With Financial Markets Volatile, Albertsons Postpones Proposed Initial Public Offering
You can blame Wal-Mart for this: last month, Albertsons Companies postponed its planned IPO launch because of instability in the financial markets. That instability was triggered by the Bentonville Behemoth’s “Black Wednesday” announcement on October 14 that it will not meet its annual profit projection. Earnings could drop 6-12 percent for its current fiscal year which ends in January (a 4 percent earnings gain was originally projected). That led to a 27 percent decline in its stock ($20 billion in market value) and essentially tanked much of the publicly-traded retail segment.
Make no mistake, Albertsons will relaunch its public offering effort, but not until the market settles down, which probably means early next year. Until the Wal-Mart announcement rocked Wall Street, the Boise, ID merchant seemed ready to launch within days. It had completed its “road show” and several financial analysts told me that they felt confident that the second largest pure-play food retailer in the U.S. (now controlled by Cerberus Capital) would achieve its goal of launching at more than $20 per share.
Just prior to the postponement announcement, Albertsons released an updated prospectus noting that it intended to offer 65.3 million shares priced at $23 to $26 a share, with the possibility of selling an additional 9.8 million shares if there is strong demand, according to the prospectus. If all 75.1 million shares were sold at the top of the range, the value of the deal would be $1.95 billion.
Also noted in the prospectus was the news that none of its existing shareholders, including principal equity partner Cerberus Capital Management, would sell any of their holdings. Those entities would continue to control about 80 percent of the shares of the new publicly-traded company.
Albertsons also released its first quarter earnings for the period ended in September. The retailer reported a net loss of $109 million, with adjusted EBITDA up 15.8 percent to $704 million. Total sales increased 2.3 percent to $17.6 billion and identical store sales rose by 4.3 percent.
At its legacy Albertsons stores, ID revenue increased 2.1 percent, compared with 3.1 percent in the fourth quarter. Identical store sales at other stores with the Albertsons banner were up 9.5 percent, compared with 8.5 percent in the fourth quarter; ID’s at Acme, Jewel-Osco, Shaw’s and Star Market rose 4.1 percent, compared with 3.6 percent in the previous quarter; and ID’s at Safeway grew 3.8 percent, compared with 3.5 percent in the fourth quarter.
If IPO proceeds are significantly lower than the original target range that would mean less for Albertsons to use for store renovations and other investments in technology and pricing. Sources said that Albertsons could consider downsizing the size of the deal from a planned 16 percent of the shares outstanding to something smaller. Some industry observers expect Albertsons to release updated financials in advance of the delayed IPO in an effort to assure investors about its financial health.
Cerberus and its partners have been building the grocery chain through a series of deals since 2006, including its merger earlier this year with Safeway, which made it the second largest conventional grocery in the country after Kroger, with sales of $58 billion at its 2,200 stores throughout the U.S.
While the postponement was certainly frustrating and emotional for many of Albertsons’ senior executives who have invested countless hours into this effort, the good news is that they’ll get another opportunity soon, because they have an inherently good story to tell.
A&P’s Mays, Hertz, McGarry, Et Al Need To Be Terminated Immediately
Because they’ve done such an efficient and methodical job of planning to fire more than 25,000 store level associates, don’t you think now would be ideal time for the U.S. Bankruptcy Court to terminate the senior management team at A&P?
Seriously, after greedily mismanaging the bankrupt retailer for the past five years, why should chairman Greg Mays, CEO Paul Hertz and chief restructuring officer Chris McGarry be allowed to “earn” another dime from the company they helped destroy?
At this juncture of the Chapter 11 proceedings, A&P’s “big three” really serve no purpose; there are no stores they can manage and there are few remaining office associates (all on retention bonuses until they will be let go in the next two months) that they can direct – virtually everything is run by the bankruptcy court and, as such, Judge Robert Drain should summarily fire all senior management and appoint a trustee to provide oversight at the company which will likely file Chapter 7 liquidation by the end of the year.
