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United, Pepsi Outcry Unlikely to Hurt Financial Results

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04/15/2017 | 10:14am CEST
By Tatyana Shumsky 

A social media kerfuffle can bruise a company's reputation, but these incidents rarely leave a red mark on the bottom line.

Video of a passenger being dragged off a United Airlines flight is fanning the latest outrage on social media. Earlier this month, PepsiCo Inc. pulled an advertisement that was panned as culturally insensitive. Starbucks Corp. faced a backlash in January when it said it would hire 10,000 refugees globally.

These incidents often grab consumer attention, but such controversies rarely translate into a material impact on sales or earnings in the absence of serious product issues. When money is paid -- as in the case of United Continental Holdings Inc. refunding the ticket costs to all customers on the 70-seat flight -- the effect is barely a rounding error on the quarterly results.

"There's no way that [refunding] one flight would be material to United's total financial condition," said Trent Gazzaway, national managing partner of professional standards at accounting firm Grant Thornton.

There is also scarce executive disclosure of these events in financial filings because they are not considered material, or likely to change a reasonable shareholder's investment decision.

A review of filings by companies including United Continental, Pepsi and Starbucks showed they so far haven't disclosed the social media incidents to the Securities and Exchange Commission.

"Social media interest by itself may not be material enough to warrant a disclosure in the financial statements," said Olga Usvyatsky, vice president of research and CPA at Audit Analytics, an audit, regulatory and disclosure research firm.

Companies typically make such disclosures, like flagging the effect of a severe storm or a cyberbreach of corporate computer systems, in quarterly reports or a so-called Form 8-K, used to notify investors of a current event that could be material to the company or affect the stock price.

A social media uproar should prompt executives to assess the potential for a material impact from a corporate-disclosure perspective. "This is a massive area of judgment for CFOs," Mr. Gazzaway said.

When determining materiality, executives weigh quantitative factors, like whether income or sales are likely to fall below a company-determined threshold, as well as qualitative factors, which are less clearly defined.

A United Airlines spokeswoman declined to comment on questions about the materiality of the incident. The company is due to report its first-quarter earnings on Monday after markets close. In January, it posted fourth-quarter earnings of $397 million on revenue of $9.05 billion.

United Continental stock fell last Monday, the day the video came out, though analysts attributed the move to mixed operational data released that morning. The stock ended the week down 2.6%, and the Dow Jones U.S. airlines index fell 0.9%.

"Historically, incidents like this are one-off in nature and rarely pose lasting or significant financial headwinds for major transportation companies," analysts at Citigroup said in a note to clients.

Still, consumer-facing companies, which are particularly vulnerable to social controversies, should outline such risks and response strategies in financial filings, said Nell Minow, vice chair of corporate governance consulting firm ValueEdge Advisors.

"They need to let their investors know that they're prepared to deal with it promptly and effectively to prevent a material deterioration of the stock price," Ms. Minow said. "It's very much like cyberattacks -- it's a relatively recent phenomenon that every company has to be prepared to deal with."

PepsiCo likely paid as much as $30 million in talent and production costs of the ad it scrapped in response to the social media outcry, said Gene Grabowski, a crisis management specialist at communications firm kglobal.

"For Pepsi, in this situation, there might be some short-term impact, but long-term, it's doubtful," Mr. Grabowski said, adding that the company has built up strong consumer loyalty over its history. "Pepsi is an old brand, and a lot of consumers may not care about this."

Starbucks in January sparked social media calls for a boycott after Chairman and Chief Executive Howard Schultz said the coffee-store chain would hire 10,000 refugees globally. Some customers criticized the announcement on Twitter, with the hashtag #BoycottStarbucks trending on the social-media network for several days.

Mr. Schultz addressed the issue at the company's annual shareholder meeting in March.

"I can unequivocally tell you, and we all know this from the research we've done, that there is zero, absolutely no evidence whatsoever that there is any dilution in the integrity of the Starbucks brand, reputation or our core business as a result of being compassionate," Mr. Schultz said.

Write to Tatyana Shumsky at [email protected]

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