Grocery (Short Mom & Pops; Long Dollar Stores & Judges)

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This is a good example of what happens when a Walmart ($WMT) rolls into town, prices compresses like a boss, and puts local shops out of biz. People have to drive 40 minutes to go grocery shopping. That's bananas. Which explains Dollar General Corp's ($DG) strategy to, as the Wall Street Journal put it, "build thousands more stores, mostly in small communities that have otherwise shown few signs of the U.S. economic recovery."Which, in turn, illustrates, in part, the juxtaposition between what is happening in various communities across the country and the macro-economy generally. On one hand you have a record 86th straight month of nonfarm payroll expansion and unemployment at 4.1%. On the other hand, you have job and resource drain. Apropos, Todd Vasos, CEO of DG is quoted, "The economy is continuing to create more of our core customer." Speaking of jobs, we now have two precedents for judges ordering shuttered/shuttering retailers to, uh, not shutter. Last week we noted that Starbucks' ($SBUX) plan to shut Teavana locations down got blocked by a judge siding with Simon Property Group($SPG). Now Whole Foods has run into the same problem. Landlords 1, failed retail 0? Seriously...are there ANY winners, here, really?

Grocery (What is Dead May Never Die)

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This space is getting uglier and uglier by the week. Info dump here: Jet.com (aka Walmart's ($WMT) e-commerce division) is launching its own grocery line to compete with Amazon. Walmart is also getting into the "meal kit" space. And The Fresh Market continues its descent into distressed territory with its secured notes down 15 points and Cerberus Capital Management - already big in the space - purportedly buying in.

Grocery (I Scream, You Scream, We All Scream for Ice Cream)

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Margins for grocers are notoriously thin. So a few supermarkets in the UK are testing (partial firewall) electronic label technology that enables prices to fluctuate at the price of a button. In other words, surge pricing for food. 100 degrees out? Ice cream goes up in price. Freezing cold out? Ramen goes from 25 cents to 50 cents. High as a *%(&#*(#$? Cheetos and Vienna Fingers jump 3x. Just joking about that last part: the tech can't facial scan for bloodshot eyes. Yet. ;)

Food CEOs Biting the Dust

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So Travis Kalanick is out and those of you who actually cared can now switch your corporate accounts back to Uber from Lyft. Congrats. Starwoodspoints! Anyway, ICYMI, mere days after the Amazon/WholeFoods announcement, the CEOs of both Fresh Market and Bi-Lo were replaced. Clearly the Board of Directors at both felt like a shape up was needed for the bloody war to come. 

Grocery Meet Tech. Tech Meet Grocery. (Blue Apron & Flashfood)

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This is interesting and potentially game-changing in multiple respects. An app called Flashfood is gaining traction in Canadian grocers and we dig it. The app notifies customers when food is nearing its "best before" date and going on sale. Customers can pay for the food through the app and then pick the order up the same day in-store. The idea is to eliminate waste, beef up grocer sales, and unburden landfills. Query, however, what this means for food banks. Elsewhere in grocery and "tech," Blue Apron has released its financials and, annualized over '17, they show a $208mm loss on a $240mm marketing spend (maybe they'll advertise in PETITION?). Their CAC are through the roof ($94/per) and they're showing an uptick in subscribers but a downtick in value per order and orders per customer. So, retention and volume are issues. $960mm annualized revenue, though. May be time to try it before it goes public (or fails) and the $30 VC-subsidy disappears....

Groceries - Long the Germans

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That's right, Germans. They're coming. And we're not referring to Christopher Nolan's bada$$-looking Summer flick, Dunkirk (video). We're talking about Lidl and Aldi, both of which are planning to expand in the US - a prospect that will surely cloud/crowd the grocery space and may push deflated food prices even further downward. Little known fact: there are currently 38k grocery stores in America and the average margin is only 1.25% to 1.5%. Insane.

