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February 17, 2009 8:25 PM

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Yearning for Earnings

Retailers finish their fiscal years at the end of January, after catching their breaths and attempting to trim their inventories and redeem gift cards once the holidays ended. That means that we're about to be swamped, and possibly hosed, by...

Retailers finish their fiscal years at the end of January, after catching their breaths and attempting to trim their inventories and redeem gift cards once the holidays ended.

That means that we're about to be swamped, and possibly hosed, by a tidal wave of earnings results. They're not going to be pretty, but neither will they be quite as ugly as they appear at first. Let's hope all these earnings guidance revisions have prepared us properly. But how can we get a firm grasp on what these numbers mean and overcome numerical sensory overload? We all know that business has been brutal and that the more immune a company was to financial pressures before the recession, the more it seems to be victimized by them now. (See "luxury.") So all but a handful of companies are going to be down for the fourth quarter and, because of the southerly drift of business conditions throughout the year, the declines (and frequently losses) in fourth-quarter results are going to be worse than those for the full year.

We've already been inundated by year-end same-store sales numbers and know that double-digit sales declines, once a rarity, are now the norm. So those figures are in many cases old and in most cases almost irrelevant. And there's no real victory in a company topping expectations that have been lowered to the spreadsheet equivalent of the basement.

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How is your company weathering the financial market?
Comment below.
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Forgetting about cash and debt for a moment -- but only a moment -- the key "metrics" (a great euphemism for "numbers") to look at could be gross and operating margins -- good indications of how well expenses were pulled back in comparison to sales. Arriving at the bottom line, you can subtract those pesky special items like impairment charges, but only long enough to get valid comparisons of where a company was a year ago versus where it is today. But if those special charges are indicative of a more widespread rot within, as they sometimes are, I won't be as quick to discount them, even if I do so mathematically.

The financial press, along with the rest of the population, has gotten some badly needed education in the past few months. Our definitions of success and trust have been shaken and we no longer attach the same importance to monthly sales or quarterly earnings that we once did.

Instead of focusing on the operating statement, we're moving lower, to the balance sheet, where the action really is. In what direction are cash, debt, receivables and inventories traveling? Is this company making progress or going backwards? Gaining or losing market share and brand equity? Does it have debt coming due and, if so, how does it plan to pay it off? And we mustn't forget the possibility of covenant calamity -- could results put its credit arrangements at risk? Increasingly, we see that much of what we need to know to evaluate a company's fiscal fitness isn't on the quarterly statement at all. It's buried in some SEC filing somewhere or in some court case or in the mind of some disgruntled employee or would-be whistle-blower. It's certainly nothing a company's public relations contact will be sharing with us anytime soon.
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