The Big Story
Buffett and Dimon Are Right About Quarterly Guidance
Paul S. Alexander, CFA
In a commentary published in the Wall Street Journal last week, JPMorgan Chase & Co CEO Jamie Dimon and Berkshire Hathaway chairman Warren Buffet encouraged companies to cease issuing quarterly earnings guidance. The rationale was that short-term guidance “often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability.” The article further argued that markets’ fixation on the near-term can also deter companies from going public, which can limit those companies’ financial options, as well as the investing options of the general public.
The Buffet/Dimon piece is persuasive – they must be pretty smart guys. The assertion that companies need to focus on the long term rings especially true for our focus sector here at Consensus: the consumer economy. Over the last decade, as advancing technology and changing consumer behaviors have reshaped retail, companies with the ability to be forward thinking have generally fared best, and positioned themselves well for the future. Pity the retailer that is forced to pass on a promising omnichannel investment or an Amazon defense strategy because it may result in a miss to quarterly guidance.
The Buffet/Dimon article makes its arguments concisely, and largely sticks to its two main points. However, probably in the interest of clarity and brevity, the authors neglected to mention other points that support their argument. I’ll humbly piggyback on their piece and expand on one multifaceted point against quarterly guidance: the practice is of questionable usefulness in the first place. Many companies already do not issue quarterly earnings projections, and the market operates just fine without them for multiple reasons.
First, stocks do not trade based on how a company performs relative to management’s guidance. The key measuring stick is usually consensus earnings estimates, which are established by theoretically-impartial research analysts based on their own views of how the company in question should perform. Sometimes the market views analysts’ estimates skeptically (analysts are often known as an optimistic bunch), resulting in an unpublished, elusive “buy-side consensus” that becomes the key number determining a miss or beat. Regardless, whether a company issues guidance or not, the investment community ultimately decides what should constitute a good quarter.
Second, company-issued guidance (of all types, not just quarterly) is often conservative, as management teams try to influence the market consensus into giving them an easier hurdle to clear. The market usually sniffs out perennial sandbaggers, rendering company-issued guidance less important.
Third, critical communications to shareholders do not need to be delivered only as part of formally issued earnings guidance. Significant changes, such as new investments or unexpected windfalls, are important to signal to shareholders because they are difficult to predict for outsiders. But there’s no reason that companies need to issue earnings guidance in order to give color on such upcoming events.
Public companies always face a certain level of near-term pressure to hit market estimates. This is helpful to avoid complacency, and to encourage both day-to-day execution and progress on long-term initiatives. But company-issued quarterly guidance is a distraction and bad influence at worst, and trivial at best.
Headlines of the Week
Nine West Holdings, Inc., a leading jeanswear, women’s apparel, fashion jewelry and footwear company with a portfolio of brands that includes Nine West, Anne Klein, and Gloria Vanderbilt, today announced that Authentic Brands Group (ABG), owner of a global portfolio of celebrity & entertainment and lifestyle brands, was the successful bidder in the auction conducted under Section 363 of the U.S. Bankruptcy Code. ABG’s winning bid is valued at over $340 million of cash and other consideration. This winning bid is over $140 million more than ABG’s stalking horse bid. “Authentic Brands Group is an industry leader and we are pleased that they will bring the dedicated expertise and resources to manage the next stage in the life of two strong brands,” said Ralph Schipani, CEO of Nine West Holdings. “We are pleased to have completed this important step in our restructuring and are now focused on moving forward with the reorganization of our remaining businesses with the support of our key stakeholder groups.” “This was a highly competitive bidding process, which is a testament to the strength of these brands and we are thrilled that the outcome had ABG taking ownership of Nine West and Bandolino,” said Jamie Salter, Chairman & CEO of ABG. Consumer and retail investment banking firm Consensus Advisors (www.consensusadvisors.com) advised the Company on this transaction.
Honest Co, the consumer goods company co-founded by actress Jessica Alba, received $200 million in funding from private equity firm L Catterton. The company, which makes products ranging from sunscreen lotions to detergents, said the investment will be used to strengthen its supply chain and expand globally. “This partnership will bring the full Honest Beauty line to seven European countries, starting in spring 2019”, the company said in a statement. Alba co-founded the company in 2011, touting its baby products as a safer alternative to those that use synthetic chemicals. Last year, Alba’s company reached a $7.35 million settlement for wrongly labeling ingredients in its home and personal care products as natural, plant-based or chemical-free. Following the settlement, the company said it was raising new funds, at a lower price than its previous round, after a possible deal with Unilever faded.
