November 13, 2019
Camping World reported mostly poor operating results for its third quarter, including a 5% drop in comps and a 33.5% decline in EBITDA. Total sales grew 6% to $1.39 billion, as the Company added more RV locations, largely through acquisitions and the conversion of former Gander Outdoor sites. However, total store count fell by 18 to 209, as the Company continues its “strategic shift” to divest the remaining Gander locations that do not sell RVs, leaving it with 176 RV-centric locations.
Since the end of the third quarter, it closed three stores, and expects to sell, divest, repurpose, relocate or close 28 of the remaining 35 non-RV Gander locations, and two of the seven retail locations operated by TheHouse.com. Meanwhile, the RV business continues to suffer from weakening demand and promotional pricing. As a result, management said it is pushing the pause button on acquisitions and external expansion as it focuses on improving its existing operations and operating margins, and growing its higher-margin preowned RV business. The Company also trimmed its already lowered fiscal 2019 EBITDA guidance range of low to mid-$200.0 million by at least $30.0 million due to higher costs associated with the ongoing divestment of the non-RV Gander locations. Cash flow has been the one stable spot, benefitting from the liquidation of the closed stores and other efforts to reduce non-RV inventory. During the fourth quarter, management is looking to cut another $140.0 million – $150.0 million in non-RV inventory. Also, once the strategic shift is complete, management anticipates a $35.0 – $45.0 million annual EBITDA improvement, after eliminating excess costs at closed locations. Click here to request a list of future closings.
On October 18, it was reported that Transform Holdco (New Sears) borrowed an additional $150.0 million from lenders including Edward Lampert, chairman of ESL Investments, Inc., and hedge fund Cyrus Capital Partners LP., which had provided funding to Sears Holdings, DIP during its bankruptcy. On November 5, we reported that the Company has already closed or is in the process of closing at least 126 stores after acquiring 425 stores from Sears Holdings out of bankruptcy in February. On June 3, Transform Holdco agreed to acquire Sears Hometown Inc. and about 414 of its stores, which sell appliances and lawn & garden products. The acquisition of Hometown by Transform should occur any day now.
Yesterday, reports stated that: (i) the Company has secured an additional $100.0 million in loans (for a total of $250.0 million) from lenders that include Edward Lampert, and (ii) it will close 96 additional stores, amid mounting losses. This will leave the Company with less than half of the 425 units it acquired from Sears Holdings, DIP. Following the planned closures and the planned acquisition of Sears Hometown, Transform will operate about 600 locations. The store-closing sales are expected to begin December 2, with all locations expected to be closed by the end of February.
On Friday, Hudson’s Bay Company (HBC) successfully completed the sale of Lord & Taylor to Le Tote, Inc. for C$99.5 million (US$75.0 million) in cash and a secured promissory note for C$32.2 million (US$25.0 million) payable in cash after two years, subject to customary adjustments. HBC now holds an equity stake of approximately 25% in Le Tote, and a right to designate two members to Le Tote’s board. Le Tote has acquired the Lord & Taylor brand and related intellectual property, and has assumed the operation of 38 stores, Lord & Taylor digital channels, and associated inventory. In addition, Le Tote has hired the vast majority of Lord & Taylor’s associates. HBC will maintain economic responsibility for the rent payments owed by Lord & Taylor at the 38 locations operated by Le Tote for the initial three years post-closing. Click here to request a list of HBC openings and closings.
Net of HBC’s distributions from HBS Global Properties, HBC expects to continue to be liable for approximately $77.0 million in Lord & Taylor total cash rent on an annual basis. Starting in 2021, HBC and Le Tote will have options to reassess the Lord & Taylor store network, which may include HBC recapturing select locations to determine their highest and best use, including possible redevelopment into mixed-use properties, which is an inherently complex, capital intensive, long-term project. For any recaptured or returned stores, HBC retains long-term rent responsibility, risk, and costs for redevelopment. Merchandise shipped to Lord & Taylor after the close will be the responsibility of Le Tote. Hudson’s Bay recently completed the sale of its European stores and real estate, and has a vote scheduled for December on a potential going-private transaction.
