10 Pages Posted: 2 Jun 2017
A large general-merchandise retailer misses its fiscal year earnings-per-share guidance, so its CFO is charged with improving the firm's forecasts. This case presents the use of probability distributions for forecasting discrete and continuous uncertainties such as GDP growth, inflation, and unemployment, including the benefit of ranges and distributions over point estimates. The Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters is introduced as a source of forecasts.
Rev. Aug. 9, 2012
It was late January 2009, and Angela Morella, CFO of PriceMax, a large general-merchandise retail chain, had just hung up the phone with the CEO, Tom Vicente. Vicente was concerned about the forecast PriceMax would soon provide the public for its 2009 earnings per share (EPS). Last year's 14.7% decline in basic EPS fell well below expectations. This year he wanted a better forecast for EPS growth and asked Morella to look into the guidance provided by firms such as Procter & Gamble (P&G).
Vicente highlighted the recent guidance P&G gave for 2009: “[P&G] stated that it is comfortable with analysts' current consensus earnings per share estimate of $ 4.29. This approximates the midpoint of the company's revised Fiscal 2009 guidance range of $ 4.20 to $ 4.35 per share.” He wondered whether PriceMax would benefit if it were to provide earnings guidance as a range rather than a single-point estimate. In any case, Vicente worried that, if PriceMax did not improve its guidance, investors might shun the company's upcoming debt issuance—financing it needed to fund store expansions.
Morella's Guidance Challenge
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Keywords: forecasting, guidance, ranges, distributions, EPS
Suggested Citation: Suggested Citation
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