MISSION INTANGIBLE

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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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Walmart v Target: Great expectations chapter 2

C. HUYGENS - Tuesday, September 17, 2013
Among the giant retailers battling for customers' attention and wallets, ethics has emerged as a point of differentiation. This issue manifests in two forms: ethical treatment of retail employees, which includes matters of pay and attitude towards sexual orientation; and ethical treatment of suppliers, which includes a much larger range of work environment and labor standards issues. Walmart Stores (WMT) and Target (TGT) are two stalwarts of this battle who've been favorites of Huygens and the Mission Intangible blog readers for many years. Walmart is famous for its domestic labor issues; also, its supplers were party to both the Tazreen factory fire and the Rana Plaza building collapse tragedies in Bangladesh over the past year. Target, famous for its pro-gay policies, was not implicated in either of those events that consumed so many garment workers' lives.



The Steel City Re reputational value metrics reveal that stakeholder expectations were impacted by the events described above with RVM volatility (Consensus Trend) being the earliest measure and Reputation Rank deterioration (Reputation Premium) being the casualty, with the advantage going to Target.  Yet if stakeholders are giving Target a range of economic benefits as the result of its superior reputation, what caused Target to report a severe drop in profitability in late August which then triggered its stock price to plunge from a +10% ROE to a -6% ROE over the past few weeks? Stay tuned.

Sears Holdings: Know when to hold, when to fold

C. HUYGENS - Wednesday, May 29, 2013
Financial wags are talking about retail sector mergers. The buzz: "How does Neiman Saks Fifth Avenue sound? Or Saks Fifth Avenue Marcus?" Or this one: Sears and JCPenny? Assuming the exercise has greater prospects then rearranging the deck chairs on the Titanic, why not? Both JCPenny and Sears could use some reputational help. Huygens spent time recently on the former's near suicide. Here are the Steel City Re reputational value metrics for the latter.

Briefly, the RVM volatilties are in the 14th percentile indicating the consensus trend among stakeholders is set -- and it is not pretty. The reputational rank, aka reputational premium, is rock bottom for the peer group. With numbers these bad, stakeholders would welcome almost any surprise.

JCPenny: Into the valley of death

C. HUYGENS - Tuesday, April 09, 2013
Ron Johnson's semi-suicidal charge ended badly for him. Unlike most of the troops of Alfred, Lordy Tennyson's poem, however Johnson will get to leave the JCPenny (JCP) field of combat alive with only the remnants of his 2012 compensation package, about $1.9 million or a cut of nearly 97 percent, and no sizeable stock award and no bonuses. As if this wasn't in the cards a few weeks ago? Hopefully, he is getting a better return on his 2011 signing bonus of $53.3 million than did his Board of Directors.

WMT v. TGT: Spring 2013 Edition

C. HUYGENS - Tuesday, April 02, 2013
It's time to review Huygens' favorite retail rivalry. Previously, six weeks ago, Walmart (WMT) made the news as leaked emails suggested management was concerned about awful sales. It was not the economy, although it provided good cover. It was further evidence of a looming reputational crisis.

A reputational crisis, as readers of Reputation, Stock Price and You well know, is a business condition when a plurality of stakeholders reassess their relationship with a company and act with economic force in a way that punishes a company. Customers stop buying, price premiums drop, employees work less efficiently for higher labor costs, suppliers charge more or otherwise reduce a company's priority, credit costs rise, etc.

Bloomberg reports today that Walmart is having trouble stocking its shelves. Customers are not finding that which they seek, and are not returning. According to Bloomberg, the problem is labor -- more specifically, a shortage. "The Bentonville, Arkansas-based retailer’s workforce at its namesake and Sam’s Club warehouse chains in the U.S. fell by about 120,000 employees between 2008 and Jan. 31, according to a securities filing on March 26. The company now has about 1.3 million U.S. workers. In the same period, it has added about 455 U.S. Wal-Mart stores, bringing its total to 4,005." Here's the math: Five-year store growth at 13%; employee growth at -1.3%.

