Should you take corporate forecasts on performance seriously?
Should you take corporate forecasts on performance seriously?
The department store chain Kohl’s reported earnings numbers this morning, including its outlook for the year ahead. That outlook, bluntly? Not so great. Kohl’s predicts that revenue will decline between 5% and 7%, compared to last year — way worse than what Wall Street was expecting.
The retailer has joined a growing list of companies that have been making less than rosy predictions about what the future holds: In just the past two days, Delta Air Lines and Dick’s Sporting Goods have also issued gloomy forecasts.
That kind of corporate guidance, to use the technical term? It’s all about setting expectations.
Zachary Warring, vice president of equity research at CFRA, takes these corporate guidances with a grain of salt. Actually, a little more than a grain.
“I’d say it’s probably more like a tablespoon or maybe even a cup. Projections are the hardest thing to get right in finance,” he said.
As a broad rule of thumb, if a company’s earnings come in lower than what either the company or Wall Street analysts expected, the stock price goes down. If they beat expectations, the price goes up.
So why set high expectations, when you can underpromise and overdeliver?
“You definitely see companies underestimate. They give a range typically, and you’ll almost never see them miss the bottom of that range,” Warring said.
Legally, corporations don’t have to publish these types of forecasts.
“What we’ve seen is a lot of firms moving away from issuing these, these estimates,” said David Volant, a professor at Indiana University’s Kelley School of Business.
But that doesn’t mean they don’t have any value, especially since firms have more up-to-date data than, say, what the government puts out.
“The way that the macro environment is impacting the internal projections? That’s already happening, so they can observe internally, you know, contracts, canceled sales, increases in growth,” Volant said.
So what then to make of so many different companies being such Debbie Downers about the future?
Sean Dunlop, a director at Morningstar, said it’s partly a hedge against all the uncertainty involving tariffs, the Department of Government Efficiency and, well, the world.
But it also could be a sign of a broader downturn that’s already begun.
“While consumer spending held up really well in 2024, it’s starting to look like there are cracks in the armor, and a lot of companies are revising their guidance accordingly.”
Here’s hoping those corporate guidances are wrong again.
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