October 30, 2019
On October 23, it was reported that Transform Holdco (New Sears) borrowed an additional $150.0 million to fund operating losses. The lenders include Edward Lampert, chairman of ESL Investments, Inc., and hedge fund Cyrus Capital Partners, which had provided funding to Sears Holdings Corporation, DIP during its bankruptcy.
On October 25, published reports stated that Transform Holdco has hired investment bankers including Guggenheim Partners to advise it on potential asset sales, including the DieHard brand, after receiving inquiries from potential buyers. 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. We are monitoring developments closely and will provide updates as additional information becomes available. Click here to request the latest list of closures.
On Sunday, Wegmans made its New York City debut with the opening of a 74,000 square-foot store in Brooklyn’s Navy Yard. The store was first announced in 2015. Wegmans said its Brooklyn store sells nearly 50,000 items, 2,000 of which are organic, and offers several seating areas for prepared food options. There are currently two Whole Foods locations and two Trader Joe’s stores within two miles of the new Wegmans.Click here to request a store overlap analysis on two retailers of your choice.
On October 24, the Court authorized the Company to initiate closing sales at 210 stores, with completion by the end of 2019. The Debtors reserved the right to close additional stores. Click here to request a list of the 201 stores that have been identified so far.The Court authorized the Company to pay all or part of undisputed prepetition trade claims on a case-by-case basis, in an amount not to exceed $2.5 million. A hearing on final approval of the interim orders is scheduled for November 14.
According to published reports, Lidl could have up to seven new stores in the works in metro Atlanta. Possible store locations include Atlanta on Memorial Drive, Dunwoody, Brookhaven, Peachtree Corners, Roswell, Lawrenceville, and Suwanee. The Company currently operates four stores in Georgia, in Snellville, southwest Marietta, Mableton and Augusta. Lidl entered metro Atlanta earlier this year. In 2015, the grocer envisioned 50 stores in Georgia. However, its initial rollout was scaled back, as Lidl pulled out of deals in locations that include Sandy Springs and Gainesville. Click here to request a sample list of future openings.
According to a recent study by research firm Packaged Facts, Amazon is set to become the largest retailer in the U.S., overtaking Walmart by 2022.This is based on the expectation that Amazon sales will continue to grow at a much faster rate. Packaged Facts estimates that Amazon’s U.S. gross merchandise sales will comprise 43% of U.S. e-commerce sales in 2019, up from 28% in 2015; by 2022 it will constitute almost half of U.S. e-commerce sales. Nevertheless, Packaged Facts added that Walmart’s in-store services strongly differentiate it from online competitors, and these services produce revenue and drive traffic. Data shows that more than 20% of Walmart purchasers use in-store services (including purchasing/using a range of financial services, onsite pharmacy, optical, and photo processing). Plus, among survey respondent click-and-collectors, 43% identified Walmart as the pick-up location for their last click-and-collect order, three times the percentage of those who cited runner-up Target.
Raley’s plans to close 27 pharmacies, citing “challenges in the pharmacy space,” which likely refers to the ongoing pressure on pharmacy reimbursement rates. Pharmacies slated for closure include 18 in Raley’s stores (16 in California, two in Nevada), four in Bel Air Markets (California), two in Nob Hill Foods (California), two in Food Source stores (one in California, one in Nevada) and one in a Sak’N Save store (Nevada). The closures began this past weekend and should be completed by November 5. Prescription files for those locations have been sold to Walgreens, CVS Pharmacy, and Rite Aid and will be transferred to the drug chains’ nearby stores. Raley’s said it will continue to operate 69 pharmacies in California and Nevada.
On October 24, Nordstrom opened a seven-story, 320,000 square-foot full-line store near Columbus Circle on the West Side of New York City. The store is across the street from the Men’s Store that opened in April 2018. The Company also has six Nordstrom Rack stores in New York City (two in Manhattan) and two recently opened merchandise-free Nordstrom Local stores. Click here to request a list of Nordstrom future openings and closings.
