Chief financial officers at Orange County’s contingent of publicly traded companies are girding themselves for earnings season, the four pressure-packed times a year when they and the companies they serve are either enjoying or facing Wall Street’s music.
A majority of the 66 largest publicly traded companies tracked on OCBJ-BNY Mellon list will be reporting their quarterly and/or annual reports within the next three to four weeks.
Most have enough investor interest to warrant holding a concurrent conference call with analysts and investors.
“The funny thing about earnings calls is that I’m most nervous when just reading our scripted remarks,” Mike Henry, chief financial officer at Irvine-based Tilly’s Inc. (NYSE: TLYS), said in an email.
“Once we get into Q&A, it’s ‘game time’ and I’m completely calm because I know I have it nailed, and I’m ready for battle!”
Four CFOs of publicly traded companies here gave insights to the Business Journal about what it’s like to deal with Wall Street every 90 days.
Each company has had moments of thrilling increases, such as the tripling of the volatile stock of Boot Barn Holdings Inc. (NYSE: BOOT) during the past 20 months.
Each, too, has had disappointing and perplexing stock drops.
“Wall Street doesn’t tend to interrupt my sleep,” said Greg Hackman, chief financial officer of Irvine-based Boot Barn. “Over the long run the market gets it right, although the day in and day out fluctuations can be difficult to understand.”
Global Benefits Group (LSI: GBGI), which provides insurance to expatriates, operates from Foothill Ranch and trades on the London Stock Exchange, which is similar to American exchanges, Chief Financial Officer Eric Dickelman said.
“In general, investors in both exchanges simply want an honest assessment of the business’ performance over the reporting period and, where possible, a glimpse into what they can expect into the future,” Dickelman said.
“Investors are investors and they don’t tend to be much different between the U.S. and U.K. If you miss a forecast or are not transparent in your earnings then they will ask the same tough questions and react in exactly the same manner.”
GBG, which went public in 2017, had initial success before cratering after political and economic problems surfaced in Angola. It’s scheduled to be sold in the first quarter for $132 million to Further Global Capital Management, a New York City-based private equity firm.
The following are edited excerpts from the four OC CFOs about earnings season:
How long does it take you to prepare?
Henry (Tilly’s): I’m always preparing, all year long, every week and month. I don’t wait for a quarter to end to start thinking about what we need to say. I’m already significantly prepared for our Q4 earnings call, and our quarter isn’t over until Feb 2.
I typically have our script written before the quarter is over, only needing minor tweaks as the call approaches and final results are determined. Q4 is already drafted for Chief Executive Ed Thomas and me. As we progress through a quarter, I’m constantly thinking about what our results say about our business and what we may need to share with our investment community.
Once a quarter is completed, I study until I can recite any line item and its relationship to last year and/or our guidance, including memorizing our scripted remarks to such an extent that I can recite our entire script, including our CEO’s portion, without having to reference any materials. Once I feel comfortable that I know everything cold, I start asking myself, “What else could get asked that I may not like, may not want to answer directly, or that might surprise either Ed or me?”
Dickelman (GBG): It generally takes us 45 days to prepare our quarterly financial packages. Prepping for investor meetings can vary but generally a week is about right.
Hackman (Boot Barn): We have a pretty robust weekly business review meeting and forecasting process that allows us to project how the quarter is shaping up in advance of quarter-end close. This allows us to think through messaging, outline the key points, and then fine-tune the release and script a couple of weeks in advance of the call. Jim Conroy, our CEO, Jim Watkins, our VP of investor relations and Megan Wilhelms, our financial reporting manager, meet for a couple of hours a week for the two or three weeks leading into the call.
John Michel (First Foundation Inc.): The preparation for an earnings call is an integral part of the closing of our books at each quarter end, which begins immediately after the end of a quarter. It’s not easy to break out the time used specifically for the earnings release during this three to four week process because it is so integrated into our financial close.
What’s the best day of the week to release earnings?
Henry: I like Wednesdays. It gives me a couple days to consider the most recent weekend’s results and whether that impacts my thoughts on guidance. It also gives a couple days post-call to respond to analysts and shareholder questions before the week is out.
Dickelman: The guidance within our market is that earnings get released when they are done, regardless of the day. The timing of releasing earnings is critical. Under the rules of the exchanges in the U.K., we have found that releasing earnings has to be done ASAP after the board has been briefed and signed them off.
Hackman: We typically try to have our call during the middle of the week: Tuesday, Wednesday, or Thursday. This allows us to schedule analyst and investor calls right after we have had the earnings call.
Michel: Not sure we have a preference other than not on Friday.
What is the best time?
Henry: We like immediately after market close around 1:30 PST, as it flows with the natural course of the workday as opposed to pre-market, which is rough for the West Coast, or later in the day, which gets tough for the East Coast analysts’ timing of publishing a note post-call.
Dickelman: The U.K. market that our stock trades in is open at 8:00 U.K. time, which is midnight here. So investors will have had about six hours to digest the information and formulate questions. So the day of the release, particularly our morning, can be hectic as you respond to inquiries and questions.
