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September 11, 2019

On Monday, Fred’s, Inc. filed a voluntary Chapter 11 petition in the U.S. Bankruptcy Court for the District of Delaware. The Company also filed a motion seeking interim and final approval of a $35.0 million DIP Facility to be provided by certain of the Company’s existing lenders. The Company said it is committed to ensuring an orderly wind-down of its operations, and it has commenced liquidation sales at all of its 87 remaining retail locations (click here to request a list), which are expected to close over the next 60 days. Management said it expects to continue fulfilling prescriptions at most of its pharmacy locations, while it continues to pursue the sale of those assets as part of the Court-supervised proceedings.

Last week,Saks Fifth Avenue’s flagship location in New York City opened “The Vault,” consisting of dedicated lower-level space for fine jewelry and watches from more than 25 brands. With 12,000 square feet of space (more than double the previous space allotted for jewelry and watches), The Vault includes the largest selection of men’s watches Saks has ever offered. It contains six jewelry shop-in-shops, eight vendor-designed watch shops, two private VIP rooms, and an international lounge catering to foreign tourists and offering repair services. Saks is a subsidiary of Hudson’s Bay Company.

Nordstrom opened its Local concept in New York City in an 1,800 square-foot location on the Upper East Side. A second Local will open in the West Village on September 27. Services offered include online order pickup and returns, alterations, shoe/handbag repair, styling services, and gift-wrapping. Both Locals will take donations of “gently used fashion” for Housing Works and serve as meeting spots “for networking and family driven events.” There are currently three Local stores in Los Angeles, in addition to the one in New York City.

Neiman Marcus Group has partnered with four companies to start selling luxury mattresses online. The four brands are Aireloom, Royal-Pedic, Sferra, and Shifman. The Company is pairing the mattresses with “everything from the right pillow to comfortable pajamas and more” on a magazine-style shopping page that it calls The Art of Sleep. It should be noted that these mattress brands are not well known, like Serta, Sealy, Stearns & Foster, or the popular digital native mattresses in a box brands like Casper, Purple, Nectar, or Tuft & Needle. Instead, they are high-end brands with prices that range from $2,000 for a twin to $19,000 for a king.

In other news, Neiman Marcus announced on September 4 that Adam Orvos, EVP, CFO and COO, is resigning to join another company. Mr. Orvos will remain with Neiman Marcus through October 11 to assist with the transition. The Company has initiated a search for a new CFO, but given the time constraints, it is unlikely to have a new CFO in place before Mr. Orvos’ departure. Mr. Orvos has been with the Company for less than 18 months. Although Neiman Marcus recently extended the maturity of its debt by three years (the nearest maturity is now October 2023), it is still saddled with a nearly $5.00 billion debt load as it attempts to navigate a turnaround.

Tractor Supply opened its 1,800th store in Berkshire Township, OH yesterday, its 93rd location in the state. The Company opened 80 new stores in 2018, and it is on track to open another 80 this year (click here to request a list). So far, 35 stores have opened this year.

Vitamin Shoppe announced that the “go-shop” period provided for under the terms of its previously announced merger agreement with Liberty Tax, Inc. expired on September 6. The Company also announced that it had received an acquisition proposal from a third party (the Bidder) during the go-shop period. As previously reported, on August 8 the Company entered into a definitive agreement under which Liberty Tax will acquire the Company in an all-cash transaction valued at approximately $208.0 million. The Company has determined that the Bidder’s acquisition proposal is reasonably likely to lead to a superior proposal. While the Company intends to engage in negotiations with the Bidder regarding the proposal, it has not determined whether the acquisition proposal (which remains subject to several conditions, including the completion of due diligence and the negotiation of a definitive transaction agreement) constitutes a superior proposal. Accordingly, there can be no assurance that the acquisition proposal will ultimately result in a superior proposal, and discussions and negotiations with the Bidder could terminate at any time. 

It should be noted that the Company is subject to a termination fee payable to Liberty Tax of not more than $3.2 million for documented out-of-pocket costs and expenses (including attorneys’ fees) in the event the Company accepts a superior proposal. Neither the board nor the special committee has changed its recommendation in favor of the Company’s pending merger with Liberty Tax. Kirkland & Ellis is acting as legal counsel to The Vitamin Shoppe and BofA Merrill Lynch is acting as financial advisor. Investors were encouraged by the news, as the shares were up more than 7% in early market trading yesterday, reaching $6.90.

