In these days of disappointing financial results at retail, companies are butchering the language and spinning their best in order to downplay the bad news.
George Orwell once wrote: “Most people who bother with the matter at all would admit that the English language is in a bad way.” Had the author of “1984” and coiner of the term “Newspeak” (“Freedom is Slavery”) lived to see a modern apparel company’s earnings release when its profits were in “a bad way,” he would probably require the Heimlich maneuver to keep from choking on its turgid, obfuscating prose.
The problem with publicly owned companies is that they are required by law and investor pressure to keep in constant communication with their shareholders. When times are tough, when sales and earnings are down, they have to disclose it with weekly and monthly sales updates, same-store sales releases and quarterly reports, especially since the dawn of Reg FD a couple of years ago. When this flurry of news is not good, investors dump their stock, which depresses the price and brings another round of recriminations. Now it is certainly an understandable fact of human nature that no one likes to be the bearer of bad news. Unfortunately, that is especially so when it means your stock options are now worth less than the toilet paper you’ve just flushed them with.
So what do public, and even those private companies that have to disclose, do? They engage in the time-honored American tradition practiced so expertly by everyone from P.T. Barnum to Bill Clinton. They spin.
They bend the truth. They abuse the language. They conceal bad news, overemphasize good news and lead with minutiae in order to avoid drawing attention to “substantia.” They emphasize the immaterial “highlights” of their quarterly performance and then cough and cover their mouths while muttering, “And our net loss for the quarter was $14 gazillion.” Worst of all, they hide bad news in an impenetrable swamp of bland, monotonous and seemingly endless prose that makes the Soviet-era newspaper Pravda read like “Tropic of Cancer.”
In other words, they do what any good salesman does: They try to get you to keep buying what they’re selling — their stock.
Probably the most common and blatant way companies spin their earnings announcements is by leading off, often in screaming banner headlines, with how great their EBITDA was. For the uninitiated, EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization. Onomatopoeically pronounced “ebit-DUH,” earnings before interest, taxes, depreciation and amortization is just a long and complex term for a very simple concept: It’s how much money the company made in fantasy land.
As Charlie Munger, who, with über-investor partner Warren Buffett runs Berkshire Hathaway, the company that sets the standard for honesty and openness as well as price per share, was reported by Fool.com to have said at its annual meeting earlier this month: “I think that every time you see the word EBITDA [earnings], you should substitute the word ‘bullshit’ earnings.”
This is from the vice chairman of a company whose stock price 10 years ago was about $15,000. Today it trades in the neighborhood of $74,000. That’s a nice neighborhood.
What Munger neglected to say is why EBITDA is such a meaningless number. It’s because, in the real world, companies, just like people, have to pay those pesky little things like taxes and interest. Their hard assets, such as fleets of trucks, depreciate and their intangible ones, trademarks, for example, amortize. Imagine now, that you don’t have to pay taxes every year, that the credit card company doesn’t demand its interest payment each and every month and that the value of your brand new car didn’t immediately drop 50 percent the very second you drove it off the lot. You would have a lot more money, too.
True, EBITDA is a decent measure of cash flow — admittedly an important thing — and is one indicator of the efficiency of core corporate operations. But it is not the bottom line, and producing ever-increasing profits is the name of the game. If a company doesn’t make more money quarter after quarter and year after year, its stock price is not going to go up.
Some other sneaky words intended to keep investors from looking at all-important net income are “operating earnings,” “gross profit” and especially the expression of earnings on a “pro forma” basis. Operating income is really just a synonym for EBITDA, and “gross profit” is even more misleading because it eliminates nearly all costs but those of goods sold, as if everything in fantasy land is now not just tax free, but free free. How much easier it would be if a company didn’t have to pay for things like rent or electricity or employees.
Then there’s “pro forma.” Pro forma is a fancy Latin phrase. Loosely translated from that dead and ancient language, “pro” is Latin for “bull” and “forma” is Latin for “stool.” When you see the words pro forma, like EBITDA, skip to the bottom line that says net income.
“One-time gain” is another phrase that should raise your suspicions. This usually means that a company’s net income is inflated because it sold something like a factory, or a brand, or received cash in an insurance settlement or from a legal dispute. It’s great to have that income fatten the bottom line, but you can only sell something once. Keep reading and usually buried deep within a company’s press release will be a sentence that starts “excluding one-time gains, net income was….” This is the figure that indicates how well the apparel company performed while doing what it actually does: selling coats, slacks, knits, denim, whatever. Not real estate.
And, of course, while firms love to slip in those one-time gains, they really love to keep in isolation “one-time charges” or “special items” that deplete the bottom line.
Then there’s the old bait-and-switch. This occurs when a company holds on like grim death to any piece of good news when all else around it is falling apart. Bankrupt Spiegel Group Inc.’s Eddie Bauer division’s sales and earnings are in free fall, but they are always very proud of their ongoing commitment to tight inventory management. They like to trot that out over and over again, insisting on how “pleased” they are with the way they are managing their inventories. What Eddie Bauer doesn’t say, but should, is that the company has been very good at managing inventories of clothes that they can’t sell.
Which brings us to “pleased.” Read a company’s press release or listen to an earnings conference call and it’s amazing how often management is either “pleased” or “excited.” That’s because these words are actually euphemisms. “Pleased,” in fact, means relieved, or even grateful, that something worked according to plan. “Excited” means “we are crossing our fingers so hard….”
When managers aren’t pleased or excited, they’re “disappointed,” as in “we’re disappointed that our sales and earnings came in well below plan and that our stock is now being traded in pesos.” Disappointed? No. Disappointed is when you get socks for Christmas. In this case, disappointed is a cover word for “please-don’t-fire-us-we-swear-it-wasn’t-our-fault.” Which, of course, it never is. It’s “unseasonably” warm weather. Or cold weather. (Doesn’t matter.) It’s the economy. Or gas prices. Or a dock lockout. Or the war. Or SARS. But it is absolutely never due to mismanagement. Read an apparel company’s press release during a bad quarter and you’d be convinced the chief executive officer was Job.
One very general rule of thumb is that the shorter a company’s press release, the less spinning is going on. That’s because when things go wrong, a company will do back flips trying to make operations seem better than they are. This is not always true, of course, and a good example of that is Saks Inc. Their releases are usually on the long side, but that’s because the company does an admirable job of breaking out important operating details at both its department store group and Saks Fifth Avenue. Kudos to them.
But look at Wal-Mart Stores Inc. Here is the world’s largest company with $246.5 billion in sales and more than 3,400 units in 10 countries spanning the globe and it manages to squeeze its annual earnings release into just five pages.
Now compare that with dot-com survivor Bluefly Inc., which had full-year revenues of less than $10 million and posted a net loss of $1.7 million. It took them six pages to explain what the heck happened. Sure enough, Bluefly led with sales growth — a truly good thing — and then touted its gross profit increase and lower operating loss. That’s all very well and good, but ultimately, the company wound up in a deep, dark $1.7 million hole.
To be fair, corporate communications is a thankless task. The problem, as Notre Dame business professor James O’Rourke 4th explained, is that a public company has a variety of “stakeholders” all of whom have conflicting interests.
“Employees want stability and job security,” O’Rourke said. “Investors want you to cut costs. Customers want you to cut prices. And then there are communities and special interest groups that have their own expectations.” Speaking with one clear, authoritative voice that keeps these sundry groups appeased is no small task, said O’Rourke.
So don’t expect corporate communications to get clearer anytime soon. If anything, the language will only get more obtuse as fresh financial-speak neologisms are invented all the time.
After all, whatever happened to “synergy?”