans to build, own and operate 26 Wahlburgers restaurants, the first three of which opened last year at Mall of America in Bloomington, MN; West Des Moines, IA; and Olathe, KS. Hy-Vee also sells Wahlburgers-branded menu items at its full-service Hy-Vee Market Grille restaurants in the Des Moines area.
FAO Schwartz
FAO Schwarz plans to open its first European flagship store in London on November 1. The new store will feature play-based experiences, including in-store demos and the FAO Raceway, where shoppers build custom remote control cars with the help of trained mechanics. ThreeSixty Group, which bought the FAO Schwarz brand in 2016, has been working to revive it. The Company re-opened its New York City store in December 2018.
According to the NPD Group, U.S. retail sales of toys generated $21.60 billion in 2018, down 2% from $22.00 billion in 2017, after four straight years of growth in the toy industry. Toys “R” Us was estimated to account for 10% – 15% of all toy sales prior to its liquidation last summer.
Inserra Supermarkets
Inserra Supermarkets opened a new ShopRite store in Wyckoff, NJ on January 13. The store features a bakery, ShopRite Kitchen, and a health and wellness department.
Meanwhile, after a successful pilot, fast-casual salad restaurant chain Saladworks is looking to grow its presence at ShopRite supermarkets in the Philadelphia area this year. Saladworks opened its first location inside a remodeled ShopRite last year, owned by Wakefern member Brown’s Super Stores, and two more are slated to open by the end of the first quarter in other Brown’s stores. If they perform well, Saladworks could expand to four more Brown’s supermarkets within the year. Brown’s owns and operates 11 ShopRite and two Fresh Grocer stores in the Philadelphia area.
Bashas'
Bashas’ Diné Markets recently opened a newly renovated store in Tuba City, AZ (the Navajo Indian Reservation’s largest community). In addition to extensive upgrades that were made to all areas of the store, Bashas’ introduced a larger produce department along with an increased amount and variety of healthy meal options. Diné Markets are on Native American Reservations throughout Arizona. The banner is deemed a “modern-day trading post” that specializes in products serving the needs of Navajo, Apache and Tohono O’odham customers.
Yum! Brands
Yum! Brands’ Taco Bell signed an 11-year lease extension (until 2030) on its corporate headquarters in Irvine, CA. Taco Bell’s headquarters encompasses 180,000 square feet. The Company said the lease extension also means that plans to restore the first Taco Bell restaurant, “Numero Uno,” will move forward but said it will provide details at a later date. In 2015, the Company saved the building from demolition, loaded it on a flatbed truck, and moved the entire structure 45 miles from the original Downey location to its Irvine headquarters.
Shake Shack
This summer, Shake Shack will open its second Ohio location at Easton Town Center in Columbus. The 3,523 square-foot restaurant will feature an outdoor patio and seating for more than 100 guests.
BJ's Wholesale Club
BJ’s Wholesale Club began construction on a new store in Madison Heights, MI at the site of a former Super Kmart, which closed in 2014. It will be the Company’s first store in the state. The 143,000 square-foot project is estimated to cost $33.0 million. Competition will be fierce, as both Walmart’s Sam’s Club and Costco have stores a little more than a mile away. The Company also plans to open a new store in Taylor, MI in 2019.
Kohl's
Kohl’s unveiled a pilot program with Weight Watchers for an in-store WW Studio. Select stores and Kohls.com will begin offering WW Healthy Kitchen products in June 2019, and store associates can also gain subsidized WW Freestyle program memberships through the Kohl’s Healthy Rewards program. The first WW Studio will be 1,800 square feet inside one of Kohl’s Chicago stores and will host wellness workshops for local Weight Watchers members.