Oh, it’s not just Greg “Don’t Call Me Willie” Mays, Paul “Pay Me ‘Til It” Hertz and Chris “Be Wary” McGarry that need to go, other senior executives such as CFO Tim Carnahan, CMO Eric Kanterman and CIO Nirup Krishnamurthy should be ousted as well.
Is it a coincidence that those men were the ones who directly received $12.6 million worth of “trust fund” payments made a few months prior to A&P’s Chapter 11 filing in July? Take a guess.
On the playing field, things aren’t going too well for what remains of the company, either. The first two rounds of store auctions netted significantly less cash than the creditors were hoping for.
At presstime on November 6, more than 100 units remain unsold. While I expect more action in the near future (A&P plans to close all stores by Thanksgiving), the results so far have been disappointing.
“If A&P and the court want to sell more stores they need to reduce the minimum dollar thresholds they have placed on these supermarkets,” said a retail executive whose company has successfully bid on several A&P units. “Some of these minimums were ridiculous, especially for stores whose sales have been trending down for years and are in poor physical shape.”
Since there was relatively little action at the two auctions – held on October 1-2 and 7-8 – beyond the “stalking horse” bidders (Acme, Stop & Shop, Key Food and Wakefern), an additional “clean up” auction may be held at which lower qualifying bids could be allowed.
And you can expect even further movement once the supermarkets remain closed for 30 days. That will allow non-union bidders a free and clear entry to stores (UFCW Locals said they would waive union status for future stores acquired in return for guaranteed jobs for its thousands of retail clerks and meatcutters who are headed for the unemployment line soon). There will also be side deals between landlords and retailers once those real estate entities gain control of their sites (either by acquisition or attrition).
However, the fact remains that many A&P stores will stay dark. Too many stores are in awful condition (expect buyers to spend at least $1 million per store for basic refurbishments) and there simply aren’t enough active players (especially independents) willing to roll the dice in market conditions that remain over-stored and ultra-competitive.
All the more reason for the court to appoint an independent steward to supervise A&P for the final few months before its death.
And if that were to occur, there would be many associates and vendors who would happily say to A&P’s senior management team, “Adios – don’t let the door hit you in the wallet on your way out.”
Interesting Times At C&S
While tremendous scrutiny has been placed on A&P and its current bankruptcy/wind down process, not much attention has been paid to the role of its primary supplier and largest creditor, C&S Wholesale Grocers.
The nation’s largest wholesaler, C&S, as it currently stands could be the biggest loser in the A&P debacle. The soon-to-be-defunct retailer owes C&S nearly $40 million in unpaid bills and settlement will likely be pennies on the dollar. Additionally, as A&P’s primary supplier there’s an estimated $2.5 billion in annual wholesale volume that will be departing. At presstime, based on A&P stores purchased by C&S-supplied retailers at auction (Stop & Shop, Key Food, ASG/Compare Foods, Best Yet and Foodtown), that $2.5 billion hit will only be minimally replenished.
As such, C&S announced that it has laid off a small percentage of its associates at various locations.
“As a family-owned company, we recognize the impact this restructuring will have on our employees and their families. Unfortunately, the reality of our industry is that we have to make changes, including the difficult decision to restructure some of our core functions and reduce our workforce, to ensure the competitive strength of C&S gong forward,” C&S CEO Rick Cohen said in a statement.
However, the news is not all bad for the Keene, NH distributor. Last month, Albertsons announced that C&S will retain the supply business for Safeway’s eastern division, albeit in a different form.
C&S’ Collington Services unit has been operating and managing the now Albertsons-owned distribution center located in Upper Marlboro, MD since 2000 (Safeway built it in 1998). The wholesaler’s contract was due to expire next May and many in the industry thought that Albertsons’ sister firm Supervalu would be named to service Safeway’s approximately 130 stores in the Baltimore-Washington market. Clearly that was not the case.
