The past year has brought a wave of hurdles for footwear-and-apparel brands and retailers to clear.
Now that a growing number of retailers — including Sports Authority, American Apparel, Pacific Sunwear, Sport Chalet and City Sports — have had to seek out Chapter 11 protection, many companies are reevaluating their go-forward strategies.
Rationalizing store fleets is among the most popular tactics retailers are considering in order to stay afloat. Last year, Wolverine World Wide Inc. unveiled its plans to downsize Stride Rite’s brick-and-mortar presence, while Macy’s Inc. was among the department stores to announce several store closures in order to focus more on digital development.
According to Citi Research analyst Paul Lejuez “in the current retail landscape [characterized by sales shifting from bricks and mortar to online] too many retailers have too many stores.”
In a report distributed last week, Lejuez and several other Citi analysts offer key reasons why retailers should consider unloading a few stores.
Here, we round up the Top 3 signs that it’s time to close a retail store.
Are You Just Trying to Break Even?
“Too often we hear managements say that if a store is cash-flow break even or slightly positive, they keep it open,” Lejuez said. “Hold on. A retailer wouldn’t open a store [under normal circumstances] to break even, so why keep one open to break even?”
Many retailers grapple with the thought of closing a store after fronting the costs for opening the location to begin. Further, it can be emotional for retailers to let go of a particular store — this is especially true for smaller companies and when it comes to flagship locations. Perhaps, management is trying to “keep hope alive” or often there is a moral struggle around the impact of inevitable layoffs on employees and their families.
Nevertheless, the analysts warn that since stores require working capital to operate — and need to earn a return on said capital — “break even should not be the reason to keep a store open.”
Is The Inventory Spend Worth It?
Elevated inventory was a major problem for brands and retailers coming into 2016. After an unusually warm winter left levels of seasonal inventory high, many companies struggled to clear merchandise and were forced to rely of heavy promotions, which dragged down margins.
Citi’s team suggests that hefty inventory spend should be another major consideration when it comes to deciding whether to keep a struggling store open.
“The working capital/inventory investment should be considered when weighing whether to close a store because it represents ongoing capital required that could get put to other uses if a particular store didn’t exist,” Lejuez wrote. “If a company has a group stores that aren’t hitting a certain cash flow threshold, we would argue that the company should consider the potentially millions of dollars of inventory that would be freed up if those stores were to be closed.”
It’s Hurting More Than It’s Helping
Perhaps it goes without saying: managing a ginormous fleet of stores is no easy feat. And sometimes rightsizing the number of locations under a company’s umbrella just makes life a little easier.
Having many doors in diverse neighborhoods increases the number of accommodations companies must make in order to cater to consumers and their unique location demographics.
“Keeping a store base more cohesive makes simplifies the jobs of the design and merchant teams, as well as planning and allocation functions to come up with what the right product is and get it into the right stores,” Lejuez said.
Also, with hefty rental costs cited as a factor in several recent retail bankruptcies, keeping an underperforming brick-and-mortar store open just for the sake of it is hardly an option these days.