M&A SPOTLIGHT

APRIL 2011
M&A Spotlight / April 2011
Advisory
April: Increase in
Retail M&A Expected
also saw the beginning of some M&A
activity recently. In March, shareholders
approved the $3 billion buyout of J. Crew
Group Inc. by private equity firms TPG
Capital and Leonard Green & Partners.
3

That same month, private equity firm
Golden Gate Capital agreed to sell a
majority stake in womens retailer J. Jill
to Arcapita Bank BSC, a Bahrain-based
investment bank, for an undisclosed
amount.
4
However, certain factors
indicate that there are still challenges
ahead for retailers. Unemployment is still
above nine percent, commodity prices
continue to rise, and higher gas prices
are cutting into discretionary income.
In order to gain a deeper understanding
of the retail landscape, KPMG LLP, in
conjunction with the National Retail
Federation (NRF), conducted a survey
of 318 retail executives in 135 North
American companies (the Survey).
5
Retailers Are Generally Optimistic
The economic slowdown was extremely
challenging for retailers. But last year,
many retailers were able to return to
profitability and are facing the current
year with renewed optimism. After
sliding in recent years, average gross
margins rose a modest .7 percent in
2010 for respondents. Although most
Survey participants were not able to
substantially increase their same-store
sales last year, an emphasis on cost
discipline meant that fewer companies
were unprofitable. According to Survey
The retail market relies heavily on
consumer sentiment and the general
state of the economy. Last year,
both seemed to rebound. December
retail sales, which include the all-
important holiday season, rose 7.9
percent, according to the Commerce
Department
1
and managed to surpass
their prerecession level. There have been
other recent signs that the retail sector
is beginning to recover. In February,
the 25 retailers that issued same-store
sales showed a 4.2 percent gain from a
year ago and certain retailers, such as
Saks Fifth Avenue, reported a 15 percent
jump in same-store sales.
2
Retailers
respondents, the number of companies
reporting operating losses shrank by
11 percent year over year.
As 2011 progressed, several retailers
posted substantially improved profit
numbers. Macys fourth quarter profit
grew 50 percent from a year ago, and
Abercrombie & Fitch Co.s profit jumped
95 percent.
6
Retailers are no longer just
focused on cost-cutting and survival. In a
relatively new state of affairs, companies
now even have enough cash on hand
to return some of it to shareholders. In
February, Kohls board authorized the
first dividend in the companys history.
The board also added $2.6 billion to its
share repurchase program, expanding it
to $3.5 billion.
7

