Year-over-year comparisons don't mean what they used to.
August 31, 2021
The pandemic has caused a lot of disruption for businesses. In some cases, sales have actually increased. That has been the case for a number of retailers which sell essential items. That makes judging year-over-year earnings a challenge because the conditions of a year ago were very different than the conditions right now.
It’s a very unique situation that the companies fully understand as many have gone out of their way to report their two-year progress to account for the anomalies that come up when you only look at year-over-year numbers. The problem — at least for short-term stock prices — is that the financial media has generally used a pretty narrow set of metrics when reporting results. Same-store sales, for example, have generally been used as a gauge of success and a major part of reporting on quarterly earnings.
Same-store-sales numbers spiked for a number of companies a year ago due to increased demand due to the pandemic. Some of those companies have actually reported a drop in those numbers on a year-over-year basis while pointing out that they have posted significant sales gains over the past two years.
That’s a level of nuance that traditional reporting on earnings reports does not capture. This forces investors to take a deeper look at the numbers and consider questions like whether the company has moved forward with its long-term goals and whether it has added customers, even if they’re spending less in this post-lockdown part of the pandemic.
These aren’t always easy adjustments to make, especially when investors have gotten used to looking at certain metrics. Maxx Chatsko and Steve Symington joined Dan Kline on the August 27 edition of “7investing Now” to examine how we should be reading earnings reports given these (hopefully) once-in-a-lifetime circumstances.
A full transcript follows the video.
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Dan Kline: Guys, we’re going to hit the ground running really, really quickly here. We would like your comments, we would like your questions, feel free to get them into the chat here. But let me set the table a little bit. So we’ve had a number of companies report in the retail space, Ollie’s Bargain Outlet (NASDAQ: OLLI) yesterday being a lead example, that have delivered numbers that are lower year over year in sales and same-store sales, but higher than they were two years ago pre-pandemic. So on a two-year stack, the numbers look better. Matt, I’ll let you start here with a simple question. Do we have to change how we look at earnings for companies that were impacted positively, at least in raw sale numbers by the pandemic?
Matt Cochrane 1:43 Well, I would I would go even further Dan. It’s not just positively but negatively too. I mean, some company’s numbers were outstanding last year, and now look lackluster this year by comparison, and vice versa. So I mean, look year over year, comparable sales, or same-store sales have historically been great metrics for investors to use when evaluating companies, especially retailers. But that being said, look, of course, investors need to recognize what a historically disruptive event COVID was, and how that’s going to make the numbers look like they’re gonna look wonky for a while.
Dan Kline 2:16 I’d argue that same-store sales growth is not always a great metric. We’ve talked about it with say Costco (NASDAQ: COST), where membership numbers matter way more than same-store sales growth. I’d also argue that right now, margin and profitability matter more, because if you had $3 million in sales due to the pandemic, but you were selling rice and soup, which are low margin, and now you’re selling patio furniture, which is high margin, it’s not that relevant if your same-store sales went down.
So why are we talking about this today? We’re talking about it because we think you have to go deeper. I hate saying this, but the financial media tends to cover things like robots. This is how we looked at it last year, I will give CNBC credit, that in some of their stories, they’ve made some of the distinction that I’m making. But most places your Reuters of the world are not doing that. Maxx Ollie’s went out of their way to spell out the two-year comparisons. I actually have that in a graphic. JT, if you want to share that.
This is from their CEO John Swygert, he says, “We are very pleased with our results for the second quarter as we delivered comparable store sales growth of 15.3% on a two-year stack basis. Well ahead of our long term growth algorithm and adjusted EBITDA, growth of 44% as compared to 2019”. We’re likely to see similar year over year trends that only tell part of the story with mature healthcare and energy companies, maybe people delayed treatments, and/or, maybe certain drugs sold better during the pandemic, Maxx?
Maxx Chatsko 3:50 Yeah, actually, there’s another quote in the press release from Ollie’s, that I looked at, in preparation for this show. And it’s kind of funny to me.
Dan Kline 3:58 That is some deep prep by the way, Maxx does not follow Ollie’s in any way.
