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Retailers are also looking for stores to be more profitable. They review stores each year, passing grades are getting tougher, and profitability is being pitted against property values. Hypothetically, if a store does $1 million in earnings before interest, taxes, depreciation and amortization and the company is trading at a 5 multiple, that store is worth $5 million. However, if the store’s real estate is worth $10 million or $15 million, it doesn’t make sense to hold on to it.
That’s only one element of the formula for evaluating a store’s future, though. Additional issues factor in, such as whether a store has the potential to increase EBITDA. There are also strategic issues, such as maintaining market share and competitive control of the marketplace. It may be better not to give up space to a competitor.
In addition, relationships with landlords must be considered.
“When you have 10 percent of the chain either breaking even or operating in the red, which is not unrealistic, and 90 percent making a decent profit, you live with that,” Bronstein said. “When the percentage exceeds 10 percent and hits 20 or 25 percent, you start to look at the stores and say, ‘I’ve got to take my chances with the landlord and shut some down.’ When you have a lease, you can’t just walk away from it, but sometimes you are losing so much money that you are willing to take chances.”