Did CVS Resort to Tricks to Boost Its Earnings?

CVS (CVS), the drugstore chain, hasn't reported fourth-quarter earnings yet, but when it does on Feb. 8, some analysts will be looking extra closely at whether the company just meets or exceeds its forecast of 43 cents per share. The difference is crucial, considering that CVS quietly added a week to its December monthly sales reporting period. Rather than covering five weeks, which has been the case in December in prior years, the monthly data were boosted to six weeks. (Likewise, the year was stretched to 53 weeks from 52 weeks.)

What's more, the sales period ended Jan. 1, a day after CVS' fiscal year usually ends.

It's almost always a red flag when companies expand their sales reporting period because it suggests they're pulling out all the stops to goose the quarter. This year it's especially curious because the last week of the year was unusually strong for pharmacies, as people stocked up on prescriptions over Y2K fears.

CVS, though, says that isn't the case. A spokesman explained that, like other retailers, CVS typically has five weeks in the December quarter and that the quarter ends on the Saturday closest to Dec. 31. As a result, he says, every five years the company picks up six weeks.

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However (and this is an important one, folks, so stay with me), a look back at disclosures by CVS, which has only been a standalone company since 1996, shows that the sales period ended on Dec. 27 in 1997 and Dec. 26 in 1998. However, in each of those years, the closest Saturday to Dec. 31 was in January, and according to the company's own SEC filings, its fiscal year officially ends Dec. 31. (Confused? So am I.)

Why did CVS extend the reporting period into January this year, when Saturday days in January were closer than Saturdays in December last year and the year before? (Based on the prior years' schedule, this year's cutoff should've been Dec. 25!) A spokesman didn't know and couldn't find any execs to answer the question. (If they do, I'll forward those responses along in an "Extra" today.)

The extra week clearly caught some analysts by surprise, but the company says it shouldn't have because "all of our guidance throughout the year included the extra week." Maybe it did, but the company apparently didn't tell analysts. Merrill Lynch analyst Mark Husson, for example, wrote in a report to clients that the extra week was "unexpected." He couldn't be reached, but at least one person who knows Husson said he didn't know the year's guidance included an extra week.

Ditto Eric Bosshard of Midwest Research in Cleveland. "The first we heard of it was the day the sales were reported."

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