May 6, 2020
On May 4, J. Crew Group, DIP filed a voluntary prearranged Chapter 11 petition in the U.S. Bankruptcy Court for the Eastern District of Virginia. The proceedings have been designated as case number 20-32181. The Company announced it has reached an agreement with its lenders holding 71% of its Term Loan and 78% of its IPCo Notes (J. Crew Domestic Brand, LLC Notes), as well as with its financial sponsors, under which it will restructure its debt and deleverage its balance sheet. Under the terms of a Transaction Support Agreement (TSA), the lenders will convert $1.65 billion of the Company’s debt into equity. As part of the TSA, the Company’s Madewell subsidiary will remain part of J. Crew Group.
The Company’s 182 J. Crew retail stores, 140 Madewell units, and 170 factory locations have been closed since March 17. Click here for more case information.
On May 4, Gold’s Gym International, DIP filed a voluntary Chapter 11 petition in the U.S. Bankruptcy Court for the Northern District of Texas. The proceedings have been designated as case number 20-31319. The Company operates more than 700 gyms around the world. As part of a prearranged Plan, 30 Company-owned gyms will be closed, mainly in the St. Louis, MO; Alabama; and Colorado Springs, CO markets. Gyms owned by franchisees (about 90%) will not be directly affected by the restructuring. Additionally, Gold’s will try to sell itself under terms proposed by TRT Gym Asset Holdings, the majority shareholder of Gold’s Gym, which is in discussions with the Company over the terms of a DIP Facility and exit financing. The Company said it plans to restructure and emerge from Chapter 11 by August this year or sooner. During the proceedings, Gold’s will try to reopen gyms closed because of COVID-19. Click here for a list of closures.
On Monday, L Brands announced a mutual agreement with Sycamore Partners to terminate its deal to sell 55% of Victoria’s Secret and updated its go-forward strategy. The new strategy is focused on eventually separating Bath & Body Works and Victoria’s Secret (includes Victoria’s Secret Lingerie, Victoria’s Secret Beauty, and PINK) into separate standalone public companies.
The Company is also making its previously announced changes to the board and implementing a cost-reduction program. As we reported, Chairman and CEO Leslie Wexner will step down and become chairman emeritus. Andrew Meslow, current CEO of Bath & Body Works, will become CEO of L Brands and join the board. Stuart Burgdoerfer, current CFO of L Brands, will also serve as interim CEO of Victoria’s Secret.
On April 30, L Brands announced that its cash flow revolving credit facility was converted to an asset-backed loan facility, with the total commitment remaining at $1.00 billion. Upon completion of the conversion, the Company prepaid the $950.0 million that was previously drawn down on the original facility. The new facility does not contain the previous leverage ratio financial maintenance covenant. As of April 30, and subsequent to the revolver pay down, L Brands still had over $900.0 million in cash.
The Company is also cutting its 2020 capital expenditures to $250.0 million, from its original forecast of $550.0 million, as it works to reduce operating and capital costs. L Brands was also able to reduce its spring inventory receipts by 45% at Victoria’s Secret and 20% at Bath & Body Works to match current demand. The Company is extending payment terms to vendors and suspending rent payments while stores are closed.
COVID-19 Reopenings
Best Buy aims to open 200 locations across the country in May for consumers who make appointments for in-store consultations to purchase appliances or electronics. Employees will be mandated to wear masks and gloves, and have temperature checks prior to each shift. The rest of the Company’s 1,231 stores remain temporarily closed. Geek Squad and third-party delivery, repair and support teams are back to work, after those services were suspended for more than a month. The Company is using protective equipment, social distancing practices, and employee self-health checks.
Macy’s reopened 68 department stores on May 4 and plans to open the rest of its 775 stores in the next six to eight weeks, as long as there are no remaining government restrictions (malls have begun reopening in Texas, Florida and Georgia, where Macy’s operates a combined 100+ locations). In the first few weeks, it expects to do about 20% of normal sales volume, with sales slowly building after that. The Company said that online business was strong in April, led by beauty and home; apparel sales were softer. Cash burn has not been as severe as anticipated (Macy’s expected to burn approximately $40.0 million per week) due to extreme expense cuts and delayed payments to vendors. However, cash burn is expected to worsen once the Company resumes normal vendor payments. Macy’s has nearly $1.50 billion in remaining liquidity and is in the process of securing additional financing. The previously announced 120 store closings over the next three years remain on schedule but may be accelerated or added to depending on how business conditions evolve.
To better serve its customers, H-E-B will expand its temporary hours of operation at stores across Texas. Hours will now span from 7am to 10pm. With an improving supply chain and stronger product availability, the Company says its stores have the capacity to serve more customers throughout the day. Click here for a list of future openings and closings.
