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What keeps retail executives up at night? BDO USA finds out

BY Michael Johnsen

 

CHICAGO — Upbeat sales projections and elevated consumer confidence levels aren't painting a rosy picture for most retail chief executives concerned about future growth, a recent report from BDO USA found. According to BDO USA’s ninth annual analysis of risk factors listed in the most recent 10-K filings of the 100 largest U.S. retailers, concerns over growth initiatives remain high, despite promising year-over-year performance across the industry. This year, 92% of companies note risks related to U.S. growth and expansion, up from 56% in 2013. Meanwhile, as more companies look strategically at consolidation as a way to increase market share, 76% note merger and acquisition risks. 
 
What’s clear is that retailers are aggressively eyeing opportunities to grow their brands and provide consumers with speed and convenience across platforms. But even with stronger cash flows at their disposal, many of these new capital investments bring greater risks and less tangible ROIs. Not surprisingly, a full 92% of companies this year cite risks around failure to execute business strategy, while 71% note failure to successfully invest capital.
 
After months of a precarious sourcing situation stemming from labor negotiations at the West Coast Ports, the 2015 BDO Retail RiskFactor Report also found that virtually all (98%) retailers analyzed are concerned about supplier and vendor risks, including shipping and imports. Although the labor issues were resolved in February, many retailers have since faced delays and increased transportation costs. These exposures, combined with rising labor and import costs from traditional sourcing regions like China, have prompted more retailers to consider near-sourcing as a strategic approach to reducing costs and liabilities. In fact, a plurality (42%) of retail CFOs cited North America as the most attractive sourcing option this year in BDO’s 2015 Retail Compass Survey of CFOs. 
 
“Until 2008, retailers’ capital spending default was to invest in opening new stores,” said Doug Hart, partner in the Consumer Business practice at BDO USA. “That default no longer suffices. Now, with the migration of customers online, the ROI on new store openings is often reduced and capital investment is being redeployed to online sales channels, supply chain networks and systems implementations. As the ROI on that spending is less proven, there is a higher risk associated with such capital investment.”   
 
BDO USA identified the top 25 risk factors cited by the 100 largest U.S. retailers:
 
  1. General economic conditions (100%);
  2. Federal, state and/or local regulations (100%);
  3. Competition and consolidation in the retail sector (100%);
  4. Implementation of maintenance and IT systems (99%);
  5. Privacy concerns related to security breach (99%);
  6. U.S. and foreign supplier/vendor concerns (98%);
  7. Labor (health coverage, union concerns, staffing) (96%);
  8. Natural disasters, terrorism and geo-political events (96%);
  9. Dependency on consumer trends (95%);
  10. Legal proceedings (95%);
  11. Credit markets/availability of financing and company indebtedness (94%);
  12. Failure to properly execute business strategy (92%);
  13. Impediments to further U.S. expansion and growth (92%);
  14. Changes to accounting standards and regulations (90%);
  15. Consumer confidence and spending (89%);
  16. Goodwill impairment (88%);
  17. International operations (86%);
  18. Environmental laws, regulatiosn and liability (83%);
  19. Loss of key management/new management (80%);
  20. Insurance costs and uninsured liabilities (77%);
  21. Mergers and acquisitions and joint ventures (76%);
  22. Intellectual property infringement (72%);
  23. Failure to successfully invest capital (71%);
  24. Inventory balance (69%); and
  25. Advertising, marketing and promotions (68%). 
 
Along with top industry risks, the BDO study looks at specific challenges retailers cite under general economic conditions. For the second year in a row, interest rates (88%) came in as the most frequently cited economic concern over fuel prices (83%). With unemployment now well below 6%, both retailers and consumers alike are looking to the Federal Reserve, to see if it will soon curtail its easy-money policy and increase what have been historically low interest rates over the past several years. If it does normalize rates, companies are well aware of the potential negative impact on consumer spending, as well as their debt financing.
 
With the U.S. dollar’s value having risen 22% in the last 12 months, currency rate risks and their impact on profits and revenues are top of mind this year for a full 82% of retailers. For retailers with stores in European and BRIC countries (Brazil, Russia, India and China), converting foreign sales to U.S. dollars currently can cut deep into margins, and sourcing internationally in U.S. dollars can have the same costly effect. Meanwhile, nearly nine-in-ten companies cite international operations risks this year surrounding economic conditions, laws and regulations such as the Foreign Corrupt Practices Act.
 
