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KPMG Study Shows Cash Flow Key

NEW YORK — The superior ability of North American stores to generate cash flow has put their shareholders in a better position to benefit from both an economic upturn and continuing consolidation than those of their overseas...

NEW YORK — The superior ability of North American stores to generate cash flow has put their shareholders in a better position to benefit from both an economic upturn and continuing consolidation than those of their overseas competitors.

That was the conclusion of the first segment of a study of 500 public retailers worldwide conducted by KPMG, the accounting and tax firm, in conjunction with Oxford University’s Templeton College. While the first part of the project focused on the relative market performance of stores, the second, expected to be concluded before the end of the year, will attempt to shed light on the reasons behind the differences in performance.

Mark Larson, KPMG’s partner for its retail practice in the Americas, said: “As retail continues to become more of a global industry, we wanted to look at what was driving the successful retailers versus the less successful retailers.”

In a phrase, what appeared to be driving success was strong cash flow. Limiting the focus to two financial criteria — the effective use of capital rewarded by stock market valuations and the ability to generate cash flow returns — larger retailers that also were deemed to be solid cash flow generators did best, but smaller and medium-sized retailers with strong cash flow generation also pulled ahead of the pack, Larson said.

“Good cash flow was a more important factor than the market value of the firm. The stock market rewards you for good cash flow,” Larson said.

The sheer size of the North American group contributed to its stellar performance. Stores in the U.S. and Canada represented 164 of the top 500 global retailers and have a combined market capitalization of $734 billion, nearly three times that of all the European representatives combined.

In comparison, retailers in mainland Europe and the U.K., separated in the study, have lower valuations and poorer cash returns than their North American cousins. In addition, the results indicated that the U.K. retail value model is actually closer to that of continental Europe, even though it is often thought to be different from that of both Europe and North America.

At the bottom of the totem pole was the valuation performance of Japanese retailers. The study said they are “most likely to find themselves in a continued valuation quagmire, unable either to raise funds in the depressed stock market or to improve performance internally.”

Looking ahead to the second part of the study, Larson speculated that issues overseas such as the costs of labor and regulations governing store hours and retail square footage have tended to work against the efficient use of capital by retailers outside of the North American region.