Retail is Ripe for Deal Activity, According to Our Tenth Annual Retail Compass Survey of CFOs

Retailers are facing increasing economic headwinds, from growing global market volatility to weakening sales and an overcrowded marketplace. In response, many retailers—especially traditional brick-and-mortar retailers—are re-evaluating their business strategies for the coming year and choosing to move from, as my colleague Natalie described on this blog recently, an “if you build it, they will come” attitude to an “if you can’t beat them, why not acquire them?” mentality. This may be why the 100 retail CFOs we surveyed for our tenth annual Retail Compass Survey of CFOs believe the year ahead will bring healthy merger and acquisition (M&A) activity. Only a mere 1 percent expect M&A activity to decrease.

The majority (51 percent) of CFOs expect financial buyers (51 percent) to drive most of the M&A activity this year, but strategic buyers will still have a significant role to play. CFOs cite increasing market share and revenue and profitability as the primary drivers of strategic deal flow. These drivers could have been what spurred the recent acquisition of  luxury discount e-tailer Gilt Groupe Holdings by Hudson’s Bay Co. and of Ebuys Inc. by DSW (check out Natalie’s post, linked above, for more information about these developments).
Beyond using an acquisition-focused growth strategy to maintain their competitive edge, retailers are also refocusing on their physical footprint to improve the in-store customer experience. Part of this will be improving their merchandise assortment, which 37 percent of CFOs expect to focus on most heavily this year as their top growth tactic, up from 26 percent last year.

Also crucial to strengthening brick-and-mortar performance will be attracting and retaining top talent. Not only do 48 percent of CFOs expect to increase headcount, 56 percent also plan to increase wages. Many retailers, despite the strain it could put on their bottom line, have already committed to higher wages because they understand the long-term benefit quality talent could afford. Fortune recently reported, “As these stores continue to battle each other and, store operations have gotten more complex, meaning they need top notch motivated staff.”

With these adjustments to their overall strategies and in-store experiences, retailers are hoping for stronger store sales. Our first cut of data revealed that nearly three-quarters of retailers believe their total store sales will be higher compared to 2015. This optimistic total store sales forecast could be leading many retailers to believe that they may be able to try to sell their way out of debt. However, with consumers’ growing preference to allocate dollars towards experiences, like travel, instead of goods, this strategy could be an uphill battle. Nearly three-quarters (72 percent) of CFOs say it will be at least slightly difficult for retail and consumer businesses to refinance debt, up slightly from 68 percent last year.

To measure their sales performance this year, the majority of retailers (30 percent) have returned to the industry’s traditional measuring stick – gross sales. Another 24 percent say they are watching free cash flow most closely, while 20 percent point to comparable store sales, 19 percent cite EBITDA, and 7 percent say return on equity is their most important financial metric.

And while it is forecasted that retail deal activity could pick up in 2016, that is not the case for IPOs. For the second year in a row, two-thirds of retail CFOs expect the number of retail and consumer products IPOs to stay about the same as 2015 levels, while 21 percent forecast an increase. CFOs report the strength of the U.S. economy and stock market (cited by 30 percent) and strength of brand (cited by 27 percent) will be the top factors driving a company’s ability to go public this year.

Click here to view our infographic discussing these results, and stay tuned to the blog in the weeks ahead for the final findings from this year’s tenth annual Retail Compass Survey of CFOs, which will focus on digital and mobile growth, capital investments and cybersecurity.