As shares plummet, how much longer will investors accept the finger pointing?
Blaming the weather appears to be a long and noble tradition, supported by leaders in every industry, across the globe. Take 2016, for instance; this year, the weather has already been cited by an incredible array of business leaders for a range of spectacular losses.
Sports Direct, the United Kingdom’s largest sporting retailer, operating roughly 670 stores worldwide, was the first out of the gates. It issued a profit warning on January 8 announcing that it expected to miss its target for underlying profits due to unexpectedly warm weather over the Christmas period. That warning sent shares falling 14%. It was a real surprise after the company had just one month earlier confirmed it would hit its targets for this financial year during the reporting of its half-term results.
FirstGroup, the leading transport operator in the UK and North America, quickly followed suit, issuing its own profit warning that the floods that hit Britain over the winter had resulted in revenues falling by 9.5 percent in the third quarter and that operating profits for the year would be “slightly lowered”. Similarly, Zurich Insurance released a profit warning of an estimated 100 million further quarter business operating loss for its general insurance business as a result of the high number of claims following the British floods. Shares plummeted 9% following the release.
Of course, blaming the weather is not practice limited to the United Kingdom. Astral Foods, South Africa’s leading integrated poultry producer, issued a profit warning in March, stating that it has been impacted to the tune of up to a 30 percent loss in profits for the six months ending in March of this year. Droughts conditions led to an increase in feed costs and forced the import of maize. In Hong Kong, Bossini, an apparel brand owner, retailer and franchiser, issued a profit warning saying an unseasonably warm weather had intensified competition in several core markets where it operates, leading to a decrease in profits in the range from 80-90% as compared with the corresponding period for the six months the year before.
If 2015 is anything to go by, blaming the weather in profit losses is only going to continue. In 2015, industry leaders released no less than 18 profit warnings around the world, all with the same theme. An unusually warm autumn in the UK led to retailers lamenting loss revenues in profit warnings, each causing shares to fall. Esprit, Boohoo, N Brown, Bonmarche, and Shoe Zone all experienced well below market forecasts, as consumers bought less, or bought less expensive items. Pricey winter boots were snubbed for ankle boots, and winter coats and other cold essentials were left on the racks. A warm autumn was also attributed to profit losses by Vipshop, a flash sale e-commerce headquartered in Asia.
Meanwhile, continued adverse weather conditions led to Petrofac, a British oil and gas services company releasing a profit warning that it would take a second huge charge– of £130m – against the massive gas plant it is building on Shetland for France’s Total. The company’s shares consequently fell by 10 percent. The weather also led to profit warnings being issued by an energy producer in the United States; Peabody Energy Company expected a charge of $40 million during the second quarter related to rain and flash flooding in Montana and Wyoming. Its shares plummeted 15.5 after the profit warning was released.
Just how weather affects business is unique to each industry and region. A cold and wet spring in the UK affected profits for C&C Group (an alcohol manufacturer and distributor), just as cold and wet spring slashed earnings for Warehouse Group, a retail group in New Zealand. Meanwhile, drought and frost resulted in profit loss warnings being issued by Illovo Sugar and Pioneer Food Group in South Africa. Drought and frost were also to blame for profit warnings by Australian Vintage wine and Graincorp in Australia. In India, heavy and incessant rainfall impacted the operations of Hexaware Technologies, just as heavy rainfall was to blame for profit losses by James Cropper and Walker Greenbank in the UK.
In total, approximately 70% of business sectors worldwide are exposed to weather variability for a total exposure of 30% of GDP in industrialized countries. Weather-sensitive sectors include energy, agriculture, food and beverage, clothing and textile, mining, transport, retail, entertainment, and tourism, to name a few. But while the weather is cited in business reports, press releases and retail surveys as an explanation for lower-than-expected financial results, the impact of weather is never quantified. Broadly speaking, 70% of annual reports make references to unfavourable weather conditions, whilst only approximately 20% mention weather risks in the risk factor section. Save for energy companies, none of the annual reports quantified the exact contribution of weather to sales or to EBITDA.
Meteo Protect’s vision was to provide clients with a means to efficiently manage weather risks, starting with the evaluation of how climate variability contributes to a company’s results, analysing the relationship between each business activity and the weather, and providing the financial hedging instrument to deliver their financial targets. It assembled the largest team in Europe dedicated to weather risk management and developed a pricing platform called Vivaldi for providing weather risk management solutions for any weather-related risk.
In this way, Meteo Protect now offers an innovative solution to a risk historically considered unquantifiable and unmanageable, meaning that the end of blaming it on the weather is near. Companies now have the means to identify, quantify, mitigate and disclose weather risks. In the future, investors, shareholders and rating agencies will require nothing less.