Maxx Chatsko 4:02 I go hard in the paint. So Alright, this quote is “We continue to face strong year over year comparisons in the third quarter as we, ‘once again’, delivered record sales and profits last year”. So I envision the CEO just pulling his hair out trying to explain this to Wall Street analysts who are only looking at the year over year difference. And he stressing that the importance of looking at the two year stack as you’re arguing, Dan,
Dan Kline 4:24 Yeah, it’s like if you’re if you’re walking up a hill, if you run for 10 feet, and then walk slowly, it’s only your progress that matters. It’s not the it’s not sort of what you did in the last segment. We’ve talked about this a lot with Netflix, that of Netflix adds 16 million subscribers in quarter one and comes out and says, Wow, that’s way more than we expected. But hey, people are stuck at home. They really wanted to watch some stuff. We expect we’re only going to add 5 million in the next quarter and then they come out and do that. But their original projections were for like 12 million during the two quarters and they get to 21. Wall Street punishes them for that, which is, it’s really like, and I’ve talked about this a lot. It’s like looking at a second-quarter basketball score. And they’re like, okay, games over. That is a really strange way to do it. But Maxx you wanted to comment on drug companies here.
Maxx Chatsko 5:15 Yeah, so maybe, I think every industry has been affected, obviously, by the oddity, the outlier, that was 2020. So in the areas I cover, healthcare and energy, I think we’ve seen the same thing. It’s actually like Matt was saying, kind of the opposite, though, sometimes, of what we’re seeing with retail. They had a big year, like certain companies did really well last year. And now they’re kind of going back to trend from above. And then there’s other companies in healthcare, maybe that’s a delay clinical trials or drug launches, or had trouble getting drugs to, access for patients. So they saw sales dip last year, and now they’re returning to trend from the underside. Similarly, with like electric utilities, they saw a big surge in retail, so residential electricity use, which is higher profit margins, higher prices, compared to like commercial and industrial sales of electricity. Which, of course, if no one’s in the mall or a Target (NYSE: TGT) during lockdowns, you’re not gonna be selling electricity to those companies, right, and factories are down and so forth. So we see some of those trends as well.
Dan Kline 6:14 So when you look at a company, you really need to look at their explanation. And look, we’ve seen a lot of bad companies, retailers, like Sears and JC Penney explain away bad results by saying, Oh, no, no, no, we see in the first two weeks of the next quarter, the demand for leggings has gone up 42%. So you have to be careful about some of the spin. But if a company that sells, I don’t know, tooth whitening, says hey, people don’t really want to sit for an hour and have someone’s hands in their mouth for a voluntary service, so we don’t expect demand to pick up until next year. Well, that makes a lot of sense.
So this is where you need people like us who follow these companies on a long-term basis, to say, here’s what’s happening, because I’ll go back to Ollie’s. But this is going to be true of a lot of retailers, you’re seeing it across Five Below (NASDAQ: FIVE), you’re seeing it other places. If they added to their customer count, if they built customer loyalty. It’s not that relevant if they have a bad quarter, because the things you would buy for them aren’t things you generally need.
I’ll give an example. My family home in New Hampshire has an Ocean State Job Lot near it. And every year we go buy my son a whole bunch of winter gloves there because he loses winter gloves. And we’d buy some other supplies like the warmers you put in your gloves. Well, if this year, we didn’t travel there, because we were staying home and not getting on a plane. That is not a long-term change in behavior. That is a short-term, pandemic-driven change.
We’re going to get to Matt in a second. But JT I wanted to take the comment from our friend in Malaysia, just so we could say hello, because it’s pretty exciting. We Ben [unknown name] says, “from Malaysia here. Good midnight”. Yeah, there’s people watching all around the world. We really appreciate that.
Damo San [unknown name], we will get to your comment later on. Feel free to ask your questions. We know this is kind of an esoteric and complicated topic. But Matt, I want to get to you here. Do you expect more companies to offer a broader explanation, spin, nuance whatever we want to call it, as they deal with oddities created by the pandemic?
Matt Cochrane 8:17 Well, I feel like that’s all we’ve been seeing the entire quarter. Like, we talked about Amazon’s (NASDAQ: AMZN ) earnings a couple of weeks ago, Dan, and the CFO on the conference call, carefully just walked through. These were our growth rates before the pandemic, the pandemic hit. And these were our growth rates during the pandemic. Our rates in 2019 were like, it was like 21%. And then in the second quarter, last year, it jumped to over 40%. And this year, it was down to like, I forget, but it was down to like, in the in the 20% range again. And they said look, but this is our two-year range. And that’s still higher than our growth rate was in 2019. And he just walked, everybody through the numbers. And video game companies have done the same thing. I feel like that’s all we’ve seen the entire, this entire quarter’s worth of earnings calls is companies trying to explain this.
