CO-OP COME­BACK?

Hard-hit, go-to store for UT stu­dents, fans has plan to re­bound.

Austin American-Statesman - - FRONT PAGE - By Se­bas­tian Her­rera and Bob Sech­ler sher­rera@states­man.com bsech­ler@states­man.com

In 2006, af­ter the Univer­sity of Texas won the na­tional cham­pi­onship in foot­ball, the Univer­sity Co-op was rid­ing high off sales from its flag­ship text­book and mer­chan­dise store on Guada

lupe Street. De­mand for Longhorns gear was at a peak, and the Co-op was ex­pand­ing to reach fans in other cities around the state.

But times have been much tougher since then for the 122-year-old an­chor of Austin’s

iconic Drag across from cam­pus. The Co-op has been hit hard by on­line com­peti­tors and the rise of dig­i­tal text­book rentals, and it has been ham­strung on sales of Longhorns mer­chan­dise be­cause of sub­se­quent medio- cre per­for­mances by UT’s ma­jor sports teams.

Over the past five years, the Co-op has posted mil­lions of dol

lars in oper­at­ing losses as rev­enue dropped pre­cip­i­tously and branch stores in Hous­ton, Dal­las and Fort Worth strug­gled. Large bonuses paid to its for­mer CEO in the wake of the boom year — Ge­orge Mitchell, who re­tired in July 2016 — didn’t help. The Co-op’s fi­nan­cial trou­bles

hit a low point 17 months ago,

when its au­di­tor at the time raised “sub­stan­tial doubt about the Co-op’s abil­ity to con­tinue as a go­ing con­cern” if it failed to re­struc­ture some of its fi­nanc­ing as planned or to col­lect rev­enue as ex­pected.

Now, the Co-op is in the midst of a strat­egy to stem the red ink, one that even­tu­ally will take it back to where it started — with only a sin­gle store in Austin. The Co-op in­tends to close all of its branches, and it has sold as­sets, cut staff and re­duced in­ven­tory.

“It has been chal­leng­ing times,” said James Kielty, the Co-op’s chief fi­nan­cial of­fi­cer. “We’ve been try­ing to get through it.

“We’ve re­struc­tured ev­ery­thing.”

‘It’s an ex­pe­ri­ence’

Founded in 1896, the Co-op — of­fi­cially named the Univer­sity Co-Op­er­a­tive So­ci­ety — op­er­ates as a not­for-profit or­ga­ni­za­tion and is in­de­pen­dent of UT. But it’s a sta­ple for stu­dents, alumni and Longhorns fans, who for gen­er­a­tions have vis­ited the main store on Guadalupe dur­ing game days and college tours, or treated it as a must-stop when walk­ing the Drag.

“If you are in there, par­tic­u­larly on game day, ev­ery­body is ex­cited and ev­ery­body is happy,” said Chuck Har­ris, chief ex­ec­u­tive of the Texas Exes alumni as­so­ci­a­tion. “It’s an ex­pe­ri­ence for sure.”

Har­ris, a 1986 UT grad­u­ate, hadn’t heard that the Co-op was hav­ing fi­nan­cial prob­lems, but he said he hopes it man­ages to weather them.

“I think it would be tragic” if it isn’t able to do so, he said. “You can’t repli­cate that (ex­pe­ri­ence of shop­ping at the Co-op) by go­ing on Ama­zon. For a lot of alumni, it is where they got their first (Longhorns) T-shirt, or their first koozie.”

Co-op of­fi­cials are adamant that the or­ga­ni­za­tion is nowhere near hav­ing to shut down its flag­ship store. They said the Co-op should break even fi­nan­cially or be slightly prof­itable on an oper­at­ing ba­sis over­all in its 2018 fis­cal year, which ends June 30, and then im­prove go­ing for­ward.

Still, the rev­enue de­clines have been stark.

Sales topped $50.3 mil­lion in the Co-op’s fis­cal 2006 — which en­com­passed the UT foot­ball team’s dra­matic na­tional cham­pi­onship run — but a decade later that fig­ure had plum­meted to $27.4 mil­lion.

Mean­while, the Co-op lost $1.2 mil­lion in its fis­cal 2016, ac­cord­ing to tax doc­u­ments. It also lost roughly $1.7 mil­lion more in fis­cal 2017, ac­cord­ing to au­dited fi­nan­cial state­ments pro­vided to the Amer­i­can-States­man by the Co-op.