Interesting Restructuring News

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  • Grocery. Cerberus Capital Management-owned Albertsons is reportedly in talks regarding a possible take-private buyout of publicly-traded grocer Sprouts Farmers Market ($SFM). Given the tough grocery environment, this is an interesting development. And it may get EVEN MORE interesting given this.
  • Oil&Gas. Crude stockpiles hit a modern record this week as American producers basically flick off Saudi Arabia/OPEC and produce, baby, produce. Crude priced down to ~$48/barrel. This - and the embattled state of Seadrill Ltd. - isn't stopping John Fredriksen from looking at picking off offshore assets. Speaking of offshore assets, the oil players are going face-to-face with power suppliers - for wind. Meanwhile, a dissenting view relating to the effect of the rise of electric cars on oil demand (paywall). Elsewhere, in Canada...
  • Retail. Bebe Stores Inc. ($BEBE) is plans to shut down its brick-and-mortar locations and become an exclusively e-comm brand - a plan that depends on the sudden charity of landlords who have shown ZERO propensity for flexibility with retail tenants. Seriously, like, ZERO. See, e.g., THE TRAIL OF RETAIL CORPSES LINING THE 2017 BANKRUPTCY ROLLS. Meanwhile, Land's End ($LE) continued to suffer from its association with Sears while reporting a perfect storm of, wait for it...decreased net revenue, decreased catalogue and e-commerce revenue, decreased same-store sales, and worsening gross margin. J.Crew  reported sliding sales, revenue and same-store comps but nevertheless reported a (very) small profit - largely on the back of Madewell. And then there is Nike ($NKE) which, in its quarterly report, noted increased profit but modest sales growth in the face of online shipping headwinds.
  • Retail II. Uh oh. It appears that Walmart may be getting it's (e-commerce) sh*t together which doesn't bode well for brick-and-mortar already suffering from the Amazon onslaught. Speaking of which, peace out Payless Inc. Wethinks we'll soon be saying "peace out" to a bunch of Chinese shoe manufacturers on top of the thousands of American jobs that will be wiped out. But dividends for Golden Gate Capital and Blum Capital Partners!
  • Rewind I: We have taken a little bit of heat for two mentions of 3D-printing in this newsletter; we have been accused of over-hyping the technology and its near-term ramifications. Well, noting the Adidas announcement this week, have we?? 
  • Chart of the Week: 

Interesting Restructuring News

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  • 3-D Printing. A few weeks ago we noted the disruptive potential of 3-D printing. You can revisit that piece here. The spare parts market already appears to be under seige.
  • Automation. We hate to pick on support staff as there's been a lot of pain there the past decade but...short administrative assistants? On the flip side, note this.
  • European Distressed Debt. The vultures are looking at Spain and Italy. Meanwhile, last week Agent Provocateur, this week Jones Bootmaker = the latest PE-backed European retailer staring down the brink of administration(with KPMG hired to find a buyer).
  • Grocery. Food deflation appears to be leveling off - good news for grocers who had a rough 2016 (which we covered previously here).
  • Guns. Looks like the rise in anti-Semitism and hate crimes hasn't translated into robust gun sales: Remington Arms Co. is downsizing. The $2.6mm trade claim the company has in the Gander Mountain Company bankruptcy won't help matters either.
  • Malls. The Providence Arcade is deploying new and creative ways to put mall space to use. This brings a whole new meaning to "consumer culture." Meanwhile, more on malls becoming the new big short.
  • Restaurants. Ruby Tuesday is now for sale after closing 100 locations. UBS is apparently the financial advisor.
  • Retail. Shocker! A newly released report delineating the most valuable retail brands failed to include Charming Charlie's, Payless Shoes, rue21, J.Crew...ah, you get the point. Also notably absent from this list is Neiman Marcus which, given its lack of scale (42 stores, ex-Last Call & Bergdorf Goodman), isn't all too surprising on a relative basis but that hasn't stopped it from attracting attention from Hudson's Bay Co (note: the Canadians have been taking a lot of interest in US retail lately, see, also Eastern Outfitters). Looks like some teens DO shop at Neiman Marcus but find malls, generally, "vanilla"...choice quote here: "I like finding stuff on eBay - clothes and accessories that no one else is wearing...[e]verything you can't find in a mall." See, also, Poshmark. Meanwhile, private equity backed retail is especially sordid.
  • Retail II. Bon Ton Stores (BONT) reported higher earnings, cost savings that bested projections and a free cash flow positive '16 (compared to a wildly cash flow negative '15). But same store sales were down big. A few takeaways: 1) bad retail performance is always partially the weather's fault; 2) it's planning to make its landlords sweat with lease negotiations; 3) it's closing 46 stores in '17; 4) it's picking from the carcass of closed Macy's locations, poaching vendors and sales associates; and 5) it's still over-levered AF. While there is no near-term maturity post-retirement of the '17 second lien senior secured notes and the company claims liquidity through '17, the company is still levered at 8.5x and raising rates, generally, won't help retail. And the stock trades in dogsh*t (reverse split?) territory at $1.00. Hmmmmm.
  • Fast Forward: iHeartMedia launched an optimistic restructuring process seeking to swap more than 90% of its $20b of debt; Gymboree got a going-concern warning in the face of declining revenue and same-store sales and a 12/17 maturity; Gulfmark Offshore skipped its interest payment triggering a 30-day grace period due 4/15; the same date marks the forbearance expiration agreed to by lenders of 21st Century Oncology; and Concordia International Corp. reported HORRIBLE numbers and declined to provide go-forward guidance given the headwinds confronting drug pricers. 
  • Rewind I: We swear we're not picking on Sun Capital Partners but this week S&P Global Ratings downgraded Vince Intermediate Holdings to CCC+ making SCP's portfolio a virtual retail minefield. 
  • Rewind II: Yawn, more Westinghouse. 
  • Rewind III: Last week we covered Aquion Energy in our summaries of cases (click company name for summary). Turns out, this dog is more controversial than we thought as its another example of government subsidy gone wrong. Which is not to say we're not for experimentation/funding with/for alternative energy businesses, particularly in storage. But the comments to this seem on point.
  • Chart of the Week: 

Chart of the Week II: