Let me begin first by saying that this question came to mind after reading a quarterly earnings report by a company I was interested in. It is a well established company which I personally feel has hit their “peak” at nearly a century old in the luxury retail industry (and not doing as well as many others). That point is fairly significant because a young company can easily have higher percentage earnings vs. an older much more well established company. What I mean by this is compare a new company (using arbitrary numbers) with a 100% increase in revenue from $100,000 to $200,000 its first year, to a company who’s revenue is 5billion which had increased its revenue only by a mere 2% or $100,000,000. With that said, while 100milion dollars is a heck of a lot of money, the well established company will probably not “feel” the profits as much as if they had just completely doubled their profits like the smaller company. While the smaller newer company may be able to completely remodel their storefront, the well established company may just barely be able to pay for electricity with the $100,000,000.
Upon reading and listening to quarterly earnings reports CEOs have with investment companies, it doesn’t take a genius realize that the C-level execs must present the company as profitable as possible, and show that it is making strides for a better future. Then comes my question: Do CEOs utilize population growth rate to predict future profits? Lets talk specifically about luxury retail since that is the specific industry of the earnings report I am talking about. Plus that point might be fairly important since it is a purely “want” based industry as opposed to needs like food and water which the ENTIRE population will purchase.
When reading the report, the company discusses earnings in the last quarter, what it plans for the future, what they’re doing that might be innovative, and etc… The statement in this report that got me thinking was when the Chief said they predicted a 2% growth in revenue. Wow, 2% huh? Now without getting into a deep analysis of ALL the different possibilities the CEO could have used to calculate this number, and in order to stay on topic, I wondered if this one rate factored in: the population growth rate.
With the population surging in the USA by about .7%, I thought, surely this could be used to estimate how much the company can be expected to grow (at least in the future), or even looking at past data (I will get to this point later).
Now if you’re smart you’re probably going to find many problems with what I’ve said. First taking into account the point that you can’t just assume the whole “new” population of people is going to buy from this store. Ok that’s obvious, but here’s my logic.
A .7% increase of a population of 313.9million (current population of the USA give or take) people is about 2,200,000. Now lets say of those 2,200,000 people only the “top 1% earners” in America shop in this retailer (which is absolutely not the case, but I am using the worst case scenario for those who are being critical). So about 22,000 people can be predicted to have the cash flow to shop in this store in the future. Take about 10% of that (assuming not all of them will) and you’re left with 2,200 people. Now lets say those 2,200 people only spend about $1,000 each (which is vastly underestimating the spending power of the 10% of the 1%) you still reach $2,200,000 in profit!
Looking at the companies current revenues of 2.5billion (I won’t use exact numbers because I don’t want to promote this company in any way, and you could probably Google if I used the exact digits) that’s almost about .1% of the 2% the CEO said. Also keep in mind that I have used “growth rate” and not “birth rate.” Otherwise my numbers would probably be much larger, but would fail to consider deaths. The shopper demographic I’ve used also vastly underestimates the number of luxury shoppers, and their willingness to spend.
Now as I said earlier, how could the age of people become an important factor? Well knowledge is power. I know one simple statistic about the company – that the average age of shoppers is 47 (now that isn’t the real number, its more give or take a couple years but I didn’t want to give anything away to reveal the company). There are currently about 20million people in the U.S. between the ages 45-49. These people were all a statistic of the “growth” rate, and are now impacting the current revenues of the company. So I wonder, do large businesses bother to take these statistics into consideration?
Although, with all that said… The execs could have just picked the random number 2% because it was reasonably small enough of value for them to meet, which renders this entire post nothing but brain candy. However if that’s the case, he could have boosted his number by .1%, and possibly even looked smarter to investors who may say “wow, he must have really put thought into his prediction if he’s going into decimals.”