Also This Week: Target Targets Urban Centers with Smaller CityTarget Format; Apollo Management Merging Henry's and Sprouts Farmers Markets; Noteholders Set a Base Bid of $290 Million for Blockbuster; DJM Realty Gets Borders' Assignment; Hilco Gets A&P; Two Pizza Chains Cook Up Chapter 11 Reorganization Plans; Convenience Store Decline Reverses Course in 2010; and Casey's Expands in Minnesota Through Acquisition
Best Buy Co. Inc. plans to significantly cut the number of openings of its larger, standard-sized store format in favor of its smaller Best Buy Mobile stores.
The Minneapolis-based electronics retailer also announced plans to improve efficiencies in its U.S. supply chain operations.
"The actions we are taking are consistent with our strategy of driving businesses that have earned the right to additional capital while curtailing activities that we believe will not meet our return on investment thresholds," said Brian Dunn, CEO of Best Buy.
The company plans to open approximately 150 Best Buy Mobile stand-alone-stores in the U.S. in fiscal 2012. These openings would take the total Best Buy Mobile stand-alone-stores to approximately 325 in the U.S.
The company plans to open only six to eight large-format stores in the U.S., resulting in square footage growth of less than 1%. This is a significant reduction compared to the average square footage growth rate of 5% during the last three years.
The company also plans to restructure certain end-to-end supply chain processes in the U.S., which it believes will improve efficiency and reduce costs. This restructuring will result in charges related to asset impairments on real estate, equipment and inventory as well as costs incurred to deliver labor efficiencies.
The company estimates that restructuring charges, which include asset impairments, settlement of lease obligations, facility closure costs, severance costs, and inventory adjustments will total $225 million to $245 million, including approximately $60 million of cash settlement costs, all on a pre-tax basis.
Given the timing of these actions, the company expects that the majority of the charges will be reported in the fourth quarter of fiscal 2011 (approximately $210 million to $230 million or $0.33 to $0.36 diluted EPS impact) with the balance of the charges reported in fiscal 2012.
Target Targets Urban Centers with Smaller CityTarget Format
Target has identified the first location for its new small-format store concept. Target plans to open the store in Chicago in the Carson Pirie Scott building at South State Street and Madison Street East. The small-format stores are being dubbed CityTarget.
Target previously reported last fall that it hopes to open up to 10 such locations in 2012. Other cities mentioned included Seattle, San Francisco and Los Angeles.
CityTarget will offer a smaller assortment groceries, apartment essentials, trendy fashions and exclusive designer collections.
The store will open in 2012 and create about 200 jobs locally. Target currently has 10 other stores in the City of Chicago.
Apollo Management Merging Henry's and Sprouts Farmers Markets
Two separated cousins of the natural foods business are planning to re-unite: Henry's Farmers Market and Sprouts Farmers Market. The two companies that were founded by the same family years apart, but which have always operated under separate owners -- are planning to combine forces under the majority ownership and sponsorship of private equity firm Apollo Management LP.
The Boney Family, which created both brands, will manage the company from an operating perspective.
The combined company, which will also include the Henry's stores currently operating as Sun Harvest Farmers Market in Texas, will eventually come together under the Sprouts Farmers Market name.
Sprouts will thus become one of the larger grocers in the Western U.S., with 98 stores, more than 7,000 employees, and annual revenues in excess of $1 billion at the time of the closing, which is expected to be early in the second quarter of 2011.
Until the closing of the merger, Henry's/Sun Harvest and Sprouts will remain separate and distinct entities. Once the merger is finalized, changes will be phased in gradually over the next year, with the lion's share of them taking place in the second half of 2011 and into 2012.
Shon Boney, CEO of Sprouts said it was currently evaluating whether all of the stores the two currently operate would remain open after the merger.
Once the deal has closed, the corporate operations will be run out of the Sprouts' offices in Phoenix, AZ. The Henry's office in Irvine, CA, will remain open serving regional needs of California. However, that decision could be re-evaluated in the future once the company has determined the combined needs of the merged operations.
The company said almost all existing positions would be retained, especially in the stores, but that there could be a small number corporate roles eliminated that are duplicative in nature.
Noteholders Set a Base Bid of $290 Million for Blockbuster
Blockbuster Inc., the Dallas-based movie and game rental giant undergoing Chapter 11 bankruptcy reorganization, has initiated a process to sell the company, which it said it believes represents the best means of maximizing value for its stakeholders.
Blockbuster has entered into an asset purchase agreement with a "stalking horse" bidder, Cobalt Video Holdco LLC, a limited liability company formed by funds managed by Monarch Alternative Capital LP, Owl Creek Asset Management LP, Stonehill Capital Management LLC and Värde Partners Inc., each of which is a secured noteholder of the company.
Under terms of the agreement, Cobalt has agreed to purchase substantially all of the assets of Blockbuster Inc. and its U.S. and international subsidiaries for $290 million, subject to adjustment.
The Cobalt agreement serves as the "stalking horse" bid in the auction, which sets the floor or minimum acceptable bid.
"By initiating a sale process at this time, we intend to accelerate our Chapter 11 proceedings and move the company forward," said Jim Keyes, chairman and CEO of Blockbuster. "An auction will allow the company to invite competing bids from both strategic and financial investors. This will also allow for the consolidation of ownership of the company to those with a clear and focused vision for Blockbuster's future."
DJM Realty Gets Borders' Assignment; Hilco Gets A&P
Borders Group Inc., which filed a bankruptcy petition under Chapter 11 last week, has retained DJM Realty, a Gordon Brothers Group Co., to manage the disposition project of approximately 200 underperforming stores.
