October 26, 2022
Just days after announcing its merger with Kroger, Albertsons posted better-than-expected 2Q22 results, with comps up 7.4%, driven by higher prices. Gross margin eroded due to higher product, supply chain and delivery costs (digital sales grew 36%), and fewer COVID-19 vaccines. However, top-line growth leveraged overhead costs, and Company-reported EBITDA margin was flat. The Company didn’t host a call with investors, or provide an update on FY22 guidance or the merger.
Meanwhile, the U.S. Senate is planning to hold a hearing on the Albertsons-Kroger merger in November, while some senators have already urged regulators to block the deal, and others sent a letter to the FTC requesting it closely scrutinize the merger (unions and state attorneys general have also voiced concern). With inflation still surging, grocers have been mostly passing on higher costs, reflected in a 13% increase in September food-at-home inflation. Already thousands of unionized retail workers from the U.S. Mid-Atlantic to the West Coast are lobbying regulators and lawmakers as part of a broader effort to stop the merger. Four local chapters of the UFCW, representing about 100,000 Kroger and Albertsons workers in Colorado, Wyoming, California, Ohio, Maryland, Virginia and Tennessee, have reportedly already been assessing their options for lobbying and coordinated action against the deal.
Although the companies say the merger will position them as “a more compelling alternative to larger and nonunion competitors” (Walmart and Amazon), we maintain that regulators could block the merger of the top two traditional grocers, with nearly 5,000 stores and over $200 billion in combined revenue (second in grocery sales only to Walmart), or at least require significantly more store divestments than the 100 to 375 units the companies initially said they plan to spin off (the deal allows for the divestment of up to 650 stores). Our store overlap analysis shows that about 57% of Albertsons’ 2,272 stores are located within five miles of a Kroger, including in major markets such as Phoenix, Southern California, Denver, Chicago, Dallas, Seattle and Washington DC. In addition to spinning off the stores, the companies said they plan to invest $500 million in cost savings in lower prices at Albertsons (representing about 70 bps of Albertsons’ sales), and $1.30 billion in improving the customer experience. Still, regulators have in recent years blocked a number of retail deals, including Walgreens’ acquisition of Rite Aid, and late last year the FTC ordered large retailers and manufacturers, including Kroger, to provide information regarding how they handled supply chain challenges, and whether this led to anticompetitive behavior. As part of Albertsons’ 2015 acquisition of Safeway, it sold 146 stores to Haggen to satisfy regulators; however, Haggen failed to integrate the new stores, and later in 2015 filed bankruptcy and liquidated, resulting in Albertsons repurchasing about 30 stores. FTC Chair Lina Khan called that transaction a spectacular failure.
A lengthy regulatory review is assured. The merger agreement terminates in January 2024, although the companies may mutually consent to extensions.
Kroger has officially opened its newest Customer Fulfillment Center (CFC) in Romulus, MI. The 135,000 square-foot facility will service customers in a 90-minute radius. The CFC will have more than 700 employees as it continues to expand its services throughout southeast Michigan. The grocer currently operates additional CFCs in Monroe, OH; Groveland, FL; Forest Park, GA; Pleasant Prairie, WI; and Dallas, TX.
Meanwhile, Kroger has opened a new concept store in Monroe, OH, near a CFC and about midway between Cincinnati and Dayton, that the Company describes as having a “game-changing” checkout experience. The concept gives customers a variety of options that include a group of Kroger’s new high-tech modes of checkout as well as traditional methods. Customers can use Kroger’s KroGo carts, which have built-in scales and cameras and have been tested in a few markets. They enable customers to scan groceries as they shop, pay at the cart and completely skip the checkout line. If the expanded pilot is successful, Kroger plans to add it to about six Greater Cincinnati stores next year as well as some units in Columbus.
