Even nowadays, one-time charges aren't always bad, apparently.
jumped 8% after a Merrill Lynch analyst upgraded the stock to strong buy Wednesday morning, saying it was cheap after two days of sharp selloffs.
Circuit City shares lost more than a quarter of their value Friday and Tuesday as investors worried about rising remodeling costs. But analyst Peter Caruso's note Wednesday morning predicted Circuit City would account for the remodeling costs as a one-time charge, thereby preserving operating earnings. The report comes amid heightened scrutiny on Wall Street of the quality of companies' profits, particularly regarding the varying definitions of so-called operating earnings.
"Investors price and value retail stocks based on what is happening to operating earnings and we think will exclude the cost of a major remodeling campaign if and when it comes," Caruso wrote. (Merrill Lynch has had an investment banking relationship with Circuit City in the past.)
Circuit City declined to comment on the report, the remodelings or how it might account for any remodeling costs. Caruso hadn't returned a call seeking comment as of Wednesday afternoon.
To be sure, there is nothing improper about accounting for remodelings as an extraordinary charge. Indeed, most analysts expect remodeling costs to be segregated from operating earnings, which investors watch for signs of a company's progress in its core businesses.
But as investors continue to scrutinize the accounting practices of public companies in the wake of the Enron scandal, Wall Street's shrugging off a big charge is far from a sure thing. In recent weeks, charges taken by retailers including
Linens 'n Things
under scrutiny from some analysts.
Circuit City shares rose $1.68 to $23.79 Wednesday afternoon. The electronics retailer's shares had
dropped 10% Friday and 16% Tuesday amid worries about the remodeling project; in a report published Tuesday, Gerard Klauer Mattison analyst Scott Ciccarelli warned that those costs could double his previous estimate of $700,000 to $800,000 per store. When Circuit City exited the appliance business in 2000, it announced a three-year plan to remodel all its stores.
The Richmond, Va.-based company didn't take a one-time charge when it shut its appliance business two years ago, although it did say in a press release at the time what earnings would have been had certain costs been excluded.
In a sign of the heightened anxiety surrounding accounting questions, investment bank Credit Suisse First Boston recently issued its first quarterly report on retailers and accounting issues. "Clearly, accounting issues have become major investment issues recently," the report says. One area in which problems can potentially arise are "charges ... to distort near-term results leading to a major growth surprise for investors when that artificially induced growth reverses," the report states.