Investments

Retail Stocks’ Long Shadow

The phrase “creative accounting” usually comes in relation to SEC investigations and court sentences, but the fact of the matter is that corporate finances aren’t the cut-and-dry concept that consumers might think they are. Rather, some differing interpretations of the same numbers can lead to critical developments, like the ones currently playing out on the stock market.

Macy’s excess inventory problems have been front and center as the retailer has had to make some difficult decisions with store closures and personnel, but The Wall Street Journal explained that not all brands — and not even all department stores — calculate inventory costs in the same way. Two strategies prevail: the cost method and the retail method. Smaller brands, like Abercrombie & Fitch and Michael Kors, use the former, which doesn’t translate the losses from assigned discounts on excess inventory until the products are actually sold. This can push losses from inventory purchases in one quarter to the next. Bigger brands, like Macy’s, though, use the latter, which incorporates those losses as soon as discounts are applied and can result in bigger and more sudden hits to retailers’ bottom lines.

Macy’s inventory issues are somewhat compounded by other factors. The retail inventory accounting method certainly fed into higher losses, but WSJ noted that the retailer intentionally overstocked on winter weather merchandise in a gamble that temperatures would fall to their seasonal averages in time for holiday shopping. When this failed to occur, Macy’s was stuck with not only bulging inventories in stores across the country but also the immediate and long-term financial effects of how those excesses are calculated for investors.

“In light of our disappointing 2015 sales and earnings performance, we are making adjustments to become more efficient and productive in our operations,” Macy’s CEO Terry Lundgren said in a statement.

Just when those adjustments help the retailer climb out of the hole it finds itself in remains to be seen.

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