StreetAccount Summary – U.S. market recap: Dow +0.19%, S&P 500 +0.24%, Nasdaq +0.57%, Russell 2000 +0.68%
Online mortgages and the weekly roundup in tech and retail by Leah Grace
Apple Watch and the continuing cult of Mac/iOS by Leah Grace
Barry Ritholtz’ Masters in Business Bloomberg radio show with Charley Ellis, Chair of Yale Endowment, and author of Winning the Loser’s Game: Timeless Strategies for Successful Investing.
The Complete Bull Vs. Bear Debate on Whether Biotech Is in a Bubble
Not really my definition of “complete†but interesting.
Period of adjustments – Watch out for the growing list of ‘exceptional’ items in company results
(…) By their nature, these issues will rarely be black or white and with restructuring – a particular favourite with the adjusters – the greyness relates to how much something is truly an exceptional item rather than a continual cost of doing business. Some costs associated with closing a business, say, could well be a true one-off but, if a business needs to ‘restructure’ every year to keep up with the latest trends, it probably is not.
Speaking of trends, something we are seeing more and more in the retail sector is businesses looking to make an adjustment for the cost of refitting stores and then flagging that as ‘exceptional’. Again, it can be a matter of degree but surely one must at least ask the question as to how much keeping your stores looking nice so customers actually want to visit actually counts as an exceptional, and how much it is just a basic cost of retailing.
Another adjustment classic relates to acquisition costs. If a company is regularly buying other businesses, should the legal, investment banking and other costs being incurred every year in relation to that really count as exceptional? That is before we start to consider whether the reason a company is having to make regular acquisitions is to compensate for underinvestment in R&D or marketing.
In a similar vein, the same question may be asked about costs incurred by companies that regularly have to defend themselves against legal actions. For a number of multi-nationals – banks, pharmaceuticals and tobacco companies would be obvious examples – fighting lawsuits, dealing with regulators and so forth is not so much exceptional as a cost of staying in business. You might take a different view on the explicit large fines such companies can face but even negotiating their size is arguably part of the decisions those businesses make every day.
Then, since we mention the pharmaceutical sector, there are research and development costs – and indeed explorations costs for, say, oil and mining businesses. It is a well-established accounting practice that, if these costs are expected to have a high probability of leading to revenues or similar in the future, they can be capitalised as an asset on a company’s balance sheet rather than charged against profits on day one.
This is open to a fair amount of management discretion as it is, but the real distortion comes if it later transpires these costs will not yield any benefit, which results in the asset having to be written off. These write-offs tend to be treated by companies as exceptional items yet, if you are an oil producer or a pharmaceutical company, say, respectively digging for oil and investing in research and ending up with nothing to show for it is not so much exceptional as a fact of business life. In this way the inevitable costs of failed endeavours all businesses have can be hidden both as they are being incurred and when they are written off.
There are other examples of these rather unexceptional exceptionals – stripping out the costs of running a company pension scheme, stripping out the costs of giving employees shares as part of their remuneration package and so on – but you get the idea. The bottom line, if you will excuse the pun, is there is a growing list of reasons for investors to be wary of how companies are stating their profits.
In order to build up a real sense of what a company’s profits and cash generation actually are – and that, after all, is how you appraise the value of a potential investment – investors need to roll up their sleeves, dig into the numbers and come to their own view on whether certain costs really are as exceptional as some companies would appear to believe. Blindly accepting a company’s view of what its real profits are is an increasingly perilous thing to do.
I am not a big fan of these “read me-hear me-see me†apps (really no time for much of that!) but they are fascinating nonetheless. Here’s the latest one:
1 thought on “BEARNOBULL’S WEEKENDER”
Regarding the retail store extraordinary items in earnings reports, it should be noted that for almost two decades, whenever Walmart relocated from an older, conventional Walmart store into a newer format Supercenter, the sales at the new location were still counted as “same store sales” for corporate accounting purposes.
Even though these new stores were in a completely new location apart from the old one they replaced, Walmart still counted these new locations as same store sales for reporting purposes.
It is pretty easy to double your sales by adding groceries and doubling your store size in a new location. If same store sales were a metric investors used to gauge the Walmart miracle, it would have been quite difficult to perform a proper analysis. In the end, it is likely top and bottom line growth were the numbers that investors were most concerned with, but it is disconcerting that the same store numbers may have been made intentionally opaque.
I don’t know if I’ve ever seen this mentioned in any mainstream press. These days, Walmart is more prone to re-working older stores than relocating them to do the re-fits, so I do not believe it’s as common as it was in the late 1990’s and early 2000’s.
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