During Kroger’s annual investor conference, which was held last Tuesday in New York, the Company disclosed that its Restock Kroger plan has begun to pay off and will accelerate growth in the months ahead, albeit later than anticipated. The Company outlined ways it is reworking the plan, focusing on leveraging its core grocery business for high-margin, asset-light alternative investments, including its media operations and Kroger Personal Finance, which are expected to bring in $150.0 million in incremental profit next year, up from $100.0 million this year. Kroger’s media operation leverages its loyalty program data and purchase data to help its suppliers place targeted ads on Kroger’s physical properties and the web. Kroger Personal Finance offers a line of products that include home equity loans, first mortgages and credit cards. Additionally, the Company will focus on initiatives like expanding its Simple Truth and Private Selection private label, utilizing data to roll out more personalized offers, and a new look and marketing campaign dubbed “Fresh for Everyone.”
In terms of its Ocado partnership, Kroger’s Chief Information and Digital Officer Yael Cosset said the Company and Ocado will utilize small, medium and large facilities to fill orders according to market demands. This includes pickup as well as delivery, and orders ranging from on-demand to next-day and beyond. Those larger facilities, projected to cost around $50.0 million each, are proving more expensive to build than the Company anticipated. Kroger said the cost of land has gone up since Ocado began building its facilities, and rising labor costs have contributed to a higher price tag for construction. By the end of the year, Kroger will offer same-day delivery as well as pickup from more than 2,000 stores. The Company announced last week it will waive its $4.95 fee for grocery pickup in select markets through the holidays. Both Kroger and Ocado have been testing expedited delivery. In Cincinnati, Kroger has been testing a 30-minute service called Rush, while Ocado’s micro-fulfillment solution, Zoom, debuted earlier this year in London.
While Kroger’s three-hour presentation and outlook were fairly optimistic, many left the conference with mixed feelings, saying that the plan was lacking in detail and did not go far enough for a true transformation. With escalating competitive pressures from all sectors and higher costs of land and labor, many found it difficult to envision such an optimistic future. However, given recent results from Amazon suggesting competition from brick-and-mortar players might be starting to take a toll, our analysts see no reason for Kroger to stray from its current strategy. On November 6, Kroger debuted its new logo and brand transformation campaign that includes a new tagline “Fresh for Everyone,” as well as a new ad campaign that focuses on its fresh food offerings.
2018/19 Mergers & Acquisitions Report
Global merger and acquisition activity in 2018 broke its two-year streak of declines; deal volume grew 16% to $3.870 trillion. Thus far in 2019, the megadeal trend has continued, with the top ten U.S. deals totaling almost $510.00 billion; the smallest transaction in the top ten was $25.94 billion. This report outlines significant merger and acquisition activity, including notable asset sales within the supermarket/food wholesale, convenience store, foodservice, drug retail/wholesale, casual dining/restaurants, and mass merchandise sectors.
On November 7, Gap announced that President and CEO Art Peck stepped down from his positions and from the Company’s board. Gap appointed Robert J. Fisher, its current non-executive chairman, to serve as interim president and CEO while it searches for a permanent replacement. The departure follows a challenging third quarter, as comps declined 4% on top of flat comps in the prior-year period, led by weakness in the Gap brand, down 7% on top of a 7% decline last year.
Meanwhile, same-store sales at Banana Republic and Old Navy fell 3% and 4%, respectively, compared to 2% and 4% increases last year. Gap lowered full-year adjusted EPS guidance to $1.70 – $1.75, from prior guidance of $2.05 – $2.15.
Yesterday, Topgolf Entertainment Group announced it entered into a franchise agreement with Sports Entertainment Asia, H.K. Limited (SEAL) to open locations in Greater China (including Mainland China, Hong Kong, Macau and Taiwan) and the Philippines. Currently, Topgolf operates 57 locations worldwide, including 53 in the U.S., three in the U.K., and one in Australia. Plans are also underway to open new locations in additional U.S. and U.K. markets, as well as Mexico, Dubai, and Canada. Topgolf recently announced expansion plans for central Europe through a partnership with another new franchise partner.
