July 31, 2019
Barneys New York is reportedly in discussions with existing lenders, including Wells Fargo & Company, about a DIP Facility to fund operations if it decides to file for bankruptcy. The discussions are in the early stages, and management is still evaluating options that could avert a bankruptcy filing, such as forming “partnerships.” The Company has held meetings in Europe and Canada with potential buyers, according to sources, which also note that if the Company does elect the bankruptcy option, the filing could come as soon as this week. The Company reportedly has approximately $250.0 million of debt obligations, including a $200.0 million asset-based revolver provided by Wells Fargo and a $50.0 million term loan. A Company representative stated, “We continue to work closely with all of our business partners to achieve the goals we’ve set together and maximize value. Our board and management are actively evaluating opportunities to strengthen our balance sheet and ensure the sustainable, long-term growth and success of our business.”
PetSmart raised about $1.00 billion in proceeds from the Chewy IPO, and for the first time in a long time, was on the receiving end of some good news. Estimates have the Company paying down about $825.0 million of its debt, primarily its term loan and its 5.875% senior secured notes. The reduction will save the Company an estimated $47.0 million in annual interest expense, and reduce debt to TTM EBITDA to about 9.5x. The debt reduction, along with the lofty Chewy valuation in the $14.00 billion range, gave both rating agencies the impetus to upgrade the Company. S&P upgraded PetSmart’s first lien debt to “B” from “CCC” and the senior unsecured debt to “CCC+” from “CC.” Moody’s followed suit, raising the senior secured debt to “B2” from “B3” and the senior unsecured debt to “Caa2” from “Caa3.” With the volatility and fight with its lenders now behind it, PetSmart should be able to focus on its retail operation. As Chewy moves toward becoming operationally profitable, PetSmart’s metrics will also improve, as it still owns about 67% of Chewy. Store metrics have also improved, with fiscal 2019 first quarter numbers showing flat store sales, which was an improvement over the consistent negative trend during fiscal 2018. As pet owners spend more on premium products and continue with the “humanization” of their pets, the segment is expected to grow for the next few years and remain moderately recession proof, or at least recession-delayed should the economy slow.
Yum! Brands appointed new CEOs of Taco Bell (Mark King) and Pizza Hut (Artie Starrs), effective August 5. Mark King most recently served as president of Adidas Group North America. Artie Starrs is being promoted from president of Pizza Hut U.S. Click here to request a list of Yum! Brands Future Openings.
A receivable arising from a legal dispute with Transform Holdco (New Sears) represents one-third of the assets in the bankruptcy estate. The relatively high percentage reflects the fact that the asset balance in the estate has been falling, as the case is late in its lifecycle, and bank debt and intercompany items have already been paid. A confirmation hearing is scheduled for August 16.
Earlier this month, Walmart opened Walmart Pickup Point, a 40,000 square-foot prototype store in Lincolnwood, IL, to cater to customers’ online pickups and deliveries. Customers drive up to designated parking spots at the site, and Walmart workers load up their cars with their orders.
Retail Bankruptcies - Special Update
AggData’s Chapter 11 Recap takes a look back at the previous six months of retail bankruptcy activity from all 94 U.S. jurisdictions and presents the data by month, industry and state of primary operation.
As part of United Natural Foods’ Pacific Northwest rationalization plan to consolidate five distribution centers to two, a WARN notice was filed indicating the Company will be laying off 116 workers at its Auburn, WA facility. The layoffs are expected to begin September 8. UNFI (Supervalu) will replace the Auburn facility, along with DCs in Tacoma, WA and Portland, OR with two facilities in western Washington. The closings come as a result of UNFI’s purchase of Supervalu last year. UNFI is building a new 1.2 million square-foot distribution center in Centralia and expanding its Ridgefield operations in Clark County by more than 500,000 square feet.
On July 24, Empire Company Limited, parent of Sobeys, announced the next four locations for the expansion of its FreshCo discount banner into Western Canada. The four FreshCo stores in Saskatchewan are expected to open in summer 2020, with the respective Safeway locations closing in March 2020. The combined closure costs related to store conversions are estimated to be $6.0 million. With these four locations in Saskatchewan, the Company has now confirmed 22 of approximately 65 planned locations in Western Canada. In fiscal 2018, the Company announced plans to convert approximately 25% of its underperforming Safeway and Sobeys locations over a five-year period. The Company recently opened its first two Chalo! FreshCo stores in the West in Surrey, BC, and has plans to open four more FreshCo stores in British Columbia in 2019 and seven in 2020.