H&M opened its first “hyper-local” flagship in Berlin, Germany, a 3,300 square-foot store (one of H&M’s smallest locations to date). The omnichannel location is equipped with touchscreens for customers to access H&M’s complete collection online and build an outfit. The in-store merchandise mix is targeted to appeal to the local clientele, with products drawn from H&M’s main collection and select external brands (primarily Berlin-based). Click here to request a list of future openings.
FAO Schwarz opened its first brick-and-mortar location in Europe, in a 22,000 square-foot flagship store in London. A second location, a 6,000 square-foot space, opens today in Dublin, Ireland. The London location features the signature dance-on-piano, greeters dressed as toy soldiers, clock tower and rocket ship, as well as magic shows, baby doll adoptions, build-your-own race cars, and a candy shop. In addition to a wide range of dolls, plush toys, kids’ tech, magnets, souvenirs, and automotive toys, the store features an exclusive line of toys and two new collections from the brand, a learning-focused science and technology line, and a design-driven robotics and laser line. The London and Dublin stores mark the third and fourth FAO Schwarz locations to open worldwide over the past year, starting with a New York City location opened in November 2018 and a Beijing, China location opened in May 2019. The expansion comes under owners ThreeSixty Group, which acquired the brand from Toys “R” Us in 2016. ThreeSixty plans to open 12 to 15 FAO Schwarz flagship locations in major cities worldwide. FAO also has a licensing agreement with Hudson Group to open in airport terminals throughout the U.S.
Fresh Thyme Farmers Market will reportedly close three stores in mid-November. Two of those are in Nebraska, one is in Grand Island which opened last February, and another is in Omaha. A store in Ames, IA, which opened last year, is also slated for closure. These closures follow two others that took place over the summer in Dayton, OH and Louisville, KY. Reports indicate that the stores were underperforming.
On October 17, Barneys New York Inc., DIP entered into a $271.4 million stalking horse agreement with Authentic Brands Group LLC, which will purchase substantially all of Barneys’ assets, subject to exclusions, which may include certain leases. Under the offer, Saks Fifth Avenue (a unit of Hudson’s Bay) would launch Barneys departments in certain of its stores and potentially take over some Barneys locations. On October 24, reports stated that an auction scheduled for October 28 was canceled after the only other competing bid, for $260.0 million by a group led by Sam Ben-Avraham, was rejected. Barneys is reportedly moving forward with the sale but hasn’t completely ruled out the rival bid. Reports state that Mr. Ben-Avraham is still considering “an unconditional, fully committed” offer that keeps all of Barneys’ stores open. He has until October 31, the date of the sale hearing, to make another offer to buy Barneys out of bankruptcy. Barneys currently operates seven stores, including its flagship New York City and Beverly Hills locations, after closing nine locations when it filed for bankruptcy on August 6.
According to a recent report from CBRE, commercial rent decreases along Broadway in SoHo and Madison Avenue in New York City have led to a 5.7% decline in asking prices in Manhattan over the past year. The average asking price of $756 per square-foot marked the eighth consecutive quarter of rental rate decline in the city. Vacancies were up in SoHo and on Madison Avenue, with new buildings and spaces placing downward pressure on pricing. High rents were a main driving point for Barneys’ bankruptcy filing.
The American Dream megamall opened on October 25 in East Rutherford, NJ after more than 20 years in the making, design changes, and financing delays. The three million square-foot complex, which cost an estimated $5.00 billion to build, is opening in stages through 2020. Once completely open it will be one of the largest malls in North America, featuring a theme park, ice rink, water park, and indoor ski center in addition to over 450 stores. The first phase included the Nickelodeon Universe theme park, DreamWorks water park, and ice-skating rink. The mall was first envisioned in 1996 and eventually developed by Triple Five Group, the Company that owns Mall of America and West Edmonton Mall, the two largest retail and entertainment centers in North America.
