Taking Stock

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‘Round The Trade

Two retailers with even bigger worries than the aforementioned Whole Foods are Sears/Kmart and Macy’s. The former merchant continued its race to the bottom by announcing it will shutter 108 Kmarts and 42 Sears units over the next three months, meaning that the Hoffman Estates, IL-merchant will have closed more than 200 stores in its current fiscal year and has suffered a store decrease of nearly 60 percent since 2011. Many of the soon-to-be closed stores are located in the South, but the casualty list in the Mid-Atlantic and Northeast will include 10 in Pennsylvania (6 Kmarts, 4 Sears); four in New Jersey (all Kmarts); five in New York (1 Kmart, 4 Sears); two in Connecticut (1 Kmart, 1 Sears); three in Massachusetts (2 Kmarts, 1 Sears); two in Maine (1 Kmart, 1 Sears); one in Rhode Island (Sears); and one closure in Maryland (Kmart). Additionally, Sears Holdings CEO “Slow Eddie” Lampert has personally guaranteed a $500 million line of credit (through his own hedge fund – ESL Investments) to maintain the company’s current liquidity levels. The ailing retailer reportedly has only $258 million cash in hand. Another sign of imminent demise is the dumping of key assets such as the recent sales of its Sears’ Craftsman business to Stanley Black & Decker for $900 million. Sears will still carry Craftsman merchandise at its stores in a deal in which the iconic retailer can sell those products royalty-free for 15 years. And, while it hasn’t yet sunk to the depths of Sears/Kmart, Macy’s is descending pretty quickly. Early this month, the department store provided clarification of its August announcement that more than 100 stores would be closing and more than 10,000 jobs would be lost. About 6,200 of those jobs will be lost through management riffing, with another 3,900 impacted by upcoming stores closings. All told, 16 Macy’s units in Mid-Atlantic and Northeast are on the closure list. Clearly both merchants have been severely impacted by the growth of ecommerce, but that’s only part of the problem. Whether it be Kmart, Sears or Macy’s, the condition of the stores, the amount of labor on the floor and the level of associate training have all waned significantly in recent years…another retailer that announced store closings is Giant/Eagle. The Pittsburgh-based regional chain said it would close six stores in Ohio (five Giant/Eagle supermarkets and a Get-Go convenience store) and two more Get-Go locations – in Altoona, PA and Frederick, MD…more Whole Foods news: the retailer will open a 365 unit near the Barclay’s Center in Brooklyn in 2018. The 43,000 square foot store will occupy two levels of a 35-story building (currently under construction) next to the Brooklyn Academy of Music. Currently, there are only three 365 stores in operation – all on the West Coast – but another 22 are planned to open over the next 18 months, including several on the East Coast. Additionally, WFM has begun to roll out its new centralized merchandising model, in which many national brands will deal directly with national category managers based at WFM headquarters in Austin, TX. There will still be room for local buying at the retailer’s 11 regional offices, but make no mistake, the ball will be controlled from Austin. More WFM streamlining – the retailer announced that it has closed three food prep facilities on the East Coast. Units in Landover, MD, Everett, MA and Atlanta, GA have ceased operations as the organics chain will now utilize outside suppliers. It’s noteworthy that Whole Foods has held on to its regional model for so long, and clearly the move to a national procurement system and a greater reliance on outsourcing fall in line with most other larger retailers (can you spell s-y-n-e-r-g-i-e-s). But, we’ve seen countless times that internal cost savings do not make for an improved operation at store level…among those Mid-Atlantic retailers that are participating in the USDA’s recently announced on-line SNAP benefits pilot are ShopRite, Fresh Direct and Safeway…Kroger announced last month that it offered voluntary buyouts to about 2,000 associates who have until March to accept the buyout proposal. “Kroger would not be the successful company it is today without the incredible efforts of our associates. We believe a generous voluntary retirement offering is in line with our company values and recognizes the long careers many of our associates have had with Kroger. Kroger is committed to our operating model of lowering costs to invest in areas that matter most to our customers,” said CEO Rodney McMullen. The company currently employs approximately 430,000 associates…Duncan Mac Naughton has a new job. Earlier this month, the peripatetic retail executive was named president and COO of Family Dollar Discount Stores, a division of Dollar Tree Stores. Mac Naughton has had no problem gaining employment at the executive level. However, keeping a job long-term might be an issue. In the past 20 years, he has worked for Kraft, H-E-B, Albertsons, Supervalu and Wal-Mart. Most recently, he served as CEO of Mills Fleet Farm, a family-owned company based in Brainerd, MN and Appleton, WI. Replacing Mac Naughton as CEO is his old buddy from Supervalu, Wayne Sales. Wayne Sales? It’s amazing to me that so many former grocery executives with questionable leadership skills find prominent jobs at other companies…one of Mac Naughton’s former employers, Supervalu, had another tough earnings period. In its third quarter ended December 5, the Eden Prairie, MN wholesaler/retailer posted an $11 million loss from continuing operations while suffering another huge identical stores sales decrease (5.7 percent) at its corporate retail stores which also saw a 3.8 percent decline in customer count and a 1.9 percent dip in average basket size. Supervalu’s wholesale business was somewhat healthier with a sales increase of 0.2 percent, to $1.91 billion, although administrative expense adversely impacted profits. Wholesale operating earnings were $52 