March 9, 2020

Among U.S. Retailers, Female Leadership Means Outperformance

by Jharonne Martis.

Retailers are reporting Q4 2019 earnings, coincidentally during Women’s History Month. The impact of women in leadership is symbolized by the well-known “Fearless Girl” statue facing the New York Stock Exchange. More corporations, including retailers, are being pushed to boost female participation on their boards and in their executive ranks. Goldman Sachs has joined the movement, saying it will no longer do a company’s IPO unless the company has one diverse board member. This is increasingly exerting change in the areas of corporate environmental, social and governance (ESG) issues.

Various authoritative studies show that companies with gender diversity, and especially with females in leadership roles, are more profitable and tend to overperform their benchmark.  The question for investors is – what impact does this trend have on financial returns?

More women, higher returns

To examine further, we turn to the Refinitiv ESG data in QA Direct. Here we look at the percentage of female managers in our retail universe and consumer stocks within the S&P 500 index from January 2016 through June 2019.

The data shows that retailers and other consumer cyclical stocks in the S&P 500 with a higher percentage of women in management roles have outperformed their less diverse peers (Exhibit 1). Looking at the cumulative return within that sector over a 3-1/2 year period through mid-2019, companies with the top 20% of women in management outperformed the least diverse 20% by 40 percentage points. They also beat their benchmark returns.

Exhibit 1: Top 20% Women Management vs. 20% Least Diverse Consumer Cyclicals Stocks: 2016 – 2019


Source: Refinitiv QA Point

The difference in performance is even greater when looking at the consumer non-cyclical stocks. Looking at the cumulative return over the same time period (2016 – 2019), companies with the top 20% of women in management outperformed the least diverse 20% by more than 60 percentage points of performance and also beat their benchmark returns.

Exhibit 2: Top 20% Women Management vs. 20% Least Diverse Consumer Non-Cyclicals Stocks: 2016 – 2019


Source: Refinitiv QA Point

Individual consumer stocks

To analyze consumer stocks on an individual level, we used the Eikon screener to pull three sets of ESG metrics: the overall ESG score, board gender diversity and executives’ gender diversity. The last two metrics will look at the percentage of females in leadership roles. Examining these three metrics will allow us to consider both financial and business sustainability dimensions to evaluate these companies with superior business characteristics, including management, culture and risk profile.

When evaluating the 202 companies in our Retail/Restaurant Earnings Index, we find that about 24% of these companies have all-male senior executives. Across the board, nearly half (45%) of these companies have disclosed that less than 15% of its leadership roles are filled by women.

To pull the companies with superior performance, and with more females in leadership roles, we set our criteria for the overall ESG score above 70, the board gender diversity score above 40, and an executive members gender diversity score above 15 (Exhibit 3).

The top five retailers have an ESG score of 74 and above, suggesting that these companies meet the top standards of corporate responsibility and have superior management compared to their peers (Exhibit 3). These companies are more vocal and transparent when it comes to social responsibility, company culture and management. They also happen to have over 40% of females on their board, and over 15% females in executive leadership roles.

Exhibit 3: Retailers with High Overall ESG Scores, Board Diversity, Executive Diversity


Source: Eikon Screener

Best Buy makes the top of the list of ESG scores. It also has the highest percentage (50%) of females on its board, including a female CEO. Recently, the retailer reported Q4 2019 earnings that topped estimates in a time when other retailers struggled to sell merchandise over the holiday season. Best Buy’s stock notched a six-month growth of 25.78%, above the 6.55% S&P 500 index gain. (Exhibit 4).

What’s more, in its recent earnings release, the retailer updated its FY 2021 revenue guidance, above Refinitiv’s previous revenue estimate. This guidance includes Best Buy’s best estimate of the impacts from supply chain disruptions caused by the coronavirus outbreak (Source: Q4 2020 Best Buy Earnings Call). This reinforced Best Buy CEO’s view that the disruption will not affect its long-term strategy.

Exhibit 4: Best Buy Stock vs. S&P 500 Index: Last 6 Months


Source: Refinitiv Eikon

Sustainable Leadership Monitor (SLM)

To evaluate Best Buy’s long-term health, we turn to the Eikon Sustainable Leadership Monitor (SLM). The SLM is a data-driven app that uniquely aggregates a deep range of financial fundamentals with environmental, social and governance criteria. Looking at the SLM dashboard, three out of the four pillars show strong scores of 88 and higher – thus placing Best Buy in the top quintile scores for the environment, governance, and citizenship pillars (Exhibit 5). The blue line in the middle of the circle is the benchmark median.

Exhibit 5: Best Buy Sustainable Leadership Monitor (SLM)


Source: Refinitiv Eikon

Best Buy’s environment pillar has the highest score of 89 out of 100. The retailer is known for its Geek Squad repair crew, which also happens to drive hybrid cars to clients’ locations to shrink its carbon footprint. Its innovative and technological solutions promote a circular economy by fighting e-waste, offering electronic repairs and trade-ins. In a traditional linear economy, these electronics would end up in landfills and therefore end the resource’s life.

Similarly, Best Buy’s citizenship and governance pillar have a score of 88 out of 100, reflecting its respect towards the human rights convention, diverse workforce and leaders.

When it comes to the long-term return pillar, the retailer scores a 69 out of 100. It’s important to note that its long-term yellow flags component has seen a recent improvement, as Best Buy’s YoY% increase in leverage has dropped 10.32% from the previous fiscal year. This is being reinvested in other growth opportunities.

Moreover, the long-term earnings quality (EQ) component boasts a score of 94 out of 100, suggesting Best Buy’s earnings are coming from sustainable sources, it’s sitting on a solid amount of cash and accruals looks healthy.

The other significant long-term component here is the StarMine Combined Credit Risk (CCR) model. This model systematically calculates the default probability (DP%) within the next 12 months for all companies by region with a score of 1 having the highest probability of default. Best Buy however, scores a 72 out of a possible 100, above the peer average of 64. This suggests Best Buy has a very low probability of default (0.07%).

Exhibit 6: Best Buy Peer Comparison: The StarMine Combined Credit Risk Scores

Source: Refinitiv Eikon

To summarize, Best Buy outperforms peers that have less female leadership. The SLM monitor reaffirms Best Buy healthy financial position compared to its peers. It’s strong CCR and EQ scores suggest a low probability of default, and profits from sustainable sources. The company’s cash flow and accruals look healthy, thus implying that it is also best positioned among its peers to weather the coronavirus effects on its market.

Finally, the retailers’ ESG scores in QA Direct, and in Eikon, suggest that gender diversity at the board, and leadership level can potentially improve a company’s performance in the consumer industry vs. its benchmark and peers with less diverse leadership.

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