Schnuck Markets’ management confirmed that the Company’s fiscal 2018 year-end top line remained essentially flat, at about $2.70 billion, as store count remained static, and competition from both brick-and-mortar and online sources was strong. After fiscal year end, in October, the Company purchased 19 St. Louis-area Shop ‘n Save stores (14 in Missouri and 5 in Illinois) from Supervalu; although it subsequently closed three of the acquired stores, the Company said it expects fiscal 2019 sales to increase to $3.10 billion. Management said it would not currently announce if any new stores were in the development pipeline. Overall, Schnucks stores average about 60,000 square feet, but their sizes vary widely according to location.

In other news, last Wednesday, thousands of union members of Local 655 employed at dozens of Schnucks in the St. Louis, MO region approved a three-year contract, avoiding a strike. The old contract expired in May. The union says the new agreement preserved healthcare benefits, strengthened union pensions, and raised wages.

Hy-Vee is investing $90.0 million on the remodel of 14 of its Kansas and Missouri locations to include unique food service offerings, new departments, updated signage, enhanced health and wellness services, and refreshed convenience stores in some of the stores. Construction is already underway in some locations, with most remodels slated for completion by early 2020. See below for Future Store Opening Map - click here to request a list.

Ace Hardware announced the acquisition of Handyman Matters, a franchisor of home repair, maintenance, and improvement services based in Denver, CO. Handyman Matters will become Ace Handyman Services and operate as a standalone subsidiary of Ace Hardware. The franchisor operates 57 locations in 23 states.

After Walmart’s announcement last week that it would stop selling certain firearms and ammunition, and discourage customers from openly carrying in its stores, four more retailers are now asking customers not to openly carry guns in their stores: Walgreens, CVS, Wegmans, and Kroger. Retailers have faced increasing pressure from customers and employees to take action to prevent gun violence after the mass shooting that occurred inside a Walmart store in El Paso, TX last month.

Dollar General announced it will be expanding into two new states with stores in Centralia and Cathlamet, WA and Pine Bluffs, WY. The stores are expected to open in early 2020 and will expand the Company’s presence to 46 states.

Target said it plans to hire 130,000 seasonal workers for the holidays, up from 120,000 last year; it will also double the number of workers who fulfill online orders from stores. About 125,000 hires will be in stores and 8,000 will be in fulfillment and distribution centers. In other news, on October 6, Target plans to roll out its Target Circle loyalty program nationwide. The card-less program was tested in a number of cities in April 2018 and was originally called Target Red. It offers customers 1% back on each purchase

On November 15, Starbucks will open a new Reserve Roastery store in Chicago, IL. It will stand at 43,000 square feet and will be the largest Roastery, its third in the U.S., and sixth overall. The Company reportedly has no plans for additional locations. 

Click here to request a complimentary sample list of Starbucks Future Openings.

On September 6, Super Center Concepts (dba Superior Grocers) opened a small-format store called The Market By Superior. Much smaller than its traditional 67,500 square-foot supermarkets, the 25,000 square-foot store offers farm-fresh produce, expanded prepared foods and everyday essentials. 

On August 22, Key Food Stores Co-Operative opened a 45,000 square-foot Food Fair location in Plantation, FL. It is the Company’s 11th store in the state, and management said it plans to open an additional 30 stores in Florida.

On August 29, Duluth Trading announced that Stephanie Pugliese resigned as president and CEO to assume a leadership position at another company. In the interim, pending a search for a new CEO, the Company appointed Executive Chairman and Founder Steve Schlecht as CEO. Mr. Schlecht previously served as the Company’s CEO until 2015. 

Duluth Trading’s sales have increased for 37 consecutive quarters, with fiscal 2019 first quarter revenue rising 14%, primarily driven by 18 additional stores in operation since 1Q18. Direct sales declined 0.8%, while retail sales grew 42.8%, driven by growth in both men’s and women’s businesses. The Company recorded an EBITDA loss of $5.1 million, compared to EBITDA of $1.9 million in the same period last year, due to accelerated clearance and deep discounting activity, coupled with higher labor and occupancy costs. While the balance sheet remains relatively healthy, debt more than doubled year-over-year due to higher revolver borrowings to support store expansion. The Company expects to open 15 new stores in fiscal 2019. At May 5, liquidity was adequate, with $2.6 million of cash and $40.8 million of availability under the Company’s $80.0 million secured revolver.

