September 18, 2019
Yesterday, Stage Stores announced plans to convert substantially all of its stores to Gordmans, its off-price banner. Based on the early success of the conversion strategy, the Company plans to begin converting its remaining department stores in February 2020 and expects to be operating approximately 700 predominantly small-market Gordmans off-price stores by the third quarter of fiscal 2020. A limited number of stores may continue to operate under existing department store nameplates until leases expire. The Company plans to close approximately 40 stores during fiscal 2020 (click here to request the list of 40 stores).
On September 12, Forever 21 responded to reports saying it is preparing for a bankruptcy filing, with plans to close some of its 700 stores in the near future. In a statement, the Company said, “The reports are inaccurate; Forever 21 is not planning to file for bankruptcy on Sunday [September 15]. Our stores are open and it is our intention to continue to operate the vast majority of U.S. stores, as well as a smaller amount of international stores.” The Company operates about 815 stores in the U.S., Europe, Asia, and Latin America. We previously noted that reports stated negotiations with lenders have stalled, and management is preparing for a potential restructuring, as turnaround options fade and liquidity continues to decline. The Company hired advisors in June to help renegotiate leases with landlords and overhaul its operations in an attempt to avoid a formal restructuring (click here for more information).
On September 11, the Court issued interim orders authorizing Fred’s, Inc., DIP to access up to $35.0 million under a DIP Facility provided by Regions Bank and Bank of America, subject to a roll-up of $15.1 million in borrowings and $8.8 million of letters of credit outstanding under the prepetition credit agreement; and enter into an agreement with SB360 Capital Partners to conduct closing sales at 87 stores. Store-closing sales started September 4 and will conclude on October 31. A hearing on final approval of the interim orders is scheduled for September 27.
Click here to request a list of Fred's closures.
Also on September 11, the Court entered an order granting approval of certain procedures regarding the sale of certain de minimis pharmacy assets and non-residential real property. Accordingly, the Company has entered into real estate contracts to sell properties located at 605 South Jackson Street, Starkville, MS for $850,000, and 605 North Henderson Blvd, Kilgore, TX for $1.3 million.
Published reports indicate that the Hudson Group is in talks to take over the leases for 30 existing Brookstone stores in U.S. airports. The deal, which sources say is close to being finalized, would have the stores continue to operate under the Brookstone name. Hudson reportedly aims to increase that airport retail footprint to 50 stores and offer Brookstone products in 800 Hudson News stores. BKST Brand Holdings, a subsidiary of Bluestar Alliance, owns the Brookstone brand. Brookstone filed for bankruptcy in August 2018 and closed about 100 mall-based stores; in October 2018, BKST paid $72.0 million for Brookstone’s assets. As part of the deal, BKST maintained the majority of Brookstone’s airport retail stores, distribution center and operating team in New Hampshire. BKST had outbid Hudson Group and ThreeSixty Group for the assets.
Ahold Delhaize’s Stop & Shop division has remodeled 21 stores on Long Island, as part of a $133.0 million investment. The remodeled stores focus on delivering more fresh, healthy, and convenient options, and offer lower prices throughout the store. Long Island is the second market to unveil Stop & Shop’s new look, following 21 stores that were remodeled in 2018 in the Hartford, CT market. The remodels are part of the Company’s multi-year initiative to refresh more than 400 stores across the Northeast. Click here to request a list of Ahold Delahize Future Store Openings.
According to Casey’s General Store CEO Darren Rebelez, the Company plans to build 60 new convenience stores and acquire approximately 25 additional stores during fiscal 2020. Casey’s has already opened 15 new stores and acquired four during the first quarter. It currently has 11 additional stores under agreement to purchase.
Mr. Rebelez also stated that the Company is in the final stages of evaluating a location and design for its third distribution center, which it expects to break ground this fall. This plan comes just three years after Casey’s opened its second DC in spring 2016. The 250,000 square-foot facility in Terre Haute, IN allowed Casey’s to explore expansion opportunities further east. Click here to request a list of future openings.
Amazon reportedly plans to open a “first of its kind,” three-story distribution center in Seattle, WA. The multiple floors can be accessed by delivery trucks through ramps. This new type of DC could reduce delivery times in congested cities.
