Measuring consistency: the retailers cases study

As mentioned in my article “How to measure stock reputation”, communicating on strategy and targets is critical, but actually realizing this strategy and achieving targets is even more critical for stock reputation. Say what you do and do what you say. For this study, I decided to analyze the consistency of the largest listed retailers in the world, namely Walmart (US), Costco (US), Carrefour (France), Tesco (UK), The Kroger (US), Metro (Germany), The Home Depot (US) and Target Corporation (US).

Consistency in strategy

To start, I looked at the announced strategy for these companies at the end of 2011. Then I reviewed their communication over the last three years in order to spot inconsistencies, strategic changes and more broadly, all initiatives that were not in line with this announced strategy. According to the frequency and importance of those changes (either major or minor), I rated the consistency in strategy from zero to seven.

Overall, American retailers get good ratings on this criterion. Costco and The Home Depot are perfectly consistent throughout their publications. Their strategy and priorities have remained the same over the last three years and remain valid today.

On the contrary, the Europeans have been particularly inconsistent during the last three years. They all changed their CEOs and, with them, their strategy. This occurred at Carrefour in 2012 and it adjusted it strategy again in 2013. The CEO of Tesco was appointed in 2011, put in place a new strategy in 2012, and made a further adjustment in 2013, before being sacked in 2014.

The achievement of guidance and targets

The achievement of targets and guidance represents the second level of consistency analysis. A profit warning will of course strongly impact reputation but systematically better results than guidance is also not a positive. Not giving guidance is not a solution as it increases uncertainty. As previously, I reviewed in detail the publications from the last three years (12 quarters) for each company in order to spot profit warnings and revised targets. Then, I rate from zero to seven each company according to the frequency and importance of their profit warning (or any difference with expectation).

Over the last three years, The Kroger and The Home Depot have not issued any profit warnings. On the contrary, almost every quarter, they have done better than their guidance. It is for this reason that they do not receive the maximum points. This  raises investor expectations and increases potential disappointment risk for the day when those companies will only just make guidance.

Target and Tesco are at the bottom of the ranking. In three years, Tesco has been forced to issue two major profit warnings (at the beginning of 2012 and during the last change of CEO). Target did the same in the first quarter 2013 and during the second quarter 2014.

It should be noted that Carrefour and Cosco obtained a below average rating because they do not give guidance.

Reporting consistency

Reporting consistency is the last factor to analyze and rate. Once again, I reviewed in detail results publications, presentations and reporting in order to spot changes that would negatively impact understanding and visibility. Depending on the importance (major or minor) and the frequency of those change, I rated reporting consistency from zero to six (this criterion is slightly less important than the two others).

Just like the other criteria, the American retailers are doing much better than their European competitors. The annual report and accounting presentation of Costco in 2014 are identical to those of 2012 (no restatement). The Home Depot and the Kroger are also particularly consistent from one publication to the next.

This is not the case for Metro. Over the last three years, the German retailer’s reporting has been extremely difficult to follow. Metro made some accounting adjustments in 2012, but most importantly changed its divisional reporting and its reporting calendar in 2013 (the reporting year end changed from December to September). Carrefour has not been much better with accounting revisions and important reporting changes taking place almost every year.

Conclusion

By adding the results on these three criteria, it was possible to rate the consistency for each company. This rating gives the last measure of stock reputation.

Overall, the American retailers appear to have done much better than their European competitors. The Home Depot, The Kroger and Cosco are particularly consistent in their strategy, reporting, targets and achievements. On the contrary, the Europeans have issued multiple profit warnings, and changed their strategy and reporting many times. Their operational difficulties and CEO changes are, without a doubt, the reason for this.