Expect C&S, Wakefern To Be Aggressive Bidders At A&P Auction Next Month
One of my first thoughts when the list of “stalking horse” bidders was revealed in the soon-to-be A&P “good riddance tour” was the absence of both Wakefern and C&S Wholesale Grocers. Don’t expect their silence to last much longer. I would expect both wholesalers to be aggressive bidders when the bankruptcy auction commences on September 24 in White Plains, NY.
In fact, there’s a lot of heavy lifting to do before the final disposition of A&P occurs.
Already there are contentious union issues, landlord problems, creditor complaints and potential pension trust concerns (on August 5, the Pension Benefit Guaranty Corp., the insurer of multi-employer pension funds, filed a complaint with the Bankruptcy Court, stating that A&P should change its auction procedures to “encourage assumption” of pension liabilities by a proposed buyer. Pensions for 25,815 A&P workers under multi-employer plans are currently underfunded by $302.5 million, according to the filing. If A&P were to withdraw from any of its pension funds, the liability would then fall to the other retailers in that fund).
Landlords also took aim at the procedures for auctions and sales of the company’s stores.
And, even once everything is legally handled by the Bankruptcy Court, the FTC will have to be heard from regarding potential store overlap issues for potential buyers.
From a strategic perspective, Stop & Shop made a brilliant move by overpaying ($146 million for its 25 stores), especially for the nine units on Long Island. That move, at least until the auction, protects Stoppie’s dominant Long Island share (17.7 percent with 42 current stores and estimated annual sales of $1.71 billion) and keeps Wakefern/ShopRite from gaining more traction in a market in which it desires to expand (there are currently only 10 ShopRites on the “Island,” but each ShopRite averages nearly 50 percent more than the average Stop & Shop unit). Even though Wakefern will have a chance to trump Stop & Shop’s individual store bids at the auction, Judge Robert Drain’s history during the 2010-2012 A&P bankruptcy shows he favored multi-store “package” deals over individual bids at the 2011 auction of 25 Super Fresh Maryland stores.
The “multi-store package” strategy should also serve Acme/Cerberus well, too. Tentatively, with 76 stores in its portfolio (valued at $256 million), Acme has the most skin in the game. It’s understandable that the Malvern, PA retailer would want to enhance its already strong DelawareValley store base, but I was impressed by the moxie shown by the company in trying to build its relatively weak Northern New Jersey offerings and also by expanding into new marketing areas (Lower Hudson Valley, Connecticut). Even though many of those A&P units are old and small, the folks at Acme have proven they can take declining stores and improve store conditions, associate engagement, advertising and pricing.
For Key Food, this is an excellent opportunity to grow its urban store network, especially in the five boroughs of New York City. While Key trails Associated (ASG) for leadership in all of New York City, for the past five years it has achieved the fastest organic growth of any bannered trading group in the $17.5 billion trading area.
As stated earlier, while we believe that Wakefern will be an aggressive bidder at auction and will also be discreetly active in terms of making deals with landlords for specific sites, we also feel that C&S will be a force when the fire sale begins next month in White Plains. As A&P’s largest creditor ($39.4 million), C&S is also vulnerable to lose business to other wholesalers (or retailers who are directly supplied) if the auction results don’t go their way. With Stop & Shop and Key Food (if those deals hold up), C&S is assured of servicing those accounts, but it won’t be supplying Acme, and there’s the real possibility that other non-C&S affiliated retailers will scoop up other A&P units at the auction while other current A&P stores will close and remain dark. I expect C&S to deploy a strategy similar to what it did with Grand Union’s bankruptcy and auction in 2000 when it acquired 185 stores to primarily parcel out to existing customers and perhaps serve as incentive to attract new ones. However, I don’t expect C&S to re-enter the retail business as it did with the Grand Union proceedings.
