Retailer Bankruptcies Shine A Light on Gift Cards And 'Breakage Income'

Retail Bankruptcies Shine A Light On Gift Cards

Gift cards may be the gift that keeps on giving — not just for the recipients, but also for the companies that issue them.

Consider the enduring popularity of these plastic offerings (and their virtual counterparts). If you get one as a gift, it gives you the flexibility to choose what you want to buy — and when — at, say, Target, Walmart or Starbucks.

But then again, we’re pretty apt to forget to use these gift cards at all. A recent survey of 2,600 consumers found that roughly half of all Americans own at least one unredeemed gift card. The average unused amount on the card or cards tops $167. That extrapolates to billions of dollars in unclaimed funds for Americans as a whole.

The mechanics and financial impact of gift cards for the firms that issue them boil down to what’s called “accrual accounting.” Under that accounting method, the $25 that you spend buying Aunt Ginny a Starbucks card isn’t actually counted as revenue by the coffee giant until the card is actually redeemed.

Since there’s often a five-year lag time between when cards are bought and when they expire (at least in states that don’t ban expiration altogether), companies must log the balances as liabilities. Those can be significant and eventually make some top-line impact. For example, Walmart logged $1.9 billion in unused card liabilities last year.

That’s known as “breakage income,” which is tied to estimates by various companies of the gift-card money that customers will never redeem. Starbucks said in its latest 10-K filing that in 2019, its breakage income totaled $119 million.

Now, accounting is accounting, and that doesn’t actually mean breakage income will translate into cash flow. That’s because companies receive cash when someone actually buys a gift card. In essence, a company collects money before giving over a product or service to the gift card’s recipient.

It’s worth noting that during the pandemic, scores of businesses offered up gift cards as a way to keep their businesses afloat. For those firms that didn’t make it, the cards are now most likely worthless.

And for other gift card recipients, the clock is ticking. Consider people who, as per The Wall Street Journal, hold $59 million* in unredeemed gift cards from Pier 1 Imports, which is in the process of liquidating.

As reported in this space earlier, the retail-induced bankruptcies of J. Crew, JCPenney and others have tens of millions of dollars in gift card balances/liabilities outstanding as well. However, it should be noted that those retailers are not liquidating (at least not yet), and are in a position to continue accepting gift cards. JCPenney reported $182 million in such balances, according to bankruptcy filings, while J. Crew said it had $37 million in such balances.

To be sure, these firms would rather stay in business (or at least out of a Chapter 11 reorganization), and no doubt would prefer the foot and site traffic tied to gift card use. After all, the use of gift cards could spur ancillary purchases, which in turn would continue to boost these troubled retailers’ revenues.

On the other hand, a gift card left forgotten in a drawer might, in a few years’ time, become nothing more than a cash windfall to the retailer.

(*Editor's note: An earlier version of this article incorrectly stated that Pier 1 had $59 billion of unredeemed gift cards instead of the correct $59 million.)



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