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How Retail Industry in the USA is Adapting to the “New Normal”

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Financial Policy of Retail Sector of US Companies

The deterioration in economic conditions that began in 2007 affected the business across all sectors; and the retail sector was among one of the major sector hit. Elevated unemployment, tightening of consumer credit along with the decline of the housing and stock markets in United States contributed strongly to the reduction in consumer spending and thus a negative impact was seen in the revenue generation for retail sector.

The deterioration of economic conditions affected credit customers’ payment patterns resulting in increased bad debt expense. With improvement seen in the macroeconomic indicators recently, business improvement is seen but owing to the key factors such as employment levels, consumer credit and housing market conditions remaining weak, a sluggish economic recovery is on the cards currently. In such a volatile situation it became important for the companies to plan their expense and other financial policies like acquisition, shareholder rewards etc. accordingly.

Analysis of Trend in Capex in different Retail Sub sectors

Talking of the financial policy followed in retail sector specifically, we see a similar trend in Capex across all the sub sectors viz. Auto Parts, Department Stores, Discounters and Off Price, Home Furnishing, Home Improvement, Restaurants, Supermarkets and US Retail and restaurant companies. A rising capex was seen in the year 2008 with comparatively low magnitude than the year preceding. Subsequent fall was seen across majority of sub sectors for the year 2009 and 2010. Sub sectors like Auto and Supermarkets were the one which were the exception and saw a rising capex in the year 2010. The year 2011 seemed to be somewhat improving year across all sub sectors in retail and a rising spree was seen.

Given below is the analysis of trend in capital expenditure in the various retail sub sectors:

i) For Investment Grade companies like Target Corp. (Ticker Symbol: TGT) capex was $4,368 million in 2011, compared to $2,129 million in 2010 and $1,729 million in 2009. The increase was driven by the company’s purchase of Zellers leases in Canada and also included store remodels.

ii) Looking at the auto parts subsector we see that for Advance Auto Corp. (Ticker Symbol: AAP) the primary capital requirements have been the funding for continued new store openings, maintenance of existing stores, the construction and upgrading of distribution centers, and the development of both proprietary and purchased information systems. An increase to an extent of 68.5 million was seen for the year 2011 when the capex reported was $268.1 million.

iii) For the restaurants subsector, when the food giant McDonald’s Corp. (Ticker: MCD) reported a 28% increase in capex in the year 2011, owing to higher reinvestment in existing restaurants and higher investment in new restaurants. In 2011, the Company opened 1,118 traditional restaurants and 32 satellite restaurants with closure of 246 traditional restaurants and 131 satellite restaurants. Thus with the signs of upturn in the global economy the companies in retail sector are going for network expansion by opening up of stores and thus have high capex.

iv) Few acquisitions took place in sub-sectors such as restaurant which were mainly the acquisition from franchisee and were not meant to diverse the operating business. Companies like Yum! Brands Inc. (Ticker Symbol: YUM) completed the acquisition of Pizza Hut in 2006, which turned favorable for them in later years during recession as it helped greatly in revenue generation.

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To conclude we see that due to the changing consumer behavior during the recession period, companies in investment grade started M&A so as to improve on their product lines and market penetration as experimenting from scratch was not a very feasible option. Also capital expenditure was reduced slightly which later improved during 2010 and 2011, with the changing macroeconomic conditions. During the said period, positive movement in the market allowed companies to announce dividends and share purchase program which saw a tremendous rise after several years of continuous decline. For speculative grade companies, maintaining the credit worthiness (rating) during 2008 was a major policy followed.

Companies lowered their acquisition and increased capital expenditure during the period which was used mainly for the maintenance and modification work of existing retail stores. Also a lot of emphasis on customer service and satisfaction was laid on by these companies. Later, with the economic support the acquisitions improved and better results allowed companies to increase on its share repurchase and dividend payout.

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Niraj Satnalika

Niraj is an MBA in International Business (Finance). Prior to this he completed B.Tech in Electronics and Instrumentation. He is currently working with Confederation of Indian Industry (CII), Kolkata in capacity of Consultant. Satnalika is actively involved with an NGO and works towards promoting education among the underprivileged.

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