Genesco Inc., the parent of Journeys and Lids, is clearly enjoying the leverage it's gained on landlords in the downturn. Besides outright rent reductions, CEO Bob Dennis said money is being saved on remodels, new store openings and even in store closing negotiations.
Speaking at Piper Jaffray's retail conference in New York City this week, Mr. Dennis said that for the first time in "many, many years," rent per square foot is growing slower for the company than its total square footage.
In terms of rent cuts, Mr. Dennis noted that the company had renegotiated 181 leases across its store base that were up for renewals or had kickouts in 2008, 2009 and 2010. Across the 181 lease renegotiations, Genesco received a five percent reduction in rent on an accounting basis. On a cash-on-cash basis, the reduction was in the double-digits. Mr. Dennis said, "That's a sizeable reduction after seeing rents going up greater than comps for years." With 1,000 stores up for renewal or having a kickout clause over the next three years, Genesco expects to pick up 30 basis points in operating margin improvements.
In conversations when closing unprofitable stores, Genesco has been able to achieve "very meaningful" rent reductions as landlords have become more eager to keep stores from going dark.
Meanwhile, the cost of remodeling stores has "gone down dramatically." Although this is partly because contractors are more flexible around pricing in the current environment, the bigger reason is because landlords have become "much more flexible." In the past, landlords would demand the latest - and often most-expensive - upgrades in remodels, but have softened those stances. "Now we'll remodel with a little paint and carpet, which is the right answer now from an economic standpoint," said Mr. Dennis.
Regarding new stores, Genesco is opening significantly fewer stores in 2009 than last year, but the stores being opened are negotiating attractive lease rates. Both its Journeys and Johnston Murphy chains are either getting into malls that were unreachable before or accessing better spots in some malls - both at attractive terms.
However, a Reuters article implied that landlords weren't doing enough to offer concessions to avoid vacancies. In 2008, the amount of space occupied by U.S. retailers fell for the first time since 1980 and has yet to recover, according to research firm Reis.
In the article, Nina Kampler, executive vice president at Hilco Real Estate, said she expects more retail bankruptcies ahead as consumers file for personal bankruptcy. This could lead to another rash of store closings that could further squeeze landlords.
"The consumer is disincentivized by a dark miserable experience," Ms. Kampler said. "It is depressing to be in a place where nobody else is."
Discussion Question: How might the shift in leverage from landlord to retail tenant in lease negotiations reshape the retail climate, particularly the mall? How should retailers look to further capitalize on any newfound rent leverage? Does it seem that landlords are doing enough to keep stores from going dark?
Do you sense that landlords in general are doing enough to prevent store vacancies?