Dan Kline 9:10 The big challenge here is going to be separating companies that did well because we needed staples, that are actually going to hold on to those customers. Like you go to a grocery store you don’t usually go to and have a good experience and then you become a customer? Or did you go to a Winn Dixie and find yeah it’s still terrible compared to a Publix and you’re not gonna go back. That’s a very Florida reference Maxx for those watching.
Matt Cochrane 9:34 But look at Walmart, we started using curbside pickup just for that reason, and we’re still using it. We’re not going to go back after this.
Dan Kline 9:40 We increased how much we buy on a casual basis from Wawa. I know that sounds silly. But like Wawa stocks paper towels and things that like you might go to Target and there’d only be a 12 pack and there’d be really easy ways to buy stuff.
We see your questions and comments. We will get to them.
Maxx, let me ask the question. Will there be more uncertainty and more variability quarter to quarter.
Maxx Chatsko 10:04 Dan, I actually was born in Florida and I used to, I lived on a goat ranch there not that long ago. So that’ll be a topic next week, I’ll talk about my tips for raising goats. But yes, I think there’s gonna be more variability this year. I mean, we’re still working out the kinks, right? The economy is recovering, but it’s so unusual. It’s unlike any other recovery in terms of its speed, the depth of the drop, basically, the whole country shut down last year. So we’re still gonna, see some, dips here, some surges there. But again, I don’t, I mean, what do you guys think maybe we see this kind of returned to more, it’s gonna get more normal over time, but maybe not completely normal until like, 2023. I mean, I don’t know.
Dan Kline 10:43 I think we’re dealing with it and living with it, which is obviously, varied from market to market. So I don’t think we’re gonna see shutdowns. But I do think this will be something we consider. It is absolutely having an impact on, say, tourism.
Matt, I’ll ask you the question before you weigh in here. Domino’s Pizza (NYSE: DPZ), one of the companies that’s incredibly benefited from the pandemic. But it’s also been an incredibly steady winner overall. Because their numbers have been so good, do you think they will have their first quarter, in I don’t know, it’s like six years or some crazy amount, where they don’t post growth simply because the comparables are so high.
Matt Cochrane 11:22 Blasphemy Dan, blasphemy. So I think that’s what, but you saw Dominoes earlier this year, like the stock price like lag because of that, because I think some analysts were expecting them not to show growth. And when they did, even though it was slower growth than they normally show, but on top of the huge sales they had last year the stock price jumped, but I think many people are expecting that, but no way, Domino’s Come on, get out of here.
Dan Kline 11:47 So we all read earnings reports. And that’s like part of what we do for a living. And we listen, we listened to earnings calls. Were probably like some of the only people that get in the car and instead of like throwing on Bill Simmons, or like whatever podcast you might listen to, are putting on like, like the Southwest Airlines (NYSE: LUV) earning call at double-time speed.
I’ve listened to a lot more earnings calls than companies, I actually care about all that deeply. Because it is a really good way to take the temperature of a company. But most media doesn’t. I think the average person who’s casually writing about 100 stocks at Business Insider or wherever it might be, they are following news of the moment. So how to long term investors when they’re seeing news stories written by people that don’t truly understand what they’re covering. How to long-term investors look at a company that on the surface had a bad quarter and figure out what really happened. Maxx, you wanted to weigh in first here?
Maxx Chatsko 12:43 Yeah, I mean, we see a lot of attention get paid to analyst expectations. And, I think all of us here at 7investing, put each quarterly operating result announcement into the context of like, two or three or longer-term trend, right. So it’s not just how does this quarter compared to last quarter, the year-ago period, but, how does it fit within the context and nuance of the last eight quarters or more. All these companies face challenges and opportunities, they’re investing in growth initiatives. Some of those are nearer, some of those are further away. So how well a business operates in a three-month period doesn’t really tell you a whole lot about the business Dan.
Dan Kline 13:23 Yeah, I agree with that. Matt, your thoughts here?
Matt Cochrane 13:25 Uh, yeah, no, look, investors need to be able to recognize the difference between short-term hiccups in their companies and long-term results. I mean, you can go back to Chipotle (NYSE: CMG) a few years ago, and they had those food poisoning issues. And the stock price dropped dramatically. And like some people are able to, like, recognize this was probably more of a short-term problem, measured over a couple of years. But that it was something the restaurant was going to get through and go back to their previous growth numbers
Dan Kline 13:55 Yeah, so that was a non-story. I’ve called it, I’ve said this before people get mad at me. 137 people have the stomach ow’ies. If you produce fresh food, occasionally, people are gonna get sick. The problem is, if all your marketing is about how great and fresh your food is, and you have something slip through, it’s going to hit you worse. But the reality was Chipotle poorly that, and I’ve talked about this so I won’t belabor it, as well as any company, they shut down for half a day. They hired advisors, they changed procedures about how they cook food, they did everything you could do, and it was two years before the stock price, it cost the CEO his job. He didn’t, he didn’t necessarily make all the right moves in other areas.