In a related matter, I recently called Yucaipa Cos.’ managing partner Ron Burkle, A&P chairman Greg Mays and current A&P CEO Paul Hertz “clowns” for the way they greedily bungled the company’s post-bankruptcy effort in 2012. To that group I must add Christopher McGarry, A&P’s current chief administrative officer, general counsel and now chief restructuring officer. Yes, when it comes to running a grocery chain in the new millennium, these guys really are the “Feeble Four.”
McGarry’s comments made in a July 19 declaration to the Bankruptcy Court would have been almost laughable, if they hadn’t been so damaging. While it is A&P’s right under U.S. Bankruptcy law to seek cancellation or modification of current labor contracts (but first must attempt to reach agreements with its unions), McGarry’s filed statement with Court said that the labor savings achieved during the first bankruptcy served as only a “modest reduction” (tell that to most of the 27,000 UFCW members who would never use the word “modest” to describe their concessions). McGarry also stated that the 2010 bankruptcy was mainly prompted by A&P’s need to rationalize its store base and renegotiate supply and distribution agreements. His theory happens to be correct, but the dirty little secret that wasn’t revealed was that once they achieved those backroom savings, A&P totally fluffed the duck by not following through on its promise to revitalize the store network by adding the capital necessary and re-energizing the associate base.
Despite promises to improve A&P, especially with the cleanest slate possible after emerging from bankruptcy, Yucaipa and its A&P lackeys did almost nothing to change the view. And if they believed that a few remodelings, very modest price reductions and an attempt to create a more “local” image would do the trick, then this crew shouldn’t even have been managing an ice cream stand in Ho-Ho-Kus.
Was this recent second bankruptcy filing caused by deliberately not having an actionable rebuilding plan? Probably not. But the disingenuousness and avarice (top management certainly got theirs in terms of annual salaries and bonuses) at the expense of the associates and its vendors is unconscionable.
These guys never really tried hard enough to fulfill their promises and it seemed that by the end of 2012, their weak attempts at a turnaround turned to total apathy (but it seemed they never let their personal greed get in the way of watching a company melt away). Now the final chapter is at hand and, for the “Feeble Four,” I’m betting they won’t lose a night of sleep over the destruction and misery they’ve caused.
Why should we believe anything that they say, anyway?
Supervalu Evaluating Save-A-Lot Spin Off: Posts Solid 1st Quarter Sales, Earnings
Supervalu announced July 28 that it is exploring a separation of its Save-A-Lot business, and that as part of that process it has begun preparations to allow for a possible spin-off of Save-A-Lot into a stand-alone, publicly traded company.
Hard discounter Save-A-Lot operates more than 1,300 total stores nationally, comprised of approximately 430 corporate stores and approximately 900 stores operated by licensee owners. In making the announcement, Supervalu president and CEO Sam Duncan said: “We believe Save-A-Lot has significant growth potential. Over the last two and a half years, Save-A-Lot has repositioned its brand, refocused its efforts on fresh produce and meat, and re-merchandised its stores and product offerings to better appeal to a broader group of customers. Today’s announcement reflects our commitment to continuing to explore ways to maximize value for our shareholders. We believe a separation of our Save-A-Lot business could allow Save-A-Lot, our independent business and our retail food banners to better focus on their respective operations, and pursue strategies specific to their business characteristics and growth potentials, for the benefit of our shareholders, customers, licensees and employees.”
The company said no specific timetable for a separation has been set and “there can be no assurance that a separation of Save-A-Lot will be completed or that any other change in the company’s overall structure or business model will occur.”
Barclays and Greenhill has been engaged to serve as financial advisors, and Wachtell, Lipton, Rosen and Katz as legal advisor, in connection with this possible separation.
The news about Save-A-Lot came shortly after Supervalu released its first quarter results for 2016, reporting operating earnings of $158 million, $23 million higher than last year’s first quarter; its seventh consecutive quarter of positive Save-A-Lot network ID sales; and sales increases in all operating segments.
