Posted on: Sunday, August 8, 2004
COMMENTARY
If business is bad, there's no reason to make up excuses
By Rachel Beck
NEW YORK — Excuses, excuses. Why is it that corporate America still seems unwilling to tell bad news straight up?
In the wake of all the business scandals, corporate integrity is supposed to be on the rise. But companies continue to dance around the truth.
Some of the tales aren't new — like the tired weather fallback that's often used to explain away business woes. And now the blame game is being pinned on everything from rising oil prices to the low-carb diet, too.
When things are going well, corporate leaders often cite their vision as the key to their companies' success. But in tough times, executives often try to pin problems on events that are out of their control.
Take the low-carb craze. Sure, many food companies have been hurt by the public's desire to shift their diets away from carbohydrates, but a red flag should go up when a company suddenly uses this as an excuse for sagging profits.
That's exactly what is going on with Krispy Kreme Doughnuts Inc., which unexpectedly announced in May that the mania over the high-protein diets would knock down its earnings per share by as much as 10 percent.
The warning came as a big surprise to investors, who were told a much different story about the company's growth prospects as recently as March, and left Wall Street analysts unconvinced that was the real reason why the company would miss its earnings targets.
J.P. Morgan Chase analyst John Ivankoe points to other fundamental problems that could be crimping Krispy Kreme's profits, including its sale of too many doughnuts outside of Krispy Kreme stores.
Apparently, the Securities and Exchange Commission agrees that there may be more to this story. The company announced last week that regulators had opened an informal investigation, which will include the review of its May earnings guidance revision.
Maybe the SEC's move is a giant first step toward cracking down on excuses.
Next on their list should be the "blame it on the weather" line often given by retailers. You don't hear much about the weather when sales and profits are up. Instead, they tout their merchandise selection and cost efficiencies. But too much rain, heat or snow is often used as a crutch in tough times to explain why shoppers stayed away.
Look at what retailers are saying about sales in recent months. As Nomura Securities chief economist David Resler points out, earlier this summer "retailers blamed cooler than normal weather for their poor results ... now the same pattern of below normal temperatures are being credited for helping retailers."
Regulators may also want to keep a close watch on the travel business. Should gasoline prices continue climbing, don't be surprised if underperforming hotel chains start touting that as the reason they weren't booked. Same goes with the terrorism factor, which can be used to explain why rooms are empty and airline seats unfilled.
Given all the excuses out there, it is refreshing to occasionally hear companies come clean.
Take Washington Mutual Inc. The Seattle-based savings and loan company slashed its earnings forecast in late June because of higher long-term interest rates in its home-lending business.
When the disappointing earnings were announced last month, CEO Kerry Killinger told the investment community he wasn't happy with the mortgage division's results and spelled out what went wrong and why.
"I apologize for the performance of our mortgage banking unit for the past few quarters. The problems were greater, they are taking longer to fix than we initially thought. This is totally unacceptable to me," he said in a conference call with analysts, according to a transcript provided by Thomson StreetEvents.
His frankness helped stem a potential shareholder revolt and limited the decline of Washington Mutual stock in recent weeks. Now that sounds like a better way of doing business.
Rachel Beck is national business columnist for The Associated Press.