It has been over two weeks since Hurricane Ian flooded central Florida after devastating the Fort Myers/Port Charlotte area; it also hit parts of Georgia and flooded sections of the Carolinas and Virginia. Citi Trends and Cato Fashions have not publicly commented but likely have suffered some damage because of their store concentration along the storm’s path. Citi Trends has 9.2% of its stores in Florida and 38% in the affected states combined (Florida, Georgia, North and South Carolina, and Virginia). Cato Fashions has less exposure at 4.6% in Florida and 27% of the store base in the affected states. Historically, both companies battled storms but have not been severely affected due to the geographic distribution and positive performance of the remaining stores.
In 2021, Citi Trends’ operations were affected when Hurricane Ida (Category 4) hit Louisiana, yet 3Q sales were up 14.5% due to government stimulus checks. Before that, Hurricane Matthew (Category 5) in 2016 caused comps to drop 3% in September and October when almost 100 stores closed. Cato Fashions has reported more frequently on storm damage in its 3Q results. In 3Q20, comps were down 23%, mostly from reduced operating hours due to COVID-19 cases and Hurricane Laura (Category 4), which hit Louisiana. Prior to that, in 2018, it was a double punch of Hurricane Florence (Category 4), which hit the Carolinas, and Hurricane Michael (Category 5), which hit the Florida panhandle, Georgia and the Carolinas. In these cases, the Company reported “slight” negative impact on comps. Both Citi Trends and Cato, which cater to lower-income clients, had sales and earnings declines in 2Q22, and these negative trends were expected to continue into 2H22 due to the negative impact of Hurricane Ian.
Apparel retailers do not typically participate in the buying frenzy before hurricane landfalls. Instead, they suffer lost sales from store closures and physical damage to inventories and structures from winds and water. Insurance may offset some of damage, but the losses stem from the delay in the recovery to normalcy, which may take six to eight weeks. We expect declines in 3Q comps, sales and earnings for Citi Trends and Cato, given macroeconomic headwinds, negative operating trends, and disruption from Hurricane Ian.
Four Walgreens stores in Louisville, KY will close in November, with a Company representative stating the decision would best meet customer needs: “When faced with the difficult task of closing a particular location, several factors are taken into account, including things like the dynamics of the local market and changes in the buying habits of our patients and customers, for example.” Pharmacy files will be transferred to the nearest Walgreens. According to Nielsen, as of July 2022, Walgreens operated 56 stores in the Louisville MSA and held 65.3% of the retail drug market share. At its FYE August 31, 2022, Walgreens closed 287 of 500 planned US store closures.
Reitmans had solid 2Q23 results, reflecting the reopening of all stores and lifting of government capacity restrictions, unlike 2Q22. Last year, COVID lockdowns disrupted operations in some areas, which was followed by phased re-openings. In 2Q23, net sales were up 33% on stronger traffic and bigger baskets, despite seven fewer stores. Subsequent to quarter end, Penningtons, the plus-size fashion banner, was rebranded as “PENN.” The brand has 91 retail stores and an e-commerce business. PENN. will add 10 new stores in key markets over the next three years, with an emphasis on Ontario and Quebec. PENN.’s growth strategy aims to attract new customers; it is also reviving the Addition Elle label. Reitmans’ other banner, RW&CO., started offering Thyme Maternity apparel given the Company’s expertise in the maternity market. Reitmans permanently closed all 54 Thyme Maternity stores in July 2020 and all 77 Addition Elle locations in August 2020, as part of its bankruptcy restructuring plan (the Company emerged in January 2022). With these initiatives, the Company is returning to its original niches but with a more streamlined store base.
BJ’s Restaurants reported 3Q22 revenue growth of 10.3% to $311.3 million. Total restaurant operating weeks increased 1.2%. Comp restaurant sales rose 8.9% and 8.2% compared to 3Q21 and 3Q19, respectively. Adjusted EBITDA was $15.2 million, compared to $16.4 million last year, and includes a $3.1 million benefit related to the Employee Retention Tax Credit in conjunction with the CARES Act.
The Company recently opened its newest restaurant in Las Vegas, NV, and expect to open two additional new units in 4Q22, which will bring total 2022 openings to six. Due to construction delays, two restaurants previously expected to open in 2022 are now scheduled to open in 1Q23. The Company’s long-term target remains to operate at least 425 domestic BJ’s locations. Click here to request a sample list of future store openings.