In the new arrangement, C&S will service Safeway’s dry grocery needs from its York, PA warehouse, perishables products from its North East, MD depot and general merchandise
items from its Bethlehem, PA distribution center. About 700 unionized workers will be impacted. An older, smaller warehouse in Landover, MD will also be shuttered.
And there could be more potential good news ahead for C&S. If I’m a betting man, I’m wagering big that the large privately-held wholesaler reaps significant additional business once the Ahold Delhaize merger is completed next year.
‘Round The Trade
Obviously, the pending Rite Aid acquisition by Walgreens Boots Alliance has created a tremendous amount of dialogue in my world. Even though the FTC is likely to approve the deal (after the ExxonMobil deal that was sanctioned in 1999, there seems to be little that’s not anti-competitive in the FTC’s view). However, this transaction will certainly draw more government scrutiny than usual, simply because we’re dealing with people’s access to a key component of health care – prescription medications. Additionally, in the case of Walgreens-Rite Aid, we’re not comparing locations that are 1.5-2 miles from each other, we’re literally talking about stores that are across the street from each other… more Wal-Mart stuff: in addition to the recent layoff of 450 associates at its Bentonville, AR headquarters, Wal-Mart’s got big troubles that are far more severe than employee lawsuits, out-of-stocks and shoddy perishables. The very core of the nearly $500 billion merchant is being tested and, despite recognizing Wal-Mart’s issues, relatively new CEO Doug McMillon seems unable to turn the big, lumbering and inflexible ship around. A few months ago, we reported that Wal-Mart has been pressuring suppliers to deliver lower costs. Several vendors we talked to at the time deemed this tactic unfair and said it seemed to be designed to offset the cost of the retailer’s recent wage increase to a minimum of $9/hour for its associates and to fund its future e-commerce initiatives. On October 15, the mega mass merchant sent a letter to many suppliers stating it is rescinding previous trade agreements as part of a reemphasis on its everyday low price strategy. If Wal-Mart were still as strong as it was a decade ago, this bullying tactic might have worked, but not today, because of the changing market landscape and Wal-Mart’s still large but declining share of market. Some suppliers will certainly buckle to the pressure, but the dozen or so that I’ve talked to told us they will hold their current ground. And, remember when Neighborhood Markets were going to be the key to Wal-Mart’s “go-to” growth plan? Reportedly, the Behemoth plans to reduce the number of NMs it will open during the next two years, citing its focus on e-commerce and its more profitable SuperCenter operation. Also at Wal-Mart, Steve Bratspies has been promoted to chief merchandising officer-U.S. That post has been vacant since Duncan “Mr. Overconfident” Mac Naughton exited almost a year ago. In his new post, Bratspies, who most recently was Wal-Mart’s executive VP of food, will now supervise all merchandise categories covering about 4,500 U.S. stores. That arguably makes Bratspies one of the most powerful grocery executives in the country…it’s been a tough 60 days for Whole Foods, too (but its problems are not anywhere near the level of Wal-Mart’s). However, we can now all feel reassured since the company announced that it will no longer sell food made by prison inmates. The “good for you food” retailer had been working with a firm called Colorado Correctional Industries that paid prisoners to produce such items as goat cheese and farmed tilapia and trout. In explaining Whole Food’s decision to discontinue its association with the company, spokesperson Michael Silverman said that while WFM liked the idea of employing inmates, “We felt that supporting supplier partners who found a way to be part of paid, rehabilitative work being done by inmates would help people get back on their feet,” adding “we have heard from some shoppers and members of the community that they were uncomfortable with Whole Foods Market’s sourcing products produced with inmate labor.” And in order to stay “in-tune” with customers’ wishes, the natural/organics retailer came to its decision to stop selling the goat cheese and tilapia. And no, I have never bought goat cheese at my local WFM that came with a file in it…The Fresh Market, yet another company that’s had a recent rough go of it, is reportedly considering going private again. Founder and board chairman Ray Berry, who led the company’s effort to go public in 2010 and still owns a 4.1 percent stake in the upscale merchant, has reportedly reached out to several private equity firms to see if the upscale merchant can leave the tight scrutiny and pressure that are part of the publicly-trade world. The Greensboro, NC based retailer has struggled with same-store sales and earnings and has failed or is struggling in its attempts to enter new markets such as California (from which it has already exited) and Texas. Additionally, the company