The 200 leases that are available for assignment total 4.7 million square feet and range individually from 12,895 to 42,770 square feet.
"Borders' real estate has begun to create interest among retailers, supermarkets and non-retailer users," said Andy Graiser, co-president of DJM Realty. "The available portfolio offers a unique mix of mid- and big-box locations with long lease terms and strong retail co-tenants. Numerous properties are located in markets that are very difficult to enter, including northern and southern California, the cities of New York, Chicago, Dallas, Atlanta, Boston and their neighboring suburbs."
In separate bankruptcy news, Hilco Real Estate LLC was appointed real estate advisor to The Great Atlantic and Pacific Tea Co. (A&P) in its bankruptcy restructuring. Hilco is managing A&P's disposition efforts, including the immediate sale of 31 leases on stores in the process of being shuttered.
"These 31 locations range from 24,000 to 60,000 square feet. They are in prime locations in Connecticut, Delaware, Maryland, New Jersey, New York and Pennsylvania. Early interest in these sites has been significant and we expect that momentum to continue throughout the sale process," said Gregory S. Apter, president of Hilco Real Estate.
The sale process will be managed by Ross Block, a senior disposition specialist.
Two Pizza Chains Cook Up Chapter 11 Reorganization Plans
Two big-name pizzerias filed for bankruptcy reorganization in the past week: Round Table Pizza Inc. in Concord, CA, with 470 locations; and Chicago’s Giordano’s Enterprises Inc. with 55 locations.
Round Table Pizza filed a petition for protection under Chapter 11 with the U.S. Bankruptcy Court in Oakland designed to improve the company's cash flow and stabilize its business through recapitalization of its debt and renegotiation of above-market leases.
Despite improving business performance and expense reductions, the company said seeking legal protection under Chapter 11 was necessary to improve the company's competitiveness as the economy recovers.
The filing does not impact Round Table's 148 franchisees that operate 355 independently owned Round Table Pizza restaurants on the West Coast.
Round Table Pizza said that it would close some unprofitable, company-owned restaurants but stressed that most of its company-owned locations and all of its franchised locations will remain open, with minimal impact on consumers.
"Our company has experienced consistent growth and management has been responsive to the difficult economic environment," explained Rob McCourt, the company's president who has also been appointed CEO. "Unfortunately, we are compelled to take further steps, including this reorganization plan, to meaningfully address the high cost of our capital and above-market leases.
Giordano’s Enterprises, home of the “world famous” deep-dish pizza, filed for bankruptcy protection in U.S. Bankruptcy Court in Chicago.
Giordano’s sought Chapter 11 protection along with 32 affiliates. In court papers, Giordano’s said it has “an urgent and immediate need for cash to continue to operate.”
Also seeking bankruptcy protection were real estate affiliates of Giordano's: Randolph Partners LP, which owns 12 restaurant buildings leased to four company-owned stores, two joint ventures and six franchises, according to court documents.
Convenience Store Decline Reverses Course in 2010
The number of U.S. convenience stores increased 1.2% to 146,341 as of Dec. 31, 2010, over the store count from the year prior.
This increase in the National Association of Convenience Stores and The Neilsen Co.'s TDLinx 2011 Convenience Industry Store Count reversed a rare two-year drop in the store count and is the highest number of stores ever recorded, eclipsing the 146,294 stores from the 2008 count.
"Despite some industry pressures, the convenience store count has grown dramatically since 2001," said Todd Hale, Nielsen's senior vice president, Consumer & Shopper Insights. "That said, the convenience store industry is widely fragmented, and we expect to see more consolidation as big-box retailers and some supermarket chains continue to add gas pumps to their sites."
"Look for more convenient stores to open in unique locations (office buildings, universities, airports and large condominium/apartment buildings) and without gas," Hale added. "Foodservice will continue to gain attention, as it rises to be the most profitable contributor to convenience store gross margins, especially given the cigarette tax."
"The increase in store count shows that the interruption of service in many areas, caused by many traditional fuel-based operators exiting the industry, is turning around. Those locations are now in the hands of capable retailers who see the consumer demand and are willing to fill it," said NACS vice chairman of research Fran Duskiewicz, senior executive vice president of Nice N Easy Grocery Shoppes Inc. in Canastota, NY.
A total of 117,297 convenience stores sell motor fuels, a 1.7% increase over 2009. The increase in the number of stores selling fuel (1,957 stores) was greater than the increase in overall store count (1,800 stores), with the remainder being convenience-only stores that added fueling or gas stations that added convenience operations. Overall, 80.2% of all convenience stores sell motor fuels.
The convenience retailing industry continues to be dominated by single-store operators, accounting for 62.7% of stores. The growth of one-store operations mirrored the overall growth in store count. The industry increased by 1,800 stores overall, the number of one-store operations increased by 1,766.
Casey's Expands in Minnesota Through Acquisition
Casey's General Stores Inc. in Ankeny, IA, signed a definitive purchase agreement to acquire 11 convenience stores from NuWay Cooperative of Trimont, MN. All of the stores are in Minnesota operating under the NuMart banner and will be immediately rebranded to Casey's.
"These are well maintained locations that fit perfectly with the company's business model of operating in smaller rural communities and further strengthens our existing market presence in southern Minnesota," said Robert J. Myers, Casey's president and CEO.
The transaction is expected to close during the company's fourth fiscal quarter. The acquisition will be funded by existing cash and operating cash flow.
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