Ahold Delhaize’s Food Lion will debut its latest store upgrades of 23 stores in 14 towns and cities throughout the greater Charlottesville and Harrisonburg, VA markets today. As previously indicated, the Company made a capital investment of $40.0 million in the stores, which included the remodeling projects and hiring 400 additional associates. Store-level improvements include a greater product variety and assortment across all departments including more local, natural, organic and gluten-free products, an improved selection of fresh produce and meat, a larger offering of Nature’s Promise products, walk-in produce coolers, a wider variety of grab-and-go items, and a more efficient checkout process. Click here to request a list of Ahold future openings and closings.
Giant Eagle has received approval to build a 4,900 square-foot GetGo convenience store in Murrysville, PA alongside a dozen fuel pumps near the existing Giant Eagle. Construction is expected to begin by the end of the year.
Weis Markets has rolled out its Weis 2 Go online pickup and delivery service to another 61 stores. With the expansion, the program is currently offered at 150 of its 200 stores in Pennsylvania, Maryland, Delaware, New Jersey, New York, Virginia and West Virginia.
Sprouts Farmers Market will open a 25,000 square-foot store in West Hollywood, CA on July 31. Sprouts operates about 120 stores throughout the state, or about 36% of its store base.
Strategic Sales Insights
TJX Companies’ off-price retail model continues to drive business, as evidenced by the Company posting its 23rd consecutive year of comp growth in fiscal 2019. TJX reported $38.97 billion in sales for fiscal 2019, up 8.7% from the previous year. Top-line growth resulted from increased customer traffic across all business segments, culminating in significantly better than expected 6% consolidated comp growth for the year. Revenue growth was further boosted by the net opening of 236 stores, primarily throughout the U.S. 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.
In early July, it was reported that CEC Entertainment Inc. (a subsidiary of Queso Holdings, owned by private equity firm Apollo Global Management) was expected to complete a merger with Leo Holdings Corp., a publicly traded special purpose acquisition Company. However, the deal did not go as planned, and CEC terminated the agreement with Leo Holdings, effective immediately. The reason for the termination was not disclosed. CEC will not be going public anytime soon. As of June 30, CEC operated and franchised a total of 609 Chuck E. Cheese and 141 Peter Piper Pizza restaurants, with locations in 47 states and 14 countries.
Cracker Barrel announced it has entered into a strategic relationship with Punch Bowl Social (PBS), a Denver-based experiential food and beverage company with 17 locations in 12 states. Cracker Barrel will invest up to $140.0 million to acquire an initial non-controlling stake in PBS to provide growth capital for future development and will have the option to acquire a controlling stake or full ownership in the future. PBS presently plans to open 11 additional locations by the end of calendar 2020. Management noted that while PBS expects to have positive store-level and Company-level EBITDA in fiscal 2020; Cracker Barrel also expects PBS’s operating income will be negative in the near-term due to growth and pre-opening expenses.
Wakefern will open a 24,300 square-foot automated micro fulfillment center in Clifton, NJ that will serve online customers of 10 ShopRite stores operated by member Inserra Supermarkets located in New Jersey and New York. The mini-warehouse will fulfill both pickup and delivery orders, and is reportedly able to robotically assemble orders of 60 SKUs or less very quickly. Wakefern is partnering with Takeoff Technologies to power the facility. Wakefern could open additional micro fulfillment centers that would serve high-density urban and suburban neighborhoods.
Hy-Vee will open its first coffee shop/restaurant in partnership with Smokey Row Coffee Co. in mid-September in Chariton, IA, where the Company also has a distribution center. Smokey Row will take the place of the Hy-Vee Market Grille restaurant in the Hotel Charitone. This will be the fifth Smokey Row location in Iowa and the first of several locations planned in partnership with Hy-Vee. This Company has made a number of other strategic partnerships over the past few years including with restaurant chain Wahlburgers and Orangetheory Fitness.
Separately, the Chariton Hy-Vee grocery store’s current Market Grille Express will be renovated to accommodate a wider selection of food options.
Hy-Vee is also changing vendors for its clothing boutiques, ending its relationship with F&F and going into business with Joe Fresh, a Loblaw-owned clothing chain. Joe Fresh merchandise, including apparel, accessories, footwear and health/beauty for women, men, children and babies, will debut in Hy-Vee stores as soon as next month. The shop-in-shop concept is launching in seven markets: Des Moines, IA; Kansas City, MO; Lincoln, NE; Minneapolis, NM; Omaha, NE; Rochester, MN; and Grand Island, NE. Joe Fresh is currently sold in nearly 1,500 Canadian retail locations; it tried to enter the U.S. market through a deal with J.C. Penney that did not work out. It also had a store on New York City’s Fifth Avenue, but that was closed several years ago.
