By most accounts, 2013 was a banner year for IPOs. According to Renaissance Capital, a total of 222 companies went public in 2013, marking the best year for the IPO market since 2000. As we predicted in a previous article in Chain Store Age, the retail and consumer products industry played a key role in this IPO activity, accounting for 19 offerings and $8.3 billion in proceeds. This marked a notable increase from the number of offerings seen in 2012 (15) and 2011 (12), according to Renaissance Capital.
Moreover, performance was strong. Renaissance Capital reports that the average return overall was 41%, with the retail and consumer products industry posting a strong showing. In fact, according to the Motley Fool, four retail chains doubled their IPO price this year: The Container Store, Potbelly, Noodles & Co. and Sprouts.
Our 2014 IPO Outlook Survey recently polled 100 capital markets executives on their expectations for the IPO market in 2014 and found that investment bankers are projecting continued growth on U.S. exchanges. Nearly two-thirds (63%) predict an increase in U.S. IPOs in the coming year, and on average, investment bankers predict a 9% increase in the number of IPOs in 2014.
Capital markets executives are most bullish for increased activity in the technology, energy, biotech and healthcare sectors, with most investment bankers (52%) expecting retail and consumer products IPO activity to be flat, and just 22% forecasting an increase. While the number of retail IPOs may not be headed for large increases, it’s important to remember that these projections come on top of a record year for offerings in the industry. Moreover, there are reasons for investors to have continued optimism in the industry.
Positive performance in 2013 will likely be encouraging to retailers who are considering IPOs in 2014, and ongoing low interest rates will help with investor demand. On the consumer spending front, the NRF reports that holiday sales met expectations and increased 3.8% over 2013. However, many retailers depended on deeper and longer discounts that harmed margins and are causing some to trim their holiday quarter profit expectations.
Given these results, the holiday season is unlikely to have a major impact on the IPO environment this year. Still, we know consumers have been spending on big-ticket items like homes and cars, and renewed confidence bodes well for spending across the board as we enter 2014.
As the economy continues to slowly improve, private equity firms are seeing better opportunities to finally turn over their retail investments. A plurality of bankers in our survey (43%) identified private equity portfolios as the biggest source of offerings this year, and we expect private equity will be a significant backer of IPOs in the retail industry this year.
The U.K. market also appears ripe for PE-backed IPOs, with Poundland and other consumer brands looking to raise funds. Additionally, the retail industry could see an uptick in foreign-based IPOs on U.S. exchanges this year. A majority of capital market executives (58%) predict that the number of U.S. IPOs from China-based businesses will increase in 2014 due to the perception that Chinese regulators and companies are more willing to meet U.S. governance standards and accounting regulations.
Potential Concerns for Investors
When analyzing retailers, potential investors will be looking for factors that show signs of stability. Retailers pursuing an IPO should have a strong management team in place and be able to show a solid track record of sales and growth. But even with this in place, there are a number of external factors that could weigh on investors’ minds. When asked what presents the greatest threat to the IPO market overall this year, investment bankers point to the Federal Reserve paring back its monetary stimulus, as well as global political and financial instability and the threat of tax increases.
Within the retail industry, there are other hurdles to consider. As retailers continue to embrace the omnichannel movement, expanded presence on digital platforms and an influx of consumer data has made the industry more vulnerable to security breaches than ever. Recent attacks on Target’s and Neiman Marcus’ data systems have stirred consumer confidence and raised questions about the industry’s ability to adequately protect not only credit card information, but other personal information like passwords, addresses and shopping preferences.
In the short-term, identifying the source of these attacks is key, and longer term, retailers considering an IPO will need to address these risks and demonstrate to potential investors that they have taken steps to secure their systems and protect against hackers. Despite a few headwinds, we expect the retail industry will continue a steady growth in 2014. The sector has shown a great deal of resilience over the past few years, and the increase of IPO activity is one more positive indicator of overall industry health.
Ted Vaughan is a partner in the retail and consumer products practice at BDO USA, LLP. He can be reached at [email protected].
Sport Chek’s High-Tech Flagship
Sport Chek has opened a digitally savvy flagship in the largest shopping mall in North America: West Edmonton Mall, Edmonton, Alberta (Canada). The sporting goods retailer has woven interactive technology and digital installations throughout the 80,000-sq.-ft., two-level space, which is designed to offer an enhanced, personalized shopping experience that connects consumers to the sports they are passionate about.
The experience starts on the facade, designed to resemble a player’s entrance tunnel into a hockey rink or football field. As customers enter, they trigger motion-activated video screens showing sports scenes.
Inside the store, hundreds of interactive screens allow customers and employees to source product information, including in-stock sizes, colors and access to vendor videos. Customers can also access interactive digital video walls that enhance and provide one-of-a-kind sport and lifestyle experiences. In all, the store features more than 1,200 sq. ft. of digital projection, and 800 screens displaying product images, deals and other information. Transparent display boxes with digitally over-layed content showcase the newest product. Employees are outfitted with tablets and the latest in technology.
Sport Chek also features an array of interactive features, including a treadmill equipped with cameras that capture a runner’s biome-chanics to ensure the best shoe fit. And golfers can receive feedback by swinging in the store’s FlightScope simulator, which uses 3-D tracking radar and video analysis. Customers can learn how to light a camping stove upstairs in a designated area with a pop-up exhaust fan.