million, or 2.7 percent of net sales versus adjusted operating earnings of $60 million, or 3.2 percent of net sales in the year-ago period. Things should get better in that department next quarter as SVU assumes primary grocery supply responsibility for all 178 The Fresh Market stores and an additional 50 America’s Food Basket units in the Northeast. CEO Mark Gross commented on the company’s wholesale and retail status, while also addressing the recent Save-A-Lot (S-A-L) transaction: “The successful sale of Save-A-Lot early in the fourth quarter provides Supervalu with additional flexibility to operate and grow our business. Additionally, our wholesale team has done a tremendous job delivering for our customers. It is a significant accomplishment that we increased wholesale sales compared to last year given the sales lost at the end of fiscal 2016. Unfortunately, in our retail segment we have not been able to overcome persistent deflation, competitive impacts, and other factors. It takes time to change customers’ shopping habits, but our team is dedicated to improving our results.” Gross’ assessment is accurate and he knows that rebuilding Supervalu as solely a wholesaler is going to take time. However, the shakeout process is difficult to watch. Everybody knows that the company’s retail stores need to be sold and/or closed. But are there viable buyers to attract? To make matters worse, as SVU continues to invest less capital in its more than 200 corporate units, the rougher they look, which further devalues those banners and stores in markets that continue to be overstored and are ultra-competitive… just before we went to press, SVU announced that it hired Anne Dament as senior VP- merchandising and marketing for its retail stores. She previously held senior management posts at Safeway, Pet Smart and most recently Target. A native Minnesotan, at least she won’t have to move very far in her new job, but her challenges will be enormous. With heavy speculation that Supervalu is looking to sell its 200-plus store retail unit, Dament must find ways to re-energize a disparate store base that has been essentially cap-ex starved for more than a decade. Making Shoppers, Farm Fresh, Cub, Shop ‘n Save and Hornbacher’s relevant again will be a supreme challenge. There was one additional pearl in reading the agate type in SVU’s recently filed 10-Q report. The company revealed that it paid only $17 million for the 22 former Food Lion stores it acquired last year. That more or less confirms that Ahold Delhaize sold its 85-store divestiture package for less than $1 million per unit, an indication of how anxious the big Dutch retailer was to dump those locations in order to complete the merger. The downside for those Supervalu acquired units in Maryland, Pennsylvania and West Virginia (trading as Shop ‘N Save) is that they are performing worse than any of the other former Food Lion, Martin’s, Stop & Shop and Hannaford stores that other retailers purchased. Furthermore, we’re hearing that a potential sale of those stores to a group led by former S-A-L president Bill Shaner and Western PA independent operator Tom Jamieson is in jeopardy…Wal-Mart announced that it will be riffing 1,000 corporate jobs at its Bentonville, AR headquarters, using the trimming to also realign some of its bricks and mortar and online operations so they become more integrated. At store level it’s a different story as the Behemoth will add 10,000 jobs and provide skills-building training to approximately 250,000 store associates. More Wal-Mart news: Rosalind Brewer, the 23 year Wal-Mart veteran who for nearly the past five years has led a generally unsuccessful turnaround of the Behemoth’s Sam’s Club division, is out as CEO. She will be replaced by John Furner, 42, who was named chief merchandising officer for the club store unit in 2015. Furner is also a Wal-Mart lifer, having started as an hourly store associate in 1993…more club store news: word on the street indicates that Costco may shortly be increasing its membership fees. Costco CFO Richard Galante hinted at a price increase during his analyst conference call last month. The club store leader last raised its membership fees in November 2011. One of the strengths of Costco has always been its affiliated credit card program (first with American Express before switching to Visa last June). It appears that Godzilla (Amazon) is about to launch a new credit card – Amazon Prime Rewards Visa Signature – that will rival or exceed the benefits of Costco’s rewards card. The new card offers Amazon Prime members 5 percent back on all amazon.com purchases as well as 2 percent back at restaurants, gas stations and drugstores, and 1 percent back on every other purchase. In order to get the full reward value from the card, holders must join Prime for $99 a year. Non-Prime members who get the card still receive 3 percent back at amazon.com, 2 percent back at restaurants, gas stations, and drugstores, and 1 percent back on every other purchase. “We are adding even more value to Prime by offering rewards on Amazon and everywhere else you shop,” said Max Bardon, an Amazon VP. The new card also offers other benefits, including no foreign transaction fees, travel protection, and 24/7 concierge service. While the card could be a modest game changer, I’m hoping that an Amazon drone drops off a package on my front porch or maybe Godzilla will build me one of those new Amazon tunnels. With a tunnel leading up to my house, then I’d really know why my cable reception isn’t so good. And just before presstime, Godzilla announced that will build a 1.2 million square foot fulfillment center in North East, MD (Cecil County). The new DC, Amazon’s third in the state, will employ about 700 and carry larger items such as televisions and patio furniture…Bain Capital Private Equity Co. (60 percent) and Chinese supermarket chain Yonghui Superstores (40 percent) have acquired Stamford, CT-based Daymon Worldwide, the private label development and retail merchandising services company, for $413 million.