Taking Stock

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‘Round The Trade 

As expected, Fresh & Easy, Tesco’s failed and bankrupt entry into the U.S. food retailing business, was given Delaware court approval to sell 150 of its approximately 200 stores to private equity firm Yucaipa Cos. in a deal that will see Tesco loaning $120 million to Yucaipa. The PE company, controlled by billionaire Ron Burkle, has named former 7-Eleven CEO Jim Keyes to run the F&E venture, which many believe will ultimately re-emerge as Wild Oats Markets, the natural/organics retailer Yucaipa had a major stake in before it was acquired by rival Whole Foods in 2007. There was also an interesting related piece to this story that appeared on nasdaq.com which stated that Tesco, knowing it was losing money ($22 million a month) and facing bankruptcy, pulled $215 million out of Fresh & Easy to cover other company expenses and possibly make it easier for potential creditors that were not paid (due to the bankruptcy) to sue to challenge the sale of Fresh & Easy to an interested party such as Yucaipa Cos. The nasdaq.com story notes that, of the funds pulled out of Fresh & Easy, $18.9 million was used to repay debt owed Tesco, another $10 million went to cover Tesco payroll costs in the U.K. and India and $15 million was termed “all other payments.” …after six years of operating control, Morgan Stanley Capital Partners (MSCP) has sold its 66 percent stake in Buffalo based Tops Friendly Markets to six current executives including veteran Top’s CEO Frank Curci. No great surprise here as MSCP has been looking for an exit strategy for quite a while and a public offering didn’t seem likely since the regional chain lost $9.5 million during the first six months of 2012. Along with Curci, the other Tops executives included in the deal are: Kevin Darrington, COO; Rick Mills (former Weis exec), CFO; John Persons, SVP-operations; Jack Barrett, SVP-HR; and Lynne Burgess, SVP-general counsel. Terms of the deal were not disclosed, but you can bet that Curci & co. got a cool deal since MSCP’s options were limited and the management group has done a solid job in improving the organization since MSCP acquired Tops from Ahold USA six years ago. (Curci served as Top’s CEO when AUSA owned the retailer). You can also expect a further refinancing plan to be announced after this deal closes by year’s end…while many retailers are continuing to face another prolonged period of soft sales, the November 1 federal government reduction of SNAP (Supplemental Nutrition Assistance Program) benefits will only add more salt to their wounds. The government mandated cutback affects 47 million families. On a monthly basis that means household reductions of $11(one person), $20 (two people), $29 (three people) and $36 (four people). That’s a big number to swallow, especially when retailers have seen SNAP usage escalate in recent years to where 5-8 percent of total sales for a typical store are comprised of food stamp usage. And it may even get worse if the House of Representatives get its way. The House wants to cut an additional $40 billion from the food stamp program as part of the pending new Farm Bill… it was another flat quarter for Wal-Mart in the U.S. as comp store sales decreased 0.3 percent in its third quarter ended October 25. Additionally, grocery comps dropped 0.7 percent for the 13 week period. On the earnings side of the ledger, the Behemoth’s profit increased $3.6 billion to $6.3 billion. At its Neighborhood Markets banner, which is targeted for major expansion in the next two years, comp store revenue rose 3.4 percent. And besides all the hoopla surrounding the announcement of Doug McMillon as its incoming CEO and the ribbon cuttings in the District, Wal-Mart is once again making an attempt to build a new 100,000 square foot SuperCenter about a mile from the large NationalHarbor development in Oxon Hill, MD. Two years ago it unveiled a plan to build a store near the big shopping, restaurant and hotel venue, but was rebuffed because Prince George’s County Council members had issues with the store design. Wal-Mart has since modified its design to better handle traffic and safety concerns… at Brussels-based Delhaize Group, the company’s “brand repositioning” efforts at its Food Lion and Hannaford banners appear to be helping sales, but not profit. At its U.S. stores, which also include Bottom Dollar Foods, total revenue grew 2.2 percent to $4.4 billion and comparable store sales increased 2.2 percent as well in the third quarter. However, underlying profit at its U.S units (not including Sweetbay, Harveys and Reid’s which are in the process of being sold to Bi-Lo Holdings) dipped 20.2 percent to $169 million and operating margins were down a full percentage point to 3.9 percent  of sales. Overall, the international retailer said additional price investments helped create a $112 million loss. As I’ve said in the past, Delhaize’s U.S. stores remain in big trouble, especially if even bigger gains aren’t achieved at its flagship Food Lion banner. We’ll be better able to judge Delhaize’s U.S. performance in mid-2014 when the company cycles new numbers a full year after implementing its “brand repositioning” efforts. And, last month, Food Lion finally completed the last phase of its “brand repositioning” by revamping 169 stores in eastern North Carolina and South Carolina.  The rebranding effort began 30 months ago with the refurbishment of 167 stores in the Raleigh, NC and Fayetteville, NC markets. On a related Food Lion/Delhaize America note, it didn’t take long for short-term former Delhaize America CEO Roland Smith to find work. Office Depot, which recently acquired rival Office Max, has named the well-traveled Smith as its new chief executive. He replaces co-CEOs Neil Austrian and Ravi Saligram, who will be leaving the Boca Raton, FL based office supply retailer…staying south, Southeastern Grocers, the parent firm of the newly aligned Bi-Lo/Winn-Dixie stores, posted significantly decreased earnings of $14.2 million in its third quarter ended October 2. That represented a 55.2 percent profit plummet. Sales also declined 3.1 percent. Southeastern Foods, which is controlled by Lone Star Funds and former Randall’s CEO Randall Onstead, is attempting to launch an IPO next year…Harris Teeter’s fourth quarter numbers were considerably better, although its profit was down, too, primarily because of costs associated with its pending sales to Kroger the Matthews, NC-based retailer said. Fourth quarter profit was $21.1 million, down 7.5 percent ($5.9 million was attributed to merger related expense). Overall revenue jumped 4.5 percent, driven by new stores, and comp store sales increased a healthy (for the current economic environment) 1.5 percent. HT is still hopeful that the FTC will approve the sale before the New Year. Some of Harris Teeter’s new store activity (and Bi-Lo’s new store activity, too, with 22 acquired units) have come from purchasing six Piggly Wiggly supermarkets in South Carolina and what remains of Piggly Wiggly Carolina (PWC) – 32 corporate stores and 28 franchised units – will be supplied by C&S from its Greenville, SC distribution center. In the process, PWC will shutter depots in North Charleston, SC and Jedberg, SC…shortly before we went to press, it was announced that Safeway had sold 11 more of its Chicago area Dominick’s stores to Roundy’s for $36 million in cash. It’s a good fit for Roundy’s, whose CEO Bob Mariano once was Dominick’s chief executive, too. The stores will be converted to the upscale Mariano’s banner (currently 13 units, with five more planned in 2014), giving Roundy’s a significantly stronger presence in Chicagoland. Safeway previously sold three Dominick’s units to Jewel and said it will exit the market on December 28. With only 14 of a possible 72 stores having been moved since Safeway announced it was withdrawing from its 15 year old failed investment in October, the process seems extremely slow. However, one of our Chicago sources said that he expected more activity once the remaining stores are closed, because interested parties will have more negotiating leverage with Safeway and can also avoid possible union organization if the stores are dark for 30 days. And our source added, “Chicago is severely overstored, a number of units are mediocre or poor and with new competition moving in – Wal-Mart, Meijer and Roundy’s – I could envision a good number of stores not being moved.” His description seemingly could apply to every major metro market in the U.S.