recently named former Food Lion president Rick Anicetti as CEO. He replaced Craig Carlock, who was terminated last January…according to Frans Muller, CEO of Delhaize (and future deputy chief executive and chief integration officer of Ahold Delhaize), both companies are making good progress as they work toward a mid-2016 completion of their merger agreement, which was announced this past June. Muller made his remarks during a conference call with analysts following the release of Delhaize’s earnings late last month, adding that he and Ahold CEO Dick Boer are planning several road shows this month into early December. In the meantime, Muller is focusing on Food Lion’s “Easy, Fresh & Affordable (EF&A)” rebranding initiative. The Salisbury, NC unit recently completed the revampment of its 162 units in the Raleigh, NC market, which cost the retailer approximately $250 million for store remodels, price reductions and associate training. Muller indicated that he is pleased with the early progress of EF&A and plans to expand those efforts into other Food Lion markets next year…one more thought about the A&P meltdown: Ron Burkle, who remains the managing partner of the parent firm he founded in 1986, Yucaipa Cos., ought to ashamed. Burkle, whose DNA is rooted in the grocery industry (he began his career at Stater Bros. where his father also worked), used to be a stellar example that venture capitalists can also have a soul. Up until the new millennium, Burkle made several deals in which both the retailer he acquired and then sold and Yucaipa benefited (most notably he sold Fred Meyer to Kroger in 1999 for $13.5 billion). That hasn’t been the case with the Tea Company (although Burkle has not been part of A&P’s day-to-day operations since the end of the first bankruptcy in 2012). A&P is an unmitigated disaster and Burkle shares much blame for Yucaipa’s strategy and motives. As for other investments, the one-time buddy of former President Bill Clinton hasn’t been “rolling sevens,” either. His equity stake in Hollywood media giant Relativity Media has gone bust (another Chapter 11 victim) and Yucaipa’s “on the cheap” sale and remake of Fresh & Easy Markets (acquired from Tesco in 2013) has filed Chapter 11 as well. While U.S. Bankruptcy Judge Robert Drain is at it, he ought to fire Burkle, too…Wegmans confirmed that it will open a new 120,000 square foot store in Lancaster, PA, most likely in 2018. The new unit will be the anchor of a mixed use large shopping project (The Crossings at Conestoga Creek) that is being developed by The High Real Estate Group. The new store will be the company’s second Central Pennsylvania location (its Mechanicsburg, PA store opened in 2007) and 17th overall in the Keystone State (its newest store opened on November 8 in Concordville, PA)…Acosta has named Kevin George chief marketing officer and president of its Acosta Marketing Group. Most recently, George served as global chief marketing officer at Beam Suntory and served in various senior sales positions at Unilever. Also, just before presstime we learned that Acosta will be losing the large Heinz account. We’re told the reason is that Heinz will be merged into the direct sales force of Kraft Foods, which was acquired earlier this year by private equity firms 3G and Warren Buffett’s Berkshire Hathaway group, the same company that acquired Heinz in 2013…Albertsons has announced that former Stop & Shop New England pr
esident Joe Kelley has joined rival Shaw’s/Star Markets as VP-marketing and merchandising. In his new post, he will lead the retailer’s merchandising and marketing efforts covering the approximately 155 stores the company operates in the New England market. Kelley replaces Paul Gossett, the Albertsons veteran who has been reassigned to head the company’s merchandising and marketing efforts for its Southern division, covering the Dallas-Fort Worth market. In other Albertsons news, its Acme Markets unit which acquired 71 A&P stores at auction, is nearing the end of its store conversion process. Approximately 12 units a week are being switched with a two-and-a-half day turnaround allotted for each store (a mind-numbing process involving construction, cleaning, retail merchandising and training). All stores are expected to be fully converted about a week before Thanksgiving. I visited the former A&P stores in Woodcliff Lake, NJ and Montclair, NJ to experience the turnaround and it was impressive (both stores are far exceeding A&P’s pre-bankruptcy volumes). Stop & Shop, too, has almost completed the conversion process of the 25 former A&P stores it purchased at auction. Stoppie closed most of its units for seven days to complete the extensive remodeling effort needed to improve the units, which for the most part were in deplorable condition. “We are very excited to begin the store conversion process, and we will strive to minimize the inconvenience to customers,” said Don Sussman, president of Stop & Shop’s New York Metro division. “Stop & Shop is committed to improving the overall shopping experience in these 25 stores to meet the quality, selection and savings that customers have come to expect from us.”
