Russell Harrop, Head of International Equities
We find quarterly earnings from companies useful and useless, often both at the same time. Even the Financial Times gets drawn into hyperbole when commenting on what did or didn’t happen during a quarter, how this compares to ‘consensus’, and how much a share price went up or down on the day. In reality, a quarter of a year is a very short period of time. It’s very difficult to predict what a business will do in any given year with any degree of accuracy, let alone over 91 days. One might find it comical that online clothing retailers, Zalando and ASOS, blamed mainland Europe’s long hot summer for ‘lower than expected’ numbers. Rather than buying full-priced autumn trench coats, shoppers purchased late summer dresses at half price, which really did impact their revenue and profits.
The useful part is that we get to see what the operating business has been humming away at. As long-term investors, if we believe a business can grow at 7% per annum over the next fifteen years, then we don’t mind whether this is an average that results from sometimes 10% growth, and sometimes 5%. The caveat, of course, is that we do need to decide at the time whether 10% or 5% is the new level of growth, or merely inevitable variation around the average. In the short run, the market is a voting machine but in the long run, it is a weighing machine. The father of value investing, Benjamin Graham, may not have said precisely this, but his protégé Warren Buffet certainly has, and it’s important to remember these wise words.
So, what to make of the latest set of earnings from the US? Well, overall growth was robust, with revenue in Q3 2021 19% higher than in the third quarter of the previous year (when revenue fell 2% as the impact of the pandemic and associated lockdowns lingered). Compared to pre-pandemic, or Q3 2019, revenue was 16% higher. This has resulted in nearly 8% annual growth over the two years and is much higher than the 3 to 4% growth that was experienced annually going into the pandemic.
This brings us back to the useful / useless debate around quarterly earnings. This was obviously a very good quarter for companies in the S&P 500 Index, but whether this is a new higher growth path or just pent-up demand from previous quarters (or a combination of the two), we will only know in hindsight. Only when we look at individual companies can we attempt to reach a conclusion. Headlines for Zalando’s Q3 2021 earnings focused on the 9% fall in the share price (ignoring its more than doubling over the past three years). While revenue growth might be lower than the lockdown-driven 60% and 40% growth seen in Q1 and Q2 2021, 25% growth in Q3 2021 was still a hugely impressive number. For us, these latest quarterly numbers were useful because they indicated that high growth has continued even after competitor retail shops reopened. We remain confident in Zalando’s long-term compounding ability. The market chose to vote and mark the shares lower. We weighed it and saw a chance to buy the stock on sale.
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