KPI Mania: celebrating in the wrong end zone

Precision on the present stopped paying

The revenue-precision prediction game was highly effective in the ZIRP era of growth at any cost, four IPOs a day and two unicorns a week. With a normalized cost of capital likely to persist, the ability to generate organic demand that turns into earnings and future profits will trump hitting current-quarter revenue targets.

Commentary and guidance on future organic growth will generate alpha, not a touchdown dance in the revenue-precision end zone. Knowing that business slowed for 3.5 days because of rain isn't likely to be rewarded if it's unrelated to longer-term organic growth.

The allure of data science mixed with hubris has created an ecosystem of dozens of venture-backed alt-data firms, all claiming to predict current-quarter revenue within a tiny margin of error. Herding compounds this with poor risk-reward. There is too much data predicting the present, and a black hole on the profitability and sustainability of those sales.

Coupons move quotas

Experienced investors know management has many tricks to hit quotas, such as pulling forward demand or spamming customers with coupons and promotions. With lead and customer lists in the millions, brands can quickly escalate discounting until the product moves.

The Random Walk Promotional Ensemble provides the most real-time and accurate view of that behavior. We uncover the brands with the most egregious changes in the behind-the-scenes email blasts they would rather institutional investors not see.

The Children's Place beat on revenue, then cut the holiday

The Children's Place reported revenue of $480M against consensus of $465M, yet guided the holiday quarter to just $0.35 in earnings, a dollar below expectations. Investors who leaned on clickstream conversions and credit card data scored touchdowns in the KPI end zone.

Meanwhile, our promotional ensemble had alerted clients to unprecedented email volume, steep discounts and never-before-seen language, a pattern similar to brands that eventually disappeared from the public markets, such as JCP and BBBY. Explosive growth in promotions is the easy tell that a brand has lost pricing power and the ability to differentiate in a hyper-competitive market in Amazon's shadow.

Fewer promotions, stronger demand

The ensemble also revealed businesses relying on fewer promotions. At DoorDash we tracked a significant decline in the promotions and discounts it had used to attract new customers, and fewer incentives for existing ones. That won't produce a precise GOV forecast, but it reveals something more valuable: management was seeing stronger organic demand for its core product. Soon after cutting incentives, DoorDash reported nearly 300% EBITDA growth and noted across-the-board acceleration.

Coupon clipping misses the first signs of slowing, because brands use software to target cohorts and segments. Well before Etsy and RH reduced guidance, they were dramatically increasing their email campaigns. There were no coupons to clip: facing slack demand, they first pinged customers and leads more often with "check out our new furniture" style campaigns. Our total email volume index flagged those changes for investors.

Don't win the decathlon of profitless predictions

Our promotional ensemble shows how management reacts to changing demand. When demand sags, brands ramp up email volume, and that is the signal worth watching.

Brand signals from the Random Walk Promotional Ensemble as of November 2023. Not investment advice.