The Court authorized Pier 1 Imports, DIP to temporarily defer paying rent until 45 days after business operations are resumed. On April 28, the Court authorized the Debtors to continue withholding rent payments through the end of May. The Court also overruled an objection by a group of landlords seeking to require the Company to “make some minimum rent payments now.” The landlords argued that they are being required to “bear the full brunt of financing the Debtors’ use and occupancy of the stores, which is inequitable and inconsistent with both the spirit and provisions of the Bankruptcy Code.”
Pier 1 plans to reopen a “critical mass” of stores by June 1. However, it qualified the goal on the following conditions: (i) enough states allow the Company to reopen at least half of its roughly 540 stores, and (ii) reopening would be economically feasible, meaning the Company has the supply chain in place to support operations without losing money. The Court ordered the Debtors to file a status report by May 21 describing whether it still plans to resume operations on June 1.
On May 1, Cato Corporation announced it reopened a majority of its 1,298 stores, as state governments and local health regulations allow. The Company will reevaluate store re-openings on a location-by-location basis, in compliance with CDC and governmental guidelines. In addition, Cato will offer masks and disposable gloves for associates to wear, and hand sanitizer for associates and customers, and will have enhanced cleaning procedures at all locations.
Boston Market announced April 29 that it has been acquired by Engage Brands, LLC. Engage Brands, one of the Rohan Group of Companies, is owned by real estate investor and restaurant operator, Jignesh Pandya of Bucks County, PA. Engage Brands will now assume ownership of Boston Market, purchasing the brand from affiliates of Sun Capital Partners. Terms of the deal were not disclosed.
On May 4, Burlington Stores announced it expects stores to open in phases as local government guidelines allow, with the first wave of stores to reopen on or about May 11. This will be followed by additional phased groups of store re-openings during the coming weeks and months.
On May 4, Shoe Carnival announced plans to reopen the majority of its stores across the U.S. On May 1, the Company reopened 122 stores in states where officials have relaxed or canceled their closure orders for non-essential retail businesses. On May 4, Shoe Carnival reopened another approximately 62 stores. The Company operates 390 stores in 35 states and Puerto Rico.
On May 4, Express announced that it expects to reopen about 300 stores before Memorial Day (May 25), following the few stores the Company opened last week in Georgia and South Carolina. Express will be taking a phased approach with the pace and staffing, with openings to coordinate with mall traffic and consumer demand. Curbside pickup will be available at test locations in Columbus, OH and Chicago, IL and will be expanded based on customer response. BOPIS will also be available in all reopened stores.
Sprouts Farmers Market opened a new store in Jacksonville, FL on April 29. It is the Company’s second location in the city. Sprouts is closely following CDC and local health authority guidelines related to COVID-19. Click here to request a list of future openings.
Cracker Barrel Old Country Store announced that as of April 28 it has opened five Cracker Barrel restaurants in Georgia and five Maple Street restaurants in Georgia and Tennessee for dine-in service, after the governors of those states authorized such re-openings. These locations represent a small portion of the Company’s 48 total restaurants in Georgia and 53 restaurants in Tennessee as of the end of FY19, but management plans to continue to open restaurants in these and other states, as municipalities lift shelter-in-place restrictions. Dine-in capacity is still being restricted, with Georgia only allowing 10 customers per 500 square feet and Tennessee limiting capacity to 50%. Management did not provide recent sales results but indicated that comparable restaurant sales for the week ended March 27, the first week in which all of its restaurants were limited to off-premise business only, were down approximately 85%.
JCPenney has gone to court to prevent Sephora from terminating its contract with the Company. Sephora currently operates approximately 600 shops within JCPenney stores. The current contract, originally signed in 2009, expires in 2024; however, Sephora is threatening not to reopen the shops unless JCP agrees to terminate the contract in April 2021. There have also been disagreements about reopening the stores and the procedures that will be used to protect employees’ health. Sephora has countersued and moved the case to federal court. Sephora also commented that it has been in active discussions with JCP for “some time” about the agreement.
In other news, JCPenney is rolling out a new website and app design intended to promote higher levels of customer traffic, conversion, and repeat visits. Features include a cleaner, easier-to-navigate home page with larger graphics and fewer background distractions, enhanced search functionality, automatically applied coupons, clear delivery dates, and a seamless checkout process. The Company is also adjusting its online product assortment and merchandising to highlight items that are in demand during the ongoing pandemic, such as comfortable loungewear and pajamas, kitchen essentials, and work-from-home essentials.
