September 25, 2019
On September 19, Walmart announced the pricing of two new bonds totaling $1.50 billion. The Company indicated the proceeds will be used for general corporate purposes, including refinancing maturing debt. The next large maturity on the horizon is July 2020, when $1.00 billion of 3.875% Notes come due. The new issues raise debt to about $54.65 billion, with estimated debt to TTM EBITDA of 1.7x, without giving any consideration to paying the July 2020 maturity. Liquidity remains strong, with $9.28 billion in cash and full availability on its $15.00 billion revolver.
In other news, Walmart recently took some bold steps on the social front. Earlier this month, Walmart announced it would stop selling ammunition that can be used in military-style assault rifles. It is also discouraging its customers from openly carrying guns in stores where it is allowed. On Friday, the Company announced it will discontinue the sale of e-cigarettes at Walmart and Sam’s Club stores. The Company will sell through its existing inventory and then cease selling the products.
Conn’s reported on its status after Tropical Storm Imelda made landfall on September 17. As a result of dangerous rainfall and flooding, Conn’s temporarily closed 23 stores across Beaumont and Houston, TX; its distribution and service centers in Beaumont; and its Beaumont corporate office. The Company’s corporate offices in The Woodlands and San Antonio were unaffected, and they supported store, credit and collections, and customer service operations outside the path of the storm. In addition, there was no impact on the Company’s other stores or its Houston distribution center. All locations have now reopened for business. The Company will provide more detailed information about the impact when it reports third quarter results in December. The below map identifies the 24 stores in the Houston and Beaumont areas. Conn’s operates 138 stores in 14 states, including 65 locations in Texas
The Michaels Companies launched a new e-commerce site in Canada last week that gives Canadians 24-hour access to Michaels’ full inventory online. Online customers can now take advantage of the Company’s buy-onlinepickup-in-store services. The Company offers free same-day pickup after checkout and free returns at any Michaels location nationwide. Michaels operates more than 1,272 stores, including 133 in Canada.
Tru Kids Brands announced plans to open a toy- and play-themed pop-up exhibit, called Toys “R” Us Adventure, in Chicago, IL as well as in Atlanta, GA. Families will need to buy tickets ($20 for kids, $28 for adults) to explore about a dozen rooms devoted to toys and play, including an 8,500 square-foot ball pit. Toys “R” Us Adventure was developed in partnership with candy-themed pop-up Candytopia, and is expected to run from the second half of October through January 2020, before moving to other cities. Both locations will feature Toys “R” Us mascot Geoffrey the Giraffe and toy brands including Melissa & Doug, Paw Patrol, and collectibles maker Schleich. CEO Richard Barry (former Toys “R” Us executive) said, “We’re trying to build on the essence of a brand consumers love, the fact that it was a place for kids and families to go and engage with great toy brands, but thinking about it very differently.”
As previously announced in July, Tru Kids is rebuilding the Toys “R” Us retail presence in the U.S., with the opening of two stores in Texas and New Jersey due to open before the holidays. The new stores will be 6,000 square feet – 10,000 square feet, located in top-performing malls. The Company expects to have 10 locations by the end of 2020 and is in the process of restarting online sales for the upcoming holiday season.
On September 20, Hudson’s Bay Co. announced HBC Netherlands, which is owned by a joint venture of Signa Retail Holdings and Hudson’s Bay Co., is going to close its remaining 15 stores in the country, as well as its e-commerce site and headquarters. As part of HBC’s agreement, Signa’s portion of the European retail joint venture, Hudson’s Bay Netherlands, is expected to transfer wholly to HBC, upon the transaction’s closing, which is anticipated to occur this fall. All of the stores and the website are expected to be shuttered by December 31. HBC said its management in the Netherlands “worked intensively on a social plan, and have come to an agreement with local unions to offer solutions for employees impacted by the closure.” On August 28, HBC announced it entered into an agreement to sell its Lord & Taylor division. That transaction is slated to close at the end of November. HBC is focusing on Saks, Saks OFF 5TH, and Hudson’s Bay, as it attempts to turn around operations.
Word on the street indicates Fairway is back on the market, just three years after it emerged from Chapter 11 bankruptcy with new owners. According to sources, who asked not to be identified, “The Company’s owners, including Brigade Capital Management LP and Goldman Sachs Group Inc., have privately started seeking bidders and have received interest from potential strategic and financial buyers.” However, the asset has realistically been on the market since before filing the last time, with the new owners (previously debt holders) only taking on the operations of the asset as part of the bankruptcy restructuring and due to a lack of other options. The Company remains significantly leveraged, and we believe there is way too much debt for the Company to be able to be sold straight up without dealing with the debt first. Fairway, which operates 15 supermarkets and four wine stores in the New York metro area, recently announced that Its supermarket in Nanuet, NY will close today. The store was originally opened in October 2013.
