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Can SalesForekast™ Accurately Predict a Private Company's Sales within 1%?

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FilterX, with sales over $100 million, used the SaleForekast™ methodology to complement its bottom-up forecast. This tempered the forecast for the Company’s Board and enabled a smoother exit for the private equity firm that owned FilterX.

 

Background

FilterX sells highly engineered materials into a range of end-markets including Industrial, Consumer, and Medical & Biotechnology. The materials are designed for precise filtration, diffusion, and separation of liquids. FilterX focused on higher margin, higher growth products and end-marketing. At the time, more than 60% of FilterX’s sales were in the US, though the company had a global presence. FilterX was owned by a leading private equity firm with the goal of value creation.

FilterX was interested in understanding which end-markets were driving sales as well as providing external validation for its bottom-up sales forecasts. At the same time, the company was investing in both Research & Development for new products and in expanding geographically. Thus, it would expect to exceed the forecasts based on historical trends and estimates of the sales resulting from new investments.

SalesForekast™ provided FilterX with a capability that helped validate internal sales forecasts and budgets as well as provide greater credibility to its business model. The company used this process nearly every quarter.

 

Business Case SUmmary

This case study presents forecasts on the quarterly sales for 2009 to 2013. These forecasts are then compared with the actual sales for 2014 and 2015. Note: At the time, the computations were more manual as the SalesForekast software had not yet been fully developed, but the analysis is identical to the software available today.

FIrst, the software determined which macroeconomic indicators most closely correlate with FilterX’s sales history, providing valuable insight into what drives FilterX sales.

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FilterX correlated significantly, above .94, with a number of economic indicators:

  1. Industrial Production - key end market for the company
  2. Motor Vehicle Sales - good measure of consumer spending
  3. Real GDP
  4. Healthcare Spending - key sector for FilterX and a high-growth area
  5. Personal Consumption, Food Services - good measure of consumer spending

The other correlations were not as significant, though the model uses the top eight correlations to build the best-fitting regression equation. Note: At times, indicators, such as Total Business Inventories, probably have less of a direct impact on the company. This happens due to possible mathematical correlations and can usually be ignored.

The regression equation that resulted included only three of these variables, with industrial production having the highest impact (See Below: industrial production coefficient of 1.2 vs. the others at below 0.1).

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The model then took the forecasts of the variables in the resulting regression equation and used these to forecast sales for the following three years. In addition, SalesForekast™ looked at the sales trends themselves to find the best fit. For the case study, the model used actuals for 2014 and 2015 since these are now available.

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The actual projections are indicated below:

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The model forecasted sales of $125MM for each of 2014 and 2015 (at constant currency, to take out the effect of currency variations over this period).

The actual sales were:

  • 2014: $124.8MM  
  • 2015: $126.5MM.

Each of these results were within 1% of the SalesForekast™ projected number in 2013.

FilterX also used the methodology to develop forecasts for its key markets: industrial, consumer and healthcare (but those data are not being disclosed publicly).

Kroger to Continue Growth Despite Recent Whole Foods Acquisition

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The following report looks at the projected sales forecasts for Kroger, Shoprite , and Whole Foods. These were created by SalesForekast™, the new forecasting that provides projections based on correlations with macroeconomic indicators.

For this analysis, we are using the stock code for Village Super Market as a proxy for Shoprite, acknowledging that Village Super Market has 29 stores operating under the Shoprite banner, of a total of 337 Shoprite stores.

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Kroger ($KR), Whole Foods ($WFM) , and Shoprite ($VLGEA) have each seen varying levels of success over the past few years with three different models. Kroger, battling with the likes of Amazon and Wal-Mart ($WM), remains the largest pure grocery chain in the United States. Whole Foods, recently bought by Amazon, has been a catalyst to the growing natural and organic trend.  Finally, ShopRite continues to perform well regionally in the Northeast and Mid-Atlantic.

Here are a few interesting reference facts about these brick and mortar supermarket chains:

  1. Kroger remains the largest supermarket chain in the United States by annual revenue, with over $110 Billion in sales revenue in 2016.

  2. Whole Foods focuses on organic and natural food products. Amazon recently acquired the firm for $13.7 billion.

  3. Village Super Market has seen steady growth over the last quarter. The firm had sales of $392 million with comparable-store sales increasing by 1.1% in the quarter.


