As Wall Street takes a magnifying glass to companies' books, it's starting to see some one-time charges in a different light. Companies have a good deal of latitude in determining which expenses qualify as operating costs and which don't, a question that's important because it affects reported earnings. In normal times, analysts and investors tend to give executives the benefit of the doubt on these matters. But these times are anything but normal, what with the Enron scandal echoing through the halls of Congress and various other companies facing SEC inquiries of varying degrees of severity. Now, as giant discounter Wal-Mart ( WMT) prepares to kick off retail earnings season, analysts and investors are increasingly scrutinizing one-time charges. And as the decline in shares of companies like Tyco shows, when Wall Street decides it doesn't like a company's bookkeeping -- whether the accounting's proper or not -- there's often hell to pay.
"I think that clearly falls on the other side" of what is normally considered a proper charge, says one hedge fund manager who is short Ann Taylor stock. "Retailers always overorder or underorder. To say that a routine act of doing business is a charge is absurd." Indeed, in the wake of the Sept. 11 terrorist attacks many retailers found themselves trying to cancel orders for holiday merchandise, this person says. Yet he can think of no other retailer that took charges for those costs. Ann Taylor representatives didn't return a call seeking comment. Of course, a single item that raises questions wouldn't in itself be cause for concern, investors say. But observers note that Ann Taylor issued earnings warnings in each of the four quarters of 2001; the company's results in some cases diverged wildly from what Wall Street was expecting. That kind of track record can cause people to question whether the expenses covered in the latest period's charge were legitimately nonoperating. Moreover, retail investors note that the best-managed companies, the leaders in the industry such as Wal-Mart and Home Depot ( HD), rarely, if ever, announce one-time charges. Charges complicate the business of gauging earnings quality: companies normally tout their earnings figure prior to the charges, and that can make it difficult to compare one year's financials to another. "I think that's always a concern," says Brian Postol, who covers retail companies for A.G. Edwards. "It's something in this environment that's not well received."