The number a retailer uses to decide which stores to keep, rebuilt from the sales line a landlord already receives, with the central costs that four-wall leaves out.
Four-wall EBITDA is a store's sales less cost of goods, store staff, occupancy cost (rent, service charge and rates) and the store's own running costs, before any head-office overhead. On an illustrative 600 m² fashion store selling 2,400,000 a year, it is 450,000, an 18.75 per cent margin, and rent cover on four-wall EBITDAR of 3.50x. Charge the store its share of central costs and cover falls to 2.43x, which is the figure a landlord should underwrite.
Worked in full in Retail Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Retailers run their estates store by store on four-wall EBITDA: it is the number that decides which units are closed at the next lease event or proposed for a rent cut in a restructuring. A landlord rarely sees it, but retail is the asset class where tenants routinely report their sales, and with the sales line and a margin for the trade the landlord can rebuild the store's profit and see the decision before the retailer announces it.
| Input | Value |
|---|---|
| Sales area, m² | 600 |
| Sales | 2,400,000 |
| Gross margin (cost of goods 48%) | 52% |
| Store staff, including employer costs | 384,000 |
| Rent | 180,000 |
| Service charge | 36,000 |
| Business rates | 54,000 |
| Other store costs: card fees and consumables | 2% of sales |
| Other store costs: utilities, maintenance, local marketing | 96,000 |
| Central costs: head office, distribution, IT | 8% of sales |
The margins are illustrative, not market data. A landlord would take the gross margin from the retailer's published accounts and the staffing from the store's opening hours.
Gross profit = sales × gross margin = 2,400,000 × 52% = 1,248,000
Occupancy cost = rent + service charge + rates = 180,000 + 36,000 + 54,000 = 270,000
Other store costs = 2% × 2,400,000 + 96,000 = 48,000 + 96,000 = 144,000
Four-wall EBITDA = 1,248,000 − 384,000 − 270,000 − 144,000 = 450,000, or 18.75% of sales
Four-wall EBITDAR = 450,000 + 180,000 = 630,000; rent cover = 630,000 / 180,000 = 3.50x
Excel: =Sales*GM-Staff-(Rent+SC+Rates)-(Sales*Var+FixedOther)
| Line | Amount | % of sales |
|---|---|---|
| Sales | 2,400,000 | 100.0% |
| Cost of goods | −1,152,000 | 48.0% |
| Store staff | −384,000 | 16.0% |
| Rent | −180,000 | 7.5% |
| Service charge and rates | −90,000 | 3.8% |
| Other store costs | −144,000 | 6.0% |
| Four-wall EBITDA | 450,000 | 18.8% |
| Central costs | −192,000 | 8.0% |
| Store contribution after central costs | 258,000 | 10.8% |
The occupancy cost ratio is 11.25 per cent, which is the test most landlords stop at. Four-wall EBITDA goes further: it says whether the store makes money at that ratio, given this retailer's margin and staffing.
Four-wall EBITDA leaves out everything the store consumes but does not pay for directly: the buying team, the distribution centre that fills its shelves, the systems. Those costs scale roughly with sales, and a retailer that closes stores sheds part of them. Charged at 8 per cent of sales, they are 192,000, and the store contributes 258,000. EBITDAR after central costs is 438,000, so rent cover is 2.43x rather than 3.50x. A store at 3.5x on four-wall EBITDAR looks impregnable; at 2.4x after its central costs it is comfortable, and the next table shows how quickly that changes.
Contribution margin = gross margin − variable store costs = 52% − 2% = 50%
Fixed store costs = staff + occupancy + fixed other = 384,000 + 270,000 + 96,000 = 750,000
Break-even sales = 750,000 / 50% = 1,500,000, so sales can fall 37.5% before four-wall EBITDA reaches zero
After central costs at 8%: 750,000 / (50% − 8%) = 1,785,714, headroom 25.6%
Staffing is treated as fixed here, which is roughly right over a band of trading: a shop needs the same people on the floor whether it takes 2,160,000 or 2,400,000.
| Sales change | Sales | Four-wall EBITDA | Margin | Cover, four-wall | Cover, after central |
|---|---|---|---|---|---|
| −20% | 1,920,000 | 210,000 | 10.9% | 2.17x | 1.31x |
| −10% | 2,160,000 | 330,000 | 15.3% | 2.83x | 1.87x |
| Base | 2,400,000 | 450,000 | 18.8% | 3.50x | 2.43x |
| +10% | 2,640,000 | 570,000 | 21.6% | 4.17x | 2.99x |
A 10 per cent fall in sales cuts four-wall EBITDA by 26.7 per cent, operating leverage of 2.7 times, because the rent, the rates and the rota do not fall with the till. At −20 per cent the store still shows a positive four-wall margin of 10.9 per cent, yet its cover after central costs is 1.31x. That is the store a retailer puts on its list for a rent reduction while telling the landlord it is profitable, and both statements are true.
Comparing a retailer's reported store EBITDA with the rent. Under IFRS 16 the lease charge is replaced by depreciation and interest, so the "EBITDA" in a retailer's accounts or investor presentation is before rent for every leased store. On this store that reported figure would be 630,000, which is four-wall EBITDAR, not EBITDA. Take it for EBITDA after rent, add the rent back to get "EBITDAR" of 810,000, and you report cover of 4.50x instead of 3.50x; subtract the rent from it and you have the right four-wall EBITDA of 450,000. Check which definition you hold before you compute anything.
The second mistake is to stop at four-wall. Cover on four-wall EBITDAR flatters every store, because no store can trade without the central costs, and they are the costs a retailer has in mind when it decides which store to close.
From the landlord's side the inputs are the reported sales, a trade margin and the occupancy cost the landlord already knows. The rent a trade can sustain on that basis is set out in how to calculate a retailer's occupancy cost ratio, and the growth in sales a store needs to keep paying it in how much sales growth a retailer needs.
The book runs the same trading arithmetic across a whole tape, unit by unit, to find the rent no occupier can sustain; the live model is in the free workbook for this case.
It depends on the trade's gross margin and on how much central cost the store must carry. In the illustrative fashion store a four-wall margin of 18.75 per cent leaves 10.8 per cent after central costs of 8 per cent of sales. A store at 10.9 per cent four-wall, after a 20 per cent sales fall, contributes only 56,400 after central costs and covers its rent 1.31x.
Four-wall EBITDAR adds the rent back, so it measures what the store earns before paying for its premises. Dividing it by rent gives rent cover. On the worked store, four-wall EBITDA is 450,000 and EBITDAR 630,000, so cover is 3.50x. Under IFRS 16 a retailer's reported store EBITDA is usually the EBITDAR figure, because the lease cost sits below EBITDA.
No. It covers only what is spent inside the store's four walls: goods, staff, rent, service charge, rates and local running costs. Head office, distribution and systems are excluded. On the worked store they are 192,000 at 8 per cent of sales and cut rent cover from 3.50x to 2.43x, which is why a landlord should test both.
This article is one calculation from Retail Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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