Steve & Barry’s Sweet Lease Deals Expire
By Tom Ryan
The most popular retailers commonly get the most advantageous lease terms from real estate landlords. For landlords, finding a premier anchor drives customer traffic to shopping centers and other retailers to pay more for their leases. But one fast-expanding retailer, Steve & Barry’s, is teetering on the edge of bankruptcy after apparently being supported for years by sweetheart deals from landlords.
According to a report in the Wall Street Journal, the liquidity problems faced by the casual apparel sportswear chain are not directly tied to end-consumer demand, but the needs of mall owners in a softening commercial-real-estate market. Much of the company’s earnings came in the form of one-time, up-front payments – often for $2 million to $3 million – from mall owners designed to lure the retailer to take over vacated sites, said several people familiar with the company. Without these payments, the stores are barely profitable, if at all.
The Journal said new stores usually opened strongly, but could not keep pace after a few quarters. Steve & Barry’s margins totaled approximately $20 million to $30 million on annual sales of about $1 billion, or roughly one percent to three percent.
With cash running short, Steve & Barry’s is readying plans to close more than 100 of its stores and is contemplating a full liquidation if unable to land emergency financing, according to the Journal.
Steve & Barry, which sells most items below $10, has been one of the fastest-growing U.S. retailers, with more than 250 stores in operation in 40 states. In 2005, it was named "Hot Retailer of the Year" by the International Council of Shopping Centers. Dubbing their effort the "Google of retailing," its founders said the U.S. market could support 5,000 stores.
Besides its low prices, Steve & Barry’s also garnered a lot of buzz by entering into a string of deals with celebrities and sports stars such as Stephon Marbury, Venus Williams, Sarah Jessica Parker and Amanda Bynes.
Some retail observers believed a breakneck store opening pace was the root of Steve & Barry’s problems. It opened nine stores in the past few weeks alone. But others long questioned the retailer’s ability to sell merchandise at prices rivaling Wal-Mart’s.
A executive at a luxury chain told WWD, "I don’t know how you can sell goods at no markup, at $8 or $9, and expect to make money."
Discussion Question: Have landlords been overly generous in handing out sweetheart deals to anchors? Are you surprised by the apparent real estate issues impacting Steve & Barry’s? Is Steve & Barry’s an anomaly or a sign of bigger real estate problems to come at retail?
I agree with Marc Gordon. This is about a poorly conceived business model. As we’ve seen time and time again, a retail business that fails to generate measurable profits in their stores will not last. When you compound the poor Steve & Barry’s business model with rapid growth, there is little doubt the concept won’t work.
What I find perplexing is the General Electric Finance folks continued to provide this company with a credit facility while they were opening stores with revenues from developers and little or no profits. Profitability is one of those things that every retailer must find a way to achieve. There may be short-term ways around it, but in the long term retailer’s must be profitable in order to survive.
Every clothing chain opening many new stores quickly can report unusually high earnings for a little while, simply because a new store has minimal obsolete inventory. After a year or two, the true merchandise margin is known. As for new store opening allowances, for decades now, landlords who want certain tenants pay for their build-outs. The construction cost becomes part of the rent. It’s just another form of financing leverage.
As for Steve & Barry’s difficulties, it’s not unusual for folks unfamiliar with a retailer’s financials to confuse success with new store openings and sales growth.
Their fundamentals didn’t match their PR machine, which has nothing to do with landlords or the economy; a con is still a con.
Steve & Barry’s appears to have made two classic mistakes: First, expanding far faster than their infrastructure and financing can handle. Second, taking on high-rent sites driven by “sweetheart deals” that do not bear up under their margin and expense structures.
I pointed out in a RetailWire comment a while back that the stated expansion plan of Steve & Barry’s executives was bound to get them in trouble. This is turning out to be the equivalent of a subprime mortgage, where the company simply doesn’t have the finances in place to afford its real estate portfolio.
:::Sigh:::: Just when we thought a retailer had done the impossible…it turned out to be…impossible. Steve and Barry’s was a great story for about 15 minutes. I hope the company can straighten itself out and continue.
Truth be told, in acknowledgment of the fact that malls and strip centers have become “seas of sameness,” landlords jump on anything that seems different and interesting. My friend, who owns a very small chain of high end large sized women’s clothing stores, is regularly courted by mall operators. She just doesn’t have the appetite to expand. You just can’t have a nation of channel masters and expect the consumer to get excited about seeing the same stores in every town, city and hamlet.
“I don’t know how you can sell goods at no markup, at $8 or $9, and expect to make money.” (Or at any price with no markup, for that matter.) RW should license this as its motto; it would cover many of the discussions regarding ill-considered business “models.”
Then again, remember the “I Love Lucy” episode with the salad dressing where “they would lose money on each sale, but make it up in volume”?
As for the question at hand, the model for years was simple: anchors received low/no-cost leases because they were doing all (or most) of the heavy lifting in attracting customers (advertising, promotions, etc.)…indeed, that’s why they were called “anchors.” If landlords wish to extend this policy to the latest Nine Day’s Wonder, then they will find it works …for just about that long.
The interesting storyline is Steve & Barry’s communications and public relations initiatives. Otherwise, it’s just another flawed business model.
Is this really a story about landlords? I think it’s more about a defective business model that has survived as long as it has because of the generosity of shortsighted landlords.
The simple fact is that if a business expands too quickly and makes virtually no money due to overly low markups, cash flow problems are bound to occur. Add to that the high cost of celebrity endorsements, and it sounds to me like it’s going to take more than landlord subsidies to make this ride last.
On the upside, I’m sure there will be some great deals to be had when they liquidate.