Friday, April 18, 2008

More information is Better; Less Information is Bad

Yesterday The New York Times ran a story in its Business section entitled, “Retailers Get Stingy With Data”.  The gist of the story was that an increasing number of national retail chains are abandoning their long standing practice of reporting monthly sales and forecasting annual profits (providing earnings guidance).  It seems the chains think that such information encourages short-term decision-making and can confuse investors.

Of course, I suppose it’s only coincidence that they have come to these conclusions just when the economy is softening and consumers are spending less.  Everyone knows that sales numbers are not confusing when they are going up, it’s only when they start to head down that they can lead the poor unsophisticated Wall Street MBAs astray.  Further, by eliminating monthly sales reporting do they really think that they are encouraging longer term decision-making?  They still have to report sales on a quarterly basis, and I’ve never heard a CEO say that quarterly performance is long term.  It could be that they are engaged in the practice of hoping they can recover from one bad month’s sales in a quarter with a stellar performance in the other two months.  I’ve actually had a CEO tell me, “We don’t report monthly sales because our business can turn around so fast”.  Of course, this same CEO also said, “We’re a big company and trying to turn things around is like trying to turn a battleship”.  I don’t think you can have it both ways.

My favorite quote from the article is from a Macy’s executive talking about sales numbers being skewed by calendar shifts: “The numbers are increasingly confusing because of the calendar shifts”.  That darn calendar just gets more and more confusing every year. 

What it boils down to is this: when things look good, company managements don’t mind investors being well informed because it will help the stock price.  When things look bad, management would prefer that investors be kept in the dark for as long as possible, so that the bad news won’t impact the stock price and maybe they can fix things in the interim. As a Catholic, this reminds me of some of my early theological training.  Hoping for a miracle almost never works; it is better to confess your sins and shortcomings and ask for forgiveness.

In the long run, a company’s ability to generate earnings and cash flow will determine how its stock is valued.  In evaluating earnings and cash flows investors will consider their confidence in the data they are receiving, the clarity and quality of the information given, and the history and consistency of the data.  Eliminating data just at a time when investors need more information to separate companies that can perform well in a slowing economy from those that can’t is classic short-term thinking by management.

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