UT Co-op aims to remake itself after ‘challenging times’

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 Guadalupe 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 mediocre performances by UT’s major sports teams.

Over the past five years, the Co-op has posted millions of dollars 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 not-for-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 six-month 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.”

Increased 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.

Still ‘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.”

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