SalesForekast™analysis suggests that Kroger and Shoprite will continue their steady growth trends, with Shoprite appearing to be on a path to increase at a faster rate.

Kroger and Shoprite correlate well with GDP, personal expenditures, and e-commerce sales. As the economy rises, both are likely to see an increase in sales.

In comparison, Shoprite correlates with ‘total business inventories’ as a leading indicator. This differs from Kroger where ‘final sales of motor vehicles to domestic purchases’ acts as a leading indicator. Leading indicators suggest that changes in macroeconomic indicators affects sales in the following quarter.

Whole Foods does not correlate well with macroeconomic factors. Due to this, SalesForekast™ projects a great degree of uncertainty.

Whole Foods is likely affected by other market factors, including intense competition in the growing natural and organic areas and expansion into general merchandising categories. The recent acquisition by Amazon may further exacerbate this uncertainty.  

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See below for the Salesforekast™ reports for the each supermarket chain:

KROGER COMPANY

SalesForekast™ projects Kroger to perform just above the best-fit line maintaining a slow growth rate. Kroger’s success will likely depend on competition, especially after Whole Foods acquisition.

To read the full report on Kroger Company ($KR), click here.

 

Shoprite

 

SalesForekast™ projects Shoprite to perform slightly better than their best-fit line. The firm is expected to maintain steady growth over the following quarters.

To read the full report on Shoprite ($VLGEA), click here.

 

About SalesForekast

SalesForekast™ correlates historical sales or market capitalization data with over 30 selected macroeconomic indicators to project data for future quarters based on the forecasts for the macroeconomic indicators that drive the company’s sales or market cap.

 

 

 

 

 

 

 

How SalesForekast™ Works: The Math Behind the Software

SalesForekast™ uses historical sales (or market cap) data to determine which macro-economic indicators correlate, and models that into the future. In this post, the details behind the model will show how it works.  

We uploaded the following data file: Demo Financial Data

The variables with highest correlations, up to six, are then narrowed down by an iterative process that ensure each variable is at least 95% significant (until all remaining variables have a p value below 0.05). If no variable has correlation of at least 85%, the software will report ‘no correlation’. (Note: the .85 number can be manipulated to meet the user’s specification)

SalesForekast™ macro-economic indicator analysis for the demo data provided in this post.

SalesForekast™ macro-economic indicator analysis for the demo data provided in this post.

The output of SalesForekast™ provides the regressions statistics for each successful regression.Once a regression is performed, the regression statistics are available as below:

SalesForekast™ regression analysis for the demo data provided in this post.

SalesForekast™ regression analysis for the demo data provided in this post.

In this case, the multiple R value was 90.1%. This is the probability of the actual sales lying within range indicated. The standard error was 0.345 - or about 4% of the quarterly sales.

However, to be clear, the goal of SalesForekast is not to absolutely predict the future.  The software’s primary benefit is to provide an alternative view of the future based on correlations with macro-economic indicators. Most companies do not look at this very critical variable.

SalesForekast™ projections for the demo data provided in this post.

SalesForekast™ projections for the demo data provided in this post.

If trends in GDP, the consumer price index, employment levels, construction spending or one of 25 other such variables impact sales, it is highly important to consider this in future projections.

Traditional bottoms up forecasts do not consider this variable. Rather, they focus only on sales trends and may adjust for new products and new customers.

Changes in the macro-economic environment do have an impact, as we have seen several times in the past. For example, large global companies have panels of dozens of economists to provide senior management insight for this same data.

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What does SalesForekast™ do for your company?

  1. It identifies which macroeconomic variables, if any, impact historical sales (or market cap or P/E for public companies). This is great insight on what is important for your business (or division, geography, customer, etc).

  2. It enables you to test sensitivities on macroeconomic variables. If consumer price index has a significant correlation, different levels of projected growth to see how big the impact might be ($X change in sales per one point change in the CPI).

  3. If none of the 30 variables in the mode have a statistically significant impact, you have access to the Federal Reserve Economic Database of over 500,000 data tables to see if any other variables correlate.

  4. The forecasts developed by this software should primarily be used to adjust bottoms up internal forecasts.

  5. The software allows you to tests forecasts for companies, divisions, or product lines. The more cohesive the business, the more likely that significant correlations exist.  

  6. It can be used to screen potential acquisitions as most major private equity firms and large strategic buyers use this methodology late in the process because it has traditionally been very expensive.

