Market Overview

BRG Study: Retail's Hollow Victory- the Higher-Sales/Lower-Profitability Conundrum from Recent Sales Growth

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Despite increasing sales in the fourth quarter of 2017, many
retailers still face declining gross margin percentages and lower
overall EBITDA.

Berkeley Research Group released today a report prepared by
professionals from its Retail Performance Improvement practice showing
that in spite of healthy sales increases in the fourth quarter, many
retail executives felt the impact of a dynamic business environment that
challenges retail companies on numerous fronts, including new
technology, evolving consumer preferences, digitalization and new
competitors.

"Recent strength in year-over-year sales increases is not surprising,"
said Managing Director Keith
Jelinek
, co-leader of BRG's Retail Performance Improvement practice.
"We questioned whether the sales increases are actually driving
increased profitability."

Entering the fourth quarter of 2017, BRG's Retail team conducted a
survey of over one hundred retail executives and asked about their
expectations for the holidays and what they foresaw in terms of
promotional activity. Based on the survey responses, the BRG Retail team predicted
another year of moderate year-over-year sales growth, coupled with
significantly lower retail margins resulting from aggressive promotional
activity during the holiday season. The new ex-post analysis completed
by BRG's Retail team suggests that while sales outperformed
expectations, gross margin percentages did decline.

To gauge the impact of promotional activity, BRG professionals examined
the financial results of seventy-seven large and medium-sized public US
retailers across eighteen retail channels. They found that while total
sales increased 5.5 percent and gross margin dollars increased 3.3
percent, gross margin rate declined by 55 basis points—high promotional
activity had its expected impact, especially on the bottom line.

The BRG Retail team's analysis also shows that the top-line growth did
not translate to increases in EBITDA improvements in all channels. In
addition to gross margin softness due to promotional activity, they
found that retailers continue to face higher cost to serve in the highly
competitive retail environment. The authors believe that the higher cost
comes from increased transportation costs, wage pressures in a tighter
labor market and greater cost of complexity from delivering omni-channel
initiatives and other efforts to grow the business.

"In today's fluid and competitive consumer environment, retailers still
believe they have to entice consumers with aggressive prices and
promotional discounts—and this may be the case," said Managing Director Rick
Maicki
, co-leader of BRG's Retail Performance Improvement practice.
"But based on our examination of Q4 results, the much-heralded sales
bump over the holidays failed to generate added profitability for retail
in aggregate and yielded a profit increase for only a subset of
retailers."

According to the authors, despite recent green shoots, retail remains a
stressed industry. Companies in all retail categories have undergone a
wave of disruption, and over the last few years some have fallen short
in addressing challenges. Those that remain will face more tests, but
opportunities exist for those that can piece together the puzzle. They
say it will require a strategic and coordinated effort across the
operation, as well as flexibility in addressing both short- and
long-term challenges.

"Attracting new customers and keeping loyal shoppers ‘in the fold' is
never a fait accompli," said Managing Director Rich
Vitaro
, co-leader of BRG's Retail Performance Improvement practice.
"We have identified six strategies that help retailers profitably grow
the business while maintaining a relentless focus on cost and complexity
reduction."

The full report is available here.

About Berkeley Research Group, LLC

Berkeley Research Group, LLC (www.thinkbrg.com)
is a leading global strategic advisory and expert consulting firm that
provides independent advice, data analytics, valuation, authoritative
studies, expert testimony, investigations, transaction advisory,
restructuring services, regulatory and dispute consulting to Fortune 500
corporations, financial institutions, major law firms and regulatory
bodies around the world. BRG experts and consultants combine
intellectual rigor with practical, real-world experience and an in-depth
understanding of industries and markets. Their expertise spans economics
and finance, data analytics and statistics, and public policy in many of
the major sectors of our economy, including healthcare, banking,
information technology, energy, construction and real estate. BRG is
headquartered in Emeryville, California, with offices across the United
States and in Asia, Australia, Canada, Latin America, the Middle East
and the United Kingdom.

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