A Blog by Jonathan Low


Sep 23, 2020

How Leaders Are Adapting Strategies To the Reality Of An Extended Pandemic

The initial business leadership response to the pandemic was largely tactical: cut costs, hoard cash, hunker down and wait for the certainty-uncertainty ratio to improve.

Now that the pandemic appears to be a longer term proposition, companies are becoming more strategic in their operations, financial planning and positioning in order to optimize outcomes in the future. And the capital markets are rewarding them for doing so. JL 

Theo Francis and Jennifer Maloney report in the Wall Street Journal:

CEOs are shifting their sights from surviving the coronavirus pandemic to charting new courses through it. Companies spent the first months of the pandemic hunkering down, slashing costs, hoarding cash and pulling financial forecasts. As the coronavirus’s spread continues, businesses have concluded they’ll coexist with it for some time. So they are reviving operational plans, changing leaders and reissuing financial targets. Half of companies expect the pandemic to hurt sales or profits, down from 78% in June. “It was more tactical. Now it’s more strategic and long-term. Businesses see opportunities."
Plenty of CEOs remain stuck working from home and boards may still be meeting virtually, but companies are shifting their sights from surviving the coronavirus pandemic to charting new courses through it.
Verizon Communications Inc. is jumping into the low end of the wireless market. Clorox Co. CLX 1.85% directors picked their next leader. A railroad set a new profit goal for the year. New owners are taking Neiman Marcus out of bankruptcy.
That attitude is a change from earlier in the year, when most U.S. companies spent the first months of the pandemic hunkering down, slashing costs, hoarding cash and pulling their financial forecasts. As the coronavirus’s spread continues in the U.S. and abroad, businesses have concluded they’ll coexist with it for some time. So they are reviving stalled operational plans, changing leaders and reissuing financial targets.
“There’s this realization that the new normal will last for a while,” said Gregory Daco, chief U.S. economist for Oxford Economics. “Businesses for which the finances have held during the first phase of the crisis are looking at an environment where they see some opportunities.”
Plenty of companies won’t be able to make the shift, especially smaller ones with fewer resources or where sales have evaporated, he said, adding: “We have to make a distinction between small and large companies.”
This summer, Clorox directors weighed whether the business was stable enough to name a new chief executive after years of succession planning. They decided it was, and the board installed company veteranLinda Rendle as CEO on Sept. 14.
Ms. Rendle said this past week that, while her top priority is ramping up production of cleaning products around the pandemic, the company has exited crisis mode. She is working on ways to capitalize on flexible schedules and changes prompted by the pandemic. “It has been less about Covid interruption and more about reimagining how we work,” she said.
After shedding 22 million jobs in March and April, the U.S. economy has replaced 10.6 million of them through August. The stock market has rebounded from a 24% drop in March and hit a new high in early September. The S&P 500 is now trading up nearly 3% for the year.
Corporate profits fell in the first and second quarters, but many companies weathered the economic crisis better than executives and investors expected when much of the economy shut down in the spring. Overall, the S&P 500 reported per-share earnings 23% above analysts’ expectations in the second quarter—compared with the long-term average of about 3%.
Guiding the WayS&P 500 companies reissuing earningsguidance withdrawn at the pandemic's peakSource: MyLogIQ (companies); S&P Global MarketIntelligence (sectors)Note: For guidance withdrawn March 15 throughJune 30 and reissued July 1 through Sept. 17.
InformationTechnologyIndustrialsHealth CareConsumerStaplesMaterialsFinancialsConsumerDiscretionaryCommunicationServices0 companies4812
Companies are starting to set public targets again. Of about 200 S&P 500 companies that withdrew earnings or sales guidance by July, at least 30 have since reinstated or raised their forecasts, according to data from MyLogIQ, a research firm.
Some, like railroad Kansas City Southern, KSU 0.30% which predicted profits would be flat from last year, said the damage wasn’t as severe as feared. Others like Quest Diagnostics Inc., DGX -2.47% a laboratory company handling Covid-19 tests, are coming out ahead.
Just over half of companies expect the pandemic to hurt sales or profits this year, down from 78% in June, while a quarter now expect sales or profits to improve, up from 11%, PricewaterhouseCoopers LLC found in an early-September survey of chief financial officers. More than half said they expect pricing and customer strategies they are undertaking to improve sales growth by the end of this year.
Even some companies that aren’t setting firm targets say they have a better view into the final months of the year. Larry Culp, the chief executive of General Electric Co. , told investors Wednesday the company will generate positive free cash flow in the second half of the year, answering a key question about the company’s direction.
GE pulled its financial projections in April amid the pandemic uncertainty and pressure on its aviation business, which is cutting one-quarter of its workforce. “Our markets are, by and large, stabilizing, but not in any way rapidly recovering,” Mr. Culp said at a Morgan Stanley MS -1.51% investor conference.
After a pause in merger activity early in the pandemic, some companies are now moving forward with deals. In recent days, Gilead Sciences Inc. GILD -1.26% sealed a $21 billion takeover for another biotech with a promising cancer drug, Kraft Heinz Co. KHC -1.42% agreed to sell off a hunk of its cheese business, and Verizon Communications Inc. VZ 0.35% agreed to a nearly $7 billion takeover of prepaid wireless provider TracFone.
Many of these deals were in the works long before coronavirus surfaced and weren’t triggered by the outbreak, but in some cases it did affect timing, according to executives and bankers.
“To me, that’s a sign of confidence when you’re willing to go out and do large deals,” said Keith Parker, head of U.S. and global equity strategy for UBS.
Large companies can make these kinds of strategic moves because they acted quickly to cut costs early in the crisis. Free cash flow for the S&P 500 actually increased 20% year-over-year in the second quarter—the worst of the slowdown, Mr. Parker said.
“Despite the worst quarter since the 1930s, companies did an extraordinary job controlling costs, working down inventories, potentially negotiating rents and cutting” capital expenditures, Mr. Parker said.
Coca-Cola Co. KO 1.16% in August announced a restructuring plan that includes layoffs, a decrease in its number of operating units, a revamped marketing strategy and an acceleration of its effort to pare the number of products it sells.
“We saw that with Covid, where we had acted boldly in the second quarter, it had worked for us,” Coke CEO James Quincey said at an investor conference this month. “And that just gave us the encouragement to really just accelerate and be bold, be decisive, and go for it.”
The beverage company's sales dropped sharply in April as restaurants, movie theaters, sports stadiums and other venues closed, but have improved since. Mr. Quincey said he expects global sales to continue to rebound in 2021, as vaccines become available and economies adjust.
Some smaller firms have adapted, too. S’well, a maker of reusable water bottles, put an overseas expansion on hold in March. Those initiatives have now resumed, said S’well founder Sarah Kauss, who is now adding overseas distributors and hiring for a role to lead the company’s international business.

