Tailored EPS performance in UK Retail, when Off the Peg won’t do

We’ve been taking a look recently at the adjustments that listed-UK retailers make to the Earnings Per Share (EPS) numbers they report. In short, we wanted to know much variability there is between a given company’s ‘Statutory’ EPS on the one hand, and the various ‘Adjusted’ or ‘Continuing’ EPS numbers they may also choose to present from year to year on the other hand. We think this is a proxy for how much restructuring or upheaval a given company or industry has been through over a given time period.

If you aren’t an accountant (and we’re not, either), some companies present ‘Adjusted’ EPS numbers when they discontinue or dispose of a given part of their business, and they normally do this to explain to investors how profitable their continuing operations are relative to the discontinued ones. Other companies want to exclude all the so-called Adjusting items they may present for a given year (only some of which may relate to disposals), many on the basis that Adjusting items are exceptional to one degree or another, and so shouldn’t be seen as recurring. Many CEO/CFO compensation matrices use ‘Adjusted’ profit and EPS metrics rather than the raw or statutory numbers, also on the basis that their senior staff shouldn’t be unfairly short-changed (or over-compensated) on account of such one-off events (at Tesco, 50% of CEO Ken Murphy’s annual bonus is calculated using such an ‘Adjusted’ Profit, with 50% of his long-term incentive plan based on ‘Adjusted’ EPS).

For the UK’s top 20 listed Retailers by revenue, then, we add up Earnings Per Share on both a ‘Statutory’ (i.e. pre adjustment) and ‘Adjusted’ basis either for the past ten financial years, or for all the financial years the company’s shares have been publicly traded (e.g. only four years for Wickes, five for THG and seven for Watches of Switzerland). We then calculate for each firm the sum of ‘Statutory’ EPS reported for the years considered as a percentage of ‘Adjusted’ EPS reported.

A company that doesn’t report ‘Adjusted’ EPS numbers as different from its ‘Statutory’ numbers would have a ratio of 100%. If a company goes through some restructuring, this would tend to result in lower ‘Statutory’ EPS versus ‘Adjusted’ numbers during the period of the restructuring, after which the two numbers should converge again.

Going into this exercise, we had no idea what the data would show either on average for all the companies considered, or individually (i.e. how much one retailer differed from another). While we aren’t qualified accountants, we did read International Accounting Standard (IAS) 33 (‘Earnings Per Share’) to better understand the rules as the standard -setters have currently set them before embarking on our trawl of relevant Annual Reports.

Figure 1

On average, UK listed retailers appear to have bolstered their Earnings Per Share numbers by around 30% over the past ten years as a result of the various adjustments made to statutory financials (it is 18% if we use the median ratio presented in Figure 1). If you believe that all of retail has been forced into painful restructuring under the weight of the online, this would be a justification. But spare a positive thought for Next, where the company has only reported ‘Adjusted’ EPS at all in two of the past ten years, and in both cases to dampen down ‘Statutory’ EPS numbers that the company believed were the result of one-off GAINS. Likewise, Dunelm has only presented modified ‘Adjusted’ EPS number twice in the past decade. Frasers Group is another interesting case, reporting lower ‘Adjusted’ EPS versus the unadjusted ‘Statutory’ numbers in seven of the past ten years (aka one-off gains, not losses). In all three of these corporate cases, the companies have been blessed with positive top-line performance, meaning little restructuring of the painful variety to do in the first place.

At the other end of the spectrum, note the degree to which Tesco, M&S and Sainsbury’s have all been through the restructuring wringer in the past decade. Indeed, in its last ten Financial Years, Marks & Spencer (and Sainsbury’s) has adjusted its accounts in such a way that ‘Adjusted’ EPS has exceeded ‘Statutory’ EPS in nine of those ten years. By the way, if you want to take any comfort from the numbers presented for Ocado and THG, their 100% numbers occur simply because they haven’t used Adjusted EPS at all for the years in question (also, both had negative EPS on average for the years analysed).

Of course, this is just one variable OF MANY that we might looks at as a proxy for just one aspect of a company’s performance over a given time period. Nonetheless, we do think there is useful information content in variables such as these (we are hoping to present more in due course). Professional investors and analysts will often say how important ‘Management’ is to the well-being of a company, but coming up with standardised metrics to corroborate such sentiments can often be much more elusive.