Net sales for the quarter were $5.41 billion and net earnings from continuing operations were $63 million ($0.23 per diluted share), which included $2 million in after-tax structural and tax planning fees. When adjusted for this item, first quarter fiscal 2016 net earnings from continuing operations were $65 million ($0.23 per diluted share). Net sales were $143 million more than net sales of $5.26 billion in the comparable period last year, an increase of 2.7 percent.
Net earnings from continuing operations for last year’s first quarter were $48 million ($0.18 per diluted share), which included $2 million in after-tax net charges and costs for employee severance and debt financing activities. When adjusted for these items, first quarter fiscal 2015 net earnings from continuing operations were $50 million ($0.18 per diluted share).
“We delivered sales increases across all three business segments and managed our costs very well in this first quarter,” said Duncan. “I’m pleased with our bottom line and ability to manage to these results in spite of softer sales at Save-A-Lot and in our retail food stores. We have plans in place and operationally we remain well positioned.”
Independent Business operating earnings in the first quarter were $77 million, or 3.1 percent of net sales. Last year’s Independent Business operating earnings in the first quarter were $66 million and included $1 million of pre-tax employee severance costs. When adjusted for this item, independent business operating earnings in the first quarter of fiscal 2015 were $67 million, or 2.8 percent of net sales. The increase in independent business operating earnings was driven by higher sales, higher base margins and lower logistics costs.
First quarter Save-A-Lot net sales were $1.41 billion, compared to $1.36 billion last year, an increase of 3.8 percent. The sales increase reflects the impact of new store openings and network identical store sales of positive 0.6 percent. Identical store sales for corporate stores within the Save-A-Lot network were positive 2.8 percent.
Save-A-Lot operating earnings in the first quarter were $51 million, or 3.6 percent of net sales. Last year’s Save-A-Lot operating earnings in the first quarter were $46 million, or 3.4 percent of net sales. The increase in Save-A-Lot operating earnings as a percent of sales was primarily driven by higher base margins and lower logistics costs, offset in part by higher occupancy and employee related costs driven by new store growth.
First quarter retail food net sales were $1.47 billion, compared to $1.43 billion last year, an increase of 3.0 percent. The sales increase reflects the impact of new store openings partially offset by negative identical store sales of 0.3 percent.
Retail food operating earnings in the first quarter were $33 million, or 2.2 percent of net sales. Last year’s retail food operating earnings were $30 million, or 2.1 percent of net sales. The increase in retail food operating earnings was driven by higher base margins, offset in part by higher shrink and employee related costs driven by new store growth.
Net corporate operating loss in the first quarter was $3 million and included $3 million of structural and tax planning fees. When adjusted for this item, net corporate operating earnings were $0 million. Last year’s first quarter net corporate operating loss was $7 million. The improvement in net corporate operating results was primarily driven by higher fees earned under the TSAs (transition service agreements). First quarter fees earned under the TSAs were $64 million, compared to $58 million last year. The increase was primarily driven by fees earned under the Haggen TSA.
First quarter fiscal 2016 net cash flows provided by operating activities of continuing operations were $111 million compared to $57 million in the prior year, reflecting lower levels of investment in working capital. First quarter net cash flows used in investing activities of continuing operations were $70 million compared to $32 million in the prior year, reflecting purchases of intangible assets and increased payments for capital expenditures. First quarter net cash flows used in financing activities of continuing operations were $19 million compared to $18 million in the prior year.
A couple of things to consider here. First of all, Cerberus clearly wants to get its money out of its two large grocery investments – the Save-A-Lot division of SVU (it owns about 20 percent of SVU, which gives it operating control) and Albertsons.
Additionally, if Save-A-Lot can successfully launch an IPO, you’ve got to wonder if Supervalu would remain a publicly-traded company, especially if you believe that that the Eden Prairie, MN based firm wants to ultimately dump its marginal corporate store unit (Shoppers, Farm Fresh, Cub, Hornbacher’s and Shop ‘n Save).