In early September, Vitamin Shoppe received an acquisition proposal from a third party during the go-shop period provided under the terms of its previously announced merger agreement with Liberty Tax. The bidder qualified as an “Excluded Party,” and the Company believed the proposal could lead to a superior offer. On September 23, in light of the failure of the bidder to obtain committed financing, the Company ceased negotiations with the bidder. Neither the board nor the Special Committee has changed its recommendation in favor of the merger with Liberty Tax. As we previously reported on August 8, Liberty Tax agreed to acquire Vitamin Shoppe in an all-cash transaction valued at $208.0 million. Liberty Tax is also in the process of acquiring the Outlet business from Sears Hometown and Outlet Stores.
U.K.-based Primark is looking to create a supply chain closer to the U.S. to supply its nine stores in the country. Primark currently sources all clothes from China, India, Bangladesh, Cambodia, Vietnam, and Turkey, which it says is costly due to freight expenses across the Pacific, through the Panama Canal and up the U.S. Eastern Seaboard. The plan now is to use suppliers in Central America, including Guatemala, Costa Rica, and Mexico. Primark has invested £250.0 million (US$313.0 million) in the U.S. since it opened its first store in Boston, MA in 2015. All nine stores are located in the Northeast and are supplied by a warehouse in Pennsylvania that can serve up to 30 stores.
Strategic Sales Insights
Wawa operates over 860 convenience stores, as of July 2019, throughout New Jersey, Delaware, Florida, Maryland, Pennsylvania, and Virginia. Wawa’s fiscal 2018 estimated sales were up about 20%, reflecting the benefits of an increased store count (up 25 net to 815 at fiscal 2018 year end) and additional legacy stores offering fuel. The Company plans to open approximately 65 new stores and remodel 60 existing stores in 2019. 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 announced plans for a new fulfillment center in Scarborough, in the City of Toronto. The one million square foot facility will be the Company’s 12th fulfillment center in Canada, and seventh in Ontario. The facility will be used for small items.
In other news, the Company recently said it was buying 100,000 electric trucks as part of its effort to eliminate the Company’s carbon footprint by 2040.
Things Remembered completed the first phase of its in-store renovations, which includes the introduction of personalization bars to 50 of its 174 stores. In addition, the Company rolled out iPads chainwide that allow customers to personalize gifts, preview designs, and make edits, with the assistance of an in-store personalization expert. The Company recently started the second phase of its in-store renovations, with an entirely new store prototype in development. These in-store renovations come after the Company filed Chapter 11 in February and sold most of its business to Enesco, which acquired 176 locations and its online and direct mail operations.
Starbucks plans to launch a new format called Starbucks Pickup, exclusively for Rewards members who use the mobile-order-and-pay option. The format, which is being tested in New York City, apparently resembles the Starbucks Now express service store that launched in Beijing this summer.
At Home Group has opened two of four planned stores this month, growing its national footprint to 209 locations across 39 states by the end of September. The two opened locations are in Crestwood, IL and Clearwater, FL. The other two locations in Lincoln, NE and Schaumburg, IL are opening this week. The Company opened 24 stores during the first half of fiscal 2020, as part of plans to open 32 stores during the year (click here to request a list).
Academy Sports + Outdoors opened a 63,000 square-foot store in Richmond, TX (Houston metro area) on September 16. The new location features an updated design, with apparel and footwear moved to the front of the store and specialty departments placed around the perimeter. The Richmond location has 15% less inventory than a typical Academy store, as the Company is looking to declutter stores and create a more “open, airy feel.” The Company is in the process of refreshing many of its 245 locations with this same updated design, including its 32 Houston-area stores.
Meijer completed a 15-month initiative to offer the Shop & Scan technology at all its stores, rolling out the checkout option to 44 stores throughout southeastern Michigan on September 17. With this latest launch, Meijer now offers the option at all 246 of its stores throughout the Midwest. Click here to request a list of Meijer future openings.
H.E. Butt recently announced plans for two construction projects in West Houston, TX that include a distribution site expansion and a store renovation. Combined the projects are expected to cost $16.0 million. The Company received the necessary approvals to begin construction of the 99,830 square-foot warehouse “addition and/or remodel” at its Houston, TX distribution center. The construction comes just as the Company is nearing completion of a 64,000 square-foot manufacturing plant about a half a mile away, its second such facility in Texas.