Separately, Hy-Vee is looking to open a freestanding, drive-thru pickup kiosk in a parking lot adjacent to its New Hope, MN store.
Restaurant Brands International (RBI) signed a development deal to open 1,500 Popeyes restaurants in China over the next 10 years. There are currently 3,100 Popeyes worldwide. This follows recent similar deals to expand Popeyes into Spain and Tim Hortons into Thailand, underscoring RBI’s emphasis on international growth.
The special committee of the board of Hudson's Bay issued an update on its ongoing review of the June 10, 2019 proposal from a group of HBC shareholders to take the Company private for $9.45 per share in cash. The committee is currently evaluating the proposal; it has invited a number of shareholders to share their views in the coming weeks. It is also reviewing the unsolicited offer and letter to HBC shareholders by The Catalyst Capital Group to acquire up to 14,836,795 common shares for $10.11 per common share in cash. The special committee has retained TD Securities as independent valuator to prepare a formal valuation of the Company’s common shares. It also retained J.P. Morgan Securities as financial advisor, Centerview Partners LLC as special advisor, and Blake, Cassels & Graydon LLP as legal counsel to assist in its process. Meanwhile, it is engaging real estate appraisal firms and planning consultants to assist with valuing HBC’s real estate assets. HBC does not intend to comment or disclose further developments regarding the special committee’s evaluation unless and until it deems further disclosure is appropriate or required. Click here to request a list of Hudson's Bay future closings.
Kroger and online grocery retailer Ocado have begun construction on a second customer fulfillment center (CFC), located in Groveland, FL. The CFC model is an automated warehouse facility with digital and robotic capabilities. Kroger is investing $55.0 million to build the 375,000 square-foot center, which is expected to be operational in 2021. Earlier this month Kroger and Ocado announced plans for a CFC in Forest Park, GA (same investment and square footage). It began construction in June on its first CFC in Monroe, OH. Overall, Kroger has committed to building 20 CFCs, powered by Ocado.
Starbucks reported third quarter sales growth of 8.1% to $6.82 billion. Global comps increased 6%, driven by a 3% increase in average ticket and a 3% increase in comparable transactions. Comps in the Americas rose 7%, with U.S. comps up 7%. China/Asia Pacific comps increased 5%. Operating income was $1.12 billion, up 8% from $1.04 billion last year.
The Company opened 442 net new stores in the quarter, with nearly one-third of the new openings in China and 48% in other international markets.
For fiscal 2019, Starbucks expects global comp growth of 4%, revenue growth of 5% and EPS of $2.86 – $2.88. It expects to open approximately 2,000 net new Starbucks stores globally, including over 600 in the Americas (click here to request a sample list of Starbucks Future Openings).
Albertsons Companies posted favorable first quarter results, including stronger sales, EBITDA and reduced debt. Identical store sales increased 1.5%. This included the benefit of e-commerce sales growth, which was 33%, down from 52% and 83% in the fourth quarter and fiscal year of 2018, respectively, as the Company has cycled past events including the acquisition of Plated in 2017. Albertsons said it expanded store pickup to more than 300 stores and plans to expand to 600 by fiscal year end. Instacart is available in over 2,000 stores. Private-brand penetration continued to grow and now represents 25.3% of volume. Organic and natural private brands grew 11.5% and now represent 22.6% of total natural and organic sales. At the store level, on a net basis the Company continues to close stores, with store count down by 32 over the past 12 months. The Company is also accelerating its remodel efforts, with plans to more than double the number for fiscal 2019 to 300; 28 were completed in the first quarter. The Company also plans to open 15 to 17 new stores this year. Year-over-year net debt levels declined $1.55 billion, with debt to EBITDA improving from 5x to 3.9x. Since the beginning of fiscal 2018, management reported it reduced debt by $2.40 billion, primarily with proceeds from the sale-leaseback of distribution centers. Subsequent to quarter-end, the Company completed sale-leaseback transactions for 50 stores and one distribution center for $886.0 million, which will be used to pay down additional debt. Adjusted for this, pro forma debt to EBITDA at quarter end was 3.2x.
