2011 retail sales to increase 3 percent, BDO-USA survey finds
— Retail CFOs forecast stagnant economic conditions amid low confidence levels
Chicago, IL – In the midst of a difficult economic climate, retailers expect solid year-end results. According to a recent survey by BDO USA, LLP, retail CFOs anticipate a 3 percent increase in total 2011 sales. While this marks the study’s most optimistic sales forecast since 2007, it is down from the 4.7 percent sales increase reported by the Commerce Department in 2010.
The vast majority (77%) of CFOs also say they expect to see a continuation of stagnant economic conditions. Just 11 percent expect to see an economic turnaround in the next year, up slightly from 2010 (9%). Thirty-eight percent of CFOs say improved consumer confidence will be most important factor for economic recovery, and another 36 percent cite lower unemployment as the linchpin.
“Retailers may not anticipate a full recovery in the near future, but we’re not seeing gloom and doom in sales expectations,” said Doug Hart, partner in the Retail and Consumer Product Practice at BDO USA, LLP. “Despite low confidence levels, macroeconomic conditions are not weighing on the consumer’s wallet as much as expected, and CFOs anticipate moderate spending levels to continue through the holiday season.”
These findings are from the fifth-annual BDO Retail Compass Survey of CFOs, which examined the opinions of 100 chief financial officers at leading retailers located throughout the country. The retailers in the study were among the largest in the country, including 10 percent of the top 100 based on annual sales revenue. The survey was conducted in August and September of 2011.
Other major findings of the 2011 BDO Retail Compass Survey of CFOs:
CFOs Forecast Comparable Store Sales Increase. Retailers are moderately optimistic for sales in the second half of 2011, including the all-important holiday season. A majority (51%) expect sales to increase during this period, up from 44 percent in 2010. Overall, retailers project a 3.5 percent increase in comparable store sales for the second half of 2011, an increase from CFOs’ pessimistic 2010 projections (1.9%). For all of 2011, retail CFOs forecast a 2.3 percent increase in comparable store sales.
M&A Activity to Increase, Focused in U.S. Market. The appetite for M&A deals is on the rise. Nearly all (96%) of retail CFOs expect M&A activity to increase or remain steady in the next year. Most CFOs (66%) expect M&A activity to take place primarily in the United States, followed by the Asia-Pacific region (18%) and Europe (16%). However, the CFOs in the top 100 largest retailers who were included in the sample have greater expectations for the international market. Seventy-five percent of CFOs in the top 100 expect Europe to see the majority of M&A activity.
Both Strategic and Financial Buyers Key to M&A Uptick. Although private equity deals have dominated acquisition activity, CFOs are predicting an increase in strategic buyouts this year. In fact, CFOs are split on whether upcoming M&A activity will be primarily driven by strategic buyers (52%) or financial buyers (48%). On average, CFOs say they would expect to see an EBITDA (earnings before income and tax, depreciation and amortization) multiple of 6.6 for an acquisition in the retail and consumer product space. According to averages from PitchBook, this multiple is down from the 2010 average of 6.8 and the 2009 average of 8.2.
Revenue & EBITDA are Primary Financial Metrics. Retailers place great weight on sales growth, and 38 percent of CFOs say revenue is their primary financial metric focus. Still, another 36 percent say EBITDA is their primary financial focus. Sales growth is normally considered the best snapshot of the strength of the retailer’s brand, and competitive positioning. However, when it comes to credit and financing decisions, EBITDA is paramount, as it is considered the best indicator of recurring cash flows.
Unemployment Still Plaguing Consumers. With unemployment levels hovering around 9.1 percent, it’s no surprise that CFOs cite it as the biggest barrier to consumer confidence (57%) so far this year. CFOs also point to fuel prices (17%), personal credit availability (14%), weak housing market (7%) and inflation (5%). CFOs surveyed after the U.S. credit downgrade noted a greater concern over personal credit, with 21 percent citing it as the biggest barrier to confidence, compared to 14 percent of the sample overall. For the remainder of 2011, CFOs consistently say unemployment (64%) will be the biggest bully to confidence, and relief does not appear to be in sight. The Congressional Budget Office predicts that unemployment will remain above 8 percent until 2014.
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 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm services clients through more than 40 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global network of 1,082 offices in 119 countries.
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