Villa: A Bright Spot in the Retail Gloom

While most retailers are suffering, Villa has held up relatively well, in part because its customers never got hooked on easy credit

It's late morning in the Villa store on Penn St., the main drag in downtown Reading, Pa., and Alex Rodriguez, a 21-year-old construction worker dressed all in black from his Sox baseball cap to his Nike (NKE) ACG boots, has a huge smile on his face. Rodriguez has just laid down $150 for a pair of Air Jordan Ring 6 basketball shoes—white with shiny black patent leather sides. He'll add it to the collection of 35 pairs of Air Jordan shoes he keeps on display in his apartment like so many museum pieces. "Some people collect cars. I collect Jordans," he says.

He also shops frequently at the Villa store in Reading, one of 22 outlets the company operates in neighborhoods of large cities or downtowns of smaller burgs in Pennsylvania, New Jersey, and Delaware. In fact, Rodriguez points out that he purchased every article of clothing he is wearing at Villa.

Fortunately for the chain's management, there are a lot of shoppers like Rodriguez in Philadelphia, Pittsburgh, and other cities in the Northeast who treat the Villa stores like an all-you-can-eat buffet: They just keep coming back for more. U.S. same-store sales for November fell by 2.7% from last year, according to the International Council of Shopping Center's index of 37 stores, the largest drop in 39 years. But for now, Villa seems to be shielded from the worst of it. Its sales rose 25% in November, and gross margins rose by a healthy 6%—though the stores that had been open more than a year recorded a sales decline of 8% because of discounting. Despite facing the worst retailing climate in decades, Chief Executive Jason Lutz expects to open four or more stores in the next 12 months and to see his sales stay on an even keel. "We're not immune to what's going on in the economy, but we're positioned well to ride out the roller-coaster," he says.

The Urban Advantage

Here's why: Villa's customers, primarily African Americans and Latinos between the ages of 14 and 30, didn't get caught in the credit trap. For the most part, they don't own houses and don't have credit cards. Only 15% of Villa's sales come via plastic. Also, most of the customers or their parents work in government jobs or in service industries and are less vulnerable to layoffs than those in banking or manufacturing. The same logic goes for other chains that serve not-so-well-heeled urban folks, including Family Dollar (FDO) and Save-A-Lot.

The chain didn't start off as an urban fashion mecca. It was launched 19 years ago as Sneaker Villa by Chris and Ruth Lutz, a waitress and a steel worker, in a suburban strip mall outside Reading. Their goal was simply to be able to make enough money to pay for their kids' educations. After eldest son Jason graduated from college, he saw the opportunity to capitalize on the popularity of hip-hop culture and opened stores in urban neighborhoods. But Lutz didn't just want to sell sneakers and T-shirts in cities. He wanted his stores to become part of the communities and to help rebuild them.

Over the years the Lutzes have run numerous programs aimed at improving the lives of their customers and their communities, including discounts for high school students who don't skip school and for people who turn in guns to the police. The stores provide above-market-rate wages, plus health benefits for full-time employees, and they train people from the neighborhoods to be managers. Store managers often act like father figures for their communities, dispensing advice and setting up rap contests. Darren "Big Moe" Walton, a 310-pound former footballer who manages the company's Philadelphia stores, dreams of being CEO one day. "Hopefully, I'll sit in Jason's office and realize the American Dream," he says.

The help-the-neighborhood ethic is more than altruism. Lutz believes that if he wins the trust of shoppers and helps build up the local economies, it will boost store revenues.

Money to Spend

Villa's business strategy is far different from that of most fashion and sneaker chains. It pays low rents and faces little competition in urban centers. Yet surprisingly, there's disposable income in its markets. Within a one-mile radius of a store opened in West Philadephia last summer, for instance, there are 25,000 households with an average annual income of $25,000. Half of the apartments rent for less than $500 a month. So there's money left over.

There's something else unusual about Villa: It's financed not by bank loans but by venture capitalists. VCs including California's New Cycle Capital and Rosewood Capital bet $17 million on the company two years ago. Thanks to the VC cash, Lutz has ambitious long-term goals. Within five years he hopes to increase the number of stores at least fourfold to between 80 and 100 in Pennsylvania, Ohio, New Jersey, and New York. Revenues last year came in at roughly $27 million, up 25% from the year before.

Even as the company grows, it retains some of the flavor of a family business. Chris and Ruth instilled a strong work ethic. While they no longer have official roles, they stay involved. Both were breaking down cardboard boxes in the stock room of Sneaker Villa's West Philadelphia store during the grand opening in May.

Four years ago, after taking over as president, Jason incurred the wrath of his parents by expanding too rapidly and suffering a cash crunch. In May 2005 he was running out of funding options. The Seattle venture capital firm Maveron had turned down his plea for money, but he flew west to make one last pitch. Maveron shot him down again. Yet the day was a turning point. Maveron partner Ben Black was struck by Sneaker Villa's blend of social mission and ambitious business goals. Black decided he couldn't let Lutz fail. He tapped his own savings to help fund Sneaker Villa. "I was the person of last resort," says Black.

The seemingly rash act ultimately led Black to leave Maveron and create New Cycle Capital with a friend, Josh Becker. They bill their firm as the first U.S. venture outfit focused on profit-making companies with explicit social missions. Eventually, venture investors led by New Cycle Capital acquired about two-thirds of Villa's equity. They helped Lutz get the business on an even keel after the expansion troubles, in part by bringing in a handful of seasoned executives. Larry Long, a former executive at Modells Sporting Goods, came on as chief financial officer and helped Lutz win back credibility with shoe vendors and financial firms.

Some advocates for the poor criticize Villa for charging high prices for its designer items. "If the stated mission of a business is to help uplift a community, selling expensive items that most residents cannot readily afford seems incongruent to that aim," says Yvonne Bynoe, a senior fellow at Wake Forest University who studies urban culture. But Villa's regular customers are quick to voice their support for the company. The stores have a wide range of merchandise at varied price levels, and they see a retailer that's heavily involved in their communities. "They treat you like family," says Floyd Brown, a 33-year-old security guard who's a regular at the branch in Allentown, Pa. The challenge for Villa will be keeping that family feeling strong and the sales flowing in the midst of the worst economic slump in decades.

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