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For one thing, companies have to
explain what they’re doing to counter
disruption. Valens has been sounding
alarms about retailers losing steam
to Amazon, for example, since
around 2012. The firm’s analysts
noted several retail companies they
thought had more potential to thrive
than most, including L Brands, the
parent company of Victoria’s Secret
and Bath & Body Works. When
Valens was hired by investors to
use its audiogram in the company’s
first- and second-quarter earnings
calls this year, it found further
confirmation of its belief that the
company was going to be able to,
as a Valens research report put it,
“streamline operations, while still
driving innovation that consumers
wanted.” But it turns out that 2017
hasn’t been a great year overall for L
Brands. Sales dropped after Victoria’s
Secret stopped selling swimwear
and apparel to concentrate on its
flagship lingerie, only to find that
Amazon was undercutting that
business.
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world monitor
When the company convened its
second-quarter earnings call in
August 2017, the stock was falling.
However, in an answer to an
analyst’s question about inventory,
Stuart Burgdoerfer, chief financial
officer of L Brands, said, “It is up a
little bit but not significantly, and
there’s a little bit of timing involved.
But our commitment to manage
inventory in line with sales was
as strong as ever.” The CFO didn’t
deny that there was a challenge.
More to the point, his voice pattern
as detected by Valens’s audiogram
indicated that he believed what he
was saying. The company’s stock
has since started to rebound. A
coincidence? Possibly. But Litman’s
investor clients are looking for an
edge that comes from an analysis
of whether all the measures of
a company’s financial health —
equity value, debt, and a senior
management team that has a firm
grasp on reality — come together.
Rittenhouse believes it’s more
important than ever for corporate
leaders to be forthcoming in times
of significant disruption because
managers who are honest about
what they’re doing — honest with
themselves and their shareholders —
will be compelled to develop a clear
strategy. “Delusional speech creates
a cognitive dissonance that, in some
sense, shuts down the brain,” she
says.
The good news is that companies can
turn around a habit of obfuscation.
Examining Walmart’s latest annual
report, Rittenhouse found the letter
a big improvement over last year’s.
It contained clear language about
factors the company could actually
control, such as, “In the U.S., we’ve
delivered positive comp store sales
for 10 consecutive quarters and
we’re hearing from our customers
that their experience continues to
improve.” You don’t need a computer
program to detect the realistic
confidence in that statement.
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