Retailers’ Top Risks Signal Questions around Avenues for Growth – BDO USA Report

May 2015

Gordon Porter
Bliss Integrated Communication
(212) 221-4521
gordon@blissintegrated.com

CHICAGO — May 18, 2015 — Despite upbeat sales projections, strong consumer confidence levels and a host of other positively trending economic indicators, retailers are still unsure about how to strategically invest for growth in the new U.S. retail marketplace. According to BDO USA’s ninth annual analysis of risk factors listed in the most recent 10-K filings of the 100 largest U.S. retailers, concerns over growth initiatives remain high, despite promising year-over-year performance across the industry. This year, 92 percent of companies note risks related to U.S. growth and expansion, up from 56 percent in 2013. Meanwhile, as more companies look strategically at consolidation as a way to increase market share, 76 percent note merger and acquisition risks.
 
What’s clear is that retailers are aggressively eyeing opportunities to grow their brands and provide consumers with speed and convenience across platforms. But even with stronger cash flows at their disposal, many of these new capital investments bring greater risks and less tangible ROIs. Not surprisingly, a full 92 percent of companies this year cite risks around failure to execute business strategy, while 71 percent note failure to successfully invest capital.
 
After months of a precarious sourcing situation stemming from labor negotiations at the West Coast Ports, the 2015 BDO Retail RiskFactor Report also found that virtually all (98 percent) retailers analyzed are concerned about supplier and vendor risks, including shipping and imports. Although the labor issues were resolved in February, many retailers have since faced delays and increased transportation costs. These exposures, combined with rising labor and import costs from traditional sourcing regions like China, have prompted more retailers to consider near-sourcing as a strategic approach to reducing costs and liabilities. In fact, a plurality (42 percent) of retail CFOs cited North America as the most attractive sourcing option this year in BDO’s 2015 Retail Compass Survey of CFOs.
 
“Until 2008, retailers’ capital spending default was to invest in opening new stores,” said Doug Hart, partner in the Consumer Business practice at BDO USA, LLP.“ That default no longer suffices. Now, with the migration of customers online, the ROI on new store openings is often reduced and capital investment is being redeployed to online sales channels, supply chain networks and systems implementations. As the ROI on that spending is less proven, there is a higher risk associated with such capital investment.”   
 
The following chart ranks the top 25 risk factors cited by the 100 largest U.S. retailers:
 
  2015 Rank 2014
Rank
2013 Rank 2012 Rank 2011 Rank 2010 Rank
General Economic Conditions   #1 #1 #1 #1 #1 #1
Federal, State and/or Local Regulations #1t #2 #2 #4 #4 #6
Competition and Consolidation in Retail Sector   #1t #3 #4 #3 #2t #3
Implementation and Maintenance of IT Systems #4 #7 #5 #6t #12 #10
Privacy Concerns Related to Security Breach #4t #8t #8 #12 #19 #16
U.S. and Foreign Supplier/Vendor Concerns                #6 #4 #3 #2 #2 #2
Labor (health coverage, union concerns, staffing) #7 #5 #6 #10 #7 #7
Natural Disasters, Terrorism and Geo-Political Events #7t #13 #11 #5 #9 #7t
Dependency on Consumer Trends #9 #6 #8t #6 #5 #11
Legal Proceedings #9t #8t #13 #11 #7t #12
Credit Markets/Availability of Financing and Company Indebtedness #11 #11t #6t #8 #6 #4
Failure to Properly Execute Business Strategy #12 #11t #12 #13 #10 #20
Impediments to Further U.S. Expansion and Growth #12t #17 #20 #20t #16 #14
Changes to Accounting Standards and Regulations #14 #13t #15 #17 #14 #13
Consumer Confidence and Spending    #15 #8t #10 #9 #11 #5
Goodwill Impairment #16 #19t #28 #25t N/R N/R
International Operations #17 #15 #14 #13t #15 #15
Environmental Laws, Regulations & Liability #18 #19t #19 #22 #26 #28t
Loss of Key Management/New Management #19 #16 #16 #15 #12t #17
Insurance Costs and Uninsured Liabilities #20 #22 #17 #20 #21 #21t
Mergers and Acquisitions and Joint Ventures #21 #18 #21 #18 #18 #18
Intellectual Property Infringement #22 #21 #22 #24 #29 #23
Failure to Successfully Invest Capital #23 #28 #37 #30 #28 #41
Inventory Balance #24 #30 #24 #23 #20 #23t
Advertising, Marketing and Promotions #25 #24 #27 #27 #25 #26
*t indicates a tie in the risk factor ranking
 
Further findings in the 2015 BDO Retail RiskFactor Report:
 
Interest Rates Top List of Economic Risks. Along with top industry risks, the BDO study looks at specific challenges retailers cite under general economic conditions. For the second year in a row, interest rates (88%) came in as the most frequently cited economic concern over fuel prices (83%). With unemployment now well below six percent, both retailers and consumers alike are looking to the Federal Reserve, to see if it will soon curtail its easy-money policy and increase what have been historically low interest rates over the past several years. If it does normalize rates, companies are well aware of the potential negative impact on consumer spending, as well as their debt financing.
 
Currency Rate and International Concerns Grow. With the U.S. dollar’s value having risen 22 percent in the last 12 months, currency rate risks and their impact on profits and revenues are top of mind this year for a full 82 percent of retailers. For retailers with stores in European and BRIC countries, converting foreign sales to U.S. dollars currently can cut deep into margins, and sourcing internationally in U.S. dollars can have the same costly effect. Meanwhile, nearly nine-in-ten companies cite international operations risks this year surrounding economic conditions, laws and regulations such as the Foreign Corrupt Practices Act.
 
Cybersecurity Risks Now Ubiquitous from Digital Growth and Pervasive Threats. As retail CFOs predict nearly double-digit online sales growth this year, according to BDO’s 2015 Retail Compass Survey of CFOs, virtually all (99 percent) retailers now cite both IT system operations and cybersecurity threats as top risks. Although IBM calculated that the number of cyber breaches against retailers actually declined in 2014, the high legal, operational and reputational costs associated with point-of-sale intrusions and web application attacks still very much have retailers up at night, especially as they expand their digital offerings and become increasingly cloud-based in the year ahead. A majority (56 percent) of retailers are proactively investing more into their cybersecurity measures in 2015, according to BDO data, but heightened concerns over legal proceedings (95 percent) point to the significant, wide-reaching damage that IT failures can inflict on retailers.
 
Labor Market Concerns Remain High within Tightening Workforce. Labor risks remain top of mind for a full 96 percent of retailers. Faced with the pressures of a tightening workforce, retailers are struggling to hire and retain qualified store associates and distribution center workers. Major players like Wal-Mart are increasingly offering benefits and higher wages in an effort to attract and keep the best workers. It can be a costly investment in an environment of rising healthcare costs, cited as a risk by 63 percent of retailers, but a critical one in today’s ultra-competitive labor market. Competition for top industry leaders also remains entrenched, with four-in-five retailers citing risks related to attracting and retaining key management personnel.
  
The 2015 BDO Retail RiskFactor Report examines the risk factors in the most recent 10-K filings of the largest 100 publicly traded U.S. retailers; the factors were analyzed and ranked by order of frequency cited.
  
About the Consumer Business Practice at BDO USA, LLP
BDO has been a valued business advisor to consumer business companies for over 100 years. The firm works with a wide variety of retail and consumer business clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on myriad accounting, tax and other financial issues.
 
About BDO
BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals.  The firm serves clients through 58 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,328 offices in 151 countries. 
 
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.