Management Predictive Accuray: Startup idea #2
In visiting my friend John McPeake at Devi Capital, and discussing Startup idea #1 (Identifying and tracking key equity event movers), he suggested idea #2 — a service to track management credibility for public corporations.
The fundamental concept is to get more granular vs. traditional earnings guidance. How is management doing for key operating goals? Who made forecasts and how did they do vs. those forecasts? John said there is nothing like this in the marketplace and thought it would be a valuable service for professional investors like himself.
To investigate the idea I took on an analysis of GameStop ($GME).
Disclaimer: I am long GameStop. This article does not promote a purchase or sale of GameStop and is written only for the purpose of soliciting feedback for the product concept of a management credibility service.
I thought GameStop would be an interesting choice because there is a strong bull / bear case. The bull case rests on GME having a high dividend yield, and being able to successfully continue the diversification of their business away from physical gaming. The bear case is that GME will be the next Blockbuster — put out of business or subject to years of negative / stagnant growth by the increasing trend of buying games digitally and competition from online retailers.
I took every call and presentation on GME for the past year and created a spreadsheet of each forward looking statement, tagged each with a date, event title, event type (financial, strategic, etc.), and executive. After logging in all the statements over the past year (126 in total), I then went back through the actual quarterly results to see if the predictions actually happened, scoring each statement with a “Yes”, “No”, “On Track” or “Not on Track”. With the data in hand it was straightforward to do a couple quick pivot charts. On to the data….
Over the past year GameStop has become much more credible, good for the bulls.
By taking all the executive statements, and classifying them as Achieved (Yes/No) or On Track/Not on Track (for FY goals that are in progress), I was able to assess goal completion and summarize that by quarter, executive, target date, etc.
Thus in addition to the quarterly look above, we can look at the predictions made by each executive, and of course this could be drilled down by quarter as well. The overall executive analysis showing the predictive accuracy of statements made over the past year are shown below. There are a number of FY 17 goals where there is not enough public data to say if GME is on track or not on track to achieve goal completion, so for those I left them as ? for goal completion.
A few notes on the graph above:
Company predictions are ones taken from investor presentations where a future-looking statement has been made but cannot be attributed to a particular executive. And the graph gets a bit tougher to take in with the ? goals — those are the FY ones where there hasn’t been adequate interim reporting to support an assessment yet of being “On Track” or “Not on Track”.
It is worth noting that GME switched from quarterly guidance to annual guidance for 2017. This change was announced on their YE 2016 call on March 23, 2017. If we remove the ? categories where we don’t have an answer yet as to being On Track/Not on Track, and graph each category as a % of statements by executive, the analysis gets clearer.
Not the prettiest picture above for GME, but it’s also possible to look at a single executive over time…. the graph below is for Rob Lloyd, Gamestop’s CFO.
As the graph indicates, the trend has been positive; prediction accuracy has increased greatly over the past year with a large decrease in the number of missed predictions. Starting with the Q4 2016 call, predictions have either been met, on track, or still open (some of the 2017 predictions). The one prediction of Rob’s that hasn’t been On Track (in my opinion) in FY 17 was the prediction that in FY 17 that “Gross margin should move 50 to 75 bps higher as we expand Tech Brands and Collectibles”. So far in FY 17 GME has had margin reductions with Q1 flat YOY at 34.3% and Q2 dropping from 37.9% to 37.0%. But this could change through Q3 and Q4 with the expected lift in Tech Brands for the iPhone 8/X launches. So perhaps that one could be considered as a “?” vs. not on track. It’s also worth noting that the number of predictive statements has diminished over the past year as GME has reduced their guidance granularity.
Looking ahead GME built in to its model significant lift in Tech Brands in Q3/Q4 from iPhone 8/X launches. Official guidance is for Tech Brands to see traffic and same store gross profit to be “flat to +2%” for FY 17. However, in Q1, Tech Brands had traffic of -7% and same store gross profit comps of -19%. In Q2, Tech Brands had -9% traffic and -13% same store gross profit comps setting up a significant growth challenge in the 2nd half of FY 17.
GME has stated that …
“Our full year guidance includes the launch of the new iPhone during the third quarter, which we modeled based on the average of the last three iPhone launches.” — Rob Lloyd, 8/24/2017
At this point I was curious to see how the iPhone launch was going. I stopped in to an AT&T store and spoke with a sales rep who noted that order volume for the iPhone 8 was about 75% of what he had seen in prior launches. Admittedly that’s just a single data point. But in a story on 9 to 5 Mac,
“KGI Securities notes that newly launched iPhones typically ship 3–6 weeks after being ordered while most iPhone 8 models are shipping in 1–2 weeks or less. The reason? The radically new iPhone X is coming in November with pre-orders for the high-end model starting in late October.”
Thus a question for GME will be to what extent the lift from iPhone will be spread over Q3 and Q4 with potentially a lighter than expected benefit from Q3 and potentially higher than expected benefit in Q4.
If you find this type of analysis interesting and useful, please let me know. I’d appreciate any feedback about the commercial viability of launching a service that tracks predictive accuracy at the company, event, and executive level. If there’s another stock you’d like me to consider covering next please let me know as well. Thank you!