Our last update revealed retail CEOs received below-target bonus payouts for fiscal year 2017 while long-term awards generally fared better. In this blog we highlight expectations for fiscal year 2018 and how year-to-date performance has fared, which could point to how incentive plans may be impacted. (For more details of our last analysis, see “Pay-for-performance update for the retail industry: pay for fiscal 2017 performance,” Executive Pay Matters, August 2, 2017.)

We reviewed consensus investment analysts’ expectations for fiscal year (FY) 2018. While some metrics are expected to post slightly better results in FY18 than FY17 (revenue, EBIT growth and ROE), others are lagging (EPS and cash flow), as shown in Figure 1. But even where improvement is expected, the expected growth levels are modest on an absolute level.

Figure 1. Analysts’ growth expectations for FY18 in the retail industry

Figure 1. Analysts’ growth expectations for FY18 in the retail industry
 
Figure 2 compares the first six months of FY18 to the first six months of FY17. With the exception of online sales growth, the scorecard illustrates that income statement and balance sheet results are generally flat or slightly down. Cash flow growth shows the largest decrease while first half total shareholder return (TSR) results are down compared to prior period performance. What’s more, revenue and EBIT growth appear to be trailing expectations, although EPS results are on track to meet expectations. The implications for FY18 bonus payouts may well vary based on which measures are being tracked.

Figure 2. First half financial scorecard for the retail industry

Figure 1. Analysts’ growth expectations for FY18 in the retail industry
 
With higher than expected GDP results recently announced, historically low unemployment levels and signs that the economy continues to improve, the retail industry may begin to benefit from an increase in consumer spending, as evidenced by positive online sales results. Alternatively, the improving economy contributes to rising labor costs, which in turn, pressures margins and could further reduce earnings growth. Meanwhile, the impact of recent natural disasters has yet to be fully recognized: challenges affecting revenues include hurricane-induced store closures, reduced business, shipping delays and damage. For a look at the 2017 expectations through third quarter in the broader S&P 1500, see “Third-quarter pay-for-performance update for the S&P 1500: Improving results continue”, Executive Pay Matters, December 13, 2017.

Relatively soft absolute and expected year-to-date performance could indicate another below-target bonus year for the industry. The industry will have its hands full setting goals for FY19. Goals that are too high to be attainable, risk alienating executives and employees, while goals that are too soft risk the ire of investors and their watchdogs. Willis Towers Watson has been helping companies calibrate incentive plans goals using predictive analytics, namely with our proprietary Predictive Performance Model (PPM). To learn more about our model, follow the link here.


ABOUT THE AUTHORS

Kate King 

Kate King

Willis Towers Watson
Seattle

Chris Marques 

Chris Marques

Willis Towers Watson
Detroit


Kate King is an executive compensation consultant in Willis Towers Watson’s Seattle office and is the West Division leader for Willis Towers Watson’s Retail Industry Team. Chris Marques is an executive compensation consultant in Willis Towers Watson’s Detroit office. Email kate.king@willistowerswatson.com, chris.marques@willistowerswatson.com or executive.pay.matters@willistowerswatson.com.