Look no further than Target (NYSE: TGT), whose topline growth has completely stalled. Not that long ago, the retailer was anticipating up to a 2% increase in comparable same-store sales for the fiscal year. But the final number just came in at an anemic 0.1%. In dollar terms, that's a couple billion less than expected.
And with store traffic down for ten straight weeks now, comps are expected to flatline in 2025. Chief Financial Officer Jim Lee said the tepid outlook reflects "a wide range of potential scenarios and uncertainty". In fact, the company has so little confidence in its short-term forecasting ability that it just suspended quarterly sales guidance.
That's tantamount to saying we can't even give you a rough idea how much shoppers will spend over the next three months. No wonder the stock has slumped to a multi-year low.
At times like this, I gravitate to business that have future sales already in the bag. By that, I mean they have already locked up hefty purchase commitments, but the transactions just haven't been counted yet.
These companies don't really start the next fiscal quarter at zero. They know in advance that a certain number of widgets are already in the sold column. Any new sales will only add to the total. How? Because there are previous orders still in the queue. They have simply been too busy to manufacture and ship the items.
In other words, the company is sitting on a stack of confirmed purchase orders and only needs to deliver the merchandise for the sales to be recognized on the income statement. Converting these orders into revenue is often just a matter of weeks or months.
Yes, I'm referring to backlog.
Boeing (NYSE: BA) currently has a backlog of 5,500 commercial and military jets worth $521 billion. This isn't some kind of projection or guidance figure. I'm talking about signed-and-sealed orders that have already been placed by China Airlines, British Airways and dozens of other customers.
These are contractual orders, so the guesswork has been taken out of the equation. It's just a matter of manufacturing the planes and shipping them out the door — or hangar, as the case may be.
Boeing still hasn't fully recovered from recent missteps. Still, it's reassuring to know that without a single new call from customers, the company has half a trillion in sales in the pipeline.
"Backlog" is defined as sales orders that have been received, but not yet fulfilled. Call it a head-start on the next quarter or next year. This unfinished work builds up when companies consistently have more demand than they can handle (not a bad problem to have) and must put some of it on the back-burner for later.
Here's how I like to explain this situation…
Picture a football team scoring 49 points in a game. Then let's imagine that the scoreboard operator couldn't keep up and credited the team with only 35 points at the final whistle — so the remaining 14 points were carried over to the start of the next game.
Now, this team's high-powered offense will probably score again and again over the next four quarters and add to the total. But even if the offense goes cold and gets shut out in the next game, it still has at least two touchdowns on the board, quite possibly enough to carry it to victory.
Backlog is highly visible, predictable, and quantifiable. Since the transactions have already occurred, projecting future revenues is a bit like forecasting yesterday's weather.
Take Beazer Homes (NYSE: BZH), a mid-sized builder with an active presence in a dozen states from California to North Carolina. The company delivered more than 900 new homes to customers last quarter at an average price of $508,000, generating revenues of $460 million.
Meanwhile, it received orders for 932 more. The backlog now stands at 1,507 units. This figure would gradually be whittled down if not replaced by fresh incoming orders. But at the very least, even if demand dries up, we know that Beazer has enough work to keep it busy for five months, a "rainy day" fund worth $816 million.
Now, that doesn't mean these companies are completely immune to recession. They aren't bulletproof. During a slowdown, they will see a slump in new orders just like anyone else. But here's the difference — they at least have a pipeline of existing product orders that will continue to feed revenues and earnings for a while until activity picks back up.
That helps explain why backlog-heavy companies such as IBM (NYSE: IBM) and defense contractor General Dynamics (NYSE: GD) have not only maintained dividends during lean times, but increased them – both hiked payouts even during the harsh 2008/2009 recession as well as the pandemic.
While guaranteed revenues can be a luxury during shaky economic conditions, it's arguably even more important to monitor changes in backlog levels to gauge underlying demand trends. That's what initially drew me to Okta (NSDQ: OKTA).
The cybersecurity vendor employs the term "remaining performance obligations" in lieu of backlog. But whatever you call it, the dollar value has swelled by 25% over the past year to reach $4.2 billion. About half of that will be recognized over the next 12 months – a sizeable head start.
Keep in mind, this follows what was already a record-shattering free cash flow haul of $284 million last year.
Even more encouraging is the swifter growth in large-scale enterprise customers (those generating $100,000+ in annual revenues. Okta has been landing them left and right and now has nearly 5,000 of these big fish on the client roster.
These corporate clients feed a steady stream of high-margin (80%+) subscription-based revenues. Recent bookings aside, Okta has only scratched the surface of its addressable market. As data breaches and other digital attacks become a constant (and increasingly sophisticated) global threat, organizations must rely on trusted partners with proven solutions.
And 19,000+ have turned to Okta to help validate the identity of employees and customers to protect their networks.
Pressing pause on the benefit fear train
Elon Musk and the Trump administration are shaking things up inside the D.C. beltway… and it's threatening to impact popular entitlement programs like Social Security.
Whether that turns out to be true, or just another bit of "fake news," you owe it to yourself to check out a little-known loophole my colleague Jim Pearce has discovered.
It allowed a small handful of regular Americans to collect over $109 million last year. You can join them by getting the full story here.
