Table of Contents I. Retail & Consumer Products Leadership Team 3 II. The 2013 Holiday Season Outlook 6 III. U.S. Retail Sector Trends 14 IV. Appendix: Macroeconomic Outlook 21 2
Retail & Consumer Products Leadership Team
Our Retail & Consumer Products Experts Bob Duffy Steve Coulombe Mark Weinsten Global Leader, Retail & Senior Managing Director Senior Managing Director Consumer Products Boston, MA Boston, MA Boston, MA +1 617 897 1501 +1 617 897 1515 +1 617 897 1522 mark.weinsten@fticonsulting.com bob.duffy@fticonsulting.com steve.coulombe@fticonsulting.com Over 20 years restructuring 15+ years restructuring experience 19 years restructuring experience experience, including experience as Significant experience and expertise Substantial experience negotiating COO and CRO of retailers in advising underperforming loan agreements and debt Specializes in revitalizing specialty retail companies restructurings underperforming retailers that need Experience as interim CFO of Assisted financial sponsors and fast and decisive improvement $600M+ furniture retailer strategic acquirers in assessing and Led over 40 assignments involving analyzing potential transactions Led efforts to raise new and retailers replacement financing for several Significant experience and expertise Led many large and high profile specialty retailers in advising underperforming engagements for companies and companies Developed and implemented asset equity sponsors disposition and cost containment Assisted companies in creating Instrumental in the creation of cash plans liquidity to avoid impairment of flow forecasting systems and operations and executing Worked extensively with suppliers implementation of action plans to restructuring plans and customers to minimize working increase cash flow and reduce capital needs Implemented initiatives necessary working capital to realize cost synergies associated Effective at implementing cost Established credibility with banks with acquisitions effective out-of-court store closure Effective at negotiating with banks programs M.B.A., Wharton School, UPenn and creating solutions for retailers B.S., Carnegie-Mellon University M.B.A., Babson College M.B.A., Kellogg School, B.A., University of Massachusetts Northwestern B.S., Babson College 4
Retail and Consumer Products Practice Overview Busi Bu siness S s Strategy Pe Performan ance & & Process Corporat ate F Finan ance Strategic diagnostic Store portfolio Working capital Our retail and consumer practice is dedicated to helping ■ ■ ■ Business strategy optimization management companies and their stakeholders at every stage of the ■ development Merchandise Finance organization ■ ■ corporate life cycle to prosper in the midst of market Business plan assessment transformation ■ changes. assessment Marketing effectiveness M&A / IPO advisory ■ ■ We apply our highly developed analytics and expertise to Strategic Store operational Investor relations ■ ■ ■ move decisively, and our network of relationships with key communications efficiency industry players keeps us on the cutting edge of industry Cost optimization ■ trends and provides us with unmatched capabilities. We have been engaged by many of the world’s leading retail and consumer companies to provide a wide range of services. Retai ail a l and Consumer P Prod oducts E Engag agements Restaurants and Pubs Specialty Retail Consumer Products Grocery and Food Stores Education Apparel 5
The 2013 Holiday Season Outlook
Holiday Season Outlook Overview Our forecast model projects that nominal sales of holiday-inclined merchandise will increase by 4.9% in 2013 — an average year by historical standards but, nonetheless, one with which we suspect most retailers will be pleased. Holiday sales consistently account for about 28%-32% of annual sales but 35%-45% of annual operating profits. Department stores are the most seasonally influenced retail segment, followed by specialty apparel. Many stores have begun to run holiday promotions prior to Black Friday and hold longer store hours in November. These earlier holiday promotions are increasing the length of the holiday season to well before Black Friday. We expect an increasing share of sales to be claimed by the online channel this holiday season. Shopping mall traffic figures have weakened in recent seasons as the convenience, transparency and deals found online have become irresistible to many millions of shoppers. This trend will continue in 2013. The thrill of hitting the malls has waned for many Americans; we still do it but are making fewer trips during the holiday