How to Assess a Retailer’s
Expansion Potential from Afar
One of the key factors when deciding whether or not to invest in
a retailer is its potential to add stores, which is typically the main
engine of revenue growth.
If the company opens up sales by store as part of due diligence, a detailed
multivariate regression model can be used to come up with a solid
estimate of expansion potential. But if not, it’s also possible to do an
outside-in assessment that will yield a solid approximation, which
can be used to validate management’s (or analysts’) forecasts or to
independently develop a forecast from scratch.
Armed with such an objective perspective, private equity firms and
hedge funds can better predict a retailer’s future store growth and
revenue and, ultimately, make a better-informed investment decision.
Ann Taylor and LOFT
Women’s apparel retailer Ann Taylor caters
primarily to professional women searching
for work-appropriate clothing and accessories. In 1996, in response to the by then
well-established trend of less formal attire
in the workplace, the company launched
LOFT, which offers more casual clothing and
attracts a younger clientele. Management
currently believes that it can open 100 LOFT
58
stores in addition to its current 516 while
it continues to downsize the number of
original Ann Taylor locations.
To assess management’s forecast, we did
the following:
1. We identified the mix of different psychographic segments within 15 minutes of each
current LOFT location to find out where
LOFT over-indexes. (See page 61.)
59
2. For each segment that is overrepresented
2 to come up with the total potential number
of new location sites. (See Exhibit 2.)
in LOFT markets, we determined the thresholdlevel concentration required for a “successful”
4. We then eliminated any sites within specified drive times of the new locations. The
typical starting point is the existing median
drive time between locations but, again, given
changing retail patterns, a more conservative approach increases the drive time. We
determined that LOFT locations, as with
comparable mall-based apparel retailers that
we’ve analyzed in the past, can successfully
be opened within 10 minutes of each other.
store. The median level is usually a good starting
point, but given the shift to e-commerce and
declining traffic in almost every retail format,
a more conservative approach for future projections is the 75% percentile. (See Exhibit 1.)
3. We took a database of all existing retail
locations (around 42,000) and screened
them against the criteria established in step
THE FOUR DEMOGRAPHIC GROUPS WHERE LOFT OVER-INDEXES
Young City Solos—Younger and middle-aged singles living active and energetic
lifestyles in metropolitan areas
Significant Singles—Middle-aged singles and some couples earning mid-scale
incomes supporting active city lifestyles
Flourishing Families—Affluent, middle-aged families and couples earning
prosperous incomes and living very comfortable, active lifestyles
Singles and Starters—Young singles starting out, and some starter families,
in diverse urban communities
EXHIBIT 1: LOFT Psychographic Segments
EXHIBIT 2: Population in Key LOFT Psychographic Segments
(LOFT Distribution vs. National Distribution, within 15-Minute Drive-Time Radius)
(Index to National Average % of Population, within 15-Minute Drive-Time Radius)
200
Power Elite
> Power Elite, Young City Solos, Flourishing Families and
Significant Singles are the most over-indexed groups
> These groups collectively encompass 33% of LOFT’s core
population vs. 21% in the national average
150
Young City Solos
56.0
Flourishing Families
52.9
Significant Singles
51.2
42.9
40.5
34.6
100
28.5
90th Percentile
23.5
50
14.5
13.6
0
Power
Elite
60
Young
City
Solos
Flourishing Significant
Families
Singles
Booming
with
Confidence
Suburban Aspirational
Style
Fusion
Singles
and
Starters
Cultural Middle-Class Thriving
Connections Melting
Boomers
Pot
Median
10th Percentile
5.2
0.1
LOFT
2.6
0.0
National
Distribution
7.1
0.0
LOFT
0.0
National
Distribution
12.6
7.6
0.5
LOFT
0.0
National
Distribution
7.5
1.9
LOFT
0.0
National
Distribution
61
62
E-Commerce Sales Growth (2-year CAGR, 2009–2011)
E-Commerce Penetration (2011)
ett as we did to LOFT, we determined that
Hibbett could open 298 stores, 122 fewer stores
than the 420 management had projected.
In order to achieve the forecast of 420, the
company would have to pack more stores
39%
ate the company’s store growth potential.
An arm’s-length starting point
2%
11%
16%
15%
7%
14%
8%
6%
0%
12%
12%
10%
0%
Jos. A. Bank
would be necessary in order to further evalu-
18%
New York
& Co.
impacted by the growth in e-commerce,
11%
13%
2%
6%
4% 5%
bebe
19%
brick-and-mortar expansion is increasingly
American
Eagle
management has in mind, especially as
Guess?
business itself. Identifying which strategy
Forever 21
43%
store format or modify the economics of the
Gap
into a smaller radius, change its existing
Aéropostale
Hibbett Sports tends to open in small
markets that most national and other large
chains do not and features a smaller footprint
(roughly 5,000 square feet vs. 55,000 for
competitors’ chains, on average). It offers
a mix of merchandise specifically tailored
to the local market, such as that of sports
teams favored by its surrounding populations: primarily ethnically mixed, middle-aged couples with modest incomes and
little to no college education. And just 30%
of Hibbett Sports’ stores have another location within 20 minutes—consistent with the
106%
Charlotte
Russe
Hibbett Sports, a full-line sporting goods
retailer, operates mostly in the Southeast,
Southwest and Midwest, primarily in smallto mid-sized markets. Currently, it has 879
stores in 29 states, a number management
believes it can grow to more than 1,300, with
approximately 420 new stores.
Applying the same method of analysis to Hibb-
EXHIBIT 3: E-Commerce Overview
Abercrombie
& Fitch
Hibbett Sports
in each of its small markets.
Ann Inc.
In the end, we determined that there are in
fact approximately 175 potential locations for
future LOFT stores in the United States alone.
company’s strategy of having just one store
The Men’s
Wearhouse
5. The final step was to do a reality check
by looking at competitor locations, as well
as the demographics and income in the trade
areas, to make sure that the psychographic
segments were truly representative of more
basic measures.
Few factors are as important to a retailer’s
growth as its ability to open new stores,
even as e-commerce continues to rise in
importance. Indeed, our formula can easily
accommodate the addition of e-commerce
sales and sales projections (see Exhibit 3),
including those expected to cannibalize
brick-and-mortar sales down the road. And
further analysis can and should be conducted
once inside information, such as the sales and
AUTHOR
Drew Klein
Manager, Private Equity and Strategy Practice
drew.klein@kurtsalmon.com
profitability of each location, is obtained. v
63