IMG_7130 (2)Deb Shops and Delia’s announced plans to liquidate last week and many other specialty retailers appear on the verge of bankruptcy.  While the economy, new competitors, and the disruptive impact of e-commerce are partially to blame, other avoidable mistakes are also at play.  Leadership problems, merchandising issues, and operational missteps are common.  Flawed store opening strategies compound these issues.  Long term leases are equivalent to debt and when sales and gross margins fall, hidden leverage (rent) can create liquidity problems.

Dictator-style leadership

Many retail businesses are run by authoritarian leaders that are unwilling to consider outside feedback.  These leaders make decisions from the gut and avoid taking into consideration the opinions of their team and industry best practices.  They believe themselves to have visionary ideas that are beyond reproach and decision making is governed by ego.  These types of leaders overspend on marketing, staff, and store build-outs. They sometimes create dysfunctional teams where merchants, designers, finance, and operations are pitted against each other.

Reliance on ‘hero products’

Fashion changes gradually at first and then quite suddenly.  When retailers repeat what worked in the past, they risk missing changes as they happen.  Reliance on ‘hero products’ or large volume categories can lead to disastrous results when the consumer pivots.  Logo products in teen retail are an example of category over reliance, as were embellished jackets in women’s retail and premium denim at the high end.

Lack of inventory discipline

Merchant optimism can sometimes dictate inventory decisions and lead to excess product and heavy markdowns. In some cases, merchants lose their conviction and stores become over-assorted with no clear product message. Inventory decisions should involve heavy input from finance executives with an eye on capital allocation.  Retailers convince themselves they did not have enough inventory to drive sales increases in a prior period and then over correct the perceived problem.  If inventories are too light, merchandise margins should be inflated.  If not, the customer is saying they want better product, not more product.

Inefficient supply chain

Supply chain speed, flexibility, and cost have improved meaningfully in the soft-goods industry in the last decade.  Brands that are not constantly improving the supply chain face a significant disadvantage.  Fast fashion threatens U.S. specialty retailers by leveraging supply chain strength to capitalize on current trends quickly and offer great value to consumers.  Also, an efficient supply chain can help mitigate markdown pressure in today’s highly promotional environment.

Rapid over-expansion

Rolling out stores too quickly can amplify the impact of basic mistakes on the whole fleet.  The best retailers test strategies before rolling them out.  This allows for tweaking merchandise, marketing, store size, fixtures, layout, and many other elements of a concept based on early learnings. Additionally, committing to an aggressive roll-out plan may lead to poor real estate decisions based on lack of availability.  Smart retailers wait for the right location and some even test through pop-ups or showrooms before signing long-term lease.

Huge stores

There is a direct correlation between store size and sales per square foot (SSF) productivity. The most productive concepts like Michael Kors and Lululemon have the smallest store sizes.  Even low-price retailer Francesca’s has 50% higher productivity than comparable concepts due primarily to its small stores.  Selling an apparel-only offering in a store over 8,000 square feet is difficult unless a brand is selling dual-gender adult, kids, and accessories.  Even then, there is little reason for store sizes greater than 15,000 square feet.  Larger stores are harder to staff and difficult to merchandise.  We see a number of fast-fashion foreign import brands currently making this mistake.


Historically, it was not uncommon to see specialty retailers targeting store counts in the range of 600 to 1,000 stores.  Investors focused on square footage growth as a driver of earnings growth.  Today, many retailers are closing stores to focus on profitability.  According to Green Street Advisors, only 30% of malls are classified as ‘A Malls’ having SSF of $455 or greater and 41% are ‘B Malls’ with SSF between $345 and $454.  Almost 30% of all malls are less productive than these two groups and are struggling for viability.  The quality of store locations is key to a retailer’s success and closing stores is extremely costly.

Under investment

Typically retailers sign ten-year leases and remodel stores every four to five years.  Today’s consumer wants an engaging shopping experience in which she is surprised and delighted.  That is hard to do with infrequent remodeling.  The problem is compounded when necessary updates are delayed because of store under performance.  Stores with dirty carpets and dingy fitting rooms are never going to improve without investment and they may be too far gone to fix after years of neglect.  Retailers should update stores on an ongoing basis to keep stores looking fresh.  This same strategy applies to investments in e-commerce, omnichannel integration, and digital technology in stores.  Taken all together, these updates are daunting.  But investing continually is manageable and necessary to stay relevant.

So Who Might Be Next?

Several specialty retailers have single digit (or worse sub-$1) stock prices, including Aeropostale, American Apparel, Bebe Stores, Body Central, Cache, Pacific Sunwear, and Wet Seal.  All except PSUN have negative EBITDA for the trailing twelve month period according to Capital IQ.  Trends at BEBE and PSUN have improved in the most recent quarter.  ARO and APP have large investors supporting turnaround efforts.  BODY just unveiled a plan to cut costs, close stores, reduce inventory, and revamp merchandising.  CACH is considering strategic alternatives, as is WTSL which added a disclosure in its recent filing that financial alternatives under consideration included possible restructuring or bankruptcy.  Without stabilizing sales, it will be difficult for any of these retailers to recover.


Within the last 12-months Talmage Advisors has solicited consulting business from one or more of the companies mentioned in this post.


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