Local Notes
I was very saddened to hear of the passing of Robert Weis, former chairman of Weis Markets, the Sunbury, PA-based retailer that was started by his father and uncle in 1912. Bob Weis was really a mountain of a man who led his company and his life with great dignity. He was an old school gentleman, treating people with respect while going about his daily life with selflessness and great humility. If you met Bob on the street you’d never suspect his business acumen or his generosity. He had a deep love of his family – his wife of 57 years, Pat; his three children, Jonathan (currently Weis’ chairman and CEO), Colleen and Jennifer (Monsky). Bob Weis spent nearly 70 years with the company and, since he was named chairman of the 163 store regional chain in 1995, Weis has continued to add stores while remodeling more than 100 units. Perhaps his shining moment came in 2001, when heirs of his first cousin (and former CEO) Sig Weis attempted to force a sale of the company. Bob Weis stood his ground and ultimately purchased the stock of the “Janet Weis faction,” effectively removing them from adversely impacting the organization. “Mr. Weis was an exceptional leader who helped build and grow an extremely successful company from the ground up,” said Kurt Schertle, Weis’ chief operating officer. “His career was one of sustained accomplishment and quiet excellence. He was also a loyal man who was devoted and proud of his family and associates. Here at the company that bears his name, we will remember him with fondness and respect for his decency and achievements.” Couldn’t have said it any better…Wakefern Food Corp. late last month reported record retail sales of $15.7 billion for its 53 week fiscal year ended October 3. That represents a 6.7 percent increase from 2014. Wholesale sales at the Keasbey, NJ based co-op also increased to $12.8 billion. Those results were announced at Wakefern’s annual meeting held in East Brunswick, NJ on October 29. “Our customers have different expectations of us today and we need to meet those expectations,” said Joe Colalillo, chairman of the hugely successful co-op. “We are going to deliver that customer experience by uniting around our purpose and bringing our values to life at our stores.” During the past year, five new ShopRites and four new PriceRites opened. Moreover, Wakefern acquired 13 stores at the recent A&P auction. Colalillo also said that two long-time members of Wakefern’s board, Steve Ravitz (president of Supermarkets of Cherry Hill) and Ken Capano (CEO of Five-Star Supermarkets), have retired. New board members include Marshall Klein (COO of Klein’s ShopRite of Maryland) and Neil Greenstein (president of Brookdale ShopRite/ShopRite of Newark). “Our world is rapidly evolving and we are transforming with it,” noted Joe Sheridan, COO of Wakefern. “We’re optimizing our brick-and-mortar experience, accelerating our digital platforms and engaging our associates to deliver the ultimate customer service piece.” Additionally, Lorelei Mottese, Wakefern’s director of government relations, has received the National Grocer’s Association’s “Clarence G. Adamy Great American Award,” which is presented annually to “an individual or company whose leadership in the food industry best exemplifies active and effective participation in government relations as a citizen and industry representative.” In related news, Wakefern’s second largest and only publicly-traded member, Village Super Market, announced that both sales and earnings increased in its recently completed fourth quarter ended July 25. The Springfield, NJ based ShopRite operator posted comp store sales gains of 2.3 percent and earned $6.9 million, an increase of 16.9 percent from the corresponding period last year. The 29-store retailer, which operates supermarkets in Lutherville