When asked about the Southern California labor negotiations, CEO Vivek Sankaran said negotiations are proceeding well. As previously disclosed, Southern California union workers have authorized a strike.
Finally, Albertsons appointed Jonathan Gardner as Group VP of strategic sourcing; he previously served as VP, global sourcing and supplier relations at Starbucks. The Company also promoted David Nelsen, VP of manufacturing, to Group VP of manufacturing.
Chipotle’s second quarter revenue rose 13.2%, to $1.43 billion, driven by 10% comp growth. Comp sales improved primarily due to 7% growth in comp restaurant transactions and a 3.5% increase in average check, which includes a benefit from menu price increases implemented during 2018, partially offset by 40 basis points as a result of deferred revenue from the Chipotle Rewards loyalty program. Net income was $91.0 million, nearly double the $46.9 million last year. Excluding the impact of restaurant closure costs, corporate restructuring, legal reserves, and certain other costs, adjusted net income was $112.9 million.
Chipotle opened 20 new restaurants during the quarter and closed one, bringing the total restaurant count to 2,523.
Looking ahead at fiscal 2019, the Company now expects high single-digit comp growth, up from its previous forecast in the mid to high single digit range. It plans to open 140 – 155 new stores (click here to request a list of Chipotle future openings).
Amazon announced results for its second quarter and year-to-date period ended June 30. Sales re-accelerated 20% to $63.40 billion during the quarter; all segments grew except physical retail (Whole Foods and other retail locations) which remained flat, implying negative comps. Management also noted that the free one-day Prime offering has exceeded the initial $800.0 million cost estimated. Despite the factors above, EBITDA grew 27% to a TTM of $39.12 billion, surpassing Walmart’s $31.11 billion.
In other news, Amazon is reportedly looking for up to one million square feet of space in Brooklyn, NY for a logistics facility that would enable quicker delivery to New York customers. The Company is considering Industry City, a campus of buildings located along the waterfront in Sunset Park. Amazon could also be looking for space nearby on a parking lot at the Brooklyn Army Terminal. The Company currently operates a fulfillment center in Staten Island, which includes an 855,000 square-foot warehouse, and about 360,000 square-feet of space in Manhattan’s Hudson Yards. In February, Amazon decided not to move forward with plans to build a second headquarters in Long Island City, Queens.
In an effort to encroach on Stitch Fix’s market, Amazon announced that it is adding a styling service to its Prime Wardrobe apparel box offering, with recommendations for $5 a month for Prime members. The service first launched with women’s apparel, but the Company expects to expand the service to men’s apparel and other categories in the future.
Meanwhile, Amazon is opening its 18th North American tech hub in Houston, TX. The 25,000 square-foot office will predominantly house Amazon Web Services (AWS) teams.
BJ’s reported second quarter revenue growth of 4.7% to $301.1 million, impacted by a 2.6% increase in operating weeks and 2% comp growth. Growth was partially offset by wage rate pressures and higher commodity costs during the quarter, resulting in a 200 basis point restaurant level margin decrease. Net income was $14.2 million, down from $16.9 million last year, and was impacted by a $700,000 expense related to the adoption of a new accounting standard and a $1.1 million excess tax benefit from equities. During the quarter, BJ’s opened three new restaurants in New Jersey, bringing its store count to 206.
Town Sports International reported second quarter sales increased 5.7% to $118.7 million. Comparable club revenue fell 3.4% during the quarter, compared to a 1.8% increase last year, primarily due to a decrease in member count and personal training revenue, partially offset by higher average dues per membership and increased annual fees. As a result, adjusted EBITDA declined 13.2% to $12.0 million. The Company acquired six new clubs in the first quarter and opened one new club during the second quarter; it also closed two underperforming clubs in the first quarter. Last year, the Company acquired 25 clubs, opened one new club, converted one existing Company-owned club to a licensed club, and closed six underperforming clubs. The Company owns and operates 190 fitness clubs under various brand names.