Meanwhile, the Company’s cashierless Amazon Go stores in San Francisco (4) and New York (3) are now accepting returns for purchases made online. Amazon Go stores also operate in Seattle and Chicago, for a total of 16 stores. Amazon also accepts returns in its 19 Amazon Books locations, three Amazon 4-star stores, Amazon Hub Lockers, and in more than 1,150 Kohl’s locations.
Amazon is reportedly facing a potential investigation of its marketplace by antitrust officials examining whether it is using its influence to hurt competition. Investigators with the FTC have started interviewing small businesses about how much revenue they make on Amazon versus other online marketplaces like Walmart or eBay. Internationally, Amazon is facing an antitrust probe by the European Commission over its role as a marketplace for independent sellers and a business directly selling competing products.
Amazon and UK grocer Morrisons have agreed to extend their partnership for “a number of years rather than on a rolling basis.” The partnership, first established in 2016, allows Morrison’s customers online ordering and delivery.
Click here to request a list of future openings across all Amazon banners.
Published reports claim Amazon has adjusted its product-search system to more prominently feature listings that are more profitable for the Company. This could mean potential legal and regulatory issues for the Company, as the U.S. and European Union are looking into Amazon’s dual role as both a marketplace operator and seller of its own branded products. Amazon has denied the reports on Twitter, saying it has “not changed the criteria we use to rank search results to include profitability.”
Amazon is set to open its regional air hub at the Fort Worth Alliance Airport next month. The hub, announced at the end of last year, is designed to support larger-scale regional needs, including sortation capability and infrastructure to handle multiple daily flights. Amazon’s first branded aircraft, Amazon One, began flying in 2016, and the Company now operates more than 45 aircraft at over 20 air gateways in the U.S. It will open a central air hub at the Cincinnati/Northern Kentucky International Airport in 2021.
Amazon continues to expand its brick-and-mortar presence and plans to open a 4-star store in the San Francisco area next month. This would be its second in the region. The typical 4-star store averages 4,000 square feet and offers a curated selection of items all with ratings of four stars or more, and specific to the store’s location. Other 4-star stores are located in New York City’s SoHo, a Denver suburb, and Amazon’s Seattle headquarters.
Amazon is expanding its office in downtown Chicago, IL by more than 70,000 square feet, which will allow it to double its tech workforce there. The Chicago tech hub is one of the Company’s 18 North American tech hubs.
Last Friday, Walmart opened its first 10,000 square-foot “Walmart Health” center in Dallas, GA. The concept features an array of primary medical services, dental care, and behavioral health services, including things like optometry, counseling, laboratory tests, X-rays, hearing, and wellness education. It offers more services than the 19 Care Clinics currently operating within Walmart stores that take up about 1,500 square feet. Another Walmart Health center is planned for Calhoun, GA early next year. The news comes as CVS Health and Walgreens Boots Alliance push further into outpatient healthcare services through various models.
In other news, Walmart will roll out an unlimited grocery delivery subscription service. The service will charge an annual membership fee of $98 for unlimited same-day delivery, which will be offered in 1,400 stores in 200 markets. By year end, it will extend to a total of 1,600 stores, serving more than half the country. The service will offer about 100,000 items ranging from fresh food to select general merchandise. Orders must be a minimum of $30 and will be fulfilled by local stores. With same-day delivery, there is a four-hour minimum wait time between placing an order and having it delivered. Curbside pickup is available at 3,000 stores and will expand to 100 more stores by the end of the year.
McDonald’s is acquiring a voice-recognition startup called Apprente, as it reviews technology for its drive-thru windows. The companies have already launched tests at some McDonald’s restaurants. McDonald’s says Apprente’s technology is aimed at handling “complex, multilingual, multi-accent and multi-item conversational ordering.” Terms of the deal were not disclosed. This marks the third recent tech investment for McDonald’s. Earlier this year it purchased Dynamic Yield, which customizes drive-thru menus based on factors like weather and time of day, and it also invested in Plexure, a New Zealand company that makes some of its mobile apps.
The Wendy’s Company plans to launch its breakfast menu, currently available in more than 300 restaurants, across the U.S. system in 2020. As a result, the Company updated its 2019 outlook as it expects to make one-time upfront investments during 2019 of approximately $20.0 million. The Company now expects adjusted EBITDA will be flat to down 2%; adjusted EPS to be down 3.5% – 6.5%; cash flows from operations of $290.0 million – $305.0 million; and free cash flow of $215.0 million – $225.0 million, down approximately 2.5% – 7%. During 2019, the Company continues to expect global system-wide sales growth of 3% - 4% and capital expenditures of $75.0 million – $80.0 million.
