How to pull out key points from CEO/Chairman Statement in Annual Reports?

The AGM (Annual General Meeting) is coming. The annual report is printed with fancy images, painting a positive picture of the company. Looks like a colourful brochure to me. I flip the pages and more stunning visuals pop up. Selling the business may be appealing, however, that’s not important to me. What’s critical is the information beneath, which I need to tear out bits and pieces.

One of the first things I will look at is the CEO/Chairman statement. It’s an executive summary, providing an overview of the business. The statement is found in the first few pages of the prospectus. As example - I will use FJ Benjamin Annual Report 2012/2013. FJ Benjamin is in the business of selling apparel in retail outlets

Previously, I did a post regarding about the first 2 questions that a Retail Investor should ask in an annual report

Before going further, I will like to highlight that my interpretation is objectively angled, based on the aim of this article – what are the useful details to pick up in CEO/Chairman statement. The thinking process is the most important. Additionally, it’s practically challenging to connect many things together in an article. (easier to communicate verbally with visual drawings) Otherwise, the blog post will be lengthy. Therefore, I will cover a portion of it.

If you need to know more about the CEO/Chairman statement, please feel free to contact me (scroll down the page and the "contact me" box is on the right hand side of my blog) and I’ll send you a free copy of my template. And if you are keen to discuss further, drop me a note and I am happy to correspond with you.

Do kindly note that I do not own shares of FJ Benjamin. This report is used for educational purpose only. Seek your licensed financial advisor for professional advices.

CEO/Chairman Statement

Firstly, I will scan through the entire pages to get a “feel” about the business condition that impacts FJ Benjamin, understanding that it’s prone to macroeconomic shifts. It’s to gather the management’s opinion about the firm’s current (and future) scenario.

Next, I will write down a set of keywords found in the summary that emphasizes the business conditions:

1) Most challenging

2) Volatile times

3) Subdued sentiment in China

4) Dampened consumer outlook

5) Reduced spending in the lifestyle arena

The keywords are found on page 1 and page 2 of the Executive Chairman’s Review.

While it’s good to accept the details at face value, I will ask myself if the above reflects the current trend now – by checking external country statistics, press releases and compare like-for-like listed retailer, similar to FJ Benjamin. Sometimes, prior observation on the ground assists my cross-checks. For instance, I will randomly ask my female professional friends who are regular lifestyle shoppers and compare their feedback with published sources. (e.g. newspaper clippings and income figures)

After getting a cursory insight of the external environment, I will seek to comprehend the factors surrounding the overall business performances, using 3 pessimistic questions.

A. What causes the company to be in this stage of business performance?

B. Is this a permanent or temporary financial change to the business?

C. How did the management plan to navigate around the obstacles?

Illustration for questions A and C:

A. What causes the company to be in this stage of business performance?

It’s stated that the luxury timepiece business is the main drag on earnings, due to the subdued sentiment in China that affects consumer spending. Thus, the business in Hong Kong and Taiwan are affected.

Another reason is the inventory turnover – “orders for goods are placed many months in advance, we found ourselves with more inventory than required”

This probably may explain why the management aims to be “nimble and flexible”, as highlighted in the first paragraph, including this question that is answered briefly - C. How did the management plan to navigate around the obstacles?

I like to be on the downside, asking questions like the above. It’s during this transition that I am able to clearly discover the management’s tone and ability to turnaround the business. When the business is doing well, the CEO’s statement looks green and rosy to me and therefore, it’s hard to find out the underlying reasons.

Thus, I am practically studying the integrity of the management. No business is 100% foolproof. Since the keyword is “dampened consumer outlook”, I won’t expect above-average returns. A good way is to study the past 3 to 5 year’s annual reports and keep track whether the FJ Benjamin has been using the same reasoning. If it is, the question to ponder is “how will the top guys allocate resources, create opportunities and propel the business forward?” And has FJ Benjamin meet their supposed targets quoted in past CEO/Chairman statements?

To investigate further, I will read through the overall results of each division. The company will comprise of several subsidiaries/business units that contribute to the Group’s profitability/loss.

In this instance, I will turn to both the Chairman and CEO’s report. Here are some data facts:

There is the fashion, licensing and timepiece segment, split by country and region. You can also refer to the charts in the next few pages:

In the Chairman/CEO statement, there can be more to read within the lines. Extract essential intelligence, place them together in an A4 paper and this will make sense of where the company’s direction is heading, how they are able to react constructively during the bad times and where the business is moving forward in the near future. There can be some missing analysis. Don't worry, that’s fine. I can read up the rest of the annual reports and contact FJ Benjamin for further clarity. Certain inputs from external analyst reports are free and may help too.

Feel free to contact me at the bottom right hand corner of my blog should you need any assistance.

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