Recapping, Walmart has regulatory issues with possible violation of the Foreign Corrupt Practices Act; labor groups are active again; customers are not visiting; work is not being done...a reputational crisis in waiting, no? Other objective measures, namely the Steel City Re Reputational Value Metrics, indicate significant volatility in the measure of reputational value. In "investor relations" parlance, these data indicate that there is a deteriorating consensus about Walmart's prospects. In "reputation risk" parlance, these data are indicators of a reputation in the early stages of trouble. Momentum indicators are still neutral, but given Walmart's heft, once they start sliding aggressively, it'll be tough to reverse.

By the way, if you were wondering who were the leading and lagging firms in the retail sector, the current king is Costco (COST). At the other end of the spectrum, the firm with the lowest reputational value among its 15 peers is Sears Holdings (SHLD).

JC Penny: Basement, no bargain

C. HUYGENS - Friday, March 15, 2013
If the owning the news cycle is the goal of public relations, JC Penny (JCP) needs a new shop. As Business Insider reports, "The retailer  has been on a terrible run. The last few weeks have been disastrous: it reported horrific Q4 earnings, went to court to fight Macy's over Martha Stewart, and had a board member dump a chunk of his stake." Caribou coffee opted not to open cafes in the stores.

Tally the butcher's bill: unnecessary litigation, abandonment by equity investor insiders, abandonment by partners, and no shortage of negative media chatter. It's a classical reputational value crisis.  Here's a link to how the Society's Mission Intangible Monthly Briefing moderator, Jonathan Salem Baskin, described the situation qualitatively to CNBC today: Baskin on CNBC.

Here's how the Steel City Re Reputational Value Metrics describe the situation quantitatively. Relative to 24 companies in the Retail Trade/Department Store sector, JCP has had the most volatile reputational value this year (Historic RVM Vol) indicating no consensus of expectations at one point in time. JCP now has the least volatile reputational value (Current RVM Vol) indicating that stakeholders are now in the tightest concensus about prospects. Unfortuanately, those prospects are awful with a CRR rank in the 9th percentile and the worst performing equity with an ROE of -60%. Worst, there is still room to fall and the metrics all indicate a further downward trend and low expectations for stability.

In his interview, Baskin suggested JCP should focus on its reputation. Expectations were very high when Ron Johnson, formerly of Apple, came aboard as CEO. They were at levels that could not possibly be met, and that is why the market is now punishing JCP (and for that matter, Apple). As Baskin said, "It breaks my heart."


Amazon: A greater distance to fall

C. HUYGENS - Tuesday, March 12, 2013
Amazon.com (AMZN) recently emerged as the company Harris Interactive ranks as having the best reputation in 2012 among the general public in the U.S.  As Mark Hulbert explains in the Wall Street Journal, "companies that have great reputations tend to be overvalued." The implication is that Apple's fall from grace is the norm, not the exception, and Hulbert backs the claim with several academic studies. Part of the problem, as readers of this blog and the book, Reputation, Stock Price and You, already appreciate, is that the reputational rankings published by Harris Interactive, the Reputation Institute, and others are weakly associated with stock price because:

1. The surveys have several organic challenges
   a. They survey consumers, not necessarily investors.
   b. Historic return on investment is a factor in their reputation rating; by the time a survey is published, a company may be fairly or even over priced
   c. Rather than surveying reputation, which is a going forward expectation that will better correlate with stock price, Harris and others are actually surveying brand affinity. (These "reputation" rankings best correlate with brand recall studies).

2. Rankings do not correlate well. One of the best surveys is published by Barron's. This survey asks money managers to rank firms on the basis of respect. In 2012, the reputation rankings from Harris and the rankings from Barron's showed a 72% correlation. (The rankings from the Reputation Institute and Fortune Magazine's Most Admired companies showed a correlation of 21%.)