Trader Joe’s will open three new locations by the end of the year in College Park, MD; Tigard, OR; and Providence, RI. The Company will also open its fourth location in Utah, in Draper, in 2023. Click here to request a sample list of future store openings.
Tractor Supply reported 3Q22 results this week, turning in another good quarter, with sales up 8.4% and comps rising 5.7%. FY22’s results have been remarkably consistent, with all three quarters coming in at about the same as 3Q, despite lapping tough comps in FY21, including a 39% comp increase in 2Q21. Sales are being driven by consumables, as consumers veer away from discretionary purchases. The 3Q22 performance gave the Company the confidence to bump up FY22 projections, including raising the sales estimate to $14.06 billion to $14.12 billion, up from $13.95 billion to $14.05 billion, and increasing comps to 5.4% - 5.8% from the previous 5.3% - 5.8%. Last week, Tractor Supply finally received approval to complete its acquisition of Orscheln Farms’ 166 stores. The Company will have to divest 85 stores. The total purchase price was $320 million; however, Tractor Supply will receive $72 million for the divested stores and $10 million from the sale of Orscheln Farms’ HQ building, resulting in a net price of $238 million. Click here to request a sample list of future store openings.
Jack in the Box debuted an off-premise-only prototype with the opening of a location in Tulsa, OK. The 1,350 square-foot concept has no interior seating, and features a double y-lane drive-thru, a walk-up window for ordering and dual assembly kitchens. It also has a dedicated pickup window for mobile and third-party delivery orders. According to the Company, the new prototype reduces buildout costs by around 20%, while also increasing real estate flexibility. The new format was created for freestanding locations but can be adapted to fit in a variety of spaces such as convenience stores, travel plazas and end-cap locations. Click here to request a sample list of future store openings.
Northgate González Market will open a new store in Santa Ana, CA next month. The Company is investing more than $25 million into the new store and the surrounding shopping center. It will offer consumers an expanded, fresh and new authentically Mexican shopping experience with a larger format and enhanced customer service. The store, combined with another opening, will replace two smaller locations slated for closure. Northgate González operates 42 stores in Orange, Los Angeles and San Diego counties in California.
The Teamsters union, representing more than 18,000 workers, said it has ratified a national contract with Costco. The first-ever national agreement provides members with significant wage improvements over the next three years and a substantial increase in pension contributions by Costco. In June, the union had rejected the Company’s initial contract offer by a vote of 93%. The contract, which was ratified by a vote of 72%, also provides for higher semiannual bonuses and a more flexible attendance policy, alongside other workplace benefits. Click here to request a sample list of future store openings.
Bloomingdale’s, a subsidiary of Macy’s, is opening its second, smaller-format Bloomie’s store on November 17 in Skokie, IL, after debuting the concept in Fairfax, VA last year. The 51,000 square-foot location will offer a hyper-curated product assortment featuring top brands across all departments, including apparel, shoes, handbags, home, beauty, and accessories. It will also offer a new tech-enabled stylist service to give visitors personalized recommendations as they shop. In addition, the store will have a restaurant, called bCafe, that will offer “light American cuisine with a modern flair” as well as cocktails and frozen yogurt. Bloomingdale’s operates 34 full-size stores and 20 outlet locations.
Authentic Brands Group (ABG) completed the acquisition of British lifestyle brand Ted Baker for £211 million (US$254 million). ABG will convert the Ted Baker business into a licensed business model. The Company is currently in discussions with operators in key regions to manage the manufacturing, physical retail, e-commerce, and wholesale operations of the Ted Baker business. Founded in 1987, Ted Baker put itself up for sale in April; it offers men’s and women’s fashions and accessories in 370 stores globally, as well as in-store shops and concessions. ABG opened its London-based European headquarters in February 2022; its portfolio includes more than 50 lifestyle and entertainment brands, including Reebok, Eddie Bauer, Brooks Brothers, Nautica, Forever 21, Izod, Lucky Brand, Aeropostale, Juice Couture, and Nine West.
