Slaves to the quarter-end

We are in the middle of a pandemic. Company earnings forecasts are just guesswork.

For the last century companies have been "slaves to the quarter-end". The temptation to manipulate quarter-end figures has been overwhelming. The practices of sending out goods before the quarter-end, knowing they will be returned in the next quarter, the practice of selling goods at a discount to "make your numbers" before the quarter closes, the practice of delaying sales closures before the q/e when you have "made your numbers". All this needs to stop for people to trust the Stock exchanges again.

A new CEO often "takes a bath" on their numbers, they take all the losses in one quarter, so that they can re-calibrate the measure of earnings growth in the next quarters. We all know that the US q/e reporting is not audited and is subject to this culture achieving quarterly forecasts at all costs.

These companies are on a treadmill of quarterly reporting. if you "borrow" from the current quarter's numbers or sales figures, you need to "pay back" in the next quarter. The continuous overselling leads to a boom-bust Stock-exchange, which selfishly feeds our recessionary cycles. The end to this slavery to the quarter end might be an unexpected bonus from the Covid-19 pandemic.

Korn Ferry March 2020: "But many executives have complained for years that a focus on short-term performance hurts value for everyone over the long haul. In the past couple of years, JPMorgan Chase CEO Jamie Dimon and Berkshire Hathaway’s Warren Buffett have advocated eliminating quarterly earnings guidance, and former PepsiCo chair Indra Nooyi successfully lobbied the White House to get the US Securities and Exchange Commission to undertake a study on moving to a six-month reporting schedule. “There is definitely a pattern moving away from quarterly guidance, to focus on long-term investments rather than quarter-to-quarter forecasting,” McDermott says. “A more tumultuous market will prompt more companies to follow this trend.”

It’s been a part of every business quarter: company executives report how much money their firm made over the last three months and then tell investors what the firm expects to do over the next three months and fiscal year. Indeed, firms did just that in January and February, during their last earnings calls.

But now, companies are telling investors to disregard all that. Company executives have said they can’t guide investors on revenues or profits, not only for the coming quarter but for the foreseeable future. Several airlines, hotels, and other travel-related companies made such announcements last week, and on Monday a major electronics retailer and a semiconductor company joined in. Experts predict that the practice of “withdrawing guidance,” will only increase over the coming weeks as companies begin the traditional first-quarter earnings report period. “It’s the safe move, and maybe the only common element investor relations experts can take, whether it’s a positive impact or a negative impact,” says Richard Marshall, global managing director of Korn Ferry’s Corporate Affairs practice.

Such steps also bring up a bigger debate: will firms change how much guidance they give investors altogether?

The reason for the short-term withdrawal, of course, is COVID-19, not only for the impact the virus has already had, shutting down broad swaths of the world, but also for the uncertainty of how long those shutdowns will last. Firms, which until only a couple of weeks ago saw a slow-but-steadily growing economy, are now contending with a potentially very deep recession. Other firms are tapping lines of credit, worried that a huge drop-off in sales could leave them short of cash to pay bills or repay other debt. “It is impossible to try to model out how this is going to go for a year, or even the next couple of days or weeks,” says Peter McDermott, a senior client partner in Korn Ferry’s Corporate Affairs and Investor Relations practice.