Today, Stew Leonard’s will open its first store in New Jersey, in Paramus. The 80,000 square-foot supermarket is located in the Paramus Park Mall at the site of a former Sears location. It will be the Company’s seventh location overall, with the last one opening in East Meadow, NY on Long Island.
Sears Holdings Corporation, DIP has proposed that holders of administrative expense claims take a “haircut” in order to expedite confirmation of the Chapter 11 Plan. In a filing with the Court, the Debtors stated that they have proposed a settlement with certain administrative expense claim creditors in exchange for their acceptance of a reduced but accelerated recovery on their administrative expense claims. The Debtors’ own financial estimates indicate a potential current shortfall in funds, while they also believe they would have sufficient assets to satisfy administrative expense claims, but it could take time to monetize the assets. Some of the assets relate to contingent items, including proceeds from preference actions and two ongoing lawsuits, prompting the Debtors to note that the assets “will be more than enough to satisfy the Debtors’ estimate of outstanding claims by the effective date.” If a Plan cannot be confirmed, the case would be converted to Chapter 7, with a trustee controlling the liquidation process.
Click here to request the latest list of Sears and Kmart closings.
Neighborhood Goods will open a 10,000 square-foot store in Austin, TX in 2020, its second physical location following a 14,000 square-foot store opened in Plano, TX in late 2018. A third location is set to open later this fall in Manhattan’s Chelsea Market. The retailer sells a rotating line-up of contemporary brands, many of which are traditionally sold online, along with events and services. It recently raised $11.0 million in funding, led by its long-term partners at Global Founders Capital, bringing its total funding to $25.5 million.
J.C. Penney launched St. John’s Bay Outdoor, a new men’s private label brand, in 600 stores and online on September 12. The collection includes rugged shirts, jackets and pants aimed at an outdoor lifestyle. Additionally, J.C. Penney is launching an Outdoor shop in 100 stores on October 4, featuring St. John’s Bay Outdoor as well as three national sportswear brands new to J.C. Penney: American Threads, The American Outdoorsman, and HI-TEC. In other news, J.C. Penney announced Colin Dougherty will join the Company on September 23 as SVP of finance. Mr. Dougherty brings 18 years of retail finance experience to the Company, most recently serving at consulting firm Storch Advisors, where he advised clients on strategy, growth, mergers & acquisitions, e-commerce and innovation. Prior to Storch, he served as SVP, financial planning & analysis at Hudson’s Bay Company.
At Home Group has reversed its stance on e-commerce and now plans to have a full online offering by 2022. In the fourth quarter, At Home will test customers buying items online and picking them up in stores. If the test proves successful, more locations will be added next year, with shipping to be added by 2022. The Company is also slowing its aggressive growth plans, now planning to increase its store base 10% annually, down from 17% currently. It still expects to grow to 600 stores from 200 currently, but now it will take more than a decade to reach that goal. At Home posted its first negative comps during the first quarter of fiscal 2020, breaking its streak of 20 consecutive quarters of positive comps. Not having an e-commerce presence leaves the Company more vulnerable to weather-related headwinds since consumers can opt to make their purchases online during inclement weather conditions.
Gap announced it will begin franchising its Athleta and Janie & Jack brands internationally, starting online and with in-store shops. Eventually, Gap plans to open physical franchised locations through its global franchise and strategic alliances division, which opened the first Gap franchised store in 2006 in Singapore. In the last three years, Gap has opened 100 new franchised locations, bringing the total franchise count to more than 500. The announcement comes as Gap finalizes its plans to split into two publicly traded companies, with one devoted to Old Navy and the other to Gap, Banana Republic, Athleta, Intermix, Hill City, and Janie & Jack.
On September 5, the hhgregg brand opened a store in Somerset, NJ, more than two years after all 220 former hhgregg stores were shuttered in 2017 in a Chapter 7 liquidation. In June 2017, Valor Group, LLC acquired the hhgregg brand and intellectual property for $400,000. Soon after, Valor began selling products online under the hhgregg name, operating out of Somerset, NJ. The new physical location is just under 2,000 square feet, much smaller than the previous hhgregg stores, which averaged 18,000 square feet. This is the first time hhgregg has had a presence in New Jersey. Prior to its liquidation, the stores had been predominately in the Midwest. Click here for a list of future openings & closings in the electronics industry.
