“What is your definition of the dollar?”
—Rep. Ron Paul to Federal Reserve
Chairman Ben Bernanke, March 2, 2011
Chairman Ben Bernanke, March 2, 2011
We have a simple question for the commissioner
of the SEC, and it’s a takeoff on the question famously asked of Ben Bernanke
by the take-no-prisoners crackpot otherwise known as Ron Paul.
of the SEC, and it’s a takeoff on the question famously asked of Ben Bernanke
by the take-no-prisoners crackpot otherwise known as Ron Paul.
Our question for Mary Jo White is this: “What
is your definition of Earnings?”
is your definition of Earnings?”
We ask it on the heels of the recent Target
Corporation quarterly earnings call, in which the company led each discussion of
so-called “earnings” with the phrase “Adjusted EPS” rather than GAAP EPS.
Corporation quarterly earnings call, in which the company led each discussion of
so-called “earnings” with the phrase “Adjusted EPS” rather than GAAP EPS.
Here’s how they started their script:
Target’s second-quarter financial results
reflect strong US profit performance in spite of soft traffic and sales…. As a
result, we delivered second-quarter adjusted EPS of $1.19, at the high end of
our expectation going into the quarter. Our GAAP EPS of $0.95 was in the middle
of our expected range, reflecting higher than expected dilution of $0.21 from
our Canadian segment. As we monitor the economy and consumer sentiment, we
continue to see a mix of signals in which emerging optimism is balanced with
continuing challenges.
reflect strong US profit performance in spite of soft traffic and sales…. As a
result, we delivered second-quarter adjusted EPS of $1.19, at the high end of
our expectation going into the quarter. Our GAAP EPS of $0.95 was in the middle
of our expected range, reflecting higher than expected dilution of $0.21 from
our Canadian segment. As we monitor the economy and consumer sentiment, we
continue to see a mix of signals in which emerging optimism is balanced with
continuing challenges.
And here’s
how they concluded before taking questions:
how they concluded before taking questions:
For
the full year, we’ve become incrementally more cautious in our US sales
outlook, given our own recent results and those of our competitors. … Even with
our more tempered sales expectation we believe full-year adjusted EPS will
remain in the $4.70 to $4.90 range we provided previously, although our
expectation has moved to the low end of that range. We expect full-year GAAP
EPS will be approximately $0.95 lower than adjusted EPS reflecting $0.82 of
dilution from the Canadian segment combined with a net $0.13 of dilution from
the credit card portfolio sale and associated debt repurchase.
the full year, we’ve become incrementally more cautious in our US sales
outlook, given our own recent results and those of our competitors. … Even with
our more tempered sales expectation we believe full-year adjusted EPS will
remain in the $4.70 to $4.90 range we provided previously, although our
expectation has moved to the low end of that range. We expect full-year GAAP
EPS will be approximately $0.95 lower than adjusted EPS reflecting $0.82 of
dilution from the Canadian segment combined with a net $0.13 of dilution from
the credit card portfolio sale and associated debt repurchase.
By way of background, Target recently entered
the Canadian market after buying a bunch of store leases from Hudson’s Bay two
years ago. The newly opened Canadian Target
stores are losing money at the moment.
Quite a bit of money—something like half a billion dollars in their first year.
the Canadian market after buying a bunch of store leases from Hudson’s Bay two
years ago. The newly opened Canadian Target
stores are losing money at the moment.
Quite a bit of money—something like half a billion dollars in their first year.
Target management, not wanting to spook the easily-spookable analyst community on Wall Street, simply subtracts
those losses, along with some other stuff, from its GAAP EPS (readers may
recall that “GAAP” accounting means, to be clear, earnings in accordance with
Generally Accepted Accounting Principles) to create something it calls “Adjusted
EPS.”
those losses, along with some other stuff, from its GAAP EPS (readers may
recall that “GAAP” accounting means, to be clear, earnings in accordance with
Generally Accepted Accounting Principles) to create something it calls “Adjusted
EPS.”
And Wall Street’s Finest dutifully report what Target gives them.
In fact, in my inbox following the call were
half a dozen Wall Street analyst reports using the “Adjusted EPS” figures in
their earnings—and Price/Earnings—tables.
half a dozen Wall Street analyst reports using the “Adjusted EPS” figures in
their earnings—and Price/Earnings—tables.
Not the GAAP EPS figures.