Sports Direct International plc delayed the publication of its fiscal 2019 results due to “complexities in the integration of the House of Fraser business, and the current uncertainty as to the future performance of this business, together with the increased regulatory scrutiny of auditors.” After the stock market closed on Friday, July 26, Sports Direct reported fiscal 2019 revenue increased 10.2% to £3.70 billion due to the addition of the House of Fraser, a U.K. department store chain, which was acquired in August 2018, after it entered administration proceedings (bankruptcy). The increase in revenue occurred despite a 1.9% decrease in U.K. comps, which came on top of a 1% decrease last year. EBITDA and EBITDA margin fell 5.7% and 140 basis points, respectively, due to additional costs associated with integrating the House of Fraser acquisition. U.S. sales (Bob's Stores and Eastern Mountain Sports) grew 9% to £174.3 million. During the year, Bob’s closed a net of two units, ending with 28 stores, while EMS opened a net of four stores, ending the period with 23 units. Both Bob’s and Eastern Mountain are organized as U.S. limited liability corporations rather than as divisions of the U.K. parent, and as a result, each unit should be considered a separate and distinct credit risk.
In other news, management reported that CFO Jon Kempster plans to step down, effective September 12, 2019, at which time he will be replaced by deputy CFO Chris Wootton.
Aaron’s reported second quarter sales increased 4.3% to $968.1 million, primarily due to higher revenue at its Progressive unit and the contribution from 152 franchised locations acquired by the Aaron’s Business in 2018, partially offset by the closure of 151 Aaron’s stores in the first half of 2019. Progessive’s revenue increased 6.7% to $516.3 million, and Aaron’s Business sales increased 1.9% to $443.2 million. Comparable sales at Aaron’s Business stores were up 0.1%. Company-operated Aaron’s stores had a 2.9% increase in customers; there were 1,171 Company-operated stores and 357 franchised locations at the end of the period. Adjusted EBITDA rose 10.7% to $107.4 million, primarily due to the strong results at Progressive as well as a $3.6 million insurance recovery from hurricane losses reported in 2017.
Carter’s reported second quarter sales increased 5.5% to $734.4 million, driven by growth in the Company’s U.S. retail and U.S. wholesale segments, partially offset by a decline in sales in the international segment. U.S. retail segment sales (57.5% of total sales) increased 5.3% to $423.1 million, and comps were up 3.8%, reflecting growth in both retail store and e-commerce sales. The Company believes second quarter comps benefited from the later timing of Easter in 2019 compared to 2018. The Company opened five new stores and closed six underperforming stores in the segment. U.S. wholesale sales (31.4% of total sales) increased 9.4% to $229.1 million, driven by demand for exclusive brands, and international sales (11.1% of total sales) decreased 3% to $82.2 million, reflecting the transition of the Company’s business model in China and lower sales in other markets outside of North America, partially offset by increased demand in Mexico. Overall, EBITDA rose 12.6% to $87.6 million.
Sleep Number’s second quarter sales increased 12.5% to $356.0 million, on an 8% comp gain and growth from new stores. The Company opened 32 stores and closed 17 underperforming stores during the first half of 2019, ending with 594 stores in operation. Gross margin increased 130 basis points to 61%. Adjusted EBITDA rose 26.8% to $26.8 million. CEO Shelly Ibach commented, “Consumer response to Sleep Number’s 360 smart beds has driven double-digit demand growth for four consecutive quarters, including performance at the high end of our expectations in the second quarter.” The Company now expects fiscal 2019 EPS to be $2.35 - $2.75, up from its previous outlook of $2.25 - $2.75.
O’Reilly Automotive’s second quarter sales increased 5.4% to $2.59 billion. Comps were up 3.4%, on the lower end of the Company’s 3% to 5% guidance, as unseasonably cold and rainy weather was a headwind to summer heat-related categories. The challenging weather also caused delays in construction and new store openings, resulting in lower than planned non-comparable store sales. Gross margin rose 30 basis points to 52.8%, and operating income was up 3.9% to $498.1 million. During the first half of 2019, the Company opened 107 new stores and acquired 20 locations, while it closed two underperforming stores, ending with 5,344 stores in operation.
Tractor Supply’s second quarter sales increased 6.3% to $2.35 billion, and comps were up 3.2%. Gross margin was up 11 basis points to 34.9% driven by product mix and the Company’s price management program. Operating income was up 5.2% to $287.6 million. The Company opened 25 new Tractor Supply stores and two new Petsense stores during the first half of the year. The Company now expects fiscal 2019 sales of $8.40 billion to $8.46 billion, narrowed from previous guidance of $8.31 billion to $8.46 billion. Comps are expected to rise on the high end of its previous guidance of 2% to 4%. EPS is projected to be $4.65 to $4.75, on the higher end of its previous guidance of $4.60 to $4.75. The Company continues to forecast capex of $225.0 million to $250.0 million, with plans to open 80 new Tractor Supply stores and 10 to 15 Petsense locations.
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