Restating earnings because of lease accounting practices has become the fashionable thing for retailers to do these days. Companies like Toys "R" Us (NYSE:TOY), Panera Bread (NASDAQ:PNRA), Nordstrom (NYSE:JWN), and even Starbucks (NASDAQ:SBUX) tipped off their investors back in February that a clarification in how leasehold improvements should be accounted for would shuffle up previously filed income statements, and I figured that was only the tip of the iceberg.
I had advised investors not to become overly concerned about it, since this was a bean-counter huddle that ultimately had no impact on a company's cash flow -- the true measure of fiscal prowess. However, after seeing a few hundred restaurant chains and retailers announce over the past two months that they, too, would be following suit with the restatements, I've started to fear that some companies may be taking advantage of the situation to sweep some other demons under the rug.
Exhibit A? Let's try Gottschalks (NYSE:GOT) on for size. A little more than a month ago, the company reported unaudited fiscal 2004 results. At the time, the company advised its shareholders that it would be reviewing its accounting practices, with a likely restatement to follow. Fine. That's what the all of the hip retailers are wearing this season. Yet the company also went ahead to project that earnings for 2005 would come in between $0.62 and $0.67 a share on an expected 2% gain in same-store sales.
Last night, the company restated its numbers dating back to 2002. It also pointed to the new lease accounting practices having an impact in the current year, and it lowered its guidance accordingly. Gottschalks is now looking to earn between $0.59 and $0.64 a share in 2005.
You have little reason to doubt the retailer's intentions. Still, the cynic in me starts to wonder. Since the company's initial guidance during the first week of March, things haven't been going so well at the store level. Last week, the company reported that comps were off by 2.4% during March. That's quite off the 2% increase the company was banking on for the year as a whole.
Sure, a month does not a year make. The company could have very well been counting on negative comps early in the fiscal year being overcome by a robust holiday finish. That is more than likely the case. This wasn't simply an excuse to lower guidance under the false pretense of lease accounting adjustments. At least that's what I will assume until proven otherwise. But watch all of the retailers closely. They can't all excel in synchronized bean-counter swimming.
Some more related scenes from the shopping center:
- Learn more about why retailer earnings are being restated.
- The company's fiscal 2004 showing was a mixed bag.
- Gottschalks stock has come a long way since bottoming out last year.
Longtime Fool contributor Rick Munarriz doesn't fancy himself a conspiracy theorist. Then again, he thinks that the grassy knoll is always greener on the other side. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