If that were to occur, it would take SVU back to its roots as a wholesale grocer and it could focus on national growth (organically and through acquisition). It would also mean that, aside from several strong regional players (AWG, Bozzuto’s, Burris, Unified, SpartanNash, Affiliated Foods, MDI, Associated Foods), Supervalu and C&S will likely be battling for dominance among all wholesalers.
‘Round The Trade
Weis Markets posted strong second quarter earnings and sales as it continues to drive volume through its focus on increasing sales. For the 13 week period ended June 27, the Sunbury, PA based regional chain saw its net income increase 28.4 percent to $16.4 million. Overall revenue was up 3.8 percent to $718.4 million and comp store sales rose a healthy 4.3 percent. This marks the first quarter in which Weis was able to comparably cycle its price impact program, demonstrating the closely-held retailer’s ability to grow both shares and profit. According to CEO Jonathan Weis said, “Our second quarter results reflect our continuing investments in sales-building strategies and disciplined promotions that helped us generate strong sales and earnings. During the period, our results benefited from strong unit sales growth throughout our fresh and center store departments.” More Weis news: the company confirmed that it will acquire the Nell’s Family Market in Hanover, PA, which will replace its older, smaller Hanover unit. The store is one of four Nell’s units that are owned by C&S, which acquired the independent supermarket as part of the AWI bankruptcy acquisition (the other three Nell’s corporate units are located in Carlisle, East Berlin and York, PA). The deal should be finalized later this month and Weis said it plans to interview current Nell’s associates for positions at the store. And a tip of the hat to Weis, Redner’s and Ahold USA, which all held their annual golf outings recently, raising millions for local charities. Especially notable was Ahold USA’s effort, which featured nearly 2,000 golfers and raised a record $10.2 million in contributions. Kudos to the vendors, too, for serving as the foundation for those levels of fundraising…what to do about Fairway? After another disappointing quarter which resulted in a $13.9 million loss, it may be time for the “like no other market” merchant to consider finding a buyer. Even the optimism of relatively new CEO Jack Murphy (ex-Earth Fare, ex-Fresh Fields, who joined the Manhattan merchant 10 months ago) isn’t shared by many others, especially after he said that the unprofitability could last several more quarters and he was hopeful that a positive top line sales could be achieved in the next 12-18 months. This certainly isn’t Murphy’s fault – he’s a top-shelf merchant with strong industry experience. He just entered the scene too late. Every measurable performance metric has been flat or has plunged since the company went public in April 2013, and as we went to press, the urban retailer’s stock price plummeted to slightly more than $2 per share (it traded at approximately $28 per share about two years ago). Furthermore, the company that was founded by the Glickberg family in 1932 (they sold majority control to PE firm Sterling Investment Partners in 2007, before Fairway went public) has scaled back its store expansion and also has had major difficulties in dealing with new competitors (particularly Whole Foods) which have invaded Fairway’s universe. Clearly, Fairway is running out of options and Wall Street is only going to wait so long…on the other end of the sales and earnings spectrum is Aldi, which is “killing it.” The Batavia, IL based U.S. division, currently growing sales at about 18 percent annually, plans to add 600 new stores and an 10,000 additional associates by 2018 and is hosting jobs fair this month to fill 2,500 positions. Hiring “events’ are slated for 10 locations in New Jersey and 16 in Pennsylvania. Moreover, in an attempt to vary its product mix, the German-owned discount retailer has added more organic items to its SKU catalog. Under its “Simply Nature brand, Aldi is trying to offer more healthy options for its discount-minded shoppers and also better compete with the likes of Whole Foods, Sprout’s and Trader Joe’s, a company that the parent firm also owns…I guess he couldn’t get the obvious next title (corporate CEO), so Rite Aid