J. Alexander’s Holdings announced that Merus Grill will be the name of its new restaurant in Houston, TX. The 7,900 square-foot restaurant will have seating for 200 guests. The Company has yet to announce the type of cuisine it will offer, but President and CEO Mark Parkey said that the “eclectic menu offerings will follow the Company’s long history of fresh seafood, aged beef cut in house and unique made-to-order dishes.” J. Alexander’s operates about 45 restaurants in 16 states.
Earning Reports
Kroger announced results last week for its second quarter and six months ended August 17. During the quarter, Kroger’s identical store (ID) sales remained positive, as the Company posted a 2.2% ID sales increase, excluding fuel. Total sales increased a minimal 0.5%, to $28.17 billion. Excluding fuel, business dispositions and merger transactions, total sales increased 2.5%. Gross margin improved 30 basis points. Management noted that gross margin was stable in the supermarket business, while headwinds in pharmacy were offset by strong fuel performance during the quarter. SG&A margin deteriorated 20 basis points due to investment in the Restock Kroger initiatives, which focus on driving administrative efficiencies, store productivity, and cost reductions. As a result, EBITDA advanced 1.2% to $1.16 billion.
Dollarama reported strong second quarter sales, up 9% to $946.4 million, and comps improving 4.7%. Operating income increased 2.7% to $221.6 million.
The Company also announced it had closed on its previously announced acquisition of a 50.1% interest in Latin American value retailer Dollar City. Dollarama continues on its growth trajectory with 14 net new stores during the quarter, bringing it store count to 192.
In a call with analysts, CEO Neil Rossy said that the U.S. trade war with China could make it more challenging for Dollarama to find new products that appeal to customers’ desire to hunt for “treasures.” Chinese factories are on standby and not creating new molds or putting money into research and development on products destined for the U.S. market because of the trade instability. Mr. Rossy said Dollarama has been expanding its product offering where possible and updating selection all the time. It offers more than 4,000 year-round products and more than 700 seasonal ones.
Hudson’s Bay Company reported second quarter sales decreased 0.5% to $1.85 billion, and comps were down 0.4%. Comps grew, for the ninth consecutive quarter, by 0.6% at Saks Fifth Avenue, and 3.4% at Saks Off 5th. However, Hudson’s Bay comps decreased 3.4%, as the chain continues to correct its previous merchandise missteps. Digital sales jumped 19% (Company does not provide percent of total sales), driven by data-driven marketing, assortment balance, and technology improvements. Gross margin declined 530 basis points to 34%, from the strategic decision to exit Home Outfitters and the closure of four Saks OFF 5th locations over the past year, as well as transitions in vendor relationships. SG&A margin improved by 170 basis points to 36.7%. As a result of the decline in gross margin and the partial sale of real estate assets in Europe last year, adjusted EBITDA fell 50.9% to $52.0 million. As we reported recently, the Company agreed to sell Lord + Taylor to Le Tote, pending Le Tote securing financing commitments for the full purchase price. The Company expects the transaction to close prior to the 2019 holiday season.
Duluth Holdings reported second quarter sales increased 10.2% to $122.0 million, its 38th consecutive quarter of year-over-year sales gains. Sales growth was driven by 16 new stores added in the last year, partially offset by a 0.9% decline in direct sales. Gross margin decreased 310 basis points to 53.1%, primarily attributable to a decrease in product margins due to additional global promotions, coupled with recent clearance activity. SG&A margin increased 280 basis points to 50.1% due to an increase in occupancy and equipment cost from store growth. Declining margins and increased costs led adjusted EBITDA to fall 26.7% to $9.6 million. The Company opened four new stores during the quarter, in Rogers, AR; Danbury, CT; Madison, AL; and Kennesaw, GA.
