By Theo Francis and Jennifer Maloney
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. 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 veteran Linda 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%.
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, which predicted
profits would be flat from last year, said the damage wasn't as
severe as feared. Others like Quest Diagnostics Inc., 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 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. sealed a $21 billion takeover for another biotech
with a promising cancer drug, Kraft Heinz Co. agreed to sell off a
hunk of its cheese business, and Verizon Communications Inc. 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. 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 investor conference. "I don't think
we've seen it all play out."
--Sharon Terlep, Thomas Gryta and Drew FitzGerald contributed to
this article.
Write to Theo Francis at theo.francis@wsj.com and Jennifer
Maloney at jennifer.maloney@wsj.com
(END) Dow Jones Newswires
September 20, 2020 07:14 ET (11:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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