The Co-op has yet to file its re­quired tax re­turn for not-for-profit en­ti­ties for fis­cal 2017, which ended last June, even though it was due to the In­ter­nal Rev­enue Ser­vice in Novem­ber. In­stead, it filed for an au­to­matic six­month ex­ten­sion, mean­ing the tax re­turn won’t be avail­able un­til next month.

An au­dit for fis­cal 2016 — the doc­u­ment that sounded the “go­ing con­cern” alarm — noted that the Co-op “has ex­pe­ri­enced oper­at­ing losses since fis­cal year 2013 and neg­a­tive oper­at­ing cash flows since fis­cal year 2012, and ex­pects to in­cur losses in fis­cal year 2017.”

Michael Hasler, chair­man of the Co-op board, said the warn­ing about its con­tin­ued vi­a­bil­ity was based on cer­tain fi­nan­cial trends that “if we didn’t get those taken care of, we could be in trou­ble.” But he and other Co-op of­fi­cials said they have never thought that the or­ga­ni­za­tion was in se­ri­ous jeop­ardy of ceas­ing op­er­a­tions.

The Co-op sub­se­quently switched au­dit­ing firms, although Co-op of­fi­cials say a de­sire for fresh eyes on the or­ga­ni­za­tion prompted the move, not dis­agree­ments with the pre­vi­ous au­di­tor.

Re­gard­less, the strat­egy the Co-op has been fol­low­ing since is rel­a­tively sim­ple: sell off some as­sets and fo­cus on its flag­ship lo­ca­tion.

In 2014 and 2015, the Co-op sold two Austin prop­er­ties — one on West 23rd Street and an­other on Med­i­cal Arts Street — for a com­bined $9.6 mil­lion. It also moved its Dal­las store to a less costly lo­ca­tion in Plano, and it closed three un­der­per­form­ing stores dur­ing 2016 and 2017 — one in Fort Worth, one on Dean Kee­ton Street in Austin and one in Hous­ton.

In ad­di­tion, the Co-op plans to close its San An­to­nio store when its lease is up in De­cem­ber, and it plans to do the same with the Plano store when the lease is up in 2021.

Even­tu­ally, CEO Ch­eryl Phifer said, the Co-op also will close its art sup­ply store that’s two doors down from the Guadalupe Street flag­ship and op­er­ate from a sin­gle lo­ca­tion.

“When the satel­lite stores were opened com­ing out of that na­tional cham­pi­onship in 2006, it made a lot of sense at that time be­cause there was a lot of in­ter­est for UT logo-wear,” Phifer said. But “when I came (in Fe­bru­ary 2016) the satel­lite stores weren’t serv­ing the same func­tion they did in 2005. Just from a big­ger strat­egy stand­point, (the Guadalupe Street) store is what peo­ple think of as the Co-op.”

More com­pe­ti­tion

The slid­ing sales that have plagued the Co-op — as well as brick-and-mor­tar book­stores na­tion­wide — are mainly the re­sult of in­creas­ing com­pe­ti­tion from on­line re­tail­ers and a drop in de­mand for text­books, Phifer said.

About two-thirds of the Co-op’s rev­enue comes from sales of mer­chan­dise and ap­parel, with the re­main­ing third com­ing from text­book sales and rentals. Sales can jump by roughly a third when UT’s most pop­u­lar sports teams are win­ning cham­pi­onships, Phifer said.

“We could be crazy prof­itable with a re­ally good foot­ball sea­son,” she said, although she added that the Co-op’s cur­rent strat­egy is de­signed for it to make money even in sub­par sports years.

Mean­while, the Co-op’s full-time staff has been cut from more than 100 em­ploy­ees in 2016 to 65 now.

The or­ga­ni­za­tion also has re­duced its cost of yearly in­ven­tory by about $1 mil­lion, ac­cord­ing to Phifer, with the Co-op no longer in part­ner­ship with brands such as Rus­sell Ath­letic and Ralph Lau­ren. Its flag­ship store has vis­i­bly fewer items for sale than in past years, when UT mer­chan­dise and prod­ucts crowded ev­ery nook and ap­parel rack.

