BDO Capital Advisors, LLC Member FINRA/SIPC BDO Capital Advisors, LLC is a separate legal entity and is an affiliated company of BDO USA, LLP, a Delaware limited liability partnership and national professional services firm.

Texas A&M University Retailing SummitOpportunities for Strategic Growth

Robert A. Snape, PresidentBDO Capital Advisors, LLC

Ted C. Vaughan, National Retail & Consumer Products Partner

BDO USA, LLP

Robert A. Snape, PresidentBDO Capital Advisors, LLC

OVERVIEW

Current Deal Flow Trends And Opportunities In The Retail Industry:

Trends in strategic expansion

Opportunities and risks identified by retailers

Economic and capital markets trends

Focus on retail mergers and acquisitions

Consumer Products Companies Ride M&A Wave

“Global consumer products companies are in the midst of

merger mania.”

“Global consumer products M&A deal

volume in the 1st half of 2014 was almost 4X the amount during the same period last year, and the highest since

2008.”

“The second quarter of 2014 was the [retail

and consumer products] sector’s

strongest quarter of IPO’s in three years,

measured both by the number of deals and

the proceeds generated from

them.”

Focus Areas for M&A

Retailers must prove that they have:

A defined customer base

Consistently demonstrated growth

A strategy for targeting a specific segment or demographic

Product that sells well online

Opportunities and Risks for Retailers

Top 10 Risks Identified by Retailers:1. General Economic Concerns (100%)

2. Federal, State and/or Local Regulations (99%)

3. Competition & Consolidation in Retail Sector (98%)

4. U.S. and Foreign Supplier/ Vendor Concerns (96%)

5. Labor (health coverage, union concerns, staffing) (94%)

6. Dependency on Consumer Trends (93%)

7. Implementation & Maintenance of IT Systems (92%)

8. Privacy Concerns Related to Security Breach (91%)

9. Consumer Confidence and Spending (91%)

10.Legal Proceedings (91%)

Strategic Growth Initiatives

7

ECONOMIC OVERVIEWConditions Continue to Improve

• World economic recovery is ongoing but challenged; Q2 2014 Eurozone GDP flat

• Moderate growth continues in U.S.

• Consumer confidence is rising but volatile– Net worth of U.S. households fully

recovered from recession lows

– Deleveraging has occurred

– Unemployment declining

• Manufacturing and output has recovered to near pre-recession levels in most sectors and regions

• Companies are more productive and competitive

– Profit margins at record highs

• CAPEX expected to increase in 2014/2015 - further fuel for growth

• Balance sheets are strong‐ S&P 500 leverage ratio at 20 year low

• Borrowing costs are low; capital is abundant

• Federal Reserve tapering in full swing– Low inflation – labor, raw materials, energy

costs are contained

8

ECONOMIC OVERVIEWGrowth Taking HoldGDP growth at 4.2% for Q2 2014, reversing 2.1% decline in Q1

– Weather was major drag on Q1; sharp rebound in Q2

– Inventory investment contributed 1.7%

– Durable goods shipments up 3.9% in last year

– Industrial production up 5.5%, Q2 annualized

– Consensus forecast of 3% GDP growth for 2014; highest since 2005

U.S. GDP Growth Rate

Q1'08

Q2'08

Q3'08

Q4'08

Q1'09

Q2'09

Q3'09

Q4'09

Q1'10

Q2'10

Q3'10

Q4'10

Q1'11

Q2'11

Q3'11

Q4'11

Q1'12

Q2'12

Q3'12

Q4'12

Q1'13

Q2'13

Q3'13

Q4'13

Q1'14

Q2'14

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Qu

art

erl

y %

Ch

an

ge

9

ECONOMIC OVERVIEWU.S. Consumers Have Money to Spend• U.S. Household Net Worth has grown to $80 trillion,

recouping the $16 trillion lost during the financial crisis and growing to new highs

• Total household financial obligations as a percentage of disposable income peaked in Q3 2007 at 17%; they are now down to 15% – Household debt is $8T mortgages, $1.1T student loans, $900B

credit cards

2000

2002

2004

2006

2008

2010

2012

2014

$0

$20

$40

$60

$80

$100

U.S. Household Net Worth

Tri

llio

n

2006 2007 2008 2009 2010 2011 2012 2013 201412%

14%

16%

18%

20%

U.S. Household Obliga-tions as % of Disposable

Income

10

ECONOMIC OVERVIEWConsumer Sentiment and Confidence Building• Recent surveys show the U.S. consumer is gaining confidence in the future

• Improving business conditions and job growth fueling rebound

2007 2008 2009 2010 2011 2012 2013 20140

20

40

60

80

100

University of Michigan Consumer Sentiment

2007 2008 2009 2010 2011 2012 2013 20140

20

40

60

80

100

120

The Conference Board Consumer Confidence

20 Year Average =

87

11

ECONOMIC OVERVIEWSteady Improvement in Retail Sales

A M J J A S O N D J F M A M J J A S O N D J F M A M J

0%

1%

2%

3%

4%

5%

6%

Core Retail Sales*

YOY CHANGE

*Retail sales ex. autos, gas and building material

2012 2013 2014

12

IndexYTD1

Return2013

Return

Dow Jones 2.7% 26.5%

NASDAQ 8.3% 35.1%

Russell 2000 -1.2% 37.0%

S&P 500 7.5% 29.6%

CAPITAL MARKETS OVERVIEWU.S. Public Equities• All major market indices rose approximately 25-35% in 2013, best performance

since 1997

• $36B raised in 154 U.S. IPOs in H1 2014, most since H1 2000

• Equity markets are seeking direction given current valuation levels – corporate earnings, geopolitical risk, Fed tapering

