Editor's note: Last earnings season, Scott Rothbort explained how to distinguish between good, bad and misunderstood earnings conference calls, and what each type of call sounds like. Here is a new set of examples.
Good: Urban Outfitters
May 15 and August 14, 2008: In a softening economy with rising prices and a restrained consumer,
has put together not one, but two excellent quarters for its fiscal 2009 accounting year.
The key to these calls was to focus on how Urban Outfitters was performing during the economic slowdown.
If you listen to these calls, you'll hear that the company's management was able to not only ease investor and analyst concerns, but also paint a positive picture for its expansion efforts going forward. The assumption is that once the economic clouds clear, Urban Outfitters would be poised for greater levels of growth and success.
On May 15, in the company's first quarter of the year (which ended in April), Urban Outfitters reported EPS (earnings per share) of 25 cents, which beat consensus estimates by 2 cents. Net sales of $394.3 million were a record for the company and were in line with the company's pre-announced higher level of sales, and slightly ahead of analysts' estimates. Gross margins increased 444 basis points, to 40.2%.
Sounds good. But how did Urban Outfitters do it?
The company was able to achieve this success by
price markdowns. In retail slowdowns, markdowns tend to increase in order to reduce inventory. Urban Outfitters was able to avoid the markdown syndrome and, in the process, reduce its comparable store inventory by 3%. This was a testament to management's execution and the company's business model.
Finally, same-store "comps" were a positive 10% (an aggregate rate). All of this took place
the federal rebate checks hit consumer pocketbooks.
So what happened when it came to Urban Outfitters' second quarter (which ended in July)?
A week before the earnings release, Urban Outfitters previewed their sales results by reporting a total sales jump of 30% to $454.3 million. This is significantly greater than Wall Street analysts' consensus estimate of $431.1 million. Total same-store sales rose 13% in the quarter. And when the company reported its quarter on August 14, the EPS number clocked in at 33 cents. Now compare 33 cents to 19 cents in the year-ago quarter, as well as and analysts' consensus estimates of 29 cents (with the highest estimate being 31 cents).
Clearly, Urban Outfitters has the right stuff in this economy and proved itself in both of its most recent quarterly conference calls.
To listen to an archive of either of these conference calls, click one of the following links:
May 15, 2008 Conference Call
August 14, 2008 Conference Call
July 23, 2008: Before
reported its second quarter results, analysts expected the company to earn $1.22 per share on revenue (or sales) of $17.24 billion. In the year-ago quarter, Boeing earned $1.35 per share on sales of $17.03 billion. Instead, Boeing reported a second quarter 2008 EPS of $1.16 on revenue of $16.96 billion. Included in the bottom-line EPS figure was a one-time charge of 22 cents per share. So excluding the charge, Boeing earned $1.38 for the accounting period.
Going into this conference call, investors' and analysts' concerns focused on Boeing's continuing problems surrounding its 787 Dreamliner project -- in particular, the weakness in the domestic commercial airline business. A great deal of the Q&A part of the call focused on the 787 and the negative impact of rising crude oil prices on the company's business.
On the surface, the results may have looked promising. However, if you listened to this conference call, you would glean the problems that are mounting at Boeing.
For example, I believe that the $248 million pre-tax charge which was attributed to the Airborne Early Warning & Control (AEW&C) program (a defense project) should not be considered a non-recurring item. (Don't miss
") Boeing associated the charge to additional time they needed to complete and integrate the ground support systems. It sounds to me like Boeing's failure to control costs and the overall production process are real operational costs and hence, I considered their quarterly results to be $1.16 -- lower than analysts estimates.
To add insult to injury, Boeing's 787 project delays and increasing costs continue to be a major drag on the company. I believe that Boeing will be an "event-driven" stock in the next year, as its fortunes will be directly related to the 787 project. (Don't miss "
If the company can launch a test flight on time, that will put a "bid" in the stock. In other words, buyers will emerge to begin to buy the stock. If the company can then make Dreamliner deliveries according to its current schedule, then that event will provide a fundamental condition which will make Boeing attractive to stock buyers. On the other hand, if any of those events fail to materialize on time, the stock could head even lower.
To listen to an archive of this Boeing conference call,
July 23, 2008:
was expected to earn 86 cents per share on revenues of $5.92 billion. In the year-ago quarter, McDonald's earned 71 cents per share on revenue of $6.01 billion. Confused? The year-over-year drop in revenue is deceptive. Why? The company has converted many of its restaurants, especially in Latin America, from company-owned to franchisee-operated. (Don't miss
So when McDonald's reported its results for the second quarter with $1.04 EPS on revenue of $6.075 billion (including global same-store sales "comp" increases of 6.1%), one would have expected market reaction to be elation. However, the stock pulled back.
Why did that happen?
The McDonald's conference call turned into a discussion of commodity costs. This spooked some investors. (Don't miss "
Specifically, the following commodity facts were disclosed by McDonald's on the call.
No single commodity makes up more than 15% of the company's foodbill, with beef being the highest at 15%.
U.S. operating margins declined 40 basis points year-over-year due to commodity costs.
Food costs rose 2% in the U.S., including chicken up 6%. For the full-year, chicken costs are expected to rise 5% to 6%, and beef is expected to increase8% to 9% in the U.S.
In Europe, commodity and labor costs rose 6%, including chicken up 8%..For 2008, in Europe, chicken is expected to rise 7% to 8%, and beef is expected to tack on 8% to 9%.
There is a lot of volatility in the beef market. Recently, Russia bannedimports of Latin American beef.
McDonald's has become vertically integrated with its suppliers -- from the farmthrough final processing. (Don't miss "How to Invest in Food Stocks: Restaurants")
In reaction to commodity cost pressures, McDonald's is going to retool its "Dollar Value Meal."
During the conference call, while analysts harped on about commodity costs, they missed the opportunity to discuss the company's strong domestic sales, improving European operations and growth in China. I think that some short term damage to the stock was inflicted by the analysts' agenda during this call's Q&A.
To listen to this call,
By the conclusion of trading on the day of the conference call, McDonald's stock fell. In fact, the stock dropped nearly 4% over the course a four-day period from the day
the company announced earnings.
However, to confuse matters, there was a post-script to this McDonald's story. On August 8, just over two weeks after McDonald's reported its quarterly results, the company reported very strong July sales. As a result, shares of McDonald's rose to an all-time high close of $65.95 on August 11, before running into some profit-taking as the overall markets retreated.
It takes more to understanding a company's quarter than just reading a summary of results. Here are a few more lessons learned from this batch of recent of calls:
During an economic slowdowns there are companies that can grow their earnings -- Urban Outfitters and McDonald's are two prime examples.
Whatever a company may report, you need to extract important forward-looking data as well.
At the time of publication, Rothbort was long URBN and MCD, although positions can change at any time.
Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele.
Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.
Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.
For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at
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