ASK THE EXPERTS WEBINARHOW RETAIL INDUSTRY TRENDS AFFECT TODAY’S FINANCE & ACCOUNTING FUNCTIONS

March 12, 2020

PRESENTERS

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Mark Cox MANAGING DIRECTOR

Years of Experience: 11

Expert Areas: Technical Accounting, Capital Markets and Internal Controls

Industries Served: Manufacturing, Technology and Energy

Anand Raghuraman EXECUTIVE MANAGING DIRECTOR

Years of Experience: 23

Expert Areas: Strategy and Performance Improvement

Industries Served: Retail and Consumer Products

KEY REMINDERS

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Presenter contact info

3

LEARNING OBJECTIVES

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1 Understand Key Trends Affecting The Retail Industry

2Understand How Industry Trends Affect Technical Accounting Areas

3Understand How Industry Trends Affect IT Systems, Business Processes and Internal Control Considerations

THE STATE OF RETAIL

6

are facing the largest

disruption that we have

seen in generations

SHOPPING HABITS ARE EVER EVOLVING

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WHAT DRIVES THIS ‘DISRUPTION’?

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1. ConsumersRelentlessly increasing consumer expectations, changing tastes, and declining loyalty, challenge retailers to deliver differentiated and compelling customer experiences

3. TechnologyDigital innovation changes the tools, capabilities

and talent that retailers need to compete; forcing retailers to meet consumers across an

increasingly complex array of digital channelsAI & machine learning

Augmented reality

Social listening

Indoor mapping

Chatbots & digital assistants

Interactive displays

Location-based marketing & analytics

Real-timepricing &targeting

2. Competitors

THE US IS OVERSTORED

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Retail space per person (square feet)

48.6

23.016.4

10.82.0

13.46.5 1.5

UnitedStates

Germany

UK JapanCanada Australia MexicoIndia

10

46689111820212227334040404445465154555960

102107127140150170178200200200210222230250261

363390

512557

650800

2100

0 500 1000 1500 2000 2500

Macy's

Nordstrom

Lord & Taylor

Walmart

Barneys New York

J.C. Penny

Francesca's

Christopher & Banks

The Children's Place

Lowe's

Party City

Bed, Bath & Beyond

Sears

Pier 1 Imports

LifeWay Christian Store

Things Remembered

GameStop

Avenue

Chico's

Shopko

Charlotte Russe

Dressbarn

Payless ShoeSource

Sources: Moneywise, Coreinsights

2019 Total:>8,800

…WHICH IS A 20-PLUS YEAR HIGH

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4,7504,800

3,700

2,5002,900

2,000

4,500

3,100

2,000

2,800

1,8001,300

2,800

6,150

4,3003,800

2,5002,100

1,800

3,100

5,050

2,050

8,640

5,844

8,838

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Uni

t Clo

sing

Retail Unit Closings, USA, 1995-2019

ECOMMERCE CONTINUES TO GAIN SHARE FROM BRICKS & MORTAR…

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Overall retail expected to grow at ~2% CAGR from 2019-2023eCommerce expected to grow at a ~13% CAGR in same period449.9

514.8 586.9

668.6 759.4

858.9 969.7

8.9%9.7%

10.7%

12.0%

13.4%13.1%12.9%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2017 2018 2019 2020 2021 2022 2023

% e

Com

mer

ce p

enet

rati

on

$ S

ales

(B

)

Retail ecommerce sales % total retail sales

…WITH THE US LAGGING IN ECOMMERCE PENETRATION

13

4.1%

8.7%

8.7%

9.6%

10.8%

10.9%

22.2%

22.3%

35.3%

Italy

Japan

Germany

France

Canada

US

South Korea

UK

China

Source: eMarketer

AMAZON’S NPS MAKES IT THE FIRST CHANNEL USED TO DO SEARCH

2015 2019

$398

44%

First channel used by US internet users when researching products digitally

2015–2019

66%

34%

21%

20%

14%

Amazon

Search engines

Retailers

Amazon Average offline

retailers

Average online

retailers

62%

46% 45%

Market-leading Net Promoter Scores (NPS)

15

AMAZON HAS DOMINANT SHARE IN ECOMMERCE…

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Over double the share compared to next 9 combined

Top eCommerce retailers in the US 2019By % share of total eCommerce sales

Sources: Marketingcharts, Yahoo News

…AND ITS SHARE OF US MARKET KEEPS GROWING

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Amazon represents two-thirds of total US eCommerce growth

0%

10%

20%

30%

40%

50%

60%

0

50

100

150

200

250

300

350

400

450

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

$G

MV

(B

)

Amazon US GMV Amazon US Market Share

Sources: Company Reports, US Census Bureau, eMarketer, Needham & Company

…AND ITS SHARE OF US MARKET KEEPS GROWING

Note: (1) As per 03-03-2020Sources: L2, Amazon, eMarketer

2006 - 2019 YTD1 growth

236%

Wal

mar

t

-11%

No

rdst

rom

’s

-63%

Mac

y’s

-99%

JCP

enn

ey

-100%

Sea

rs

AMAZON’S STOCK OUTPERFORMANCE VS COMPETITION IS STAGGERING

Am

azon

3,912%

18

YOUNGER GENERATIONS BUY FROM DIFFERENT CHANNELS…

Source: Poshmark

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…AND GET TO DECISIONS DIFFERENTLY