3. Reputational value is measurable. But surveys are not the best measurement tool if one is interested in financial reward or risk; i.e., finding stock-picking opportunities or insuring reputational value loss.

Turning to Amazon and the reputational value rankings from Steel City Re, which are based on stakeholder expectations and the behaviors that are expected to create value, the reputational vital signs show consistent top quartile rankings among the 21 companies in the internet retail sector. The historic RVM volatility, a measure of the tightness of the range of stakeholder expectations is great ranking in the 85th percentile. This indicates there were many stakeholders who were going to be surprised by Amazon's performance. The current RVM volatility shows that they are still being surprised, and the resulting ranking, the CRR, is tops. RVM is a non-financial measure of reputational value while CRR is a measure of reputational ranking - call it the reputation premium.

Interestingly, the ROE is not at the top, which reflects the pessimism of some equity investors who, as part of the overall group of stakeholders, are voting with their shares. The other measures shown below indicate an ongoing pattern of high RVM volatility, metrics that place Amazon in the extreme of various measures relative to its peer group, and values that all indicate greater than average risk of a 12-forward month risk of a 7.5% or more fall in market cap.

Walmart: Awful quarter

C. HUYGENS - Monday, February 18, 2013
Three months ago, Huygens reported that the reputation value metrics calculated by Steel City Re suggested that Walmart was on course for a reputational value crisis. It was a message easy to ignore, as Walmart's travails have been covered extensively by Huygens among many others and stumbling consequent to a host of reputational value crises has been long expected. It had to come eventually, although Huygens in December boldly predicted -- there's nothing all that bod about interpreting reputational value metrics, actually -- it would be evident by Spring 2013.

Hours before Bloomberg News leaked emails from Wal-Mart executives calling February sales a "total disaster," off to the worst start in seven years, the updated reputational value metrics showed yet another spike in RVM volatility. RVM, as described in the book Reputation, Stock Price and You,  is a non-financial measure of reputational value, and its volatility is an indicator of stakeholder expectation alignment with messaging. High RVM volatility values suggest poor alignment. Somethings 'a comin'.

Compared to Target, a much smaller company, Walmart's RVM volatility is leaping of the vital sign charts to the 71st percentile among the 15 companies in the Discount Store peer group. The company's CRR, a measure of reputational value  premium, is in the 93rd percentile. This measure should be a source of good cheer but for the corresponding RVM volatility and the fact that Walmart's ROE is comparable to Target's at the 77th and 69th percentiles, respectively. This mix of measures of reputational value make for an unstable picture as the four week rise in Current RVM Volatility suggests. Worst yet for Walmart, the reputational value Forecast Stability metric, the fifth of the five vital signs, suggests that this pattern of volatility can be expected to remain, well, stable.

Twenty hours after this chart was generated, the markets closed for the extended weekend. Walmart was down 2.18% for the day; Target was reflexively down 2.14%, and the S&P500 was down only 0.1%. Equity investors are event driven. With more thought, expect Target to rebound, and Walmart to continue to sink.

WMT v TGT: Fall 2012 Edition

C. HUYGENS - Thursday, December 13, 2012
With less than two weeks of shopping before Christmas, Huygens thought it would be interesting to return to an perennial favorite--the rivalry between Walmart (WMT) and Target (TGT). When last compared in the spring of 2012, Target was leading Walmart in all indicators of Steel City Re's Reputaitonal Value Matrics signaling reputational value growth. The volatilityy of Historic and current RVM's, non-financial measures of reputational value, were both elevated for Target. Also, the CRR, a measure of relative reputaitonal ranking, was higher as was ROE. The forecast, on the other hand, suggested more change in store for Walmart with indicators pointing to a reduction in CRR. And so it came to pass as Walmart spent the balance of the year wrestling with a number of labor and ethical scandals.

