Earnings Breakage?

Gross profit dollars increased 16% to $1.8 billion, fueled by revenue growth and a 120-basis-point improvement in the gross profit rate. The improvement included a 30-basis-point benefit (or $0.04 per diluted share) related to the initial recognition of gift card breakage (gift cards sold but not expected to be redeemed). The gift card breakage was recognized in revenue [emphasis added].

Thus reads today’s earnings press release from Best Buy, which—surprise, surprise—matched the Street’s 28c a share earnings expectation to the penny.

Followers of the retail sector—and anybody who’s ever received a gift card themselves—know that a certain percentage of those cards are never redeemed. They get lost or forgotten—or they’re from stores you never get around to visiting.

But without this up-front inclusion of assumed income from credit card “breakage” it looks like Best Buy would not have been close to the $0.28 a share earnings expected by Wall Street’s Finest.

Sounds more like earnings breakage to me.

Jeff Matthews I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.