On October 28, LVMH confirmed it has held preliminary discussions regarding a possible transaction with Tiffany & Co., adding that there is no assurance that these discussions will result in an agreement. Tiffany & Co. also confirmed that it has received an unsolicited, non-binding proposal from LVMH to acquire Tiffany for $120 per share in cash. Tiffany is reviewing the proposal with the assistance of its financial advisors, Centerview Partners and Goldman Sachs. No additional details have been disclosed. The $120 per-share offer is 22% more than Tiffany’s closing price on Friday, for a total offer value of $14.50 billion, more than double LVMH’s $7.00 billion Christian Dior acquisition in July 2017. As of June 30, LVMH had ample liquidity supported by €3.99 billion (approximately US$4.43 billion) in cash and full availability under its €5.90 billion (about US$6.55 billion) unsecured credit lines. Net debt levels increased 16.6%, to €9.48 billion due to acquisition-related borrowings, but the balance sheet remained healthy with minimal leverage, as evidenced by a debt-to-TTM EBITDA ratio of slightly over 1x.
Tiffany & Co.’s net revenues declined 3%, to $1.00 billion during the fiscal 2019 second quarter ended July 31. Comparable sales were down 4%, on weak demand from foreign tourists amid an environment of geopolitical and currency uncertainties. As of July 31, the Company operated over 300 stores worldwide including 124 stores in the U.S., Canada, and Latin America, 90 stores in Asia-Pacific, 56 stores in Japan, and 47 stores in Europe.
Tiffany’s shares surged about 30% on the news, surpassing the $120 per share offer, to $126.60 per share.
Trader Joe’s is continuing its expansion effort with new stores recently opened in Boston, MA and Boise, ID. Two more stores opened in New Jersey (Ocean County and Denville), and two more in the state are on the way (Cherry Hill and Bridgewater).
Captain D’s continues to expand with the opening of two new franchised restaurants in Milwaukee, WI and Danville, KY.Click here to request a list of future openings.
Kum & Go will open its first urban convenience store in downtown Des Moines, IA in spring 2020. The 3,000 square-foot new concept will be a test location for a number of new SKUs, particularly health-focused items.
On October 23, Sears Hometown and Outlet Stores completed the sale of its Sears Outlet unit and Buddy’s Home Furnishing Stores businesses to Franchise Group, Inc. for $119.9 million in cash. Franchise Group, Inc. (formerly Liberty Tax, Inc.) is the parent of Liberty Tax Service and Buddy’s Home Furnishings. The sale of the Sears Outlet business is in accordance with the agreement under which Transform Holdco LLC (New Sears) will acquire the outstanding shares of the Company following the disposition of the Outlet business, which we reported on June 3. In connection with the Outlet sale, all amounts (the amounts were not provided by the Company) outstanding under the Company’s revolving credit facility with Bank of America, other than a $7.2 million letter of credit, were repaid in full, and the facility was irrevocably terminated. Also, in accordance with the agreement to be acquired by Transform Holdco, the amount of the consideration for that transaction was adjusted upward to $3.21 per share of the Company’s common stock from the previous consideration of $2.25 per share. The upward adjustment reflects the proceeds received by the Company from the Outlet sale. Following the transaction, the Company changed its name to Sears Hometown Stores, Inc. from Sears Hometown and Outlet Stores, Inc.
As previously reported, Outlet is larger and reported an operating profit of $19.0 million in 2018, whereas the smaller Hometown unit reported an operating loss of $58.0 million for the same period. Additionally, Transform Holdco, which will acquire the Hometown unit, has been supplying inventory to the Company. Transform will remain highly leveraged following the planned acquisition of the Hometown business, and the resolution of merchandise supply issues may be difficult to achieve if Transform continues to encounter issues with vendor support.
Redner’s Markets recently opened a new supermarket in Lower Providence, PA. This is its 44th store and the second under its Fresh Market concept. The opening comes six months after the conversion of Redner’s existing Wyomissing store to a Fresh Market in April. The store is about 44,000 square feet, approximately 10,000 square feet smaller than the Wyomissing store. In addition to groceries, it features a coffee and breakfast bar, chef-inspired made-to-order meals, a full-service bakery and deli, a beer and wine cafe, a candy store, and fresh made sushi. There will also be a fuel center, but it is still under construction. The Fresh Market concept appears to be popular; Redner said sales at Wyomissing are up 25% since the April rebranding. The Company has plans for more Fresh Market stores in the future, both through new construction and remodeling existing stores. Redner said a new store is under construction in Lewes, DE, which will have the Fresh Market concept, and an existing store in Maryland will soon be converted.
