Article

IPO or no IPO? Top considerations for retailers mulling going public

The IPO landscape is attractive for retailers within special or unique niches, especially for those that can build grassroots buzz and differentiate themselves in a loaded market.

August 19, 2015

By Gary Shamis, Dustin Minton and Natalie Kotlyar

Last year saw a marked increase in retailers exploring going public, with around half a dozen companies taking the plunge with an IPO. Consumers have more dollars to spend with help from a strong dollar and low oil prices, and more shoppers are eager to spend those extra dollars on healthy, innovative foods when eating out. The current IPO landscape is attractive for retailers within special or unique niches, especially for those that can build grassroots buzz and differentiate themselves in a loaded market. Furthermore, the critical mass required to go public has dropped significantly in recent years, paving the way for smaller companies to pursue IPOs.

Exploring an IPO can be an exciting venture, but knowing whether the time is right can be difficult and riddled with a variety of complex considerations.

Heightened Regulatory and Internal Control Requirements up the Ante

Public companies are subject to more bureaucratic business environments than privately held companies, and therefore must implement a more sophisticated corporate structure to allow for proper governance. Necessary compliance measures such as establishing audit committees and structuring an independent Board can be costly and time-consuming, while also adding a layer of oversight that executive teams may not have anticipated ahead of the IPO.

Retail CEOs and CFOs are no strangers to risk, but going public brings up a new crop of business considerations and risks that are unique and personal for these individuals. Specifically, the Sarbanes-Oxley Act, or SOX, requires that senior management assume personal responsibility for the accuracy of reported financial statements, including quarterly and annual reports to the SEC. Another key provision of SOX requires management to establish extensive internal controls, as well as reporting methods on their adequacy.

For growth chains focused on finding an influx in funding to sustain needed changes and expansions, it's important not to forget the elevated regulatory requirements associated with an IPO, or underestimate their ramifications on business functions.

New Stakeholders Intensify Earnings Pressure and Financial Scrutiny 

When going public, retailers open themselves up to scrutiny from a variety of stakeholders that might not have impacted them previously, including investors, analysts, regulatory bodies, the public and the media.

One driving force behind the recent uptick in retail IPOs is a trend toward major spikes in valuation.  Many retailers choosing to pursue an IPO have extensive growth plans that benefit from the influx in capital that comes with an IPO offering.

But high valuations result in a pressure to maintain earnings per share and trade at a high level, placing public retailers under a microscope. Quarterly reporting to the SEC can also add a level of required financial oversight that many smaller companies might not have practiced prior to considering an IPO.

Broad Market Conditions Shape the Funding Landscape

Private equity investments are made with the ultimate goal of turning the investment into a liquidity event within approximately five to seven years, either by selling to another company or by taking the business public. This timeline has held true as many retailers that received post-recession private investments have evolved into potential IPOs today.

Retailers looking for funding can also consider holding onto their concept, or pursuing further investment from private equity. Some well-established legacy concepts benefit from choosing to remain private, though in the current business landscape, the trend favors public offerings among emerging brands.

Gut Check: How do Internal Factors Affect your Growth Potential?

Retailers should weigh timing and their business's overall outlook by considering various factors that might impact growth potential, including location, branding, competition and potential for market differentiation.

Assessing the level competition in a retailers' target space plays a role in its growth potential. For example, Fitbit, which recently went public, led the charge in monetizing the fitness craze. Despite high-end competition from Apple and others, the emerging wearable tech trend creates ample opportunity for the dedicated activity tracker and smartwatches company to grow its footprint. 

Retailers thinking about an IPO should also consider whether the concept will be able to differentiate itself in the market. For instance, e-commerce site Etsy spearheaded the peer-to-peer marketplace concept in the world of online shopping, and its focus on handmade and vintage items differentiates them further as consumers increasingly value artisanship and authenticity.  

Looking Ahead

2015 may not be a record-breaking year for retail and consumer IPOs, particularly given tough comparisons with Alibaba's impact on 2014 numbers, but we expect that as innovative concepts emerge, the market will continue to provide fruitful opportunities for retailers and investors alike.

Gary Shamis is a national growth and strategy officer with BDO USA, and co-leader of the firm’s dedicated restaurant practice; Dustin Minton is an Assurance partner with BDO USA's restaurant practice; Natalie Kotlyar is a partner in the consumer business practice at BDO USA.