October 5, 2018 | Blog News / Updates

Part I (Blog Post): SEC Fires Shot Across the Bow on Forward Guidance – Future Casualties Still to be Determined

An earthquake struck the Corporate IR community last week in the form an SEC Administrative Ruling; and the potential for aftershocks could reverberate across the public-company universe for years to come. The target in this case was Walgreens Boots Alliance, Inc. and the issue was guidance related to its multi-step merger, announced in June 2012, that was designed to play out over the next four years. In response to this news, and to help IR practitioners adapt within the confines of greater SEC scrutiny of guidance, Alpha IR is launching a three-part online series to discuss and dissect this case study in further detail.

This week’s blog is Part I, and we begin with a review of the facts:

  • On September 28, 2018, Walgreens Boots Alliance, Inc. announced that it will pay the SEC a fine of $34.5 million to settle a complaint related to its publicly-disclosed financial forecasts in the 2013 to 2014 time-frame. While the company did not admit or acknowledge any wrongdoing, the former CEO and CFO must also pay personal fines of $160,000 each in connection with the SEC’s investigation.
  • The SEC took issue that Walgreens did not “adequately” warn investors on multiple occasions from June of 2013 through August of 2014 of “increased risks” to achieving its targeted EBIT forecast for fiscal-year 2016 (referred to by management during this time frame as a “stretch goal”). This guidance was originally announced in June of 2012, nearly 50 months (or 17 quarters) in advance.
  • Walgreens first warned investors of increased risks to achieving its 2016 target on an earnings conference call in December of 2013. At that time, its fiscal year-end 2016 was 32 months away and the magnitude of the expected “miss” from the internal forecast as compared to the low-end of the Company’s previously-disclosed, expected range was approximately 6.7 percent.
  • Six months later, in June of 2014, Walgreens discontinued its fiscal-year 2016 forecast entirely, indicating it was no longer attainable and that it would provide the market with revised forecasts on a later date. At the time of this announcement, fiscal year-end 2016 was 26 months away and the internal forecast was approximately 16.7 percent below the low-end of the previously-disclosed range.
  • On August 6, 2014, the company initiated a new outlook for fiscal-year 2016, with a midpoint that was approximately 20 percent below the low-end of its originally-provided range. The stock declined 14.3 percent that day.

Those of us that operate in the public markets know that operating results can surprise FP&A departments sometimes, and it’s the role of investor relations to address material surprises with timely and effective communication. However, nowhere in this case do we get the sense that Walgreens deliberately misled investors, and the time-frame for their forecasts was so far in advance that a few strong quarters theoretically could have put them back within the range. From our perspective, we believe IR handled this situation fairly well given the timing of various events and the long-term nature of the guidance.

We believe the use of long-term strategic objectives/goals is a critical tool that management teams need to communicate their long-term vision and elevate their messaging out of the short-term noise that often occurs in quarterly sell-side dominated conference calls. Thus, this fine against Walgreens was a surprise to us, particularly as the SEC has recently been challenged to reduce short-termism by some of today’s most influential market participants. Perhaps the SEC’s decision to sue Walgreens was intended to cultivate a shift toward a market environment in which investors would have greater consistency of confidence and reliability on long-term corporate forecasting, thereby easing short-term pressures? Regardless, we expect this to have significant and long-lasting unintended consequences

Corporate finance and IR teams should place a high degree of pressure and responsibility on themselves to self-police public forecasts with their management teams. We believe the SEC’s punishment of Walgreens is likely to cause greater frustration and confusion in board rooms, which is more likely to result in the discontinuation of providing long-term forecasts altogether. This would be a negative outcome in our opinion, and unfortunately IR practitioners must take notice and inform management teams and boards that their “duty to update” has become far more serious.

We suspect this also will create additional challenges for corporate issuers and investor relations practitioners in the future, so in Part II of this series next week we’ll provide additional thoughts regarding our philosophies on guidance and some key considerations all companies should make in preparing, updating, and disclosing guidance information.

As always, we welcome you to reach out to us directly if you would like to discuss this topic or other questions with our teams in greater detail.

Thank you for reading! For questions or comments, please reach out to us at info@alpha-ir.com