On November 15, Topgolf will open a relocated store in Schaumburg, IL (Greater Chicago). The three-level complex will feature high-tech entertainment and gaming, hitting bays, food and beverages, a 5,000 square-foot outdoor patio, corporate and social event spaces, and music. Topgolf will consolidate its Wood Dale operations (near Chicago) with the new Schaumburg store. In the coming months, Topgolf will convert its Wood Dale space to a traditional driving range. Meanwhile, Topgolf is installing Topgolf Swing Suites at two of the largest military bases in the country, Fort Benning in Georgia and Fort Bragg in North Carolina. Topgolf Swing Suites provide an interactive, virtual experience with simulator bays where consumers can play popular games such as dodgeball, hockey, baseball, and more. The suites include lounge seating, HDTVs, and food and beverage service. Click here to request a list of future openings.
In other news, Topgolf named Stuart Foster as its U.S. venues chief marketing officer, reporting to its global CMO Brian Radics. Prior to joining Topgolf, Mr. Foster served as VP global brand marketing at Hilton Worldwide.
Bi-Mart Corporation closed all 13 pharmacies in its stores in the Portland, WA metropolitan area yesterday, as the locations are no longer profitable (click here to request a list). Management cited increasing competition in the market in recent years, rising fees charged by third-party administrators on Medicare Part D prescriptions, reduced access to healthcare plans, and anticipated cost increases from the new state business tax that takes effect January 1, 2020. Walgreens will acquire the prescription files from the Bi-Mart pharmacy locations and transfer files to nearby Walgreens locations. Bi-Mart announced the closure of pharmacies at three of its stores in Washington state earlier this year.
On November 7, Big Y opened two new World Class Markets in Derby and Milford, CT. The stores are 59,500 square feet and 55,000 square feet, respectively. The Company now has 36 stores in Connecticut and 73 overall.
Dunkin’ Brands signed store development agreements with new franchisee Manchester Enterprises, LLC to develop 18 new restaurants in Houston, TX. Manchester Enterprises will also be developing 10 multi-brand locations with Baskin-Robbins. The first restaurant is slated to open next summer. There are currently 160 Dunkin’ restaurants in Texas. Click here to request a sample list of future openings.
Weis Markets recently opened a new store in Bedminster Township, PA. The 61,300 square-foot supermarket is the Company’s eighth location in the Delaware Valley.
On October 30, Rouses Markets opened a new store in Thibodaux, LA, replacing an existing Rouses across the street. The Company has teamed with Nicholls State University for its first collegiate-themed store, featuring the school’s logos and colors. Products and services cater to the needs of college students and health care professionals, including online shopping with curbside pickup.
Target recently opened a new 48,000 square-foot small-format store in Spring Valley, NY, in a former Kmart building adjacent to a Smart & Final. Target is opening dozens of these small-format stores annually as part of a plan to tap into new markets where full-size Targets do not fit. The small-format stores range from 17,000 square feet to 50,000 square feet.
As previously speculated, Amazon plans to launch a new supermarket brand distinct from Whole Foods. Confirmation came through the posting of four job listings for “Amazon’s first grocery store” in the Woodland Hills neighborhood of Los Angeles. An Amazon representative said the store would open in 2020 and will have a conventional checkout line, unlike the Company’s Amazon Go convenience stores.
Amazon will build a $40.0 million robotics research and manufacturing facility in Westborough, MA. The 350,000 square-foot complex, scheduled to open in 2021, will be the Company’s second such facility in the state. The existing robotics and manufacturing site is in North Reading. The new location will include corporate offices, research and development labs, and manufacturing space. The two facilities combined are the hub of Amazon’s robotics development effort.
Last week, Amazon opened an “Amazon 4-star” at a large mall in Frisco, TX, its sixth under the format. All items in the store are rated 4 stars and above, are top sellers, or new and trending on Amazon.com.
In other news, the Company will deliver orders directly to Prime members’ cars this holiday season. In-car delivery is now available in 50 U.S. cities through its Key by Amazon service, which also facilitates deliveries within customers’ homes and garages. Amazon first launched in-car delivery about a year and a half ago for Prime members with compatible vehicles from Chevrolet, Buick, GMC, Cadillac and Volvo. It has since added Ford to the list.
Meanwhile, Amazon plans to open its first fulfillment center in Quebec next year that will pack and ship items ranging from toys to small electronics. In September, the Company announced it will open its sixth fulfillment center in Ontario.