Brookshire Grocery Co. said it will acquire three stores from Cranford’s Supermarkets in central Arkansas. Cranford’s in White Hall and FoodWise in Hot Springs Village will be converted to the Brookshire’s Food Store banner, and the ShopWise Market location in Redfield will be converted to a Spring Market location.
On November 7, Duluth Trading will debut a men’s underwear shop, called “The Museum of Man Area and Underwear Shop,” in its Mall of America location in Bloomington, MN. Part of the space will feature interactive, museum exhibit-inspired product displays that will entertain and educate shoppers. Founded as a catalog retailer, Duluth Trading opened its first physical store in 2010 and now operates about 55 stores.Click here to request a list of future openings.
On Monday, Dine Brands International announced an agreement with Minhas Holdings to bring 15 new IHOP locations to the Greater Toronto Area over seven years. The first location is slated to open mid-2020.
Crystal Financial LLC and Second Avenue Capital Partners LLC announced the closing of a $40.0 million Senior Credit Facility for JackRabbit, owned by affiliates of CriticalPoint Capital. Proceeds from the transaction are being utilized for general working capital needs, to refinance existing debt, and for the acquisition of certain assets of Olympia Sports. JackRabbit offers products for runners, athletes, and fitness enthusiasts through its 60 specialty retail stores in 17 states and the e-commerce sites www.jackrabbit.com and www.clevertraining.com. Olympia Sports and its e-commerce site www.olympiasports.net will become part of JackRabbit but will continue to operate under the Olympia Sports' banner. The consolidated company will operate 135 brick and mortar stores in addition to the various e-commerce platforms.
Earning Reports
Chipotle reported third quarter sales growth of 14.6% to $1.40 billion, driven by comp growth of 11%, which included 750 basis points from higher transactions. Average check grew 3.5%, including a benefit from menu price increases that were implemented during 2018. Digital sales increased 87.9% and accounted for 18.3% of sales for the quarter
During the quarter, the Company opened 25 new restaurants including one relocation and closed one restaurant.
Early “Chipotlane” drive-thru results have been positive, enough so that management is shifting its real estate strategy going forward to have about 50% include drive-thru lanes. Approximately 60 of these stores will be open by the end of 2019. The shift will move some openings into next year, so 2019 total openings are now expected to be at or slightly below the guidance of 140 to 155 (150 to 165 openings are expected in 2020) - click here to request a list.
Tractor Supply Company’s third quarter sales increased 5.4% to $1.98 billion, and comps were up 2.9%. Comparable average ticket increased 2.3%, and comparable transaction count was up 0.6%. Comp growth was driven primarily by strength in everyday merchandise, along with growth across spring and summer seasonal categories. Gross margin increased 28 basis points to 35% from 34.7% due to the strength of the Company’s price management program and a reduction in freight expense as a percentage of net sales. Operating income rose 5.7% to $161.8 million. The Company opened 25 new Tractor Supply stores and one new Petsense store and closed one Tractor Supply store and two Petsense stores. Click here to request a list of future openings.
Walgreens Boots Alliance reported results for its fourth quarter and fiscal year ended August 31. Quarterly revenues increased 1.5% to $33.95 billion and increased 2.6% on a constant currency basis. Within the Retail Pharmacy USA segment, which represents approximately 77% of total revenues, the Company reported sales of $26.00 billion, an increase of 2.1% over the year-ago quarter. Excluding the impact of store closures from optimization efforts following the acquisition of Rite Aid stores, organic sales growth was 2.9%. Sales in comparable stores increased 3.4% during the period, driven by a 5.4% lift in pharmacy comps partially offset by continued weakness in front-end comps, which were down 1.2%. The latter was entirely due to the de-emphasis of tobacco products. Retail Pharmacy USA adjusted operating income decreased 12.2% to $1.10 billion, representing approximately 73% of consolidated adjusted operating income. Performance was adversely impacted by a decline in front-end gross profit and planned incremental spend related to store, labor, and digital investments. Click here to request a list of Walgreens future openings & closings.