Whole Foods will open a new 45,000 square-foot West Seattle, WA store on October 9. The Company has ten other stores in Washington.
On September 18, Stater Bros. reopened three stores in Aliso Viejo, Huntington Beach, and Yucaipa, CA. The remodeled stores include updated exterior signage featuring the Company’s new logo, interior upgrades, and expanded offerings.
Ahold Delhaize will replace a shuttered BI-LO supermarket in Goose Creek, SC with a Food Lion. It is expected to open “sometime later this year,” and will be Food Lion’s third location in the Goose Creek area. Nearby competition includes a Publix and a Walmart Neighborhood Market. Click here to request a store overlap analysis on two retailers of your choice.
7-Eleven opened its first location inside a mall in Brandon, FL. It is reportedly the first of seven units the Company plans to open in malls this year. 7-Eleven has also recently opened new concept stores in sporting venues and airports.
The new Macey’s grocery store that opened on September 18 in Highland, UT, owned by Ridley’s Family Market, is the first to be licensed by Associated Food Stores (AFS). The other 27 Ridley’s Family Market locations will continue to operate as usual. AFS serves more than 400 retailers across the intermountain West.
Hollister, the teen apparel division of Abercrombie & Fitch, will open a location in New York City’s Herald Square district (click here to request a list of future openings). Hollister signed a short-term lease on the store, which is slated to open on September 27. The Company did not reveal the length of the lease. CEO Fran Horowitz said, “Based on our landlord relationships, our balance sheet strength, and our ‘test and learn’ culture, we have the flexibility and agility to take advantage of opportunities arising from the current retail real estate environment to trial new formats on shorter lease terms.” The Herald Square location is part of the Company’s plans to invest in new stores while also reducing overall square footage as it moves towards smaller stores with omnichannel functionality and away from big flagships. Earlier this year, Hollister closed its flagship store in Manhattan’s Soho neighborhood, and Abercrombie & Fitch is closing its namesake flagship locations in Milan, Italy and Fukuoka, Japan.
Demoulas has delayed opening its new store in Westbrook, ME yet again. It was originally slated to open in early 2019, then postponed until November and now expected to open in the spring. It will be the Company’s second store in Maine. Demoulas has about 80 stores throughout the Northeast.
Menards, which operates more than 300 locations in 14 states, is planning to build its first store in Pennsylvania. The 200,000 square-foot unit would be located in South Union Township and would represent the Midwestern Company’s most eastern location. Fayette County Redevelopment Authority agreed to sell approximately 80 acres to Menards for about $1.7 million last week. The Company is also looking to expand into West Virginia with two locations. Click here to request a list of Menards future openings.
Topgolf plans to open a location in Farragut, TN; although the opening date is still to be determined, construction may begin this fall. The Company has been eyeing a location in East Tennessee since December 2017. The closest Topgolf locations to East Tennessee are in Greenville, SC; Nashville, TN; and Atlanta, GA. Topgolf also plans to open a unit in Holtsville, NY, which would be its first location in the state. However, this location is in the planning stages and still requires permits before it can begin construction. The closest Topgolf locations to Long Island, NY are in Edison and Mount Laurel, NJ. There are 64 Topgolf stores in the U.S. and three in Great Britain. At the beginning of the year, Topgolf announced plans to open 11 new locations this year, on top of the 10 stores opened in 2018. The Company’s average store size is 65,000 square feet, with stores averaging $300 per square foot ($19.6 million per store).
Starting October 1, Macy’s is testing free same-day delivery, for orders of $75 or more, in 30 markets. The Company first began offering same-day shipping in 2017, but this pilot program drops the $8 fee. Orders placed before noon Monday through Saturday and before 10 a.m. on Sunday, will be delivered the same day through the Company’s existing partnership with delivery service Deliv. This news follows Amazon’s free one-day shipping for Prime subscribers (announced in April) and Walmart’s free delivery program for orders $35 or more (announced in March). In other news, Macy’s announced that the founders of the Bluemercury beauty unit, which the Company acquired in 2015 for $210.0 million, are leaving. Barry Beck stepped down as COO on September 20 “to pursue a new entrepreneurial venture.” CEO Marla Beck will remain until a new CEO is found. A search for replacements will consider executives from within and outside the Company.
Costco will begin construction on a new, 354,000 square-foot distribution center in Owatonna, the Company’s first in Minnesota. Costco operates 11 warehouse clubs in the state.