Bass Pro Shops announced plans to relocate 120 jobs at Cabela’s Sidney, NE headquarters to its Springfield, MO headquarters. Earlier this year, Bass Pro closed the Cabela’s facility in Sidney, resulting in the loss of 120 jobs at the time. Before Cabela’s was acquired by Bass Pro, it employed about 2,000 people in Sidney.
According to sources, KKR was the private equity firm that approached Walgreens Boots Alliance to take the Company private. CEO Stefano Pessina has a 16% stake in the Company, which currently has a market value of about $55.00 billion. If completed, this would be the largest leveraged buyout in history. The Company is reportedly working with investment bank Evercore to explore whether it can put together a deal, which could prove challenging given Walgreen’s overall size, debt load, industry headwinds, and opioid litigation exposure. Walgreens also owns very few real assets. Meanwhile, shares surged 4.6% on Monday to close at $61.96 after reports of KKR’s interest. This wouldn’t be the first deal between KKR and Walgreens. KKR bought Alliance Boots in 2007, when Stefano Pessina was Alliance’s executive chairman. Walgreens began acquiring Alliance Boots in 2012, though KKR remained an investor. Click here to request a list of future openings and closings.
On November 6, the Court issued final orders authorizing Forever 21, DIP to: (i) access up to the full amount of the $275.0 million DIP Facility provided by JPMorgan Chase Bank, N.A., subject to a “creeping roll-up” of $194.5 million outstanding under the prepetition ABL facility; (ii) access up to the full amount of the $75.0 million DIP term loan; and (iii) use cash collateral. The Court also set January 13, 2020 as the date for filing claims that arose prior to the petition date, including requests for payment under Section 503(b)(9). Additionally, reports state the Company negotiated $100.0 million in rent savings from landlords and cut the number of planned store closures substantially, now seeking to close only 88 U.S. locations, down from a potential 178 store closings announced on the petition date. Furthermore, 295 vendors have agreed to continue selling merchandise to the Debtors on the same or better terms than they did before the bankruptcy filing. This is up from 130 vendors on the petition date.Click here to request a list of closings.
Destination Maternity, DIP will be delisted from the Nasdaq on November 18, according to a recent filing with the SEC. The Company did not appeal the decision, which became final on October 30. Nasdaq determined that “the Company no longer qualified for listing on the Exchange pursuant to Listing Rules” in light of its bankruptcy filing on October 21. The Company plans to restructure, which includes closing around half of its stores, and find a buyer. An auction is scheduled for December 9. Destination Maternity has said that its search for a possible buyer has “already yielded indications of interest from several credible bidders.”
Office Depot’s third quarter sales decreased 3.6% to $2.78 billion, due to lower retail division sales reflecting a 4% decrease in comps and the closing of 55 units during the year, and lower sales in both the CompuCom and BSD divisions. Product sales were down 3% from the prior-year period, while service revenue fell 7% as a result of lower comps at CompuCom(management did not provide the details), partially mitigated by a 7% increase in service revenue in the retail division. On a consolidated basis, service revenue represented 15% of total Company sales in the third quarter of 2019. EBITDA increased 15.4%, and EBITDA margin improved 110 basis points, due to cost cutting. TTM EBITDA margin was 5.2%, up from 4.9% last quarter, and TTM interest coverage was acceptable at 7.5x.
In other news, the board approved a review of the feasibility of creating a new holding company structure, under which The ODP Corporation will become the new parent of Office Depot. The new entity would replace Office Depot as the public company trading on Nasdaq under ticker symbol “ODP.” The evaluation is expected to be completed by the end of the first quarter of 2020. If implemented, the existing shares of Office Depot, Inc. would be automatically converted on a one-for-one basis into shares of common stock of The ODP Corporation. Management said that the contemplated holding company reorganization is intended to simplify the Company’s legal entity and tax structure, more closely align the operating assets to their respective operating channels within the legal entity structure, and increase operational flexibility. If approved, the public company reorganization is not expected to result in a change in the directors, executive officers, management or business of Office Depot, or impact the timing of the declaration and payment of the Company’s regular quarterly dividends.
