Analysis: Barnes & Noble needs to appoint new CEO ‘as quickly as possible’
The departure of Demos Parneros from Barnes & Noble [Parneros was terminated on Tuesday for violating company policy] will make little material difference to the company in the immediate term. But does leave the bookseller leaderless at a time when it desperately needs a sense of direction.
Under Parneros’ management, Barnes & Noble had started to make much-needed changes to its stores, offer, and services. However, the journey remains far from complete and much more change is required before the chain can claim to be back on an even keel.
Although we recognize that there is talent within the current leadership group, we are not keen on the CEO’s responsibilities being shared among its members. Management by committee is rarely successful and usually leads to inertia. That is the last thing Barnes & Noble needs and, as such, we believe that it is imperative the company appoint a new CEO as quickly as possible.
Although the reasons for Parneros’ departure are unclear, we applaud Barnes & Noble for taking swift action to mitigate anything that could damage its image as an inclusive business that serves education, families, and communities.
Signet Jewelers completes credit outsourcing
The nation’s largest jewelry retailer has completed the last phase of a plan to outsource its credit portfolio, in a deal in which it received $445.5 million from the sale of existing non-prime receivables.
Signet Jewelers Limited, parent company of Kay Jewelers, Zales, Jared The Galleria Of Jewelry and other brands, said it has sold its existing non-prime receivables and implemented a “forward flow purchase arrangement for future non-prime receivables,” with funds managed by CarVal Investors and Castlelake. The closing of the deal means that Signet has transitioned to a fully outsourced credit structure while maintaining a full spectrum of financing and lease options for consumers.
“The outsourced credit structure allows the company to enhance its strategic and operational focus on its core jewelry retail business as it executes the Signet Path to Brilliance transformation plan,” stated Signet, which operates more than 3,500 stores. “In addition, the sale of the credit accounts receivable significantly reduces Signet’s balance sheet risk and lowers working capital needs, as well as enabling the company to return significant capital to shareholders.”
Signet received $445.5 million in cash proceeds from the sale of existing non-prime receivables excluding transaction costs, net of a 5% holdback. (The holdback may be paid out at the end of two years depending on the performance of such receivables in that period.) The company expects to use the proceeds, along with cash on hand, to repurchase shares.
Analysis: Walgreens needs to invest in, enhance core retail offer
On the surface, Walgreens [Boots Alliance] has posted another good set of results with growth in both net sales and U.S. retail pharmacy revenue accelerating over the prior quarter. However, the headline numbers are mostly driven by a favorable foreign exchange movement and the acquisition of 1,932 Rite Aid stores. When these things are stripped out, performance is somewhat softer with comparable sales down 1.2% in the U.S. and 2.1% internationally.
On the bottom line, Walgreens also posted gains. Net income rose by a solid 15.8%, thanks in part to a lower tax provision. Operating income, which is not affected by tax code changes, also increased, albeit by a less impressive 5.5%. Looking ahead, we remain confident about the profit outlook as we believe the integration of Rite Aid will create opportunities for both synergistic cost savings and improved operating disciplines which will boost sales and margins. We expect these benefits to accrue between now and the end of 2020.
While the acquisition of Rite Aid stores is financially helpful, it only serves to mask some of the underlying and entrenched problems on the core retail side of the business. Within the U.S., core comparable retail sales, which exclude pharmacy, fell by 3.8% over the quarter. This is a deterioration over the prior quarter when sales dipped by 2.7%.
There are several reasons for the deterioration of front-of-store retail. These include Walgreens pulling back on a number of categories in a bid to improve profitability — something which we recognize as sensible and which has produced an uplift in gross margins. A decline in customer traffic in some locations where Walgreens are located has also been unhelpful. However, the main reason that sales declines haven’t moderated is a lack of effort. We maintain our view that Walgreens could and should do much better in front of store retail.
In fairness, Walgreens has made some progress in beauty thanks to improved shop layouts, enhancements to ranges, and better in-store marketing. However, even here, there is something lackluster about the investments.
Indeed, the vast majority of Walgreens stores remain below par when compared to the beauty market as a whole. And despite the addition of some high-profile brands from the Boots side of the business, Walgreens consistently fails to match the retail growth of players like Ulta and Sephora.
Outside of beauty, the product mix and strategy is mediocre. Although there have been efforts to make a play for growth categories like food on the go, the impact here is piecemeal and inconsistent. In Walgreens’ main store in Denver, a sushi bar and other enhancements create a compelling experience that draws shoppers in. However, this kind of development is rare and not reflected across most of the chain. In our view, until Walgreens significantly enhances and invests in its core retail offer, it is not going to drive its front-of-store business forward in any meaningful way.
The failure to develop the retail business has a long-term downside as anything that minimizes footfall could also ultimately impact pharmacy sales. This will become a much greater risk as mail order and online pharmacy fulfillment become more significant.
The lack of a compelling store offer could also be a disadvantage if and when CVS adds more health services to its own stores. In essence, Walgreens needs to move onto the front foot in terms of retail in order to defend and grow other parts of its business.