Movie Theater Customer Service, and Financial Statement Errors
A recent movie theater experience reminded me of the risk of poorly trained staff, and the cost of poor customer service. Hiring the wrong people can also impact your financial performance- we’ll get to that in a minute.
It was confusing.
We had ordered tickets online and I had the QR code on my phone. There were two kiosks off to the left (to scan tickets), but neither of them worked, and there was a line at the first ticket window.
I noticed a guy inside the ticket booth at a second window, standing in front of the black microphone. I walked up and said: “Can you help me? I have a question about tickets.”
Now, the employee had two choices:
A. Realize that he couldn’t hear me (the mic wasn’t on), walk around the ticket booth and answer my question, so we can be on time to the movie
B. Mouth the words: “I can’t hear you” and stare at me.
This movie worker chose B. I walked inside the doors and found the ticket taker with a scanner for the QR code.
Did I mention that the theater is own by AMC- a company that nearly went bankrupt during the pandemic?
Frustrating…
The Risk of a Short-Term Accounting Focus
Management at a public company may feel pressure to create short-term (quarterly) results for shareholders. However, since most investors have a long-term investing horizon (5 years, 10 years, or longer), growing sales and earnings over years should be equally important.
Accounting issues require a similar discussion. A qualified audit opinion, or criticism from a regulator, can cause shareholders to lose confidence in the short-term. These issues can damage the firm’s reputation and result in a lower stock price.
Over time, however, a firm can get back on track. A few years of growing sales and earnings, timely reporting to regulators, and “clean” audit opinions can rebuild a reputation.
So, where is your focus?
Reviewing Hertz accounting issues
In 2014, Seeking Alpha provided some important analysis of Hertz, the rental car company:
“In June of 2014, the company filed an 8-K form stating that its Audit Committee had found substantial errors that required the reissuing and revising of financial documents from 2011 to 2013.
Three months later, the company released that it was being investigated by the Securities and Exchange Commission due to a severe problem in its internal controls, resulting in tens of millions of dollars in accounting errors.
The total amount of accounting errors has continued to grow, and the mistakes are now expected to reduce profits by over $180 million from 2011 - 2013.”
This upheaval has caused an approximate 30% drop in the share price.
Understanding the fallout
Restating financials from the prior year hurts your firm’s credibility. You found a material (large) mistake, fixed it, and issued new financials.
It happens- not the end of the world.
Reissuing financials for multiple years may be devastating.
Why?
Your stakeholders, after all, relied on your original financial statements. Shareholders decided to buy or sell stock, bondholders may have purchased debt, all based on the originally-issued financials.
So there’s really two issues to consider:
· Can I rely on management to issue accurate financial statements moving forward?
· Can the company grow sales and earnings?
Well, let’s take on the second bullet point here. One way to analyze a company’s financial performance is to look at financial ratios. You can separate financial ratios into two groups:
Using liquidity ratios
These are short-term ratios- think about the company checkbook. Can Hertz generate enough cash to operate over the next six months or a year? Consider current ratio, which is:
(Current assets)/ (current liabilities)
Can the firm generate cash (collect receivables) fast enough to pay the bills (current liabilities)?
Most important, is the firm generating cash from operations (day-to-day) business? Hertz is in the business of renting cars. Does that generate sufficient cash to operate? If Hertz has to sell assets to survive, it’s probably not a viable company.
Working with solvency ratios
Solvency has a long-term focus, and one category of solvency ratios is capitalization. How much of Hertz’s capital was raised through issuing stock- and how much by floating debt?
The more debt issued (as a percentage of total capitalization), the more earnings need to be generated to pay interest and repay principal on the debt.
Take a step back
So, take a deep breath and do some analysis. Once you get past the accounting errors and restatements, where does the company stand financially? Can they perform so that investors regain confidence in management and buy the stock? Use these types of ratios to figure that out.
And try to bypass that ticket window- the QR scanner is inside…