As retail CFOs predict nearly double-digit online sales growth this year, according to BDO’s 2015 Retail Compass Survey of CFOs, virtually all (99%) retailers now cite both IT system operations and cybersecurity threats as top risks. Although IBM calculated that the number of cyber breaches against retailers actually declined in 2014, the high legal, operational and reputational costs associated with point-of-sale intrusions and web application attacks still very much have retailers up at night, especially as they expand their digital offerings and become increasingly cloud-based in the year ahead. A majority (56%) of retailers are proactively investing more into their cybersecurity measures in 2015, according to BDO data, but heightened concerns over legal proceedings (95%) point to the significant, wide-reaching damage that IT failures can inflict on retailers. 
 
Labor risks remain top of mind for a full 96% of retailers. Faced with the pressures of a tightening workforce, retailers are struggling to hire and retain qualified store associates and distribution center workers. Major players like Wal-Mart are increasingly offering benefits and higher wages in an effort to attract and keep the best workers. It can be a costly investment in an environment of rising healthcare costs, cited as a risk by 63% of retailers, but a critical one in today’s ultra-competitive labor market. Competition for top industry leaders also remains entrenched, with four-in-five retailers citing risks related to attracting and retaining key management personnel. 
 

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Sears Holdings, Walgreens finance veteran lands CFO job at LivingSocial

BY Michael Johnsen

WASHINGTON — LivingSocial, the local marketplace to buy and share the best things to do in your city and beyond, on Thursday announced the appointment of Sears and Walgreens veteran Atul Kavthekar as CFO. He will join the company in June, and will report to president and CEO Gautam Thakar.
 
“Atul is a seasoned finance leader with deep retail, ecommerce, corporate development and strategic experience, which will be a tremendous asset in shaping the refounding journey at LivingSocial,” said Thakar. “We are thrilled to have him join the team at this important stage of the business.”
 
Having started his career as an engineer, Kavthekar brings more than 20 years of experience in finance, banking and strategic business development. Prior to LivingSocial, he served as CFO and head of corporate development for Sears Holdings Corporation’s Health and Wellness Solutions business unit. In this position, he was responsible for overall financial management, corporate and business development, and strategic planning for the division.
 
Prior to Sears, Kavthekar was the CFO for Walgreens’ ecommerce division, where he oversaw the financial management and business development of the retailer’s rapidly growing, multi-billion dollar unit, including its mobile, tablet and website platform development. Also at Walgreens, he was a leader in mergers and acquisitions and strategic investing, including the company’s acquisition of drugstore.com. Kavthekar was responsible for the overall financial performance of walgreens.com, drugstore.com, beauty.com, skinstore.com and visiondirect.com, as well as additional venture capital investments.
 
Earlier, Kavthekar held senior investment banking positions at KPMG Corporate Finance, Trenwith Group and Morgan Stanley. In these roles, he led corporate development initiatives and transactions across multiple industries, sectors and countries.
 
Kavthekar has an MBA from the University of Chicago Booth School of Business, a master’s degree in industrial engineering from Wayne State University and a bachelor’s degree in engineering from the University of Michigan.
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Family Dollar merger almost done, Dollar Tree says

BY Michael Johnsen

CHESAPEAKE, Va. — Dollar Tree on Thursday reported progress with the Federal Trade Commission and divestiture buyers in order to complete the company's pending acquisition of Family Dollar. The FTC's staff has substantially completed its review and Dollar Tree plans to divest approximately 330 Family Dollar stores representing approximately $45.5 million of operating income. The company intends to reach an agreement with a divestiture buyer in the coming days and secure FTC clearance thereafter. 
 
Dollar Tree intends to close the proposed merger in early July 2015.
 
The dollar store operator, which sells everything in its stores for $1 or less, reported consolidated net sales of $2.2 billion, up 8.8%, for its first quarter ended May 2. Consolidated same-store sales increased 3.4% on a constant currency basis, compared to a 2% increase in the prior-year period. 
 
"Comparable store sales grew as the result of increases in both traffic and average ticket," said Bob Sasser, CEO Dollar Tree. "Customers are shopping with us more often and they are buying more on each visit. Our performance continues to validate that Dollar Tree is part of the solution for millions of customers seeking great values for their hard-earned dollars. Despite challenges presented by delayed receipts of merchandise related to the West Coast port congestion and the impact of the holiday calendar shift, our team worked together to deliver solid sales and earnings, both of which were well within our guidance range. We entered the second quarter with fresh inventory, stocked shelves and greater values than ever for our customers."
 
Dollar Tree opened 93 stores, expanded or relocated 10 stores, and closed six stores during the quarter. Retail selling square footage increased to 47.2 million square feet, a 7.1% increase compared to the prior year.
 
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