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Commentary: Earnings: Excuses, Excuses, Excuses


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Commentary: Earnings: Excuses, Excuses, Excuses

It's called confession season, but it seems more like concoction season. It's the time just before quarterly earnings are released when companies own up to falling substantially below forecasts, and warn investors. But perhaps now more than ever, companies are spinning tales to lay blame for shortfalls elsewhere.

Some 60% of companies' earnings pre-announcements have been negative, up from 44% in the first quarter, according to First Call/Thomson Financial, the earnings research firm. O.K., higher fuel costs and interest rates have pinched some margins. But forget that. Companies are using such fanciful excuses that they are creating a credibility gap. And the market isn't buying it. Many of these stocks are getting clocked worse than if they played it straight. Consider these:-- The Check Is in the Mail. BMC Software, Compuware, and Computer Associates, which manufacture mainframe software, are feeling the pinch as more clients move to Internet-based systems. Yet these companies--and computer-services company Unysis--blamed woes on failure to win several large contracts late in the quarter. Factually correct, yes, but it's not digging deep enough, says Melissa Eisenstat, executive director of equity research at CIBC World Markets: "There's confusion in the marketplace as companies get Web-enabled. This is going to be a long-term process." The excuses didn't get past the market. On Unisys' June 29 announcement, the stock fell 36%, to 14 9/16. Computer Associates warned of its shortfall minutes before midnight on July 3. The stock plunged 42%, to 29 7/16, the next trading day, erasing two years of gains. The stocks of BMC and Compuware also tanked after warnings.-- The "Y2K" Defense. Immucor, maker of blood-testing systems, says sales to hospitals slowed because these customers already built up inventory prior to January. Immucor's stock has dropped some 50% since the Mar. 31 announcement. Says Mitra Ramgopal, senior equity analyst at Sidoti & Co., the Y2K excuse might have worked last quarter, but now performance "falls squarely on the shoulders on the company." He says Immucor needs to revamp its sales force and cut costs.-- Our Profits Were Stolen By Thieves. Texas-based Cellstar's profits were hijacked when $3.5 million in Motorola and Nokia cell phones disappeared from its London offices. Analysts say the real deal is the company's lack of overseas operational controls. Shares plunged 54%, to about 2, after the company warned on May 26 that it would post a second-quarter loss. "The only thing that has been consistent about Cellstar is its inconsistency to meet expectations," says Robert C. Damron of Tucker Anthony Cleary Gull.-- Fickle Tastes Are Cramping Our Sales. Catalog retailer Lands' End blames its shortfall on fewer women's career clothing sales. But the real culprit, say analysts, is the hefty price the company is paying to move some of its sales online. The stock trades around 36 after the June 6 warning, 56% off its November 52-week high.-- I Have No Clue. Chairman W. Bruce Turner says he's just as surprised as investors to discover the earnings miss at Gtech Holdings Corp., a Rhode Island company that designs online lottery systems around the world. He offered this just two weeks after announcing that the company was on track: "Some things are out of our control." One possible reason for the shortfall: a computer glitch that hung up the lottery system in Britain. Gtech's cluelessness, says Thomas Graves of Standard & Poor's Equity Group, "raises bigger questions of how well Gtech is managing its business."

Companies should realize that although confession is painful, it's good for the soul, and in the end, may make believers out of its shareholders.By Mara Der Hovanesian; Der Hovanesian Covers Markets.Return to top


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