So sometimes a very small thing can have a very outsized impact. And where you come in as a long-term investor is identifying that this doesn’t matter. If a company achieves its five-year goals. It doesn’t really matter if it got 90% of the way in year one, and then struggled the next four years as long as it explains why that happened and why and year six things will be different or what the next five years are.
So why do we listen to earnings calls? It’s because we want to hear the CEO and the CFO explain what’s happening quarter to quarter. I talked about those Sears numbers, they would often bring up okay, well, this was bad. But here’s where it’s trending and why we think it’s turned around. And I would make a note, okay, women’s apparel trending up, and then I would watch the next quarter and women’s apparel wouldn’t be mentioned. Those are red flags. That’s what you have to. You want a company when it’s dealing with a problem, like Chipotle did, to be very in front of that problem. As ridiculous as it was, remember when Chipotle a warned that they might have shortages of avocados in some markets, and people freaked out as if like the mayor announced there would be shortages of water and oxygen.
But that’s what you have to do. You have to explain that this is where we’re going this is what might go wrong. And this is what we’re going to do to correct it. That doesn’t make for a good headline, nuance is not good. Look I have a newspaper background. And you put the biggest boldest headline up. Maxx faults me for this sometimes when we’re titling these shows, that I want as many people as possible. So I’ll come up with bold headlines, and he’ll sort of dial it back a little bit. That’s sort of what we should be doing. And that’s what you have to do as a long term investor.
We’re gonna close out this topic soon. We’ve got a few of your comments in there a few more people saying hello, we’ll take those in a minute. But let me jump in Maxx, you wanted to comment on drug companies and how they should be dealing with this over the long term. And I skipped you completely there.
Maxx Chatsko 16:29 Yeah, so I mean, you were asking if a company should be reporting their two year, performance just to, isolate 2020. And I was just gonna say, I mean, it depends on the industry there. But Matt had a comment in the sheet. I don’t know what we’re doing. But hey. Yeah, so I mean, for some industries, it matters more, for some last, if you’re an early stage drug developer, obviously don’t have any revenue, so doesn’t really matter. But even some of those companies, I’ve seen a big trend in the first half of 2021, where they’re still seeing delays in clinical trials due to the pandemic.
So there’s a lot of companies that are seeing delays in getting access to non-human primates to conduct pre-clinical work, which is going to delay their entry for some of those up-and-coming programs into the clinic. A weird, crazy hangover from the pandemic, right? There’s still a lot of research being devoted to vaccines and other things and just a shortage in general of those research tools. So an interesting kink that maybe is not as apparent, as the chip shortage or something else, but something that has an effect nonetheless.
Dan Kline 17:27 That was actually the question, I was gonna ask you, Maxx, because we have a number of testing centers here that are used for trials. And of course, they were used for the vaccine trials. There are billboards offering pretty stupendous amounts of money to take part in certain trials. So that would suggest to me that it’s difficult to get people to take a voluntary drug trial, in a situation where they risk exposure to something that could make them sick, and it could get confusing. But Matt you want it to close out on this one?
Matt Cochrane 17:55 Yeah, so I was just gonna say like, I mean, this wonkiness, it might continue yet. I don’t think we’re through it. This quarter it was a perfect storm for some of these legacy, brick and mortar retailers, you had easy comparables from last year, you had stimulus checks hitting the bank accounts of consumers. There was a lot of pent-up consumer demand and supply chain issues led to lower inventory levels, meaning retailers could sell merchandise at higher prices, without like running a lot of promotions and sales. And next year could be the opposite. You’re gonna have harder comps, you’re gonna have no pent-up demand, or less pent-up demand. You probably won’t have stimulus anymore. And those supply chain issues could be resolving, meaning you’re gonna have this huge surplus of inventory.
So retailers might be running a lot of sales and promotions next year. So the wonkiness, I don’t think we’re over it. I don’t think we’re through it, in fact, in some ways like as extreme as this was to one side it could go to an extreme other side like next year when we’re 12 months out from this quarter.
