Corporate chiefs need to walk a fine line between realism and
optimism
By John D. Stoll
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (January 5, 2019).
Among the things having as good a decade as the U.S. economy is
Apple's iPhone. Rummage through the pockets and purses of your
workmates, and chances are you'll find one.
The health of the near-ubiquitous smartphone and the economic
engine it has helped drive and ride are both under a growing cloud,
though. Apple Inc. slashed its revenue target this week as iPhone
sales slumped, a development that tests the nerves of investors
already on the lookout for signs of the first American economic
downturn since 2009.
If there is a list of executives we'd expect to be capable of
soothing concern, Apple Chief Executive Tim Cook is on it. After
the guidance cut Wednesday, Mr. Cook sat for a televised interview
and published a letter to investors. He pinned Apple's problems on
"mounting uncertainty" and promised to do better.
Mr. Cook's explanations were met with the suspicion that the
iPhone's problems are deeper than the company is letting on. Shares
plunged on Thursday and finished the week down 5.1% even after
mounting a recovery Friday.
Mr. Cook is the first executive to face the firing squad this
year, but he won't stand alone. CEOs and their finance chiefs are
in a tight spot as they start reporting the most recent quarter's
financial data this month. For a few years, they've been
cheerleading for the economy, arguing that employment, spending,
tax cuts and underlying fundamentals indicate all is well. When
they didn't have an answer ready for a tough question, they would
point to economic or political uncertainty.
The art of guidance is always a delicate dance between realism
and optimism, but a misstep in these febrile times can lead to a
fall. Anything cautious that a CEO or CFO says about consumer
demand, supply chains, inventory or credit conditions could be read
as proof the sky is falling.
When making predictions about the economy, "you don't want to be
the guy that sticks his head above the water and all the sudden,
two months later, have The Wall Street Journal writing about how
wrong your comments were," said Ken Goldman, Yahoo's former
CFO.
While earnings growth is expected to remain steady and 2019
outlooks should be rosy, analysts say a sense of impending doom
lingers.
"Scores of recent client meetings indicate that many investors
believe the U.S. economy will enter a recession in 2020,"
Citigroup's chief equity strategist David Kostin wrote in a
research note distributed before Christmas. The firm's pessimistic
scenario calls for investors to start pricing in a potential
recession later this year -- an unwelcome prediction following the
market's recent swoon.
Investors aren't the only ones getting anxious. Duke
University's quarterly CFO survey, released in December, reported
half of respondents expect a recession to start late this year. In
an email, Duke economist and professor John Graham said respondents
assigned significantly higher probability of recession than they
did when similar questions were asked in 2015 and 2016.
C-Suite executives serve as companies' main spokespeople, and
walk a fine line when talking about the broader economic
environment. Even if they agree there could be trouble on the
horizon, they often default to only addressing specific operating
strategy and the immediate economic conditions when addressing the
public. This is safe, but lacks the authenticity investors
crave.
Elena Gomez, CFO at customer-service company Zendesk Inc., said
analysts and investors expect her to be consistent but also be "a
realist."
Zendesk has been pursuing a $1 billion annual revenue goal for
several years, for instance, and analysts often fixate on that
benchmark as a barometer for the company and the sector. Ms. Gomez
says that goal is important, but just a "stop on the journey" to
growing from its current $600 million in annual sales to becoming a
multibillion-dollar enterprise. Still, she welcomes the scrutiny
and realizes Wall Street needs specifics to judge the company
by.
"You can be transparent about as much as you can to give
confidence in the outlook without being tone deaf," she said. "I
appreciate a CFO is in a seat where every word you say can
influence the outcome."
This dance is well under way.
Companies reporting earnings in the week before Christmas, for
instance, saw their executives -- including Carnival Corp.'s Arnold
Donald and Worthington Industries' President Andy Rose --
downplaying concerns and focusing on the positive. Mr. Rose,
formerly a CFO, said "the economy is strong and showing no signs of
extended showdown."
The message isn't always getting through. Carnival's Mr. Donald
was frustrated with investor reaction to the cruise-ship operator's
results, saying in a CNBC interview that analysts were overly
concerned about yields and comments about weakness in Europe,
discounting the company's focus on profit growth. He said the
company will maintain its strategy.
Charles Holley, a former Walmart Inc. senior executive, faced
plenty of heat while running the retail giant's finances. He said
the 2015 decision to invest $2 billion in e-commerce was criticized
by analysts, but the decision panned out.
"You've got to make sure the company is standing up to Wall
Street, [which] may not like what you are telling them at times,"
Mr. Holley, now consulting for Deloitte, said Thursday. Still,
because many companies -- including his former employer -- have
pulled back on certain disclosures, transparency is increasingly
valued by investors, he said.
Mr. Holley was Walmart treasurer when the company stopped
publishing monthly sales during the last recession.
A decade later, analysts want executives to understand the need
for clarity.
During Cintas Corp.'s conference call an analyst asked whether
the work-uniform company is doing anything differently given
investor jitters.
"I feel like every business leader, their comments are extremely
scrutinized right now in terms of how they feel," Northcoast
Research Partners' John Michael Healy said on the call. CFO Michael
Hansen responded by pointing to improved guidance and
better-than-expected results.
Even if executives don't want to talk about their view on a
recession, their audience may force them to. Office furniture maker
Steelcase Inc. fielded questions about the likelihood of a
prolonged downturn and how that would affect demand for a company
dependent on business spending.
Instead of deflecting, executives reassured callers demand is
strong and then described how the timing and reasons for downturns
are hard to predict.
"It kind of depends on what the nature of that recession is,"
CEO James Keane said in a lengthy response during the conference
call. "If it's consumer-driven, it may affect us differently. If
it's a credit crunch affecting small companies, it could affect us
differently. If it's big companies, we know what that looks
like."
Write to John D. Stoll at john.stoll@wsj.com
(END) Dow Jones Newswires
January 05, 2019 02:47 ET (07:47 GMT)
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