promoted Ken Martindale, 55, to chief executive of Rite Aid stores. He was most recently president of the Camp Hill, PA based drug chain. John Standley, who has worked alongside Martindale from their days at Smith’s Food & Drug (Yucaipa Cos.) dating back to the mid-1990s, remains chairman and CEO of the entire Rite Aid empire. Standley first joined Rite Aid in 1999, left for 18 months to serve as Pathmark’s CEO (where he brought in Martindale) and became Rite Aid’s CEO in 2008. ..now for some wholesale news: C&S and the state of New York have reached a $46,000 settlement after EmpireState officials accused the Keene, NH-based distributor of illegally dissuading new employees from reporting injuries suffered on the job. As part of the settlement, C&S will change its policy and will now train all associates to become more aware of their worker’s compensation rights and benefits… at Cheshire, CT based Bozzuto’s, one of its longest standing customers, Tri-Town Foods, has been acquired by Intercontinental Holding Co., a unit of the big family-owned wholesaler. Tri-Town currently operates two stores in the Nutmeg State – East Lyme and Portland – and will continue to operate under its current banner. Intercontinental currently operates 12 supermarkets under the Adams Hometown Markets, Better Val-U Supermarkets and Jerry’s Markets banners. Tri-Town Foods was founded in 1969 by Edward Sharr, Sr. His son, Edward “Rick” Sharr Jr. joined the independent retailer in 1974 and was CEO before the recent Intercontinental deal…it’s been a busy six weeks for Albertsons. Along with its announcement that it will attempt to launch an IPO, and its plan to open eight new stores and remodel 115 others in 2015, the Boise, ID-based operator also found time to sue Haggen, accusing the Bellingham, WA-based grocer of fraud for failing to pay more than $36 million as part of the agreement when it acquired 146 grocery stores, from Albertsons as part of the divestiture ruling when Albertsons acquired Safeway earlier this year. The lawsuit filed in California federal court alleges that Haggen refused to pay for $36 million worth of inventory at 32 of the stores it acquired. Albertsons also says Haggen owes it nearly $5 million in inventory at another six stores, which it says are also now past-due. That brings the total to more than $41 million, the suit said. Additionally, Albertsons says Haggen waited until deals closed on all 146 stores before notifying Albertsons that it would not pay for the inventory. In a statement, Haggen, which is now led by former Save-A-Lot CEO Bill Shaner, said Albertsons failed to live up to its end of the bargain in the companies’ purchase agreement. Haggen said it notified Albertsons of those violations before the Albertsons filed the suit last month. The Haggen statement went on to accuse Albertsons of mounting a “strike suit to avoid addressing its wrongful conduct.” In its counterclaim, Haggen said it “will mount a vigorous defense and aggressively prosecute its counterclaims. Haggen has struggled since it expanded into Southern California and Arizona, new markets for the former 18 store independent. Albertsons also announced that it has terminated its contract with specialty food distributor UNFI, effective September 15. The original agreement was set to expire on July 31, 2016. Kehe Distributors has been named to fill the specialty food distribution role at Albertsons. UNFI said the business loss represents approximately 5 percent of its $8.2 billion annual revenue…Wal-Mart late last month opened its new e-commerce fulfillment center in Bethlehem, PA. The facility, one of two Wal-Mart centers in the Lehigh Valley dedicated to filling online orders, is part of a next-generation network to support the company’s rapidly growing e-commerce business. The new 1.2 million square foot facility in the Majestic Bethlehem Center, which features state-of-the-art automation and warehousing systems, created nearly 400 full-time jobs in the Lehigh Valley. Roughly 200 additional jobs were created at the second Wal-Mart fulfillment
