CHICAGO — the retail industry is poised for another busy year of mergers and acquisitions. A BDO USA, LLP survey of 100 retail chief financial officers found that 59 percent of them expect M&A activity in the retail industry will increase this year, even on top of last year’s strong results. This marks the most bullish forecast for deal flow seen from retail CFOs in the survey’s history. In fact, 16 percent of CFOs say M&A is the growth tactic they are most heavily focused on for 2015, up notably from just three percent in 2014. Seventy-three percent of CFOs expect M&A will take place primarily in the United States, and 15 percent expect Asia to see the most activity.
What’s driving deal flow? A majority of CFOs (56 percent) say strategic buyers will be the most acquisitive, while 44 percent point to financial buyers. Retail CFOs say strategic buyers will be primarily targeting market share (cited by 43 percent) and increased geographic coverage (cited 24 percent, up from just 8 percent in 2014). Another 16 percent say increased revenue and profitability will be the top driver, 12 percent say technology assets and intellectual property, and six percent cite increased distribution channels as the top driver of strategic deals. CFOs expect buyers will pay an average EBITDA multiple of 5.2, up from 2014’s projected multiple of 4.2.
“Behind the uptick in retail deal flow is one simple truth,” says Ted Vaughan, partner in the Consumer Business practice at BDO. “Many traditional brick-and-mortar retailers have fewer opportunities for growth, and are turning to M&A to gain market share through consolidation or enter new markets to extend their brand and reach. On the other hand, we’re seeing more and more online-only retailers eyeing floor space to demo products and engage with consumers, and acquisitions can be an effective way to do so.”
These findings are from the ninth annual BDO Retail Compass Survey of CFOs, which examined the opinions of 100 chief financial officers at leading retailers located throughout the country. The survey was conducted in January 2015.
Other major findings of the 2015 BDO Retail Compass Survey of CFOs:
Retailers Look to Source Closer to Home. Amid ongoing labor issues at the West Coast ports, as well as congestion that will likely cause delays and increase transportation costs over the coming years, retailers are taking a close look at their sourcing strategy. This year, 43 percent of retail CFOs said that North America was the most attractive sourcing option this year, with another 12 percent citing Central America, including Mexico, and four percent citing South America. Although costs of labor and importing from traditional sourcing strongholds like China are on the rise, 37 percent of CFOs still say Asia is the most attractive sourcing opportunity.
Retail IPOs Hold Steady but Strong. Two-thirds of retail CFOs expect the number of retail and consumer products IPOs to stay about the same as 2014 levels, while 20 percent forecast an increase. These projections are in line with BDO’s recent IPO Outlook Survey which found that a plurality of investment bankers (45 percent) expect the number of retail and consumer IPOs to remain flat this year, and 26 percent forecast an increase. According to Renaissance Capital, 2014 saw 16 retail and consumer IPOs, down slightly from 2013 levels, but retail IPOs were among the top performers for the year. Positive returns from the IPO of PE-backed Michael’s in 2014 are an encouraging sign for both specialty retailers and PE-backed opportunities in the industry. CFOs say strength of brand (cited by 37 percent) and the strength of the U.S. economy and stock market (cited by 31 percent) will be the top factors driving a company’s ability to go public this year.
IPO Candidates in E-commerce, Consumer Products Sectors. When asked which sectors are likely to see the most IPOs in 2015, a plurality of retail CFOs (47 percent) point to e-commerce and 31 percent say consumer products. Just five percent of CFOs expect restaurants to see the most IPOs this year, which is surprising given the success and returns from fast casual concepts Zoe’s Kitchen and The Habit Restaurants’ offerings last year. Shake Shack’s January IPO gave the company a valuation of $1.6 billion after the first day of trading, according to Nation’s Restaurant News.
“Recent restaurant industry IPO debuts like Shake Shack and El Pollo Loco have been turning heads,” said Alexis Becker, co-leader of the Restaurant practice at BDO. “There’s a bright spotlight on the hybrid fast-casual segment whose enthusiastic followers and well-known brands are rattling traditional fast food and casual restaurants, and CFOs’ conservative forecast for restaurant IPO activity in 2015 may reflect the uncertainty of the impact of this competitive and quickly evolving sector.”
Focus on Finances, Retailers Eyeing EBITDA. While the market may still be looking to sales as the best indicator of performance, a plurality of CFOs (39 percent) say the financial metric they are most focused on is EBITDA. This year, only 20 percent of retailers say they are most focused on gross sales, down from 32 percent in 2014 and 35 percent in 2013. Another 20 percent say they are watching free cash flow most closely, while 11 percent point to comparable store sales and 10 percent say return on equity is their most important financial metric. As retailers look to liquidity to help fuel strategic initiatives, and given the positive market conditions, many may look to refinance debt. Just over two-thirds of retail CFOs (68 percent) expect to encounter some level of difficulty refinancing debt this year, down from 74 percent in 2014. However, only six percent of CFOs expect it to be “very difficult.”
The BDO Retail Compass Survey of CFOs is a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, whose executive interviewers spoke directly to chief financial officers using a telephone survey conducted within a scientifically-developed, pure random sample of the nation’s retailers.