Retail’s fiscal 2019 financials, which ended January 31, improved despite reports of a poor holiday shopping season. Year-over-year income statement results were a pleasant surprise after continued reports of brick-and-mortar store closures and persistent environmental challenges. Interestingly, online sales growth improved 19%, a positive given retail’s omnichannel focus. And while shareholder returns were not nearly as strong as the prior year’s remarkable results, returns were positive and outpaced the broader S&P 1500 (-5%). The year-end scorecard in Figure 1 compares fiscal 2019 and fiscal 2018 financial and market-based performance, highlighted by income statement growth.

Figure 1. Fiscal 2019 year-end financial scorecard for the retail industry 

Figure 1. Fiscal 2019 year-end financial scorecard for the retail industry

When we compared results against the consensus investment analysts’ expectations this time last year, ROE fell short of expectations (12% vs. 16%), while other metrics generally outpaced expectations. Most notably, EBIT growth of 2% surpassed the expected 2% decline.

The measures each company uses in its annual incentive plan will determine how financial results translate into bonus payouts. The median fiscal 2018 CEO bonus payout for retail was 83% of target. Profitability measures like EBIT continue to be the predominant measure in retailers’ short-term incentive plans, so the slightly better than expected performance in fiscal 2019 may bring bonuses closer to target levels. Next quarter we will report on how CEO incentive plan payouts for fiscal 2019 for retail played out, based on forthcoming proxy disclosures.

Figure 2 illustrates how investors expect fiscal 2020 to compare to fiscal 2019. As consumers are expected to continue to be conservative with their discretionary spending, analysts are forecasting lower revenue, EPS, and cash flow growth and improved EBIT and ROE compared to fiscal 2019.

Figure 2. Fiscal 2020 analysts’ expectations for the retail industry versus fiscal 2019 results

Figure 2. Fiscal 2020 analysts’ expectations for the retail industry versus fiscal 2019 results
  
With these expectations, retailers will have to strike the right balance that sets challenging goals and also provides the opportunity for meaningful payouts if there isn’t a major turnaround. Overly conservative goals could be perceived as lacking rigor and imperil say-on-pay votes, while overly aggressive or unrealistic goals could impair engagement or retention of key talent.

For a review of 2018 results and 2019 expectations for the broader S&P 1500, see “Pay-for-performance update for the S&P 1500: Strong financials but negative shareholder returns”, Executive Pay Matters, February 21, 2019.


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 director in Willis Towers Watson’s Seattle office and leads the T&R retail industry consulting team efforts in the West Division. 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.