season. A key concern for retailers during the holiday season will be the prospect of depressed margins. Although promotions and discounts drive sales, retailers will need to be especially conscious of the bottom line. Aggressive promotions across the retail sector benefit consumers but often do little or nothing for the sector’s overall profitability. The season itself is always a promotional one; the key question always is how soon and how deep? Macy’s strong third-quarter results and fairly bullish comments regarding the upcoming holiday season indicate that the outlook for the season isn’t as gloomy as some have made it out to be, though low-end retailers will continue to see extremely value conscious shoppers. 7
And the Survey Says… We also recently surveyed nearly 10,000 adults across the nation in an online survey about holiday shopping intentions and attitudes. Some of the more noteworthy findings of the survey include: 63% of respondents intend to spend as much on holiday gifts as they did last year; 12% will spend more, 19% will spend less, and 7% don’t intend to spend on gifts this season. Households with income greater than $100,000 will spend twice as much this holiday season as those with incomes below this threshold. On average, Americans surveyed spend approximately $1,200 on total holiday spending in a typical year, though the median is $500—an indication that high spending households have a strong influence on the average amount spent. Respondents on average will purchase gifts for four adults and nearly three children this holiday season. Respondents in households with children will purchase gifts for nearly four children. Approximately 51% of respondents’ holiday budgets will be spent on gifts this year, with the balance for entertaining, decorating, dressing up, and holiday-related travel. Amazon.com is the favored shopping destination for gifts among our respondents, with 22% citing it as their favorite shopping destination, followed by Wal-Mart at 19% and Target at 8%. Online shoppers tend to spend more, with those who say they do most of their holiday shopping online spending an average of $1,721 versus $1,015 for those who shop primarily in stores. 51% of Americans love the holiday season planning, preparation and shopping, while 31% says it causes them a great deal of stress. Higher income households enjoy the holiday season more, with 70% of the top 1% of spending households saying they love it and 63% of the next 19% of spending households indicating that they too love it. 8
The 2013 Holiday Season May Look A Lot Like Last Year We expect the 2013 holiday season to be similar to last season—characterized by solid, but not great, sales growth. We do not share the dour outlook some have expressed for the season. Nearly all our forecast variables have improved to some degree from a year ago. Online sales, which account for 15%-20% of total holiday season sales, should grow at a 15%-20% rate this season while store-based sales should increase by 2.0%-3.0%. (Note that the chart below shows all non-store sales growth, which includes the weaker catalog and other direct-to-consumer channels.) U.S. Monthly Retail Sales (YOY % change in nominal sales) 18.0% 16.7% 16.0% 15.0% 14.0% 11.8% 11.6% 11.6% 12.0% 11.1% 10.0% 9.1% 8.2% 8.0% 6.8% 5.9% 6.0% 5.7% 5.7% 5.5% 6.0% 5.0% 4.7% 4.5% 4.2% 4.2% 4.0% 3.7% 3.2% 4.0% 3.2% 1.9% 2.0% 0.0% Nov-11 Dec-11 Jan-12 Holiday 2011 Nov-12 Dec-12 Jan-13 Holiday 2012 GAFO Category Stores Non-Store Sales Combined Source: U.S. Census Bureau 9
Online Channel Getting a Bigger Piece of Holiday Sales The non-store channel, primarily online sites, have been getting a larger share of holiday sales since 2009. Many consumers believe the best deals to be had are found online. That has generally been true in recent years but the announced price-matching policies of many large retail chains this year may slow this migration. Free shipping is a highly valued attribute for most online shoppers during the holidays. The soaring popularity of tablet computers has made mobile transacting online much more shopper-friendly since 2010. We expect online sales will continue to increase at a mid-teen rate (YOY) this holiday season. Relatively speaking, January, which we include in our holiday season, is the strongest month of the year for online sales share. Non-Store Sales as a % of Adjusted GAFO Sales 25% 20% 15% 10% 5% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Rest of Year Avg Nov-Jan Average Source: U.S. Census Bureau 10
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