IPO Forecast

By most accounts, 2013 was a banner year for IPOs. According to Renaissance Capital, a total of 222 companies went public in 2013, marking the best year for the IPO market since 2000. As we predicted in a previous article in Chain Store Age, the retail and consumer products industry played a key role in this IPO activity, accounting for 19 offerings and $8.3 billion in proceeds. This marked a notable increase from the number of offerings seen in 2012 (15) and 2011 (12), according to Renaissance Capital.

Moreover, performance was strong. Renaissance Capital reports that the average return overall was 41%, with the retail and consumer products industry posting a strong showing. In fact, according to the Motley Fool, four retail chains doubled their IPO price this year: The Container Store, Potbelly, Noodles & Co. and Sprouts.

Our 2014 IPO Outlook Survey recently polled 100 capital markets executives on their expectations for the IPO market in 2014 and found that investment bankers are projecting continued growth on U.S. exchanges. Nearly two-thirds (63%) predict an increase in U.S. IPOs in the coming year, and on average, investment bankers predict a 9% increase in the number of IPOs in 2014.

Capital markets executives are most bullish for increased activity in the technology, energy, biotech and healthcare sectors, with most investment bankers (52%) expecting retail and consumer products IPO activity to be flat, and just 22% forecasting an increase. While the number of retail IPOs may not be headed for large increases, it’s important to remember that these projections come on top of a record year for offerings in the industry. Moreover, there are reasons for investors to have continued optimism in the industry.

Positive performance in 2013 will likely be encouraging to retailers who are considering IPOs in 2014, and ongoing low interest rates will help with investor demand. On the consumer spending front, the NRF reports that holiday sales met expectations and increased 3.8% over 2013. However, many retailers depended on deeper and longer discounts that harmed margins and are causing some to trim their holiday quarter profit expectations.

Given these results, the holiday season is unlikely to have a major impact on the IPO environment this year. Still, we know consumers have been spending on big-ticket items like homes and cars, and renewed confidence bodes well for spending across the board as we enter 2014.

As the economy continues to slowly improve, private equity firms are seeing better opportunities to finally turn over their retail investments. A plurality of bankers  in our survey (43%) identified private equity portfolios as the biggest source of offerings this year, and we expect private equity will be a significant backer of IPOs in the retail industry this year.

The U.K. market also appears ripe for PE-backed IPOs, with Poundland and other consumer brands looking to raise funds. Additionally, the retail industry could see an uptick in foreign-based IPOs on U.S. exchanges this year. A majority of capital market executives (58%) predict that the number of U.S. IPOs from China-based businesses will increase in 2014 due to the perception that Chinese regulators and companies are more willing to meet U.S. governance standards and accounting regulations.

Potential Concerns for Investors

When analyzing retailers, potential investors will be looking for factors that show signs of stability. Retailers pursuing an IPO should have a strong management team in place and be able to show a solid track record of sales and growth. But even with this in place, there are a number of external factors that could weigh on investors’ minds. When asked what presents the greatest threat to the IPO market overall this year, investment bankers point to the Federal Reserve paring back its monetary stimulus, as well as global political and financial instability and the threat of tax increases.

Within the retail industry, there are other hurdles to consider. As retailers continue to embrace the omnichannel movement, expanded presence on digital platforms and an influx of consumer data has made the industry more vulnerable to security breaches than ever. Recent attacks on Target’s and Neiman Marcus’ data systems have stirred consumer confidence and raised questions about the industry’s ability to adequately protect not only credit card information, but other personal information like passwords, addresses and shopping preferences.

In the short-term, identifying the source of these attacks is key, and longer term, retailers considering an IPO will need to address these risks and demonstrate to potential investors that they have taken steps to secure their systems and protect against hackers. Despite a few headwinds, we expect the retail industry will continue a steady growth in 2014. The sector has shown a great deal of resilience over the past few years, and the increase of IPO activity is one more positive indicator of overall industry health.

Ted Vaughan is a partner in the retail and consumer products practice at BDO USA, LLP. He can be reached at tvaughan@bdo.com.