  7. Last, SalesForekast™ can help determine whether investment in a public company is warranted. This software gives you real insight that others will not have - and you can use your personal knowledge of likely future changes in say GDP or M1 funds to build your own portfolio (e.g. invest only in companies that are correlated to infrastructure spending or to household formation - both expected to increase).

Wal-Mart to Remain Competitive in Retail War against Amazon.Com | Industry Comparison

The following report looks at the projected sales forecasts for Amazon, Wal-Mart, and Target. These were created by SalesForekast™, the new forecasting that provides projections based on correlations with macroeconomic indicators.

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In the retail space, Wal-Mart and Target’s head-to-head battle has been well documented over the past several years. The two dominate the physical mass merchandise retail space and have reinvented the marketplace.  Amazon’s e-commerce success has forced brick and mortar firms to reconsider their strategies and both are focused on building their digital presence.

 

Here are a few interesting facts:

  1. 43% of all online retail sales in 2016 went through Amazon and the trend is continuing.  

  2. E-commerce growth in general, and Amazon specifically, has been credited with the decimation of Sears, over 6,000 store closures this year, and a staggering 60,000 announced retail job cuts.

  3. Mergers and acquisitions are being used to strengthen competitive positions. Amazon has announced the purchase of Whole Foods, while Wal-Mart is in the process of acquiring Bonobos, an e-commerce-driven apparel company headquartered in New York City that designs and sells men's clothing.

  4. Target, while lagging, announced in their last quarter earnings, an increase of 32% in online sales.

 

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SalesForekast™ analysis suggests that Wal-Mart and Amazon will remain in stiff competition. Both retailers are projected to grow; however Amazon’s growth will be significantly faster. Sales revenue for Target, on the other hand, does not correlate well with macroeconomic factors. This suggests a greater degree of uncertainty.  

Wal-Mart and Amazon both correlate well with GDP and personal expenditures. However, Amazon is also influenced by employment levels.  

Target, on the other hand, does not correlate with any macroeconomic indicators. This suggests that Target is affected by other market factors. These could include the intense competition it faces.

 

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For the specific retailers:

Amazon.Com

SalesForekast™ projects Amazon to grow at a rate slightly better than the best-fit line continuing their historical rapid growth trends. This is likely to depend on the company continuing to launch new and exciting products.

To read the full report on Amazon.com ($AMZN), click here.

Wal-Mart

Wal-Mart is likely to grow at a rate lower than the best-fit line indicating slower than historical growth expectations. The key will be Wal-Mart’s success at continuing to grow its e-commerce business.

To read the full report on Wal-Mart ($WMT), click here.

 

What does this mean for investors?

In summary, Amazon and Wal-Mart both appear to have sales growth, Amazon growth may accelerate, while Wal-Mart could be slower growth. Target, on the other hand, may be viewed as slightly more volatile, since it is competing with Wal-Mart’s physical stores and Amazon’s online presence. An interesting battleground will be the 2017 holiday season, which may provide a window to the future of retail and e-commerce.

 

About SalesForekast

SalesForekast™ correlates historical sales or market capitalization data with over 30 selected macroeconomic indicators to project data for future quarters based on the forecasts for the macroeconomic indicators that drive the company’s sales or market cap.

 

Steadier Growth Projected by SalesForekast™ for Low-Cost Airlines | Industry Comparison

The following report looks at the projected sales forecast for low-cost airlines verses the national carriers. Projections for Southwest & Spirit Airlines, as well as Delta & American Airlines were created by SalesForekast™

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This is a highly competitive market where the advent of low-cost airlines expanded the penetration of air travel.

Globally, the passenger miles have been growing at 5.5% over the last 10 years (3% in North America).

The market demographics have been changing slowly with two segments driving low cost airline growth: millennials and a new target group specifically looking for low frills tickets. 

Further, start-up style air carriers are able to compete against national firms by challenging the old pricing strategies. Low cost carriers sell no-frill tickets on shorter routes in order to gain market share. Younger consumers are drawn to the low price knowing that their ticket may include no more than just the seat.

SalesForekast™ analysis suggests that major airlines will have greater revenue uncertainty as the range of high, low, and best-fit scenarios are spread much wider. In contrast, low-cost airlines project a much more steady and optimistic growth scenario. 

