When to Fuld and When to Hold
New York (TheStreet) -- "We have a long track record of pulling together when times are tough," proclaimed Lehman Brothers CEO Dick Fuld on the company's third quarter conference call, September 10th 2008. "We are on the right track to put these last two quarters behind us."
Five days later the venerable 158-year-old Wall Street company declared bankruptcy, sending shockwaves throughout the global economy.
When a company's earnings disappoint and its CEO starts making excuses, how can you tell if they're bluffing? At what point do you start to question the veracity of what the company's leader says? I find quarterly earnings calls to be one of the most fascinating ways to get a peek into what's really going on under the hood of any particular company.
Whether you're the CEO of a $40 million brick & mortar retailer or $400 billion tech giant like Google, you have to get on the phone each quarter and broadcast your story to the world, standing metaphorically naked in front of the thousands of investors and - even more daunting - dozens of persnickety research analysts who proceed to launch a full-fledged Q&A assault. Yeup - even the deified Mark Zuckerberg has to come down to earth every three months to appeal to his followers and defectors alike on the quarterly call. And this is when analysis turns into an art. The best portfolio managers keep a very close pulse on the tone, wording and cadence of any management team they're invested in. That's why you can see a stock shoot up or down well over 10% during any given conference call, depending on what the executives say or don't say.
I found last week's earnings calls by several retailers to be a telling sign of who to trust and who to bust. Let's take a look at three companies - The Container Store (TCS - Get Report), Tractor Supply (TSCO - Get Report), and Family Dollar (FDO) - to gauge whether the alibi of their respective CEO is legitimate, downright questionable, or so ridiculous that you almost have to laugh.
Let's start with The Container Store. This company reported god-awful numbers last Tuesday and saw its stock get drop-kicked as a result. So how did its CEO, Kip Tindell, defend the disappointing results? On the call, Kip took zero responsibility, saying "Consistent with so many of our fellow retailers, we're experiencing a retail funk. So many retailers that we talk to are experiencing that." But are they? Unfortunately, Mr. Tindell, I'm going to have to pull out the red flag here. Your retail funk alibi doesn't exactly check out. Williams-Sonoma (WSM) and Restoration Hardware (RH) - two companies you compared yourself to during your IPO last year - didn't say anything about a 'funk' when they blew away numbers last week. In fact, they sounded downright euphoric about the state of the consumer. Same with those at the super expensive, highly discretionary Burberry, which reported excellent results this past Wednesday as well. The cheese stands alone here, Kip. Your excuse is questionable at best.
Next, we have Tractor Supply - the "rural" Home Depot (HD). These guys gave us a hideous preannouncement last Wednesday and shares got clipped as a result. So what plagued this farm and garden chain so much that it felt the need to preannounce? Let's hear it from the horse's mouth: according to CEO Greg Sandfort, "the challenging spring weather conditions we experienced in the first quarter persisted even later into the second quarter than the prior year." Oh great, here we go again; yet another CEO blaming the weather. But wait a second, if you read on you'll find out that as the quarter progressed and the weather improved, so too did Tractor Supply's business, with traffic picking up steadily in both June and July. I'll be honest - I'm genuinely impressed with Mr. Sandfort's analysis here. We had a late spring and when many of your customers are farmers, that matters. With business now picking up, I bet management is being conservative here by resetting expectations lower. I get it. I think this guy is legitimate.
Our final stop on the excuse train is Howard Levine, the man atop the helm of the $7 billion discount retailer Family Dollar, which just reported its third straight earnings miss last week. Mr. Levine's excuse? I quote: "while our long-term positioning and growth prospects remain strong, our results continue to be pressured by a difficult, competitive economic environment. Our core low-income customers continue to deal with elevated unemployment levels, cuts to government benefits and volatility in energy prices. They are tightly managing their spending as a result". Is Howard a D.C. lobbyist or a chief executive? He makes it sound like the plight of Family Dollar is the same as the plight of the little guy, and if only our government stepped in to fix poverty, unemployment and high gas prices, then FDO would do just fine, but until then he makes it sound like the whole dollar store category will keep suffering.
What Mr. Levine might be forgetting is that there are two other publicly traded dollar store chains, Dollar Tree (DLTR) and Dollar General (DG), and guess what? Their last conference calls were both very bullish, with their respective management teams noting that business keeps improving now that the weather isn't so horrible. If Levine's alibi had any truth to it, then his competitors would be suffering, too. Back in January Mr. Levine devoted the better half of the quarterly conference call to blaming his former COO for the company's weak results. On the hyperbolic excuse train, Mr. Levine is the conductor.
So what's the takeaway here? When earnings fall short and management makes excuses instead of taking responsibility, take a serious look at the company and evaluate whether the alibis have footing. Better yet, stick with the companies and leadership teams that you can count on; the ones who stick to their guns and remain transparent, even through hell and high water.
--Written by Jack Mohr in New York