center in the Lehigh Valley Industrial Park VII. “We are grateful to the Lehigh Valley for welcoming us with open arms, and we’re proud of the role we’ve played in strengthening this community with the jobs and community support we’re bringing to the area,” said Mike McGraw, general manager of the Bethlehem fulfillment center. The new facility is part of a network – Wal-Mart distribution centers, existing e-commerce facilities, 4,500 Wal-Mart stores and its huge transportation fleet – that will allow customers more choices for how they want to receive their online orders. “This Bethlehem facility is part of a dense, multi-faceted network that combines new buildings, existing fulfillment assets, and our portfolio of stores to create thousands of points of distribution,” said Neil Ashe, CEO, Wal-Mart Global e-commerce. “All of these elements working together enhance our ability to get more products to customers faster, at a lower cost, and provide more choices for shoppers.” While The Bentonville Behemoth still significantly lags behind Amazon in the e-commerce race, it is gaining more traction and still has an advantage by offering consumers more flexibility with its huge bricks and mortar foundation. Perhaps that was the motivation for Amazon.com, which is reportedly developing a new drive-up store concept in which consumers can order groceries online and schedule a pickup at a dedicated Amazon facility. According to industry sources, Amazon has submitted plans for an 11,6000 square foot building and grocery pickup area in Sunnyvale, CA in the heart of Silicon Valley. Of course, many traditional supermarket operators have a “bricks and clicks” model already in place. What makes this news interesting is that Amazon is attempting to reverse engineer the process and of course, anything “Amazon” bears watching. A few obituaries to report this month. Passing on was Theodore Bikel, best known for performing the role of Tevye (“Fiddler on the Roof” ) more than 2,200 times. The internationally renowned actor appeared in more than 150 movie and TV roles and created the role of Captain Georg Von Trapp in the original Broadway production of “The Sound of Music” (1959). Bikel, 91, was born in Vienna and fled with his family to Palestine (Israel) after the Nazis took control of Austria in the 1930s. He also recorded 37 albums and spent much of his life as a civil rights activist…entering author heaven was novelist E.L. Doctorow at age 84. The great American writer, who penned such classics as “Ragtime” and “Billy Bathgate,” had a unique and entertaining style in which he interspersed real life characters and events into fictional settings. He was among the most honored authors of the past 40 years, winning the National Humanities medal, the National Book Critic Circle award and several National Book awards…Moe Greene is dead. I am sad to report the death of actor Alex Rocco who the portrayed gangster in the original “The Godfather” (1972). The Boston born actor, who appeared in nearly 170 movie and television roles, was best known as the smug mobster, (based on the real life Bugsy Siegel) who is pressured to sell his Las Vegas casinos by Michael Corleone (Al Pacino). When Corleone tells Greene, “I leave for New York tomorrow. Think about a price,” Greene responds: “Do you know who I am? I’m Moe Greene! I made my bones when you were going out with cheerleaders.” Later, Greene, while getting a massage, is murdered by a shot through his eye during the dramatic ending of the first Godfather film. In a recent interview, Rocco said, “I had no idea what Moe Greene was gonna do for me. There was an off-Broadway play called ‘Who Shot Moe Greene?’ There was a Moe Greene’s Bakery. Alec Baldwin did Moe Green on ‘Saturday Night Live.’ Billy Crystal opened up the Academy awards once saying, ‘I just ran into Moe Greene outside.’ It just doesn’t die down.” Rocco was 79…and on July 30, we learned of the passing of “Rowdy” Roddy Piper, one of the most interesting wrestlers ever to inhabit the WWE ring. Piper, 61, whose wrestling act included a kilt (he was Canadian, not Scottish) and an ability to turn his hair-trigger temper into a pounding of most of his opponents. Fellow wrestler Ric “Nature Boy” Flair termed Piper “the most gifted entertainer in the history of professional wrestling.” “Rowdy” Roddy’s career also featured about 60 film and TV roles, including the lead actor in the sci-fi thriller “They Live” (1988). I can’t say that I’m much of a wrestling fan anymore (that connection ended when I was about 10 years old), but Piper (born Roderick Toombs) was always someone who caught my eye. May he rest in peace.