Red Robin’s Board announced a unanimous rejection of an unsolicited proposal from Vintage Capital Management, LLC on July 18, to acquire all of the outstanding shares of Red Robin for $40.00 per share. As of that date, Vintage owned 11.6% of Red Robin’s outstanding shares. The Board cited the Company’s ongoing turnaround plan, which it believes will generate greater long-term value to shareholders than the proposal from Vintage. The Company’s plan revolves around stabilizing dine-in revenue by presenting a stronger value proposition, building its To-Go and Catering businesses, improving guest experience and digital platforms, and selectively refranchising and reassessing its real estate portfolio. However, the Company is still in the early stages of this process, and the top-line stabilization has been slow to materialize. Comparable restaurant sales continued to decline in the second quarter of fiscal 2019 by 1.5%, driven by a 6.4% decline in comparable guest counts. Management closed 12 Company-owned restaurants in the first half, while franchisees opened one restaurant; 472 Company-owned and 90 franchised restaurants were in operation at period-end. 

Strategic Sales Insights Report

As one of the largest food cooperatives in the U.S., Wakefern (combined with its member-owned stores) maintains a top two market position in most of its major Northeastern markets, including New York and Philadelphia. Both its ShopRite and Price Rite Marketplace banners have performed relatively well in the highly competitive region; however, the promotional environment has pressured margins and profits. Fiscal 2018 system retail and wholesale sales grew 1.6% to $13.20 billion and $16.50 billion, respectively, albeit comps remained flat. The Company attributed sales growth to the four ShopRite stores and two Price Rite Marketplace stores opened during the year. In addition to store growth, Wakefern has been remodeling its Price Rite Marketplace value banner, after changing the chain’s name to Price Rite Marketplace in 2018. At the ShopRite banner, the Company is refining its private label brands, with an aim to have private brands make up 30% of total sales in the next five years, up from 13% currently (average is about 25% among major grocery retailers). 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. 

Amazon’s Whole Foods is reportedly testing scanners that can identify an individual human hand as a way to ring up a store purchase. The high-tech sensors are different from fingerprint scanners and do not require users to physically touch their hands to the scanning surface. Amazon hopes to introduce the tech to a “handful” of its Whole Foods stores by the beginning of next year and to eventually expand it to all U.S. locations. On September 4, AmazonFresh expanded to Indianapolis, IN. This follows the news last month of its expansion into Houston, Minneapolis and Phoenix. 

Macy’s announced it aims to save $400.0 million – $550.0 million annually in the next two to four years as it cuts back on discounts. The Company has been spending heavily on remodeling its stores and building its off-price and online businesses, so it has relied on discounting to clear inventory. The Company has closed more than 100 stores and cut thousands of jobs as customers shift to online shopping. Macy’s is also testing self-checkout in stores and rolling out new handheld devices for staff to improve efficiency. The Company also expects to drive about $100.0 million in additional working capital improvements. 

On September 5, Brinker International announced it completed the acquisition of 116 Chili’s Grill & Bar restaurants from its 14-year franchisee, ERJ Dining. This follows the announcement of the letter of intent made on July 10. The restaurants, primarily located in the Midwest, generate approximately $300.0 million of annualized revenue. The transaction was funded with availability under Brinker’s existing credit facility and is expected to be EPS and cash flow accretive in fiscal year 2020.

McDonald’s USA and Grubhub are partnering to expand McDonald’s McDelivery to approximately 500 restaurants in the New York City and Tri-State area. The partnership will include a direct POS integration featuring Grubhub’s “Just in Time” technology, which streamlines matching order fulfillment with driver pickup. Launched in partnership with UberEats in 2017, McDelivery will now be available in more than 10,000 restaurants across all 50 states. McDonald’s expects McDelivery to be a $4.00 billion business for both corporate and franchise restaurants globally in 2019. McDonalds expanded McDelivery in August by adding DoorDash as a delivery partner at thousands of stores nationwide. 

In connection with its $70.00 billion acquisition of Aetna Inc. in November 2018, CVS Health entered into a consent decree with the U.S. Department of Justice (DOJ) that allowed the acquisition to proceed under certain conditions. As part of the agreement with the DOJ, Aetna entered into an asset purchase agreement with a subsidiary of WellCare Health Plans, Inc., for the divestiture of Aetna’s standalone Medicare Part D prescription drug plans. The divestiture transaction closed on November 30, 2018. From a regulatory standpoint, the U.S. District Court for the District of Columbia has been examining the consent decree to determine whether the agreement with the DOJ, which approved the merger including Aetna’s agreement to sell its Medicare Part D prescription drug plan business, satisfies anti-competitive concerns. On September 4, a final order was entered by Judge Richard Leon granting the government’s motion to enter the proposed final judgment of CVS Health’s acquisition of Aetna. The order concludes that the settlement was within the reach of the public interest and was issued without conditions. The issuance of the order is the final step in the approval of the acquisition. 