Dan Kline 18:59 Yeah, and our producer JT Street brings in, he said, “hell look at lumber”. And as someone who bought lumber for four years while working for my family business. I bought planks for scaffolding. You don’t plan your lumber purchase a week ahead. You are generally hedging your lumber bet. Where okay prices are low. I’m putting some on hold. I’m bringing some in.
Now there’s a lot of that in say the airline industry where they’re hedging their fuel bet and agreeing to pay X amount for a certain time which might average out the price but you can only do that for so long. Homebuilding here and I know this because what my wife and I are looking at new homes. They’re building relatively slowly to sort of even out the supply chain. We saw lumber go very high. We’ve seen it come crashing back to Earth. This year at Christmas. We’re gonna see something really interesting that’s going to make same-store sales hard to predict. We’re not going to have the prevalence of $300 to $350 65-inch televisions we had last year. I bought a cheap 65-inch television for somewhere in the low $300’s last Christmas season. Because of the chip shortage, we’re not going to have TVs at those price points most likely.
Does that mean that Matt Cochrane goes out and spend $600 on a TV because he wants a TV and he’s doing reasonably well, which offsets two other people who didn’t buy a $300 TV? I think these numbers are going to be very nuanced, very hard to dig into.
I want to take the comment from Daimo San [unknown name] before we move into what we’re watching and talk a little bit about the Supreme Court and the eviction moratorium. “Looking forward to this as always, and how we look at some of the figures of growth enterprise data-focused companies, how to work out what is a good figure or metric to look at”?
Matt, I hope you had some time to think about this. As we were, we’re doing that. I’ll vamp a little so you can get your thoughts together? I think it’s going to be tricky. We’ve talked a lot about sales Zoom (NASDAQ: ZM), where that company might build into its valuation over the next few years, but maybe is not going to grow as quickly. Matt, your thoughts on this one?
Matt Cochrane 21:01 Yeah, I mean, I hate to say this, but I don’t know if there’s always just one number you can look at. Um, one thing I would definitely take notice of is when, it’s companies that can raise prices in times like this. So like you saw Microsoft (NASDAQ: MSFT) the other day raise prices on their Office 365 services and subscriptions. Companies that have pricing power in times like this are companies that are really well-positioned to tackle this. There’s not always like a great one number magic number you can look at, you always want to see revenue increasing, of course, but like to go more in-depth than that it’s almost on a company by company basis. But one thing you always want to see is pricing power,
Dan Kline 21:40 I think you also want to look at customer count, because in theory, there is volatile demand. So let’s say some companies see a return to the workforce, like as much as we’re gonna see flexible work and people working at home, we might see some companies like Netflix (NASDAQ: NFLX) has said they want most people in the office most days. And that makes sense, creative collaboration. There are a lot of interviews with the Saturday Night Live staff talking about how hard it was to write that show when they were working from home Mondays and Tuesdays during the last season.
So when companies like that start heading back, we might see them use something less that’s on a usage basis pricing. So one of the things I’d look at with companies is how many customers do they have? So we’re gonna see Zoom usage go down, we might see some companies cut their Zoom subscriptions or have a few less seats. But we’re not going to see companies drop Zoom, most likely. So I think that is really telling and yeah, it’s amazing that Microsoft can raise that price. It’s gonna be about $5 billion in incremental revenue for them.
But another one, do you know what the prices are at Starbucks (NASDAQ: SBUX)? I go there five times a week. I have no idea what the prices are. So if they go up by 6%, that doesn’t matter. They could probably go up by 10%. In Vegas, they’re like 50% higher than they are here. It’s noticeable, but you’re in Vegas. So I do think there’s a lot of story to tell here.
Daniel Curren says hello from Atlanta. Not too far away from us here in Florida. I’ve driven to Atlanta many a time. And Mike Fee, I’m not sure what you were trying to say. So we will just say hello.
Maxx Chatsko 23:13 It’s a goat.
Dan Kline 23:14 Oh, okay.
Maxx Chatsko 23:15 He was calling Matt “the GOAT”, the greatest investor of all time.
Dan Kline 23:17 That is possible. Warren Buffett is on the phone arguing. Warren Buffett texted me. DO you think Warren Buffett knows how to text Maxx? That’s gonna be my question. I was supposed to go to their investor day. Not this recent one that was cancelled but the one before it. If I get out there in a couple years and they have one I am asking that question. Only questions about like, do you play Xbox games like that? I am being silly.
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