Associated Grocers of New England is acquiring Clark’s Quality Foods IGA, operator of a store in Londonderry, NH. Terms of the sale were not disclosed. Associated Grocers operates a wholesale grocery distribution center in Pembroke, NH that serves more than 650 stores in New England, New York, and Pennsylvania.
Chewy.com reported results for its second quarter ended August 4. Sales increased 43% to $1.15 billion. The Company said it has 12 million active customers at quarter-end (based on making at least one purchase over the last 364 days), up 39% from a year ago. The Company reported a net loss of $82.9 million, driven by stock-based compensation of $42.8 million. Chewy posted an adjusted EBITDA loss for the quarter of $29.2 million, an improvement over last year’s loss of $53.4 million. Adjusted EBITDA margin expanded 410 basis to (2.5%). Looking ahead at fiscal 2019, Chewy expects revenue of $4.75 billion – $4.80 billion, up 35% - 36%. Adjusted EBITDA margin is expected to be improve 420 – 450 points.
AutoZone’s fourth quarter sales increased 12.1% to $3.99 billion, and domestic comps were up 3%. Gross margin decreased 20 basis points to 53.6% due to lower merchandise margins from a shift in mix. SG&A margin improved 320 basis points to 33.8%, but the prior year included a pension plan termination charge of $130.3 million. Operating profit (EBIT) rose 32.1% to $780.8 million, but excluding the pension plan charge, adjusted operating profit rose 0.5%. During the quarter, the Company opened 86 new stores in the U.S., 28 stores in Mexico, and 10 units in Brazil, ending with 5,772 stores in the U.S., 604 locations in Mexico, and 35 units in Brazil.
Destination Maternity’s second quarter sales fell 11.9% to $84.9 million due to 34 fewer stores and 134 fewer leased departments since 2Q18, and a 10.5% comparable store sales decline. Brick-and-mortar and e-commerce sales declined 11.9% and 6.5%, respectively. The lower sales and gross margin erosion due to higher shipping costs outpaced a significant decrease in expenses and pushed quarterly EBITDA down 45.9% to $2.0 million. At the end of the quarter, cash balances were $1.1 million, and the Company did not provide quarter-end revolver availability, but we note that liquidity was limited ($11.6 million) at the end of the first quarter, and TTM cash burn accelerated to $16.6 million. During the quarter, the Company closed six locations, ending with 446 stores and 491 leased department locations. Based on declining sales and EBITDA and increasing cash burn, Destination Maternity remains rated E2, with the potential for a further downgrade.
The Company also announced that, at the direction of its board, it is reviewing various potential strategic and financial alternatives. The strategic alternatives expected to be considered include, but are not limited to, a sale or merger of the Company, continuing to pursue value-enhancing initiatives as a standalone entity, along with capital structure optimization that may involve a potential financing and/or the sale or other disposition of certain businesses or assets. The Company has retained Greenhill & Co. as financial advisor to assist with its strategic alternatives review. Management stated on its quarterly conference call that it will not comment or provide updates on the progress of the strategic alternatives.
Sears Hometown and Outlet Stores reported second quarter sales fell 44.3% to $168.6 million due to the closing of 216 stores during the year and a 21.7% decrease in comps. EBITDA loss narrowed 36.2%, while EBITDA margin contracted 20 basis points, reflecting a deterioration in SG&A margin due to the deleveraging impact of the falling sales base on operating costs. Because of the agreement to sell the Company’s Outlet segment to Liberty Tax (expected to be completed in October), the reported operational results reflect only the continuing operations of the Hometown segment. The remaining Hometown unit, which Transform Holdco plans to acquire, is a perennial underperformer. Consequently, it may require significant remedial attention, which could become an additional distraction for Transform’s management. The Company did not provide cash flow information in its earnings release.
Darden’s first quarter sales increased 3.5% to $2.13 billion, driven by the addition of 40 net new restaurants and a blended same-restaurant sales increase of 0.9%. By brand, same-store sales increased 2.2% at Olive Garden, 2.6% at LongHorn Steakhouse, 1.5% at The Capital Grille, and 1.2% at Eddie V’s. Same-store sales fell 5.4% at Cheddar’s Scratch Kitchen, 1.9% at Yard House, 4.2% at Seasons 52, and 4.2% at Bahama Breeze. Net income increased 2.6% to $ 170.6 million, and operating income rose 6.6% to $201.5 million.
For fiscal 2020, Darden expects sales growth of 5.3% – 6.3%, same-restaurant sales growth of 1% – 2%, approximately 50 gross and 44 net new restaurant openings, and capital spending of $450.0 million – $500.0 million.