The North Face plans to open more than 70 new stores in North America and up to 300 additional retail and partner locations globally over the next five years. New North Face stores opened this year in Hangzhou and Nanjing, China; Stuttgart, Germany; Schaumburg, IL; and Portland, OR. Next year, stores are slated to open in Minnetonka, MN; Lone Tree, CO; Indianapolis, IN; Wauwatosa, WI; London Battersea, U.K.; and Garmisch, Germany. The North Face is owned by VF Corp., whose other brands include Timberland and Vans.
REI plans to open a 21,100 square-foot store in Huntington, NY next summer, its fourth in the state (one other location on Long Island in Carle Place) and seventh in the Tri-State region (two in New York, two in New Jersey, and two in Connecticut). The store will offer apparel, gear, and expertise for camping, cycling, running, fitness, hiking, paddling, climbing, and snow sports. In addition, it will feature a full-service bike shop and a ski and snowboard shop. REI also plans to open a store in Laguna Hills, CA in Fall 2023. The 33,000 square-foot unit will be the chain’s 12th in the Los Angeles area. Next month, REI will open in Tallahassee, FL, its first store in the Panhandle and seventh in Florida. REI operates 175 stores across the U.S.
A revenue warning and the departure of Conn’s CEO came amid a backdrop of aggressive store expansion during an economic downturn. CEO Chandra Holt stepped down from her position without an explanation; former chairman Norman L. Miller will serve as interim CEO. This occurred as management warned that macroeconomic headwinds and lower consumer spending are negatively impacting sales to the Company’s financially challenged customers. As a result, 3Q23 revenue is expected to be down 21% - 23%, with operating margin anticipated to be negative mid-single digits. Additionally, the Company withdrew its previous FY23 financial guidance. We note that these developments did not alter plans to open 10 to 12 standalone locations (a growth rate of about 8%) in the current fiscal year. Click here to request a sample list of future store openings.
Yum! Brands reached a deal to sell its KFC restaurants in Russia, as it looks to fully exit the country. It will transfer ownership of its Russian KFC locations, operating system and master franchise rights to Smart Service Ltd, which is run by existing Russian KFC franchisees Konstantin Yurievich Kotov and Andrey Eduardovich Oskolkov. The buyer will be responsible for re-branding the restaurants and retaining existing employees. In July, Yum said it transferred ownership of its Pizza Hut assets to a local Russian operator.
Hy-Vee has opened its fifth store in Wisconsin, at the site of a former Sears unit, along with an adjacent 4,100 square-foot Hy-Vee Fast and Fresh convenience store. It is the fourth Hy-Vee with the Company’s reimagined flagship store design that offers a new dining experience with a large open food hall. The store also has an in-store Starbucks, a pharmacy with a drive-up window, a Joe Fresh clothing department, a beauty department, an expanded Candy Shoppe and a large Hy-Vee Wine and Spirits department. Click here to request a sample list of future store openings.
Love’s Travel Stops recently expanded to 600 locations with the opening of its newest 12,000 square-foot store in Perry, OK. In addition to new convenience stores, the Company is adding RV hookups to locations, opened its first RV park in Cordele, GA, and has joined Amazon’s package pickup network to provide its customers with access to Amazon Lockers at more than 50 locations.
Giant Eagle is converting two of its Central Ohio supermarkets to its Market District format. The stores are located in Hilliard and Powell and will now offer expanded products and services. Additional locations are planned for conversion, including in Easton, Westerville, and Columbus.
Last week, Walmart Canada opened a supercenter in Edmonton, its first new store in Alberta since 2015. The 149,000 square-foot location represents a $10 million investment and replaces an existing store in the city. It will offer grocery pickup and delivery. In September, Walmart Canada announced $1 billion in infrastructure investments, including approximately $330 million to renovate more than 80 stores across Canada.
Walmart will close an underperforming store in Pittsburgh, PA on November 11. The unit is its only store in the city.
This week, Shake Shack will open its 12th restaurant in Massachusetts, located in Hingham.
