Valuations in the retail environment

RSM’s business valuation experts set out some of the key issues impacting current valuations in the retail sector.

The retail sector has faced significant headwinds over the past couple of years, with the UK high street facing a well-documented ‘perfect storm’ of rising import costs, weakened consumer spending power and increases in both business rates and the National Living Wage.

The trading environment has, unsurprisingly, supressed public company valuations. For example, the share price of Debenhams has fallen by over 70 per cent compared to January, with a similar picture at other retailers including Mothercare and Carpetright, who both went through CVA processes in June 2018.

For listed companies, the impact of market conditions on business value is easily observed through movements in the share price. For shareholders of private companies, however, understanding the drivers of value in the changing environment can be more complex. 

Central to any valuation (whether using an earnings multiples or discounted future cash flow approach) is establishing the current trading EBITDA for the business and developing an understanding of how this is likely to evolve. 

What can affect a business’s valuation?

We have selected a handful of current issues in the sector, and consider how these might impact valuation:

Strength of online presence

Online-only retailers have generally commanded higher multiples in trading and transactions, this together with the inherent operational efficiencies achievable from having a small number of centralised distribution facilities, reflects the expectation that online retailers will continue to grow compared to traditional multi-site retailers. 

One advantage which traditional high-street retailers do have the potential to leverage, however, is the ability to integrate online and offline activities with retail premises becoming collection points and showrooms, establishing a point of difference from online-only retailers.

Property portfolio 

With store closures featuring regularly in the news, a key consideration in valuation is the average unexpired lease term. This reflects the ability of businesses to either exit unprofitable leases or renegotiate more favourable terms. The flurry of Company Voluntary Arrangements (CVA) activity is undoubtedly shifting negotiating power in favour of retail tenants (with some demanding clauses that provide automatic rent reductions where neighbouring tenants go through a CVA process). 

Ability to diversify 

Large store portfolios, or large footprint stores do not necessarily depress valuations as they can be used to diversify the underlying earnings base. A significant proportion of the retail floorspace at the new John Lewis department store at Westfield White City, for example, is dedicated to services and experiences such as eateries, beauty treatments and personal styling. 

What we can do to help

RSM’s valuation team has a wide range of experience providing valuations for clients in the retail sector.

The examples below highlight just a handful of situations where retail businesses may require specialist valuation services.

  • Restructuring – provision of an independent opinion on the enterprise value of the business as part of an option appraisal process, or where stakeholders are negotiating over restructuring the debt and equity within the business.
  • Financial reporting – supporting acquisition accounting or assisting management with goodwill impairment testing – a particular focus of regulatory scrutiny given the changes the sector is undergoing.
  • Trade/asset transfers – independent valuation of overseas operations as part of any Brexit-related international tax structuring, which is forcing some retailers to review the structure of their international businesses.

If you would like to discuss how your business is performing and the options available, please contact Philip Robinson.