More Thoughts on Starbuck’s (and Other High Growth Companies’) Investor Relations

Last week the Houston NIRI (National Investor Relations Institute) chapter hosted a speech by Karen Blumenthal, author of “Grande Expectations, A year in the Life of Starbuck’s Stock”.  It was one of the best luncheon speeches I’ve heard in a long time.  Karen obviously knows her topic and, more importantly, knows how to tell a good story. 

During the course of the speech, Karen told the story about Starbuck’s annual shareholder meeting that I found illustrative. Starbucks annual meetings are something of an extravaganza, with thousands of small shareholders in attendance consuming large quantities of caffeinated beverages, while working themselves into a frenzy of adoration for the stock that they have done so well by.  It seems that during the meeting, when Karen began to talk to investors, Starbucks reacted negatively.  She was approached by a person with a headset on (think security type) who asked her if she was a member of the media.  When she acknowledged that she was, she was immediately requested to cease talking to people, and to leave the building.  The phrase “Media Alert!” was even heard to be spoken over the headset. 

The story struck a chord with me, as I have heard large institutional investors complain that Starbucks, for as great a company they may be, are extremely controlling about the information flow about the company.  One manager at a large Boston hedge fund went so far as to tell me, “You ask them a question and they tell you they’ll get back to you in a week or so.”  This is not exactly optimal investor relations.  This is “if I can control all aspects of what you know, then you’ll favor my stock” relations.  For some reason, many high growth, high P/E companies adopt this approach.  The thinking seems to be, “we’ve obviously invented a better mousetrap which is highly deserving of its rich valuation and we don’t have to go out of our way to answer all your pesky questions.”

What this ignores, of course, is that trees don’t grow to the sky.  Put another way, high growth rates sooner or later come to an end.  When the growth slows down, if the company has not built up its reservoir of good will and credibility with the investing community, the valuation decline will be faster, farther and last longer than if the company had established a strong voluntary disclosure program and stuck to it through thick and thin.

It’s not as if Starbuck’s doesn’t understand publicity.  Witness the recent media coverage of their three-hour shutdown to retrain their baristas in the Starbucks way of making coffee.  They had coverage in every major media outlet that I read or watch, from The New York Times to the Today Show (actually, my wife watches the Today Show, I just happen to eat breakfast in the same room.)  Yet they somehow seem to have a blind spot when it comes to dealing with investors.  Whereas more is more when it comes to stories that they can control or put in a favorable light, less is more when it comes to quantifiable data that will help investors make informed decisions.  Starbucks (and many high growth companies) needs to loosen up, give out more information and understand that not everyone will put the same spin on the information they share. To quote that great philosopher Yoda, “Train yourself to let go of everything you fear to lose.” After all, it takes both buyers and sellers to make a market.

That You Charlie?

For those of you not blessed with what passed for a multicultural education in the 50s and early 60s, “That you Charlie?” is the tag line from the old Kingston Trio song, Charlie of the MTA. (Three clean cut white guys singing folk songs was about as multicultural as we got back then.)  Charlie was the poor chump who boarded the Boston subway system, the MTA, by paying his ten-cent fare, but when they raised the fare by five cents, Charlie couldn’t get off of the train.  He was condemned to forever ride the MTA, as sort of an urban Flying Dutchman.

The song begins:  “These are the times that try men’s souls. In the course of our nation's history, the people of Boston have rallied bravely whenever the rights of men have been threatened. Today, a new crisis has arisen.”

Recently a new crisis has arisen regarding earnings conference calls.  The Wall Street Journal reported on Saturday that a mystery man has emerged on conference calls at least seven different times in the last few weeks.  Calling himself Joe Herrick of Gutterman Research, he initially poses as a well-known analyst so that he gets into the question queue, then reveals himself as Joe Herrick (a fictional name) and generally asks plausible sounding, highly detailed questions about supply chain management and lean manufacturing.  Company executives, not wanting to look dumbfounded by the questions, have generally attempted to answer the questions, not realizing that they were the victims of a prank.