Based on the Co-op’s cur­rent-year bud­get — which Phifer pro­vided to the States­man — the or­ga­ni­za­tion ex­pects to be slightly prof­itable for fis­cal 2018, re­vers­ing years of red ink.

The slid­ing sales that be­gan sev­eral years ago shed a spotlight on the siz­able com­pen­sa­tion for for­mer long­time CEO Mitchell, who was in his 80s when he re­tired in 2016 and now lives in Florida.

Mitchell, who helmed the Co-op for nearly three decades, was paid up­wards of $3.2 mil­lion from the or­ga­ni­za­tion in salary, bonuses and var­i­ous ben­e­fits dur­ing the five-year pe­riod from fis­cal 2007 through fis­cal 2011 — in­clud­ing nearly $800,000 in 2011 — a sum some ex­perts on co-ops called ex­ces­sive at the time. His total com­pen­sa­tion was re­duced from those lev­els in sub­se­quent years, ac­cord­ing to the Co-op’s tax doc­u­ments, and cur­rent CEO Phifer said her base salary is $320,000.

Mitchell was paid about $500,000 in the Co-op’s fis­cal 2016 and about $239,000 in its fis­cal 2017, ac­cord­ing to Co-op of­fi­cials. They said no other pay­ments are owed to him.

‘Huge’ for stu­dents

Re­gard­less of the or­ga­ni­za­tion’s past trou­bles and its on­go­ing ef­fort to find a sus­tain­able path for­ward, Phifer and oth­ers say the Co-op still pro­vides value for Austin res­i­dents and the UT community, partly be­cause it has con­tin­ued to con­trib­ute fi­nan­cially to UT-re­lated or­ga­ni­za­tions and ef­forts de­spite its strug­gles.

From July 2015 to June 2017, for ex­am­ple, records show the Co-op do­nated $366,607 to sup­port var­i­ous func­tions. Its do­na­tions typ­i­cally go to stu­dent groups or to help up­grade cam­pus fa­cil­i­ties.

Dur­ing its fis­cal 2006 peak year, it gave away more than $4.4 mil­lion, ac­cord­ing to tax doc­u­ments.

“The Co-op is still a huge part of stu­dents — from get­ting text­books to grad­u­a­tion clothes,” said Kather­ine Har­clerode, a UT business ma­jor who serves as one of four stu­dent board mem­bers on the 11-mem­ber Co-op board. “We’re now fo­cused on be­ing prof­itable, so we can give back more to stu­dents.”

In ad­di­tion to its do­na­tions, the Co-op is in charge of ag­gre­gat­ing in­for­ma­tion about re­quired text­books and ma­te­ri­als for UT courses, a ser­vice that pro­vides stu­dents with a sin­gle point of con­tact to make pur­chases or ask ques­tions.

The func­tion isn’t vis­i­ble and doesn’t cap­ture head­lines, but Phifer and oth­ers said it’s in­dica­tive of the en­dur­ing value that the Co-op brings to stu­dents.

The Co-op lead­ers say they are op­ti­mistic they’ve found a strat­egy that will al­low the Co-op to con­tinue its mis­sion and main­tain its place in the fab­ric of UT and Austin.

“We’ve fixed the di­rec­tion,” said Hasler, the board chair. “The Co-op, I feel, has re­ally turned around. The trans­for­ma­tion of the Co-op is one of the things I’m most proud of. It’s a dif­fer­ent com­pany today, and I’m ex­cited about where it’s head­ing.”

PHO­TOS BY RALPH BAR­RERA / AMER­I­CAN-STATES­MAN

Em­ploy­ees Luis Padro-Al­varado and Maddi Cashell ar­range women’s wear on the se­cond floor of the Univer­sity Co-Op on the Drag on Thurs­day af­ter­noon. Af­ter a cou­ple of years on the brink of dis­as­ter, the UT Co-Op has turned to a new strat­egy to en­sure...

The food court be­hind the Univer­sity Co-Op is a pop­u­lar place to or­der take­out food and pose for a photo with a gi­ant Bevo. The store has an­chored Austin’s Drag for 122 years.

RALPH BAR­RERA / AMER­I­CAN-STATES­MAN

About two-thirds of the Co-op’s rev­enue comes from sales of mer­chan­dise and ap­parel, with the re­main­ing third com­ing from text­book sales and rentals. Sales can jump by roughly a third when UT’s teams are win­ning.

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