Stores Magazine - January 2007 - (Page 122)

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For investors, I highlighted companies like Wal-Mart, Home Depot, Federated Department Stores and many o t h e r companies that I thought represented exciting investment ideas. One Monday morning I effectively stopped New York Stock Exchange trading on Sears for a time when I announced at a meeting that “the battleship had turned I Guidance or Analysis? BY WALTER F. LOEB Copyright 2007 by Loeb Associates Inc. Used by permission. a r o u n d . ” I said that Ed Telling, the chairman at the time, was embarking on a new course that I applauded as an analyst. I saw excitement in new store formats a n d merchandise realignment for consumers, and this represented opportunities for investors. As an analyst I paid close attention to economic factors. Unemployment figures, i n f l a t i o n and automotive sales were among the leading i n d i c a t o r s I used these in making my consumer discretionary spending projections. I also commented on risk vs. premium price factor. I analyzed the companies independent of any guidance that corporate management might give me. I used the mosaic method of analysis economic factors, knowle d g e of industry cycles, weather, walking the stores to judge consumer response to merchandise offerings. This gave me a picture of what the outlook for the industry might be. Narrow range Today, the narrow range of earnings-per-share guidance provided by some companies is, in my opinion, wrong. If management tells analysts that their company might earn 12 to 14 cents in a quarter, it is easy to come up with 13 cents as an estimate. Beat- Walter F. Loeb is a New Yorkbased consultant and member of the NRF board of directors whose newsletter is published monthly in STORES. ing 14 cents by reporting 15 cents makes the company and analysts heroes when, in fact, the quarter may have contained unusual factors that affect earnings. Just recently, Home Depot failed to warn investors that last year’s hurricanes brought windfall earnings and that this year’s quarter would be hurt. Similarly, AnnTaylor’s analysts’ earnings expectations failed to take into consideration that a warm Oct o b e r minimized sweater sales at Loft. AnnTaylor’s earnings did not meet analysts’ expectations, and the stock dropped. I think it is time for companies to provide less guidance. T h r o u g h o u t my career I never analyzed companies’ annual earnings to the penny: my estimates were in 5-cent increments. I think it is impossible to outguess last-in, first-out charges, shrinkage and consumer preferences at Christmas time. I a g r e e with Berkshire Hathaway’s Warren Buffett, who encourages investors to take a long-term view when evaluating companies. He believes companies should state their strategies clearly, identify associated value drivers and report auditable metrics on both. They should also address the “unexplained” parts of their firm’s share price. Buffett also wrote that he does not follow the usual practice of giving quarterly e a r n i n g s guidance. Some other companies have moved away from this practice, as well, including Coca-Cola, G i l l e t t e , Mattel, McDona l d ’s , Ford — and Sears Holdings. Monthly reports It is true that companies try to encourage analysts to follow their stock by providing earnings guidance for each quarter and the full year. I believe that a more limited approach is appropriate. I think monthly comparable-store sales give visibility to reporting companies and should be published without any projections. There should be limited annual earnings-per-share guidance that helps pinpoint management’s earnings expectations for the year. This annual estimate can be updated once at the end of the third quarter, when the important Christmas season is visible to management. Earnings-per-share guida n c e creates a short-term mindset rather than longterm strategic objectives. By not being specific every quarter, companies avoid earnings surprises that could erode stock prices and weaken investors’ confidence in the numbers that companies report. W W W. S TO R E S . O R G 122 S TO R E S / JANUARY 2 0 0 7 Warning : Unknown : The session id contains invalid characters, valid characters are only a-z, A-Z and 0-9 in Unknown on line 0 Warning : Unknown : Failed to write session data files . Please verify that the current setting of session.save_path is correct /var/lib/php/session in Unknown on line 0 http://WWW.STORES.ORG

Table of Contents for the Digital Edition of Stores Magazine - January 2007

Executive Editor's Page
President's Page
NRF News
Retail People
Store Construction
Cover Story: Pay by Numbers
Workforce Management
Human Resources
Human Resources
Warehouse Management
IT Infrastructure
Online Customer Service
Online Retail
Merchandise Planning
Loeb Retail Letter
ARTS Update
Point of View
Advertising Index
Company Index
Retail Figures
Retail Industry Calendar

Stores Magazine - January 2007