U.S. Indices Performance Trends

Source: S&P Capital IQ*1/3/11 through 9/15/14 1YTD as of 9/15/14

Major U.S. Indices*

13

• Balances held by financial and strategic buyers remain at high levels– PE capital raised increased 68% to $220 billion in 2013

– Highest yearly total since 2008

• PE firms have $466 billion of dry powder, the greatest amount since 2009– Q1 2014 PE fundraising points to another strong year, with 95% of funds reaching

their goals

• Strategic buyers are flush with cash, and have access to attractive debt financing in a record low interest rate environment

CAPITAL MARKETS OVERVIEW Capital Reserve Balances Remain High

Source: PitchBook and The Federal Reserve

Strategic and Financial Capital Availability

14

CAPITAL MARKETS OVERVIEWBanks Offer Favorable Deal Environment for Quality Companies

Source: S&P LCD; represents deals valued between $25 million and $500 million

• Leverage tolerances for middle market PE transactions have rebounded from 2009 lows and debt capital is readily available

• With valuation multiples high, equity contributions have fallen as buyers access greater leverage

Leverage Equity Contribution

15

M&A MARKET OVERVIEWHistorical M&A Cycles Provide Insight For Future Trends• Historical data supports that M&A markets are

cyclical

• Cycles are becoming more predictable and contracted– 2-4 years separate peaks and troughs

– 6-7 years to cover a full cycleChange in Announced M&A $

Volume

Source: Thomson Reuters and private company data

16

Deals with price tags >$500m account for 75% of overall market – “Super” mega deals ($10b+) are back

– Most markets up 40% to 45% over 2013

– Average deal size up nearly $50m YoY

GLOBAL M&A ACTIVITY Overall Deal Volume Rises Dramatically in 2014

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD

2013 YTD

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Global M&A Activity Number of Deals

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD

2013 YTD

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Global M&A Activity Dollar Volume

$ Trillions

17

M&A MARKET OVERVIEWOverall Market Trends Apply to Retail M&A Outlook• Global M&A reached $1T in Q2

2014, up 72% from Q2 2013– U.S. led with volume more than doubling to

$473B

• Growth driven, in part, by large cross-border tax inversion deals by U.S. companies– Retail sector active including Burger King’s

$11.4B acquisition of Tim Horton’s

• 20 deals valued at more than $10B in H1 2014, most since H1 2007

• Major drivers - record low interest rates and access to debt markets, high stock prices, encouragement by public company shareholders, external cost cutting opportunities, an increasing focus on core competencies, and return of corporate confidence

• U.S. PE firms deployed $244B of capital in H1 2014, up 27% from 2013– Deal volume up 30%; number of

transactions increased 7%

• PE firms pulled back from buying public companies due to rising stock prices– Go-private transactions 3.5% of leveraged

buyout volume in H1 2014, lowest on record, compared to 68% in H1 2008

• PE firms increased secondary buyout deals which reached 60% of leveraged buyout volume in H1 2014, highest on record

Sources: S&P Capital IQ, Dealogic, PitchBook, The Wall Street Journal

18

RETAIL M&A OVERVIEW Deal Volumes Grow

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD 2013 YTD

0

10

20

30

40

50

60

70

Global Retail M&A Activity Dollar Volume

$ Billions

Retail deals account for just 3% of overall market – North America 40%; Europe 32%; Asia 26% of retail activity in Q2 2014

– PE related activity 32% of retail M&A market

19

RETAIL M&A OVERVIEW Growth Drivers

Companies looking for economies of scale

Brand expansion / enhancement

Distribution and logistics efficiencies and synergies

Tax strategies / inversion

Organic growth limitations

Changing demographics

Market share expansion– Offense / Defense

20

RETAIL M&A OVERVIEWRetail Deal Trends

Large Restaurant

Deals

Red Lobster

CEC

Crossover

Deals Between

Retail and Technology

Etsy / Grand St.

@Walmartlabs / Stylr

Etsy / Incubart

Amazon / Iconology

Staples / PNI Digital Media

Grocers and Convenience

Stores

Safeway

Hess / Speedway

Deals

for Rivals

Signet / Zale

Jos. A Bank / Men’s Warehouse

21

RETAIL M&A OVERVIEW2014 M&A Landscape Much Better Than 2013

Barring A Major Financial or Systemic Shock to the Financial Markets, 2014 Retail M&A Activity Should Continue to Accelerate:

An improving macro-economic environment and positive M&A fundamentals are supportive of healthy transaction levels

Strategic buyers have record amounts of cash on their balance sheets, many are challenged to grow organically, and market confidence is on the rise

As stock prices climb, companies have access to a favorable transaction currency, a need to show earnings growth and the ability to pay more for acquisitions without suffering dilution

Private equity has over $466B in capital overhang available to be invested within a limited time

The debt markets are liquid, with leverage reaching its highest levels since 2007 and interest rates at historic lows

Strong valuations, public equity markets at record highs, abundant private equity, aggressive leverage multiples and the beginning of Fed tapering will compel sellers to act before the window shuts

Global push, drive for market share, brand diversification

Retail/technology “crossover” deals