Growth and Expansion Top the Agenda
For the first time in several years,
expansion is back on the agenda for U.S.
retailers. In a sign of growing confidence,
retailers are once again pursuing foreign
and domestic expansion opportunities.
Recently, Wal-Mart announced they
were buying a controlling stake in South
Africas Massmart Holdings Ltd. for
$2.4 billion.
8
In March, GAP announced
plans to open 11 stores this year in Hong
Kong and China and stated that it would
look at M&A opportunities in Asia as
a way to quickly enter that market.
9
In
the Survey, one quarter of respondents
said that global expansion would be a
major focus in 2011; that percentage is
1
January 12, 2011 report from the Economics and Statistics Administration, U.S. Department of Commerce:
Retail Sales in December, Fourth Quarter, and 2010.
2
The Wall Street Journal, March 4, 2011: February Sales Augur Well for Spring.
3
March 3, 2011 J. Crew press release.
4
Bloomberg.com, March 16, 2011.
5
National Retail Foundation, Ninth Annual Retail Horizons: Benchmarks for 2010, Forecasts for 2011.
5
The Wall Street Journal, February 23, 2011: Macys Profit Jumps 50%; Continued Strength Forecast.
7
The Wall Street Journal, February 24, 2011: Kohl Authorizes First Dividend; Profit Rises 14%.
8
Wal-Mart press release, November 29, 2010: Wal-Mart Confirms Offer to Acquire 51% of Massmart.
9
The Wall Street Journal, March 2, 2011: Gap Expands Japan Push.
2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and
cutting through complexity are registered trademarks or trademarks of KPMG International. 23945NSS
KPMG LLPs Transactions & Restructuring (T&R) Services practice provides merger, acquisition, and
divestiture support by identifying key risks and benefits that help derive value from a deal. KPMG offers
assistance throughout the transaction life cycle, including due diligence, accounting advisory, buy-side
and sell-side advisory, debt and equity advisory, integration and separation advisory, synergy and
operational analysis, and other corporate transaction initiatives. We remain independent of financing
sources, helping to ensure that our efforts are objective and aligned with the goals of our clients. Our
Restructuring professionals work alongside lenders, stakeholders, and management to help identify and
develop actions that can improve cash flow, profit and loss, and the balance sheet. Our range of advisory
services is tailored to the needs of both strategic and private equity investors, including limited partners,
general partners, and portfolio companies.
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The information contained herein is of a general nature and is not intended to address the circumstances
of any particular individual or entity. Although we endeavor to provide accurate and timely information,
there can be no guarantee that such information is accurate as of the date it is received or that it will
continue to be accurate in the future. No one should act upon such information without appropriate
professional advice after a thorough examination of the particular situation.
2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and
cutting through complexity are registered trademarks or trademarks of KPMG International. 23945NSS
For more information, please contact:
Rob Coble
National Leader Corporate,
Transactions & Restructuring
404-222-3014
rcoble@kpmg.com
Mark Larson
Global Head of Retail
502-562-5680
mlarson@kpmg.com
Marketing Is Getting More Personal
Retailers are becoming more
sophisticated at relating to their
customers. In this years Survey,
65 percent of marketing and advertising
executives, one-fifth more than last year,
ranked increasing customer insight and
data gathering as high priorities. During
the recession, customer relationship
management and customer loyalty
programs both gained steam as tepid
consumer spending forced retailers
to work harder to attract and retain
customers. Companies in the Survey
are also spending time behind the
scenes to give customers a better, more
streamlined experience: 18 percent
more organizations than last year ranked
integrating their online presence with
social media and other channels as a high
priority, and 59 percent plan to make it
their key focus for 2011. Three-quarters
of Survey respondents said that they
advertise with links on Facebook, Twitter,
or other sites, which is 25 percent more
than last year.
Retail companies should therefore
evaluate their customer interactions
and those of any potential target, both
to determine the loyalty of a targets
customers and also to determine if the
targets style of interaction is similar to
its own.
higher than in prerecessionary times
and four times more than the 2009
percentage. Similarly, the number of
retailers intending to grow their national
footprint is almost twice that of last year.
When asked about their top strategic
initiatives for 2011, 41 percent of Survey
respondents mentioned domestic
expansion, which is substantially higher
than the 25 percent of respondents who
said it was one of their top goals for 2010.
General budgets are also expected to
grow. Nearly two-thirds of those polled
said their companies planned to increase
their investments in store operations
this year. With the economy improving,
more retailers are planning to invest in
upgraded systems and technologies,
which had been neglected.
Cost Cutting Is Still a Priority
However, companies are still focusing on
cost containment. But cost-cutting is no
longer a matter of survival. In the Survey,
58 percent of respondents said that
cost reduction and/or cost containment
would remain a companywide strategic
initiative, compared to 81 percent in
2010. M&A deals that present cost-
cutting opportunities are therefore likely
to be popular for retailers in 2011.
The Survey also found that retailers are
signaling that mobile e-commerce, or
m-commerce, will be a top focus. In
fact, 69 percent of Survey respondents
identified it as one of their companys
strategic initiatives, up considerably from
28 percent a year ago. Targets with a well-
developed mobile e-commerce presence
might be particularly attractive in this
environment.
Conclusion
Retailers are cautiously optimistic that
the tide has turned and that consumers
will once again love to shop. Many
companies regained financial strength
by cutting costs and streamlining
systems and processes. They began to
better focus on customers with a range
of personalization techniques and by
embracing social media. As profitability
has returned, companies are once again
focusing on growth and expansion
opportunities. Several recent deals
indicate that the retail industry may be
poised for an increase in M&A. With the
lessons learned from the recent past,
astute buyers should be able to engage in
deals with long-term results that benefit
both shareholders and customers.