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Barnes & Noble (NYSE:BKS) reported improved results that were better than street expectations. This brought about appropriate applause. The big improvement revolves around the issue of better than expected inventory losses. Not so much stealing and other naughty stuff that the shareholder had to put up with.

Inventory shrinkage is a challenge for all retailers and Barnes & Noble has been working on it. What concerns me is they do not know if they have got it right. In the conference call transcripts available on www.seekingalpha.com Joseph Lombardi the CFO mad the following comment:

Our shrinkage rate has been declining and it declined to a level that we weren't sure was sustainable. We estimated and accrued to a higher level and as a result, we're truing up our numbers based upon the results, as the results were more favorable than we thought they'd be.

I think the good news here is that if we sustain the improvement, this gross margin benefit is permanent albeit obviously spread more proportionately throughout the year. So just good news for us and we're pretty happy overall with the result.

If you true up your numbers because you think you have better controls that's fine. But if you cannot decide if this is a consistent positive contributor, how do investors know if the inventory shrinkage problem will worsen and the numbers true up again. Except this time they may be negative.

I find it hard to get excited about an investment because stealing is down with management not sure if they can outwit the thief tomorrow.

Source: Can Barnes & Noble Outwit the Thieves?