Amazon reported results for its third quarter and year-to-date period ended September 30. Quarterly revenue accelerated, increasing 24% to about $70.00 billion, driven by one-day shipping demand; however, this came at a price, as shipping costs increased 46%. Overall, EBITDA rose nearly 20% to $10.50 billion due to the sales boost. One item of interest was in-store retail sales (primarily Whole Foods) decreasing 1% despite more stores in operation. Amazon also provided soft guidance for the fourth quarter with sales expected to increase 11% – 20% to $80.00 billion – $86.50 billion and operating income expected to shrink to $1.20 billion – $2.90 billion, down from $3.80 billion last year, due to elevated costs of delivery.
In other news, Amazon Counter, the online retailer’s in-store pickup option that launched this summer at more than 100 Rite Aid locations in the U.S., is now expanding to several thousand more locations with the additions of new partners GNC, Health Mart, and Stage Stores. Amazon currently offers a range of alternatives to leaving packages on doorsteps, including Amazon Counter and Amazon Lockers, Key by Amazon for keyless entry into homes and vehicles, and Amazon Day delivery dates. Meanwhile, Kohl’s recently expanded its Amazon partnership on returns to all 1,150 of its U.S. locations after its initial trials drove significant revenue increases. Stein Mart also recently announced plans to install Amazon Lockers in some 200 stores.
In a move designed to grow and consolidate Amazon's grocery delivery services, Amazon announced that it is eliminating its $14.99-per-month fee for grocery delivery, making delivery from both Amazon Fresh and Whole Foods Market included in Prime membership. Further, this change will make local Whole Foods inventory available online through the Amazon App. Grocery delivery is available across 2,000 cities and towns. One- and two-hour delivery windows are available in most cities, and Amazon said it will be expanding that geographically as well. As mentioned above, Amazon’s third quarter sales continued to expand, but higher shipping costs weighed on profits. This latest initiative, which competitors inevitably will match, is likely to further that trend.
Amazon acquired healthcare start-up Health Navigator, its second purchase in the healthcare services industry. The deal comes after the Company acquired online pharmacy PillPack last year. The Company said the acquisition is a part of its new employee offering, Amazon Care, where its employees will be able to receive fast-paced access to healthcare facilities without having to make appointments. Founded in 2014, Health Navigator provides preliminary and final diagnosis and treatments on its digital platform. Financial terms were not disclosed.
Amazon’s Web Services division AWS received approval to build an $800.0 million data facility in Buenos Aires, a massive investment for the Company in South America.
Meanwhile, last Friday Microsoft was awarded the Pentagon’s $10.00 billion cloud computing contract, beating out Amazon Web Services. Given that AWS already provides those services for the Central Intelligence Agency (CIA), it was believed to be the favorite to win the Department of Defense contract.
Carter’s reported third quarter sales increased 2.1% to $943.3 million. U.S. retail segment sales (49.2% of total sales) were up 1.1% to $464.1 million, and comps were down 0.6%, reflecting in-store sales, partially offset by growth in e-commerce sales. The Company opened 14 stores and closed three underperforming locations in the U.S. during the quarter. U.S. wholesale segment sales (37.3% of total sales) increased 3.9% to $352.3 million, reflecting increased demand for the Company’s exclusive Carter’s brands. International segment sales (13.5% of total sales) rose 0.9% to $127.0 million, reflecting growth in various markets outside of North America, partially offset by the transition of the Company’s business model in China and the effects of foreign currency translation. Overall, EBITDA fell 14.8% to $107.3 million, as the Company recognized a pre-tax charge of $30.8 million related to the write-down of the Skip Hop tradename asset recorded at the time of the Skip Hop acquisition in February 2017. The reduction in the value of this intangible asset reflects lower projected sales and earnings for Skip Hop. Commenting on the impairment charge, CEO Michael D. Casey stated, “Since its acquisition in 2017, Skip Hop has achieved good growth in sales. But the carrying value of its tradename has been impaired by the loss of its largest customer, Toys “R” Us, which closed last year, lower international demand, and higher product costs driven by tariffs imposed on China imports this year. Excluding the impairment charge, we exceeded our sales and earnings growth objectives in the third quarter.”
