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Companies Put the Best Face on Covid-19's Financial Impact

02/23/2021 | 05:44am

By Jean Eaglesham and Nina Trentmann

After its business was hit by the pandemic, retailer Ulta Beauty Inc. appears to have used some accounting cosmetics to add a gloss to its financial results.

Operating income at the once-fast-growing chain, which temporarily closed stores during the health crisis, plummeted to $13 million for the nine months through October, a fraction of the $613 million earned in the same period in 2019. Two coronavirus-related items affected the math: a $40 million impairment charge for the value of some stores that reduced the operating income, and $51 million of federal tax credits that increased it.

Ulta also reported a much healthier $98 million "adjusted operating income." This tally, designed to strip out one-time items, added back the $40 million impairment cost, which boosted the adjusted number, but didn't take off the $51 million of federal aid. If that aid had been removed, the adjusted-operating-income number would have been half of what the company reported.

About a year into the pandemic, regulators are ramping up their scrutiny of potentially misleading coronavirus disclosures by companies. A senior Securities and Exchange Commission official warned in December that companies should be consistent in positive and negative adjustments when showing the impact of the pandemic.

An Ulta Beauty spokeswoman denied cherry-picking data to flatter the adjusted metric. She said the impairment cost was a legitimate one-time charge caused by the impact of Covid-19 on some stores, not a direct cost of the pandemic such as cleaning supplies.

An SEC spokeswoman declined to comment.

About one in three companies put a dollar amount related to the impact of the coronavirus in their earnings for the quarter that ended in December, according to a review of 199 filings from S&P 500 companies by data provider Calcbench. The financial pain inflicted includes everything from reduced revenues to increased bad debts, impaired assets and restructuring costs. On the plus side, several companies reported savings on travel and trade-show expenses, the review found.

While metrics that don't follow generally accepted accounting principles, or GAAP, have been criticized, they can be used to help investors disentangle the financial effect of what companies consider a one-time event from the performance of the underlying business.

American Airlines Group Inc. racked up an $8.9 billion net loss last year and a non-GAAP net loss excluding special items that -- unusually for this measure -- came in even wider at $9.5 billion.

Like Ulta, the airline added back into its adjusted metric coronavirus costs, in this case some $3 billion, and federal pandemic aid, which totaled about $4 billion.

The SEC doesn't dictate how companies report coronavirus costs and income. But the agency says companies must ensure comments on the effects of the pandemic are accurate and not misleading.

Restaurant chain Cheesecake Factory Inc. agreed in December to pay $125,000 to resolve SEC civil charges it misled investors last spring by saying its locations could continue to operate, when it estimated it only had about four months' worth of cash left. A spokeswoman for Cheesecake Factory, which didn't admit the SEC's findings in its settlement, declined to comment.

One area of Covid-19 accounting that the SEC said it would scrutinize closely is any changes to revenue to compensate for losses because of the health crisis.

Uber Technologies Inc. spent tens of millions of dollars last year to help its drivers and others affected by the pandemic. The ride-hailing company added back this coronavirus cost in an adjusted-net-revenue figure, boosting the number. As the company had always done, however, the adjustment also stripped out a measure called excess driver commissions, leaving the adjusted $8 billion tally for the nine months through September lower than the $8.9 billion GAAP revenue figure.

Uber stopped quoting an adjusted net revenue in fourth-quarter and full-year results earlier this month. An Uber spokesman declined to comment.

Another bugbear of regulators and investors is companies that exclude one-time coronavirus costs quarter after quarter, or try in other ways to use the pandemic as cover to remove some regular expenses from their non-GAAP numbers.

David Knutson, vice chair of the Credit Roundtable, which represents institutional investors, said the longer the pandemic continues, the harder it will become for companies to single out one-time costs and effects caused by Covid-19. "I think there will be a fraction of companies still clinging to this excuse," Mr. Knutson said, adding that companies should be used to operating under Covid-19 by now.

The SEC in December questioned Puerto Rico-based Oriental Bank over an adjusted-net-income measure that stripped out "additional provision for credit losses due to Covid-19." The agency asked in a letter to Oriental's owner, OFG Bancorp, how it was differentiating expected credit losses caused by the pandemic from other credit losses.

OFG agreed in its response to drop the metric and the SEC closed its review, the filings show. A spokesman for OFG declined to comment.

Many companies aren't putting dollar numbers on the pandemic's impact, an analysis of earnings shows.

Roughly one-quarter of S&P 500 companies last year reported an adjusted figure for earnings before interest, tax, depreciation and amortization, or Ebitda. But only about one in 10 of those companies disclosed adjusted Ebitda because of Covid-19 during the three quarters through December 2020, according to data provider MyLogIQ.

Jay Knight, a member of law firm Bass Berry & Sims PLC and former SEC counsel, said it isn't surprising so few companies are doing coronavirus adjustments "just because it's so difficult to quantify some of these items."

Another possible reason: Many companies might not feel under shareholder pressure to dress up the impact of the coronavirus by using alternative numbers. Earnings have broadly held up well and most stocks are up. In contrast to hits to profits that might be the company's fault, executives generally don't need to explain away the effects of the health crisis.

The SEC is pushing for companies that exclude pandemic-related expenses to provide details to investors.

Private prison company CoreCivic Inc. in its earnings for the quarter through September excluded "expenses associated with Covid-19" from a non-GAAP measure, without explaining what those expenses were.

When the SEC in December wrote asking for details, CoreCivic broke down the Covid-19 costs into six separate categories, ranging from what it called "hero bonuses" of $500 each for employees to the added cost of giving prisoners food in disposable containers so the inmates wouldn't need to congregate in cafeterias. The SEC closed its review, the filings show.

A CoreCivic spokeswoman said in a written statement that the expenses all fell within the SEC"s guidance for non-GAAP Covid adjustments.

Write to Jean Eaglesham at jean.eaglesham@wsj.com and Nina Trentmann at Nina.Trentmann@wsj.com

(END) Dow Jones Newswires

02-23-21 0544ET

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