Occupancy leverage

[nellgeiser]

Can anyone explain what “occupancy leverage” is in the context of the retail industry? It can be positive or negative and I assume it relates to rental expense, but have not been able to find a definition.

 

[bromion]

It has to do with rental type businesses, such as personal storage (which is technically retail I guess). They have fixed costs of X, and profit margins of Y (or -Y) depending upon the occupancy percentage (how the revenue drops through the fixed cost structure, hence occupancy leverage).
Non-rental businesses have a similar concept in terms of operating leases, though it’s probably a stretch to call that occupancy leverage (I’ve never heard that term used).

 

[nellgeiser]

Hmm - that makes sense, but where I’m seeing it is in relation to other types of retailers, e.g. “TJX co’s adjusted gross margin increased 0.3 percentage point to 27.2 percent, driven by buying and occupancy leverage” and “FINL is well positioned to produce sustainable 20% EPS growth driven by industry-leading MSD-HSD SSS, strong occupancy leverage aided by robust ecommerce sales and $5+ in cash per share (20% of market cap) that can be utilized for an accelerated buyback program, DB wrote.”
I assume it has something to do with fixed rental expense versus gross profit?

 

[bromion]

I’ve never seen that definition, but I would assume it means they are seeing strong sales trends on a per square foot basis, which is all retail is – you rent X feet, and sell Y per square foot, where you want to maximize Y obviously. It’s basically the same concept: Operating leverage. Said differently, if you have a bunch of store space that is idle, you still have fixed costs for that, but are not generating sales, and therefore your consolidated margin will be lower as the P&L deleverages.

 

[nellgeiser]

Thanks! That’s helpful.