Deals and Distribution Strategies Weigh on Retail CFOs Minds This Year

Will 2015 be another big year for deal activity in the retail sector? It may, in fact, shape up to be an even stronger year than 2014, according to the latest results from our 2015 Retail Compass Survey of CFOsRetail chief financial officers gave their most bullish forecast for deal flow in the survey’s history, with 59 percent projecting an increase in M&A activity within the sector this year. Most CFOs (73 percent) expect that activity will be primarily centered in the U.S., while 15 percent think Asia will be the hottest region.

In the same vein, more CFOs are citing M&A as their primary growth tactic for 2015. This year, that number jumped to 16 percent, up from just three percent in 2014. Strategic buyers are expected to be the most acquisitive, according to 56 percent of CFOs, although 44 percent say it will be financial buyers. With the National Retail Federation projecting a 4.1 percent increase in sales this year and CFOs projecting total store sales to increase 3.9 percent, buyers will likely pay a higher price. This year’s survey found that average EBITDA multiples are expected to hit 5.2, up from 4.2 percent a year ago.

But with growth options increasingly limited for traditional brick-and-mortar retailers, M&A provides an attractive way to gain market share, either through gobbling up the competition or providing an entry point into a new market. Speaking of, retail CFOs say that market share (43 percent) is a primary target for strategic buyers, and geographic coverage is becoming more important (24 percent, up from eight percent in 2014). Other factors driving strategic deals include increased revenue and profitability (16 percent), technology assets and intellectual property (12 percent), and more distribution channels (six percent). The latter is particularly intriguing for e-retailers, like Amazon, who are looking to gain physical space where they can interact with customers and demo products.

As my colleague Rick Schreiber noted in his post last week, distribution channels have been particularly worrisome lately for all retailers, as shipments have been delayed by ongoing labor issues and congestion at the big West Coast ports. While labor issues may be resolved soon, the lingering problems have more retailers taking a close look at their supply chain and reconsidering how and where they source goods. This year, 43 percent of retail CFOs said that North America is the most attractive sourcing option, with another 12 percent citing Central America, including Mexico, and four percent citing South America. Meanwhile, more than one-third (37 percent) of CFOs say that Asia remains the most attractive sourcing opportunity, despite recent increases in labor costs.

To help fund their strategic initiatives in 2015, many retailers are looking to refinance debt and are anticipating a struggle. Sixty-eight percent of CFOs expect to encounter some level of difficulty with the process, a slight drop from 74 percent in 2014.

The public market also remains a viable option for funding. According to Renaissance Capital, 2014 saw 16 retail and consumer IPOs, down slightly from 2013 levels, but retail IPOs were among the top performers for the year. The IPO of PE-backed Michael’s in 2014 generated positive returns—an encouraging sign for both specialty retailers and PE-backed opportunities in the industry. Two-thirds of retail CFOs believe that IPO activity for retail and consumer products companies will stay relatively even with last year, although 20 percent think it will increase. This is consistent with investment bankers’ expectations for the year—45 percent think the number of retail and consumer IPOs will remain flat this year, and 26 percent forecast an increase, according to the latest BDO IPO Outlook Survey.

What kind of retail companies will we see go public? CFOs believe e-commerce (47 percent) and consumer products (31 percent) companies are the most likely IPO candidates this year. Although Shake Shack’s $1.6 billion IPO kick-started the year and there were several successful returns from restaurant IPOs in 2014, only five percent of CFOs think the restaurant category will generate the most IPOs this year. Overall, CFOs say the strength of the brand (cited by 37 percent) and the strength of the U.S. economy and stock market (cited by 31 percent) will be most important factors in determining a company’s ability to go public this year.

Stay tuned to the blog in the weeks ahead for the final results from this year’s Retail Compass Survey of CFOs, including considerations around digital and mobile growth, capital investments and cybersecurity.