Party City’s third quarter sales decreased 2.3% to $540.2 million. Retail sales fell 1.7%, and comps were down 2.6% due to a 210 basis-point headwind from the helium shortage. Net third-party international wholesale sales increased 3.9% on a constant currency basis. Sales at the Company’s temporary Halloween City locations fell 21% per store from last year; the Company operated 256 of these units this year, 17 more than last year. Gross margin decreased 590 basis points to 30.6% due to increased costs (180 basis points); inventory markdowns from the Company’s store optimization program (160 basis points); higher freight costs associated with disruptions caused by the China tariffs (130 basis points); increased retail promotional activity (100 basis points); and sales mix shifts from growth in mass market and grocery channel sales. As a result of a sustained decline in market capitalization, the Company recognized a non-cash pre-tax goodwill impairment charge of $259.1 million.
Town Sports reported third quarter sales increased 4.8% to $115.5 million, and comparable club revenue was down 2.9% due to a decrease in member count and personal training revenue, partially offset by higher average dues per membership. Membership revenue (78% of total revenue) rose 6.3% to $89.8 million, while ancillary club revenue (primarily including personal training, 21% of total revenue) fell 0.6% to $24.1 million. Adjusted EBITDA dropped 30.6% to $8.4 million. The Company recorded an impairment charge of $7.2 million during the quarter related to leasehold improvements and furniture and fixtures at clubs that experienced decreased profitability and sales levels below expectations. As of September 30, the Company owned and operated 187 fitness clubs under various brand names, primarily New York Sports Clubs.
Cato Corporation’s October sales increased 0.6% to $62.5 million, and comps were up 3%. Third quarter sales rose 1%, and comps were up 4%. Year-to-date sales were flat at $627.8 million, and comps were up 2%. CEO John Cato commented, “October same-store sales continued our positive trend. However, we remain cautiously optimistic as we continue to evaluate the potential impact of current and future tariffs.” The Company closed one underperforming store during the month, ending with 1,298 stores operating in 31 states, down from 1,350 stores operating in 33 states last year.
Rent-A-Center’s third quarter sales increased 0.7% to $649.4 million, driven by a 4.5% comp increase (on top of a 5.7% increase last year), partially offset by the refranchising of over 100 locations over the past 12 months and the closures of certain Core U.S. stores. Excluding the Company’s refranchising efforts, sales increased 2.7%. By segment, Core U.S. comps rose 3.7%, Acceptance Now comps were up 6.2%, and Mexico comps increased 8.1%. Adjusted EBITDA rose 14.8% to $56.6 million. Looking ahead, the Company provided updated guidance for fiscal 2019. Consolidated revenues are expected to be $2.64 billion – $2.67 billion, up from prior guidance of $2.59 billion – $2.64 billion. Core U.S. sales are expected to remain unchanged at $1.80 billion – $1.82 billion, while Acceptance Now sales are projected to be $735.0 million – $750.0 million, up from prior guidance of $700.0 million – $715.0 million.
Ahold Delhaize announced results for its third quarter and nine months ended September 29. Quarterly sales at Ahold Delhaize USA grew 2% to $10.25 billion. Comps, excluding fuel, increased 1.8%; excluding both fuel and the impact from Hurricane Dorian, comps increased 1.5%. Online sales jumped 26.3% to $272.0 million (2.7% of total U.S. sales); management continues to predict that it will achieve total online sales growth of more than 20% in the U.S. during fiscal 2019.
During the third quarter, the Company continued to open Click and Collect points, bringing the total to 537 sites as of September 29. In October, the Company reached its goal of having more than 600 points operational by the end of fiscal 2019.
Grocery Outlet’s third quarter sales jumped 13.1% to $652.5 million, driven by comp growth of 5.8% and new store openings. The comp increase was attributed to strength across all categories and regions. Net income was $12.4 million, compared to $7.7 million last year, and adjusted EBITDA increased 12.3% to $128.3 million. During the quarter, the Company opened eight new stores, ending the quarter with 337 stores in six states. Click here to request a list of future openings.
The Company updated and upgraded its guidance for fiscal 2019 and now expects sales to be slightly above $2.55 billion, up from prior guidance of $2.50 billion – $2.53 billion; it anticipates 30 new stores, up from 29 previously; comp growth of 4.9%, compared to previous 3% – 4%; and adjusted EBITDA of $167.0 million – $168.0 million, up from $162.0 million – $165.5 million.