O’Reilly Automotive’s third quarter sales increased 7.4% to $2.67 billion, and comps were up 5%. Gross margin was up 30 basis points to 53.3%. SG&A margin improved 30 basis points to 33.2%. Operating income rose 10.6% to $536.4 million. Commenting on store growth, CEO Greg Johnson stated, “As we discussed in our second quarter earnings release, year-to-date store openings through June 30 fell short of our plan, due to weather related construction delays. We made significant progress with store openings during the third quarter to close that timing gap, and remain on track to open 200 net, new stores by the end of 2019. We continue to view organic store growth to be a strong opportunity to invest capital at robust rates of return and plan to continue to execute our expansion strategy during 2020 with the addition of approximately 180 net, new stores. This target is slightly below our 2019 store opening pace as our teams will be heavily involved with completing the acquisition of Mayasa Auto Parts, which we announced in August. We are very excited to close on this acquisition in the fourth quarter and begin the process of partnering with the experienced Mayasa leadership team to capitalize on the long-term profitable growth opportunities that exist in the Mexican market.” Click here to request a sample list of O'Reilly future openings.
Wakefern reported another period of lackluster retail system sales (corporate owned and member retail sales) for fiscal 2019, increasing just 0.6% to $16.60 billion. Wakefern comprises 50 members who independently own and operate 352 supermarkets under the ShopRite, The Fresh Grocer, Price Rite Marketplace and Dearborn Market banners in New Jersey, New York, Connecticut, Pennsylvania, Maryland, Delaware, Massachusetts, Rhode Island, and Virginia. Wakefern and its members primarily compete against Ahold Delhaize’s Stop & Shop, which has been remodeling stores in many markets. Ahold Delhaize is also acquiring King Kullen, which has 37 stores all on Long Island (New York). In addition, Lidl has been the latest new competitor to encroach on Wakefern’s market area with the acquisition of 26 Best Yet Markets, mostly on Long Island. Lidl’s first four stores on Long Island are expected to open by 2020. The Company also opened its first micro-fulfillment center in July, which it hopes will help improve its online business.
GNC Holdings reported third quarter sales declined 14% to $499.1 million, primarily due to the transfer of the Nutra manufacturing and China businesses to newly formed joint ventures, the closure of Company-owned stores under its store portfolio optimization strategy, U.S. and Canada segment negative comps of 2.8%, and lower International franchise revenue. E-commerce revenues grew 12%, driven by increased conversion rates due to an improved site experience. During the third quarter, the Company opened eight new stores and closed 85 underperforming Company-owned units in the U.S. and Canada; domestic franchisees opened three stores and closed seven underperforming stores.
Regis Corporation reported first quarter sales decreased 14.2% to $247.0 million, primarily driven by the conversion of a net 1,143 Company-owned salons to the Company’s asset-light franchise portfolio over the past 12 months. Revenue for Company-owned salons declined 30.2% to $174.5 million, and franchised salons’ revenue increased 90.8% to $72.5 million. Franchise revenue now makes up about 30% of total sales, up from 13% a year ago. System-wide same-store sales declined 1.1%, including a 2% drop at Company-owned stores and a 0.1% slip at franchise stores. The Company recorded an EBITDA loss of $5.8 million, compared to EBITDA of $9.8 million last year as a result of the previously mentioned conversions. Adjusted EBITDA in the franchise segment increased 20.2% to $11.9 million but decreased 58.4% to $11.5 million in the Company-owned segment. There were 4,456 franchise salons, up 6% from last year, while there were 2,551 Company-owned salons, down 33.3%. During the quarter, the Company sold and transferred 545 Company-owned salons to its franchise portfolio, generating $38.0 million in cash proceeds. In addition, approximately 900 salons, or about 42% of the remaining Company-owned salon portfolio, are now in various stages of negotiations to be purchased by new or existing franchisees.