Christopher & Banks’ second quarter sales fell 4.6% to $83.4 million due to a 4.1% comp decline and six fewer stores in operation since Q218. Management stated the comp decline was the result of lower store traffic and a 1.3% decrease in ecommerce sales. Management did note that third quarter to-date comps have increased in the mid-single digits. Gross margin expansion due to fewer markdowns and lower expenses resulted in the quarterly EBITDA loss narrowing to $3.1 million. The Company ended the quarter with $24.0 million in liquidity ($2.2 million in cash and $21.8 million in revolver availability), compared to $45.3 million at the end of the second quarter last year
J. Crew Group announced second quarter sales increased 0.2% to $588.8 million, reflecting a comp decline of 1% (following a 5% increase in the same period last year), a 26% increase in wholesale sales, and 29 fewer stores in operation compared to last year. Sales at the J. Crew unit (which made up 67.8% of total sales) decreased 7% to $399.1 million, and comps fell 4% following a 1% increase last year. Madewell sales (23.7% of total sales) increased 15% to $132.9 million, and its comps rose 10% on top of a 28% increase in the prior year. “Other” sales (8.5% of total sales) jumped 35% to $50.0 million. Significant gross margin contraction, due to promotional activity and higher wholesale revenue, was the primary factor in the 22.9% decline in quarterly EBITDA to $41.8 million. TTM interest coverage retreated to 1x from 1.7x last year. The Company initiated a cost-optimization program that it expects will reduce expenses by $50.0 million over the next three years, including $10.0 million in fiscal 2019. During its quarterly conference call, management announced it filed a Form S-1 to register an IPO for Madewell with the SEC (click here for more information). The Form S-1 was filed under the name Chinos Holdings, Inc. Chinos Holdings will be renamed Madewell Group Inc. before the IPO Is completed. Management declined to make any additional comment on the IPO at this time.
Cracker Barrel reported fourth quarter revenues fell 2.9% to $787.1 million, impacted by an additional week in 4Q18 (adjusting for the impact revenues increased 4.6%). Comps increased 3.8%, representing a 3.6% increase in average check and a 0.2% increase in comparable store restaurant traffic. The average menu price rose 2.3%. Comparable store retail sales increased 0.4%. Operating income was $79.4 million, down from $82.8 million last year. Looking ahead at fiscal 2020, Cracker Barrel expects revenue of $3.15 billion – $3.20 billion, comp store growth of 2% – 3%, comp store retail growth of 1%, and capex of $115.0 million – $125.0 million. The Company anticipates its investment in Punch Bowl Social will have an unfavorable impact of approximately $0.50 on EPS, driven primarily by pre-opening expenses; taking these impacts into account, the Company expects to report EPS of $8.80 – $8.95.
GameStop’s second quarter sales dropped 14.3% to $1.29 billion, driven by 132 net store closures and a comp decline of 11.6% (on top of a 0.5% decline last year). Hardware, software, accessories and pre-owned sales declined 41.1%, 5.3%, 9.5% and 17.5% respectively. Management noted that digital receipts also fell 11.2%, due to weaker title launches, and that the negative trends will continue until Sony and Microsoft launch their next generation consoles in 2020. While the Company continues to struggle with its core business (comprises 81% of sales), the other segments (collectibles, digital and eSports partnerships) are the growth drivers, now representing 19% of sales compared to 15% last year. Due to weaker sales and higher promotional activity, gross margin eroded 30 basis points, while SG&A margin deleveraged an alarming 370 basis points, pushing EBITDA margin for the quarter to negative 1.5%. EBITDA loss for the quarter was $19.6 million, and margin eroded 390 basis points from last year. The EBITDA figure excludes $400.9 million of goodwill impairment related to tangible and intangible assets. Since February 2, the Company impaired all of its goodwill, representing a total of $1.98 billion. While profit margins are eroding, TTM EBITDA margin remains at 6.4%. The balance sheet still carries a net cash balance of $4.9 million, with liquidity of $707.0 million ($424.0 million of cash and $283.0 million in revolver availability) compared to $687.3 million at the end of the second quarter last year, benefitting from store closures. The Company also generated TTM free cash flow of $13.5 million (although a significant decline from $210.4 million in TTM cash flow for the same period last year). Going forward, management noted that given the decline in operations, it lowered fiscal 2020 guidance and increased the size of its cost-cutting measures, including shuttering additional stores.
The Company previously guided $100.0 million of cost savings related to store rationalization, headcount reduction, and supply chain integration. Following the second quarter results, management has increased its cost savings initiative to exceed $200.0 million on an annualized basis. The Company noted that it remains on track to close 180 – 200 underperforming stores globally. While it did not provide the number of store closures for fiscal 2020, management noted that over the next 12 – 24 months it expects to close a much larger number of locations than in prior years.