PriceSmart’s October net merchandise sales increased 3.7% to $253.9 million, including a negative impact of $4.8 million from foreign currency exchange. Comps increased 1.4%. For the year-to-date period (8 weeks ended October 27) sales increased 2.5% to $500.5 million, and comps rose 1.2%. On October 24, the Company opened a new warehouse club in Panama City, Panama, its seventh store in the country and 44th overall.
Costco’s October sales increased 6.8% to $11.92 billion. Comps, excluding gas prices and foreign exchange, rose 6.3%; comp growth was 6.8% in the U.S., 6.5% in Canada, and 3% in Other International. E-commerce sales rose 16.7%.
In other news, Costco is testing one-hour delivery of prescribed medication to members in California and Washington State via Instacart. Delivery is free for orders of more than $35.
Noodles & Company announced results for its third quarter and nine months ended October 1. Quarterly revenues increased 1.4% to $118.3 million, as 2.1% comp growth was partially offset by the closure of eight net locations over the past 12 months. Comps benefited from menu price increases implemented earlier in the year, which made up for a 1.7% drop in customer traffic. Those price hikes also improved gross margin 120 basis points, though rising third-party delivery fees ate into this gain somewhat (delivery orders generated 7.6% of total sales).
CEC Entertainment announced results for its third quarter and nine months ended September 29. The Company reported a 1.5% quarterly revenue decline to $217.6 million, mostly attributable to the closure of net 16 stores over the past year and a 0.9% comparable venue sales drop that broke a streak of five consecutive quarters in positive territory. Comps are still up 2.7% for the year-to-date period, and management noted that comps rebounded in October, rising 2.5%. The shuttering of underperforming locations reduced venue operating costs and contributed to a 210-basis point improvement in EBITDA margin to 19.4%, while EBITDA rose 10.2% to $42.2 million. However, asset impairments related to the closures resulted in quarterly net loss widening to $15.3 million, from $9.5 million a year earlier.
Lumber Liquidators reported third quarter sales decreased 2.4% to $264.0 million, and comps were down 3.6%, driven by soft sales at the beginning of the quarter and a network security incident in late August. The incident was caused by malware that encrypted certain information technology systems and impacted the ability to electronically process transactions. The Company estimates the disruption negatively affected total revenue by $6.0 million – $8.0 million. Comps began to improve in September, driven by growth in transaction count and higher average ticket. Gross margin decreased 100 basis points to 36.2%, resulting in operating income declining 67.5% to $2.2 million. The Company opened four new stores and relocated one existing store during the quarter.
CVS Health announced results for its third quarter and nine months ended September 30. Quarterly revenues increased 36.5% to $64.81 billion, primarily driven by the November 2018 Aetna Acquisition ($16.54 billion revenue gain, representing 95.5% of the total CVS Health increase), as well as increased volume and brand name drug price inflation in both the Pharmacy Services and Retail/LTC segments. The increase was partially offset by continued price compression in the Pharmacy Services segment, reimbursement pressure in the Retail/LTC segment, and an increased generic dispensing rate. Adjusted operating income increased 38.9% during the quarter, primarily due to the Aetna Acquisition as well as increased claims volume and improved purchasing economics in the Pharmacy Services segment, partially offset by continued reimbursement pressure and price compression in the Retail/LTC and Pharmacy Services segments, respectively. Retail/LTC segment revenues grew 2.9% in the third quarter, driven by a 6.4% increase in total prescription volume and brand name drug price inflation, partially offset by continued reimbursement pressure and increased generics dispensing rates. Total same store sales increased 3.6%, comprised of pharmacy and front-store comp growth of 4.5% and 0.6%, respectively.
During the quarter, the Company recorded a store rationalization charge of $96.0 million in connection with the planned closure of 22 underperforming retail pharmacies in the first quarter of fiscal 2020, the majority of which were nearing the end of their lease term. Additionally, the Company provided an update on its HealthHUB initiative, indicating the pilot stores in Houston are “outperforming their control group,” providing further confidence in the planned rapid rollout to approximately 50 locations in three additional markets this year and scaling to 1,500 locations throughout the country by the end of 2021.