Turning to a face-off of the most recent metrics among a custom peer group of 125 retail stores, and Targets CRR has risen only slightly from the 87th percentile to the 90th. And while Walmart's reputational metrics were more volatile and trended negative in the late spring, by early summer, the measures changed course and the company's reputation climbed to its current CRR in the 89th percentile. The ROE, not surprisingly, outperformed Target's returns with rankings in the 57th and 47the percentiles, respectively. Interestingly, as the chart below row 1 column 2 shows, Walmart's RVM volatility is countercyclical to both Target, the industry median and somewhat so relative to the CBOE VIX, better known at the "fear index."

Forecasting for next time, the measures again show less stability for Walmart and a negative CRR. Stay tuned through Spring 2013 when we'll present the next installment of WMT v TGT.

JCPenny: For your thoughts

C. HUYGENS - Monday, November 12, 2012
Last Friday, J.C. Penny Co. Inc (JCP) reported a $123 million loss for the most recent quarter. CEO Ron Johnson describes the company as “the fastest-growing startup in retail history,” language that unfortunately brings to mind Kodak’s characterization of its innovation-led transformation over the past decade. It is a great mindset but spending, too, has to conform to an environment where the business model is still being perfected.

The company sees itself in transition: the boutique, jcp, emerging from the tired jcpenney. The new jcp is boasting higher productivity of $269 per square foot compared to $180 per square foot at jcpenny. Combined, however, the stores reported a 26.1% drop in same-store sales on reduced traffic of 12%. Internet sales fell by almost 40 per cent in the third quarter reported last week. At best, customers are not sure what to expect. At worst, they've stopped looking. Employees, and other stakeholders are confused, perhaps too, and that, by definition, is impacting the firm’s reputation.

Looking at Steel City Re’s Reputational Value Metrics, its been a wild ride for JCP's RVM. The metrics at left show that both the RVM and CRR measures are holding at nearly rock bottom, but that future stability is unlikely with a ranking among its 22 peers at 0.0 percentile. The volatility metrics, shown at right, report extreme movements with negative directionality. The only conclusion to draw is that stakeholders as a group are confused -- and that can't sit well with equity markets.

WMT v TGT: How things change

C. HUYGENS - Saturday, November 26, 2011
It's Black Friday season. It is a jolly good time, to borrow from seasonal expressions, to return to one of our most viewed reputational competitions, WMT vs TGT (or for those who do not live and die by ticker symbols, Walmart vs. Target). At our last review in February 2011, things were not looking particularly good for either firm. Both were losing reputation and value - Target was dropping faster and its metrics were more volatile. Between the two, our money was on Walmart.

At that time, Walmart’s (NYSE:WMT) reputation had dropped over the trailing twelve months from the 88th to the 81st percentile according to its Steel City Re Corporate Reputation Index ranking. Economically, the company was underperforming the median of this peer group by 26.53%. Target (NYSE:TGT), as a point of comparison, had diminished in terms of reputational standing having dropped over the trailing twelve months from the 93rd the 76th percentile. Economically, the company was underperforming the median of this customer peer group by 21.4%.

One year later, Walmart is looking much better. Walmart’s reputation has climbed over the trailing twelve months from the 85th to the 90th percentile among the 137 companies in the Retail sector. Its trailing 26 week exponentially weighted moving average reputation volatility is 1.7% while its 12 week reputation velocity and reputation vectors were both 0% . These are indicators of a slightly accelerated rise in reputation value. Economically, the company is now outperforming the median of this peer group by 12.62%.

Target (NYSE:TGT), as a point of comparison, has improved marginally in terms of reputational standing having increased over the trailing twelve months from the 88th to the 89th percentile. Its trailing 26 week exponentially weighted moving average reputation volatility was 6.9% while it s 12 week reputation velocity and and reputation vectors were 2% and 3.9%. These are indicators of a much slower reputation transition. Economically, the company was outperforming the median of this customer peer group by .84%.

The relative change in intangible asset fraction in the two companies says it all. Walmart's intangible asset fraction is now greater than the median; and Target's isn't.


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