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As store owners sign more short-term leases, landlords are taking a risky bet on the future of retail

Leases on about 1.5 billion square feet of retail space in the U.S. are set to expire this year, according to CoStar Group, or about 14% of the retail market.

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Shoppers walk through the King of Prussia mall in King of Prussia, Pennsylvania.

Jennah Moon | Bloomberg | Getty Images

Retailers and their landlords are engaged in a high-stakes game of risk right now. And it will be a few years until we find out which party is on the winning side.

As thousands of retail leases come up for renewal, their duration is increasingly shrinking, as businesses grapple with an unpredictable future and look for ways to slash costs, stay flexible and maintain leverage over their landlords, even after the health crisis abates.

The risk is a two-way street, though. Because on one hand, in two or three years, mall and shopping center owners could have the chance to turn the tables back in their favor, by hiking rents or booting retailers out for another tenant. But more short-term deals could also leave landlords with even greater vacancies down the line.

Best Buy Chief Executive Corie Barry said Thursday that the big-box retailer’s average lease term is definitively dwindling.

She said the company has about 450 leases coming up for renewal in the next three years, or an average of 150 annually. The electronics retailer has closed about 20 of its larger-format locations each of the past two years, but expects to shut even more in 2021, she said.

“As we look to the near-term, there will be higher thresholds on renewing leases, as we evaluate the role each store plays in its market, the investments required to meet our customer needs, and the expected return based on a new retail landscape,” Barry said during a conference call with analysts.

The trend spreads far across the retail landscape and into malls. Apparel companies are increasingly rethinking whether it makes sense to be in an enclosed shopping center anchored by department stores that are struggling to lure shoppers and grow sales.

Vans and Timberland owner VF Corp. said leases for its stores have been trending shorter for years. But they’ll be even briefer coming out of the pandemic, according to the company’s chief financial officer, thanks to recent and ongoing negotiations. VF Corp. is making the shift to allow it the freedom to close stores more quickly.

“The way we structure our leases now allows us to be quite nimble, quite agile, and … we can pivot as consumer behavior changes,” CFO Scott Roe said in a recent phone interview.

The retailer’s average lease term is about four years, Roe said, and will soon be even shorter as new agreements are signed.

“The landlords have been cooperative and working with us,” VF Corp. CEO Steven Rendle added. “We both have the same objective, which is to be viable and to be productive.”

Vacant space abounds

While it has traditionally been in a landlord’s best interest to sign a long-term lease — lasting 10 or 20 years — to limit risk and keep a space filled as long as possible, many are succumbing to the pressures brought on over the past 12 months.

With vacant space abounding in many markets across the country, tenants such as retailers and restaurateurs are finding themselves in a greater position of power. It’s a trend that many real estate experts expect will only proliferate, and become the norm, from here.

Leases on roughly 1.5 billion square feet of retail space in the United States are set to expire this year, according to a tracking by the real estate services firm CoStar Group. That’s about 14% of the retail market. So either those leases won’t be renewed, and more retail stores will close, or those contracts will be renegotiated.

‘We’re OK with that’

To be sure, while short-term leases can pose a greater risk for landlords, which then have to deal with unpredictable waves of tenants moving in and out, it goes both ways. Retailers could sign a short-term lease and rents could trend higher in the future if the market strengthens.

David Simon, CEO of mall owner Simon Property Group, told analysts during a conference call in early February that there has been an interest among tenants to go “a little bit shorter term.” Simon is signing more three-year leases these days, he said.

“We’re OK with that, because I’d rather negotiate two or three years from now” than not have a store filled at all, he explained. “I think actually that could be in our best interest, too, because … we don’t quite have the ability to point to sales as a way to increase rent,” he said.

“It’s actually a two-way street, and it’s working out fine with a vast majority of our retailers,” Simon said.

Beth Azor, CEO of retail real estate management and development firm Azor Advisory Services, said she has worked on a number of super short-term deals during the pandemic. Azor, often referred to as the “Canvassing Queen” on social media by her peers, helps leasing agents fill vacant space across the country, working with a number of publicly traded real estate investment trusts, or REITs.

She recently took her service to the up-and-coming social network Clubhouse, where she has been hosting rooms for entrepreneurs to pitch their businesses, and landlords with vacant spaces can listen in. The leases are for anywhere from three months to a year, and sometimes that’s rent-free. She calls it “Space Tank,” a play off ABC’s “Shark Tank.”

Occupancy pays

According to Azor, landlords shouldn’t view the shorter-term leases as a negative, especially given the state of the retail industry. Having a tenant — period — boosts occupancy, she said, which can be helpful when other companies come knocking on the door asking for rent relief.

Businesses on the national and local level have been coming to mall and shopping center owners during the health crisis to try to renegotiate their rents down, Azor explained. And if a property is fuller, albeit with some short-term leases, it is harder for a business to argue that their rent should come down. So occupancy can, quite literally, pay off.

Outlet owner Tanger Factory Outlets has also been doing more short-term deals. Currently, about 7% of its tenants’ leases are classified as temporary, when it has normally been between 4.5% and 5.5%, CEO Stephen Yalof told analysts during a conference call earlier this month.

“A number of deals that actually started out as pop-up or short-term leases … we’ve extended the terms of those leases,” he explained. “So that seems to be a trend.”

