When Hurricane Katrina hit the Gulf Coast, women across the country crimped their cosmetics spending. Or at least that’s what companies like Avon Products Inc. and Estee Lauder Co. want investors to think.
Katrina also caused mattress sales to slide, according to Tempur-Pedic International Inc. Same goes for business at Books-A-Million Inc. stores and Diebold Inc.’s automatic teller machines.
With the third-quarter earnings season kicking into gear next week, the blame-it-on-the rain excuses are starting to pile up across corporate America. It’s a challenge for investors to sort out fact from fiction in those reasons.
There is no doubt that many companies were hard hit by Hurricane Katrina, and in some cases, Rita, too. Given the size of those storms and the paralysis of business along the Gulf Coast, there will certainly be some legitimate costs for business there.
Insurance companies are getting clobbered, as is any business that used New Orleans as a major port. Many retailers with large operations along that coast have also seen significant damage to their stores.
But many excuses lately seem murky, and more are expected as companies report their quarterly results in the coming weeks. Are the storms really hurting business or are they being used to divert attention from more serious problems?
Avon, for instance, slashed its earnings forecast last month in part due to Katrina, and said that higher gas prices are hurting both its sales representatives and its customers. But the company’s problems aren’t new, according to Fulcrum Global Partners analyst Alice Beebe Longley, who said many are attributable to a “deterioration in management control.”
Spice maker McCormick & Company Inc. highlighted Katrina as one major reason for its earnings to fall short of forecasts. Its Zatarain’s line of flavored rice and other products is based just outside of New Orleans.
That, though, really wasn’t the driving force behind its earnings miss. During a conference call with analysts, the Sparks, Md.-based company said that only about 25 percent, or 2 cents to 3 cents, of its 8-cent earnings shortfall came from the hurricane. The remaining amount was due to continued weakness in its industrial business.
Compare the competitor
A way for investors to size up whether companies are just doling out excuses or if problems really exist is to watch how their competitors deal with such issues.
If the hurricanes are plaguing Avon, then other cosmetics and consumer product companies should also be warning of trouble ahead. Estee Lauder noted the “continued negative impact” of Katrina when it said it would miss its profit targets, but similar red flags haven’t come from giants like Procter & Gamble Co., one of the largest manufacturers of mass-market cosmetics and beauty supplies.
Or consider the case of Tempur-Pedic. Along with the hurricane, the Lexington, Ky.-based company offered up another curious reason for its expected profit miss: the incentives being offered in the auto industry. Apparently, consumers who bought cars at deep discounts weren’t interested in buying $2,000 mattresses.
CIBC World Markets analyst Joseph Altobello noted in a report to clients that he was somewhat “skeptical” that the issues plaguing the company were industry-specific and short-term in nature. The company cites a slowdown industry wide in mattress sales, but Altobello points out that its competitor, Select Comfort Corp., recently forecast it would exceed its long-term growth targets for the second half of this year.
Tempur-Pedic is expected to announce its quarterly results at the end of the month.
Krispy Kreme Doughnuts Inc.’s situation provides a recent example of why investors should be skeptical about excuses. A year ago, the doughnut maker blamed its earnings shortfall on the low-carbohydrate craze, although its competitors weren’t complaining of similar concerns.
Soon after, it became apparent that the company’s business was in serious financial trouble. Since then, the company has restated earnings, has come under investigation for financial irregularities by securities regulators and fired its top executives.
No one is suggesting any company today is following a similar path. But investors need to be on the lookout for excuses that might seem a little too far-fetched for comfort.