“I think we’re more comfortable, clearly, with uncertainty, but we’ve also been looking at the data and the trends,” Ms. Kauss said. In the early days of the pandemic, she said, “it was more tactical and now it’s more strategic and long-term.”
The new normal is also breathing a second life into some companies that foundered during the crisis. Neiman Marcus Group was one of the first casualties of the pandemic’s economic shutdown. The luxury retailer filed for bankruptcy protection in May, soon after its department stores were forced to temporarily close.
The chain, weighed down by debt from two successive leveraged buyouts, shed more than $4 billion of its $5 billion debt load in bankruptcy and gave control to a group of investment firms. The luxury retailer has since reopened its department stores, and is preparing to exit court administration by month’s end.
Of 77 publicly traded companies that declared bankruptcy on or after March 15 this year, 14 had emerged by mid-September, according to BankruptcyData.com. Another six, like Neiman, were expected to emerge soon.
Not all executives see a smooth path ahead. AT&T Inc. boss John Stankey said this past week that the telecom and media company is girding for more economic pain in early 2021, especially among small business customers.
“We think that we haven’t seen the worst that can come yet,” Mr. Stankey, who took over as CEO in the middle of the pandemic, said Tuesday during a Goldman Sachs GS -1.23% investor conference. “I don’t think we’ve seen it all play out.”


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