Readers will recall that it was the
bastardization of GAAP earnings into non-GAAP, made-up, adjusted earnings that fooled
Hewlett-Packard’s investors into thinking the company was doing better than it
was doing for so many years.
bastardization of GAAP earnings into non-GAAP, made-up, adjusted earnings that fooled
Hewlett-Packard’s investors into thinking the company was doing better than it
was doing for so many years.
In its defense, of course, Target will argue
that investors want to see the “underlying” earnings from the company’s core
business, and that certainly has an appealing sense of logic to it.
that investors want to see the “underlying” earnings from the company’s core
business, and that certainly has an appealing sense of logic to it.
However, the company’s investment in Canada is
not a one-off. It is not a science
experiment. It is not, yet, a
“discontinued operation.”
not a one-off. It is not a science
experiment. It is not, yet, a
“discontinued operation.”
It is, in fact, part of the company’s core
business.
business.
Indeed, hundreds of public companies across America right now are investing in things that may or may not pay off, yet they do not exclude the expense of those things in “Adjusted earnings.”
Worse, Target includes expected earnings from Canada in the out-years of their
financial forecasts, as they bragged on their call:
financial forecasts, as they bragged on their call:
We’re still very confident in our Canadian
strategy, stores and team and continue to believe the segment will generate
$0.80 or more of EPS in 2017.
strategy, stores and team and continue to believe the segment will generate
$0.80 or more of EPS in 2017.
So, as with Hewlett-Packard—which
routinely excluded the bad stuff from acquisitions (goodwill amortization and restructuring
costs) in its “Adjusted” earnings while including the good stuff (sales, gross
profit and operating income, such as it was) from acquisitions— we have a retailer that
wants Wall Street to exclude the bad stuff (upfront costs of entering Canada)
and include the good stuff (future earnings from Canada).
routinely excluded the bad stuff from acquisitions (goodwill amortization and restructuring
costs) in its “Adjusted” earnings while including the good stuff (sales, gross
profit and operating income, such as it was) from acquisitions— we have a retailer that
wants Wall Street to exclude the bad stuff (upfront costs of entering Canada)
and include the good stuff (future earnings from Canada).
That sort of freeform, highly elastic notion
of “Adjusted Earnings” ended badly for HP and the Wall Street analysts who bought into it,
not to mention the poor shareholders who couldn’t fathom why HP’s stock kept
going down even though the “Adjusted” earnings looked so good.
of “Adjusted Earnings” ended badly for HP and the Wall Street analysts who bought into it,
not to mention the poor shareholders who couldn’t fathom why HP’s stock kept
going down even though the “Adjusted” earnings looked so good.
Now, we’re not suggesting Target is ever going to look like HP.
It’s just that your grey-haired editor can’t
help but recall when Target’s nemesis, Wal-Mart, opened its first stores in
Canada back in 1994, using the same technique of buying existing stores (in Wal-Mart’s
case they were old Woolco stores) and turning them into Wal-Marts.
help but recall when Target’s nemesis, Wal-Mart, opened its first stores in
Canada back in 1994, using the same technique of buying existing stores (in Wal-Mart’s
case they were old Woolco stores) and turning them into Wal-Marts.
And we recall that, unlike Target, Wal-Mart
did not reported “Adjusted EPS.”
did not reported “Adjusted EPS.”
But for those who weren’t around back then, here’s
a copy of Wal-Mart’s earnings report the first year after it entered Canada:
a copy of Wal-Mart’s earnings report the first year after it entered Canada:
If Wal-Mart could report earnings without “adjusting”
them, why can’t Target?
them, why can’t Target?
And, what, Madam Chairman, is your
definition of “Earnings”?
definition of “Earnings”?
Jeff Matthews
Author “Secrets in Plain
Sight: Business and Investing Secrets of Warren Buffett”
Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing,
2013) $4.99 Kindle Version at
Amazon.com
2013) $4.99 Kindle Version at
Amazon.com
©
2013 NotMakingThisUp, LLC
2013 NotMakingThisUp, LLC
The
content contained in this blog represents only 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. This
commentary in no way constitutes investment advice, and should never be relied
on in making an investment decision, ever.
Also, this blog is not a solicitation of business by Mr. Matthews: all
inquiries will be ignored. And if you
think Mr. Matthews is kidding about that, he is not. The content herein is intended solely for the
entertainment of the reader, and the author.
content contained in this blog represents only 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. This
commentary in no way constitutes investment advice, and should never be relied
on in making an investment decision, ever.
Also, this blog is not a solicitation of business by Mr. Matthews: all
inquiries will be ignored. And if you
think Mr. Matthews is kidding about that, he is not. The content herein is intended solely for the
entertainment of the reader, and the author.
