This week, Apple (AAPL – $199.29) adopted the new FASB EITF Issue 08-1 and 09-3 (Accounting Standard Update 2009-13 and 2009-14).  These accounting changes resulted in the recognition of substantially all of the revenue and product cost for the iPhone and AppleTV products at the time of sale.  No longer is AAPL using subscription accounting which historically resulted in the straight-line revenue recognition over the useful lives of the products.

In addition, this week Amazon (AMZN – $126.03) announced the adoption of the same accounting standard.   The Kindle’s revenues will now largely be recognized at the time of sale/delivery to the customer.

Here’s what’s interesting.  AAPL decided to “retroactively adopt” the new accounting standard.  This resulted in the restatement of historical Income Statements over the past 3 years.   AAPL made the following comment in their quarterly earnings press release:

“The company believes retrospective adoption provides analysts and investors the most comparable and useful financial information and better reflects the underlying performance of the company’s business.”

On the other hand, AMZN management decided to adopt the new accounting standard on a “prospective” basis.  Therefore, there will be no restatement of historical financial statements and the new revenue recognition standard will be applied only on a go-forward basis.

Why “prospective” adoption of the new accounting standard?  Simply, a lack of transparency.  AMZN management has a long history of providing little in the way of data points or additional color to help analysts better understand the business or the company’s profitability dynamics. 

Clearly, AMZN management decided on the “prospective” adoption of the accounting standard to keep analysts in the dark re: the Kindle’s unit and/or sales growth.  If the company had provided a restatement of financials for the last 3 years, analysts may have been able to back into the Kindle’s revenue and unit sales over the past year.  

Transparency continues to be a concept that escapes Mr. Bezos and the management team at AMZN.

Let’s also be clear about another outcome related to AMZN’s decision to “prospectively” apply the revenue accounting change.  Go forward revenue comparisons in FY 2010 will be of the apples-to-oranges variety.  By immediately recognizing Kindle revenue in FY 2010 versus the amortization of that revenue in FY 2009, AMZN’s go forward sales growth will be ‘optically’ stronger than the underlying reality. 

Will the company or sell-side analysts point out the lack of comparability when reporting/analyzing year-over-year revenue changes in FY 2010?  Doubtful. 

This week, Forever 21 opened its largest store, a 85,000 square foot former Mervyn’s space at Los Cerritos Center in Cerritos, CA.

Forever 21 changed the game in the specialty apparel arena over the past few years and continues to step on the throats of BEBE, ex-CHIC, and WTSLA.  Investors in those particular fast fashion retailers have gotten crushed over the past few years and the demise of these retailers has had very little to do with the current downturn in the economy (relative to the impact of Forever 21).

Well, today’s opening in an 85,000 square foot box puts the merchants at Old Navy, JCP, KSS, and M on notice.  Forever 21 has about 30 “larger stores” in the works including a 90,000 square foot unit in Times Square and a 125,000 square foot store in an ex-Dillards location in the Fashion Show Mall in Las Vegas. 

There is not one women’s apparel retailer that has not been materially impacted over the past few years by Forever 21.  This privately-held, $2.2 billion apparel has possibly been the biggest game changer and had the largest impact in the apparel sector over the past 5 years. 

Today, the company is setting its sights on a much bigger prize (department stores).  This could end badly for Forever 21.  But, it’s tough to bet against them (and, bet on the department stores) based upon their tremendous success over the past 5 years.

Today, the current consensus revenue estimate in Q4 2009 for Abercrombie & Fitch (ANF – $31.28) implies a +4.0% comp store sales result in January 2010.

Say what? Well, if you assume a similar “total revenue growth” vs. “comp sales growth” relationship (or, “split”) in January 2010 as November/December 2009 (see table below), you then come up with an eye popping ‘implied’ +4.0% comp store sales result for January 2010.

Does anyone out there legitimately believe ANF can deliver a +4.0% comp store sales result in January 2010? Doubtful. Even if you account for the company’s gift card promo boost that is expected for the month (we’re referring to the company’s monthly sales recordings for both November 2009 and December 2009).

Instead, we believe that revenue in Q4 2009 will come in much lower than the current consensus estimate of $944.2 million. This is simply another glaring example of the lack of due diligence by the sell-side analyst community.

The fact is that it’s fairly easy to forecast revenue for a retailer that reports its revenue numbers each month… especially after 2 of 3 months have been reported and January represents less than 19% of the total quarter’s sales mix.

Sell-side analysts generally don’t perform this elementary level of analysis or “recalibration” when constructing their earnings model. That’s why savvy buy-side analysts tend to ignore the financial modeling of the sell-side analyst community and do it themselves.

This is simply another glaring example as to why sell-side analysts have been relegated to being glorified investor relations representatives today. Financial modeling and due diligence are lost arts in today’s sell-side analyst community and why independent research providers continue to thrive by filling the void.

ANF Monthly Revenue

Comp store sales at home furnishings retailers certainly turned the corner in the latter half of 2009.  Gosh, even retailers that don’t make money Pier 1 (PIR – $5.10) and Cost Plus (CPWM – $1.38) saw their comp store sales turn positive.  These two particular retailers may never make money again (GAAP basis).

So, the conventional wisdom would suggest that consumers are now spending on home furnishings after 2-3 years of declines versus the prior year. 

But, does anyone really believe we’re seeing a pick-up in consumer demand for home furnishings?  While consumer demand may have reached a bottom, we’re of the belief that home furnishing retailers are currently benefiting from the exit of ex-LIN and others.  In addition, it is generally believed that WMT and TGT have lowered their home furnishings space allocation.      

Don’t make the mistake of listening to the sell-side analysts and company CEO’s that are suggesting a pick-up in consumer demand for home furnishings.  Much of today’s top-line improvement in the home furnishings space is simply a reflection of the exit of key historical participants in the space.  This will likely be proven when comp store sales begin to decelerate in late-Spring 2010.

Below is the link to an article that talks up the pent-up demand ‘myth.’ 

http://www.marketwatch.com/story/williams-sonoma-lifts-outlook-on-holiday-sales-2010-01-14

Today, Build-A-Bear (BBW – $5.05) was announced as one of the country’s top 100 places to work by Fortune Magazine.  Yet, this company has lost a small fortune over the past few years.

The fact is that BBW struggled to improve its profitability during the go-go days of 2005 – 2006.  Then, in 2007, BBW began its long, precipitous profitability slide (from an approximate +10.0% EBIT margin to an estimated -2.8% this year).  This profitability was in play long before the economy tanked.

BBW is the equivalent of a “one hit wonder.”  Prior to its IPO, BBW received an Oprah boost that fooled investors into thinking the company had much more earnings power than the post-Oprah reality.

BBW may be a great place to work, but making money apparently is not part of the business model.