Thursday, January 31, 2008

Starbucks’ Grande Mistake

Yesterday Starbucks announced its first quarter results, a 2% gain over the same period a year ago.  This is a weak performance by Starbucks’ standards and was accompanied by a number of announcements regarding initiatives to turn Starbucks back into the Starbucks that people used to love.  What caught my eye, however, was the simultaneous announcement that Starbucks was now longer going to provide same-store sales numbers.  I think this is a grande mistake on the part of the company.


Now, for those of you who do not immediately see the impact of this, allow me to enlighten you.  I worked in the retail sector for 23 years at Walgreens and for 15 of those years I was responsible for their investor relations.  Walgreens released same-store sales on a monthly basis so that means that I went through about 180 monthly cycles of releasing sales numbers.  I can tell you that same-store sales are the most closely watched indicator in the retail arena.  The numbers help investors figure out if you are growing in your more mature stores and how successful your merchandising initiatives are.  And while everyone knows that one month’s sales do not necessarily set out a trend, a series of same-store sales numbers will certainly help people understand where the business is going.


So, just when things are going bad, Starbucks has decided to communicate less.  I don’t agree with what they are doing, so I took a careful look at the reasons they set forth for their actions, as reported in The New York Times and The Wall Street Journal.  (I find that I need to read both newspapers to get a balanced view of the world – one pulls you to the left and then the other pulls you to the right, so you wind up in the middle.)  What I found were two justifications for the decline in communications.  First, they said that a focus on increasing same-store sales is part of what led them away from their core strategy of creating a Starbucks experience, and second, same-store sales numbers would be “erratic” during the transformation.


Frankly, in financial terms, this is a lot of baloney.  The reason the Starbucks experience changed is that they stopped acting like a neighborhood coffee shop with a focus on coffee and started acting like a chain restaurant.  Everything became standardized, with a focus on cutting wait times and controlling the process.  This worked when the economy was robust and there was little competition, but things are tougher now. 


As to the second reason, Starbucks was happy to report same-store sales as long as they were robust, giving people the impression that they were going to grow to the moon.  Now, when same-store sales might be erratic, analysts can no longer be relied upon to draw the proper conclusions (read: conclusions that are favorable to Starbucks).  It doesn’t work that way.  You can’t close the curtains on the wizard.  If Starbucks thinks that they are going to enter a period of erratic same-store sales because of the transformation they are attempting, they should be prepared to explain to investors what they are doing, the impact it has on sales and how they believe it will improve sales in the long run.  That’s part of being a public company.  To put it into consultant speak, where performance plus perception equals stock price, Starbucks is cutting off an important component of the performance portion of the equation, which will throw into doubt investors’ perceptions of the company.


I think Starbucks is a terrific company, one of the great growth stories of the past 20 years.  I’ve been to one of their analyst days and I am convinced that they are one of the best marketing companies around.  They sure know how to sell the romance of a cup of coffee, creating a premium product out of what was once considered a commodity.  I just think they’re dead wrong on this issue.  I’ve seen the “No Same-Store Sales Numbers” movie before, Home Depot version, and it did not have a happy ending.

Wednesday, January 30, 2008

The Regulatory Mindset of Investor Relations

Last week I attended the Rice Marketing Case competition where eight of the nation’s best business schools came to Rice and in the course of 24 hours analyzed a case and made a presentation of their recommendations to a panel of judges.  It was quite interesting to see how the same problem generated significantly different responses.  I am happy to report that students from my business school alma mater, Kellogg, won the competition, besting teams from, among others, Harvard, Yale, Wharton, The University of Chicago and (alas) Rice.


After the competition, I naturally headed for the reception.  Listening to four hours of marketing presentations will build up a mighty thirst.  I was busy easing that thirst on about my second glass of wine, when a fellow attendee I was chatting with turned to me and asked, “What companies do you think do a really good job in investor relations?”  I think she was trying desperately to come up with a topic to talk about because a few minutes earlier when I told her I did investor relations consulting, I was met with a blank stare. (Well, what can you expect from marketing people?)  The thing is, I was stuck for an answer.  My apologies to all of you out there with terrific IR programs, but none came to my mind.  After an awkward pause, I explained that generally I worked with companies that had need of improvement in some area, so I couldn’t name any single company that did everything right.  To keep the discussion going at that point, she then asked me “What is the most common failure in investor relations that companies have?”  Now here was an answer I could sink my teeth into, and I will devote the rest of this post to discussing my answer to her.


The single most common failure that investor relations programs have is that they approach the function as a regulatory function rather than one that conveys strategic information about the firm.  In other words, because the minimum disclosures about a firm are regulated by the SEC, many firms view that as being all that they should say about their business. 


In the early days of my career, I worked as a corporate attorney.  My practice encompassed everything from real estate to corporate law to securities regulation. One of the things I learned about attorneys that work in a regulated industry is that when they are confronted with a question, they have two default positions.  The first is to examine the facts and see if they fall within the language of the regulations.  If the regulations didn’t allow you to do what you wanted to accomplish, the second step is then to see if there is an exemption available.  If no exemption exists, then the answer is “No, you can’t do that”.