Some of you may view this as harmless fun, and if I were 15 again, I might too.  Fortunately, I am no longer 15 and I work in a profession that depends on convincing executives that it is in their best interest to speak openly with Wall Street.  It doesn’t help to have some idiot out there posing false questions designed to make fun of the system and make executives look foolish.  If this process continues the result will be that companies will make it harder to participate in conference calls or perhaps even eliminate the question and answer sessions.  No investor relations officer wants their CEO to be the next victim.  Companies will think of more ways to control the process and the information imparted during the calls.  They may start to give passwords to only a few select analysts so that they are the only ones that are allowed to ask questions, as Coke did on a recent conference call.  Any way you look at it, the amount of information imparted on the calls will be reduced, and especially reduced in the area of conference calls that offer the best opportunity to gain incremental information – the Q & A session.  The end result is bad for all investors.

So Joe Herrick, if you are out there, please ride off on the MTA into the sunset and, like Charlie, stay there.  You’ve had your fun, but you’re not helping investors, large or small.

Hello Sailor

Yesterday’s Wall Street Journal contained an article where the lead line was “America’s captains of industry are starting to talk like, well, sailors.”  I read this with great interest, as I have been a competitive sailor for a number of years, spending many happy hours racing around buoys everywhere from the Great Lakes to Long Island Sound to Galveston Bay.  My reaction was, “Sailor’s lingo is perfect for our captains of industry; it contains technical terms that sound really imposing, but generally serve to obscure the issue at hand.”  Imagine my disappointment when I read the whole article and it turned out to be only about the use of the phrase, “we are facing headwinds”.  I mean, this really isn’t a great nautical term, nothing as evocative as “All hands on deck to haul the halyard and raise the mainsail.”  Rather, this is just the latest corporate cliché, replacing “We encountered a perfect storm” as corporate speak for “conditions were tough and we couldn’t overcome them to be as profitable as you expected us to be.”

In an attempt to overcome my disappointment, I have decided to offer up a few nautical terms that corporate chieftains could employ to their advantage:

Pooped :  to be overtaken by a following sea and smothered in a mass of breaking water, which often causes the ship to founder.  For example, the housing industry has been pooped by the subprime mortgage crisis.  This expression also has the advantage of being highly evocative.

Leeway:  the lateral distance a ship is displaced from its course while sailing to windward.  Any CEO worth his salt would be able to use this one.  I can hear it now: “We made good progress against our objectives in the quarter, but lowered consumer demand produced leeway which has caused us to reset our goals.”  Translation:  We couldn’t quite hit our profit targets, so we reset our bonus objectives.

Widdershins: In a direction opposite to the usual, in a wrong or contrary to direction.  This will enable corporations to avoid talking about losses, they can simply say, “Profit was widdershins”.  Very similar to the military talking about retrograde maneuvers.

Jetsam:  Goods thrown overboard to lighten the ship during a time of emergency.  (As opposed to goods washed overboard and found floating on the sea, which is flotsam.)  This could enable CEOs to talk about layoffs without talking about people – for example, “There were 2,500 jetsam which will help us return to profitability next year”.

Gunboat diplomacy:  to influence by force of arms rather than skilled negotiation.  A perfect replacement for the term “hostile takeover”.  Microsoft’s handling of their bid for Yahoo comes to mind. 

Scud:  to sail before the wind in a storm under reduced sail.  There are plenty of companies that are scudding right now – think of the U. S. auto industry.

There are plenty of other examples I can think of, such as loose cannon (rogue trader), trim the sails (corporate layoffs) and oakum (old pieces of rope picked into shreds – think employees approaching retirement), but I think you get the idea by now.  No use flogging a dead horse.  As the sun is now over the yardarm, I think I will shove off and go splice the main brace.