CEO explanations v excuses: A Jim Cramer guide

(Click for video linked to a searchable transcript of this Mad Money segment)

Shareholders deserve detailed explanations for underperformance, but how can you tell a reasonable explanation from an elaborate excuse?

"This is a problem that comes up a lot during earnings season" Jim Cramer noted.

If a company misses numbers, Cramer says it's critical to follow their explanations closely. Then, Cramer advocates doing a little research of your own to either confirm or deny what was said.

"That's how you tell whether their alibi is legitimate, questionable or silly," Cramer explained. And what you find, may inform whether you buy, hold or sell shares of their company.

"To show you how I do this, following are the explanations offered by four retail CEOs who delivered some pretty sad results just last week. I rate the commentary from one to ten, with ten being the most believable, and one being, the least believable. I call it the Mad Money credibility scale."

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The Container Store

On Tuesday, when The Container Store reported disappointing results, CEO Kip Tindell explained weakness was due to a broad "retail funk," or malaise among consumers. However, if you also follow other higher end retailers, Cramer said it was quickly obvious that the "retail funk" was an excuse.

Had you listened to other earnings calls, you'd know that "Williams-Sonoma and Restoration Hardware didn't say anything about a funk. In fact, they both blew away the numbers and expressed optimism about the state of the consumer."

Instead, Cramer believes a much more reasonable conclusion is that leadership at The Container Store isn't executing well. "I give this explanation a three, meaning maybe the CEO believes what he's saying, but I certainly don't. Retail funk? More like a Container Store funk."

Tractor Supply

Cramer said when Tractor Supply preannounced CEO Greg Sandfort also blamed the weather saying conditions in the spring we challenging.

However, Cramer added that if you look at the trajectory of the results, you'll notice that as the quarter progressed and the weather improved, so too did Tractor Supply's business.

"I'll be honest, not only do I believe Tractor Supply's explanation, but I'm impressed with their analysis. We had a late spring, and when many of your customers are farmers, that matters," Cramer said. "I give Mr. Sandfort an 8 on the credibility scale, meaning very credible."

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*It should be noted that although the commentary is an explanation and not an excuse, making declines a potential buy, in this case, Cramer doesn't recommend Tractor Supply at current levels.

Lumber Liquidators

Last Wednesday, Lumber Liquidators issued a negative preannouncement, slashing earnings forecasts and warning of a 7 percent decline in same store sales for the current quarter.

Commentary from CEO Robert Lynch suggested that winter weather impacted orders earlier in the year, and that once a customer cancels an order, the customer tends not to reschedule it promptly. And he added the weakness could endure into 2015.

"I don't buy it. You can blame the weather for the first quarter's weakness, but there's simply no excuse for May and June to be as weak as they were. And when a CEO says traffic will be weak until next spring, you've really got to wonder what's going on under the hood. The idea that one bad winter could ruin Lumber Liquidators' entire year is downright laughable. I don't feel comfortable with Lynch's explanation, and investors shouldn't either. I give it a 2 on the credibility scale."

Family Dollar

Last week Family Dollar cut its full year earnings forecast for the third time with CEO Howard Levine explaining core low-income customers continue to struggle with unemployment, cuts to government benefits and volatile energy prices.

"I have to say, Family Dollar's explanation is downright silly. The two other publicly traded dollar store chains, Dollar Tree and Dollar General were both very bullish, talking about how business keeps improving now that the weather isn't so horrible. If Family Dollar's explanation rang true, rivals would be suffering too. I give this a 1 on the credibility scale."

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