X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.

SAN FRANCISCO-An executive with the locally based gourmet-cookware retailer Williams-Sonoma told analysts late last week it is making “substantial progress” on lease renegotiations as it focuses on aligning its occupancy costs with the new economy. The company on Thursday reported a return to third-quarter profitability that came in ahead of analyst estimates thanks in part to reduced expenses and better margins.

In August, when the operator of 630 Pottery Barn and Williams-Sonoma stores announced an 80% increase in its planned store closures to 16 from nine, chairman and CEO Howard Lester told analysts that of its “half-dozen-or-so” major landlords one-third to one-half of them that “are more willing than the others to work with the company to try to find creative solutions that will work for both of us, both in the short term and the long term. The others are more difficult and haven’t been willing to get to that point yet. So we are somewhat encouraged with one-third to one half of our major landlords but still disappointed with the other half.”

Last week, Lester continued to describe as “slow” its work with landlords “on opportunities to close stores that have become marginal.” However, company CFO/COO/EVP Sharon McCollam added that the company is gaining leverage in negotiations thanks to a flood of near-term lease expirations and the failure of co-tenants, which can trigger clauses in co-tenancy agreements allowing other tenants to renegotiate or even reject their leases.

“…between now and 2012 one quarter of all our store leases are coming up for renewal and every time that happens it is an opportunity to renegotiate. We also are finding an increasing number of opportunities on the co-tenancy side and we believe in 2010 even more of those will actually occur because a lot of the store closings that have been announced by retailers over the last 12 months actually have not closed. They are not closing until the end of this year, so when you get into GLA co-tenancy failures, and even some named co-tenancy failures, those are going to surface in 2010 as well, so there is going to be another bite at the apple in 2010.”

While McCollum described progress on renegotiations “substantial,” she declined to go into detail. “We are not disclosing and are not going to disclose because of the confidentiality agreements we have with landlords, the renegotiations that are occurring.”

On the two previous quarterly conference calls, company executives told analysts that the company is being “aggressive” in seeking rent reductions and would close some stores if it cannot renegotiate their leases. The 80% increase in planned store closures is believed to have something to do with that.

“We are trying to work with our landlords,” Lester told analysts in March, at which time the company said it had negotiated rent reductions for 15 of its stores; it has not updated that number since that time. “It’s a difficult problem for all of us, certainly as renewals come up we are able to negotiate much better lease terms than we had before. Obviously we’ve got to bring our occupancy costs in line with our sales at something close to historical levels and that’s our goal and there’s several ways to get there. We would prefer to get there by keeping our current store base and readjusting our expense structure and if we can’t, then we’ll have to get there by closing some of our stores and driving those sales into the remaining stores in those markets, so we’ll see how it plays out… .”

Rob Kashian, a principal of the real estate services firm Retail West tells GlobeSt.com that Williams-Sonoma’s ability to renegotiate its leases really comes down to whether or not the center a particular store is in is healthy or not, and whether or not the landlord can quickly backfill the space. While he believes a lot of the opportunities for rent reductions have already been realized, he agrees that more co-tenancy clauses will be triggered by additional bankruptcies following what is expected to be an average-to-subpar holiday season.

“As we start to move forward, activity picks up and more tenants enter the market their leverage goes down,” he says. “It will depend on whether their current rent is over-market and how much of a reduction they want. A vast majority of their lease deals have them paying a percentage rent or reporting sales, so the landlord knows [how the store is performing].”

Williams-Sonoma’s brands–Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, West Elm and Williams-Sonoma Home–are marketed through its retail stores, seven direct mail catalogs and six retail websites. In the third quarter, the company earned $7.3 million, or $0.07 per share on sales of $729.3 million, the company reported Thursday. In the same year-earlier period, the company lost $11 million, or $0.10 per share, on sales of $752.1 million. Excluding one-time items such as asset impairment and early lease termination charges, profit in the latest quarter was $0.16 cents per share. Analysts, who typically exclude one-time items, expected profit of $0.05 per share on revenue of $686.1 million.

Williams-Sonoma’s performance was in part due to the company lowering its selling, general and administrative expenses to $243.4 million from $259.9 million, helping push gross margins to 34.7% from 32% in the same year-earlier period. In addition, overall comparable store sales climbed 1.7% compared to the same 2008 period, which was a 21% decline from 2007. Pottery Barn and West Elm brands reported increases in same-store sales while Pottery Barn Kids, Williams-Sonoma and Williams-Sonoma Home posted declines.

Want to continue reading?
Become a Free ALM Digital Reader.

Once you are an ALM digital member, you’ll receive:

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications

*May exclude premium content
Already have an account?

GlobeSt

Join GlobeSt

Don't miss crucial news and insights you need to make informed commercial real estate decisions. Join GlobeSt.com now!

  • Free unlimited access to GlobeSt.com's trusted and independent team of experts who provide commercial real estate owners, investors, developers, brokers and finance professionals with comprehensive coverage, analysis and best practices necessary to innovate and build business.
  • Exclusive discounts on ALM and GlobeSt events.
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com.

Already have an account? Sign In Now
Join GlobeSt

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.