A comparison of macro-economic indicators, between national carriers and low-cost airlines, reveals a significant difference regarding the economy's primary effects on future company growth.

National carriers tend to be affected more by employment indicators, specifically manufacturing employment trends.

The low-cost airlines, in contrast, tend to be more influenced by GDP (Gross Domestic Product) and personal consumption.

This reflects the use of national carriers by business travelers, where convenience is more valuable. Parts of the industry are shifting to further accommodate younger generations, and older strategies used by national carrier must be reevaluated. 

For the specific airlines:

DELTA AIRLINES

Delta sales are projected to decline when correlated against the current forecast for macroeconomic trends. 

To read the full report on Delta airlines, click here.

United Airlines

SalesForekast™ is unable to graph United Airlines due to no macroeconomic correlations. This suggests that other factors have a greater influence on the firm's revenue, such as competition.

SOUTHWEST AIRLINES

Southwest Airlines, based on projections from SalesForekast™, will see an increase in sales revenue compared to their historical data.  The projections suggest that job growth, including governmental employment, will likely determine future sales. 

To read the full report on Southwest Airlines, click here.

SPIRIT AIRLINES

Spirit Airlines is likely to experience revenue growth based on future projections from SalesForekast. After correlation with macroeconomic indicators, Spirit is projected to perform better than their historical data suggests by the best-fit line. 

To read the full report on Spirit Airlines, click here.

What does this mean for investors? 

Although it is impossible to know the future, SalesForekast™ projections suggest that low-cost airlines will perform better from a top line growth perspective than the larger national carriers over the next 3 years. Growth from budget airlines has challenged these national carriers to adopt new strategies to remain relevant. Both national airlines and budget carriers are affected slightly different from macroeconomic indicators implying the previously mentioned shift in industry demands. It remains to be seen whether these projected trends will come to fruition, but SalesForekast™ offers a potential glimpse into future based on previous trends.

 

About SalesForekast 

SalesForekast™ correlates historical sales or market capitalization data with over 30 selected macroeconomic indicators to project data for future quarters based on the forecasts for the macroeconomic indicators that drive the company’s sales or market cap.

Guilford Group Releases Software that Shows How The Market Impacts Your Sales

INDIANAPOLIS — Guilford Group, an Indianapolis-based software company, announced the launch of its new software, SalesForekast™. For the first time, companies can utilize a fresh new set of online analytical tools to support a forecasting process that has historically been expensive and cumbersome.

SalesForekast™ distinguishes itself from the competition by allowing companies to simply and affordably correlate their sales to macroeconomic indicators. Therefore, companies can gain an additional perspective on future sales based on trends that the economy is following.

Using SalesForekast™, private companies gain a competitive edge by understanding how their performance can be affected by broad economic and market trends.

Similarly, private equity investors can confirm prior to investing whether market trends will provide a tailwind or headwind in the near future. This allows investors to screen opportunities efficiently while reducing the risk of poor investments.

SalesForekast™ can be used effectively to look at forecasts for sales and market capitalization for public companies or their divisions. It reduces the time and expense typically required to perform market analysis and trend correlation at this level.

SalesForekast™ also enables access to Fortune 100 level forecasting for small and mid-sized companies with large customer bases.

“The sales forecasting and economic correlation tools available through this software gave me another view as compared to the internal ‘bottom up’ forecast. This equipped me with the information I needed to convince my board of the growth potential of the company.“ - Bill Midgette

“I have used this approach with a number of companies that I have invested in and found that there was an opportunity to provide a software package that would be helpful to companies and investors in order to improve their forecasting capabilities. The correlation with macroeconomic indicators provides another view of the world – at a very reasonable cost.” - Rahul Kapur

For a limited time, SalesForekast™ is offering a free 14-day trial that includes full access to their software.

For more information on SalesForekast™, watch the video overview or visit www.salesforekast.com.

About Guilford Group

Guilford Group is a multi-discipline information technology consulting firm based in Carmel, Indiana. We specialize in IT project management; enterprise application development with particular focus on mobile development, web applications and data analytics; IT staffing; system integrations; as well as maintenance, support and upgrading IT systems. Guilford Group has a reputation in the community for our integrity, accountability, personalized attention and commitment to excellence. Our forward-thinking and client-focused service sets Guilford Group apart from other IT Consulting firms. We can be highly competitive by leveraging our dedicated outsourcing capabilities.