The following is a guest article by Jeremy Baksht, Head of Alternative Data for consumer data firm Ascential. Contact Jeremy.Baksht@ascential.com for more information.
Corporates in the consumer and retail sectors are increasing their sophistication as the industry is forcing them to leverage big data to be successful. Unfortunately, most Wall Street analysts have yet to catch up.
Consumer companies have become increasingly data driven. To be successful, they must understand point of sale, credit card transactions, web site virality, quality of impressions, and brand perception on social networks. They need to optimize how and where their products are stocked. Real-time factors of success are pushing the product cycles faster than ever.
Meanwhile, Wall Street has struggled a bit to keep up. Analysts continue to be focused on traditional metrics: sales per square foot, sales per employee, comparable store growth, and inventory turns. Suddenly beating or missing a quarter is very short term and can be misguided.. It is more critical to see where a company is headed in the next few seasons and are they equipped with the right design teams, the best products for the category. Do they keep the attention of their core audience and aspirational customers?
The buy-side has become more attuned to the changing dynamics in the consumer sector. According to Eurekahedge, 81.8% of the hedge-fund managers outperformed the global equity market in March. The typical data sets used by these teams include some combination of market data and fundamentals, industry data, and increasingly alternative data such as credit card transactions, web scraping, sentiment, location tracking, and even satellite imagery. In the consumer sector, investors will increasingly be focused on tracking brand value, the quality of experience in flagship stores, social media momentum, value of impressions and other markers of future success.
Much of the challenge for Wall Street is structural. Banks with larger operations have tended to be more optimistic in their forecasts in order to maintain discretion and favorable corporate access. Further, their estimates tend to be more surface level, looking at high-level financial metrics such as top line revenue or earnings per share.
The other big sticking point for Wall Street is the timing of revisions. Typically, revisions are posted in some form one to two weeks after earnings, or they might update one to two weeks prior to the next company quarterly announcement. According to Visible Alpha, “almost 50% of all consensus revisions in the entire quarter are captured between two weeks after an earnings announcement and two weeks prior to the next.”
As traditional research proves to be wanting, the use of alternative data has increased. It has evolved from market tick data, expert networks, physical inventory counting to an estimated $1 billion market. However, to put it into perspective, Bloomberg eclipsed $10 billion in revenue years ago so while alternative data grown, it is still the little engine that could.
Alternative data has been most frequently applied to the consumer sector because strong correlations can be consistently drawn between the use of point-of-sale or credit card transactions and a consumer company’s revenue and gross margin trends. However, as the digital economy expands and omni-channel buying muddies the financial ground truth, transaction data alone is no longer adequate. For consumer products it is necessary to expand deeper into online consumer purchasing patterns.
This has become even more true in the context of the corona virus epidemic. We are seeing retailers going into essential mode with deep layoffs and furloughs of personnel, offering customers deep discounts, completely missing product seasons if they were able to curtail manufacturing orders in time. Their financial policies are suspending dividends, drawing on credit lines, and removing guidance.
Many companies, particularly the healthy ones, have pivoted their manufacturing. Apparel producers are skewing towards lounge wear, fitness & active wear, sleep & lingerie while downshifting from business attire, formals, dresses, slacks, and swimwear. Women’s accessories, jewelry and “Over the Keyboard” is still working. The more long-term minded, such as Brooks Brothers, Asos, and Allbirds, are providing much needed support to the hospital front lines in the form of gowns, masks, and shoes .
As these stories develop, tracking many of the key performance indicators for their digital e-commerce businesses is critical. In particular, SKU level availability and daily pricing fluctuations for first-party webstores and third-party marketplaces are the leading indicators that impact revenue and margin. Other key metrics include average selling prices, product innovation, availability issues, and markdown %.
Successful consumer companies have integrated alternative data into their operations, becoming sophisticated in their ability to leverage digital trends to grow revenues and increase margins. Similarly, investors are also beginning to expand beyond transaction data for more nuanced insights into consumer stocks. Despite structural challenges, Wall Street research may also increasingly embrace the new consumer realities provided by alternative data.