Industry Insights 1H 2012 - Retail Sector

U.S. retailers have had a challenging year as overall consumer spending remains tight and commodity costs remain elevated, resulting in sustained pressure on operating margins. Retailers capable of adapting to the current operating climate with the resources to pursue new initiatives have been successful. Specialty retailers in particular have improved offerings by carrying deeper product lines, recruiting highly experienced staff, offering unique services and by entering smaller markets.

Organic growth remains challenging across the consumer economy as overall consumption is expanding only marginally. As a result, growing retailers that are capturing market share are attracting significant premiums in the M&A markets. On the one hand, national strategic players have largely tapped-out cost cutting initiatives as a means of increasing earnings. The largest of these players are currently sitting on a record $2 trillion of excess cash, and are turning to corporate acquisitions and the low-hanging fruit of cost synergies to manufacture earnings growth. On the other hand, private equity firms are bidding up quality retail targets, driven by a current backlog of nearly $450 billion of dry powder and receptive credit markets to support deal activity. Finally, the pending threat of a rising tax environment is causing many private business owners to actively consider capitalizing on liquidity and other strategic alternatives.

Year-to-date in 2012, M&A activity in the U.S. retail sector has yielded a total of 166 announced transactions, representing aggregate deal value of $18.1 billion as of July 9, 2012.