Twee retail bazaar Etsy is trading its hand-knit shawl for a three-piece suit. The Brooklyn-based firm has filed to go public, with Goldman Sachs, Morgan Stanley, and Allen & Co. managing its initial public offering. And it has a message for potential investors: Expect those earnings to be of the hand-crafted, wholesome variety too.
“Success will be based on strategies that evolve over years and decades, not just quarters,” Chad Dickerson, Etsy’s chief executive, said in the filing. “We are more focused on creating long-term results for us and our community than short-term results that lack that promise.” To that end, he wrote, when the company is public, it does not plan on giving quarterly or annual earnings guidance.
This is not unheard of in the corporate world, but it is relatively rare. Nearly 90 percent of public firms currently give some form of financial guidance, according to a survey from the National Investor Relations Institute, with about two thirds providing earnings estimates. Nevertheless, in the c-suite, there have long been questions about how useful the estimates are. Companies including Unilever, Ford, Gillette, Berkshire Hathaway, and Google have stepped away from providing them. And chief executives are being more vocal about the practice’s downsides.
As a general point, the idea behind issuing quarterly or annual earnings targets is to help keep investors’ expectations of a given company’s performance informed and reasonable. Better to let investors know that you might have a down quarter so they expect it when it comes, and better to shoot low with your earnings estimates so that any surprises come on the upside. The guidance might help limit stock volatility and even boost a company’s valuation, the theory goes.
But it does not quite bear out in practice. A McKinsey analysis found that providing earnings guidance had no effect on volatility, valuation, or shareholder returns. Putting a target out does nothing to smooth out the share price or boost the company’s value.
Plus, there are real downsides. Putting out an earnings target takes time. And putting out an earnings target means pressure to hit that earnings target, stressing out executives and distorting companies’ decision-making. One survey of corporate executives found that about four in five felt “especially pressured” to demonstrate “strong financial performance” in a time horizon of merely two years, when they were putting targets out.
“If you see one cockroach, you immediately assume that there are hundreds behind the walls, even though you may have no proof that this is the case,” one chief financial officer told researchers. “Corporations therefore have great incentive to avoid the ‘cockroach’ of missing an earnings benchmark,” their study concluded.
And there is evidence that they do so in plenty of ways that might sacrifice long-term performance for short-term results. That includes decreasing spending on research, advertising, and maintenance; delaying a new project; fiddling around with when certain project revenues come in; drawing down on reserves; postponing taking accounting charges; or offering deals to bring in new business.
Etsy, for its part, wants to duck the pressure to do any of that. “I think providing quantitative earnings guidance is misaligned with Etsy’s mission,” Dickerson said in the filing. “The pressure to hit a quarterly financial target could incent us too heavily to seek near-term gains, which could diminish our ability to fulfill our larger mission over the long-term.” And that mission is larger than profits, Etsy has long said. It’s one of a growing number of “B corporations,” companies with a for-profit head and a nonprofit heart that promise not to privilege profits over their environmental standards or social missions.
For now, those profits are illusory for Etsy, one way or another. On last year’s sales of about $196 million, it lost $15 million. But its initial public offering should help it raise cash to expand its business — and for investors willing to put in the time, commitment, and handiwork, some slow-grown, sustainable shareholder earnings should come their way.