The high-tech feel is combined with a strong service element. Featured services include an electronic stringer for tennis racquets, a baseball glove steamer and a ski-tuning machine. Sport Chek is a division of Canadian Tires’ FGL Sports Limited, which is Canada’s largest national retailer of sporting goods, operating more than 400 stores throughout Canada under various banners.
Founded as a “cook your own steak” restaurant in an abandoned gas station in 1974, Quaker Steak & Lube has evolved into one of the nation’s most up-and-coming casual-dining chains, renowned for its award-winning chicken wings and flavorful — make that hot — sauces. But as much as the food offerings have changed at “The Lube,” the brand remains true to its gas station and vintage car-loving roots.
The founders, George “Jig” Warren and Gary “Mo” Meszaros, conceived of the concept as more than a restaurant, but also as a way to preserve the culture of old gas stations and high-powered muscle cars, vintage autos and antique motorcycles. Today, the company still rescues classic cars, hanging them from the walls and ceilings in each restaurant, where they share space with gas-station memorabilia. The decor, along with high-octane events, help the concept stand out in a crowded field. (As to how it got its name, Quaker Steak was founded in Sharon, Pa., not far from Oil City, home of Quaker State Oil.)
Quaker Steak is owned by some 44 shareholders who bought into a private offering in 2004, which is when it started franchising and its growth began in earnest. Now with 63 restaurants in 19 states and Ontario, Canada, the chain is headquartered in San Francisco and poised for even greater growth under evolving leadership.
In January, CEO John Longstreet stepped down after nearly four years at the helm. Quaker Steak CFO Frederick Dreibholz is serving as interim chief executive, while the search for a new CEO is undertaken.
Contributing writer Michael Fickes recently spoke with Dreibholz about his interim assignment, the chain’s market positioning and plans going forward.
Why were you tapped as interim CEO for Quaker Steak & Lube?
Upon John Longstreet’s departure, the company was looking for an interim replacement while they complete a nationwide search for the permanent CEO. As I was the sitting CFO and had intimate knowledge of the brand and our associates, it made sense for the company to appoint me during this transitional period.
Tell us a little about Quaker Steak & Lube.
Quaker Steak & Lube is an iconic brand that has experienced significant growth in the past, and is poised to continue growing in the future. Our brand is well-received by our customers as is seen by our near industry leading average unit volumes. I look forward to continuing to move the brand forward and working with the great team assembled here.
Will you change anything significant during your term or continue the current direction?
As the interim CEO, I’ve been tasked to maintain the positive impetus we have gained over the past several years. In the restaurant industry, there are always small changes that are required to continue to retain your existing customers and attract new customers. As a result, I will focus on continuing to push the brand forward without making significant changes.
Tell us about the restaurant design.
We focus on authentic motorsports-themed decor. It is virtually all authentic cars and motorcycles — hanging from the ceiling, displayed on the walls and furnishing. There are automotive parts, oil cans, gas cans, license plates and more. Each restaurant has a unique decor package, and each has four different spaces. The Handlebar area features motorcycles. The Vet VROOM area is dedicated to Corvettes dating from 1962 to the late 1970s. Thunder Alley is the NASCAR area. Fourth is an outdoor seating area with a bar called the Brickyard Patio.
As to the exterior, our buildings look like gas stations and use colorful LED lighting. The LEDs not only save energy, but also help attract people. When you drive by one of our restaurants at night, you want to stop and see what is going on.
Who is the typical Quaker Steak & Lube customer?
We veered away from conventional marketing theory, which recommends carving out a niche. George and Gary always wanted to be all things to all people, and, by and large, they have succeeded. We attract a broad middle-class group of customers. The heaviest users range from 25 to 55, and 53% of our customers are female. Everyone asks: How can more than half of the customers in a motor-themed restaurant be women? There are a couple of reasons, including that we appeal to families. We have lots of games and lots of things for kids to do. We also work hard to make the bar female friendly.
At lunch, you will find tables of blue-collar workers, as well as doctors, lawyers and groups of elderly ladies.
What is the average footprint and site selection criteria?
Our site selection criteria include 60 different points, with the most important being a dense residential population. About 47% of our guests have children, so we’re skewed toward families with average household incomes between $35,000 and $100,000. To achieve our average unit volume, we also need nearby office, retail or industrial for a large daytime population for our lunch business. We like highway visibility, too.
Our average footprint is 7,700 sq. ft., which requires a two-acre lot, but we have two other prototypes for 6,250 sq. ft. and 5,250 sq. ft. Overall, our restaurants range from 4,500 sq. ft. to 12,000 sq. ft.
What differentiates Quaker State from the competition?
We commissioned a survey of 2,500 customers in which we asked them if they weren’t going to Quaker Steak, where would they go. Customers identified our competition as Chile’s, TGIF, Buffalo Wild Wings, Applebee’s and Red Robin. We differentiate Quaker Steak from these restaurants with our unusual motor theme, authentic decor, casual appeal, energetic music and entertainment themes. We have car cruise-ins on Sundays, all-you-can-eat wings on Tuesdays, biker night on Wednesdays.
What are your plans for expansion?
Most of our growth will come from franchising. We estimate that 70% to 80% of our future growth will be franchised restaurants. (The company plans to open 12 or more locations in 2014.)
On the company-owned side, we will expand in our heritage markets: Pennsylvania, Ohio and West Virginia. For franchisees, we will go where they want — as long as we can get product to their restaurants cost-effectively. We’re as far west as Denver now. Our northern-most restaurant is in Fargo. We’re as far south as Houston. In the Southeast, we’re in Clearwater, Florida. In the East, we’re in upstate New York and New Jersey.