The cleanup continues at Hudson’s Bay Co. The struggling Canadian retailer agreed to sell Gilt, a flash-sale, e-commerce company it bought two years ago that has become one of its worst-performing businesses. The buyer, Rue La La, announced the purchase on Monday without disclosing a price.
Apparel & Footwear
Golden Gate Capital has established a new operating company for two of its portfolio companies that it acquired out of bankruptcy. The new PSEB Group is composed of Eddie Bauer and Pacific Sunwear of California, both of which will maintain their distinct brand opportunities. It will have a retail footprint of more than 700 stores and is on track for approximately $1.5 billion in combined total sales in 2018, including $400 million in ecommerce sales. Although earlier reports suggested that Golden Gate might merge the companies in an effort to consolidate stores, there was no talk of store closings in the announcement. Both brands are performing well, according to Golden Gate. Eddie Bauer and PacSun grew same-store sales by 6.5% and 5%, respectively, in 2017, and year-to-date, same-store sales are up 6% at Eddie Bauer and 8% at PacSun.
Looking for a pursuit — and a purse — that could hold her attention, Kate Brosnahan left her job at Mademoiselle magazine, cashed out her 401(k) and started making mock-up designs out of paper cutouts and Scotch tape with the help of her boyfriend. In 1993, armed with a handful of boxy but stylish totes and a brand name that came from melding her first name with her then-boyfriend’s last name, the Kate Spade bag made its debut in an accessories show booth at New York’s Javits Center. According to an oft-repeated story about the brand’s origins, the night before her second accessories show she ripped the logo tags out of the sample bags’ interiors and sewed them on the outside in an effort to make her wares stand out. It worked, and helped propel a simple assortment of boxy $155 nylon totes into a multimillion-dollar, multi-category lifestyle brand that included footwear, apparel, stationery, fragrance, small leather goods and home goods sold in stores around the globe.
Athletic & Sporting Goods
Newell Brands Inc. announced it had agreed to sell Town and Country-based Rawlings Sporting Goods Company, Inc., to a Los Angeles-based private equity firm, Seidler Equity Partners (SEP). Major League Baseball will co-invest with SEP in the deal, which is worth approximately $395 million. Founded in 1887, Rawlings makes sporting goods, mostly in the baseball category. The company had revenue of about $330 million last year.
Sentinel Capital Partners said that it acquired GSM Outdoors. Financial terms weren’t announced. GSM, of Grand Prairie, Texas, provides branded accessories for the hunting, sport shooting, and outdoor enthusiast markets. Founded in 1999, GSM Outdoors specializes in developing and marketing innovative products for the hunting, sport shooting, and outdoor enthusiast market. GSM’s brands include Stealth Cam (technologically advanced game scouting cameras); Walker’s (hearing protection and enhancement devices); Cyclops (specialty outdoor lighting); Western Rivers (game calls); American Hunter (game feeders); HME (hunting knives and tools); and SME (targets and related accessories).
Cosmetics & Pharmacy
Walgreens Boots Alliance announced that, following receipt of regulatory approvals, it has completed the previously announced sale of a 30 percent interest in Guangzhou Pharmaceuticals to its joint venture partner Guangzhou Baiyunshan Pharmaceutical Holdings. As previously reported by Drug Store News, Walgreens Boots Alliance will continue to account for its remaining 20 percent stake in Guangzhou Pharmaceuticals as an equity method investment. “We have also announced an agreement to reduce our investment in our wholesale partner, Guangzhou Pharmaceuticals Corporation, giving us a cash-on-cash return of 3.6 times. This will leave us with a 20 percent interest in this successful partnership,” George Fairweather, former Walgreens Boots Alliance executive vice president and global CFO, told analysts.
Evergreen Consumer Brands announced that it has acquired the Salon Selectives and Daily Defense brands from CTL International. Both brands were initially owned by Unilever and Procter & Game respectively before CLT acquired both in 2011 and rebranded them to consumers seeking premium value products at affordable prices. “CLT is confident that Evergreen will continue to expand and develop these brands and that their addition to Evergreen will create real synergy for the retailer and consumer,” Jack Wilkinson, CEO of CLT, said. Salon Selectives and Daily Defense have created a following that can be found in mass, food, discount, drug and dollar retailers across North America.
