Company CEOs have been finding it difficult to provide guidance and clear business outlook in 2020 given the uncharted waters, but it’s been getting slightly better. Earlier in the year during the Q1 reporting season, almost 70% of US companies that normally guide analysts and the markets on what to expect, simply abandoned giving any forecasts. Naturally enough, this was most evident in areas like consumer discretionary. For Q2 this number had improved a bit to just 52%.
It is likely that even more companies will be able to give guidance on business prospects in the reporting season that’s currently underway.
This will still be a shocker of a reporting season with profits down 15-20% on the prior year – second largest Q3 decline since 2009. However it may not be a huge negative surprise for markets as analyst expectations have already been battered down. However in a quarter which will be dominated by politics, worsening pandemic impact and the stop/go progress of vaccines, if there is some greater clarity over company profits, it may be the only hard news investors get.
As in previous reporting seasons this year, it is less about the numbers and more critical to listen to what CEOs and CFOs are saying, to gain some insight into corporate confidence.
What is very interesting now is how many companies have moved already to re-engineer their business models to deliver better profits in a post-covid world.
Nike was quick out of the blocks with its own quarterly numbers, which are on a slightly different schedule than most companies. The Oregon-based sporting company delivered good numbers with sales around the same level as the previous year. This was a very solid outcome for one of the biggest brands in the world, and was achieved with a significant drop of 33% in its promotional spending, as so many high profile events were cancelled. Expect Nike to consider just how effective much of this type of spending really is. Can they spend less and spend better? We may well see fewer but more impactful brand campaigns. As Matt Friend CFO of the Oregon-based company said there will be a “sharper prioritisation” of such spending, and in guidance that was more qualitative than quantitative, for Nike “the future is bright”.
Self-help was also the key elsewhere. Darden, the US restaurant chain, who operate brands like Olive Garden and Long Horn Steakhouse, moved quickly to adjust to new circumstances. Supply chains were restructured, menus simplified and they made a significant move towards take- away business. Takeaway business was up 123% in the quarter. While they did cut back on marketing, it had less of an impact on sales than feared. So like quite a few companies are saying in their statements, marketing spend efficiency will be “re-evaluated”. Company CEO Gene Lee believes that as of today they have better visibility into their business model than before – and are better placed. As an indicator of just how effective these changes will be in making this a more profitable company into the future – Darden forecast that they can get back to pre-covid profitability at only 90% of pre-covid sales!
Even companies caught in the eye of the Covid storm are acting to transform their business model in advance of any better conditions. Walgreens, the pharmacy and general retailer, highly visible in most US cities, has been playing a key role in fighting the epidemic. They have completed more than 1 million Covid 19 tests at more than 440 sites in 49 states and have increased testing capacity to 500,000 per month. However at the same time Walgreen’s management have been transforming their business to deliver $2 billion in annual savings by 2022. They will close up to 500 stores, expand with drive-throughs and “kerb-side pick-ups”, and invest further in on-line. As result of their actions they see themselves coming out of 2021 “strongly”.
The pandemic has crushed demand for some companies and changed consumer patterns for others. But looking at what some management teams are saying in this reporting season, it is clear that resilient companies, who have used the opportunity to look at and refresh their business models, are going to come out of this on a more profitable footing.
Tradewinds 