Expert Viewpoints

5/21/2021

Top Five Priorities for Retail CFOs

Antony Karabus and Farla Efros

Farla Efros and Antony Karabus

As we all know, the impact of the COVID-19 pandemic on retail has been asymmetrical, with some sectors having their best year and others their worst year. One recently-retired retail CEO said to us that “a 5% increase or decrease in comparable sales was a huge change in any year prior to March 2020. Leading through a 15% to 20% reduction or increase in 2020 is an unprecedented challenge.”

For some retail sectors, the pandemic has produced the biggest increase in sales, earnings and stock prices. These “COVID beneficiaries” include grocery, drug, pet, convenience, extreme value, auto parts, home improvement, home décor, outdoor, fitness and of course Amazon.

For other sectors, often known as “discretionary”, the pandemic had a negative effect, specifically for specialty apparel, department store and luxury stores in enclosed malls. The impact on the discretionary sectors has been compounded for those with significant debt.

While the pandemic was not the primary cause of creditor protection, it was a major contributing force. Many retailers that filed for creditor protection did so to accelerate the transformation of their businesses to focus on their digital transformation and to shed debt.

For numerous retailers, the transfer of sales from stores to digital has been massive. It is not unusual for retailers to report 2020 store sales at negative 25% and digital sales up 80%. The implications of this shift are significant and will require much disciplined planning to adapt.

Fortifying liquidity/balance sheet strength was the single most crucial priority in 2020. It remains important in 2021 for the numerous retailers that took on more debt during the pandemic.

Taking into consideration all of the above, here are five top priorities for retail CFO’s moving forward.

1. Fortifying liquidity/balance sheet strength. was the single most crucial priority in 2021: A former retail CEO once said “you never go out of business for having too much cash. Cash is king”.

Fortifying liquidity/balance sheet strength was the single most crucial priority in 2020 and remains important in 2021 for the numerous retailers that took on more debt during the pandemic.

The reality was that no one knew when “to call the bottom” and how long the trough would endure. Priority No. 1 for the retail CFO was to ensure their company had the ability to finance operations and debt service. CFOs at leading department stores took decisive, successful action to fortify balance sheets early in the pandemic.

Other discretionary retailers bolstered liquidity using a combination of stock offerings (even at low stock prices), while others introduced FI-LO debt to obtain additional liquidity.

2. Rigorous capital allocation: The rapid growth of digital and omnichannel sales (mostly cannibalizing store sales) has created a need for much-increased capital spend.

Priority No. 2 for retail CFO’s is to ensure capital is directed, allocated and prioritized towards the most important strategic and operational value-drivers to ensure adequate funding for the most important new and/or enhanced capabilities.

3. Zero-based budgeting and resource optimization: Retailers must make rigorous, fact-based resource prioritization decisions given the significant capital and operating investments needed to enable digital, omnichannel, customer relationship management and other growth initiatives — as well as to keep customers and employees feeling safe in the stores and distribution facilities.

The retail CFO is well-positioned to oversee these decisions in partnership with the CEO and other key C-suite executives. Zero-based budgeting is an excellent tool (rather than incremental edits to head-count and other budgets) to ensure the right focus on the right, prioritized investments to achieve the desired near and longer-term business benefits.

4. Investing in facilities and systems to effectively engage with customers: The pandemic has moved much of retailer revenues from stores to e-commerce/omnichannel. Much of this trajectory will be retained after the pandemic as new customer habits have been formed.

As a result, many retailers will need to invest in closing, downsizing and/or relocating some physical stores and distribution centers whose locations no longer align with the way the digital customer is engaging with the company. They will also need to invest in new technology to profitably engage with customers (such as mobile POS, order management systems, inventory optimization and CRM/loyalty). These investment decisions must be disciplined and carefully prioritized.

5. Effective near-term and longer-term steady-state planning: Retail CFOs will need to play an essential role in business scenario planning to align on the right revenue and infrastructure base-line. This is important given the significant change in consumer spending since March 2020 and the anticipated re-balancing of consumer spend and pent-up demand in sectors that suffered during the pandemic.

The retail CFO has gradually taken on a key operational partner role to the balance of the C-suite during the past decade in ensuring effective allocation and deployment of capital and optimization of operating resources via zero-based budgeting. The pandemic has accelerated this partnership

Antony Karabus and Farla Efros are CEO and president, respectively, of HRC Retail Advisory, a leading retail consulting firm in improving retailer profitability and working capital, while effectively managing the organizational implications.