Discounters & Department Stores
Walmart is undergoing a massive corporate makeover. With $500.3 billion in total revenues worldwide in 2018, 11,700 stores and 2.3 million associates, it is a long-term project that will take place on many fronts. Change and corporate transformation in its business and culture were CEO Doug McMillon’s primary theme in remarks at the June 1 Walmart Associate and Shareholders Meeting. With the U.S. Walmart segment accounting for 64% of total sales, or $318.5 billion alone, including nearly 5,000 stores, as well as its e-commerce business, this is where the stakes are highest, and its eventual transformation will be measured.
With consumables a steady sales driver, Dollar General Corp. and Dollar Tree Inc. are both pushing ahead with plans to bolster their food and beverage offerings. “We recently launched a better-for-you offering intended to provide our customers with healthier consumable options at affordable prices. Over time, we expect this offering to include more than 130 products,” CEO Todd Vasos told analysts in a conference call Thursday.
Grocery & Restaurants
Southeastern Grocers announced that it has successfully completed its financial restructuring and has emerged from bankruptcy protection. Under the plan, Southeastern closed 94 locations, leaving it with more than 575 stores operating across seven states under the Bi-Lo, Fresco y Más, Harveys Supermarket and Winn-Dixie banners. Through the restructuring process, Southeastern transformed its financial profile and strengthened its balance sheet by decreasing overall debt levels by approximately $600 million (including $522 million of debt exchanged for equity in the reorganized company) while maintaining its strong liquidity position.
Earl Enterprises, parent to the Planet Hollywood and Buca di Beppo chains, will acquire bankrupt Bertucci’s Corp., besting an earlier stalking horse offer from an investment firm. The Orlando, Fla.-based company that also owns the Earl of Sandwich brand, offered to pay more than $3 million in cash, assume $4 million in Northborough, Mass.-based Bertucci’s debt and issue $13 million in second-lien debt as part of the bankruptcy court transaction. Bertucci’s, which has 58 casual-dining restaurants in 10 states and the District of Columbia, filed for Chapter 11 bankruptcy in April.
Home & Road
Target will introduce its newest home brand, highlighting affordable design basics, later this month. Called Made by Design, the collection promises to solve consumers’ pain points while not breaking the bank. It offers more than 750 items, including bedding, bath towels and accessories, storage solutions, cookware and kitchen accessories, tabletop and furniture. Ranging from $1 to $260—with most items at less than $30—the collection will be available in all Target stores and on Target.com beginning June 23. Target said it embarked on its most extensive “guest” research for the new collection, finding that consumers want quality everyday items that simplify their lives and complement their ever-evolving style while remaining affordable.
Jewelry & Luxury
Neiman Marcus reported its third consecutive quarter of sales gains while new CEO Geoffroy van Raemdonck said Wednesday the company’s “strategy is working.” In the spring quarter Neiman Marcus reported a 4.8 percent increase in total sales to $1.17 billion. Same-store sales, or sales that exclude results from stores opened and closed in the past 12 months, increased 6 percent. Gains were even across stores with no big geographic differences, van Raemdonck told analysts on a conference call. No category underperformed, and the strongest gains were in handbags, accessories and jewelry.
Immediately after De Beers announced it was launching its Lightbox lab-grown diamond line, cutting in some parts of India virtually halted. One person described the shock as “Richter scale, 9.” Sightholders and other producers felt blindsided. Everyone scrambled to figure out what it meant. At JCK Las Vegas on June 1, the Lightbox team held a lunchtime meeting that seemed to calm down at least some people.
Signet Jewelers posted better-than-expected results in the first quarter of fiscal 2019 (ended May 5), seeing strong gains at Zales, Piercing Pagoda, and James Allen, but experiencing drops at flagship Signet banners Kay and Jared. Comps rose 8.9 percent at Zales; 29.4 percent at recently purchased e-tailer James Allen; 7.2 percent at Piercing Pagoda; and 4.6 percent at Canadian chain Peoples. However, comps declined at what might be termed traditional Signet. They dropped 1.9 percent at Kay; 7.8 percent at Jared; and 6.7 percent at its U.K. division (H. Samuel and Ernest Jones). Comps also fell 11.2 percent at its regional nameplates, a category that now includes Gordon’s and Canadian chain Mappins.