He went on to explain that the REIT has favored maintaining high occupancy, with more shorter-term deals, over rent collection in 2020.

“We will see a lot more local and [temporary] leasing probably in the first half of the year,” he said. “But we’re very proactive with our long-term leasing to replace that tenancy and grow our permanent leasing base.”

Not all real estate seems to be prime for pop-ups, though.

New York City’s glitzy Fifth Avenue district, for example, is still largely populated by tenants with long-term leases, according to Fifth Avenue Association President Jerome Barth.

“These are going to be premium leases, no matter what … because this is still the No. 1 market in the world,” said Barth. “I think leases will evolve, and that’s going to be a constant. But people know the Avenue is going to be an exciting place to be for years to come.”

Disclosure: CNBC owns the exclusive off-network cable rights to “Shark Tank.”

— CNBC’s Melissa Repko contributed to this report.

The risk is a two-way street, though. Because on one hand, in two or three years, mall and shopping center owners could have the chance to turn the tables back in their favor, by hiking rents or booting retailers out for another tenant. But more short-term deals could also leave landlords with even greater vacancies down the line.

Source: https://www.cnbc.com/2021/02/26/retailers-sign-more-short-term-leases-in-a-risky-bet-for-mall-owners.html

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Stitch Fix shares surge as online styling service reports surprise profit

Stitch Fix shares jumped after the online shopping and styling service reported a surprise profit for its fiscal fourth quarter.

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The Stitch Fix application for download in the Apple App Store on a smartphone arranged in Hastings-on-Hudson, New York, U.S., on Saturday, June 5, 2021. Stitch Fix Inc. is scheduled to release earning on June 7.

Tiffany Hagler-Geard | Bloomberg | Getty Images

Stitch Fix shares jumped 14% in extended trading Tuesday after the online shopping and styling service reported a surprise profit for its fiscal fourth quarter.

Sales for the three-month period ended July 31 also came in higher than analysts were expecting, thanks to outsized growth in Stitch Fix’s women’s and kids’ categories. Menswear has been growing more slowly, the company said.

Consumers have been splurging on new outfits in recent months, as many head back to school and return to social gatherings. Some have also citied the need for new clothes after either gaining or losing weight during the Covid pandemic.

Here’s how Stitch Fix did compared with what Wall Street was expecting, based on a survey of analysts by Refinitiv:

  • Earnings per share: 19 cents vs. a loss of 13 cents expected
  • Revenue: $571.2 million vs. $548 million expected

Net income attributable to shareholders was $28 million, or 19 cents per share, in the latest period. A year ago, it posted a net loss of $44.5 million, or 44 cents a share. Analysts had been looking for the company to book a loss of 13 cents per share.

Revenue grew to $571.2 million from $443.4 million a year earlier. That was better than analysts’ expectations for $548 million.

Stitch Fix reported nearly 4.2 million active clients, up 18% from a year earlier. The company said net revenue per active client was $505, surpassing the $500 threshold for the first time ever. Customers have been purchasing more items to keep at home, Stitch Fix said, as they have more brands and price points to choose from.

Stitch Fix defines active clients as people who either ordered a “Fix” subscription or bought an item directly from its website in the preceding 52 weeks from the final day of the quarter.

The company also said it had its lowest ever churn rate at the end of the period, meaning its customers are sticking around.

Last month, Stitch Fix finally opened up its direct-buy option, which is now known as “Freestyle,” to the public. This allows people to shop Stitch Fix for individual items of clothing, without needing to sign up for a subscription.

CEO Elizabeth Spaulding said this should help Stitch Fix grow its addressable market in the year ahead. The company’s next initiative will be to market and raise broader awareness around the offering, she said. Stitch Fix is preparing to roll out a national advertising campaign on the debut.

Early indications are that “Freestyle” is meaningfully accretive to the company’s revenue per active client metric, Spaulding told analysts on a conference call.

“Clients have agency, flexibility and choice while also experiencing a highly personalized shopping experience,” Spaulding said.

For its fiscal first quarter, Stitch Fix said it sees sales in a range of $560 million to $575 million. That’s below analysts’ expectations for $588 million.

For the upcoming fiscal year, Stitch Fix anticipates sales rising 15% or more from the prior year. Analysts polled by Refinitiv had been looking for an 18% increase.

While the entire retail industry is working through supply chain complications, Stitch Fix said it is seeing a small impact, but nothing that will hurt the business in the fall and winter months. The company said it is less reliant on Vietnam, where manufacturing has largely come to a standstill due to ongoing pandemic lockdowns in the region.

As of Tuesday’s market close, Stitch Fix shares have fallen nearly 39% this year. The company has a market cap of $3.8 billion.

Find the full press release from Stitch Fix here.

Sales for the three-month period ended July 31 also came in higher than analysts were expecting, thanks to outsized growth in Stitch Fix’s women’s and kids’ categories. Menswear has been growing more slowly, the company said.

Source: https://www.cnbc.com/2021/09/21/stitch-fix-sfix-q4-2021-earnings.html

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Data is a real-time snapshot *Data is delayed at least 15 minutes. Global Business and Financial News, Stock Quotes, and Market Data and Analysis.

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Data also provided by Reuters

Source: https://www.cnbc.com/earnings/

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