57% FRIENDS, FAMILY, AND WORD-OF-MOUTH

41% INFLUENCERS

33% SOCIAL MEDIA MARKETING

31% BRICK-AND-MORTAR NETWORKS

29% PERSONAL SOCIAL MEDIA NETWORKS

16% ADVERTISING

16% EMAIL CAMPAIGNS

8% DIRECT MAIL

7% BILLBOARDS

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E-COMMERCE TRANSACTIONS AND INTERACTIONS GROWING EXPONENTIALLY AT THE PEER-TO-PEER LEVEL

58% 75%are comfortable purchasing items through a social media platform instead of directly from a company’s website.

are comfortable buying an item directly from a person online

THIS HAS AN IMPACT ON MINDSHARE OF SMALLER DNVBS

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% of respondents, March 2019Purchased in the

PastWill Likely Try in

the FuturePersonal care & beauty (e.g., Glossier, Harry's, Dollar Shave Club) 52.1% 53.9%

Clothing & Apparel (e.g., Allbirds, Everlane, Bonobos) 49.0% 57.1%

Food & Drink (e.g., HelloFresh, Blue Apron, Freshly) 39.8% 45.4%

Travel & Transportation (e.g., Away, Uber, AirBnB) 36.4% 38.4%

Pet Care (e.g., Ollie, BarkBox, KitNipBox) 29.1% 36.1%Home & Furnishings (e.g., Casper, Brooklinen, Brandless) 29.1% 35.6%

Marketplace & Rental Chains (e.g., OfferUp, Jet.com, LetGo) 29.1% 30.5%

Wealth Management & Financial Services (e.g., Wealthfront, Acorns, Robinhood) 11.8% 14.7%

Other 4.1% 1.9%

US internet user familiarity with DNVBs

Source: Toluna Survey

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Retailers need to rethin role stores need to play

~90%The good news

Source: U.S. Census Bureau

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LATE BREAKING NEWS: COVID-19 CORONA VIRUS

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POLLING QUESTION 1

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Which retail industry trend has the biggest impact on your organization?

A. Rental and/or Subscription Model

B. Direct-to-Consumer (D2C)

C. Bricks & Mortar

D. Coronavirus

E. Other/Not Applicable

CORONAVIRUS (COVID-19) CONSIDERATIONS FOR YOUR RETAIL BUSINESS

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The impacts of Corona are predominantly negative for most retailers on both the supply and demand side

Retailers with sales in affected countries (international and domestic) will see sales decline

Retailers with supply chain and sourcing footprints in these countries will see disruption including reduced manufacturing capacity, issues with raw materials flow, impeded work-in-progress and finished goods shipping

Retailers in the Food and essentials categories will see short-term upticks with ‘panic’ buying

Off-price retail will see increased supply due to delayed deliveries for other retailers

As you saw, sales typically have reverted back to the mean in the past. The question is how long will that take

Key considerations for the Finance & Accounting organization:

Impairment – Does the impact of the virus on your organization trigger any impairment indicators that need to be assessed further?

Financial reporting and disclosures – What do you need to disclose to investors and stakeholders regarding the affect on your business? The SEC has commented and provided some guidance for public filers as to how to disclose the impact on your organization such as risk factors, management discussion and analysis, etc.

Business continuity and disaster recovery planning – Does your company have a plan in place to address? If not, how can you adjust your plan to factor in similar events?

Forecasting – If you are reporting to investors on a periodic basis, how will the disruption caused by the virus affect your forecast?

Supply chain flexibility – No company can plan for everything, but how can you make your supply chain more resilient in the future?

RENTAL AND SUBSCRIPTION MODELS

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These are two separate but related modelsThe rental model is one that satisfies consumers’ need for newness while simultaneously allowing consumers to ‘trade up’

The subscription model is a replenishment-type model

Example companies:Rent the Runway, StitchFix, Panera coffee subscription

Key considerations for the finance and accounting organization:Revenue Recognition – ASC 606

Inventory accounting

Tracking of inventory

Accounting for damages of returned items

Impairment and obsolescence

Disclosures

Supply chain

Customer acquisition costs (CAC)

POLLING QUESTION 2

What is an area of accounting or financial reporting that will require a reassessment upon beginning a subscription or rental model?

A. Revenue recognition

B. Inventory accounting

C. Disclosures

D. All of the above

DIRECT-TO-CONSUMER (D2C)

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Direct-to-consumer are brands that typically were founded as digital-only companies

Example companies:

Away, Warby Parker, Everlane, Casper

Key considerations for the finance and accounting organization:

Revenue Recognition - ASC 606

Leasing - ASC 842

Inventory accounting

Supply chain

Customer acquisition costs (CAC)

POLLING QUESTION 3

What is a name commonly used for companies that started as online/direct-to-consumer brands but may have shifted to different models (such as brick and mortar)?

A. Online Only brands

B. Digitally Native Vertical Brands

C. Non-Bricks & Mortar Retail

THE POWER OF DATA

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Data Analytics is very important in retail due to the abundance of data that retailers have

Data should be used to make better decisions across all functions

Data drives better personalization and customization of products

Key considerations for the finance and accounting organization:

Cost of data

Tracking and accumulating data

Data governance

Internal audit and internal controls

Cybersecurity

Leveraging systems and tools

Disclosures

Financial Planning and Analysis implications

POLLING QUESTION 4

What is an area discussed today where retail brands are using the power of data within the accounting and finance function?

A. Financial Reporting

B. General Ledger Accounting

C. Financial Planning and Analysis

D. All of the above

Q&A