According to reports, Sur La Table is preparing for a potential bankruptcy filing after the COVID-19 pandemic forced it to close its 125 stores and cancel cooking classes. The Company operates a high-end cookware chain. The reports note that the Company is concurrently pursuing a sale. Sur La Table has grown from 86 stores in 2011 when Investcorp (which positions itself as an alternative investment firm) acquired it for $146.0 million.
On April 27, Christopher & Banks reopened a small number of stores in select markets to serve solely as fulfillment centers for e-commerce sales. On May 4, a majority of these stores opened to the public at reduced store hours. The Company’s near-term priority is to methodically and gradually execute the reopening of its store base. It also suspended rent payments while stores are closed and is working on negotiating with landlords.
On April 30, Ulta Beauty announced it would begin curbside pick-up in select stores, making this service available at more than 350 locations selected based on local market conditions, including guidance from local and state authorities. This is an extension of its buy online pick up in-store (BOPIS) offering, which was rolled out to all stores in 4Q19. The Company plans to expand the service to additional stores in the coming weeks, but re-openings will depend on government regulations as the impact of COVID-19 varies by region. Click here to request a list of future openings.
Walmart plans to expand its two-hour Express Delivery program from the 100 stores where it has been successfully piloted to 1,000 stores over the next few weeks, and then to approximately another 1,000 stores shortly thereafter. Express Delivery offers more than 160,000 items, including groceries, toys, electronics and other daily essentials available for two-hour delivery. There is an additional $10 fee for the service on top current delivery fees ($12.95 monthly or $98 per year).
Meanwhile, the Company said that it has paid out almost $180.0 million to hourly associates, with more to come in May. This is in addition to the special cash bonus for all U.S. hourly associates in April, which was $300 for full-time hourly and $150 for part-time hourly workers, a total of more than $365.0 million. Further, the Company has met its goal of hiring 200,000 associates across its stores, clubs, distribution centers and fulfillment centers since March 19. Click here for a list of future openings and closings.
On April 30, the Court authorized Modell’s Sporting Goods, DIP to extend the suspension of the Chapter 11 case and refrain from paying rent, totaling about $7.0 million monthly, through May 31, according to reports. The Court also ordered mediation between the Company and landlords as to when the accrued rent will be paid. The Creditors’ Committee supported the continued suspension of the Chapter 11 case, stating that “the present circumstances are not ideal, but the alternative — an almost certain conversion to Chapter 7 liquidation — is far worse.” The bankruptcy process generally relieves debtors of certain obligations that arose prior to the Chapter 11 filing. However, it requires immediate payment of expenses incurred during the proceedings. In that regard, we note that the Modell’s case demonstrates judicial leniency toward bankrupt retailers whose stores are closed during the COVID-19 period. Click here for a list of future closings.
Earning Reports
Amazon’s sales remained robust throughout 1Q, rising 26% to $75.45 billion. By channel, online sales jumped 24.3%, while physical store sales were up 7.7%. Amazon Web Services continued to be the strongest segment, rising 33% and comprising 13.5% of total sales. However, the Company’s struggle to handle excess demand, and the mix shift to lower-margin products as consumers flocked to its website for essentials such as household and pet supplies, weighed on profitability, with EBITDA margin falling 300 bps. Amazon increased its reserve for allowance for doubtful accounts by $400.0 million and spent $600.0 million on COVID-related costs; the Company expects pandemic-related costs to rise to $4.00 billion in 2Q and is uncertain as to the duration of these elevated cost pressures. Shipping costs increased 50% to $10.94 billion, with shipping margin up 223 bps to 14.5%. Click here to request the report.
In other news, Amazon announced plans to extend the closure of its six warehouses in France until May 8. The locations have been closed since April 16, following court rulings that ordered it to restrict deliveries during the pandemic or face hefty fines.
Albertsons’ 4Q19 comps beat expectations, growing 1.8%. Full-year comps were up 2.1%, and EBITDA margin remained steady at 4.5%, despite incremental rent expense related to sale leaseback activity that allowed the Company to deleverage its balance sheet, including reducing debt by nearly $1.90 billion in fiscal 2019. The bigger story was the strong 34% increase in comps during the first eight weeks of 1Q20, with e-commerce sales jumping 243%. The Company is also experiencing higher store costs, including hiring 55,000 new employees, related to COVID-19. Management said while it cannot ultimately predict the full impact, it expects to meet or exceed its guidance for fiscal 2020, including comps of 2% and EBITDA of $2.88 billion. The strong quarter-to-date sales has also helped cash flow. As of April 24, cash grew to approximately $4.00 billion, and net debt was approximately $6.70 billion, which includes the proceeds from a $2.00 billion draw under the $4.00 billion ABL facility. Click here to request the report.