and Silver Spring, MD, said sales improvements were created by higher volumes at replacement stores, bigger average transaction size and increased customer counts. For its 52-week period, Village reported overall sales of $1.6 billion…BrightFarms will exclusively supply Ahold USA’s Giant/Landover and Martin’s stores and the retailer’s Peapod delivery unit with fresh produce from the company’s new greenhouse in Culpeper County, VA. The 150,000 square foot facility, which will be completed next month, will service Ahold USA stores in Virginia, Maryland, Delaware and Washington, DC with spinach, arugula, Asian greens, spring mix, kale, tomatoes and baby green blends…a clarification to an item from last month’s column regarding the National Capital Barbeque Battle’s new name. The long-running and popular event will now be sponsored by Giant/Landover and will be called the Giant National Capital Barbeque Battle. Look for more details on next year’s competition, which will be held June 25-26, in our Trade Calendar as we get closer to the event…a few obits of note to report this month. Tom Stemberg, co-founder (with the late, great Leo Kahn) of Staples, has passed away at the age of 66. Tom began his career in the grocery business with Star Markets in Boston and was also president of First National Stores before he and Kahn (who had sold his grocery store chain, Purity Supreme) hit pay dirt by applying the warehouse style grocery store model to the office supply business. I spent a lot of time with Tom in the mid to late 70s and knew his fierce competitive spirit and great intellect would ultimately lead to future business success….also leaving us was legendary actress Maureen O’Hara. Born Maureen FitzSimons in 1920 near Dublin, Ireland, the actress had her screen debut in 1937 and her career that continued until 2006. Among her most notable roles were as the daughter of a Welsh miner in “How Green Was My Valley” (1941), the mother of young Natalie Wood in the Christmas classic “Miracle On 34th Street” (1947) and – in what I consider her best role – as the feisty Irish dancer in “The Quiet Man” (1952).…entering the heavenly kitchen is Chef Paul Prudhomme, 75, the New Orleans chef known for popularizing Cajun and Creole cuisine in the early 1980s. His French Quarter restaurant K-Paul’s Louisiana Kitchen became one of America’s most popular dining spots when it opened on Chartres Street in 1979 featuring such items as blackened redfish, etouffe and gumbo. He also is credited with introducing the turducken to American cuisine (have you ever seen a turducken fly?). I remember Paul from his many years of attending the FMI show. He had lost a lot of weight and could be found riding in a golf cart, intently checking out the exhibits while smiling and gladly giving autographs to those who asked…and finally, I mourn the death of the Playboy centerfold. The signature piece of the magazine started by now 89-year old Hugh Hefner in 1953, the centerfold for years was a life force of its own. For many teenage boys in the 1950s, 60s and 70s, Playboy was their underground reading (and viewing) lesson plan about the stuff that Ward Cleaver never talked about. Beginning next April as part of a magazine redesign, there will be no nudity at all in the print edition of Playboy. Provocative poses and sexy images will still appear, but garments will not be fully shed. The reason is simple: the magazine’s circulation has plummeted from a high of 5.6 million to 800,000 currently.” The battle has been fought and won,” said Playboy CEO Scott Flanders. “You’re now one click away from every sex act imaginable for free. As so it’s just passé at this juncture. Sad, but true, especially for those baby boomers who derived a hidden pleasure from finding their father’s issue and sharing it with friends.