Hackman: Being on the West Coast, we have the call after the market close. Having an earnings call at 5:30 am before the market opens isn’t ideal for us.
Michel: We prefer to release before the market opens and conduct the call that same morning.
What does Wall Street get right about your company?
Henry: They understand that despite all of the bad news about retail, we still have significant growth opportunities ahead of us if we continue executing well.
Dickelman: Not much. We have a complicated business with a lot of moving parts so, unless you are actively following us, then you won’t understand why things change within our business. We may not have hit a forecast because of an issue in Angola, for instance. We can explain why, but unless you actively follow us you may not understand the nuances associated with that issue and how it affects us short- and long-term. We spend a lot of time taking complex issues like these and translating them down to “sound bites” that investors can more easily digest and make sense of the issue.
Hackman: I think that Wall Street understands our business pretty well. We typically go on the road for a few days after each quarter to see investors and answer questions. I believe this helps with their understanding.
What do you wish Wall Street would better understand?
Henry: That we aren’t just another Zumiez or PacSun. We are not copies of each other. Each of the three businesses is different from the other in several ways with their own distinctive characteristics and strengths.
Dickelman: It’s the same thing a lot of CFOs complain about—short-term versus long-term. The markets tend to punish companies for making decisions that may negatively impact the short-term but are in the best interest of the shareholders long-term.
We went through that this past year with our decision to exit Angola. Our stock was punished for the decision. Now the market’s reaction may have been due to the idea that we did not signal we were going to make this decision and it caught them by surprise.
Our business operates in a dynamic marketplace with challenging environments. Things can change dramatically for us almost overnight. That leads to the other thing that I wish investors knew about us. It’s very difficult for us to forecast beyond six months.
We can get certain trends in place, but we’re a growing business operating in difficult insurance markets and that makes forecasting equally as challenging. That isn’t an excuse. It’s simply a fact.
Hackman: Many of the investors are in New York, Boston, Chicago, and other big cities. Initially, we had to remind them that a large part of the country lives and work outside of big metropolises.
What’s the most asked question from analysts?
Henry: They ask more about modeling than questions about merchandising or other operational topics.
It’s rare that we get a question that isn’t directly related to our scripted remarks. We have a nice cash position, so we frequently get asked what we are going to do with that cash.
Dickelman: Growth prospects and where from. They are casually interested in the “rear view” mirror look at how the business did over the last reporting period but they are more interested in the “windshield” view going forward. What’s ahead and what should they expect. That’s where it can be tricky because the look ahead is difficult but also because we are governed by rules and regulations that prohibit what we can disclose.
Hackman: We have nine analysts that cover Boot Barn and most have followed the company since we went public. They tend to focus their questions on the company’s key initiatives and updates on what differentiates us from the competition.
Michel: There is not necessarily a “most asked question.” They tend to seek clarifications of items mentioned in the earnings release and our thoughts regarding future activities.
What is the risk or reward from helping analysts with their models?
Henry: It’s helpful to try to ensure their modeling aligns with internal business expectations so that unreasonable expectations are not created in the marketplace. Sometimes too much focus on the model causes near-term distraction from the bigger picture of what’s going on with the business over the longer term.
Dickelman: They are constant model builders, as are we. They are constantly looking for things that they can “hook” their models with, or some analytics that can improve their forecasting, as are we. We listen to them as they outline their models and try and provide some guidance around certain things. But it turns into an elaborate dance over what we can and cannot say, guidance that we can and cannot offer.
Hackman: We have had great interactions and support from our analysts and feel that they try to do what they can to understand the business so they can build their models and support their recommendations.
The risk is that they could get their models wrong because they don’t understand nonrecurring or timing-related items which would lead them to projections that we wouldn’t hit.
What keeps you up at night regarding Wall Street?
Henry: Lately, it’s whether or not they are going to get our projected numbers right. I’ve had to correct them for each of the past three quarters because they forgot about the calendar shift impacts of last year’s 53rd week in the retail calendar.
Dickelman: For complicated businesses like ours, you want to educate the analyst as much as possible about our business model. Otherwise, they can get it wrong. For instance, I have had analysts build models on us that were based on their prior experience with automobile insurance companies. Completely wrong market, industry, etc. The only thing in common was that insurance was in the name. So we try and work closely with them to help them build their models without crossing the line that is set between us by the rules and regulations.
Michel: Since I have no control over Wall Street, I do not really have anything related to Wall Street that keeps me up at night.
Now that GBG is being bought, will you still be involved in releasing information to investors?
Dickelman: Yes. It doesn’t change. Just different stakeholders—a limited and focused group of shareholders now as opposed to a “market.”
But they still want forecasts, still want estimates, will still ask questions and will still hold our feet to the fire on our performance.
Because they are shareholders, we can get more in depth with the business, deeper and with more context without having to worry so much about what we disclosed and to who and when. So from that perspective it is easier.
But shareholders, as you can imagine, are less forgiving with missing forecasts.