The Las Vegas jewelry week ended on Monday with trading reflecting a steady US market, despite the slower foot traffic at the various shows. “Traffic was a bit down, but it was an okay show,” said one Israeli polished supplier exhibiting at the JCK fair. “Dealers were looking for goods, and retailers were maintaining relationships.” Some noted that activity was better for jewelry suppliers than in the diamond pavilion at JCK as retail buyers sought out designs and collections for the fall and end-of-year holiday seasons.
Office & Leisure
Vail Resorts has announced that it is buying Crested Butte Mountain Resort and two other resorts from the Mueller family making The Butte its fifth Colorado ski resort along with Vail, Beaver Creek, Breckenridge and Keystone. Vail will be paying the Muellers $82 million to acquire Triple Peaks LLC, which owns Crested Butte, Okemo Mountain Resort in Vermont and Mount Sunapee in New Hampshire, while also providing Triple Peaks $155 million to pay off leases owed to another resort company, Ski Resort Holdings. In a separate deal, Vail will pay $67 million to acquire the Stevens Pass ski area in Washington state.
Diving into the watercraft market apparently floats Winnebago Industries’ boat. The Iowa-based recreational vehicle maker announced that it has acquired luxury boat builder Chris-Craft from United Kingdom private equity group Stellican Ltd. for an undisclosed amount. It’s the Forest City company’s second expansion acquisition within the past two years. Winnebago brought Indiana-based luxury RV manufacturer Grand Design in the fall of 2016.
In its rush to find a buyer earlier this year and avoid liquidation, bankrupt Toys “R” Us Inc. landed on a familiar name: Sycamore Partners, according to people familiar with the matter. The private-equity firm, which had already scooped up several troubled retailers, held advanced talks with Toys “R” Us about acquiring the chain and keeping open half its 800 U.S. locations, said the people, who asked not to be named because the negotiations weren’t public. Target Corp. also seriously pursued buying some of the retailer’s assets, including the parent registry and website of its Babies “R” Us brand, one of the people said.
PetSmart Inc. transferred over a third of Chewy.com Inc.’s equity to separate entities, putting the stake out of reach of certain bondholders who financed its purchase a year ago with $2 billion in debt. The pet superstore sent 20 percent of Chewy’s shares in the form of a dividend to a holding company controlled by its private equity owner BC Partners. It also moved 16.5 percent of Chewy to an unrestricted subsidiary of PetSmart.
PetSmart’s bonds rallied as the move of the online vendor’s assets was seen as less aggressive than what bondholders had originally priced in. The initial buyers of the notes have unloaded the positions. Investors sold PetSmart’s debt last year on fears it would sell or spin off as much as 100 percent of the Chewy equity to the private equity owner, removing it from the pool of assets they have recourse to as bondholders.
Technology & Internet
Apple’s big developer spectacle, WWDC 2018, took place June 4th in San Jose, California. The annual conference tied together all of the latest updates to Apple’s platforms—iOS, macOS, watchOS, and tvOS—along with some bigger initiatives focused on bolstering privacy and security, and curbing technology addiction.
Finance & Economy
The jobs market has reached what should be some kind of inflection point: there are now more openings than there are workers. April marked the second month in a row this historic event has occurred, and the gap is growing. According to the monthly Job Openings and Labor Turnover Survey released Tuesday, there were just shy of 6.7 million open positions in April, the most recent month for which data are available. That represented an increase of 65,000 from March and is a record. The number of vacancies is pulling well ahead of the number the Bureau of Labor Statistics counts as unemployed. This year is the first time the level of the unemployed exceeded the jobs available since the BLS started tracking JOLTS numbers in 2000.
Warren Buffett and Jamie Dimon have teamed up to once again call for the end to quarterly earnings guidance by companies. Dimon, the chairman of the Business Roundtable, said the group of CEOs has thrown its support behind companies backing away from the practice. Executives often feel pressure to make quarterly forecasts, but “it can often put a company in a position where management from the CEO down feels obligated to deliver earnings and therefore may do things that they wouldn’t otherwise have done,” Dimon said in a rare joint interview with Buffett airing Thursday on CNBC’s Squawk Box.