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Why Earnings Don't Matter Right Now


Focus on the long term, not the bottom line.

Editor's Note: Please join us in welcoming Kristin Graham, our newest contributor.

We're smack-dab in the middle of what Maria Bartiromo has dubbed as "the most important earnings season in a decade."

It's certainly an unprecedented time for businesses to prove their financial strength to investors. However, I can only half agree with Maria, because in this particular earnings season, it isn't all about the profits.

That may sound crazy, given most of the traditional financial media's tendency to fixate on bottom-line figures. To clarify, I'm not suggesting that earnings aren't important. Profits earned by companies operating in a well-oiled economy are, for the most part, reasonable indicators of how well a firm is performing.

However, businesses today are faced with anything but normal economic conditions. As the world economy began to collapse, many management teams rushed into survival mode and took drastic measures to shield their companies from sagging bottom lines. For the time being, the actions taken may temper earnings declines or losses. Heck -- many companies might even be able to report better-than-expected earnings.

The problem is, many of the measures being taken aren't sustainable. In fact, many of them can be outright destructive to a company's future. Thus, while impulsive tactics may fluff profits in the near term, these earnings don't reflect a company's true ability to operate as a successful entity in the long run.

For example, in attempt to attract hibernating upscale shoppers, Saks (SKS) has offered up to 70% off of some of their merchandise throughout the past year. Sales within reason are usually needed to lure customers in tough times and to help reduce excess inventory when necessary. But any retail outlet that marks down prices that far risks conditioning consumers to wait in the future for similar sales rather than paying full price. Talk about a brand killer.
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