Earning Reports

Lululemon Athletica’s second quarter sales increased 22.1% to $883.4 million, and store comps were up 10%. This is the seventh consecutive quarter that comps have been up 10% or higher. Direct-to-consumer sales increased 30% and represented 24.6% of total revenue, up from 23.1% last year. Gross margin increased 20 basis points to 55%, and operating income rose 25.2% to $168.0 million. The Company ended the quarter with 460 stores, after opening 47 stores over the past year. Looking ahead, fiscal 2019 EPS is projected to be $4.63 – $4.70, up from its prior outlook of $4.51 – $4.58. Click here to request a list of Lululemon future openings and closings.

Big Y’s total sales, at $1.98 billion, were essentially flat in fiscal 2018, as store count remained static following the acquisition of eight Hannaford stores from Ahold Delhaize and a new store opened in 2016. The Company is investing about $46.0 million in the expansion of its 189,000 square-foot distribution center in Springfield, MA; the project is slated for completion before the end of calendar 2019, and will have the capacity to support up to 20 additional stores.

PriceSmart’s August sales increased 4.5% to $259.9 million. Comps increased 1.1%, negatively impacted by $7.3 million, or 2.6%, due to foreign exchange fluctuations. For the 12 months ended August 31, sales increased 1.2% to $3.09 billion, and comps fell 0.6%. The Company opened two new stores over the past year, bringing its total count to 43. 

Costco reported August sales increased 6.9% to $11.79 billion. Comps, excluding fuel and currency exchange, rose 5.9%, consisting of growth of 5.9% in the U.S., 6.1% in Canada, and 5.9% in Other International. E-commerce sales increased 23.8%.

Sales for the quarter and fiscal year ended September 1 rose 7% to $46.45 billion and 7.9% to $149.35 billion, respectively. For the quarter, comps rose 5.1%, and e-commerce sales increased 21.9%. For the full year, comps were up 6.1% and e-commerce sales increased 23.3%. 

Alimentation Couche-Tard reported first quarter results for the period ended July 21. Revenues fell 4.2%, to $14.16 billion, primarily on lower fuel prices, less favorable foreign exchange, and the sale of its marine fuel business. Total merchandise and service revenues increased 1.6% to $3.60 billion. Same store merchandise revenues increased 2.5% in the U.S., 0.7% in Europe and 0.3% in Canada. Same-store road transportation fuel volume increased 0.6% in the U.S., 0.4% in Canada, and decreased 1.6% in Europe.

The rollout of the Company’s Circle K brand in Europe was completed during the quarter, while in North America it is progressing steadily. As of July 21, the Company had more than 5,800 stores in North America, including 789 stores acquired from CST.

Alimentation Couche-Tard also announced the second in a series of transactions under an Asset Exchange Agreement executed in December 2018. As part of this second transaction, Couche-Tard transferred to CrossAmerica 56 U.S. Company-operated Circle K stores having an aggregate value of approximately US$50.2 million. In exchange, CrossAmerica transferred to Couche-Tard assets having an aggregate value of approximately U.S. $51.4 million. The CrossAmerica assets include the real property for 19 master lease properties. Previous expectations were that the exchange of assets would occur in a series of transactions over a period of up to 24 months. However, the companies now anticipate the remaining exchange of assets will be completed in a series of transactions by no later than the end of the first quarter of calendar year 2020, with most being completed before the end of 2019. It continues to be expected that there will be no additional funding required as part of these transactions. 

Casey’s reported first quarter revenue growth of 1.5% to $2.63 billion. President and CEO Darren Rebelez commented, “Quarterly results were positively impacted by our fuel price optimization initiative, store growth, and a continued focus on controlling operating expenses.” Average fuel margin was $0.244 per gallon, while same-store gallons sold were down 2%. Grocery and Other Merchandise same-store sales were up 3.2%, with an average margin of 31.3%. Prepared Food and Fountain same-store sales increased 1.6% with average margin of 62.2%. Net income was $85.8 million, compared to $70.2 million last year. During the quarter, the Company opened 17 stores, acquired four, and closed six, bringing its count to 2,161. The Company has 11 stores under agreement to purchase and a new store pipeline of 107 sites, including 35 under construction.

