What Do Retail Analysts Think of the Sector?

This week we interviewed some of the most prominent Institutional Investor rated analysts covering stocks in the LatAm retail sector. Some of the topics covered in this interview are the relevant metrics for the sector, the strengths, and weaknesses of a communication strategy, among other issues.

Most Relevant Metrics for the Retail Sector

Most of the analysts interviewed commented that the key operating indicators for companies in the retail sector are same-store sales and e-commerce growth/penetration. Others mentioned some more specific indicators such as unit growth, average ticket, and store traffic. In terms of financial metrics, the most popular indicators were profitability and liquidity ratios such as ROIC, ROE, net debt to EBITDA, gross margin, and EBITDA margin. Others look into the cash generation and inventory management.

What About the Earnings Report/Call?

The analysts mentioned that most of their attention in the quarterly earnings release goes towards the operating and financial statements sections. They mostly look for sales breakdown and some financial indicators that can better portray the company’s evolution and growth. Inflation and cash flow generation were also mentioned. Furthermore, while most analysts focus on the highlights section, one of them noted that it could be misleading, as companies usually just show the pretty aspects there and skip the ugly stuff all together.

As for the CEO’s message, the analysts interviewed said that the long-term strategy focus, beyond the current quarter, and the utilization of their resources and investments are key factors. The CapEx allocation strategy is also a topic that should be addressed in the CEO’s message. Also, it is very useful to know what the company is investing in, what are their e-commerce strategies, are they planning to grow organically or inorganically, among other things. Even though most of the analysts we interviewed said the CEO comment adds a lot of value to the report, one of them mentioned that it’s not always realistic since they never include the negative aspects and are usually focused on the positive side of the business.

Turning to the earnings call, the things that most analysts said should be included were the capital allocation strategy and an insight into the company’s performance that cannot be found in the earnings release. One of them mentioned that the call should be used to give the qualitative details that explain the quantitative results stated in the release. Other things they think should be included in the conference call are industry trends and consumer behavior. Some analysts mentioned they really appreciate when both the CEO and CFO participate in the call. Having a guest speaker can also be positive. This guest speaker can be the VP of a relevant area such as e-commerce or logistics. One of the interviewees mentioned that 30 minutes for opening remarks can be a lot and it leaves almost no time for questions. According to the interviews, opening remarks should be no longer than 12 minutes to leave enough time for Q&A.

Strengths and Weaknesses

Among the company’s strengths analysts value the most are numerical consistency, clear competitive advantages, and returns above the cost of capital. These must go hand in hand with transparency, simplicity, and a quick response time from the IR team. In contrast, the main concerns found were high leverage, lack of disclosure, a discrepancy between the company’s message and what the results are actually showing, and volatile results, making them difficult to explain. In general, analysts think that the more data they have available the better, but simplicity and friendliness of the data are crucial for a great communication strategy.

Communication Strategy

According to analysts, communication with the investor relations team should be done on a monthly basis or at least every quarter, with one of the analysts stating that the IR team should always be available to answer any questions that may arise. We also asked the analysts how often they would like to meet with the top management for one-on-one meetings and most of them agreed that it should be done at least once a year and ideally up to 6 times a year. Additionally, analysts stated that companies should have NDRs at least once per region or between 2 and 4 times per year. They also mentioned companies in this sector should attend between 3 and 6 conferences per year.

When asked about the top 5 most valued things in a company’s communication, most analysts ranked accessibility to top management first, with only one analyst ranking it last. Other communication aspects that analysts value the most are the earnings call and access to the IR team. However, most of them ranked the earnings release last, leaving the Investor Day at the middle of the mix.

Miranda IR’s Take on the Results

So, the question here is, what can we do with this information? Here are some basic tips and tricks to help you improve your IR communication based on what most analysts are looking for. First, make sure to include the most relevant metrics with an explanation in the first two pages of the earnings release. This way, analysts and investors won’t have to go through the entire report to find the information they need. While it is natural to only state the positive aspects of your company’s results, we recommend addressing the negative side as well, this way, you can control the narrative and explain firsthand why things didn’t go as you expected or even give more color on the initiatives you have in place to fix the things that went wrong. The CEO comment is a great place to do so. Also, you can include this information in the conference call script. Remember the conference call should not be a reading of the earnings release. The call is meant to add value and share more details about the mid to long term strategy, the management’s vision of the company and even seasonal topics such as Covid, supply chain crunch, inflation, etc.

Transparency, simplicity, and availability are three qualities analysts really appreciate from a company, so as an IRO, you should always strive to be as open as you can. Top management availability is also at the top of the list. Analysts should have direct contact with the top management not only during the quarterly calls but on a one-on-one basis. This way, you can free up the Q&A space for investors, since analysts know they can get access to the top management in some other ways. This can help you make the most of your conference call and allow for even more questions.

As always, in Miranda IR we would be more than happy to help you adapt your IR materials and communication strategy to better accommodate to the market’s needs.