To a large degree, this sort of thinking has infiltrated the practice of investor relations.  Disclosures are highly regulated, lawyers and accountants review everything, regulation fair disclosure hangs over everything you say and the threat of lawsuits for misleading statements is omnipresent.  The result is that the default position for most companies is to say as little as possible.  Most lawyers’ advice is that if you stick to saying only what is required by the regulations, you won’t get in trouble.  Of course, your stock is not likely to get much of a valuation, but that’s not their problem.


One of the common frameworks of investor relations is: company performance plus the perception of future performance equals stock price.  If a company is sticking to the bare regulatory minimum of disclosure, I would argue that they are only giving investors the half of the equation relating to company performance.  Regulations do require companies to talk about forward looking initiatives, but frankly, if you’ve ever spent any time reading through Form 10-Ks there is generally so much weasel language and so little meat on those disclosure bones that an investor can’t make a reasoned decision based on what they read.


So my advice is for companies to open up about how they achieve their results and where they see themselves going.  Talk about the key drivers of your business.  Discuss your view of the markets and where you need to go to be successful. Engage in meaningful disclosures between quarterly filings.  Be upfront about corporate initiatives and update them frequently with meaningful statistics.  There will be rough patches - new initiatives rarely go smoothly, but in the long run investors will understand your business better and assign it a valuation that combines both where you are and where your company is going.


I got done with my answer, feeling pretty smug about what I’d said, then I looked at the person I was talking to.  She had a dazed expression on her face, looked at her wine glass, said she needed a refill and wandered off towards the bar.  I guess good investor relations is enough to drive a person to drink.

Thursday, January 17, 2008

What is Investor Relations Worth (Revisited)

My wife, who claims that one of the great proofs of her love for me is that she allows me to keep a dog, always buys every member of the family a new calendar at Christmas time. This year she bought me a calendar featuring dog cartoons from The New Yorker. The cartoon on the cover shows two dogs and one is saying to the other, “I had my own blog for a while, but I decided to go back to just pointless, incessant barking.” Of course, sometimes it’s hard to tell the difference.

One of the most common laments I hear from investor relations officers is that it is difficult, if not impossible, to measure the value of investor relations. It reminds me of the old saying about advertising: “Half of my money is wasted on advertising, the problem is, I don’t know which half”. I suppose it can also lead to IROs questioning their own worth, but we need not stray into such troublesome waters here.

Good investor relations is especially difficult to measure, as there generally are no baselines to gauge it against. You try to look at competitors’ valuations, companies with similar characteristics, the market in general and whatever else comes to mind. From that you hope that a pattern emerges, but whatever pattern may be there is often lost in the overall performance of the company. You often feel as if you’re dancing around the issue without really coming to grips with it.

When things go spectacularly wrong, however, there is a chance to measure damage more precisely. Academics call this an event study and crank out hundreds of them in learned papers accompanied by complex mathematical equations of the sort that gave me nightmare during my freshman year of college. My goals here are a bit more modest.

You might recall that Sallie Mae (NYSE:SLM) hosted a conference call with analysts on December 19, 2007 that was one of the worst examples of its kind. On the day of the call, Sallie Mae lost $3 billion of market capitalization. A month has now passed and given that Wall Street always initially overreacts to both good and bad news, I thought that after a month’s time it would be instructive to see where things stand.

Devoted readers of this blog (yes, there are a few) will recall that back in August of last year I quoted a study by Rivel Research where a survey of buy side investors showed that they thought good investor relations could add as much as 10% to a stock’s value, while poor investor relations could subtract as much as 15% from the value of a stock. From this perspective, here is how Sallie Mae’s disastrous investor relations foray into conference calls stacks up against the broad market and the NYSE Financial index:

Date                         SLM      SPX 500    NYSE Financials
12/18/07                 28.87    1454.98     470.55
12/19/07                 22.89    1453.00     471.25
1/14/08                   20.30   1416.25      450.55
first day % chg      -20.7%  -0.14%       +0.15%
One month % chg -29.68% -2.66%     -4.25%
(Note: I have chosen the date of 1/14/08 as the measurement date because that represents the highest price for SLM in the week leading up to the one month mark from the conference call in question.)

So comparing Sallie Mae’s best price against the worst performing index, they underperformed by approximately 25%. I think this lends some credibility to the values that Rivel research assigned to investor relations. Granted, it is a case study of one (and an extreme one at that) and by itself would not stand up to rigorous academic peer review, but it sure points in the right direction and seems to be in the same range.

So, investor relations officers take heart! There is meaning and value to your function! You add value to your company even if you just convince your senior management to prepare for conference calls and not wing it. Remember, the smartest thing you may do is to convince people not to speak unless they have something intelligent to say.