Minyan Mailbag: Gift Cards
"If you give me a Gift Card you better be ready for a non-dairy diet"
Dorsey Wright's Mighty Minyan Kevin Depew asks:
"What happens when gift cards are not redeemed? I have a stack of cards that, for one reason or another, I've been too lazy to redeem over the years. I assume that others do the same... so how do co.s handle booking redemptions that never take place?"
This is an outstanding question, one that the retailers themselves are reluctant to answer (see also: "Does it really make sense to pay $20 for a warranty on a $99 product that's going to be obsolete in a year?").
Gift Cards (GC's) are only added into the official results for a retailer after the cards are redeemed (as opposed to being counted at the time you purchased one for your nephew because "who on earth has any idea what these violent little teenage freaks are into these days?"). While this makes sense from an accounting perspective (you can't calculate margins until you know what has actually been exchanged for money, whenever that money comes in) it presents some interesting issues, not limited to Kevin's question.
With the explosive growth in gift card sales and no real Standard on how to deal with them from a reporting perspective it's largely up to the retailer to communicate the impact of the cards on company numbers. Among the questions:
What happens when cards aren't redeemed? This is the most delicate PR area for the retailers. The official answer is that the answer varies by retailer and is buried in the small print, usually on the back of the cards. The rub is that companies are obviously reluctant to hi-light the worthlessness of Kevin et al's unspent cards by calling the money "earned". In fact, last year Best Buy (BBY) mentioned that cards older than one year would expire only to be greeted by various threats from consumer advocacy groups. Not surprisingly, Best Buy had no interest in that kind of pub. For now, the money paid to the retailers in exchange for what amounts to company whompum just sort of hangs out there in accounting space until redeemed.
Why does the accounting treatment of gift cards matter? While at first blush gift cards seem like nuttin' but goodness for the retailers ("We get the money now and a lot of these cards never even get redeemed!") it's not quite that simple. The (slightly) hidden cost is that the cards are most often redeemed after the holiday, when retailers have slashed prices and margins.
Sticking with Best Buy as our example, gift cards might have been as much as 10% of the company's December sales. While they aren't apt to look a Gift Card (horse) in the mouth, all things being equal the company would prefer those sales to be in goods as margins were better before the holiday than they are now.
If you wanted a Clean Answer on the economic impact gift cards have on a retailer, particularly an electronics retailer, you'd need at least average statistics for when the cards are redeemed. The earlier the better for a company like Best Buy where sales drop off hard, post holidays. You'd then weigh that timing against the percentage of dollars spent on cards that goes unredeemed to make your guess. If you wanted to get really fancy you'd also collect data on cards that were redeemed as partial payment of a larger ticket as potential add-ons also help the retailers. [Note: The news reports today suggesting that 35% of cards are redeemed within two weeks is a guess, not actual "data"]
All of which is something of a moot point because the retailers ain't talkin about these kind of specifics.
- If it's a Big Problem Without a Clean Answer why are you bothering to talk about it (eg "Why do you guys insist on treating everything like a big conspiracy?")?
Investors who actually want to put the work into the process can learn much from what companies choose to report, where they have discretion. Gift Cards are exploding in growth and their accounting treatment is the wild west. Companies report sales for December next Thursday and don't book Gift Card revenues until redemption.
To understand what to look for as "Tells" in terms of business strength in regards to gift cards, imagine that YOU are the CEO and/or PR guy for a retailer. Your Same Store Sales for December were dead-freaking-flat. The Street expects you to come in at +5%. You are going to get maimed when you report your results.
Staying in our role as CEO, let's say that you know your Gift Card sales for December were HUGE but, for whatever reason, not widely redeemed before January 1st (and thus not "reportable"). To make it fun, we'll say that you have all 5% of your sales miss sitting there, uncounted, in the form of unredeemed cards.
So... how do you report your numbers and what kind of emphasis do you put on the cards? Do you use "code-speak" words like "significant" as kind of a *wink to the Street? Do you try to bury the miss entirely and hype the pending GC windfall (and does that even seem plausible for your company)? Do you treat refusing to mention the cards at all as sacrosanct policy (given the unwanted attention they can draw)?
Lots of grey areas there and that's usually where the opportunity fishin' is best. As the sales data comes out over the next week Collins and I will try to hi-light the particular companies' treatment of GC's by way of explaining their results.
Given the rapid growth of the Gift Cards this may be the last year where companies have this much discretion in terms of reporting. Eventually they will likely be treated in a manner akin to in-house credit cards (with reserves, provisions (albeit reversed) etc.). For now, however, it's a potential Edge to understand the basic issue then put the reports in context when we get them.
So that's what we're going to do.
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