INVENTORY

GE Capital: 2015 retail industry trends

BY Marianne Wilson

New York — A mixed economic backdrop is expected to drive modest retail sales growth in the 3% to 4% range in 2015, compared to 5.5% average growth in 2010-2012 and 5.8% in 2002-2006, according to GE Capital. Low- and mid-income households will be particularly constrained by stagnant earnings despite improvements in employment status and the housing market as well as lower gas prices.

According to GE Capital, the key trends in retail include the following:

Channel shift to continue: Consumers’ focus on value and convenience will continue to shift discretionary spending away from traditional retail channels in favor of e-commerce and discount venues.

Brick-and-mortar specialty stores that lack an effective omnichannel strategy will continue to donate market share. As a result, M&A activity could pick up as traditional retailers look to rationalize store footprints and reduce costs associated with incremental investment in multi-channel systems on top of upgrading and maintaining storefronts.

Margin pressure from accelerated growth in e-commerce: The accelerated growth and shift to e-commerce/m-commerce has diminished the pricing power of most retailers. This trend has increased margin pressure, given increased competition on free shipping and negative leverage of in-store fixed costs due to declining traffic.

Middle-market retailers will likely emulate their large competitors by enhancing capacity to fulfill online orders with store inventory, which could drive better gross margin with improved inventory efficiency, lower shipping costs and potential impulse purchases in the case of store pick-up.

Retail square footage rationalizing: Mall traffic will remain difficult, exacerbated by accelerated growth of the online channel on top of the encroachment by the discounters for many years. Square footage growth will be primarily driven by dollar stores, fast-fashion retailers and outlet malls.

Contrarily, the secularly pressured sectors, such as office products, consumer electronics, teen apparel retailers and department stores will continue to rationalize their retail locations.

Capital spending on multichannel systems looms large: There is increasing need for investment in multi-channel systems to maximize flexibility for the consumer and efficiency for the business. Based on GE Capital, Americas’ recent CSO Survey, many middle-market retailers have caught up with the game by optimizing their websites for mobile purchases and accepting point-of-service (POS) mobile payments.

There is more work to be done to enhance the multichannel capacity, such as enabling inventory search and fulfillment capabilities across store systems and distribution centers, as some large retailers have accomplished.

Cost of healthcare: With the ACA in its second year, healthcare costs remain an overhang for middle-market employers that are mandated to extend healthcare coverage to full-time employees. There could also be a negative impact from the ACA on those consumers who do not qualify for subsidies and are forced to spend more on their health insurance.

For larger retailers, the incremental cost of complying with the ACA appears to be manageable as their current coverage generally meets or approaches the ACA minimum requirements. Larger retailers are also better positioned to hire temporary employees.

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FINANCE

PwC: Retail mergers & acquisition activity hits five-year high in 2014

BY Marianne Wilson

New York — U.S. retail and consumer (R&C) total transaction value for 2014 hit a five-year high and surpassed the $100 billion mark for the second year in a row, according to PwC’s U.S. retail and consumer deals insights 2014 Year in Review and 2015 Outlook report.

According to the report, transaction value for announced deals greater than $50 million was $195 billion, up 57% from $124 billion in 2013. This five-year high was due largely to the extremely active third quarter in 2014, which included several significant multibillion dollar transactions.

The report highlights that in 2014, the R&C sector experienced the largest number of megadeals (deals with a value of over $1 billion) in several years. Overall volume in 2014 for deals greater than $50 million was 177, up 13% compared to the prior year, due to higher deal volume during the first half of 2014.

"The retail and consumer sector experienced a strong year in 2014 with both deal volume and value up from 2013 – and average disclosed deal size expanding 40% to $1.1 billion," said Leanne Sardiga, partner and PwC's U.S. retail & consumer deals leader. "Consumer sentiment continued to rise in 2014, benefiting from low energy prices, but retail sales numbers suggest consumers are not funneling that money into other purchases yet. Looking ahead, we expect consumers will remain cautiously optimistic in 2015, which may impact the key strategic choices retailers will make about how to serve the evolving demographics and consumer preferences."

According to PwC, private equity (PE) activity increased in the retail sector, but decreased in the consumer sector. For deals with values greater than $50 million, PE comprised 49% of retail deal volume and 57% of the retail deal value in 2014 compared to 32% and 36% in 2013, respectively

The report notes that R&C IPO volume and proceeds decreased from 2013. Total R&C proceeds reached $4.5 billion, representing a 57% decrease over 2013. Overall, the year saw 22 IPOs compared to 29 in 2013. The slowdown in the R&C IPO market was primarily due to the weaker sector performance in the second half of the year as compared to the same period in 2013.

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OPERATIONS

Sally Beauty COO now in CEO role

BY Marianne Wilson

Denton, Texas — Sally Beauty Holdings announced that president and COO Chris Brickman succeeded Gary Winterhalter as CEO effective on Feb. 1. Winterhalter will continue to serve the company as executive chairman.

The changes are consistent with the company’s previously announced executive transition plan.

“The board and I are very pleased to have an outstanding candidate such as Chris step into the CEO role,” said Robert McMaster, lead independent director of the company’s board. “Chris is a passionate leader with an exceptional track record of success throughout his career.”

Winterhalter served as the company’s CEO since its separation from The Alberto-Culver Company in 2006. Under his leadership, sales grew from $2.4 billion to $3.8 billion, and the stock price quadrupled.

Brickman has served as Sally Beauty’s president and COO since June 2, 2014. Before joining the company, he was president of Kimberly-Clark International.

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