December 14, 2005
Best Buy is managed by Weasels
The analysis from Jeff Matthews suns up the little revenue scam that may not go onforever
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.