Survey: Retail M&A activity to stay busy
Chicago — An overwhelming majority of retail CFOs (96%) expect merger & acquisition (M&A) activity to increase or remain consistent with 2013 levels during 2014. According to the new BDO Retail Compass Survey of CFOs, two-thirds of CFOs anticipate that the majority of deal activity will occur in the U.S., followed distantly by Asia-Pacific (17%) and Europe (8%).
Survey respondents also project that potential buyers can expect to see an average EBITDA (earnings before interest, taxes, depreciation and amortization) multiple of about 4.24, down slightly from last year’s projection of 5.15.
CFOs suggest that consolidation and fierce competition in the retail sector, which about one-third cite as a leading risk to their business, may be a driving force behind the expected increase in transactions. Just more than half of CFOs surveyed say that strategic buyers, as opposed to financial buyers, will propel M&A activity in 2014, and a plurality (42%) cite increasing market share as the main impetus behind deal activity.
Other notable findings include:
CFOs split on IPO activity. 2013 was a record year for retail and consumer products public offerings, with Renaissance Capital reporting 19 initial public offerings (IPOs) yielding $8.3 billion in proceeds. Retail CFOs have decidedly mixed sentiments about whether the industry can sustain this pace: A majority (58%) anticipate that the number of offerings will decline in 2014 as the IPO environment right-sizes. However, some CFOs believe that last year’s positive momentum will continue this year, with 33% projecting an increase, more than double the number who did so in 2012. Overall, about half expect that the majority of IPOs will occur in the e-commerce sector, followed by non-food and beverage consumer products (25%) and food and beverage (12%). Similar to last year, a plurality (35%) indicate that the strength of the U.S. economy and stock market will be the most important driver of a company’s ability to go public this year.
Sales remain a priority financial metric. Sales continue to be a key measurement against which the retail industry assesses performance. As a result, a majority (51%) of CFOs cite it as their primary financial metric, with 32% specifically pointing to gross sales and 19% pointing to comparable store sales. These numbers remain broadly consistent with the 2013 survey, when 35% and 18% of CFOs cited gross sales and comparable store sales, respectively, as their main focus.
CFOs anticipate difficulty in the capital markets. Financial market instability will likely remain an obstacle for retailers when it comes to accessing capital and credit in 2014. On the heels of the Federal Reserve’s 2013 decision to ease its economic interventions combined with fluctuations in the public markets at the outset of 2014, about three-quarters of CFOs surveyed expect to face difficulty refinancing their debt in the coming year; nearly half expect it to be “somewhat” to “very” difficult.
“Consumers are showing an increased willingness to spend, but they remain price-conscious and discerning. As a result, retailers are feeling greater pressure to meet consumer demands for convenience, product assortment and low prices,” said Ted Vaughan, partner in the Retail and Consumer Products practice at BDO. “One way of responding to these pressures is to pursue an acquisition. Many retailers see it as way to add capabilities or grow their geographic reach, while others hope to build market share by joining forces with a once-competitor.”
These findings are from the eighth annual BDO Retail Compass Survey of CFOs, which examined the opinions of 100 CFOs at leading retailers located throughout the country. The survey was conducted in January 2014.
Best Buy profits from cost-reduction program
Best Buy saw revenues slip in the fourth quarter and fiscal 2013, thanks in part to declining retail traffic fueled by a shorter holiday shopping season and severe winter weather. But all was not bad news for the retailer, which was able to profit from its Renew Blue cost reduction program.
During the fourth quarter, Best Buy reported net earnings of $311 million, a notable improvement from its $460 million net loss a year earlier. For the fiscal year, Best Buy reported net earnings of $523 million, compared to a net loss of $233 million the prior fiscal year.
The main driver of this return to profitability was Best Buy’s Renew Blue effort that saved $765 million during the fiscal year, ahead of its cost reduction target of $725 million. The program is designed produces cost savings through optimization of the field and store operating models in the U.S. and Canada, structural changes to certain compensation and benefits programs; and ongoing optimization of returns, replacements and damages. Best Buy is now targeting a total of $1 billion in savings from Renew Blue.
Cost savings came as topline performance sagged. Revenues fell 3% to $14.47 billion from $14.92 billion in the quarter and declined 3% to $42.9 billion from $43.4 billion during the fiscal year. Domestic same-store sales fell 1.2% during the quarter and 0.4% during the fiscal year.
Looking ahead, Best Buy plans to open more “store-within-a-store” partnerships with technology providers such as Samsung and Microsoft. Best Buy expects continuing slightly negative revenue and same-store sales results during the first half of fiscal 2015.
Hubert Joly, president and CEO of Best Buy, said the company managed to perform well in a difficult fourth quarter.
“As we said in our holiday sales release, the fourth quarter was an environment of declining retail traffic, intense promotion, fewer holiday shopping days and severe weather,” said Joly. “In the face of these unusual circumstances, our strategy to be price competitive and provide an improved customer experience resulted in market share gains in a weaker-than-expected consumer electronics market.”
Study: Retailers move past channels with mobile strategies
Walnut Creek, Calif. – Retailers are taking an increasingly omni-channel approach to their mobile strategies, looking to combine mobile with existing channels rather than treat it as a separate entity. According to a new study from RSR Research, “Mobile in Retail: Reality Sets In,” 49% of retail respondents said the purpose of their mobile strategy is to drive traffic to the store in 2014, compared to 33% in 2013.
Similar jumps occurred in the percentage of retailers saying the purpose of their mobile strategy (more than one answer allowed) is empowering employees to meet customer service expectations (37%, compared to 29%), help employees be more efficient (35%, compared to 0%), and provide a channel for post-sale, self-service support (21%, compared to 0%).
Other notable findings include:
• Most popular mobile business challenges are consumers using mobile as part of their shopping experience and retailers need to be there (56%), difficulty coordinating with other channels to create a seamless cross-channel experience (41%), and the need to respond to significant online traffic (33%).
• 61% of retail respondents have implemented mobile searching and selecting of merchandise.
• 62% of consumer respondents want to use mobile to check prices before buying.
• The primary at-home mobile shopping activities of consumers are researching product selection (60%), comparing prices, and viewing product ratings and reviews (57% each).