When Big Lots Inc. announced yesterday that it would restate earnings, the Ohio discount retailer joined a substantial -- and still growing -- club.
In the past month, such high-profile retailers as Starbucks Corp., Target Corp., Sears, Roebuck & Co., Abercrombie & Fitch Co. and Toys R Us Inc. have said they will restate profits because of problems with how the companies accounted for leases on their books.
The restatement announcements were in response to recent Securities and Exchange Commission guidance on how to account for lease payments. Experts said they expect more restatements as the earnings season continues. Tennessee-based discounter Dollar General Corp. and Massachusetts women's clothier J. Jill Group Inc., for example, told investors yesterday that they would take extra time to review their books with regulators' guidance in mind.
In a Feb. 7 letter, SEC Chief Accountant Donald T. Nicolaisen clarified accounting standards dating to the 1970s and 1980s that address how to record rental expenses over long lease terms and in periods when rent is reduced or free. The issue is significant for restaurants and retail businesses, which often lease storefront property rather than own it.
Accounting experts said the standards have been widely flouted or misinterpreted for years.
"The SEC is enforcing what was there before," said Jack T. Ciesielski, publisher of the Baltimore newsletter, the Analyst's Accounting Observer, and a related accounting blog. "There's nothing new. It's like mass delusion that these companies think they were doing it right."
The impact of the restatements so far has resulted in charges of a few pennies per share, rather than a more dramatic reduction in previously reported profits.
California supermarket chain Safeway Inc. yesterday said it would post a charge of $6.5 million, or less than 2 cents per share, in the fourth quarter to remedy lease accounting problems. Earlier this week, Wisconsin department store owner Kohl's Corp. pegged its earnings impact as high as 3 cents a share.
At issue in the current spate of retail restatements are companies that rent stores for specific time periods, but capitalize improvements they make to the property not only over the course of the lease but also for stretches that include anticipated renewals. Using this method, companies are able to decrease the costs of improving their properties by spreading them out over time.
Experts say that such accounting treatment makes little practical sense because companies are employing two different time frames for their own benefit. Officials at several firms that now are restating profits have explained the strategy by saying that they simply followed accounting policies that dozens of their rivals used.
Another issue causing problems for many companies is the concept of rent holidays, or stretches of time when they pay reduced or no rent to landlords. Some retail businesses structure their leases so they pay little rent during the early years of a lease and make bigger payments later on, a move that reduces expenses so long as they continue to open new stores. But accounting rules generally require that rent costs be recorded evenly over the lifespan of a lease, experts say.