The Buckle’s August sales increased 2.7% to $77.2 million, and comps were up 3.1% following a 0.7% decline last year. Year-to-date sales increased 0.2% to $482.3 million, and comps inched up 0.7%. The Buckle operates 449 retail stores in 42 states, down from 455 stores in 43 states in August 2018.

Cato Corporation’s August sales inched up 0.5% to $56.7 million, and comps were up 3% on top of a 5% increase last year. Year-to-date sales slipped 1% to $494.8 million, and comps were up 2%. CEO John Cato stated, “August same-store sales exceeded our expectations. We continue to be encouraged by our current trend; however, we remain cautiously optimistic about the rest of the year given the difficult retail environment and the impact of the new tariffs.” As of August 31, the Company operated 1,299 stores in 31 states, down from 1,350 stores in 33 states last year.

Zumiez’s second quarter sales increased 4.3% to $228.4 million, and comps were up 3.6%. Operating income rose 74.3% to $11.7 million. August comps increased 7.1%, on top of a 9.5% increase last year. Looking ahead, based on better-than-anticipated trends and performance year-to-date, the Company raised its annual guidance. It now expects fiscal 2019 comps to increase 2% – 4%, compared to prior guidance of low single digits. EPS is now projected to be $2.10 – $2.20, up from previous guidance of $1.84 – $1.94. The Company currently intends to open about 16 new stores during the year, including up to six stores in North America, seven stores in Europe, and three stores in Australia. As of August 31, the Company operated 711 stores including 607 in the U.S., 51 in Canada, 43 in Europe, and 10 in Australia.

Genesco’s second quarter sales slipped 0.1% to $486.6 million, but sales would have increased 1% excluding the effect of lower exchange rates. Comps (including direct sales) increased 3%, or 1% at stores only and 20% online. Direct-to-consumer sales were 10.4% of total sales, up from 8.9% last year. Comps (including direct sales) were up 4% at Journeys, flat at Schuh, and up 1% at Johnston & Murphy. Gross margin rose 110 basis points to 48.6%, reflecting freight claim credits for Journeys Group, improved wholesale gross margin in the Johnston & Murphy Group, and efficient sell through of sale product at Schuh Group with lower markdowns. SG&A expenses eroded 30 basis points to 47.6%, reflecting increased marketing expenses, partially offset by decreased bonus expenses and store rent. Operating income jumped 175.5% to $3.0 million. Genesco operates 1,490 stores, down from 1,532 last year.

Christopher & Banks reported second quarter sales decreased 4.5% to $83.4 million, as comps were down 4.1% and the Company operated six fewer stores than in the prior-year period. Gross margin increased 88 basis points to 29.3% due to a 148 basis point increase in merchandise margin, partially offset by higher shipping costs related to its ship-from-store initiative. Adjusted EBITDA loss narrowed 30.2% to $3.1 million. The Company operates 455 stores in 44 states consisting of 310 Miss/Petite/Women’s stores, 80 outlet stores, 34 Christopher & Banks stores, and 31 CJ Banks stores.

Francesca’s second quarter sales decreased 6.2% to $106.0 million, as sales fell in each merchandise category with the exception of jewelry. Apparel sales (49.4% of total sales) fell 8%, accessories sales (15.3% of total sales) were down 6%, and gifts sales (8.1% of total sales) dropped 25%; jewelry, which makes up 26.4% of total sales, increased 4%. Overall comps fell 5%, on top of the 13% decline in the prior-year period, but improved sequentially as comps fell in the double digits during the past nine quarters. Gross margin was down to 38.2% from 39% due to lower merchandise margins as a result of deeper markdowns on legacy product and deleveraging of occupancy costs from lower sales. The Company’s cost-reduction initiatives under its turnaround plan led to SG&A margin improving 140 basis points to 36.9%. These initiatives helped drive an operating income increase of 66.1% to $1.4 million. During the first half of the fiscal year, the Company opened four new stores and closed 13 underperforming locations, ending with 718 stores in operation.

At Home Group’s second quarter sales increased 18.7% to $342.3 million, driven by new stores but partially offset by a 0.4% comp decline. The Company opened a net 39 stores over the past year, representing a 23.6% increase. Gross margin decreased 450 basis points to 29.3%, primarily as a result of product margin contraction due to incremental markdowns, increased occupancy costs from sale-leaseback transactions, and costs associated with opening its second distribution center. As a result, adjusted EBITDA fell 6.6% to $47.1 million.