Whenever bouts of cold or precipitation hit the country it is inevitable that publicly traded companies’ managements will regale quarterly analyst conference calls with the news that weather played a detrimental effect on earnings in the quarter. We think we speak for the entire analyst community when we say “save it.”
Fear mongers are already playing up the bout of cold hitting the country this week. Over at CNBC, Steve James writes:
The record cold spell that has half the country in the deep freeze could cost the U.S. economy up to $5 billion.
That’s because millions of Americans haven’t been able to drive to work, fly or take a train to business meetings or vacations, go to the shopping mall or take the kids out for a movie and a meal. And they may also have to pay more just to keep warm.
This is an example of the worst kind of financial hysteria, and perhaps the most often displayed—short-termism. Do the media expect that Americans staying in from the cold won’t go out next week and get their shopping done? If you miss a business meeting because of weather, do you just give up? Do you forfeit your entire vacation because your plane runs a little late? Almost certainly you’ll complete these activities, simply at a later date, and usually not much later.
After severe weather near the end of 2010, The Economist explained how estimates of the impacts can be exaggerated or misinformed.
It is true that businesses are hurt when they are forced to remain closed and people cannot get into work. Some revenue, like the money spent on coffee by commuters on their way in to work, is simply forgone. After all, people do not buy extra cups when they do eventually return to their offices [No, but they do tend to drink more coffee at home—ed. note from Young Research]. And certain industries, such as construction and transportation, are particularly vulnerable to bursts of bad weather. But numbers like those from the FSB almost certainly overestimate the true economic effect of a day of enforced winter holiday.
The group based its figure on the one-fifth or so of Britain’s workers who it reckons did not make it to the office, the factory or the building site during those snowy days in late December. That may be an accurate estimate of snow-induced absenteeism, but it does not mean that a fifth of the £4.5 billion-5 billion of goods and services that the British economy produces on a typical working day was simply lost. Some people work from home when they cannot get into the office; others make up for lost time when they return. A few days of no production at factories might mean a bout of overtime when things return to normal: German construction output may turn out to have boomed in January because people raced to finish projects delayed by snow. Many purchases are likely to have been postponed rather than abandoned altogether. And if people expect bad weather, they may stock up on essentials in anticipation of shops being closed for a day or two, much as they might before a holiday. In America tempers are guaranteed to fray on the day before a snowstorm is expected, as supermarkets run out of supplies. So it seems reasonable to assume that a good deal of economic activity is displaced, rather than destroyed, by bad weather.
Nowhere do you hear more about the effects of weather on earnings than from retail companies. And while it’s true that weather can have short term effects on sales, Federal Reserve economist Martha Starr-McCluer explained in a report in 2000 that weather can play a significant role in monthly sales, but that usually those effects are washed out through the quarter. She writes: “Thus, weather is indeed important for monthly fluctuations in retail sales, although the monthly effects tend to be offsetting and largely wash out at quarterly frequency.”
The moral of this story is to be skeptical with quarterly earnings data that are said to be heavily affected by weather. Unexpected extreme weather will likely have a greater impact at the end of a quarter than at the beginning because customers won’t have had time to get back to stores to offset their earlier lack of demand. But the next quarter might look better because those customers will eventually get back their appetite for consumption. So be critical, and investigate claims of weather induced earnings misses and bad performance from managements. Some may be accurate explanations, but same may be exaggerations in order to gloss over deeper problems at a company.