Publix’ 1Q sales increased 16% to $11.31 billion. Comps were up 14.4%, and the Company estimates $1.00 billion of that, or 10.3%, was due to the impact of the coronavirus. Gross margin improved 40 bps due to reduced shrink, and though the Company incurred additional employee, safety, transportation and other related costs, the profit on the incremental sales more than offset the additional costs incurred. However, earnings were significantly impacted by net losses and gains on equity securities. Excluding the equity securities impact, net earnings would have been $956.2 million, compared to $741.7 million in 2019, an increase of $28.9 million. Effective May 1, Publix’s stock price increased from $48.90 per share to $50.10 per share. Click here to request the report.
Sherwin-Williams’ 1Q sales (for the period ended March 31) increased 31.2% to $321.7 million, due primarily to higher architectural paint sales volume in North American stores and increased sales in the packaging and coil divisions within the performance coatings group, partially offset by impacts from COVID-19. Comps were up 7.4%. The estimated impact from COVID-19 on sales was 1.5%. Sales in the Americas increased 7% to $2.31 billion, consumer brands group sales declined 4.9% to $622.3 million due to softer sales in Asia Pacific, and performance coatings group decreased 1.1% to $1.22 billion due to softer end market demand in Asia Pacific and Europe. EBITDA rose 16.8% to $623.1 million.
Commenting on the impact of COVID-19, CEO John G. Morikis stated, “We anticipate that the rapid deterioration of the U.S. and global economies experienced late in the first quarter due to the COVID-19 pandemic will most likely continue through the second quarter. We see no immediate, meaningful improvement ahead in most end markets we serve, and we are unable to predict when any noticeable improvement will occur. Given the trends and indicators we see at this time, we anticipate second quarter 2020 consolidated net sales will decrease by a low-to-mid-teens percentage versus the second quarter of 2019.”
Francesca’s 4Q sales (for the period ended February 1) declined 0.3% to $118.9 million. Comps were up 1%, but higher markdowns led to significant gross margin erosion and, as a result, EBITDA fell 23.4% to $3.6 million. The Company closed substantially all of its 708 U.S. stores on March 20. It furloughed corporate and boutique employees, enacted base salary reductions for senior leadership, suspended payments on all accounts payable other than those necessary to support the e-commerce business, and beginning in April deferred payment of rent at all stores, corporate headquarters and its distribution facility. The Company borrowed $5.0 million under its revolving credit agreement and filed for a $10.7 million income tax refund with the IRS related to a provision under the CARES Act. Francesca’s is electing to take other available relief under the CARES Act, including deferral of payment of certain payroll taxes and employee retention tax credits. Management commented that as a result of the COVID-19 pandemic the Company’s revenues, results of operations, and cash flows have been materially adversely impacted, which raises substantial doubt about its ability to continue as a going concern.
On May 1, Francesca’s entered into letter agreements in connection with its asset-based loan and term loan, in each case, to obtain a waiver from the Company’s lenders of any default or event of default arising from its failure to deliver annual audited consolidated financial statements for the FYE February 1, without a “going concern” qualification. The agreements also waive Francesca’s responsibility to pay rent on leased locations while stores are closed. The agreements contain certain conditions, including a requirement to use the entire $10.7 million income tax refund requested under the CARES Act to repay outstanding borrowings under its asset-based loan and term loan. The Company must not draw down on its asset-based loan unless its cash and cash equivalents is less than $3.0 million. Click here to request the report.
Reitmans (Canada) reported 4Q sales (for the period ended February 1) increased 1% to $229.2 million, primarily due to the Company’s e-commerce channel, despite a net reduction of 18 stores over the past year. Comps were up 5%, and transactions increased 3.1%. Gross margin declined to 45.4%, from 52.5%, due to increased promotional activity mainly in the plus-size banners. As a result, adjusted EBITDA dropped 50% to $3.5 million. The Company ended the year with 582 stores, consisting of 260 Reitman’s, 111 Pennington’s, 77 Addition Elle, 80 RW & CO., and 54 Thyme Maternity.
As of March 18, Reitmans is only deriving sales from its e-commerce channel, and it is currently unable to predict when it will reopen its retail stores. Based on its liquidity position, the Company estimates it will need financing to meet current and future financial obligations. Reitmans is actively seeking additional financing and is also exploring various alternatives. The Company’s ability to continue as a going concern is dependent on its ability to resume normal operations, generate future revenues and profitable operations, and obtain financing. As a result, these conditions indicate the existence of a material uncertainty that may cast significant doubt about its ability to continue as a going concern. Click here to request the report.
